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Israel’s March 23rd election results likely to prolong political stagnation; may pose challenges to strategic business operations – Israel Analysis

Executive Summary:

On March 23, Israel held its fourth round of parliamentary elections in the past two years, which produced another stalemate. Rather than the left and right, the political fault lines in Israel are currently divided along the pro-Prime Minister (PM) Benjamin Netanyahu bloc and the anti-Netanyahu bloc. At present, neither has been able to form a viable coalition.
Even if either bloc succeeds in forming a coalition through complex political maneuvering, any potential government’s longevity will likely be limited in time. Therefore, the years-long period of political deadlock in Israel is likely to persist due to the lack of a conclusive outcome.
The political stagnation will hinder the implementation of a long-term budget and comprehensive government planning, which will disrupt proper governance, cause some economic damage, limit the ability for strategic long-term security planning, and hamper Israel’s foreign relations with key allies.
This is liable to pose challenges for long-term strategic business operations in Israel, especially those requiring high-level government collaboration. However, regardless of the political situation, essential services and infrastructure remain operational and the country is largely functioning as normal. The highly successful COVID-19 vaccine campaign has significantly reduced restrictions on business and commercial activities, with domestic and foreign companies and organizations able to operate without major hindrance.
Those operating or residing in Israel are advised to remain abreast of the ongoing political situation, which is liable to result in some challenges to long-term business operations requiring state collaboration. Consult with us at [email protected] or +44-20-3540-0434 for more information.

Implications of the political deadlock

As well as leading to an unprecedented situation in which four elections have been held in the past two years, the political stalemate has had, and will continue to have, an impact on the functioning and governance of Israel in various fields. These range from budgetary and economic issues to foreign relations and long-term security doctrines. Below are the primary areas in which the political deadlock is liable to impact until a conclusive outcome is reached and a stable government is formed.

Economy, budget, and domestic governance

The political situation in Israel has had an impact on the country’s economic functioning and ability to strategically plan ahead. As a result of the political stalemate, the Knesset has not passed an annual budget or comprehensive spending plans since March 2018, which has hindered the capacity of ministries and other government-funded organizations to operate effectively. This concern has been shared by Israel’s economic leadership, as evidenced by comments on April 9 by Bank of Israel Governor, Amir Yaron, who reiterated that “without a stable government that operates long-term” Israel will not be able to implement a multi-year economic plan to effectively emerge from the COVID-19 health and economic crises. This view highlights the importance of both the formation of a stable and cohesive government as well as its longevity for proper governance and economic growth. This is particularly in light of the pandemic, which had a severe impact on the Israeli workforce, with unemployment reaching a high of 27 percent early on in the health crisis and falling to 9.8 percent by March amid the opening up of the economy. Prior to the pandemic, unemployment had reached a record low of 3.8 percent.
FORECAST: Payments to furloughed workers in Israel are set to expire at the end of June. Many furloughed workers have preferred to continue receiving state payments instead of returning to the workforce and will thus likely be compelled to return to part-time unemployment when these payments end in June. That said, parts of the population will likely remain indefinitely unemployed. This will require government-funded training programs and investment, potentially in cooperation with the private sector, to assist these individuals to reenter the workforce. This is especially because several sectors, particularly those depending on tourism, continue to operate at lower than pre-pandemic capacity and there are therefore fewer jobs in these fields. In the absence of a stable government able to strategically implement such initiatives, hundreds of thousands of people are liable to be in a precarious final situation, which will place strain on the government and the wider economy as their consumption will be reduced.
The political situation has partly impaired Israel’s ability to respond to pressing needs in a timely manner. This is most saliently evidenced by a reported delay in Israeli payments to vaccine production companies as the Israeli cabinet has not convened to pass this budget due to political infighting in the current Likud-Blue & White caretaker coalition. This is due to the cancellation of a cabinet meeting by Defense Minister Gantz as a result of Netanyahu’s alleged refusal to permit the appointment of a Justice Minister, which also hinders the Knesset’s ability to pass key legislation. The void in the Justice Ministry is one of multiple senior roles, including in the security and defense sectors, that have not been filled due to government infighting. The fact that this led to Gantz’s cancellation of the cabinet meeting underscores the potential for multiple other issues of an important and strategic nature to be hindered or delayed due to political stagnation. The ministers were slated to vote on a 2.1 billion USD procurement of new vaccine doses, which is essential for Israel to sustainably combat the COVID-19 pandemic over the long-term and keep the economy open and thus provide crucial income for individuals and revenue for the state. FORECAST: Although the government will likely find a solution to this specific issue, the development highlights multiple aspects of the current political impasse on proper governance.
The failure to pass a budget has impacted the government’s capacity to fund infrastructure projects and major national initiatives. This has affected multiple sectors and fields. For instance, the lack of a budget hindered the start of the academic year as the Knesset was forced to pass a special budget in order for schools to open while other state-funded educational services were impacted. More generally, the lack of a long-term budget poses challenges in terms of structural economic reforms and for ministries to provide essential services, including physical and mental healthcare, social provision, and education, which require increased investment in order to meet rising inflation and demand.
FORECAST: Although the government has managed to pass a series of short-term spending plans and special budgets to cover specific needs, the longer the political deadlock continues, the more that certain services and infrastructure plans will be impacted. Furthermore, even if a coalition is formed, if its primary components lack a shared vision beyond replacing the current Netanyahu-led government, this will also hinder state funding and the passing of a viable long-term budget due to disagreement over policy and economic priorities. Taken as a whole, the political situation will continue to have a relative impact on the functioning of the state over the coming months at least. It may also reduce the desire of international firms to commit to invest and set up offices in Israel until a stable government is in place that can facilitate such operations and work in collaboration. This is also evidenced by a warning by an international credit ratings agency from March 31 indicating that while the present situation does not pose immediate risks to Israel’s economic rating, shown by the fact it kept Israel’s credit rating at AA-, if the political situation persists, it will elevate the fiscal risks due to the difficulty in reducing the deficit. Bank of Israel governor Yaron reinforced this concern, stating that “credit ratings companies are worried by the government’s instability and the failure to pass a budget.”
Regardless of the political situation, essential services and infrastructure remain operational and the country is largely functioning as normal. The highly successful COVID-19 vaccine campaign has significantly reduced restrictions on business and commercial activities, with domestic and foreign companies and organizations able to operate without a major hindrance. FORECAST: The political stagnation in the country is more likely to pose a challenge to foreign companies potentially seeking to initiate major investments or launch large-scale projects within Israel. This is because government ministries face both budgetary issues and obstacles in the decision-making process. This may also affect collaboration with ministries or state-funded organizations, but routine operations of existing companies within Israel will continue regardless, albeit delays can be expected when receiving permits, regulatory approvals, or other activities that depend on legislation.

Foreign Relations

The political situation is also somewhat affecting Israel’s ability to forge relations and gain international influence. As a result of political infighting, the current caretaker government, even when it managed to convene on a fairly regular basis, struggled to project a united message to the international community regarding Israel’s policies as senior members of the Likud and Blue and White parties frequently undermined each other. This is particularly the case in sensitive issues of foreign and defense policy, with the latter portfolios being held by Blue and White’s Gabi Ashkenazi and Benny Gantz, respectively, but many diplomatic and security matters being directed by Netanyahu. These competing points of authority have likely posed problems for various states when dealing with Israel. FORECAST: The failure to establish a viable and stable government led by ministers appointed for the long-term will likely pose a challenge for Israel’s efforts to forge relations in essential sectors such as trade and commerce. Foreign governments may be reluctant to commit to such agreements with caretaker officials, while the latter may be restricted by legal obstacles placed upon an interim government.
The current impasse has resulted in a situation wherein 36 new ambassadorial appointees, which have been approved by Israel’s Ministry of Foreign Affairs (MFA) appointments committee are not yet fulfilling their roles. This situation has been ongoing since November 2020 and many of the ambassadors are reportedly ready and set to be posted on diplomatic missions on an immediate basis. Reports state that this delay is due to a refusal by Netanyahu to bring their approval to the cabinet for its consent. The absence of new ambassadors is a significant issue that is liable to harm Israel’s diplomatic, trade, and security interests. This situation can hinder Israel’s ability to conduct diplomatic campaigns and strategic discourse with other international actors as well as to advance visits of economic delegations to other countries.
Most importantly for Israel, the lack of government can undermine the country’s relations with key strategic allies such as the US. Continued political paralysis within Israel has likely somewhat hindered its ability to build strategies and coordinate with its allies on matters of essential policy and national security. This is because these allies may be reluctant to engage in long-term planning in the absence of a stable government, especially one that may be perceived as volatile and potentially liable to fall as soon as a political crisis emerges. This may impact Israel’s positions on the Iranian nuclear agreement, especially amid international efforts to revive the Joint Comprehensive Plan of Action (JCPOA); and any US engagement with the Palestinians.
Another area that the political situation can impact in terms of foreign policy is the pre-election, US-brokered normalization trend that was recorded, consisting of diplomatic agreements between Israel and four Arab states (the UAE , Bahrain, Sudan, and Morocco). These deals are extremely important and strategic for Israel’s diplomatic, security, and economic interests as they enable Jerusalem to garner additional international support against its adversaries and forge trade and investment relations. FORECAST: This trend is likely to slow down or be suspended altogether in the absence of a stable Israel government that other potential Arab states perceive to be a long-term partner. The regional actors that are most likely to reach a normalization agreement with Israel tend to be relatively risk-averse and attach great importance to stability. Thus, if the political deadlock continues or an unstable government is formed, further normalization agreements are unlikely.

Security

In terms of security, the political deadlock will have an impact on the procurement of military hardware and weaponry. It may also impact the development of advanced security doctrines based on these weapon systems and long-term, large-scale organizational planning. This is due to various budgetary obstacles and challenges posed to the decision-making process. However, over the past two years, despite the political stalemate, Israel has continued to act to safeguard its security interests across multiple arenas. Military activity, both overt and covert, has been reported in various theaters of operation throughout the Middle East region. That said, although these operations are informed by a guiding strategy that has been formulated by previous governments and continues to be updated by Israel’s security agencies, especially vis-a-vis the regional threat posed by Iran and its proxies, the lack of a cohesive government is liable to affect proper governance and the decision-making process. This is shown for instance by the Israeli government’s apparent lack of strategy regarding the best way to manage the threat of militant groups based in the Gaza Strip, which is an issue that periodically emerges with a potentially decisive operation indefinitely put on hold until a stable government is formed. Taken as a whole, despite the political situation dictate, Israel can continue to respond to any threats to its national security and continue to formulate a military strategy to defend these interests.
FORECAST: This situation will impact Israel’s security in the strategic realm and possibly lead to long-term damage as Israel’s adversaries can gain an edge on delays to procure and develop weaponry due to budgetary and decision-making challenges. However, the ability of Israel’s security apparatus to mitigate and thwart security within Israel itself will remain intact over the coming period. The Israeli security agencies have proven during this period of relative political instability and throughout periods of far greater security volatility that the vast majority of local and regional threats, namely along its northern borders and vis-a-vis Palestinian militants in the West Bank and Gaza, are manageable. Thus, the political situation will not lead to a fundamental destabilizing of the security environment within Israel over the coming period.

Election Results and Political Blocs

On March 23, Israel held its fourth round of elections for its parliament (the Knesset) in the past two years.
During this two-year political deadlock, a government was formed in May 2020, which was led by Prime Minister (PM) Benjamin Netanyahu and the Likud party alongside Benny Gantz, his political rival from the“Blue and White” party. The government’s functioning was hindered by in-fighting and discord between the rival political factions, which eventually led to the dispersal of the Knesset in December 2020, resulting in the March election.
The results of the election can be seen below. The political fault lines within Israel since the first election in March 2019 have revolved around the parties’ willingness to join or rejection of a government led by PM Netanyahu, who is on trial having been officially indicted in November 2019 for breach of trust, bribery, and fraud.
The debate on Netanyahu’s political and legal status has transcended the traditional left-right discourse within the Israeli political landscape. In this context, parties that are part of the right-wing political camp in Israel, such as former Likud member Gidon Saar’s “New Hope”, have formally declared themselves to be part of the “anti-Netanyahu” or “change” bloc. Other parties, such as Naftali Bennett’s right-wing “Yamina” and Mansour Abbas’ Islamist “Raam”, remain unaffiliated with either of the pro- or anti-Netanyahu blocs.
This has resulted in a situation that neither the pro-Netanyahu bloc, primarily made up of right-wing and religious/ultra-Orthodox parties nor the ideologically diverse anti-Netanyahu bloc has been able to form a coalition, which requires a 61-seat majority in the Knesset.
On April 6, Netanyahu was given a four-week mandate to form a government by President Reuven Rivlin. He has until May 4 to try to assemble a viable coalition and can thereafter request a 14-day extension at the discretion of the president. If he fails, Rivlin can ask a second person or return the mandate to the Knesset. If these alternatives fail to yield a government, the Knesset will automatically dissolve and another election will be held.

Affiliations of political parties

These are the various political parties and their affiliations and policies.

Main options for government coalitions – likelihood and longevity

Option 1: Pro-Netanyahu bloc & Yamina government plus Raam external support in Knesset

Prime Minister: Benjamin Netanyahu
Coalition Components: Likud, United Torah Judaism, Shas, “Religious Zionism”, and Yamina (59 seats)
External support for government votes: Raam (4 seats)

Analysis:

This option is somewhat feasible as it includes various political parties with broadly similar ideological agendas and worldviews in government. Although the Raam party would likely not be a formal part of the government, but an external support bloc, its inclusion poses the greatest challenge to the formation of the government. The “Religious Zionism” party has explicitly stated and reiterated that it will not be part of a government that depends on Raam’s support and this is likely to hinder any progress on this option. This is compounded by major concessions that Netanyahu may have to make to Bennett for the latter to join a government led by the former. In terms of longevity, the Raam party’s leadership is able to cooperate with the religious factions in this potential government, particularly over social policy and support for religious institutions. However, its overall Islamist agenda and links to the Palestinian cause are liable to create complications for the government’s functioning, which would be exacerbated during periods of escalation or religious sensitivities.

Option 2: Pro-Netanyahu bloc & Yamina government plus defectors from the anti-Netanyahu bloc

Prime Minister: Benjamin Netanyahu
Coalition Components: Likud, United Torah Judaism, Shas, “Religious Zionism”, Yamina + 2 members of anti-Netanyahu bloc shift allegiances (61 seats)

Analysis:

This government is unlikely due to the reluctance of members of the center or center-right parties to renege on their pledges not to join a government led by Netanyahu amid his indictment on corruption charges. The “Blue and White” party has insisted it will not join a Netanyahu-led government following its previous power-sharing experience with the incumbent prime minister while “New Hope” members, more likely to defect, have so far insisted they will not join the pro-Netanyahu bloc. Although individual members of these parties may choose to join Netanyahu under the pretext of preventing another round of elections, the parties themselves are unlikely to do so due to the potential for a fifth vote and the impact this would have on voters who will perceive this as the violation of election pledges. In terms of longevity, a government made up of the Netanyahu bloc, Yamina, and two defectors from the anti-Netanyahu bloc would likely be more stable on key policies than a Raam-backed coalition. However, with legislation pertaining to Netanyahu’s legal complications, this government would likely face substantial hurdles as several members of Yamina and most potential defectors are unlikely to support any perceived efforts by Netanyahu or his supporters to release him from or evade the legal process.

