Tag: Economy
Trump’s Turkey shoot
After weeks of silence and inaction on the issue of Syria, President Trump has finally done something that will affect the outcome of the Syrian civil war. The influence will not be positive.
Using his favorite policy platform – Twitter – Trump announced Friday that as the Turkish Lira “slides rapidly downward against our very strong Dollar,” the United States will increase tariffs on Turkish steel and aluminum. As the New York Times reports, his 50 percent tariff on steel will “effectively [price] Turkish steel out of the American market, which [accounts] for 13 percent of Turkey’s steel exports.”
The run on the Lira, which has been brewing for the past few weeks, is now fully in gear. The self-fulfilling prophecy of foreign-exchange traders selling the Lira before it further loses value, hence depreciating the currency, is in full force. Investors are instead rushing to short the Lira, amplifying the detrimental effect on its value. President Trump boasting about how “strong” the dollar is – which, seeing how uncompetitive American exports are as a result, is not a good thing – does not help.
What does this mean for the countries around Turkey? In the past twenty years, through their “zero-problems” foreign policy and aim for broader strategic influence in the Middle East, Turkey has been increasing its exports to Arab states. Turkish trade with the Middle East and the Gulf increased by 22.1 percent in 2017 alone. As the Lira continues to plummet and Erdoğan continues to shake confidence in the independence of Turkey’s Central Bank, Turkey’s economic strife will have repercussions across the region. It might even cause a domino effect by rattling investor confidence in other economically struggling countries in the region, such as Jordan.
The issue here is what Turkey’s economic troubles, and President Trump’s decision to pile on at the worst possible time, mean for the conflict in Syria. This is particularly salient in the Northern region of Idlib. After Russia and the Syrian government “liberated” the south of Syria of opposition fighters in June and July, Idlib is the last region in Syria with an active Arab military opposition to Assad – IS pockets of influence in the south and the east notwithstanding. During regime attacks on rebel strongholds in Homs in 2014-15, Aleppo in 2016, and Eastern Ghouta and Deraa in 2018, many opposition militias struck deals with the Syrian regime for safe passage to Idlib in exchange for their surrender. The same goes for a significant number of internally displaced persons, who fled regime-held areas and headed for Idlib in the hopes of protection from Assad or the opportunity to leave Syria for Turkey.
The result is that the Idlib region is currently home to more than 2.5 million people, up from 750,000 before the beginning of the war. Idlib is also home to a number of Turkey-sponsored political and military groups, as Turkey hopes to maintain Idlib as a zone of influence for the foreseeable future; it has already spent considerable sums of money in reconstruction efforts, in the hopes that it can return Syrian refugees currently in Turkey to Idlib – despite the fact that most of them are not from Idlib. As the last remaining rebel stronghold, Idlib is also the next military target for the Syrian government
Speculation abounds that the only thing stopping Assad from launching his offensive on Idlib is Russian calls for restraint, as well as a Turkish “red line” warning the Syrian government not to invade Idlib. This is where Turkey’s economic woes become important, particularly as they can be attributed to American actions.
Trump’s tweet will only increase animosity between the US and an economically desperate Turkey. As a result, Turkey is likely to accelerate its turn towards economic cooperation with Russia, with whom they signed a gas pipeline deal in July. Economic cooperation, however, comes with strings attached, and it is likely that Russia will use its greater economic leverage to defuse the chances of a Syrian-Turkish conflict. This would result in Turkish withdrawal from Idlib, and – as Middle East Institute scholar Charles Lister details – a military and humanitarian crisis on a scale unlike anything seen in the Syrian civil war so far should Assad attack the overcrowded region of Idlib.
