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Managing minefields: Saudi/UAE aid puts Pakistan-Iran relations on the spot

Dr. James M. Dorsey

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Pakistan is traversing minefields as it concludes agreements on investment, balance of payments support and delayed payment oil deliveries with Saudi Arabia and the United Arab Emirates worth USD$13 billion that are likely to fawn growing distrust in its relations with neighbouring Iran.

Pakistani prime minister Imran Khan expects to next month sign a memorandum of understanding with Saudi Arabia on a framework for US$ 10 billion in Saudi investments, primarily in oil refining, petrochemicals, renewable energy and mining. The signing would take place during a planned visit to Pakistan by Saudi crown prince Mohammed bin Salman.

The memorandum follows the kingdom’s rewarding of Mr. Khan for his attendance of a foreign investors summit in Riyadh in October that was shunned by numerous CEOs of Western financial institutions, tech entrepreneurs and media moguls as well as senior Western government officials because of the killing of journalist Jamal Khashoggi in the Saudi consulate in Istanbul.

Mr. Khan walked away from the summit with a US$3 billion deposit in Pakistan’s central bank as balance of payments support and a promise to defer up to US$3 billion in payments for oil imports for a year.

The United Arab Emirates is expected to conclude similar agreements with Pakistan in the coming weeks.

Perhaps the most sensitive investment is likely to be a plan by Saudi national oil company Aramco to build a refinery in the Chinese-backed Baloch port of Gwadar close to both Pakistan’s border with Iran and the Indian-backed Iranian 486-hectar port of Chabahar. Both Pakistan and Saudi Arabia are monitoring progress in Chabahar with Argus eyes.

A potential Saudi investment in troubled Balochistan’s Reko Diq copper and gold mine would further enhance the kingdom’s foothold in the strategic province.

As always, the devil could be in the details of the Pakistani-Saudi investment agreement. Haroon Sharif, the chairman of Pakistan’s Board of Investment, cautioned that foreign investment would require a “better law and order situation and ease-of-doing-business opportunities.”

Pakistan’s security situation has somewhat improved in the last year, but the country continues to risk blacklisting by the Financial Action Task Force (FATF), an international anti-money laundering and terrorism finance watchdog because of the Pakistani military’s selective support of militants and close ties between militants and political parties, including Mr. Khan’s Pakistan Tehreek-e-Insaf (PTI).

Adding an additional layer of complexity is the fact that funds from the kingdom have been flowing into the coffers of ultra-conservative anti-Shiite, anti-Iranian Sunni Muslim madrassahs or religious seminars in Balochistan. It was unclear whether the funds originated with the Saudi government or Saudi nationals of Baloch descent and members of the two million-strong Pakistani Diaspora in the kingdom.

Saudi Arabia sees the Pakistani region as a launching pad of a potential effort by the kingdom and/or the United States to destabilize the Islamic republic by stirring unrest among its ethnic minorities, including the Baluch. While Saudi Arabia has put the building blocks in place for possible covert action, it has to date given no indication that it intends to act on proposals to support irredentist action.

The flow of funds coincided with the publication in November 2017 of a study by the International Institute for Iranian Studies, formerly known as the Arabian Gulf Centre for Iranian Studies, a Saudi government-backed think tank, that argued that Chabahar posed “a direct threat to the Arab Gulf states” that called for “immediate counter measures.”

Iran’s Revolutionary Guards were the target of a rare suicide bombing in December in the port city that killed two people and wounded 40 others.

Iranian officials, including Foreign Minister Mohammad Javad Zarif and Revolutionary Guards spokesman Brigadier General Ramadan Sharif suggested without providing evidence that Saudi Arabia was complicit in the attack.

The attack “underscores the anti-regime sentiment boiling under the surface in provinces such as Sistan and Baluchestan and Khuzestan, as well as security vulnerabilities in Chabahar and beyond,” said Brian M. Perkins, a risk management consultant and former US Navy signals intelligence analyst.

