Revitalizing Yemen’s Banking Sector: Necessary Steps for Restarting Formal Financial Cycles and Basic Economic Stabilization

Revitalizing Yemen’s Banking Sector: Necessary Steps for Restarting Formal Financial Cycles and Basic Economic Stabilization

Staff protest outside of Tadhamon International Islamic Bank headquarters in Sana’a on February 11, 2019, after Houthi security forces arrested the bank’s treasury director and two other employees.

By Farea al-Muslimi

Executive Summary

Yemen’s banking sector faces a litany of challenges stemming from the county’s ongoing economic collapse and the warring parties’ competition for financial control. The most critical challenge is the division of the central bank between Sana’a and Aden and the fierce competition between these two branches over the administration and regulation of the country’s commercial and Islamic banks. In February, this has seen Houthi authorities arrest senior officials from several banks in the capital for supposedly complying with policies set by the central bank in Aden and the Yemeni government’s Economic Committee.

Other obstacles facing the banking sector are a prolonged liquidity crisis, the deteriorating local currency exchange rate, the loss of revenue from freezes on assets and public debt repayments, obstacles to moving money within Yemen and internationally, and the general deterioration in private sector confidence in the banking sector that has spurred the migration of the financial cycle from the formal economy to informal markets and networks.

The weakening of Yemen’s commercial and Islamic banks has had wide-ranging consequences. Among the implications are a dramatic rise in black market activity, exchange rate destabilization, and increased difficulty for traders to finance imports. These in turn have undermined attempts to establish social and political stability, exacerbated the humanitarian crisis, and ultimately prolonged the conflict.

Since mid-2018 the Sana’a Center has been meeting with the heads of Yemen’s banking sector, current and former senior central bank officials on either side of the frontlines, financial authorities across the country, as well as prominent economists, business leaders and currency traders from Yemen and around the region.1 The following policy brief is an outcome of these discussions. In synthesizing the opinions of these experts, this paper lays out recommendations for revitalizing the Yemeni banking sector and offers a background on the challenges it has faced.

These recommendations are:

  • Reunify the administration for the Central Bank of Yemen; this must be a top priority of all stakeholders and the international community must pressure all parties to the conflict to facilitate this development.
  • Reactivate Yemen’s anti-money laundering and counterterrorism financing mechanisms.
  • Release Yemeni bank balances frozen in central bank accounts through re-activating the central bank’s payment clearing house functions.
  • Facilitate the secure transfers of cash holdings of foreign and domestic currency both within the country and internationally.
  • Ease import financing requirements to allow banks to utilize their frozen non-cash balances to underwrite letters of credit for the importation of basic commodities.
  • Establish a cash clearing system to swap cash payments between banks, money exchange networks and businesses.
  • Replace damaged banknotes currently stockpiled by the banking sector.
  • Restart partial servicing on the accrued interest of outstanding public debt.

Background: Challenges Facing Yemeni Banks

Prolonged Liquidity Crisis Spurs Loss of Public Confidence

The Yemeni banking sector has faced a liquidity crisis since 2016. Following the escalation of the conflict in early 2015 the country entered a precipitous decline in economic activity. Of primary concern for state spending was the cessation of oil exports, which had until 2015 been the largest source of government revenues and the country’s primary source of foreign currency. Consequently, the central bank was forced to begin drawing down on its reserves of domestic currency to fund public expenditures and deploy its reserves of foreign currency to finance imports.

Throughout 2015, the central bank took action to shore up foreign currency supplies in the country through limiting local market access, while commercial banks began limiting customer withdrawals.2 These actions, together with a financial blockade of the country that severely curtailed commercial banks’ ability to carry out international financial transactions, led traders and wealthy Yemenis to be hesitant to let banks hold their money. Cash withdrawals from the banking sector thus increased; in the first six months of 2016 alone, customers withdrew some 300 billion Yemeni rials (YR) from their accounts, amounting to a mass migration of financial flows from the formal to the informal economy.  