Option 3: Anti-Netanyahu bloc plus external support from Raam

Prime Minister: Naftali Bennett/Yair Lapid (Rotation)
Coalition Components: Yesh Atid, Blue & White, Yisrael Beitenu, Labor, Meretz, Yamina, New Hope (58 seats)
External support for government votes: Raam (4 seats)

Analysis:

In terms of the likelihood of formation, this government faces multiple challenges due to the ideological diversity of the parties it would include and the pressure within both the left-leaning (Yesh Atid, Labor, Meretz) and right-leaning factions of the potential coalition (Yamina, New Hope) to extract concessions from the other. The former parties seek to ensure Yesh Atid’s Labor is the prime minister (PM) or first in any rotation, while the latter right-leaning bloc insists on Bennett as PM and first in the rotation. The right-leaning parties will also aim to block the left-leaning parties from holding key cabinet posts and thus advancing a left-wing agenda as well as blocking their entry to the security cabinet. Even if this government does materialize, it would likely be hindered by major in-fighting and its longevity is thus very low.

Option 4: Netanyahu chooses/forced to sit aside; right-wing government formed

Prime Minister: Consensus among right-wing parties
Coalition components: Likud, Shas, United Torah Judaism, Yamina, New Hope, Religious Zionism (65 seats)

Analysis:

This option is extremely unlikely due to Netanyahu’s widespread popularity among the Likud party and the Ultra-Orthodox parties that support the Likud. Members and voters of these parties would consider any attempt to coerce Netanyahu to step down as anti-democratic, which would create major tensions within Israeli society. Netanyahu also continues to hold significant support among parliamentarians in his and other supporting parties, while even some of his detractors may oppose legislation that prevents him from being prime minister due to its targeted nature. This is evidenced by the failure of anti-Netanyahu parties to pass such legislation over the past years despite their overall opposition to his continued premiership. Taken as a whole, this option is highly unlikely and its longevity is thus negligible.

BOTTOM LINE

Overall, given that all of the above-mentioned options pose considerable challenges to political actors in terms of both the formation of a viable coalition and the longevity of any government, the most likely scenario is either a fifth election with a similar outcome along pro- and anti-Netanyahu lines or an unstable government that fails to complete its term and thus elections are again called.

Recommendations:

In light of the current situation:

Those operating or residing in Israel, or seeking to do so, are advised to remain abreast of the ongoing political situation, which is liable to have an impact on business continuity.
It is advised to allot for obstacles to cooperation with public sector bodies and ministries as well as other state-funded organizations.
Allot for disruptions to processes that require government permits, regulatory approvals, or other activities that are liable to depend on legislation.
More generally, allot for continued restrictions on entry to Israel due to the COVID-19 pandemic. Consult with us at [email protected] or +44-20-3540-0434 for guidance on entry to Israel amid the current limitations.

General Recommendations:

Travel to Israel may continue at this time while adhering to security precautions regarding militant attacks, while avoiding the immediate vicinity of the Syrian, Lebanese, and Egyptian borders, due to the persistent risk for cross-border violence.
Those traveling in the 40 km area surrounding the Gaza Strip should continue adhering to all safety precautions regarding early warning sirens for incoming rockets. Remain cognizant of the situation along with the Lebanese and Syrian border areas, as minor hostilities between various groups can escalate into a broader conflict. In case you hear a siren, seek shelter in a protected area and remain inside for at least 10 minutes.
In major Israeli cities, remain vigilant in crowded commercial areas or public transport hubs, as these locations have been targeted by militant groups in the past. Alert authorities to suspicious, unattended packages in these areas.
As a general precaution, avoid nonessential travel to the vicinity of Jerusalem’s Old City, particularly in the vicinity of Damascus Gate, due to the increased potential for acts of militancy and civil unrest. For those seeking to travel to the Old City, it is advised to contact us for a security-oriented travel guide.

COVID-19-induced impact on oil, tourism sectors to have wide-ranging economic, social ramifications on GCC countries over coming months – GCC Analysis

Executive Summary

The decline in global oil prices and tourism due to ongoing COVID-19-induced travel and business restrictions has led to severe economic challenges for the Gulf Cooperation Council (GCC) states, which heavily depend on these sectors for revenue. This will likely lead to a recession, as per International Monetary Fund (IMF) projections that the GCC economy will contract by 7.1 percent in 2020.

The ongoing repatriation of thousands of expats from the region to their countries of origin as a result of the crisis is likely to have multiple social and economic ramifications, particularly in countries like the UAE and Qatar, where foreign nationals make up almost 90 percent of the total population.

This will lead to labor shortages, increasing the need to expedite the nationalization of the workforce and rapidly train domestic workers, which is unlikely to occur in such a short time span.

Those operating in the GCC states are advised to remain abreast of COVID-19-triggered restrictions and related economic and labor measures that are being undertaken by the respective governments, and to take mitigating actions against potential resultant risks.

Please be advised

In light of the ongoing COVID-19 pandemic, Gulf Cooperation Council (GCC) countries have adopted various measures, the most prominent of which include:

Bahrain

On March 17, the government announced an economic stimulus package worth 11.4 billion USD to support the country’s private sector.

On April 20, Bahrain announced that the budget of ministries and government departments will be reduced by 30 percent, for an unspecified period, in order to mitigate the impact of COVID-19.

According to June 12 reports, the state-owned oil company decided to terminate the contracts of “hundreds of foreign employees”.

On June 15, the government approved a draft law to allocate approximately 470 million USD to the budget of 2020 in order to “deal with emergency expenses required for mitigating COVID-19 impacts and curbing its spread.”

Kuwait

On June 3, Kuwait’s Prime Minister vowed to “resolve the demographic imbalance” by reducing the expat population from 70 to 30 percent.

On June 10, the government announced that expats will no longer be hired in the oil sector.

Oman

On March 17, Oman’s Ministry of Finance announced a five percent reduction in the budget allocated to government agencies.

On April 29, Oman ordered public sector companies to accelerate the process of replacing foreign staff with Omani nationals.

Qatar

According to June 11 reports, Qatar directed ministries and government-funded entities to reduce costs through layoffs or salary cuts of non-Qatari employees.

On July 8, the Qatari cabinet approved a draft law, which stipulates that state-owned private sector companies must strive towards ensuring that their overall workforce is made up of at least 60 percent Qatari nationals.

Saudi Arabia

On April 12, the Organization of Petroleum Exporting Countries (OPEC) Plus, which is de-facto led by Saudi Arabia, agreed to reduce production by 9.7 million barrels per day (mbpd) until July, then by 7.7 mbpd from August-December, and then by 5.5 mbpd until April 2022. The group also called upon “all major producers to contribute to the efforts aimed at stabilizing the market”.

On April 15, the Saudi government allocated 13.3 billion USD to support the private sector.

On May 11, Saudi Arabia announced budgetary cuts totaling eight billion USD to “Vision 2030”-related programs and increased the value-added tax (VAT) on goods and services from five to 15 percent for an unspecified period.

UAE

On July 5, the UAE announced a broad government restructuring for “agile and swift” decision-making amid the pandemic. This includes the merging of energy and infrastructure ministries as well as abolishing several government service centers and converting them to digital platforms within two years.

The UAE has announced a phased stimulus package for businesses, totaling approximately 1.7 billion USD, the most recent part of which was announced on July 11. This has included postponement of rent payments, customs reimbursements, and refunds of 50 percent on municipality fees on sales for hotels and restaurants.

Background

There are several common features that characterize the six GCC economies, namely, Saudi Arabia, UAE, Qatar, Kuwait, Bahrain, and Oman. These include high dependency on hydrocarbon revenue, a young and rapidly growing national labor force, and high reliance on the expat workforce. Together, they account for approximately one-fifth of the world’s crude oil production and possess approximately two trillion USD worth of financial wealth.

However, there is a wide variation in resource endowments across these states, which, in turn, poses unique risks and challenges for these economies. For instance, Kuwait, Qatar, and the UAE have substantial energy reserves, with relatively small populations, as compared to Saudi Arabia, which has the largest reserves of oil but is spread across a much larger territory and population. Bahrain and Oman, with oil and gas reserves that are relatively limited, are more vulnerable to economic deficiencies when compared to the other GCC states. While plans to diversify their energy-based economies have been in place across the Gulf states in varied scale since the 1970s, the drop in oil prices since 2014 has brought forward the urgency of economic diversification in GCC states.

COVID-19-related restrictions on travel and business operations have had an overall adverse impact on the global economy. The economic ramifications of these restrictions have been severely witnessed in GCC states amid a decrease in the global demand for oil, approximated at 18 percent since the start of 2020. This has led to a steep decline of more than 70 percent in the price of oil, the lowest in over 20 years. According to an IMF report on July 13, oil revenues are now projected to decline by more than 270 billion USD in 2020, relative to 2019.

Assessments & Forecast

COVID-19-related restrictions on business, travel pose significant economic challenges to Gulf countries

Challenges posed by steep decline in oil prices

The hydrocarbon sector, namely oil, petroleum, and gas, as well as their derivatives, contribute significantly to the GDP and government revenue of GCC countries. In the case of states such as Kuwait, Qatar, and Saudi Arabia, the GDP derived from the oil and gas sector accounts for almost 50 percent of their total GDP. At the onset of the global spread of the COVID-19 pandemic, an initial catalyst that contributed to the plummeting of oil prices in the February and March was the failure of Saudi Arabia and Russia, two of the world’s largest major oil producers, to reach a consensus to slash oil production, which led to a price war between the two countries. Thereafter, Riyadh propelled its output to an unprecedented 12 million mbpd in early April in a bid to defend its share in a shrinking market. On April 12, the OPEC Plus reached a deal to slash production by 9.7 mbpd until the end of July, which underscores joint efforts to rebalance the demand and supply in the market. Despite this, oil prices have fluctuated over recent months, largely due to oscillations in global uncertainty amid the spread of the pandemic. FORECAST: While it is likely that the expected easing of restrictions on travel and businesses will boost demand for crude oil over the coming months, the ongoing uncertainty surrounding the pandemic, and potential for additional waves of infection, threatens to derail this recovery.

The decline in oil prices of more than 70 percent over recent months has led to increased financial constraints for all GCC states. This has compelled authorities to slash public spending while simultaneously redirecting funds to help citizens and the private sector cope with the significant financial challenges resulting from the virus. This has been particularly evidenced by reductions in the state budget for 2020 in Bahrain and Oman, as well as the allocation of millions of USD by Saudi Arabia and UAE to boost liquidity in the economy.

FORECAST: Overall, given that government spending is a key driver for economic growth, and is mostly derived from the energy sector, the recent cuts in capital and current spending will likely lead to an economic recession in at least some of the GCC states. This is bolstered by the IMF’s prediction, as of July 13, that the GCC economy is expected to shrink by 7.1 percent this year, both in the oil and non-oil sectors. The fact that this is a revision of the 2.7 percent predicted contraction in April, indicates the overall downward economic trend that is likely to be experienced by all six countries over the coming year, albeit in varying degrees. Most notably, the largest GCC economy, Saudi Arabia, is predicted to shrink by 6.8 percent, per June 24 reports quoting the IMF, compared to a 2.3 percent contraction that was predicted in April.

Meanwhile, GCC countries have long sought to diversify their hydrocarbon export-driven economies in order to decrease the vulnerability of their revenues. To this effect, all of the GCC countries have set out ambitious targets and strategic visions that are also designed to appeal to global investors. These include Bahrain’s Vision 2030, Kuwait’s New Vision 2035, Oman’s Vision 2040, Qatar’s National Vision 2030, Saudi’s Vision 2030, and UAE’s Vision 2021. However, given that commitment to these reforms have been inconsistent over the past years, most governments continue to rely on oil revenues. FORECAST: In this context, the slump in oil prices, as well as the overall depreciation of government revenue over the recent months indicates that investments in non-essential projects, such as in the sectors of infrastructure and real estate, will likely be postponed, which will further prolong the countries’ efforts to diversify their sources of income.

Challenges posed by decline in tourism, hospitality industry

Most GCC states have made significant efforts to transform to a hub for tourism and hospitality over recent years, constituting a major economic driver in terms of these countries’ economic diversification strategies. To this effect, GCC states have laid out long-term plans for airport expansions to increase the handling capacity of projected visitor inflow, further supported by the relaxation of visa rules to further boost tourist arrivals. Moreover, the hosting of mega-events, such as the Expo 2020 in Dubai and the FIFA World Cup 2022 in Qatar, were expected to grow the GCC’s leisure and hospitality construction sector expenditure from 467 billion USD in 2019 to 642.3 billion in 2023, implying a five-year compound annual growth of 8.6 percent, compared to the 5.7 percent achieved in 2013-18.

FORECAST: In this context, the effect of COVID-19-induced restrictions on travel between countries will have a significant economic impact on the GCC countries. For example, according to reports, the forecasted revenue loss for the UAE airline industry alone is projected at 5.3 billion USD, due to the drop in approximately 23.8 million passengers. Additionally, the postponement of highly anticipated events will exacerbate these losses. For instance, the Expo 2020 in Dubai, which was originally scheduled to take place in October 2020-April 2021 and was expected to contribute approximately 30 billion USD to the economy, will add to the decline in predicted revenues. Saudi Arabia will likely face similar challenges, given that authorities have banned pilgrims from other countries from traveling for the Hajj pilgrimage, which is slated to begin on July 28. This is particularly given that Hajj, which witnesses the arrival of almost 2.5 million pilgrims every year, generates an annual revenue of approximately 12 billion USD.

Measures adopted to mitigate economic challenges likely to increase socio-economic grievances, labor shortages

The “rentier state” model in the Gulf region has been long associated with the overall lack of taxation due to the abundance of allocated resources, wherein the state offers its citizens goods and services in return for substantial autonomy in decision-making, which is often characterized by a reduction in political engagement. However, economic conditions that have persisted across recent years, particularly in the wake of declining oil prices since 2014 and increased budget deficits in 2015-16, indicate that this pattern of governance is no longer feasible, especially as prolonged low oil prices could worsen the fiscal situation. Along with increased borrowing through the issuing of local and international bonds, in 2016, all GCC states signed an unprecedented framework for the introduction of Value Added Tax (VAT), known as the Common VAT Agreement. While the measure came into effect in the UAE and Saudi Arabia on January 1, 2018, and in Bahrain on January 1, 2019, other countries have stated that they needed more time to implement the reform. In the former states, a five percent levy has been imposed on several designated essential products and services including gasoline and diesel, food, clothes, utility bills, and hotel rooms, with the exception of public transport, medical treatment, and financial services. Similarly, a 50-100 percent “sin tax” has been imposed on certain products, including soft drinks and tobacco, in the UAE, Saudi Arabia, and Oman. In this context, Saudi Arabia’s tripling of VAT from five to 15 percent on May 11 highlights the Kingdom’s efforts to accelerate revenue generation through the collection of taxes.