Khuzestan is Iran’s impoverished, oil-rich province that is home to the country’s ethnic Arab community while Chabahar is located in the Iranian province of Sistan and Baluchistan that boasts the country’s highest unemployment rate.

Saudi thinking about stoking unrest strokes with that of President Donald J. Trump’s national security advisor John Bolton, who before assuming office, publicly advocated destabilization of Iran.

Mr. Bolton, in a policy speech in Cairo, asserted this week that the United States had “joined the Iranian people in calling for freedom and accountability… America’s economic sanctions against the (Iranian) regime are the strongest in history, and will keep getting tougher until Iran starts behaving like a normal country.”

Mr. Bolton was referring to harsh US sanctions imposed after Mr. Trump last year withdrew the United States from a 2015 international agreement that curbed Iran’s nuclear program.

Desperately in need of financial support and investment, Pakistan’s agreements with Saudi Arabia and the UAE come at a moment that “Pakistan-Iran relations are at a crossroads, according to Muhammad Akbar Notezai, Dawn newspaper’s plugged in Balochistan correspondent.

A far cry from four years ago when the Pakistani parliament refused a Saudi request that Pakistani troops join the kingdom’s ill-fated military intervention in Yemen, Iran now sees Pakistan as a Saudi ally in the kingdom’s rivalry with Iran.

Similarly, Pakistan fears that Chabahar will allow India to bypass Pakistan in forging closer economic and political ties with Iran as well as Afghanistan and Central Asian nations. Pakistani analysts expect an estimated US$ 5 billion in Afghan trade to flow through Chabahar after India last month started handling the port’s operations.

Pakistan is further concerned that Iran, in response to the Saudi funding that its sees as part of an anti-Iranian US-Saudi plot, could step up support for Baloch nationalists in a bid to raise the stakes for the South Asian nation.

Pakistan is also worried that deteriorating Pakistani-Iranian relations offers India an opportunity to subvert the US$45 billion plus China Pakistan Economic Corridor (CPEC), a crown jewel of the People’s Republic’s Belt and Road initiative.

In November, the nationalist Baloch Liberation Army claimed responsibility for an attack on the Chinese consulate in Karachi, Pakistan’s commercial and industrial heartland.

Writing in the Pakistan Security Report 2018, published by the Islamabad-based Pak Institute for Peace Studies (PIPS), Mr. Notezai noted that “to many in Pakistan, such concerns were materialized with the arrest of Kulbushan Jadhav, an Indian spy in Balochistan who had come through Iran. Ever since, Pakistani intelligence agencies have been on extra-alert on its border with Iran.”

The journalist warned that “the more Pakistan slips into the Saudi orbit, the more its relations with Iran will worsen… If their borders remain troubled, anyone can fish in the troubled water. This is what is (already) happening in the border region.”

Dr. James M. Dorsey is a senior fellow at the S. Rajaratnam School of International Studies, co-director of the University of Würzburg’s Institute for Fan Culture, and the author of The Turbulent World of Middle East Soccer blog, a book with the same title, Comparative Political Transitions between Southeast Asia and the Middle East and North Africa, co-authored with Dr. Teresita Cruz-Del Rosario and three forthcoming books, Shifting Sands, Essays on Sports and Politics in the Middle East and North Africaas well as Creating Frankenstein: The Saudi Export of Ultra-conservatism and China and the Middle East: Venturing into the Maelstrom.

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Middle East

Battling for the Future: Arab Protests 2.0

Dr. James M. Dorsey

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Credit: Institute of Security Studies

Momentous developments across Arab North and East Africa suggest the long-drawn-out process of political transition in the region as well as the greater Middle East is still in its infancy.

So does popular discontent in Syria despite eight years of devastating civil war and Egypt notwithstanding a 2013 military coup that rolled back the advances of protests in 2011 that toppled Hosni Mubarak and brought one of the country’s most repressive regimes to power.