With little cash liquidity themselves, commercial banks could not make deposits at the central bank. Concurrently, the Yemeni government denied the central bank, based in Houthi-controlled Sana’a, access to the foreign printers necessary to print new banknotes, and thus the CBY’s cash reserves of Yemeni rials began to decline. In attempting to address this, the central bank leadership began to reissue damaged banknotes that had been removed from circulation. Many businesses refused to accept them, however, leaving many commercial banks with vast stockpiles of unusable currency notes for which they have since born the costs of storing.

By September 2016, the central bank was forced to cease salary payments to most of the 1.2 million Yemenis on the public payroll, due to a lack of physical cash with which to pay them. Simultaneously, the central bank’s foreign reserves were almost entirely depleted.

A Divided Central Bank    

In September 2016, Yemeni President Abdo Rabbu Mansour Hadi issued a decree to relocate the Central Bank of Yemen headquarters from Sana’a to Aden. This brought new, interrelated challenges and risks to commercial banks. Hadi had announced the move without first securing the institutional expertise and staff, information archives or financial reserves necessary for the new location to carry out central bank functions. While the central bank in Aden has gradually developed greater capacities and has the privileges associated with being internationally recognized, it still lacks the institutional and technical capacity to supervise domestic banking operations or evaluate banks’ liquidity needs, among other deficiencies. Meanwhile, the central bank in Sana’a has maintained most of its staff and information archives, and much of its leverage with the country’s largest financial institutions, given that their headquarters are mostly located in the capital. However, it has minimal reserves and is unable to carry out international transactions.

Thus, since September 2016 there have been two central banks in Yemen – in Sana’a and Aden – claiming national jurisdiction yet neither has the capacity to fulfill the role. With the two central banks operating independently of and often in opposition to each other, the country has suffered from divergent fiscal and monetary policies. Efforts to implement mechanisms to relieve the liquidity crisis have also been hampered by disputes between the rival central bank branches, with the country’s banking sector caught in the middle (see below ‘Aden and Sana’a Compete for Financial and Monetary Control’).

Banking Sector’s Asset and Revenue Squeeze

Frozen Assets

The commercial bank deposits held at the central bank prior to September 2016 have since then become divided between Sana’a and Aden. In general, the Sana’a-based authorities have allowed commercial banks to transfer balances held at the Sana’a-based CBY to the central bank in Aden, but not cash. Since the division of the CBY, its branches in Sana’a and Aden have applied similar mechanisms to handle the balances of commercial banks in their accounting systems and to restrict cash withdrawals. The central bank in Aden allows cash withdrawals only on the net balance of cash deposits made since September 2016. Deposits made before September 2016 that were moved from Sana’a to Aden can only be transferred or mobilized to swap payments within accounts at the central bank and the banking system, and not for any other purpose (such as customer cash withdrawals).3

The central bank in Sana’a has operated a similar mechanism since early 2017; it does not allow commercial banks to use cash balances accumulated prior to 2017, which represent the bulk of most banks’ financial assets. Meanwhile, the separation of cash transactions from non-cash transactions has undermined the use of non-cash payment instruments, like checks, and has discouraged the public from conducting financial transactions within the banking sector.

The central bank in Aden has mandated that for banks to make partial cash withdrawals on non-cash deposits they must transfer assets – including treasury bills – from the central bank in Sana’a to Aden, something the Sana’a central bank has yet to allow.

Frozen Public Debt Repayments

Commercial banks have come under further strain due to the central bank’s suspension of payments on domestic debt. Prior to the conflict, commercial and Islamic banks were large investors in domestic debt instruments issued by the CBY on behalf of the Ministry of Finance. Commercial banks hold 72 percent of all treasury bills. Meanwhile, Islamic banks have invested heavily in Islamic sukuk bonds.4 The Public Debt Department, under the leadership of  the central bank in Sana’a, has continued to reissue treasury bills on maturation, and has transferred their generated interest into uncashable accounts. With regard to the sukuks, upon maturation the debt department has transferred the original amounts invested in the sukuks and their generated returns to uncashable accounts, while disallowing the re-issuance of this debt instrument. Thus, Islamic banks have lost alternative channels to relocate their investments.