FORECAST: These measures, combined with the cutting of the cost of living allowance for state workers that has been in place since 2018, will likely increase socio-economic grievances among the local population due to the increase in the cost of living. While Riyadh’s move was expected to cause a ripple effect across the region, the UAE’s Ministry of Finance indicated on May 12 that the country did not have immediate plans to raise taxes. Oman and Kuwait are expected to introduce VAT systems by 2021. However, given the possibility of protracted economic effects of COVID-19, there remains a potential for the introduction of tax reforms and other austerity measures by the remaining GCC states over the coming months.

Furthermore, the COVID-19 pandemic has forced many sectors across the GCC to shore up spending through layoffs and employee salary cuts. In this context, given that a high percentage of the population of most GCC states’ workforce consists of expats, it is this community that is liable to be most impacted by the economic downturn. While several governments have implemented policies that seek to prioritize employment for local citizens at the expense of foreign workers over the recent years, since the outbreak of the health pandemic, an acceleration of these measures has been witnessed in countries such as Oman, Qatar, Bahrain, and Kuwait.

This is evident by Oman’s April 29 decision to replace expats with Omani nationals in its public sector, as well as Qatar’s June 11 directive to all state-owned entities to curb spending through layoffs and salary cuts of expats, rather than Qataris. Meanwhile, Kuwait has explicitly stated its objective to reduce the expat population from the current 70 percent to 30 percent, although no timeframe was attached to this objective. This is part of an effort to address the demographic imbalance in the country, as indicated by the Kuwaiti PM’s statement on June 3. Kuwait has further passed measures such as a ban on the hiring of expats in the country’s oil and municipality sectors. Furthermore, several lawmakers have also tabled a bill in the parliament to introduce a quota system, wherein the percentage of expat population from different countries will be capped at certain ceilings.

To some extent, the sense of urgency in passing such expat-focused legislation has also been triggered by the growing perception that the spread of the virus in some of the GCC countries has been caused by foreigners, particularly by blue-collar workers that make up a high percentage of the countries’ migrant population. This is primarily due to the fact that a majority of such workers live in low-cost, overcrowded labor camps, a number of which had emerged as hotspots for the spread of the virus, as in the case of Doha’s Industrial Area. This may have increased resentment among parts of the local citizenry towards the migrant population, due to the pressure placed on the country’s resources and infrastructure amid the current health crisis.

That said, such policies and sentiments vis-a-vis the expat population do not resonate uniformly across all GCC states. For instance, per June 11 reports, UAE’s Minister for Infrastructure Development stated that the “UAE is a place where expats are well-skilled and we definitely need them. The pandemic is not going to be here for a long time…then we would regret that we got rid of our skilled workforce, whether it is nationals or expats. We would like to keep them”. This indicates the country’s recognition that the expat population, especially skilled migrants that constitute a majority of the middle class in the UAE, are vital for economic growth and development. This is further evidenced by the fact that the UAE and Saudi Arabia have not passed any major legislation over the recent months that seeks to specifically slash the expat population by denying them employment. FORECAST: Regardless of the absence of long-term policies to “address the demographic imbalance”, as in the case of Kuwait, the large departure of the migrant population, some of whom who are being repatriated to their home countries from the Gulf amid the COVID-19 pandemic, is liable to have several far-reaching social consequences. This will be explored in the next section.

Social, economic implications of economic slump, expat-focused measures over coming months

Domestic impact on economy, potential for labor shortage

FORECAST: The sudden exit of the migrant worker population will significantly alter the demographics, especially in countries like the UAE and Qatar, where foreign residents comprise approximately 90 percent of the population. In the UAE alone, more than 350,000 Indian nationals, and over 60,000 Pakistani nationals, have registered to be repatriated, as of the time of writing. Similarly, over 25,000 Indians have reportedly registered for repatriation due to job losses in Saudi, while 10,000 such nationals have already departed from Qatar. Moreover, countries like Kuwait also announced amnesty schemes for the evacuation of workers of all nationalities, which has reportedly benefitted over 45,000 Indians and other nationals. This will therefore have substantial economic and social implications over the coming months and years, which is expected to be larger than those witnessed during the 2008-2009 financial crisis.

FORECAST: The uprooting of middle-class residents and their families is liable to negatively impact the domestic economy, as sectors that relied on these customers such as restaurants, schools, clinics, and the retail sector, will suffer major losses. Without government support, these services will be forced to lay off more people, which may trigger a deflationary impact and likely lead to a secondary wave of migrant exodus. The exit of low-income earners, such as domestic assistance, will also lead to social implications, as this may force a change in the overall lifestyles of locals. In the UAE, it is suggested that 96 percent of Emirati families employ domestic help to raise their children, highlighting the dependence of the local population on expat workers.
FORECAST: The utility of expats as consumers and sources of revenue in the form of taxes and fees, including VAT on goods and services, road tolls, and visa renewal fees will decrease. For example, in 2018, the UAE collected approximately seven billion USD in VAT collection, which accounted for almost 1.7 percent of the country’s nominal GDP that year. Similarly, Saudi Arabia collected almost 9.3 billion USD in the form of VAT in 2018. Saudi was also expected to raise 17.3 billion USD in 2020 in the form of expat visa renewal fees, as well as the charges that are to be paid by companies for every foreign worker they hire. Therefore, this will contribute to a further reduction in government revenue.

FORECAST: A labor shortage will likely be experienced in the market over the coming months due to the departure of expat personnel, both high-earning professionals and low-income workers. This will likely be most acutely felt when the economy and oil prices rebound and stabilize to a relative degree, which will, in turn, facilitate the resumption of several infrastructural and development projects that have been currently postponed. The implementation of these projects will be hindered by the labor shortage. This is given that ambitious development plans adopted by the GCC states have largely led to an extensive, unregulated import of both skilled and unskilled labor. Moreover, the financial ability of these countries to purchase technology and knowledge also meant that professional development has not always been a top priority. This has led to a disconnect between rewards offered to nationals in the form of lucrative jobs in the public sector, unemployment and other benefits, and their level of merit and competency.

FORECAST: Therefore, GCC governments will likely face significant challenges in developing the skill sets of its national workforce to fill the gaps within the labor market over the short term. Authorities will be forced to provide substantial incentives for citizens in order to attract them towards the private sector at a time of diminishing resources, as employment in the public sector for most countries has either been or are approaching saturation. In the absence of such incentives, there also remains a possibility for protests in demand of better employment and economic opportunities. However, in many states, the overall lack of large civil society organizations and protest groups as well as a broader absence of a protest culture will render it difficult for a potential anti-government movement to mobilize.

FORECAST: Overall, COVID-19-triggered restrictions and resulting losses in revenue in both the private and public sectors have, and will likely continue to lead to, job layoffs and salary cuts across the region. For short-term delay, most GCC governments have announced emergency economic stimulus packages. These have included the expansion of government loans provided to businesses, direct cash transfers as partial payment of salaries, as well as deferments on rent and utility payments to help citizens and residents cope with the economic impact of the pandemic. Additionally, governments have been forced to utilize resources on protective measures and health infrastructure to mitigate the spread of the pandemic, bolstered by the free testing and treatment of the virus in several countries, including the UAE and Saudi Arabia. These costs are liable to increase in the event of further waves of infection. However, over the coming years, restrictions will gradually be eased in order to restore economic activity. Given the already diminished government revenue as well as the pressure to curb state expenditure and bolster public finances, states will be compelled to mitigate economic challenges by increasing taxes and training the local workforce. However, as noted, this will have a profound impact on the economic structure, social dynamics, and functionality of these societies.

Recommendations

Travel and operations can continue in GCC states while remaining abreast of COVID-19-related restrictions and procedures, as well as of social and economic developments due to changes to the workforce and reductions in state revenue.

It is therefore advised to take necessary measures to mitigate the potential adverse effect of these developments to ensure business continuity, while allotting for potential disruptions and service failures in these countries.

Furthermore, it is advised to maintain vigilance due to the heightened risk of anti-foreign sentiment in the GCC states on account of the perception among some parts of the local populace that expats are a burden on their resources.

Potential Israeli ‘annexation’ to destabilize security environment, affect relations with Gulf states – Israel & Palestinian Territories analysis

This report was written by:

Darren Cohen – Senior Intelligence Manager, Middle East and North Africa

And reviewed by:

Oded Berkowitz – Deputy Chief Intelligence Officer

Executive Summary

Israeli Prime Minister Benjamin Netanyahu and current Alternate Prime Minister Benny Gantz reached a coalition agreement in April, which stipulates that Israel can apply sovereignty to parts of the West Bank, in coordination with the US administration, from July 1.

The different and currently unknown versions and timing of the potential application of sovereignty, also known as annexation, will have an impact on both the local backlash vis-a-vis the Palestinians, as well as Israel’s relations with prominent regional actors.

Overall, Israel’s potential annexation of parts of the West Bank will destabilize the local security environment and scale back Jerusalem’s rapprochement vis-a-vis Saudi-aligned Gulf states. However, the potential for significant violence in the West Bank or large-scale armed conflict with Gaza-based militant groups remains relatively low.

Travel to Israel may continue at this time while adhering to security precautions regarding militant attacks, while avoiding the immediate vicinity of the Syrian, Lebanese, and Egyptian borders, due to the persistent risk for cross-border violence.

Current Situation

Netanyahu-Gantz Coalition Agreement

On April 20, Israeli Prime Minister (PM) Benjamin Netanyahu and “Blue and White” leader Benny Gantz reached a coalition agreement. The deal facilitated the formation of a unity government following a prolonged political deadlock, wherein Netanyahu and Gantz will alternate as PM.

As part of the deal, a clause stipulated that PM Netanyahu is authorized to bring “the agreement that will be reached with the US” on “applying [Israeli] sovereignty” [to unspecified parts of the West Bank] from July 1 “for approval by the government and/or the Knesset (Israeli Parliament).”

The agreement also states that the unity government will work with the US “while pursuing the security and strategic interests of the State of Israel, which include, maintaining regional stability, [maintaining existing] peace agreements, and striving for future ones”.

The application of Israeli sovereignty in the West Bank has also been referred to as “annexation.”

Statements by Netanyahu, Gantz

In an interview on May 28, Netanyahu stated that Israel will apply sovereignty to the Jordan Valley and extensive territory in the West Bank, while keeping Jerusalem under undivided Israeli control and not uprooting a single Israeli West Bank community.

In January, prior to a March 2 election, Gantz stated he would annex the Jordan Valley, referring to it as “Israel’s eastern protective wall”, “in coordination with the international community”.

The Jordan Valley encompasses a strip of territory that spans the length of the border between the West Bank and Jordan.

Gantz has persistently emphasized the need for coordination with both the US and prominent Arab states in the region for any unilateral Israeli annexation of the West Bank.

Reaction of Prominent Regional Actors

Overall, all implications regarding potential annexation elicit overwhelmingly negative reactions from prominent regional actors. Below are some notable examples:

On May 19, Palestinian Authority (PA) leader Mahmoud Abbas declared that in light of the coalition agreement, “the Palestine Liberation Organization (PLO)…are absolved, as of today, of all agreements and understandings with the American and Israeli governments and of all the commitments based on these understandings and agreements, including security”.

On June 15, a Hamas senior official and spokesperson stated that the group calls for “the annexation project to be confronted with resistance in all forms”.

In an interview on May 15, Jordanian King Abdullah II stated that Israeli annexation of parts of the West Bank would lead to a “massive conflict with the Hashemite Kingdom of Jordan”.

The Egyptian Foreign Minister, Sameh Shoukry, stated on June 4 in a joint declaration with the Russian Foreign Minister, that Cairo “rejected the annexation of any parts of the West Bank to Israel” and “any [Israeli] unilateral declarations”.

In an unprecedented article published in an Israeli newspaper on June 12, UAE Ambassador to the US, Yousef al-Otaiba, stated that while Israel has promoted normalization of relations with Arab states, “Israeli plans for annexation and…normalization are a contradiction.”

Background

Since 2017, President Trump’s US administration has made a series of policy announcements pertaining to Israel and the Palestinians that the latter perceive to be biased towards the former.

These include: the December 2017 recognition of Jerusalem as Israel’s capital; the May 2018 transfer of Washington’s Embassy to Jerusalem; the March 2019 recognition of Israeli sovereignty in the Golan Heights; and the November 2019 statement that the administration does not consider “the establishment of Israeli civilian settlements in the West Bank” as “inconsistent with international law.”

On January 28, the US administration launched its peace plan, known as “Deal of the Century”, which included recognition of Israeli sovereignty in approximately 30 percent of the West Bank, including the Jordan Valley, all of Israel’s major settlement blocs to the east of the 1949 Armistice Line (“Green Line”), and all other Israeli West Bank communities in the West Bank.

The plan also stipulated the formation of a Palestinian state in parts of the West Bank, the Gaza Strip and the Negev, with territory east of Jerusalem as its capital at the culmination of a four-year process.

The US’s recognition of the Palestinian state would be conditioned on numerous commitments by the Palestinians, including the disarming of all Palestinian militant factions, recognition of Israel as a Jewish state, and the termination of all payments to militants.

According to numerous reports during the month of June, the US administration seeks Gantz and his political partner, Foreign Minister Gabi Ashkenazi, to be in agreement with any move advanced by the Israeli government in order for Washington to endorse the announcement.

The US presidential election is slated for November 2020. Democratic Party presidential candidate, Joe Biden, reportedly stated in May that he does “not support annexation”, adding that he will “reverse Trump’s undercutting of peace”.

Map of Trump’s “Deal of the Century” plan

Assessments & Forecast

Factors affecting version, timing of Israeli annexation in West Bank

There are several factors affecting both the version of annexation that the Israeli government may implement in the West Bank and the timing of any application of its sovereignty. All of these factors are pertinent in assessing the potential impact on the security environment.

Version

There are multiple scenarios for the version of potential annexation. This ranges from a “hard” annexation, which would take the form of the application of sovereignty to the entire Jordan Valley, the major Israeli settlement blocs in the West Bank, as well as more isolated Israeli West Bank communities and their surrounding territory for security and expansion purposes. Overall, this would amount to approximately 30 percent of the territory of the West Bank.

A more “moderate” version would be limited to Israeli annexation of the Jordan Valley, with the exception of Palestinian territorial enclaves, as per Netanyahu’s recent statement. The Israeli control of or at least Israeli military presence in this territory has historically been part of the Israeli political consensus as a requisite for ensuring Israel’s national security. The “medium” annexation plan may also include all or some of the aforementioned major Israeli settlement blocs. These areas are relatively closer to the Green Line within the West Bank and are areas where the majority of the Israeli West Bank populace is located.

A “soft” version of annexation would be even more limited. This may include either just the Jordan Valley or be restricted to some or all of the major settlement blocs. The former would likely be presented by the Israeli government as de-jure recognition of Israeli security needs, while the latter would more likely be an attempt to represent the “facts on the ground”, namely, the large Israeli population living beyond the Green Line in major settlement areas.

FORECAST: In light of current reports indicating that the US seeks an Israeli consensus among the government partners in order to endorse annexation, and given that Gantz and Ashkenazi are known to be opposed to major unilateral moves, PM Netanyahu may be compelled to advance a more “moderate” or “soft” version of annexation. The statements condemning the move by both Joe Biden and prominent Arab states may also lead Jerusalem to pursue a softer version of annexation in order to avert a major crisis with either a potential future US administration or Israel’s regional partners.

