The rate of growth in a country’s money supply, broadly measured, will determine the rate of growth in its nominal GDP. For Saudi Arabia, the following table presents a snapshot of the relationship between the growth in the money supply (M3) and nominal GDP.
The chart below shows the course of M3. Following the oil price plunge of September 2014, the growth in M3 has slowed. The rate of nominal GDP growth will follow.
Why is the money supply growth rate declining? Since the plunge in oil prices, the Saudis’ current account has dipped into negative territory. This has to be financed, and the Saudis have used their stash of foreign reserves to do the financing.
When the Saudi Arabian Monetary Agency (SAMA) sells foreign currency to finance the current account deficit (and maintain the Riyal/USD peg), it debits the reserve accounts (in Riyals) of the Saudi banks at the SAMA. This causes the domestic money markets to tighten, which works its way through the banking system. Not surprisingly then, there has been a marked slowdown in the growth of broad money since the oil price plunge and associated current account deficit.
So, a slowdown in Saudi nominal GDP is already baked in the cake. The Saudis should get used to that sinking feeling, which will only abate if oil prices continue to rise.
Since the passing of Muhammad Ali, the establishment has been working in overdrive to convince us that the great boxer was a member of their club. In doing so, the wisdom and wit of Ali has been on display.
Muhammad Ali’s lessons on economics, however, have been absent. Economics? Yes. The lessons were developed in a most edifying book by Donald Sull, The Upside of Turbulence: Seizing Opportunity in an Uncertain World. New York: Harper Collins, 2009 – a book that Mohamed El-Erian recommended to me.
The economic lessons are summarized in “The Boxer Matrix.” A boxer’s fate is determined by a combination of his absorption capacity (read: can he take a punch?) and agility (read: can he avoid a punch?). In the Boxer Matrix, the ideal position to be in is the Northeast quadrant: where Ali and Joe Louis boxed. But, while Ali always had terrific agility, he had to train and think his way to an above average absorption capacity. This capacity was on display in his “Rumble in the Jungle” bout with George Foreman. It was then that Ali’s “rope-a-dope” tactic was executed to perfection.
This brings us to Ali’s message on economics, with particular reference to countries that are heavily dependent on the production of oil. In turbulent times (read: oil price plunges), countries like Saudi Arabia, Venezuela, and Nigeria experience a great deal of pain because their oil-dependent economies aren’t diversified. In short, they lack agility. This is reflected in their position in the lower half of the Boxer Matrix.
Saudi Arabia is able to use its huge stash of foreign reserves (high absorption capacity) to countervail its lack of agility. But, reserves can only go so far. What the Saudis need is more agility. The Vision 2030 project is intended to do just that. Whether the Saudis can endure the “training” required to achieve Vision 2030 is another matter.
As for Venezuela and Nigeria, they are – and are likely to remain – in the loser’s Southwest quadrant: the one that dooms boxers and economies alike.
Despite recently expressing doubts about America’s relationship with Saudi Arabia, President Barack Obama again flew to Riyadh and sought to “reassure” the Saudi royals about U.S. support.
The Kingdom of Saudi Arabia should raise the question: what are allies for? The president should have started moving Washington and Riyadh toward a more normal relationship.
Most important, the U.S. should drop any security guarantee, whether explicit or implicit. If the KSA is worth defending, its own people should do so. At the same time, the U.S. should take a more even-handed approach in the Iranian-Saudi cold war, looking for opportunities to draw Tehran away from Islamic extremism.
America’s relationship with the KSA was always based on oil. But supplies are expanding; even the U.S. is going from net consumer to exporter. Anyway, a successor regime would sell to the highest bidder.
Saudi Arabia is supposed to promote regional stability, but intervened in Bahrain to block reforms by the Sunni monarchy for the Shia majority, funded radical insurgents in an attempt to oust Syrian President Bashar al-Assad, and is seeking to destabilize Lebanon’s fragile confessional political system.
Worse, Riyadh has turned Yemen’s long-running domestic conflict into a destructive sectarian battle with Iran. Since the 1979 overthrow of the Shah Washington has seen the KSA as a significant barrier to expansion by Tehran. However, the nuclear agreement creates important new opportunities.
Change will not come easily or quickly, given determined resistance in Tehran, but Iran is far more likely to evolve in a more liberal and democratic direction than Saudi Arabia. Security concerns will remain, but monarchy has more to fear domestically than internationally.