In September 2018, the central bank in Aden raised interest rates on domestic debt instruments and introduced new ones in an attempt to attract the assets of commercial and Islamic banks. As of November, it had sold YR100 billion in debt to a group of commercial and Islamic banks. However, the central bank in Aden required that these debt instruments be purchased in cash, preventing Yemeni banks from shifting existing investments in public debt into the new instruments to take advantage of the increased interest rates.  

Deterioration of the Yemeni rial

The instability of the Yemeni rial has aggravated the liquidity crisis in the banking sector. As of this writing the Yemeni rial had lost, relative to the US$, almost two thirds of its purchasing power since March 2015, when it was trading at YR215 per US$1. The rial reached a record low of more than YR800 per US$1 in October 2018, before rebounding to YR525 per US$1 by the end of the year. The decline and rapid fluctuations in value of the local currency have led Yemenis to withdraw their rial savings from banks and convert them in the informal markets to foreign currencies, particularly US dollars and Saudi rials, to preserve their value and to benefit from the growing purchasing power of foreign currencies.

The depreciation of the rial caused some commercial banks losses of currency assets, particularly banks whose foreign currency obligations were greater than their assets. Meanwhile, those banks with available funds have speculated on the exchange rates.

Aden and Sana’a Compete for Financial and Monetary Control

The CBY leadership in Aden and the Yemeni government-appointed Economic Committee have recently stepped up efforts to resume a functioning importation system, restore confidence in the banking sector and return financial flows to the formal economy. However, these efforts remain difficult to implement in the absence of a unified central bank and due to disputes between the central banks in Sana’a and Aden, which have competed for control over banking and import regulations.

The CBY in Aden drafted a procedural framework in June 2018 to support the import of five essential commodities – rice, wheat, milk, sugar and cooking oil – from a US$2 billion deposit provided by Riyadh. In September, the Yemeni government issued Decree 75 to regulate fuel and basic commodity imports, although a month later the regulation of food imports was suspended indefinitely due to concerns that tighter controls would reduce food imports and worsen Yemen’s already dire food security crisis. Due to the divisions and rivalry between the central banks in Sana’a and Aden, Yemeni banks were unable to fully benefit from this new framework.

The Aden-based CBY instructed traders in June 2018 that letters of credit (LCs) to guarantee imports must be opened with commercial banks operating in Aden and that equivalent funds in Yemeni rials should be deposited at accounts held by the CBY in Aden, among other conditions. In November 2018, Houthi authorities issued orders for commercial banks to use checks to cover LCs, seeking to prevent the transfer of rial banknotes outside their territory. Houthi authorities threatened reprisals – including the imprisonment of senior staff – against banks that complied with directives issued in Aden,5 while the CBY in Aden has threatened commercial banks with fines for not providing cash to cover imports.

The Yemen Banks Association (YBA) sent a letter to the CBY governor in Aden, Mohammed Zammam, in November 2018, outlining the difficulties commercial banks faced in underwriting LCs for food and fuel importers using cash. Due to the liquidity crisis, banks did not have sufficient cash to underwrite LCs for importers. In the letter, the YBA said that to satisfy the Aden-based CBY and the Economic Committee’s demand, the commercial banks would need to use checks to purchase Yemeni rial banknotes from informal economic institutions – such as money exchangers. Due to the liquidity crisis, commercial banks have turned to informal networks to obtain cash drawn on non-cash frozen assets. In this scenario, rial banknotes are overpriced relative to checks, and commercial banks absorb the cost of exchanging checks into cash.

Fears have been raised that the absorption of these financial burdens would reduce the impact of the Aden-based CBY’s privileged exchange rate given to fund imports on basic foodstuffs. Commercial banks would also be left with little option but to deal with the same informal networks the Aden-based CBY and the Economic Committee are looking to disempower.