Timing

Although the government can, in accordance with the coalition agreement, bring the annexation plan to the Knesset from July 1, if it happens, the process itself is likely to take several more weeks and possibly months to potentially even start. This will depend on multiple factors: In the event that Netanyahu and Gantz reach an agreement pertaining to the type of annexation, and thus satisfy this reported US requirement, the government will likely seek to act swiftly in order to implement the plan. This is due to the forthcoming US presidential election in November, which Israel will be reluctant to encroach upon and thus potentially limit the Trump administration’s willingness to make such a major foreign policy decision so close to a national vote.

However, in the event that the Israeli government assesses that Biden is likely to win the forthcoming election, it may seek to adopt a more cautious approach in order to avert a crisis with the potential incoming administration. Jerusalem may, therefore, apply its sovereignty to parts of the West Bank in stages. A more symbolic or security-minded initial annexation of the Jordan Valley and/or major settlement blocs may first be implemented in July. Thereafter, Israel may apply sovereignty to the more contentious Israeli communities situated deeper in the West Bank in the months following the US presidential election, in the event of a Trump victory.

The decision to apply sovereignty may be delayed due to other domestic considerations. Israel is currently experiencing a spike in COVID-19 cases following an easing of restrictions amid a major reduction in the infection rate. In addition, the COVID-19-induced economic downturn, characterized by a sharp increase in unemployment, remains at the forefront of the Israeli political agenda. Thus, Netanyahu may consider delaying annexation until after both the US presidential election and the significant halting of the COVID-19 pandemic in Israel and the US, and attribute this decision to the prioritization of dealing with the health and economic crises that both countries are currently dealing with.

FORECAST: It cannot be entirely ruled out that the government will completely postpone plans to apply sovereignty to parts of the West Bank due to multiple reasons. These include: a possible failure to secure US backing for Jerusalem’s preferred version of annexation, external pressure from major regional and international stakeholders, domestic opposition from Israeli political parties, and, lastly, the ongoing instability of the current Israeli unity government. Since its inauguration in May, the new government has publicly clashed on a range of issues and it is known that the major components of the government, the Likud and Blue and White parties, have different visions of Israel’s future vis-a-vis the Palestinians. By the end of August, the Knesset must pass the government’s state budget. In the event that the coalition members fail to do so, this would lead to a premature collapse of the government and the postponement of annexation until after another Israeli election, which may yield a more favorable result for Netanyahu.

Israeli annexation in West Bank to destabilize security environment, unlikely to trigger widespread violence

Potential for major uprising in West Bank remains relatively low

The precedent of recent years shows growing apathy and a decline in nationalist motivation among local Palestinians in the West Bank and, as a result, an apparent decline in willingness to engage in militant activity and large acts of civil unrest. This is evidenced by the significantly reduced number of large-scale attacks over recent years and drop in the frequency and scale of unrest. In recent years, attacks have been largely limited to periodic stabbings, vehicle-rammings, small-scale shootings, and rock-hurling attacks in the West Bank and East Jerusalem. This has persisted despite the aforementioned period from 2017 onwards during which the US administration has announced a series of foreign policy measures pertaining to the Israel-Palestinian conflict, all of which the Palestinian leadership have deemed to be biased towards Israel. Calls by either the West Bank-based PA or Gaza-based Hamas militant faction for civil disobedience or “days of rage” in condemnation of these decisions have been met with a very limited response by local Palestinians, which underscores the aforementioned general apathy.

This trend has even continued since PA leader Abbas’ May 19 declaration that all agreements with Israel, including security coordination, were annulled. While there have been some limited indications that the PA has down-scaled its coordination with Israel, for instance, reports from May 22 that the PA security forces retreated from territory to the east of East Jerusalem, this was mostly symbolic. This was further demonstrated by a June 7 report indicating that PA security forces foiled an attack against the Israel Defense Force (IDF) in the Jenin area. Thus, it is likely that the declaration was rhetorical only and an attempt to pressure Israel into reversing its declared intention to annex West Bank territory. However, even in the event that security coordination is completely suspended between the parties, the limited evidence of the past month indicates that there is no major increase in motivation among Palestinians, either organized factions or local elements, to conduct large-scale attacks against Israeli security forces or civilians.

The PA has other options at its disposal. The Ramallah-based leadership may opt to completely dismantle the PA and all its institutions, which would transfer civil and security control of the entire West Bank to Israel. This is less likely, as the PA leadership remains interested in maintaining its power in the area, rather than relinquishing control, which would allow Hamas to gain a foothold. The PA may also seek to inflict an economic toll on Israel by blocking crossings between PA-administered territory and Israel, while also prohibiting Palestinian laborers and goods from entering the latter territory. This would cause economic damage to Israel, which is dependent on these workers and items in some sectors. However, this scenario is unlikely given the substantial socio-economic damage it would cause to the PA and the local populace.

The PA may wage a diplomatic campaign against Israel, rather than risk widespread security instability. Such diplomatic initiatives may include working with the PA’s supporters, both state and non-state actors, primarily in Europe, to build a coalition against Israel. This would be aimed at diplomatically and economically isolating Israel in the international area, and empowering the anti-Israel Boycott, Divestment, and Sanctions (BDS) movement to expand its activities. This is a likely scenario given the PA’s previous action and repeated warnings made by numerous European states and prominent non-governmental organizations (NGOs) against annexation of the West Bank. The PA can also act against Israel in the diplomatic arena by unilaterally declaring statehood in the entire West Bank and Gaza Strip in coordination with its allies, while simultaneously initiating anti-Israel campaigns and resolutions at prominent international forums where it is represented, or alternatively, through its regional partners. Given precedent, a unilateral declaration of statehood by the PA, or international anti-Israel campaign, is likely, as the PA/PLO leadership has embarked on similar actions in the past. However, this would be mostly symbolic, and given Israel’s strong relationships with prominent international actors, primarily the US, any PA initiative will be limited in its ability to effectively isolate Israel.

Overall, the PA, and particularly its leader Abbas, who responded to the US peace plan with “1,000 nos”, have lost significant legitimacy and popularity among West Bank Palestinians. This is even more acute among the young demographic, many of whom disagree with the PA’s strategic direction and security cooperation with Israeli authorities over recent years. Many of these individuals also consider the PA to be a corrupt institution. Thus, they are likely to remain indifferent to the potential for Israeli annexation in the territory, and subsequent undermining of the PA’s vision of a two-state solution, because they have already ceased to support such a resolution to the conflict.

That being said, a potential annexation of territory in the West Bank is likely to be perceived as a crossing of a red line that perpetuates the ongoing conflict and potential for a long-lasting solution. This is in contrast with the aforementioned US policy declarations and peace proposal that have likely been considered as either symbolic or hypothetical, while annexation would constitute a practical move that has a tangible impact on the lives of some Palestinians. In addition to this, the PA-administered areas of the West Bank, in addition to Israel and the wider region, are currently experiencing a COVID-19-triggered economic crisis. This has been exacerbated by the PA’s refusal to accept clearance funds that Israel accepts on its behalf, which constitute a significant amount of the Ramallah-based authority’s budget. The PA attributes any economic crisis to Israel’s policies in the region, which tends to resonate with most segments of Palestinian society. The combination of the perceived intolerable annexation action by Israel and the economic crisis in the West Bank are likely to elevate nationalistic sentiments and increase the motivation to convey to Israel that its perceived belligerent actions will not go “unpunished”.

FORECAST: Therefore, it is likely that an increase in violence will be witnessed in the West Bank, though the PA will seek to limit its scope and scale, with the understanding that widespread unrest would ultimately pose a risk to its own governance. In this context, violence will likely be restricted to localized outbreaks of civil unrest and low-level militancy, such as stabbings and vehicle-ramming attacks, than large-scale IED attacks, mass shootings, or suicide bombings. Moreover, these incidents are more likely to remain contained to the West Bank, rather than occurring in Israeli territory west of the Green Line. Even within the West Bank, it is likely that the violence will not be widespread throughout Palestinian cities, but will be contained to Palestinian refugee camps that are known to be more hostile to Israe. While not in the West Bank, an increase in civil unrest is also likely in Arab-populated neighborhoods of East Jerusalem, primarily Issawiya, Silwan, and the Shuafat Refugee Camp, where violence is often recorded.

FORECAST: Palestinian militant groups in the West Bank will be more motivated to conduct a large-scale attack in order to present themselves as the “protectors of the Palestinian people”. The Hamas militant group maintains networks within the West Bank and will be determined to undermine its rival Fatah faction that leads the PA by claiming responsibility for action that portrays the latter in a negative light and as “out of touch” with the Palestinian people. Hamas will likely seek to capitalize on the PA’s perceived weakness and failure to prevent Israeli unilateralism and thus garner more support and expand its influence in the West Bank, which may include direct attacks by Hamas against PA targets in order to expedite this potential process.It is furthermore possible that the Palestinian militant factions operating in the West Bank, particularly Hamas, will order a large-scale symbolic attack against a prominent Israeli target in condemnation of the perceived seizure of Palestinian territory. However, given precedent of recent years, this will likely be foiled by Israeli authorities, although this will pose more of a challenge in the event of a complete suspension of coordination with the PA. A large-scale successful attack would significantly increase regional tensions and trigger a more extensive IDF operation in the West Bank.

Annexation to increase risk of escalation in violence between Israel, Gaza-based militant groups

The Gaza-based militant factions, led by Hamas, as well as more hardline Iran-backed Palestinian Islamic Jihad (PIJ) and other smaller Salafist groups, have repeatedly rejected any Israeli presence in the region. These groups maintain maximalist ideologies that consider all territory in the region to be “annexed” by Israel and have therefore persistently and violently responded to peace talks between Israel and the PLO/PA over the past 25 years. The potential annexation of parts of the West Bank will therefore be viewed differently by these factions to the way it is perceived by the PA, whose long-term stated strategy has been to establish a Palestinian state in the West Bank on territory which includes the land Israel seeks to apply its sovereignty to.

Moreover, over the more recent period, despite employing more threatening rhetoric, the militant factions have largely refrained from significantly increasing rocket attacks into Israel from the Gaza Strip in response to US policy announcements. While major unrest was witnessed along the Israel-Gaza border when the US Embassy was moved to Jerusalem, this came in the context of a protest movement that had already begun several months earlier. This highlights the point that US or Israeli policy declarations are not necessarily triggers for action for these groups.

Regardless, the Gaza-based groups, particularly Hamas, will likely feel compelled to show some form of symbolic opposition or resistance to Israel’s annexation of territory in the West Bank. As is the case in the West Bank, the militant groups will seek to portray the PA as weak and “out of touch” and highlight their ability to violently confront Israel. FORECAST: Thus, if/when Israel formally announces its intention to annex parts of the West Bank, passes the legislation in the Knesset, and implements the policy on the ground, an increase in violence in the Gaza area is likely. This may manifest in the form of rocket fire, unruly border protests, the placing of IEDs along the border, and the hurling of grenades, crude explosives, and rocks against IDF troops. Similar escalations have been recorded periodically over the past years and generally conclude after several days of violence, at most. However, the increased motivation to avenge Israel’s perceived seizure of Palestinian territory and violation of Palestinians’ rights may trigger these hostilities to spiral out of control and lead to a broader outbreak of violence. This remains a less likely option as it is not in Hamas’ interest to risk a large-scale armed conflict with Israel that significantly weakens the organization and diminishes its hold on the Gaza Strip. It will therefore likely demonstrate relative caution when initiating any hostilities.

Another factor in this respect is the role of the Iran-backed PIJ. Iran funds and supports the Gaza-based militant group and Tehran will have a distinct interest in presenting itself as the “defender of Palestine” in the Muslim world. FORECAST: It may therefore act via its regional proxy to launch a sustained rocket assault against Israel, which the militant group has proven it is capable of doing over the past year. While during previous rounds of violence, Hamas has opted not to engage in armed conflict vis-a-vis Israel and the IDF has responded by also specifically targeting the PIJ, due to the perceived severity of the annexation issue, it will be extremely difficult for Hamas to refrain from joining the PIJ or other groups in violently opposing Israel.

FORECAST: Overall, Israeli application of sovereignty to parts of the West Bank will raise tensions vis-a-vis the Gaza-based militant groups. It threatens to undermine any potential understandings that Hamas and Israel have reportedly reached and trigger a renewal of violence. However, due to Hamas’ interest in containing hostilities, this is unlikely to prompt a major round of fighting unless one of the parties makes a significant miscalculation, which cannot be ruled out.

Israeli annexation in West Bank to undermine relations with Jordan, may lead to downgrading of ties

Israel and Jordan have shared a peace agreement since 1994. During the majority of this period, the two countries have maintained full diplomatic relations and succeeded in overcoming several temporary crises. However, a potential Israeli annexation of any of the West Bank is likely to undermine relations between the countries. This can be attributed in part to the fact that a majority of the populace of Jordan is of Palestinian descent and many Jordanians harbor anti-Israel sentiments. This is evidenced by the continued controversy surrounding any cooperation between Israel and Jordan, as illustrated by periodic protests in Amman against an Israeli-Jordanian gas agreement, which were witnessed during 2019-2020.

The Jordanian authorities will seek to prevent a major outbreak of violence in the West Bank that has the potential to spill into Jordan. Despite it not being in Jordan’s interests to sever or downgrade relations with Israel, the Kingdom’s leaders will risk substantial condemnation and anti-government demonstrations if they fail to “punish” Israel’s annexation in a meaningful manner in the eyes of their population. This is especially given that socio-economic grievances are likely to be aggravated over the coming months amid the COVID-19-triggered global economic crisis. King Abdullah II and government officials will therefore seek to avoid taking actions that bolster the potential for anti-government unrest.

However, Jordan’s stability also depends on the significant economic assistance that the US provides to the Kingdom. In 2018, USAID donated more financial aid to Jordan than any other country in the region after Israel, with an accumulative transfer of almost 1.7 billion USD. Therefore, Amman faces a trade-off between preventing destabilization by inadequately responding to Israeli actions on one hand, and on the other, facing punitive US measures if it issues what Washington perceives to be too harsh a response, by, for example, cutting diplomatic relations with Israel and thus suspending or terminating the peace agreement.

FORECAST: With this in mind, the most likely scenario in the event of Israeli annexation of parts of the West Bank is that Jordan will downgrade relations with Israel, rather than outright severing all ties with the latter. This may take the form of the recalling of its ambassador to Jordan and expulsion of Israel’s ambassador from the Kingdom, the suspension of all security and economic cooperation, and diplomatic international resolutions against Jerusalem. Meanwhile, there remains the potential for acts of unrest or low-scale militancy against perceived US-linked or Israeli-linked interests in Jordan, including government infrastructure and companies. There will likely be an overall elevation in anti-Israel and US sentiment in the country. However, given precedent and the rarity of militant activity in the country, militant infiltration attempts from Jordan into Israel are highly unlikely.