The KSA is nominally a leader in the war on terrorism. Yet Riyadh’s attack on Yemen has empowered that nation’s al-Qaeda affiliate. Moreover, domestic “anti-terrorism” efforts are directed at suppressing dissent more than violence.
Riyadh also has underwritten Islamic radicalism around the world. While the royal regime apparently has not directly supported terrorism, individual Saudis have, both funding and joining al-Qaeda. The George W. Bush administration refused to release a 28-page section of the 9/11 report detailing apparent Saudi support for terrorism. Wikileaks disclosures discussed the continuing flow of Saudi money to terrorists.
Finally, the kingdom does not share values with America, democratic or other. Saudi Arabia is at best a slightly more civilized variant of the Islamic State.
The latest Freedom House rated the KSA as “Not Free.” The group said simply: “Political dissent is criminalized.” Reported Human Rights Watch: “Saudi authorities continued arbitrary arrests, trials, and convictions of peaceful dissidents. Dozens of human rights defenders and activists continued to serve long prison sentences for criticizing authorities or advocating political and rights reforms.”
Religious freedom also doesn’t exist. The U.S. Commission on International Religious Freedom noted that “Saudi Arabia remains unique in the extent to which it restricts public expression of any religion other than Islam.”
As I point out on Forbes online, “in practice, Saudi Arabia differs little than the Soviet Union. Both were totalitarian states animated by transcendent worldviews. Both regimes suppressed human liberty in service to those visions, one secular, and the other religious. The main difference is that the second posed a direct security threat to America, while the first sometimes interferes with U.S. interests indirectly.”
None of this prevents Washington and Riyadh from cooperating. However, the U.S. should stop acting as supplicant.
The royals’ continued rule is not vital to America. The greatest danger for Washington may be the moral hazard from defending such a regime, encouraging it to resist needed reforms.
Would the U.S. “lose leverage” by disengaging? America has spent decades attempting to micro-manage and geopolitically engineer the region, with disastrous results. Let Saudi Arabia spend its money and lives for a change.
President Obama wasted his final trip to the KSA pursuing politics as normal. Washington needs to put distance between America and its counterproductive partners.
Reuters has an investigation today of the ways in which the Saudi-led War in Yemen has empowered Al Qaeda in the Arabian Peninsula (AQAP), the group’s local affiliate. While it’s been relatively obvious to observers for some time that AQAP had benefitted from the conflict, the extent of their newfound control and wealth as detailed in the article is fascinating.
Thanks to the seizure of the city of Mukalla, AQAP now controls Yemen’s third largest port, a position that Reuters estimates has allowed them to earn up to $2 million per day in fees and taxes. Extortion of businesses, including around $1.4 million from the state oil company, has also provided an easy revenue source, as has the far less subtle method of simply robbing the city’s banks.
Perhaps of more interest is AQAP’s approach to providing civic services and stability. While it’s untrue that Al Qaeda has never experimented with state-building before, such a strategy has more typically been associated with ISIS. As the Reuters investigation notes, in Mukalla, Al Qaeda is trying to present themselves as a less cruel and brutal ruler than ISIS, an approach which seems to be working with some Yemeni citizens who fear a return to instability.
So entrenched is the group that it attempted to set up a formal profit-sharing deal with the national government to split oil revenues. It is even managing taxes for the citizens of Mukalla, cancelling payroll taxes and promoting various populist policies. All of this is a remarkable feat for a group which has been the focus of concerted US drone strikes and counterterrorism activities for more than a decade.
But it should not be surprising. The ongoing GCC-backed military campaign has effectively ignored AQAP in its single-minded focus on the Houthi rebels and their allies. There is even evidence that AQAP fighters have fought alongside the Saudi-backed militias.
Meanwhile, the Saudi-led campaign – designed to restore exiled President Hadi and his government – has been bloody and ineffectual. Not only has it created one of the world’s worst humanitarian crises, its forces have stalled south of the capital without meeting their key objectives.
Today’s report really highlights the inherent contradictions in America’s Yemen policy. By backing the Saudi-led campaign, the U.S. is allowing Al Qaeda to accumulate wealth and territory, effectively undermining at least a decade of counterterrorism work inside Yemen. Adding another wrinkle to this is the fact that the Houthi rebels have often fought against AQAP inside Yemen.
While much criticism of the war in Yemen has focused on humanitarian issues, the sheer reactiveness of our Yemen policy and utter lack of any overarching strategy is worrying. Indeed, the effectiveness of some of those past policies, particularly drone strikes, is itself debatable. Studies actually suggest that there are only limited situations in which decapitation strikes are effective.
