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The Cipher Brief: How are you seeing events in the region right now, in light of the COVID-19 and energy crises?
Roule: Let's begin broadly. A global health crisis and an unprecedented clash between two of the world's three largest oil producers combined to produce a global economic crisis. It quickly became apparent that none of the actors involved in the oil price war had anticipated either the severity of the COVID-19 pandemic or the complex ramifications that would follow the collapse of world energy markets. The momentum of the oil collapse seemed as uncontrollable as the spread of the virus. The two issues are interwoven, and their combined ramifications are only beginning to be understood.
Norman T. Roule, Former National Intelligence Manager for Iran, ODNI
I am not sure that anyone can predict how the economy will perform in the coming months. Assuming the re-opening goes well, we still need to see what permanent damage exists in the retail, tourism, and service sectors, especially in the U.S. and Asia.
Oil continues to saturate the market, and the amount in storage is astounding. In the end, market forces will take charge. U.S. oil production appears headed for a significant reduction, almost entirely because of market forces. Other oil producers will meet their cuts differently, and some will take longer than others to achieve their reductions. Some may well cheat, such as Russia has done in the past. Prices are likely to recover in 2021. Beyond that is a guess. One point: oil companies are slashing capital expenditure. This lack of investment will inevitably have consequences in a few years. Indeed, we could have a price spike. As the joke goes, the solution to low oil prices is low oil prices.
In terms of dealing with the virus, we now recognize that going forward will require a tight combination of social distancing, testing, contact tracing, and anti-viral development. Our primary goal will be to reduce the virus's lethality while we work to develop a vaccine. Unfortunately, the enormity of the situation and our hyper-partisan atmosphere makes it difficult to understand the veracity and relevance of data. In the coming months, policymakers around the world will initiate a gradual re-opening of economies, and we will also see whether infections spike once more.
Regarding the Middle East, in particular, I think it remains too early to do more than to point to the obvious: economies are under unprecedented stress at a time when the region remains politically fragile. Long-standing ambitions are being shaken. The region's leaders are about to undergo a significant test of their resilience, courage, and imagination. Beyond that, it is akin to being in the middle of a hurricane. You do what you can to protect yourself, your family, and your house. However, you realize that you must wait until the storm passes before you can understand the damage to your neighborhood and what you need to do to fix things.
Norman T. Roule, Former National Intelligence Manager for Iran, ODNI
The combination of COVID-19 and the oil crisis consumes the world's attention. But when thinking about the Middle East, it would be better to consider how these crises will impact the opportunities and challenges that appeared in recent years. Let me highlight a few areas to consider.
First, regional leaders will aggressively seek new revenues, to manage existing expenditures better and to protect programs deemed critical to long-term social objectives. Those countries reliant on tourism or trade with Asia will have difficulty predicting when economic normalcy will return. But they will plan for that day, because of their past judgments on these industries. Also, they have few other options.
- In the near term, governments need to show that they have a plan. The protection of the financial and retail sectors will be a priority. Economic diversification will take on new emphasis, but attracting foreign investment will become more complicated, and this process will take time.
- Expenditures are already being curtailed, but budget deficits will be ubiquitous. The entire region will execute budget cuts, to reduce or delay capital expenditures, and will focus on national programs aimed at protecting essential services, such as the health sector, as well as employment. The timelines for large showcase projects have been extended, and some plans may be shelved entirely.
- I don't see much change in either subsidies or taxes in the near term. But over time, subsidy cuts will be sought (especially for those seeking IMF support) as well as new taxes and fees introduced.
I anticipate a particular focus by regional leaders on employment programs to maintain economic stability and prevent unrest. I worry that countries with large and costly public sectors will be unwilling to slim down these traditional sources of employment. However, you can certainly understand their rationale for not doing so. Small retail establishments have mushroomed throughout the area in the last several years, particularly in places like Saudi Arabia. These retail establishments often have little capital, and they will be challenged to survive in the current fragile ecosystem. Just like their Western counterparts, owners of these businesses need to pay salaries and rent during a shutdown. I'm not sure the region has developed a strategy to handle this part of their economy, but we also have the same challenge.
Every country in the region will face unprecedented pressures on their sovereign wealth funds. Saudi reserves stabilized in 2017 but have already declined by more than $24 billion. This cut is a significant drop, although the Kingdom retains sufficient reserves for 43 months of imports. I expect further reserve cuts, and the region's wealthiest countries could see their sovereign wealth funds decline by $250 or even $300 billion in the coming year. These countries will maintain Western investment programs but will be more selective as to where they invest their long-term portfolios. Wealthier countries will take advantage of low-interest rates to seek loans to bridge deficits. Less well-off countries will turn to the IMF or Gulf countries.
The coming months will tell the region much about their governments, and these perceptions will become critical as the world moves through the difficult economic period that will follow. Past failures of governance and sectarian rule are going to be even more apparent in the coming months. Here, the virus may assist authoritarian governments or those rulers who seek to protect only traditional or corrupt elites. Fears of contagion may keep some protestors home, although we see in Lebanon that many are still willing to come out. In other cases, authoritarian governments may be able to use social distancing requirements to crack down on unrest. We need to be careful about excessive pessimism.
Lots of tough news. But the region has some powerful strengths that deserve mention. Its population is young, entrepreneurial, and often tech-savvy. Women are increasingly part of the political and economic dynamic. This population is more willing to protest and have few ties to extreme versions of political Islam or Arab nationalism. The region also enjoys a new generation of smart, experienced, and motivated technocrats. There is a vast amount of economic and commercial expertise in the Middle East. They are certainly under enormous pressure to manage the near-term consequences of the crises as well as their long-term ramifications. But we may well now be in a world where there are no right answers, but the best possible solutions will be put forward by these teams. We should also take note of the generosity by the region's wealthier states in assisting neighbors and even the U.S. in recent weeks. That says much about their values.