Egypt likely to condemn Israeli unilateral declaration, maintain current covert ties

Israel reached a peace agreement with Egypt in 1979. In recent years, particularly in the security realm, collaboration between Egypt and Israel has further intensified as both states have conducted counter-militancy campaigns and shared intelligence. However, the peace agreement between Jerusalem and Cairo has limited popular support among Egyptian citizens, especially those supportive of the Muslim Brotherhood movement, who will increase pressure on the President Abdel Fattah al-Sisi-led government to condemn Israel. Regardless, opposition elements, including the Muslim Brotherhood, have been significantly weakened over recent years by a prolonged government crackdown. The Egyptian government is less attentive to the popular will and has been very effective at clamping down on any civil unrest over recent years. President al-Sisi will therefore be more likely to act in accordance with Egypt’s strategic interests, than attempting to placate opposition figures and critics. This is in contrast to Jordan, even though both countries are US allies and rely on Washington for financial assistance.

FORECAST: Egypt will denounce any potential Israeli annexation of the West Bank, although this will likely be limited to a diplomatic condemnation. The government will be compelled to publicly demonstrate its opposition to Israel’s actions and thus cooperation between the two states will become even more discreet and covert over the coming months in any scenario in which Israel acts unilaterally.

Israeli application of sovereignty in West Bank to lead to scaling back of rapprochement with Saudi-aligned Gulf states

Over recent years, Israel and the Saudi-aligned Gulf states, particularly Saudi Arabia, UAE, Bahrain, and Oman, have demonstrated an increasing willingness to move towards a full normalization of relations. The most recent and pertinent example of this was the June 12 article written by the UAE Ambassador to the US, Yousef al-Otaiba, in an Israeli newspaper. While the article was specifically warning the Israeli people against the ramifications of annexation, the very fact that a senior Emirati official wrote in an Israeli newspaper following decades of antipathy is historic and noteworthy. An additional and highly relevant example in this context was the decision by Bahrain to host the launch of the economic component of the US peace plan in June 2019, and thus provide legitimization of the program by a prominent Gulf state.

The period of rapprochement can largely be attributed to two parallel phenomena. On one hand, many Saudi-aligned Gulf states have demonstrated less interest in supporting the PA or other Palestinian factions. On the other hand, Israel and the Gulf states share multiple common interests. These include a shared perception of the regional security threat posed by Iran and its proxies, as well as an understanding in the mutual benefit of cooperating in the intelligence, security, technological, and economic remits. This period of “detente” has been accelerated over recent years by the US administration’s close ties with the Saudi-led bloc, which has created a covert alliance of interests.

FORECAST: Annexation of parts of the West Bank is likely to scale this normalization process back. The Saudi-aligned states, including the UAE that has been most vocal in its willingness to engage with Israel, will be reluctant to be considered as “succumbing” to perceived Israeli aggression in the form of the seizure of Palestinian territory. The Gulf states will therefore be forced to publicly condemn this Israeli action.

FORECAST: The form that this condemnation takes and the impact on the current normalization process is likely to correlate with the version of annexation. As the Gulf states and Israel do not maintain official ties, there are few diplomatic tools at their disposal because all relations have largely been covert since their commencement over the past years. A “hard” annexation that is perceived as undermining any possibility for the solution envisioned by the PA and most of the Arab world will likely significantly impact covert economic and security ties between Israel and the Gulf states. In the event of a milder application of sovereignty to parts of the West Bank by Israel, it is possible that the Gulf states will publicly condemn Israel while covertly continuing to cooperate with Jerusalem.

Recommendations

Israel

Those traveling in the 40 km area surrounding the Gaza Strip should continue adhering to all safety precautions regarding early warning sirens for incoming rockets. In case you hear a siren, seek shelter in a protected area and remain inside for at least 10 minutes.

In major Israeli cities, remain vigilant in crowded commercial areas or public transport hubs, as these locations have been targeted by militant groups in the past. Alert authorities to suspicious, unattended packages in these areas.

During escalations in violence:

Those operating or residing in Israel, including Tel Aviv and Jerusalem, should adhere to all Israel Defense Forces (IDF) Home Front Command guidelines regarding early warning sirens for incoming rockets. In case you hear a siren, seek shelter in a protected area and remain inside for at least 10 minutes. As a general security precaution, those operating or residing in Israel should ensure that contingency and emergency evacuation plans are updated due to the potential for a further deterioration in the security situation. We advise to contact us to be briefed on the situation, while consulting us for operational support.

We advise against all travel within 40 km of the Gaza Strip. Those remaining within this vicinity should initiate contingency and emergency evacuation plans due to the deterioration in the security situation. Contact us for itinerary and contingency support options.

Those operating or residing in Jerusalem are advised to avoid nonessential travel to the areas of Shuafat, Beit Hanina, Silwan, and Wadi al-Joz, as well as the vicinity of the Temple Mount/al-Aqsa Mosque Compound and the Damascus Gate given the potential for further unrest. Maintain heightened vigilance throughout East Jerusalem and the Old City for the same reason. Avoid nonessential travel to Arab-Israeli towns, particularly Nazareth, I’billin, Qalansawe, Tayibe, and Tira.

Palestinian Territories

Business-essential travel to Ramallah and Bethlehem can continue at this time. Adhere to basic security precautions regarding the threat of civil unrest and militancy. Consult with us for itinerary-based recommendations and ground support options.

Avoid nonessential travel to other Palestinian-controlled areas of the West Bank at this time given the persistent threat of civil unrest.

We advise against all travel to the Gaza Strip due to frequent border crossing closures and the threat of militant activity and armed conflict.

Minimize night travel in major cities, as the majority of IDF and PA security operations occur at this time, particularly in the vicinities of Palestinian refugee camps.

During escalations in violence:

As a general precaution, avoid all travel to the West Bank during an escalation in violence due to counter-militancy operations, and relating unrest in Palestinian urban centers. The risk for altercations remains most pronounced in the Hebron, Jenin, and Nablus areas, and to a lesser extent within Ramallah and Bethlehem.

Be advised that crossing points between Israeli and Palestinian controlled territories, including the Qalandiya checkpoint between Jerusalem and Ramallah, have frequently witnessed unrest leading to violence. As a result, crossing points may be closed, or experiencing disruptions. Additionally, avoid nonessential travel to the vicinity of the Ofer prison, due to the threat of unrest.

For those remaining in Gaza, in the event that orders to evacuate are issued by the IDF, including via flyers, it is advised to immediately comply with instructions and leave the mentioned areas. If airstrikes are reported in your vicinity, it is advised to seek shelter and remain away from windows. If no shelter is available, lie on the ground and shield your head.

Implications of recent escalation in US-Iran tensions on Iranian domestic, foreign policy – Iran Analysis

Executive Summary

Over the months of April and May, the US took multiple measures as part of its “maximum pressure” campaign vis-a-vis Iran, including the revocation of sanction waivers to importers of Iranian oil and deployment of US military assets to the Middle East.

As a response to the perceived provocations, on May 8, Iran announced its decision to partially halt its commitments to the Joint Comprehensive Plan of Action (JCPOA) and set a 60-day deadline for European states to renegotiate the financial terms of the agreement, marking a highly significant development since the ratification of the nuclear deal in 2015.

The purported involvement of Iran and its affiliates in the recent uptick in attacks against US allies, particularly the May 12 attack against four naval vessels, including two Saudi oil tankers, off the coast of the UAE, has further fueled tensions in the region.

Iran has resisted direct negotiations with the US thus far, which indicates the high level of influence wielded by hardliners on the country’s foreign policy. Tensions are liable to remain high as both Iran and the US are likely to continue their strategic posturing in the region over the short term, in order to eventually coerce each other onto the negotiating table.

Western nationals operating or residing in Iran are advised to regularly review emergency and contingency protocols as a basic security precaution due to the risk of limited hostilities between Iran, the US, and its Gulf allies. Those operating in Lebanon, Iraq, and Syria are advised to maintain a low profile due to threat of attacks by Iranian-linked elements.

Current Situation

On May 8, Iran’s SCNS released a statement announcing Tehran’s decision to partially halt its commitments to the JCPOA and setting a 60-day deadline for European states to take steps to counteract the negative effects of US sanctions.

The US President Donald Trump subsequently issued an executive order to impose sanctions on Iran’s metal industry.

On May 11, the US sent Patriot air defense systems to US CENTCOM based in Qatar’s al-Udeid Air Base.

On May 12, the US Embassy in Baghdad issued a security alert advising “all US citizens of heightened tensions in Iraq” and the “requirement to remain vigilant.”

On May 12, Saudi Arabia’s official news agency stated that two out of the four civilian commercial cargo ships that were subject to a “sabotage attempt” near UAE territorial waters in the Gulf of Oman, off the eastern coast near Fujairah, were Saudi oil tankers.

On May 14, the Yemeni Houthis claimed unmanned aerial vehicle (UAV) attack against an oil pipeline belonging to the official Saudi Arabian Oil Company in Riyadh Province’s towns of al-Duwadimi and Afif.

On May 15, the US ordered the departure of all non-emergency US government employees stationed at the US Embassy in Baghdad and the US Consulate in Erbil from Iraq.

On May 18, the Federal Aviation Authority (FAA) issued an advisory warning of risks to civil aviation over the Persian Gulf and the Gulf of Oman.

On May 19, a rocket landed in the vicinity of Baghdad’s Green Zone, less than two kilometers away from the US Embassy.

On May 20, the Spokesperson of the Atomic Energy Organization of Iran (AEOI), Behrouz Kamalvandi stated that Iran’s 3.67 percent production capacity of enriched uranium had increased by four-fold.

On May 20, two ballistic missiles were reportedly intercepted over Mecca Province’s Taif and Jeddah. Yemeni Houthis denied involvement in the attack.

On May 24, the US announced additional deployment of 1,500 military personnel to the Middle East.

Background

In May 2018, the US President Donald Trump unilaterally withdrew from the JCPOA, also known as the Iran nuclear deal, which was negotiated between Iran and P5 +1 (US, UK, France, Russia, China and Germany) countries in 2015. Subsequently, the US re-imposed sanctions related to Iran’s export of oil in November 2018, but granted sanction waivers to eight countries including India, China, South Korea, Taiwan, Japan, Italy, and Turkey for a period of 180 days. On April 8, 2019, the US designated the Iranian Revolutionary Guard Corps (IRGC) as a Foreign Terrorist Organisation (FTO). This was followed by the US’s decision to end sanction waivers to importers of Iranian oil starting on May 2, 2019. Out of the seven sanctions related to Iran’s uranium enrichment and civilian nuclear energy cooperation, the US revoked two sanction waivers related to Iran’s uranium enrichment process under the JCPOA – one that allowed Iran to store excess heavy water produced in the uranium enrichment process in Oman and one that allowed Iran to swap enriched uranium for raw yellowcake with Russia. On May 5, US officials announced their decision to deploy an aircraft carrier and bomber task force to the Middle East citing indications of Iranian threat, but provided no further details. This prompted Tehran’s decision to partially halt its commitments to the JCPOA on May 8, 2019.

Assessments & Forecast

Impact of IRGC’s designation as an FTO:

The designation of the IRGC in its entirety, including its extraterritorial wing, the Quds Force, as a “terrorist entity” marks a highly significant development, as it constitutes the first ever instance wherein the US has labelled a country’s military organization as an FTO. Such a designation comes amid the US’s continued policy to apply “maximum pressure” on the Iranian government to end its alleged role in destabilization activities across the regional as well as the international stage. It forms part of the US’s efforts to depict the Iranian administration as “rogue” or an “outlaw”, and is aimed at further isolating Iran on the international stage.

The move is largely symbolic, given the fact that US sanctions already target the IRGC and its leaders, affiliates, and subsidiaries such the Basij Resistance and the Quds Force and the US had already designated the IRGC as a “Specially Designated Global Terrorist” in 2017. However, the latest step will likely augment the existing pressure on Iran. Any individual or entity knowingly providing material support to the IRGC will now face the possibility of a 20-year US prison sentence. It will also impose immigration restrictions on members of the IRGC who attempt to travel to the US simply by virtue of their membership or affiliation to the organization. FORECAST: Given that the IRGC has significant stake in the Iranian economy, through this measure, the US likely intends to make it further difficult for foreign entities to conduct business with Iran, which, in turn, would have a negative impact upon the Islamic Republic’s economy. However, the fact that a large extent of the IRGC’s business dealings are known to be carried out through illicit channels, such dealings are unlikely to be significantly affected by the recent designation.

FORECAST: Moreover, such a move is also unlikely to alter Iran’s policies on the regional setting, like its involvement in supporting proxies such as the Lebanese Hezbollah, the Yemeni Houthis, and Shiite militias in Iraq such as the Harakat al-Nujaba (HNA). Rather, given the increased restraints faced by the IRGC, the recent move is liable to increase Iran’s motivation to expand its regional footprint through the above-mentioned proxies as well as other sponsored militias. To this effect, the Iranian government will continue to divert large funds, at the expense of its domestic population, in order to sustain its influence in neighboring countries. This, in turn, is likely to inflame already existing local grievances, which may result in further instances of widespread civil unrest in the country. However, on a broad basis, given Iran’s history of strategic culture and great power rhetoric, a majority of the Iranian populace views the US sanctions as the source of their economic hardship, as compared to the Iranian government’s policies. While this is partly aided by the intensive propaganda campaigns in the country, it nevertheless galvanizes unity in the face of a “foreign aggression”. Thus, it is likely that the Iranian administration will attempt to placate the inherent domestic concerns related to the government’s regional activities and support for its proxies amidst an economic crisis, by attempting to project strength vis-a-vis the US. This may take place through the continued portrayal of strength through military exercises, display of new defense equipment, such as the unveiling of the new domestically produced “Khordad 15” air defense system on June 9. Moreover, the Islamic Republic will seek to counteract the US’s measures by maintaining a relatively belligerent posture, given the influence wielded by hardliners on the country’s foreign policy.”

FORECAST: By continuing, or rather increasing support for its proxies, the IRGC may be able to effectively target its adversaries, namely the US, Israel, and Saudi Arabia-aligned countries in the Gulf over the coming months. In this regard, given that much of the recent attacks in the region, such as the May 19 rocket landing in Baghdad’s Green Zone near the US Embassy, the June 1 rocket attack into Israel’s Mount Hermon from Syria, or the spate of attacks against Saudi targets have consistently targeted Iran’s adversaries, it is likely that they were encouraged by Tehran in an effort to destabilize the region. Moreover, the fact that some of the attacks were carried out against energy-related targets, such as the May 12 targeting of Saudi oil tankers off the coast of UAE’s Fujairah in the Gulf of Oman and the May 14 Houthi-claimed UAV attack on the oil pipeline in Riyadh Province, suggests that Iran may be attempting to weaken the economies of Saudi-aligned countries, given their significant dependence on oil revenues. This would align with Tehran’s strategy of preventing its rival, Saudi Arabia, from expanding its influence in the region and subsequently positioning itself as the dominant regional power in the Middle East. This, in turn, would allow Iran to prevent the regional balance of power from significantly shifting away from itself, particularly in light of the reimposition of US sanctions.