Yet the gains made by AQAP serve to highlight that any benefit produced by U.S. attacks on AQAP training camps or other counterterrorism work during the last decade is being rapidly undermined by our support for the current war.
Here in America, you’d be forgiven for believing that things are on a downward spiral, as Donald Trump’s disturbing success in various primaries raises the real, and terrifying prospect that he will be the Republican nominee. So if constant media coverage of the primary season depresses you, you could do worse than consider recent developments in the Middle East, where something truly unusual has been happening in the last few weeks. With a fragile ceasefire in Syria and diplomatic negotiations in Yemen, things actually appear to be improving.
Though these developments are tenuous – and each has many problems - they show the value of diplomatic and even incremental approaches to resolving the region’s ongoing conflicts.
It’s technically incorrect to refer to the current situation in Syria as a ceasefire. For starters, it doesn’t actually prohibit attacks by any party against the conflict’s most extreme groups, ISIS and Jabhat al Nusra. And unlike a true ceasefire, there is no official on-the-ground monitoring and compliance system. Instead, that role is filled in a more ad-hoc way by a communications hotline between Russia and the United States as members of the International Syria Support Group.
There are other problems with the agreement too, particularly its role in freezing the conflict in a way which is extremely advantageous to the Syrian government and its Russian backers. While this was perhaps unavoidable – Russia would probably not have agreed otherwise – it will reduce the bargaining power of the Syrian opposition in peace talks when they restart on March 14th.
Nonetheless, it’s estimated that the cessation of hostilities – which has held for almost two weeks – has dropped the level of violence and death toll inside Syria by at least 80 percent. Violence has dropped so much that anti-regime protestors were able to engage in peaceful protest marches in several towns. Likewise, despite delivery problems and delays, humanitarian aid is flowing into some areas of Syria for the first time in years. These small advances are all the more astounding given how unthinkable they seemed even a few months ago.
Progress in Yemen is less spectacular, but still encouraging. Following negotiations mediated by northern Yemeni tribal leaders, the combatants arranged to a swap of Jaber al-Kaabi, a Saudi soldier, for the release of seven Yemeni prisoners. At the same time, a truce along the Saudi-Yemeni border is allowing much-needed humanitarian aid to flow into the country.
Again, these are at best a tiny step towards resolving the conflict, which has lasted almost a year and produced extremely high levels of civilian casualties. The truce is temporary and confined to the border region; Saudi airstrikes continue near the contested town of Ta’iz. Yet the negotiations mark the first direct talks between Houthi rebels and the Saudi-led coalition, which had previously insisted that they would deal with the Houthis only through the exiled Hadi government.
In both Syria and Yemen, observers are quick to point out the tenuous nature of these developments, and it is certainly true that any political settlement in either conflict remains an uphill battle. But I prefer to view these developments in a more positive light. As numerous post-Soviet frozen conflicts have demonstrated, ceasefires do not necessarily resolve the major disputes which precipitated the conflict originally. Yet even if the end result is not a more comprehensive peace deal, the lower levels of violence and improved access to humanitarian aid can dramatically improve life for civilians. In Syria in particular, this represents a small - but notable - victory for diplomacy.
Yesterday’s agreement for a cessation of hostilities in the Syrian conflict – including provision for humanitarian aid deliveries – is welcome news from an increasingly bloody conflict. The deal has been greeted with justifiable skepticism from observers around the world, who note the many and varied problems inherent in the proposed agreement. This is not a formal ceasefire, and it faces long odds of successful implementation. But that doesn’t mean it isn’t worth supporting to the fullest extent possible. If it does succeed in reducing violence inside Syria, it just might act as the necessary first step to a more comprehensive ceasefire and transition agreement.
One could hardly have imagined a more ill-omened location for the agreement, which was announced yesterday on the sidelines of the Munich Security Conference. The agreement itself calls for a cessation of hostilities inside Syria – though it does not apply to either of Syria’s main extremist groups, ISIS or Jabhat al-Nusra – and for the rapid provision of access for the delivery of humanitarian supplies to Syria’s besieged cities. It is not an immediate deal: parties have one week before it takes effect. Yet if the deal sticks, it will help to stem the flow of Syrian refugees and provide desperately needed humanitarian assistance.