There is much to criticize about Turkey’s role in Syria. They have sponsored salafist and jihadist groups, encouraged ethnic conflict between the Arabs and the Kurds in the north, and impeded American efforts to liberate eastern Syria from IS by attacking the Kurds in Efrin in January. Trump’s administration, however, is not attempting to influence Turkey’s behavior in Syria in a positive manner, or even to punish Turkey for their actions in Syria. Instead, Trump is kicking Turkey while it is down, meaning that Trump’s first active contribution to the conflict in Syria is somehow worse than America’s inaction in the past few months. As usual, it will be the Syrian population that suffers the most.
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Cautious optimism
Iraq is in transition. With the territorial defeat of ISIS having been completed in late 2017, the reconstruction and political renewal of the country is in full swing. In February, the Kuwait International Conference for Reconstruction of Iraq mobilized almost $30 billion of international support. On Thursday, the Iraqi government held a major oil and gas bidding round aimed at further revitalizing the sector, particularly in areas previously controlled by Islamist insurgents. Moreover, on May 12, Iraq is scheduled to hold its next parliamentary elections, which will act as a stress test for a democracy trying to recover from the ISIS surge. Notwithstanding the positive developments in recent months, Iraq faces a long and stony road ahead in terms of rebuilding and recovery.
On April 26, the Atlantic Council organized a panel addressing the country’s multiple challenges and opportunities, including the role the energy sector can play in enabling recovery. The discussion featured Iraqi Ambassador to the US Fareed Yasseen, Hafez Ghanem, Vice President for Middle East and North Africa at the World Bank, Majid Jafar, CEO of Crescent Petroleum, Ben Van Heuvelen, Editor in Chief of the Iraq Oil Report, and Ellen Scholl, Director of the Global Energy Center at the Atlantic Council, as the moderator. Atlantic Council’s President and CEO Frederick Kempe gave an introductory statement.
The Kuwait Conference was a major success for Iraq. Yasseen stresses its huge symbolic value, both due to its location and turnout. The Kuwaiti leadership showed enormous goodwill to host the event, which has opened a new chapter in relations between the Gulf country and Iraq. Participation exceeded all expectations. Instead of an estimated 500 participants, more than 2000 people showed up. Hafez Ghanem likewise emphasizes that the massive participation, especially of private sector actors, was a huge accomplishment. This demonstrates that there is trust in Iraq.
Hope is justified. Yasseen points out that there is true willingness on the side of Iraqi decision makers to move forward, despite its problems. Iraq has a plan and commitment to implement reforms. The upcoming elections—which are much less sectarian and polarized than previous political contests—will not derail this process; rather, everyone in Iraq is committed to reforming the country. Jafar confirms the ambassador’s assessment. Considering where Iraq used to stand two years ago, we have already seen much progress. The outlook for the country is positive.
Iraq has to pursue wide-scale reforms. Ghanem argues that the country has to adopt a two-fold economic transformation. First, it has to reduce its dependency on oil, both in terms of revenues and mentality. Iraq needs to drop it rentier state attitude and move toward a more productive economy. Second, the country has to scale down its overblown public sector and become more private-sector friendly. Reconstruction will only be successful if this step is made, as most of the $80 billion needed has to come from private investors. Jafar also calls for a downsizing of the public sector. He stresses that the climate for investment has to be improved substantially. Most investors are not deterred by security concerns or political instability, but complain about administrative banalities such as problems with visas, complex administrative processes, and the complex customs system. Corruption compounds theses issues.
Ben van Heuvelen calls for caution. Despite positive signs, Iraq’s situation remains tense. The bidding round on Thursday was a success, but problems stand out. In particular, experienced global oil companies shied away from the auction. Firms that have already had real exposure to the costs of doing business in Iraq are still skeptical. Moreover, the country’s overall security situation continues to be problematic. ISIS has been defeated, but the Islamist insurgency is still ongoing. Iraqi security forces do not posses the capabilities required to establish a deterrent presence throughout all the liberated areas. Although there is no major ISIS threat to the oil sector, instability puts a drain on the budget and inhibits investment. For example, planned pipeline projects to Turkey and Jordan cannot be implemented in the current security climate.