Potential Ramifications of the imposition of various sanctions on Iran:

A) Oil-related sanctions:

The US’s refusal to extend the 180-day sanctions exemptions for importers of Iranian oil (China, India, South Korea, Turkey and Japan) from May 2 constitutes a core segment of the US’s “maximum pressure” campaign, as it aims to completely diminish Iran’s oil revenue. Although India and China, the two top importers of Iranian oil, were envisaged to face significant setbacks to its energy security policy due to the US move, it appears that both countries have planned for this eventuality and are effectively looking at alternate sources to fulfill their energy requirements. In this scenario, while neither of the two countries have officially announced their position on the future of Iranian crude imports, it is likely that imports from other key energy players such as Iraq, Saudi Arabia, and the UAE will feature on a higher side, specifically in the case of India. This will put further strain on Iran’s revenues from its oil sector, which, in turn, will have a significant adverse impact upon its national economy.

FORECAST: Given that the move has been anticipated since the reinstatement of US sanctions on Iran in November 2018, early indications suggests that apart from the initial shock, the decision has not drastically impacted the global oil market, despite fears of an oil price surge and supply disruptions. This is primarily due to a boost in Saudi Arabia’s oil production in May to fill the gap of Iranian crude, along with similar boosts in production by Iraq and Libya. However, Iran may resort to illegal trade of its oil in the black market, particularly in countries such as Yemen, where the Houthis have been reportedly deriving a majority of its income by selling Iranian oil. Furthermore, Iran may also attempt to export its oil through the use of “switch-off-the-transponder” tactics, which makes tracking ships increasingly difficult.

B) Uranium enrichment-related sanctions:

The May 8 statement released by the SNSC, which was reiterated by Iranian President Rouhani in a televised address, represents a pronounced effort by the Islamic Republic to project strength in response to perceived US provocations in recent years. The decision to halt its partial commitments under the JCPOA regarding enriched uranium and heavy water reserves follows the US’s May 4 revocation of the two sanction waivers, which practically forces Iran to completely overhaul its production of heavy water and uranium enrichment or continue production and find itself in breach of the JCPOA. Moreover, the five sanction waivers that were extended were also reduced from 180 days to 90 days, in which the remaining adherents of the JCPOA are allowed to cooperate with Iran on the sites of Bushehr, Arak, and Fordow without facing US sanctions.

This was followed by the May 20 announcement from the Spokesperson of the Atomic Energy Organization of Iran (AEOI), Behrouz Kamalvandi according to which, Iran’s 3.67 percent production capacity of uranium had increased by four-fold. However, Iranian officials reportedly stressed that the uranium would be enriched only to the 3.67 percent limit set under the JCPOA. Thus, although Tehran still remains party to the JCPOA, its increased capacity to produce enriched uranium suggests that Iran is likely to soon exceed the 300 kg uranium stockpile limitation set by the accord. FORECAST: However, as indicated in Rouhani’s speech, Tehran will likely retain its enriched uranium (upto 300 kg) and heavy water (upto 130 tons) rather than selling them to other nations while remaining within the limits prescribed in the nuclear deal over the short term, at least until July 8. This would allow Iran to project its adherence to the terms set under the JCPOA.

FORECAST: However, as per the joint statement released by France, Germany, and the UK on May 9, while the European states expressed “regret” over the reinstatement of US sanctions and continued to pledge their willingness to support alternate trade mechanisms such as the Instrument in Support of Trade Exchanges (INSTEX), they also categorically rejected Tehran’s 60-day ultimatum for negotiations. While this highlights their unwillingness to publicly be strong armed onto the negotiation table, it is also indicative of their reluctance to oppose US policies. Furthermore, the reimposition of the US sanctions has increased the risk of conducting business with Tehran for foreign companies, several of whom have already ceased their operations in the Islamic Republic. This is likely to have a significant adverse impact upon Iran’s economy over the coming months.

C) Metal industry-related sanctions:

The US President Donald Trump’s May 8 decision to impose new sanctions on Iran’s metal industry are aimed at undermining Iran’s revenue from the export of industrial metals, the country’s largest non-oil sector, which reportedly accounts for approximately ten percent of its export economy. While Iran’s mining industry was already facing severe setbacks due to shipping and payment restrictions, the recent move is liable to inherently impact employment provided by the metal as well as the automotive industry, which reportedly constitutes almost six percent of Iran’s total labor force. This is liable to significantly exacerbate domestic workers’ grievances, which have manifested in the form of persistent localized demonstrations across Iran over the recent months.

FORECAST: In this context, public protests surrounding employment, pensions, inflation, increase in the prices of basic commodities and other economic-related issues are liable to continue in a significant manner over the coming weeks and months. Such demonstrations will likely take place across Iran, including in major cities such as Tehran, as well as in outlying provinces such as Khuzestan and Kordestan, where the locals comprising of an Arab-majority or Kurdish population perceive themselves as marginalized by the Shiite Iranian government’s policies. This will not only increase the threat of civil unrest in the country as a whole, but also exacerbate sectarian tensions between the countries minority communities and the Shiite-led government.

Lack of direct engagement, continued strategic posturing liable to prolong tensions in the region:

The Iranian administration’s current position to resist direct negotiations with the US, albeit agreeing to mediation talks with Japan, highlights the high degree of influence wielded by hardliners on the country’s foreign policy at this juncture. Such elements continue to criticize the Rouhani administration’s moderate approach towards dealing with the US and aspire to correct the perceived weakness with which the terms of the JCPOA were negotiated in 2015. FORECAST: This, combined with the relative lack of tangible economic benefits from JCPOA, is liable to further embolden segments of hardliners and conservative elements within Iran’s political sphere. This may result in further appointments of such elements in key leadership posts, which is liable to significantly hinder the popularity of more moderate officials, consisting of figures such as President Hassan Rouhani and Foreign Minister Javad Zarif. This is underscored by the appointment of General Hossein Salami, a prominent hardliner within Iran’s military establishment as the IRGC’s Commander-in-Chief on April 21. Such appointments are not only liable to increase the anti-US rhetoric emanating from the Islamic Republic but also significantly hamper the potential for backchannel negotiations with the US, which are generally conducted by more moderate officials.

FORECAST: On a regional level, tensions are liable to remain high due to the strategic posturing of the two countries, in order to eventually coerce each other onto the negotiating table. The deployment of US warships, including an aircraft carrier and a bomber task force on May 5, the sending of Patriot missile systems on May 11, as well as the decision to deploy an additional 1500 US military personnel to the region, is likely to significantly increase tensions in the Persian Gulf waters and the Strait of Hormuz over the coming weeks and months. This is particularly in light of Tehran’s persistent effort to assert its authority as the legitimate custodian of security across its territorial waters. These tensions may manifest in the form of limited confrontation between the naval forces of the two sides, which constitutes a general risk to shipping through the critical energy choke point.

FORECAST: Tensions are also likely to increase between Saudi-aligned countries and Israel on one side and Iran on the other. Iran may encourage its backed elements, particularly the Yemeni Houthis, to increase their attacks against targets in Saudi Arabia and the UAE. This would also align with the Houthis’ aim of weakening the economies of countries that are part of the Saudi-led Coalition in Yemen in order to reduce their ability to engage in the ongoing civil war in the country. Iran may also use its proxies and backed elements in Syria and Lebanon, such as the Lebanese Hezbollah, to put pressure on the US by using them as leverage against Israel, the US’s closest ally in the Middle East. This may manifest in the form of attacks against Israel by Iranian-backed elements in Syria, as witnessed on June 1, when a rocket was launched from Syria towards Israel’s Mount Hermon. However, such attacks are likely to remain limited and constrained to areas within close proximity to the Syria-Israel border. This is because an attack deep inside Israeli territory would trigger a large-scale conflict between Israel on one side and Syria and Lebanon on the other, and Syria is currently not interested in such a scenario given its preoccupation in hostilities with rebel forces.

FORECAST: Overall, as tensions between the US and Iran get prolonged, the risk of a military confrontation between the two countries will increase. Such a military confrontation is likely to be limited at least in the short term, with Iran attempting to use its proxies as a means to put pressure on the US and its Gulf allies and the US retaliating with a further increase in military presence in the Persian Gulf. While Iran is currently not interested in a broad conflict with the US given that its economy is unlikely to be able to sustain such a cost, as previously assessed, the influence of hardliners on the country’s foreign policy reduces the possibility of backchannel negotiations. This combined with the fact that the US is unlikely to agree to any terms that do not significantly diminish Iran’s nuclear and military capabilities, further reduces the possibility of successful negotiations. Therefore, as these tensions persist over a long period of time, the risk of a full scale conflict between the US and Iran cannot be ruled out.

Recommendations

Travelers are advised to regularly review their emergency and contingency procedures as a basic security precaution, as the current tensions between Iran on one side and the US and its Gulf allies on the other may manifest in some form of cold war or even a limited or full military confrontation.

Western nationals operating or residing in Iran are advised to remain cognizant to prevailing negative sentiment toward the United States and other North American and Western European countries.

US citizens and other Western nationals operating or residing in other countries in the Middle East with sizeable Iranian-backed elements are advised to keep a low profile and maintain heightened vigilance, given the potential for attacks by such groups.

Those operating vital infrastructure, particularly in the oil sector, in Saudi Arabia are advised to review security protocols in light of the threat posed by Yemeni Houthi-perpetrated attacks, particularly through the use of UAVs.

Those planning to operate commercial aircraft over the Persian Gulf and the Gulf of Oman are advised to exercise heightened caution and remain apprised of further FAA notices regarding the increased threat to aviation in this region.

Bolstered international support for LNA Field Marshal Haftar amid ongoing hostilities in Tripoli likely to prolong conflict – Libya Analysis

Executive summary

Over the past three years, the Libyan National Army (LNA) Field Marshal Khalifa Haftar has gained increased domestic and international legitimacy amid his forces’ territorial advances in the Oil Crescent, Benghazi, Derna and the Fezzan Region.

On April 4, Haftar announced the launch of Operation “Flood of Dignity” aimed at taking control of Tripoli and its surrounding areas from the UN-backed Government of National Accord (GNA)-linked militias.

Despite this development, recent actions by prominent Western leaders, particularly of the US, the UK, and France, have increased the international legitimacy of the LNA vis-a-vis the UN-backed GNA in Libya.

This increased Western support for Haftar may be interpreted as a “green light” for his regional supporters, namely the UAE, Egypt, and Saudi Arabia, to further extend financial and military assistance to the LNA.

Meanwhile, Turkey and Qatar have, and will continue to bolster their own measures to assist GNA-linked forces in Tripoli in order to further their own interests in the oil-rich country.

Overall, the bolstered international and regional involvement in the Libyan conflict will fuel further hostilities and the prolongation of fighting throughout the country, and specifically around Tripoli, in the coming months.

Current Situation

On April 10, France blocked an attempt by the European Union (EU) to publish an official statement condemning the LNA offensive on Tripoli.

On April 19, an official statement by the US State Department indicated that on April 15 the US President Donald Trump conversed with LNA Field Marshal Khalifa Haftar, recognizing his “significant role in fighting terrorism and securing Libya’s oil resources”.

On April 23, the UN-backed Government of National Accord’s (GNA) Prime Minister, Fayez al-Serraj, gave interviews for French news agencies, denouncing the French government’s support for Haftar.

On April 25, the LNA arrested two Turkish nationals in Tripoli. Reports quoting the LNA Spokesperson have indicated that they were arrested for alleged involvement in espionage activity. According to reports citing Turkish officials, the two were restaurant workers in Tripoli and were not involved with Turkish security forces.

On April 29, the GNA’s Interior Minister, Fathi Bashagha, visited Turkey to strengthen security and defense cooperation agreements. Bashagha was reportedly accompanied by the Chief of the Western Military Command, Usama al-Juwaili, and another top GNA-linked military official.

On April 29, the Turkish President, Recep Tayyip Erdogan, conversed with the GNA Prime Minister, Fayez al-Serraj, and expressed Turkey’s support for the GNA.

On May 18, the GNA-linked “Volcano of Wrath” Operations Room announced that they had received a ship containing military reinforcements. Picture material and additional reports indicate that the ship arrived from Turkey’s Samsun Port and contained multiple Turkish-made armored vehicles as well as other military hardware.

Background

The LNA’s Supreme Commander, Field Marshal Khalifa Haftar’s local and international legitimacy has significantly increased over the past three years. This can largely be attributed to the fact that since 2016, the LNA has made gradual territorial advances in Libya, which has resulted in an expansion of Haftar’s influence over almost two-thirds of the country. In September 2016, the LNA took control of the Oil Crescent from the former GNA-aligned Petroleum Facilities Guard (PFG). This was followed by the LNA’s announcement of the conclusion of its three-year long Operation “Dignity” on July 5, 2017, which resulted in the eviction of the Revolutionary Shura Council of Benghazi (RSCB) and the Islamic State (IS) from the city. On June 28, 2018, Haftar announced that its forces had taken full control of the eastern city of Derna from the Derna Protection Force (DPF), formerly known as the Mujahideen Shura Council of Derna (MSCD). Finally, the LNA took full control of southern Libya as part of its Operation “Murzuq Basin” in March 2019.

Although, Haftar received initial support from the UAE, Egypt, Saudi Arabia and France, over the years, countries that were initially opposed to the LNA’s Operation “Dignity”, such as the US, the UK, and Italy have shown an increasing interest in negotiating with Haftar. This is underscored by a meeting between the former UK Foreign Minister Boris Johnson and the British Ambassador to Libya, Peter Millett, and Haftar in August 2017. More recently, Italy invited both the UN-backed GNA Prime Minister, Fayez al-Serraj and Haftar to a conference on Libya in Palermo, Italy in November 2018 to discuss a potential date for a nationwide election process in the country.

Assessments & Forecast

Egypt, UAE, Jordan, Saudi Arabia to extend further support to LNA amid ongoing clashes with GNA-linked forces in Tripoli

Initially, a significant support, mainly by Egypt and the UAE, had been extended to Field Marshal Khalifa Haftar and the LNA, in light of the latter’s efforts to dislodge Islamist militants and militias from Benghazi. This most significantly came in the form of military hardware and logistical assistance by the two aforementioned countries, and the UAE’s manning of a al-Khadim airbase in 2016, to support the LNA’s military efforts. This extensive support was based since its initial phase upon Haftar’s self-positioning as the figure with the desire and ability to defeat Libya’s belligerent Islamist factions and Muslim Brotherhood-affiliated groups, which have gained significant foothold in the country amid the civil war. This is due to the fact that both Egypt and the UAE view these groups as a region-wide threat. Thus, the success of Haftar’s Operation “Dignity”, and his more recent success in taking control over the Fezzan Region, while emphasizing his determination to continue fighting such elements, has bolstered his position as a reliable ally for Egypt and the UAE. As for Egypt, another significant interest in strengthening the LNA was its determination to bolster an ally that would be able to secure the vast swaths of the desert-dense border areas between the two countries. These porous border areas serve as a major pipeline for both the smuggling of weapons and the movement of fighters from Libya into Egypt, and subsequently, to militant groups operating inside Egypt.

