The alliance of the UAE and Egypt is expanding its zone of influence in the Horn of Africa, including the establishment of Ethiopian-Eritrean relations. There is a noticeable Emirati influence in Ethiopia, where they compete with the Qatar-Turkey alliance. Saudi Arabia, being a rival of the UAE and Egypt, supports them in the region against Qatar.
The Kingdom of Saudi Arabia (KSA) is trying to cope with the consequences of Crown Prince Mohammed bin Salman’s reforms, because the population of the country is not ready for them.
Commence with demarcations
The Prime Minister of Ethiopia Abiy Ahmed Ali visited the Eritrean capital, Asmara, in July, for talks with President Isaias Afwerki on the settlement of the territorial dispute. Afwerki welcomed the guest at the airport and then they went to the presidential Palace. At the end of June, Abiy Ahmed (he assumed the post of Prime Minister in April and promised to carry out democratic reforms) received the first Eritrean delegation in Addis Ababa since the outbreak of the armed conflict in 1998.
On June 5, the ruling coalition, the Revolutionary Democratic Front of the Ethiopian People, announced its readiness to proceed with the demarcation of the border in accordance with the peace agreements signed in 2000 in Algeria and the decisions of the International Arbitration Commission issued two years later, on the division of the disputed territories approximately equally. Earlier, Ethiopian authorities have shied away from the transfer of the town Badme to Eritrea and several other border areas, therefore the situation remained tense, and Eritrea lived under martial law.
All this is due to the coming to power in Ethiopia of the Muslim Prime Minister from Oromo and the competition between the UAE-Egypt and Qatar-Turkey. The outburst of peace between Addis Ababa and Asmara was largely due to Abu Dhabi and Cairo, mediated by the KSA. In an effort to isolate Ethiopia from Qatar’s and Turkey influence, the Crown Prince of Abu Dhabi Mohammed bin Zayed al Nahyan pledged Addis Ababa investments in exchange for the normalisation of Ethiopian-Eritrean relations.
The Ethiopian Prime Minister’s trip to Asmara is a direct result of the strengthening of the alliance with the UAE, which culminated in the Crown Prince’s visit to Addis Ababa on June 15 and 16. The UAE and the Arab Republic of Egypt seek to resolve the issue of the organisation of a new strategic axis in the Horn of Africa by actively participating in the normalisation of relations between Ethiopia and Eritrea and the settlement of the long-standing territorial dispute. It should include Eritrea, Ethiopia and the UAE, but also Egypt.
The head of the Egyptian Directorate of Operational Intelligence General Abbas Kamel, who in his run-up made trips between Cairo, Abu Dhabi, Riyadh and Addis Ababa, prepared Prince al Nahyan’s visit to Addis Ababa. He coordinated his activities with the Deputy Secretary of the Supreme National Security Council of the UAE Ali bin Hamad al-Shamsi. On June 10 and 12, the head of the National Intelligence and Security Services of Ethiopia, Mohammed Ahmed, also prepared the visit to Abu Dhabi.
On June 10, the Ethiopian Premier Abiy Ahmed Ali paid a working visit to Egypt, during which he met with President Abdul Fattah al-Sisi. The previous day, the US allocated the national Bank of Ethiopia a billion dollars to tackle the currency crisis. Experts believe that Washington informally agreed to the concessions to Addis Ababa on the future agreement on quotas for the spillway during the construction of the Renaissance Dam on the Blue Nile. Most likely, it is about meeting Cairo’s requirements to regulate the process of filling the reservoir.
The Egyptians changed tactics: from supporting the unrest of the Oromo and delaying the negotiations, they moved to bribing under the direct pressure from Abu Dhabi, where they believe this is the only correct method of action in this case. It is not just the Qatari influence. Ethiopia’s position is important for the UAE for the recognition of legitimacy of the purchase of the former Soviet Navy base in Berbera in Somaliland. Addis Ababa has a strong influence in this para-statal enclave, so its support for the project becomes critical for the UAE.
The position of Addis Ababa is so important that the Emirates went for negotiations with the Ethiopian authorities for the shares of the base in Berbera. In addition, Abu Dhabi has invested $1.5 billion in Ethiopian agricultural and infrastructure projects. There are industrial investors from the UAE, Julphar Gulf Pharmaceutical Industries and RAK Ceramics. The presence in Prince al Nahyan’s delegation during the visit to Addis Ababa of the head of the Emirati real estate holding Emaar Mohammed bin Ali al Abbar testifies to the UAE’s rapid investment in Ethiopia’s tourism, hotel business and shopping centres.