What developments across northern Africa and the Middle East demonstrate is that the drivers of the 2011 popular revolts that swept the region and forced the leaders of Egypt, Tunisia, Libya and Yemen to resign not only still exist but constitute black swans that can upset the apple cart at any moment.

The developments also suggest that the regional struggle between forces of change and ancien regimes and militaries backed by the United Arab Emirates and Saudi Arabia is far from decided.

If anything, protesters in Algeria and Sudan have learnt at least one lesson from the failed 2011 results: don’t trust militaries even if they seemingly align themselves with demonstrators and don’t surrender the street until protesters’ demands have been fully met.

Distrust of the military has prompted an increasing number of Sudanese protesters to question whether chanting “the people and the army are one” is still appropriate. Slogans such as “freedom, freedom” and “revolution, revolution” alongside calls on the military to protect the protesters have become more frequent.

The protests in Algeria and Sudan have entered a critical phase in which protesters and militaries worried that they could be held accountable for decades of economic mismanagement, corruption and repression are tapping in the dark.

With protesters emboldened by their initial successes in forcing leaders to resign, both the demonstrators and the militaries, including officers with close ties to Saudi Arabia and the UAE, are internally divided about how to proceed.

Moreover, neither side has any real experience in managing the crossroads at which they find themselves while it is dawning on the militaries that their tired playbooks are not producing results.

In a telling sign, Sudan’s interim leader Abdel Fattah Abdelrahman Burhan praised his country’s “special relationship” with Saudi Arabia and the UAE as he met this week with a Saudi-Emirati delegation at the military compound in Khartoum, a focal point of the protests.

Saudi Arabia has expressed support for the protests in what many suspect is part of an effort to ensure that Sudan does not become a symbol of the power of popular sovereignty and its ability to defeat autocracy.

The ultimate outcome of the dramatic developments in Algeria and Sudan and how the parties manoeuvre is likely to have far-reaching consequences in a region pockmarked by powder kegs ready to explode.

Mounting anger as fuel shortages caused by Western sanctions against Syria and Iran bring life to a halt in major Syrian cities have sparked rare and widespread public criticism of president Bashar al-Assad’s government.

The anger is fuelled by reports that government officials cut in line at petrol stations to fill up their tanks and buy rationed cooking gas and take more than is allowed.

Syria is Here, an anonymous Facebook page that reports on economics in government-controlled areas took officials to task after state-run television showed oil minister Suleiman al-Abbas touring petrol stations that showed no signs of shortage.

Is it so difficult to be transparent and forward? Would that undermine anyone’s prestige? We are a country facing sanctions and boycotted. The public knows and is aware,” the Facebook page charged.

The manager of Hashtag Syria, another Facebook page, was arrested when the site demanded that the oil ministry respond to reports of anticipated price hikes with comments rather than threats. The site charged that the ministry was punishing the manager “instead of dealing with the real problem.”

Said Syrian journalist Danny Makki: “It (Syria) is a pressure cooker.”

Similarly, authorities in Egypt, despite blocking its website, have been unable to stop an online petition against proposed constitutional amendments that could extend the rule of President Abdel Fattah el-Sisi until 2034 from attracting more than 320,000 signatures as of this writing.

The petition, entitled Batel or Void, is, according to Netblocks, a group that maps web freedom, one of an estimated 34,000 websites blocked by Egyptian internet service providers in a bid to stymie opposition to the amendments.

Mr. El-Sisi is a reminder of how far Arab militaries and their Gulf backers are potentially willing to go in defense of their vested interests and willingness to oppose popular sovereignty.

Libyan renegade Field Marshall Khalifa Belqasim Haftar is another, Mr. Haftar’s Libyan National Army (LNA) is attacking the capital Tripoli, the seat of the United Nations recognized Libyan government that he and his Emirati, Saudi, and Egyptian backers accuse of being dominated by Islamist terrorists.

The three Arab states’ military and financial support of Mr. Haftar is but the tip of the iceberg. Mr. Haftar has modelled his control of much of Libya on Mr. El-Sisi’s example of a military that not only dominates politics but also the economy.