This emergence of the anti-Muslim Brotherhood alliance, characterizing the LNA’s relations with Egypt and the UAE, was paralelled by the increasing of relations between the Tripoli-based GNA and Turkey and Qatar, who are perceived by the UAE, Egypt, Jordan and Saudi Arabia to be supporting Muslim Brotherhood-affiliated groups across Libya, including in Tripoli. This has reportedly involved Turkish shipments of weapons to such elements in western Libya, as was highlighted by the seizure of a Turkish arms-carrying naval vessel, detained in Libya in December 2018. The increase of relations between Turkey and the GNA was likely further prompted by the current ongoing clashes in the designated capital, and was most significantly highlighted by both the April 29 security-related visit by the GNA Interior Minister to Turkey and the phone conversation between GNA Prime Minister, al-Serraj, and President Erdogan, during which the latter emphasised his support for the former. This, in turn, may have been the preceding arrangement for the May 18 reinforcement shipment, reportedly arriving from Turkey, which contained multiple Turkish-made armored vehicles as well as military hardware.

This more overt Turkish involvement has, in turn, drawn further accusation from the LNA of Turkish sponsorship of Islamist factions in and around the capital. In this framework, the LNA’s April 25 detention of two Turkish nationals on espionage charges indicates a further deterioration of relations between the LNA and Turkey. Regardless of whether or not the arrestees were indeed involved in espionage activities, the event is likely perceived by the LNA as an opportunity to further paint Turkey as intervening in Libya’s internal affairs in support of “extreme elements”. This, in turn, is likely perceived by the LNA as an opportunity to prompt its traditional aforementioned backers to supply it with additional assistance and potentially even draw the attention of other international stakeholders towards Turkey’s policies. Such efforts may have been the reason behind what appears to be greater support for Field Marshal Haftar by Saudi Arabia’s King Mohammed bin Salman (MbS), who has expressed the Kingdom’s support for the former and has also reportedly offered to financially support the LNA’s Tripoli campaign during an official meeting between the two on March 27.

FORECAST: Significant support and material assistance will continue to be extended towards the LNA by the UAE, Egypt, Jordan and Saudi Arabia. This will highly likely manifest in the form of direct aerial support, as well as military and financial aid aimed at bolstering the LNA’s capabilities and enabling it to continue its offensive on the designated capital. In terms of physical military assistance to the LNA, it remains likely that the UAE will assist the LNA with additional employment of attack and reconnaissance unmanned aerial vehicles (UAVs), as it has done in the past, and given that it still possesses an active UAV base in eastern Libya. Such support is likely to be already taking place given multiple reports indicating the discovery of remnants of missiles believed to be a type used by the UAE UAVs, and is in any case not in use by any Libyan faction. However, such assistance is likely to remain relatively limited and covert, as the UAE will likely attempt to refrain from being painted as overtly challenging a UN-backed government.

FORECAST: Given the heightened tensions between the LNA on the one side and Turkey and Qatar on the other side, specifically surrounding the ongoing fighting in Tripoli, we assess that over the coming weeks, Turkish and Qatari nationals or corporations will face a growing threat of being subjected to arbitrary measures in LNA-controlled territories in Libya. This will most likely entail extrajudicial measures, such as arbitrary arrests and military prosecution over alleged charges of espionage and militant activity.

Increased political support for LNA by major Western stakeholders bolster LNA’s legitimacy, incentivise regional backers to extend further support to LNA

Most of the Western governments involved in Libya, such as the UK, Italy, France, and the US, initially primarily backed the UN-led initiative to reinvigorate a viable political process for Libya’s unification under one functioning government. This initiative partially came in the form of the establishment of the GNA in December 2015, which has since been the officially recognized government in Libya by the UN. That being said, the aforementioned ability of Field Marshal Khalifa Haftar to take control of the Oil Crescent has consolidated his international standing among these countries. This was most significantly highlighted by the actions of Italy, a prominent supporter of the GNA, which has, after Haftar’s aforementioned successes, dedicated significant effort to convince him to participate in the political effort to unite the country under the Italian-initiated Palermo Conference in November 2018. Despite Italy’s backing of the GNA, Italian symbolic acceptance of Field Marshal Haftar was more recently highlighted even amid the ongoing offensive on the capital, when Italian Prime Minister Giuseppe Conte announced on May 7 that he is seeking to meet Field Marshal Haftar in the near future. In a similar vein, a process of gradual political acceptance towards the Field Marshal was also recorded in the UK. This mainly materialized after Haftar’s territorial gains in the Oil Crescent and Benghazi, resulting in a more accepting discourse by the UK Foreign Minister, Boris Johnson, in an official meeting between the two in August 2017.

France, contrary to the aforementioned European powers, extended its support in terms of military advisory assistance to Field Marshal Haftar during his initial Operation “Dignity”, aimed at dislodging Islamist militants from Benghazi. A more robust support by France followed Haftar’s takeover of the Oil Crescent, when President Emmanuel Macron invited the Field Marshal to the Paris Conference in 2017. That being said, despite having given such support to the Field Marshal, the French government has never explicitly acted in defense of the LNA and against the UN-backed international effort to establish unified political establishments in the country. Thus, the April 10 measure by the French government, namely the blocking of an official EU condemnation, is highly notable as it constitutes France’s first overt political support for the LNA at the expense of the UN and EU efforts to condemn and exert political pressure upon Field Marshal Haftar. This, in turn, has prompted significant protests in GNA-controlled territories, such as the April 19 “yellow vests” demonstrations in Tripoli and Misrata, with protesters dispensing anti-Macron discourse to denounce the French government’s backing of Haftar. In addition, the development has prompted GNA Prime Minister, al-Serraj, to give interviews to two primary French news agencies, where he publicly denounced the French government’s support for the “Dictator” Hafter. Lastly, this has also prompted political action by the GNA, with most significantly the Interior Ministry’s decision on April 18 to suspend bilateral cooperation with France, and the GNA Ministry of Economy and Industry’s decision to suspend operation licences of 40 companies, including a major French oil and gas company, on May 8.

The April 19 incident involving the US President highlights another culmination of international support by Western leaders for Field Marshal Khalifa Haftar and the LNA, despite the official UN support for the Tripoli-based GNA. Furthermore, on April 4, a press statement by US Secretary of State, Mike Pompeo, expressed the US’ opposition to Haftar’s move towards Tripoli, urging a cessation of the offensive. The aforementioned phone call, however, took place approximately two weeks after the LNA has commenced its offensive, which could be interpreted as a shift in the US administration’s approach to Libya and its greater acceptance of Haftar, at least by the president himself. This apparent change in the US president’s approach and the robust support extended to the Field Marshal by France, could be interpreted as predicated upon a few factors.

First, the extensive territorial gains made by Haftar in the Fezzan Region have highly likely bolstered his standing vis-a-vis the GNA, regardless of whether or not the current assault on Tripoli will succeed. The Fezzan Region has been regarded as one of the major regional focal points for contraband, illegal immigration, and militancy-related activities for international stakeholders, such as the EU, and some of Libya’s neighboring Arab countries, primarily Egypt. This is due to the fact that since Muammar Ghaddhafi’s fall in 2011, the Fezzan Region has hosted the major transit routes through which immigrants from West Africa have been travelling, via Libya’s border-crossings with Niger and Chad, towards Europe. This, in turn, has also attracted criminal, militia, and militant networks wishing to capitalize upon the ungoverned territories of the Fezzan to further strengthen their operations, while local authorities were either absent or incapacitated to act upon these threats. For this reason, the LNA has dedicated extensive discursive and physical effort towards emphasizing its determination to mitigate threats emanating from the country’s border areas. Through this, Haftar is able to capitalize upon European interests related to counter-militancy and counter-immigration efforts to gain the aforementioned political support, primarily from France.

In addition, the Fezzan campaign has resulted in Haftar’s possession of the al-Feel and Sharara oil fields, which account for approximately a quarter of the country’s oil production potential. As was recorded after his takeover of the Oil Crescent, this development increased Haftar’s international standing as an arbiter in the competition between foreign companies over stakes in Libya’s oil industry. Such competition has reportedly taken place between major Italian and French companies seeking opportunities in the country’s oil market and wishing to see the stabilization of the region. Furthermore, Haftar’s control over the majority of Libya’s oil fields, with Libya potentially being one of the top world producers of oil, stations Haftar as a potential influencer in global oil prices. This, in turn, can make Haftar a lucrative partner for major international powers seeking to influence trends in global oil prices for their interests. In the case of the US, the stabilization of Libya’s oil industry in the hands of a potential ally could serve important American national security interests that are currently being pursued, such as stabilizing a low oil price amid the ongoing sanctions against Iran.

FORECAST: Given the aforementioned developments involving the US and France, it is likely that despite the overall condemnation of the LNA by major international institutions such as the UN, these countries will continue to extend their support to the LNA. Though such support is overall likely to remain symbolic, it may be interpreted by the actors more vigorously and physically supporting the LNA, such as the UAE and Egypt, as a “green light” to employ greater measures to facilitate the LNA’s takeover of the designated capital. Meanwhile, given the heightened tensions between the GNA and the French government, and given the increased anti-French sentiment expressed in Libya’s GNA-strongholds, such as Tripoli and Misrata, over the coming months French nationals and corporations will face a growing threat from local citizens and potentially armed militias which operate in western Libya and are opposing current French policies towards Libya.

Recommendations

It is advised to defer all travel to Tripoli and Benghazi at this time due to ongoing violence, threats against foreigners, and the risk of a broad deterioration of security conditions. We advise at this time that those remaining in Tripoli and Benghazi should initiate contingency and emergency evacuation plans due to deterioration in the security situation. Contact us at [email protected] or +44 20-3540-0434 for itinerary and contingency support plans.

Travel to Misrata and Tobruk should be for essential purposes only, while adhering to all security precautions regarding civil unrest and militancy. We advise against all travel to outlying areas of the country, due to the threat of militancy, kidnapping, and general lawlessness in such areas.

French nationals operating or residing in Libya are advised to keep a low profile and to overall refrain from externalizing their nationality in western Libya’s major GNA strongholds, such as Tripoli and Misrata, due to increased public expression of anti-French sentiment in these locales.

Turkish and Qatari nationals operating or residing in Libya are advised to keep a low profile and to overall refrain from externalizing their nationality in LNA-controlled territories. This is due to a growing risk of arbitrary measures and detentions by the LNA, following the aforementioned countries’ support for GNA-linked forces.

Avoid entering Libyan territorial waters in the area between Benghazi and al-Tamimi without prior authorization, as a no-sail zone is currently in effect in this area and several naval vessels had been intercepted or attacked due to not following proper procedures.

In addition, avoid entering Libyan territorial waters off the coast of Tripoli due to the heavy deployment of LNA naval vessels in the area. If travel is unavoidable, seek prior permission from the relevant authorities in order to mitigate the risk of interception on account of misidentification.

Those planning to conduct air travel to, from and inside Libya should avoid entering the area between Marsa al-Brega, Sirte and Sebha, as it was declared a no-fly zone by the Libyan National Army (LNA).

Those planning to conduct air travel to and from Tripoli’s Mitiga International Airport are advised to follow all relevant security protocols due to the increased threat to aviation in the capital as a result of the ongoing hostilities.

We further advise against all travel to Libya’s border areas at this time due to persistent violence and lawlessness in these regions.

For those operating in or conducting business with oil facilities, it is advised to consult with us for itinerary-based travel recommendations and ground support options.

Risk of increased political, security instability as tensions escalate between Mogadishu, UAE over Somaliland port deal – Somalia Analysis

Executive Summary

A Dubai-based company’s sale of a stake in the Port of Berbera in Somaliland to Ethiopia in March triggered a political standoff between Somalia and the UAE that led to the two countries cutting military ties.

The severing of funding for the Somali National Army (SNA) and withdrawal of UAE trainers and equipment will have a serious impact on the SNA’s capacity to fight al-Shabaab and delay the withdrawal of the African Union Mission in Somalia (AMISOM) peacekeepers.

Puntland and other regional states have continued to engage with the UAE separately as they receive funding and other benefits from the Gulf country, illustrating the weakness of Somali federalism as Mogadishu holds little leverage to force its constituent states to adhere to a unified policy.

Turkey and Qatar are likely to increase their presence in Somalia following these events, though Mogadishu will likely attempt to restore ties with the UAE. Given Somalia’s dependence on the Gulf countries for support, Mogadishu will attempt to maintain its official neutrality toward the Gulf rivals even as its states pursue their own policies.

We continue to advise against all travel to Somalia at this time with the exception of the Puntland and Somaliland regions. Travel within these regions should be restricted to cities and be for essential purposes only, while avoiding travel to outlying areas.

Current Situation

On March 1, a Dubai-based company announced that it sold a 19 percent stake in the Port of Berbera in Somaliland, of which it is a majority owner, to Ethiopia. In response, on March 12, the Somali Parliament in Mogadishu declared the deal to be “null and void” as the federal government was not consulted prior to signing.

Following weeks of turmoil and several military confrontations at the federal parliament, on April 8, Mogadishu airport authorities seized a private UAE aircraft and confiscated 9.6 million USD that was suspected to be directed toward several politicians involved.

The Ministry of Defense announced on April 11 that it would cut all military ties with the UAE, with the Somali government to take over the duties of training, funding, and redistributing the forces that were under the UAE’s payroll. This prompted the UAE to withdraw its military trainers and equipment from Mogadishu on April 16, with some reports that their forces withdrew from Bosaso, Puntland as well.

On April 21, Puntland President Abdiweli Mohamed Ali “Gaas” traveled to the UAE for talks with the government to secure continued support for Puntland’s maritime police forces. Likewise, on May 7, Jubaland President Ahmed Madobe visited Abu Dhabi, where he criticized Mogadishu’s actions regarding the UAE.

Somali President Mohamed Abdullahi “Farmajo” traveled to Doha, Qatar on May 13 where he met with the Qatari emir and foreign minister to hold discussions regarding “joint cooperation” between the two countries.

Assessments & Forecast

Security Consequences

Over recent months, Somalia and the UAE have been engaged in a political standoff following the March 1 Somaliland port deal. Mogadishu does not regard Somaliland as an independent state while Hargeisa does not recognize Somalia’s authority, though a number of countries and companies have pursued separate tracks of political negotiations and commercial deals with Mogadishu and Hargeisa. In this context, the UAE has acknowledged Somaliland as a de facto country as it sought to develop political and economic interests across the region. Mogadishu’s decision to cut military ties with the UAE as a retaliatory measure after the port deal and related political turmoil is particularly notable given the UAE’s entrenched involvement. This includes UAE-based companies controlling, developing, and operating strategically-situated ports and infrastructure, while the government also funds humanitarian and development projects as well as individual Somali political figures, all in efforts to advance the Gulf country’s interests.

Click here to see Map Legend

One of the most significant developments was the UAE’s withdrawal of support to the Somali National Army (SNA). It is possible that Mogadishu did not fully consider the ramifications of severing its military ties but it came immediately, as the UAE withdrew its military trainers and halted financial support to 2,400 Somali soldiers, thought to constitute between a quarter to a fifth of the entire SNA.

FORECAST: Somalia has recurrent difficulties raising enough revenue to pay its security forces and it is likely that they will be unable to cover those soldiers’ salaries after the UAE’s withdrawal, which could result in violent protests or incidents by unpaid soldiers. This potential was demonstrated in Mogadishu on April 23 when former UAE-backed soldiers looted their former base, clashing with other SNA troops, and went on to sell hundreds of stolen firearms on the black market. This illustrates not only the fragmented nature of Somalia’s security forces, often trained by different foreign powers and answering to different clan or regional interests, but the impact of these divisions and ill-discipline on maintaining security in the country. UAE-supported soldiers were thought to be among the best-trained and equipped forces in the capital, and these changes will only make it harder for security forces to manage the threat posed by al-Shabaab and other armed groups.