Iraqis and international investors have regained confidence in the country. There is legitimate reason to assume that Iraq will recover from the ISIS nightmare and move towards stability. However, this process will be tedious and arduous, and setbacks will certainly occur.
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A game of chicken
President Trump thinks a trade war will be easy to win.
When a country (USA) is losing many billions of dollars on trade with virtually every country it does business with, trade wars are good, and easy to win. Example, when we are down $100 billion with a certain country and they get cute, don’t trade anymore-we win big. It’s easy!
Like so much of what he says, that is false.
Let’s consider the warring parties. The US still has the larger economy, but exports much less to China than it imports from China. Trump has tweeted we therefore have less to lose. But that nonsense is based on the notion that imports represent losses and exports represent gains. That just isn’t true: for everything sold by China in the US, there is a willing buyer. Ditto in China: for everything the US sells there, there is also a willing buyer. US imports of Chinese goods and services, and Chinese imports of US goods and services, are a net plus for consumers in both countries, no matter what their impact on producers.
So the question is not who has less to lose, but rather the more canonical one in negotiation theory: who has a better alternative to a negotiated agreement (BATNA)? It is true that China will run out of US products it can levy tariffs on faster than the US will run out of products it can levy tariffs on, but that really doesn’t matter. China is a highly centralized polity that has lots of levers it can pull to hurt US companies doing business in China, which by the way are also main importers of US products. The US government will have a harder time doing this, because it lacks the same degree of control over American media, business associations, consumer groups, and politicians. Trump is already getting a lot of backlash against the tariffs from the agricultural sector, which the Chinese have targeted with their retaliation.
Centralized control is however also a vulnerability for China. At the national level, there are no “safety valves” to release social and political pressures that build up against the tariffs. Trump may lose big in the November election, in part because he has precipitated a big trade war, but he will remain in power (unless impeached and removed from office for other reasons). Xi Jinping has no election he can lose but still hold on to power, free media that can air grievances, or civil society to pressure his regime. Discontent could go directly to the street, especially if the trade war precipitates China’s first post-Communist recession. An autocracy has one main instrument–the security forces–to use against its people in the street. Tienanmen hinted how risky and deadly its use can be.
So who is more resilient? Is it the liberal democracy with limited presidential control that allows for dissent, protest, and political opposition? Or is it the autocracy that controls the levers of power but leaves no room for dissent, protest, an political opposition? I would prefer not to find out, but I’ll enjoy that luxury only if Xi or Trump backs down.
My bet is on Trump to flinch first. He is all bully and bluster, not to mention the damage that the tariffs will do to China’s willingness to be helpful with North Korea and to the American economy. Xi has consolidated power and can’t flinch without losing face in a way that would put his hold on power at risk. His lack of resiliency means he has reason to be more inflexible, not less. In the short run, he has the advantage in a game of chicken. He’ll do his best, by targeting the tariffs against those states that voted for Trump, to make sure we never get to the long term. The US stock and labor markets are already signaling distress at the consequences, and the Fed will have to consider raising rates to counter the inflationary impact of the tariffs as well as the recent tax cut and budget deal. Trump will need to have more staying power than he has demonstrated on many issues so far to win this game of chicken.
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Russia should be job 1
Far be it from me to in any way align myself with John Bolton, but there are things he could get the Administration to do consistent with at least some of his stated positions that would be preferable to the hodge-podge of contradictory signals Washington is currently sending on foreign policy.
For the moment, President Trump has prioritized the Iran nuclear deal. He is trying to use his threat to withdraw as leverage to get the Europeans to agree to amend the deal in order to gain access to Iranian military sites, restrain Tehran’s missile program, and end the “sunset” (expiration) clauses. His self-imposed deadline is May 12, when Congress requires him to certify once again that the deal is in the US interest. He didn’t do that last time around and said he would withdraw if the agreement wasn’t fixed by the next deadline.