The Emirati Change Tactics
The UAE’s support of the Prime Minister of Ethiopia helps to withstand competition from the Tigrayan People’s Liberation Front. The main objectives of Abiy Ahmed’s policies are to resolve the ethnic problems by reconciling them with the federal model as the country’s structure, while at the same time easing tensions with its neighbours, especially Eritrea and Somalia. It is of particular importance for Addis Ababa to get access to seaports through the normalisation of relations with them. The UAE is behind the progress in establishing relations between these countries, which should lead to the resumption of activities of the Eritrean ports of Aseb and Massaua with Ethiopian foreign trade. The Emirates will take an active role in the modernisation of the port facilities and access roads.
The main contractor from the UAE here will be the Dubai state company “DP”, which previously acquired the former Soviet Navy base in Berbera. The Emirates are leading the process that fits into the concept of the UAE’s regional policy in the Horn of Africa. It implies maximum control by Abu Dhabi over all major port facilities in the region. It is essentially for this that on July 9 Abu Dhabi made peace with Isaias Afwerki. A diplomatic source in Addis Ababa said: “Emirati diplomats discussed…a new strategy for Djibouti”. This republic has long been the main ally of Ethiopia in the region, including in anti-Eritrean activities.
Addis Ababa and Djibouti were united by wars between the latter and Eritrea. The UAE’s relations with Djibouti are tense. The Emirates seek to block the operation of the railway built by the Chinese from Ethiopia to Djibouti, and in the future, to redirect the main flow of goods to the ports of Eritrea under its control. The key issue of the negotiations between Isaias Afwerki and Abiy Ahmed Ali was the elaboration of the agreement on joint port management and the taxes that would be charged by the authorities in Asmara. Addis Ababa hopes to acquire a Navy, operating outside the region, and Abiy Ahmed Ali counts on Djibouti and Port Sudan, until Massawa, Assab and Berbera are upgraded (a future hub according to UAE plans) for processing Ethiopian cargo.
The port construction strategy was the main reason for the Ethiopian Prime Minister’s visit to Mogadishu, where he discussed the possibility of investing in four Somali ports. At the same time the UAE has encouraged Afwerki’s visit to Somalia. On July 30 in Asmara, Isaias Afwerki and the President of Somalia Mohamed Abdullahi Mohamed signed an agreement on the establishment of diplomatic relations between the countries. Eritrea recognised the independence, sovereignty and territorial integrity of Somalia. The parties agreed to jointly promote peace, stability and economic integration in the region. The state visit of the head of Somalia to Eritrea was the first in many years.
We observe that the UAE, with direct support from Egypt and indirect support from the US, has changed its tactics in the Horn of Africa. From trying to replace the President of Somalia due to his negative position regarding the purchase of the base in Berbera by the UAE without the consent of Mogadishu, Abu Dhabi has moved to the creation of a single controlled trade association in the region. A constructive attitude that allows all local leaders to feel that they are winning, which ultimately determines their success in one of the poorest regions of Africa.
Zigzags of Saudi Reforms
After Crown Prince Mohammed bin Salman announced in 2016 the launch of the economic reform plan in Saudi Arabia Vision 2030, the government proceeded to implement radical changes, spread over a decade and a half. Among the main tasks are: diversification of the economy (reducing the share of oil money in the budget), stimulating the development of the private sector, creating the necessary investment climate for reforms, reducing unemployment, introducing innovations and modernising the social structure of the country. Two years after the beginning of the restructuring of the KSA, experts, primarily American, make the first conclusions about the success of the Vision 2030 strategy.
Since 2016, Saudi Arabia has been conducting aggressive economic reforms, but since oil prices have risen, they have slowed. The KSA efforts to attract foreign investment and stimulate the private sector activities are faced with contradictions in the regulatory environment. Everything in the Kingdom, from social issues to the rules of doing business, are still strictly controlled by the state, which causes suspicion of both investors and the Saudis themselves, according to the agency Stratfor. So far, this has not prevented American and European companies from competing for Saudi contracts, from the military-technical cooperation to the construction of roads and social infrastructures. Not to mention the oil.
Behind this conclusion lies the concern of a number of American investors and business interests with the results of the anti-corruption campaign, under the guise of which the political opponents of King Salman and his son are forced out of big business. They destroy the network of American and European business presence in the KSA that have been developed for decades. Old partners are leaving, and new ones will have to agree on the patterns of interaction and the amounts of kickbacks for the contracts. Personalities are changing and so are the rules of the game. As for the Saudi citizens, their concerns are clear: business is taken away from them and are must pay pay for fuel themselves, water and to work.
The root of the contradictions that have risen in the Saudi elite is not in reforms, but in who will lead them, control the main financial flows during their implementation. If it is the clergy, the imams will have to convince parishioners of the need to suffer and tighten their belts. But the Crown Prince does not want to share. Hence his anti-corruption campaigns, the opposition and the inertia of a large part of the elite: it does not see itself in this light. The Americans believe that Riyadh can use pauses in the initiatives and reforms, and this does not mean that the Vision 2030 concept has failed. We will note that when oil prices fall there is talk of the need for changes and diversification of the economy in the KSA and forget about them when the prices rise.