The region's monarchies proved resilient during the post-2011 unrest, and we shouldn't be surprised if they do so in the coming months as well. That doesn't mean we've always agreed with their actions or the steps they've taken to address local political or economic concerns. But the regime needs resilience and decisiveness. In countries where the response to the virus has been viewed favorably (such as the Gulf), we may well see their populations come out of this more confidant in their governments than some Western narratives suggest. We have also seen a couple of examples of confidence by Gulf leaders. Some of the wealthier Gulf states have used the decline in international asset prices to acquire long-term holdings to preserve their capital in the long term. The Ramadan films in Saudi Arabia, and I believe Kuwait, touching on relations with Israel also represent a confidence unseen in the past. We should expect the region's rapprochement with Israel to continue slowly.
Two countries that will be hit, especially hard, will be Iraq and Iran. Each has seen economic unrest in recent months, and current pressure will increase the likelihood of more violent protests in the future. But when we talk about countries, we sometimes forget how many people are involved. These two countries together represent around 125 million people. Perhaps a third of the region's population. My sense is that Iran is being hit harder than its leadership is letting on. Iraq is having a particularly difficult time in that it relies upon oil for 90% of its revenue. I read a recent report that noted in March, Iraqis oil revenues were sufficient only to pay one half of their public sector, with no money to spare for anything else. Baghdad has also cut budget allocations to the Kurdish north. This period will be a severe test of Iraq's stability. I think they will get through it, but they will need international support.
Second, expatriate workers will likely be targeted for cuts in terms of benefits and numbers, although the extent of the impact may take some time to play out. This shift will have a significant impact on countries such as Egypt or Lebanon that heavily rely on their remittances. For Egypt, such funds mean around 10% of its GDP and as much as 12% for Lebanon.
Last, I think China will seek to take advantage of the situation to build upon the successes of its Belt and Road Initiative. Beijing is likely to exploit cheap oil to develop its strategic reserves, invest in depressed regional projects or offer financial support to gain political influence, and use propaganda to claim it is a better partner than the U.S. But I think this strategy has limits. The region's economies will continue to maintain deep connections to China, India, and other Asian countries. But socially, politically, and militarily, they continue to look West.
The Cipher Brief: What about other countries in the region?
Roule: Egypt, Lebanon, and Jordan together represent another 120 million people. They have grappled with challenging financial problems for years and relied heavily on tourism and assistance from their neighbors and the international community. Egypt alone has lost something like $15 billion from its tourist sector. Lebanon has been in a political crisis for several years, and it remains uncertain how its Hezbollah-influenced government will conduct the reforms needed to free the $11 billion it required before the current crisis. Its population is enduring a terrible cash crisis where many are unable to access their dollar savings because of foreign exchange problems. Then, we have the broken or fragile states – Syria, Libya, Yemen, and Palestine that represent around 52 million people. In the absence of a coherent international approach to these problems, they will remain centers for human tragedy, extremism, and pandemics.
The Cipher Brief: What about Iran, specifically?
Roule: Lots of heated commentary, but Iran's current level of aggression appears to be at or below historical levels. The impact of sanctions and COVID-19 is probably more significant than Iran admits. Tehran's reserves have plummeted in recent years, and Iranians have little reason to view the ruling system with enthusiasm. Ship and drone activity in the Gulf continues but the pace of these operations appears no higher than past levels. The satellite launch has been a long time in coming, but the overt connection between the Revolutionary Guards and this program is likely more evidence that Iran has little interest in compromising on its missile program.
Iran's aid to proxies has reportedly dropped because of sanctions, but that doesn't mean Iran's influence has diminished. I expect Iran to continue to press its partners to ignore political solutions. A good example is Yemen. The Saudi-led Arab coalition declared a unilateral ceasefire. Houthis acceptance would have allowed for space for a political solution and a chance to deal with Yemen's COVID-19 and mine problem. The Houthis rejected the effort. It is unfortunate that the international community didn't respond more positively to the coalition gesture and more forcefully against the Houthis. This failure provides little encouragement to either the coalition to make the same gesture and tells the Houthis and Tehran that aggression has no consequences.
Norman T. Roule, Former National Intelligence Manager for Iran, ODNI
The question of deterrence is tough to answer. Too many people interpret deterrence as deterring Iran from any actions anywhere. Deterrence means you may have discouraged a class of activity or just activity in a particular area. It certainly doesn't mean that all activity will stop. Adversaries may be temporarily deterred but always test our fortitude, albeit usually with different tools and in different battle spaces.
Neither the U.S., Iran nor any of the regional countries seek war. Iran is likely to try to influence our political discourse through incidents that capture our attention (and generate domestic bickering) but do not threaten the conventional conflict Iran knows it would lose. This situation suggests further loud Iranian rhetoric, actions aimed at manipulating our domestic politics, and creating more divisions with foreign partners. In the worst-case scenario, one of Tehran's missile, cyber, or militia attacks could achieve a catastrophic success with unpredictable results.
Unfortunately, I see little evidence Tehran has any interest in diplomacy at this time. A prisoner exchange is possible. Their rejection of U.S. aid was another lost opportunity to turn the page, although I continue to believe we should do what we can to provide medical assistance to Iran. It may well be that Iran feels its best bet is to wait for the next administration – no matter who is president – before it tests the waters for a deal.
Read also The Uneasy Balance Between Care and Provocation by Senior National Security Columnist Walter Pincus only in The Cipher Brief
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