Withdrawing from the deal is patently not in the US national interest. Either Iran will also withdraw and re-initiate its nuclear program, giving it the potential for nuclear weapons within a year or so. Or Tehran and Brussels will decide to proceed without the US, splitting the Western alliance on a vital issue. US withdrawal would also spell the end of any distant hope (but see below) for a deal with North Korea, as Pyongyang would be correct to conclude that the US can’t be trusted to hold up its end, and strain relations further with China and Russia (who helped negotiate the agreement with Iran and continue to support it). There are simply no gains from withdrawal, only losses, unless you want to provide yourself with an excuse to go to war. That means risking the Sixth Fleet as well as numerous US bases and troops in the Gulf and Iraq, as well as attacks elsewhere in the Middle East and even inside the US.
Another apparent priority is North Korea. It already has nuclear weapons and credible if not certain means to deliver them, at least against US forces and allies in South Korea, Japan, and Guam. The odds of successfully negotiating “denuclearization” with Pyongyang are risible. There simply is no better protection for North Korea against an American attempt at regime change than Kim Jung-un’s nukes. Once again, the only real option to “denuclearize” is war. The consequences would be worse than catastrophic: at the very least a massive artillery barrage by the North against Seoul, killing tens of thousands, if not a nuclear exchange.
A third priority for Trump has been trade, in particular the North American Free Trade Agreement, (that is, Canada and Mexico) as well as China’s intellectual property expropriation and excess capacity in steel and aluminum. There is little hope of anything good coming of Trump’s unilateral measures (tariffs on steel and aluminum as well as on Chinese products), beyond the agreement already reached with South Korea (which has lots of reasons to be nice to the US these days). Tariffs are a blunt tool that has nothing to do with intellectual property theft, and the US doesn’t import much steel or aluminum from China. It does from Canada and Mexico, which have already been exempted from the tariffs, whose main impact will be to raise prices to American consumers (not only for steel and aluminum but for all the products in which they are used).
The remaining priority is Russia, which has distinguished itself in recent years by defying the norms of the liberal international order: murdering its opponents abroad and at home (including with nerve gas in a public place!), refusing to leave parts of other countries (Moldova and Abkhazia), annexing Crimea, invading Ukraine, threatening the Baltics as well as Sweden and Finland, meddling in democratic elections while making its own non-competitive, and intervening to slaughter the relatively moderate opposition as well as thousands of civilians in Syria while launching a mercenary attack on US troops and allies there. Moscow is the capital of a state that has gone rogue.
Bolton is no friend of Russia. He recognizes and has denounced most if not all of the offenses listed here. The problem is the President. While the Administration rightly boasts that it has done more against Russia (in expulsion of diplomats and sanctions) than Obama did (partly because Russia has done more against the US than in Obama’s time), President Trump has still not uttered a word of criticism against Vladimir Putin. Such consistency is not his normal habit and raises the question worldwide whether the US really speaks with one voice. That incoherence limits the impact of the modest moves made so far to counter Russia’s troublemaking.
It seems to me the right order of priorities is this:
- Russia: pushback worldwide, with a view to reaching a new, more balanced, modus vivendi
- Iran: no withdrawal from the nuclear deal but instead get it and its proxies out of Syria, where they pose a threat to Israel
- Trade: by using the WTO and other well-established multilateral mechanisms, not unilateral tariffs and exceptions that will shift imports but do little to limit them
- North Korea: deterrence is really the only option
More in a future post on how to accomplish at least 1 and 2.
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It’s the region, stupid
The Middle East suffers from a whole range of problems. War and conflict are besetting wide parts of the region and have caused massive destruction as well as displacement in several countries, including Syria and Yemen. Climate change has brought about enormous environmental degradation such as desertification and water scarcity. At the same time, stressed domestic economies are increasingly unable to provide job opportunities for the region’s disenchanted youth. The Middle East faces enormous challenges that transcend borders and hence require answers that narrow-minded national policy making is no longer able to provide. Indeed, the region is today in dire need of regional responses.