There are certainly reasons to doubt the deal’s feasibility. It is accurately described as a cessation of hostilities, rather than a ceasefire, which would require monitoring and enforcement mechanisms. This deal lacks either; without a relatively neutral third party monitor, it will be difficult to ascertain from dueling propaganda whether it is actually working. Nor are the main belligerents – the Assad regime and the Syrian rebels – actually parties to the agreement, another reason for its less formal structure. The deal will rely heavily on the ability of Russia and the U.S. to pressure conflicting parties.
The biggest obstacle to any peace remains the same: the definition of “terrorist.” This agreement doesn’t apply to extremist groups, meaning that US airstrikes against ISIS will continue unabated. But it is also unknown whether Russia will reorient its own airstrikes, which have often struck at more moderate anti-Assad rebels that the Russians describe as terrorists. The problem is compounded by the fact that Jabhat al-Nusra itself doesn’t hold geographically distinct territory, with members spread throughout the West of Syria who mingle and cooperate with other rebel groups. It will be exceedingly hard to tell whether Russian airstrikes are aimed at Nusra alone, or at other groups.
It is also true that the one week delay before hostilities end will likely allow Russia and the Assad regime to solidify the gains they’ve made in and around Aleppo, freezing the conflict in a strategically advantageous way. Russia pulled a similar stunt during the Ukraine conflict, delaying the implementation of a ceasefire in order to solidify rebel control over the key town of Debaltseve. Yet if Russia continues its indiscriminate air campaign past the one week mark, however, it will suffer a reputational and public relations costs.
For all these flaws, the deal agreed in Munich offers a potential way forward for a peace process which has stalled, in a situation where there are few other good options. The alternatives are far worse: an impossible to protect no-fly zone which would could bring the US and Russia into direct conflict, a military intervention by Turkey or Saudi Arabia aimed at backing favored rebels and toppling Assad, or simply the incessant grinding humanitarian tragedy of the ongoing war.
And if the cessation of hostilities is successful, it will provide much needed space for humanitarian aid to flow into besieged areas like Deir ez-Zor and Aleppo, as well as providing the time and minimal level of trust needed to reopen the stalled Geneva peace process. There were also hints from Kerry and Lavrov that we might see increased U.S.-Russian military cooperation against ISIS, which has so far been inhibited by Russia’s wholehearted military support for Assad. Secretary of Defense Ashton Carter spoke this week in Europe about the need to accelerate the campaign against ISIS. But this is likely to be impossible in the absence of a peace process in Syria and increased coordination or cooperation with Russia.
There are many good reasons to be skeptical about yesterday’s announcement. As Secretary Kerry noted, “the proof of commitment will come only with implementation.” Despite that, it offers the potential for a path forward in a conflict that has become increasingly intractable and bloody. It might fail. But until it does, the United States should do everything in our power to help it succeed.
Possibly the strangest foreign policy decision the Obama administration has made was their decision to support the Saudi-led war in Yemen. The White House has made quiet counterterrorism operations a key plank of its foreign policy agenda, and the administration includes a number of officials best known for their work on human rights issues, most notably Samantha Power. As such, the President’s decision to supply logistical, intelligence and targeting support for the Saudi-led coalition’s military campaign – a campaign which has been horrifically damaging to human rights inside Yemen, as well as detrimental to U.S. counterterrorism goals – was deeply surprising.
Less surprising was the fact that the conflict has turned into a disastrous quagmire. Yemen was already arguably a failed state when the intervention began in April 2015. The power transition negotiated in the aftermath of the Arab Spring was weak and failing, with Yemen’s perpetual insurgencies worsening the situation. Since the intervention began, the United Nations estimates that over 21 million Yemenis have been deprived of life’s basic necessities. Thousands have been killed. Even more concerning, United Nations monitors reported to the Security Council that they believed the Saudi-led coalition may be guilty of crimes against humanity for its indiscriminate air strikes on civilians.
Strategically, the coalition has made few gains. Despite the terrible loss of life, the coalition has stalled south of the capital, Sanaa. Further advances will be exceedingly difficult. At the same time, Al Qaeda inside Yemen has grown in strength and size, benefitting from the conflict, and even presenting itself as a viable partner for the Saudi coalition. It is hard to see how U.S. strategic interests - counterterrorism, human rights, or even regional stability – are being served by this conflict.
So what should the president do? In his last few months in office, President Obama should take advantage of his executive power to end U.S. support for the war in Yemen, and direct America’s diplomats to aggressively pursue a diplomatic settlement. This war is humanitarian disaster and a strategic failure; ending our support for it should be a no-brainer.