As a result, the LNA is engaged in businesses ranging from waste management, metal scrap and waste export, and agricultural mega projects to the registration of migrant labour workers and control of ports, airports and other infrastructure. The LNA is also eyeing a role in the reconstruction of Benghazi and other war-devastated or underdeveloped regions.

What for now makes 2019 different from 2011 is that both sides of the divide realize that success depends on commitment to be in it for the long haul. Protesters, moreover, understand that trust in military assertions of support for the people can be self-defeating. They further grasp that they are up against a regional counterrevolution that has no scruples.

All of that gives today’s protesters a leg up on their 2011 counterparts. The jury is out on whether that will prove sufficient to succeed where protesters eight years ago failed.

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As Marsha Lazareva languishes in jail, foreign businesses will “think twice” before investing in Kuwait

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IF THERE IS one thing to glean from the case of Marsha Lazareva, it’s that foreign businesses must now think very carefully before investing in Kuwait.

For more than a year, Lazareva, who has a five-year-old son and is one of Russia’s most successful female investors in the Gulf, has been held in the Soulabaiya prison by Kuwaiti authorities. Those authorities claim she ‘stole’ half a billion dollars, a claim she strenuously denies.

Human rights groups and prominent officials, including the former FBI director, Louis Freeh, and Jim Nicholson, former Chairman of the Republican Party and former US Ambassador to the Vatican, have called for her release and expressed concerns about the apparent absence of due process in a country where Lazareva has worked for over 13 years. Both Freeh and Nicholson visited Kuwait in recent weeks with Neil Bush, son of the late President George H. W. Bush. Bush has said Lazareva’s incarceration ‘threatens to darken relations between the U.S. and Kuwait, two countries that have enjoyed a long and prosperous relationship.

Russian officials have been equally concerned. Vladimir Platonov, the President of the Moscow Chamber of Commerce and Industry, confirmed that a single witness gave testimony in Kuwaiti court, and only for the prosecution. ‘I myself worked in prosecution for more than eight years, and I cannot imagine any judge signing off on an indictment like this,’ he said. ‘One fact of particular note is that Maria was given 1,800 pages of untranslated documents in Arabic.’

Serious questions surrounding the safety and future viability of investing in Kuwait are now being raised. Through The Port Fund, a private investment company managed by KGL Investment, Lazareva has contributed hundreds of millions of dollars to local infrastructure and economic development projects during her time in the country. Until 2017, when a Dubai bank froze $496 million without cause, she had worked largely unobstructed.

But as things stand, more foreign investment is unlikely to be forthcoming. Jim Nicholson has said that the ‘imprisonment and harassment’ of Lazareva ‘threatens’ U.S. support. adding that the ‘willingness of the U.S. to do business with Kuwait’ is based on ‘its record as a nation that respects human rights and the rule of law’. Mark Williams, the investment director of The Port Fund and a colleague of Lazareva’s, has called on international investors to ‘think twice before doing business in this country’. 

These comments will surely concern the Kuwaiti government, who said last year that FDI was ‘very crucial’ to the success of its Kuwait Vision 2035 road map. In September 2018, the FTreported that the government planned to reverse its traditional position as an investor in order to diversify its economy, carrying out a series of reforms designed to facilitate foreign investment and assist investors.

But despite these changes, which have propelled Kuwait to 96th—higher than the Middle East average—in the World Bank’s ‘Ease of Doing Business’ report, investors may be unwilling to take the risk so long as Lazareva remains in jail. Lazareva’s lawyers have accused Kuwait of violating international law by breaching a long-standing bilateral investment treaty with Russia. Lord Carlile of Berriew, QC has brought the case to the attention of the British public and the EU, writing in The Times that ‘there is no evidential basis to justify any claim of dishonesty, corruption or any other criminal wrong’. He added: ’Anyone thinking of doing business in Kuwait should read on with mounting concern.’