On March 7, the Middle East Institute presented a roadmap of how future cooperation should look like in the Middle East. Resulting from Track 1.5 initiative involving current and former officials and senior experts from across the Middle East as well as from China, Europe, Russia, and the United States, the so-called Baghdad Declaration outlines 12 good neighborhood principles for the region. The discussion featured three major participants in the Middle East Dialogue. Naufel al-Hassan, deputy chief of staff to Prime Minister Haider al Abadi of Iraq, Abdullah al-Dardari, who serves as a senior advisor on reconstruction at The World Bank, and MEI’s senior vice president for policy research and programs Paul Salem provided their perspective on the Baghdad Declaration and the Middle East’s future. A full recording of the event is here:
Regional integration is already prevalent in the Middle East. Abdullah al-Dardari stresses that, excluding oil and gas, intraregional trade accounts for some 40% of total trade in the Middle East; taking the informal economy into consideration, this figure might even reach 60%. Moreover, the Middle East has the world’s highest level of intraregional level of remittances. Paul Salem underlines this observation and adds that only because of the high level of existing regional interdependence and interaction conflicts were able to spread that easily across the Middle East. However, the integration of today is neither well-structured nor reflected in the political relationships between Middle Eastern states.
The region is still in dire need of better cooperation among its members. Al-Dardari argues that the model of country-based economic growth has reached its apex in the Middle East. Self-sustained economic development is no longer possible as national labor markets, productive bases, and consumption levels have become too narrow. Instead, only regional economic integration and the resulting creation of an open regional market can attract extensive investment and the money needed to rebuild war-ravaged countries: an estimated one trillion dollar of assets has been destroyed since 2011. Naufel al-Hassan also points out that political and environmental challenges such as transnational terrorist networks and water scarcity go beyond the problem-solving capacities of single states and require common answers. In the same vein, the region’s governments can only bring back hope to the Middle East’s youth when they collaborate on providing decent job opportunities. A new regional framework is hence not an option, but a necessity.
Although the contemporary conflicts in the Middle East seem to make increased regional cooperation almost impossible to achieve, change is possible. Salem stresses that other regions of the world were able to transition from a conflict system to a stable order. Not even a century ago, Europe suffered from two wars which much exceeded the level violence that has beset the contemporary Middle East. Yet Europe has been able to overcome its international divisions and conflicts and has established a strong system of cooperation, the European Union. At the same time, the Middle East has proven to be able to move beyond regional standoffs, as the surmounting of rivalry between Egypt and Saudi Arabia of the 1950s has demonstrated. We can thus be hopeful whereby al-Hassan emphasizes that a new stage of integration has already begun. To defeat ISIS, the region has displayed a new level of cooperation, which can serve as a blueprint for future efforts to unite in face of political, economic, and environmental challenges.
A better future is hence possible for the Middle East. The Baghdad Declaration offers a distinct vision that can show the path towards deeper integration in the region. When this transition will materialize will however depend on the readiness of the region’s current leadership to cease hostilities and acknowledge that small-minded national agendas cannot act as a remedy. For the sake of the Middle East and its people, this change of mentality and political outlook should occur soon.
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War profits
Last week at the Middle East Institute, Tim Eaton of Chatham House defined “war economies” simply as an economy during wartime, including but not exclusive to the parts of the economy that directly fuel conflict. Eaton was joined by fellow Chatham House experts Lina Khatib and Renad Mansour on October 19 in a panel on “Wartime Economies in the Middle East: A Look into Libya, Syria, and Iraq.” The Middle East Institute’s Paul Salem moderated.