According to the Americans, the pace of implementation of the new concept of development slowed down. This is due to the fact that since the introduction of the economic reform plan in 2016, the KSA authorities faced inevitable obstacles. As expected, the inertia of the Saudis turned out to be too serious: they are used to receiving significant benefits form the government in the form of subsidies, but are not ready to change the perception of what jobs and services deserve. That is, they want to be leaders but not workers. In addition, most young people do not seek to study for the sake of a diploma from a prestigious university, but having in mind a future professional career.
Problems were identified in connection with the KSA authorities attempts to open the economy, which is one of the largest and at the same time the most closed in the region, in order to attract foreign investment. Now that oil prices have risen, reforms in Saudi Arabia have stalled, despite the fact that diversification and revitalisation of the private sector remain priorities for the government. It is one thing for the declaration, and another to take the necessary unpopular steps for the majority of the population.
Among the signs that point to this is that the Americans refer to the delay in the announcement of the IPO of the KSA state oil company Aramco, the vague government regulations, the disorganisation of small and medium-sized businesses, the forcing to refrain from further development and investment, the high and stable unemployment, the degree of civil discontent with a number of fiscal measures and primarily the introduction of sales taxes. “Building a dynamic society”, “a thriving economy” and “an ambitious nation”, as stated in the plan as goals, are vague.
A number of them have clear indicators (a plan to increase non-oil state revenues to one trillion Saudi rials, that is, 267 billion dollars). Others are vague and relate primarily to changes in social behaviour, such as “synchronising higher education with labour market requirements”. But in any case, the root of the problem lies in the consent or absence of the majority of Saudi nationals to review the social contract with their government.
From an economic point of view, the KSA has been successful in implementing reforms. One of the main driving forces of the new development concept was the need for diversification, which became apparent in 2014, when world oil prices fell. Saudi Arabia faced a decline in revenues, which led to an increase in the budget deficit and depletion of foreign exchange reserves. Vision 2030’s focus on finding alternatives has been recognition of how vulnerable the country will be as long as it remains dependent on oil exports.
Since 2016, non-oil exports have been growing. In the second quarter of 2018, it increased relative to the first by 26.5 percent. It is unclear at the expense of what articles. Dates will not create such growth. But the main part of this export is the sale of electricity and fuel to Jordan, Bahrain and now to Iraq. Non-oil revenues increased by 63 percent compared to the first quarter of 2018 due to the new value added tax introduced in January. But this is just an additional tax burden on the buyer of the same imported goods and services: the country still does not have its own industrial economy.
The government intends to raise tariffs for electricity, water and fuel. It continues to adhere to strict deadlines for the increase in tariffs for electricity (Saudi Electric Co. by June increased tariffs by 67 percent in yearly calculations). The slowdown in reform is linked to the stabilisation of oil prices, which allows the government to act more slowly to mitigate the shock among the population. In the long term, Saudi Arabia still has an incentive to develop a diversified economy that will be less dependent on oil revenues. At the same time, the state will maintain a cyclical approach to reforms, trying to combine them with peak hydrocarbon prices.
A key aspect of Vision 2030 is moving away from the traditional pattern of government-to-population relations (providing resources and services at low cost to the population in exchange for high level of control). Riyadh increases taxes and tariffs on tourism services, which is linked with a reduction in subsidies. The matter is not easy: a significant number of citizens in the hot months went to Lebanon or Morocco. A 145 percent increase in electricity tariffs for residential and commercial premises constrains consumption. In 2018, cash withdrawals and consumer spending by the Saudis showed steady stagnation (the result of an increase in the VAT and tariffs).
The higher taxes and higher prices for services reduce the incentives for foreign companies to set up businesses in the Kingdom, which was previously considered a tax haven. The KSA welcomes the reduction in the inflow and use of foreign labour forces with its replacement with Saudis. At the same time, the cost of living in the country is higher than ever. In response to growing discontent, the government is trying to take mitigating steps. Riyadh spends billions of dollars on a programme of special subsidies to the poor. In the 2018 budget, these items were absent, which means that the authorities feel a high level of discontent, and the lack of budgeted amounts allows the government to vary, increasing the subsidies payments, adopting special decrees at the expense of the Central Bank reserves without increasing the budget deficit (for international rating agencies).
One of the foundations of the KSA economic reform is the increase of foreign investments. In a number of key areas, Riyadh is laying the legal foundations for this. The Kingdom has introduced a bankruptcy law that has simplified this process. A new regulation of public-private partnership has been introduced. Saudi Arabia, as an “emerging market”, increases its investment index, thereby giving an incentive to foreign invertors to buy Saudi shares, but only to average sized companies, as the privatisation programme of the backbone structures remains confusing. Changes can be expected only after the decision of the KSA leadership to conduct an IPO on Aramco.