What’s worth remembering is that Kuwait is an important, long-standing ally of the UK, and a country generally seen as stable and fair. It is equally a major non-NATO ally of the United States, where there are more than 5,000 international students of Kuwaiti origin in higher education. But these relationships, and the investment to which they have historically led, have been cast into doubt. And it now seems certain that relations will continue to sour so long as Marsha Lazareva languishes in Soulabaiya.

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Middle East

Economic reform in the Gulf: Who benefits, really?

Dr. James M. Dorsey

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For Gulf leaders, long-overdue economic reforms were never going to be easy.

Leaders like the crown princes of Saudi Arabia and the United Arab Emirates, Mohammed bin Salman and Mohammed bin Zayed, quickly discovered that copying China’s model of economic growth while tightening political control was easier said than done. They realised that rewriting social contracts funded by oil wealth was more difficult because Gulf Arabs had far more to lose than the average Chinese. The Gulf states’ social contracts had worked in ways China’s welfare programmes had not. The Gulf’s rentier state’s bargain—surrender of political and social rights for cradle-to-grave welfare—had produced a win-win situation for the longest time.

Moreover, Gulf leaders, struggling with mounting criticism of the Saudi-UAE-led war in Yemen and the fall-out of the killing of journalist Jamal Khashoggi, also lacked the political and economic clout that allowed China to largely silence or marginalise critics of its crackdown on Turkic Muslims in the troubled northwestern province of Xinjiang.

The absence of a welfare-based social contract in China allowed the government to power economic growth, lift millions out of poverty, and provide public goods without forcing ordinary citizens to suffer pain. As a result, China was able to push through with economic reforms without having to worry that reduced welfare benefits would spark a public backlash and potentially threaten the regime.

Three years into Mohammed bin Salman’s Vision 2030 blueprint for diversification of the economy, Saudi businesses and consumers complain that they are feeling the pinch of utility price hikes and a recently introduced five per cent value-added tax with little confidence that the government will stay the course to ensure promised long-term benefit.

The government’s commitment to cutting costs has been further called into question by annual handouts worth billions of dollars since the announcement of the reforms and rewriting of the social contract to cushion the impact of rising costs and quash criticism.

In contrast to China, investment in the Gulf, whether it is domestic or foreign, comes from financial, technology and other services sector, the arms industry or governments. It is focused on services, infrastructure or enhancing the state’s capacities rather than on manufacturing, industrial development and the nurturing of private sector.

With the exception of national oil companies, some state-run airlines and petrochemical companies, the bulk of Gulf investment is portfolios managed by sovereign wealth funds, trophies or investment designed to enhance a country’s prestige and soft power.

By contrast, Asian economies such as China and India have used investment fight poverty, foster a substantial middle class, and create an industrial base. To be sure, with small populations, Gulf states are more likely to ensure sustainability in services and oil and gas derivatives rather than in manufacturing and industry.

China’s $1 trillion Belt and Road initiative may be the Asian exception that would come closest to some of the Gulf’s soft-power investments. Yet, the BRI, designed to alleviate domestic overcapacity by state-owned firms that are not beholden to shareholders’ short-term demands and/or geo-political gain, contributes to China’s domestic growth.

Asian nations have been able to manage investors’ expectations in an environment of relative political stability. By contrast, Saudi Arabia damaged confidence in its ability to diversify its oil-based economy when after repeated delays it suspended plans to list five per cent of its national oil company, Saudi Arabian Oil Company, or Aramco, in what would have been the world’s largest initial public offering.

To be sure, China is no less autocratic than the Gulf states, while Hindu nationalism in India fits a global trend towards civilisationalism, populism and illiberal democracy. What differentiates much of Asia from the Gulf and accounts for its economic success are policies that ensure a relatively stable environment. These policies are focused on social and economic enhancement rather than primarily on regime survival. That may be Asia’s lesson for Gulf rulers.

Author’s note: first published in Firstpost

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