Eaton provided an overview of the economic situation in Libya, identifying four modalities: individuals with goods to sell, those who generate rent money, those who prey on state revenue, and those who receive salaries from external backers. Concerning those who sell goods, one of the main avenues for such activity has long been the smuggling of subsidized products, an industry which persists post-revolution. Criminalized trade, especially in drugs, has also been a major source of revenue, generating $400-$500 million per year. Additionally, since 2013, the movement of people has been included in this category. The biggest industry, however, is still oil and fuel smuggling, which generates about $2.5 billion.
Rents are another avenue for certain individuals, the money coming from the establishment of checkpoints and the control of territory. This has led to extortion through blockades imposed on roads and oil fields, with such blockades costing the state over $160 billion in the East alone. The state has also been experiencing losses due to those who are able to “prey upon state revenue.” Since 97% of revenue comes from oil and gas trade, Eaton considered this a critical area from which revenue has been taken. These losses have also been augmented due to the discrepancy between the US dollar to Libyan dinar exchange rate both in the official sector, where it is 1.4 dinars, and in the black market, where it is 8 dinars. Those with the means to buy products at the official rate and sell them in the black market have seen major profits.
Eaton emphasized that all actors in Libya have been benefiting from the conflict, finding ways to take advantage of the country’s situation. Since armed groups have been able to obtain salaries as a result of the conflict, this has encouraged them to maintain the status quo. There is little incentive to find a solution to the conflict or undergo a political process. On a state level, economic difficulties, as well as “administrative chaos” and questions of legitimacy, have hindered the functioning of the three most important state institutions: the National Oil Company, the Central Bank, and the Libyan Investment Authority.
Mansour focused on the effect of economic factors on the survival and functioning of ISIS in Iraq. The international community has tried military and political solutions. The one solution most overlooked has been the economic solution. The key concept here, according to Mansour, is that organizations and individuals are opportunistic: they go where jobs and money are available, such as ISIS. In looking for ways to defeat ISIS, creating alternatives that would allow potential members to survive economically is important. ISIS has three key sources of revenue: trade (goods, oil, antiquities, etc.), fees (through taxation, rents, and licenses), and state resources. Looking to the future, ISIS is now investing in “legitimate industries” such as hotels, pharmaceuticals, and currency exchanges, to maintain their economic power and facilitate a future revival. In response, Iraqi state institutions and international actors have been working on limiting ISIS’s influence. Their flaw, according to Mansour, has been that none of these actors are working together.
Khatib gave an overview of the war economy in Syria, grouping the different areas of the country into three categories: areas under the control of Hay’at Tahrir al-Sham, areas besieged by the regime, and areas under regime control. Hay’at Tahrir al-Sham has been following a similar model to that of ISIS in that they have been investing in formal industries while also setting up private companies to maintain the group’s economic independence. They have also been benefiting from their control of water and electricity in Idlib, collecting charges from residents. There has also been much trade activity between such rebel-held areas and regime areas, which has encouraged both sides to maintain the status quo, much like the situation in Libya.
Besieged areas have also witnessed trade activities, primarily through tunnels operated by middlemen. The government has been manipulating the formal exchange rate, making the rate inside besieged areas higher than elsewhere and consequently accumulating more revenue.
Regime-held areas have experienced much change. Since 2011, the state budget has decreased from $18 to $4 billion, with half now coming from external actors supporting the regime, and inflation has increased by 700%. To evade sanctions, the regime has set up front companies in loyalists’ names. For example, the Syrian Council for Metal and Steel set up in 2015 has contracts with its international partners Iran and Russia. Iran has militias and business-people working for it in the country. Khatib noted that the extent of outside interference has begun to worry the regime, and that true reconstruction, particularly including a return of refugees is not a goal of the state.
A key takeaway from the speakers’ overviews of the topic and the ensuing discussion is that economic alternatives to the present situation–which presents many economic incentives–must be found. The importance of political processes will not surpass the importance of economic security for citizens and state institutions alike. So long as the current situation is more profitable than any alternatives, it will persist.
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