FORECAST: This is also expected to impact the African Union Mission in Somalia’s (AMISOM) plans for withdrawal from the country. Peacekeepers have already begun to draw down, with plans to fully exit by 2020, though their departure is contingent on conditions that include improvements in Somalia’s security situation and political development, as well as the SNA’s ability to replace AMISOM. This further highlights the UAE’s multifaceted role in Somalia, as it contributes to building the SNA’s capacity, which has an effect on the broad security of the country and the army’s ability to step in for the peacekeepers, as well as their interference in Somali politics and institution-building. Given this role, should the standoff between Somalia and the UAE continue, this will complicate AMISOM’s plans. While this is positive in the short-term given AMISOM’s capabilities in comparison to the SNA, international donors have already grown impatient with continually funding the peacekeeping operation and this may force the end of the mission before Somalia is prepared to take over.

Internal Political Implications

In addition to Mogadishu and Somaliland, the UAE is also heavily involved in the semi-autonomous region of Puntland. There they signed a deal in April 2017 to develop and run the Port of Bosaso, alongside an agreement to create, fund, and train Puntland’s Maritime Police Force (PMPF). These financial and military benefits prompted Puntland’s president to publicly deviate from Mogadishu’s position and travel to Abu Dhabi in efforts to secure their continued support. His willingness to directly engage with a foreign government in defiance of the constitution that imbues only Mogadishu with the power to conduct foreign policy is another reflection of the limitations of Somali federalism and unification.

FORECAST: Moreover, Mogadishu has little leverage over Puntland and would likely not be able to persuade the region to bend to their position. As a result, Puntland is likely to continue pursue its independent policies while Mogadishu softens its rhetoric in order to reduce the internal rifts.

That the UAE would negotiate individually with Mogadishu, Puntland, and Somaliland is consistent with the longstanding conceptualization of Somalia into the three regions. However, regional states in Somalia are likewise divided, and Jubaland, Galmudug, Hirshabelle, and Southwest states have all formed their own positions regarding the Gulf crisis and to which side they believe Somalia must be aligned. Much of this is derived from the funding Somali politicians receive from Saudi Arabia, the UAE, Qatar, and Turkey. While this has largely remained in the political sphere, one example of this manifesting in violence was the confrontation at the Somali parliament in April. This was, in part, driven by the parliament speaker’s opposition to the president and prime minister’s response to the Somaliland port deal, which he claimed was a result of their allegiances to Qatar.

FORECAST: Given that both sides of the Gulf crisis continue to fund Somali political figures and commercial interests, this is expected to remain a source of tension for the foreseeable future. While this may result in further violence between security forces backed by different factions, its effects will largely be political. However, this effect could seriously hinder the development of Somalia’s permanent constitution, the advancement of negotiations between the federal states and the central government, and the political progress necessary to make Somalia a viable state.

Effects on Foreign Policy

Given the impact on security and Somalia’s internal regional dynamics, it is likely that Mogadishu will pursue negotiations with the UAE to resolve their differences and restore relations. However, Qatar and Turkey likely view this as an opportunity to increase their involvement in the Horn of Africa and undermine their rivals. Qatar and Turkey have likewise sought to gain a foothold in the country in the past several years, with Turkey being one of the country’s largest donors and investors and Qatar securing its influence by funding Somali politicians, including President Farmajo. This underlines the position that Somalia is in due to its weak governance and reliance on foreign aid, vulnerable to the aims and goals of the international community, whether that is Western development and military intervention or competition between the Gulf rivals over their expanding influence in the region.

With the UAE remaining interested in Somalia despite recent events and Turkey and Qatar expected to increase their presence, it will be difficult for Mogadishu to maintain its officially neutral stance on the Gulf crisis.

FORECAST: Given Somalia’s dependence on these countries to fund and operate not only military training but critical infrastructure and services, including airports, seaports, and hospitals, they will likely continue to maintain this balancing act. However, the federal government will likely face growing diplomatic and economic pressure to choose a side, though it will also have to contend with internal pressure by its constituent states who will disagree. In this regard, even if Mogadishu continues to lean toward Qatar, the nature of Somalia’s weak federalism will mean that different regions and states will continue to maintain their own foreign policies and relations with either side of the Gulf rivalry.

Recommendations

We continue to advise against all travel to Somalia at this time with the exception of the Puntland and Somaliland regions. Travel within these regions should be restricted to cities and be for essential purposes only, while avoiding travel to outlying areas.

If travel to southern Somalia is unavoidable, we advise remaining in the confines of Mogadishu’s Aden Adde International Airport complex.

How countries such as Saudi Arabia, Bahrain, UAE, Egypt cutting ties with Qatar is likely to influence the region – Middle East & N. Africa Analysis

Current Situation

During the morning hours of June 5, Saudi Arabia, Bahrain, Egypt, and the UAE announced the cutting of all diplomatic ties with Qatar. The Hadi-led government in Yemen, as well as Libya’s anti-Islamist House of Representatives (HoR) similarly announced the severing of diplomatic ties with Qatar on the same day. The first four countries issued a 48-hour ultimatum to Qatari diplomats to evacuate their respective nations, while similarly issuing an ultimatum to all other Qatari citizens to leave within two weeks. Additionally, Saudi Arabia, Bahrain, Egypt, and the UAE announced that they had closed their airspace for Qatari aircrafts, and that all flights by airliners from these countries to Qatar were suspended. Qatari naval vessels will also not be allowed to use the countries’ seaports to anchor, while land travel between Qatar and Saudi Arabia will be limited to non-Qatari nationals only.

Additional measures implemented against Qatar include the expelling of the country from the Saudi-led coalition in Yemen and its anti-Islamic State (IS) coalition in Syria. These measures were implemented based on accusations that Qatar is “supporting and financing extremist groups” across the region, as well as encouraging sectarianism and subversive elements operating in the abovementioned countries. Meanwhile, Qatar’s Ministry of Foreign Affairs issued a statement that the accusations are “absolute fabrications” and “proves that there are premeditated intentions to cause damage to Qatar”.

How countries such as Saudi Arabia, Bahrain, UAE, Egypt cutting ties with Qatar is likely to influence the region - Middle East & N. Africa Analysis | MAX Security — Map of countries affected by travel restrictions on Qataris

Assessments & Forecast

Severing ties may hurt Qatar economically, push its policy towards more pro-Iranian approach; limited impact on regional conflicts

While the new development is unlikely to have any effect on Qatar’s and any of the other impacted countries’ security conditions in the short term, we assess that this measure may lead to multiple local and regional ramifications over the coming months. For instance, approximately 90 percent of Qatar’s imports of food products are transferred through land from Saudi Arabia. Thus, in light of the border closure between the two countries, Doha will likely be forced to divert a large amount of resources in developing its maritime trade, including in the form of improving its seaport infrastructure, as now its imports via sea are liable to be enhanced significantly. Moreover, given the high-profile nature of the event, there remains a possibility that the turn of events will impact global markets, and particularly the oil sector, as it may be perceived as a source of instability across this oil-rich region.

These new developments may also impact expatriates, including Westerners operating in Qatar and the GCC, particularly given the suspension of flights between the GCC countries and Qatar and the closure of the land border with Saudi Arabia. In light of the likely increase in logistical difficulties in traveling between Qatar and the above-mentioned countries, exacted upon expatriates by the measures, it is likely to damage Qatar’s national economy. Though the impact on GCC residents seeking to enter Qatar is yet to be determined, it cannot be ruled out that Qatar will implement punitive measures and ban GCC citizens and residents from entering the country.

The partial isolation of Qatar may affect several conflicts and political rivalries across the region. With regards to Iran, Doha is liable to improve its bilateral relations and economic ties with Tehran, as now Qatar would be compelled to compensate for its political and economic setback. Moreover, in Yemen, in the short-term, Qatar’s absence from the Saudi-led coalition may slightly reduce the latter’s on-the-ground capabilities in fighting against the Iranian-backed Shiite Houthis. However, given Qatar’s already limited role in the coalition, as well as the aforementioned arms deal with the US, in the medium to long-term the Saudi-led coalitions is unlikely to be significantly impacted by Qatar’s absence from the coalition.

In Syria, in light of the already heightened internal divisions between rebel factions, it remains possible that this new development will further exacerbate tensions between rebel groups supported by Qatar on one side, and factions backed by Saudi Arabia and the UAE on the other. Should the event indeed lead to an economic recession in Qatar, their supported factions on-the ground would suffer from a shortage of resources, thus forcing them to disband or merge into other factions. With this in mind, should scenarios eventually materialize, it would potentially tip the scale towards the pro-government forces in the Syrian conflict.

In Libya, the development may constitute a boost to the HoR and its allied Libyan National Army (LNA), given their conflict with the pro-Islamist General National Congress (GNC) and its affiliated militias, which are partially supported by Qatar. That said, Qatar’s direct involvement in this conflict has significantly waned in recent years, particularly since the March 2016 arrival of the UN-backed Government of National Accord (GNA) to the designated capital of Tripoli, and therefore any implications on the conflict will remain limited.

Cutting ties with Qatar likely linked to global, regional developments involving Iran, new US administration

Today’s development comes amidst years of tensions between Saudi Arabia, Bahrain, UAE, and Egypt on one side, and Qatar on the other, surrounding multiple issues, chiefly the latter’s alleged direct involvement in the internal affairs of countries throughout the region. This is particularly relevant to Qatar’s long-standing support for Muslim Brotherhood-linked political elements across the Middle East and North Africa, as the countries in this Saudi-led alliance view the Islamist organization is a subversive element and a threat to their respective governments. Additional contentious issue include Qatar’s overall positive relations with Iran, as opposed to that of the other Gulf Cooperation Countries (GCC), with the exception of Oman, which remain strong adversaries of Tehran. This is highlighted by numerous past economic agreements between Tehran and Doha in recent years, such as the agreement from February 2014 to create a joint free trade and economic zones between the two countries. A further issue that contributed to the strained relations with Qatar throughout the years is the cooperation of the Qatari-based news outlet al-Jazeera, which had been accused by the aforementioned countries of attempting to undermine their, as well as their regional allies’, governments.

That said, despite these strained relations, Qatar and the other GCC countries’ relations can be characterized over the past several years by intermittent escalation and rapprochement between the sides. For instance, on December 9, 2014, Qatar agreed as part of a GCC summit, to establish a regional police force in order to improve coordination regarding drug trafficking, money laundering, and cybercrime, as well as announced its “full support to al-Sisi-led government in Egypt”. This followed Saudi officials’ March 9, 2014 threats to impose sanctions against Qatar, including in the form of sea blockade, in light of Doha’s persistent support for Muslim Brotherhood-linked elements across the region. However, the complete cutting of diplomatic relations between the aforementioned Saudi-aligned countries is highly notable given its wide scale and scope, as it includes significant restrictions on Qatar and its citizens.

We assess that this escalation is linked to global and regional geo-political developments, largely with regards to Iran and the new Donald Trump administration in the US. With this in mind, in recent years, under the Obama administration, relations between Saudi Arabia and its allies on one side, and Washington on the other, were oftentimes strained due to the US’ perceived efforts to approach Tehran, which was likely viewed by Riyadh as coming at its expense. In light of the aforementioned normal relations between Qatar and Iran, Saudi Arabia and the other GCC countries were likely felt compelled to prevent Qatar from approaching the Islamic Republic too much, as this would have significantly undermined their sense of security and regional interest.

Since President Trump’s inauguration, Washington increased its anti-Iranian rhetoric, while at the same time strengthened its ties with Saudi Arabia. This is highlighted by the May 15 UAE-US defense agreement, as well as the 350 Billion USD agreement between Riyadh and Washington involving an arms deal, and Saudi investments in the US. Thus, there remains a potential that the recent visit of President Trump to Saudi Arabia in late May, as well as the US’ growing support for Saudi Arabia and its allies, motivated the Kingdom to implement these measures, as part of the shared interest with the US in tackling Iran and its allies’ influence throughout the region. With this in mind, given Saudi Arabia’s decreasing need for Qatar’s cooperation on security and political support amidst the ongoing rivalry with Shiite Iran, it is likely that Saudi Arabia assessed that it is no longer obligated to maintain positive bilateral relations with Qatar, prompting this development.

The development comes amidst a diminishing political influence of the Islamist Muslim Brotherhood organization across the Middle East and North Africa over the past two years. In this context, it remains possible that Saudi Arabia no longer felt compelled to maintain good relations with Qatar, following the reduction of the threat stemming from the Muslim Brotherhood, as opposed to previous Saudi attempts to pressure Qatar to abandon their support for the Islamist organization in return for the improvement of relations with the other GCC countries.

Recommendations

Travel to Qatar may continue as normal while adhering to cultural norms and avoiding making any statements critical of the Qatari Emir and government officials, despite the aforementioned new restrictions. That being said, those operating in Qatar over the coming days and weeks are advised to stock up on food and basic products, due to the possibility that these will be in shortage due to the declared measures. Those operating throughout the Middle East and North Africa, and particularly in Saudi Arabia, Bahrain, UAE, and Qatar are advised to remain cognizant of developments and potential effects on travel and business continuity given the current lack of full information regarding the various restrictions that will be in effect. This is particularly relevant for the possibility of unexpected border closures between the relevant countries over the coming days and weeks.

This report was written by:
Asaf Day – MAX Security’s Senior Intelligence Manager, Middle East & North Africa

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Executive Summary

We continue to advise against all travel to Somalia at this time with the exception of the Puntland and Somaliland regions. Travel within these regions should be restricted to cities and be for essential purposes only, while avoiding travel to outlying areas.

Current Situation

Assessments & Forecast

Security Consequences

Click here to see Map Legend

Internal Political Implications

Effects on Foreign Policy

Recommendations

If travel to southern Somalia is unavoidable, we advise remaining in the confines of Mogadishu’s Aden Adde International Airport complex.

Yemen’s Greatest Challenge

By Gabi A.

Getting the oil flowing again is a basic requirement for the success of any future government.

yemen oil — An oil pipeline in Northern Yemen.

Even as fears of continued factional conflict continue to attract media attention, the question of economic stability and sustainability in Yemen has barely received the consideration needed to avoid a spiral into the status of a failed state. The interim government in the country faces difficult political challenges in the weeks ahead as it prepares for what many observers are hoping will be the country’s first free election. The head of the interim government, Vice President Abed Rabbo Mansour Hadi, is already facing calls to resign as protests continue to rage in the streets of the capital city of Sanaa with demonstrators facing off against forces loyal to now supposedly deposed President Ali Abdullah Saleh.

The destruction brought on by the nearly-ten-month uprising against the regime of Saleh has wreaked havoc not only on the delicate political system but also on the nation’s oil production infrastructure that provides the lifeblood for the economy. Oil exports are responsible for somewhere between 60-70% of government revenues and 90% of overall national exports. Continue reading Yemen’s Greatest Challenge →