Houthi Authorities Obstruct New Liquidity Circulation

In response to the Aden-based imports financing mechanism requiring importers to deposit cash at the central bank in Aden to underwrite LCs, in December 2018 Houthi authorities imposed new restrictions to prevent the transfer of cash out of their territory. Houthi authorities banned banks from transferring amounts exceeding YR450,000 (equivalent to roughly US$900 in December 2018) from Sana’a to Aden without prior approval from the Sana’a-based central bank. Although sources in the banking sector report that rial banknotes are being transferred via informal networks, this process is associated with high costs and risks due to the conflict-driven instability in Yemen. Bankers have complained that banknotes transported by truck are vulnerable to confiscation and robbery over road networks, and that the cost of transferring rial banknotes to Aden has become untenable.

Houthi authorities have also tried to prevent new banknotes printed in Aden from circulating in their territories, thereby obstructing efforts to address the liquidity shortage faced by commercial banks. Houthi authorities have been motivated by the assumption that the new banknotes would increase the local currency supply and thus create inflationary pressures. They also seek to prevent these rial banknotes from being used to purchase foreign currency out of the market in Houthi-controlled areas. While these restrictions have eased somewhat, and new currency printed in Aden is being used in restaurants and shops in Sana’a, Houthi authorities have focused on preventing commercial banks from handling or using these banknotes.

When the central bank was relocated to Aden in 2016 the amount of physical money in circulation was estimated at YR 1.3 trillion; of these banknotes, which are still largely in circulation, at least 90 percent are currently considered damaged, according to banking sector sources that spoke with the Sana’a Center. The Aden-based central bank has since printed more than YR1 trillion to replace damaged rial banknotes in circulation, but Houthi restrictions against the use of this new currency has limited its impact on the liquidity crisis faced by commercial bank.

This further diminished public confidence in formal banking operations and reduced cash deposits in commercial banks, as Yemenis have been reluctant to deposit their savings in banks that were unable to accept new banknotes. Houthi authorities have regularly carried out inspections of bank treasuries and cash boxes to check if they were accepting the rials printed in Aden and have at times taken measures to confiscate new banknotes they found.

An October 2018 World Bank report estimated that currency circulation outside the formal banking sector more than doubled between 2014 and 2017, from YR810.9 billion to YR1.67 trillion. This number has likely risen since the report, as more than YR1 trillion in banknotes printed in Aden have not been allowed to enter the commercial banks operating in densely populated Houthi areas, where some 70 percent of the population live, with corresponding high consumption and economic activity.

Houthi Security Detaining Senior Bank Staff

Since the beginning of this year, the Houthi authorities, through their affiliated national security agency and central bank in Sana’a, have intensified measures to punish commercial banks intending to relocate their headquarters to Aden, or those caught implementing financial transactions to open letters of credits under the Aden-based central bank’s import financing mechanism. These actions have increased fears and shaken confidence of the banking sector, forcing both banks and their customers  to search for safer ways to transfer funds and relocate investments.

While Houthi authorities lack the international financial legitimacy and monetary tools essential to influence the banking sector activities directly, they have applied physically coercive tactics to try and force the banking sector to abide by their decrees and, more often, to prohibit them from following directives issued from Aden.

On February 10, Houthi security personnel raided the headquarters of Tadhamon International Islamic Bank (TIIB) and arrested the treasury director and another two employees. TIIB is Yemen’s largest bank in terms of total assets. Houthi security also arrested several executives from al-Kuraimi Microfinance Bank, and Saba Islamic Bank.

Banking sources told the Sana’a Center that such actions were a punishment for TIIB management’s interaction with the central bank in Aden – in particular opening letters of credit – and the bank’s refusal to sell 20 million Saudi rials to the central bank in Sana’a to fund the imports of a basic commodities importer loyal to the armed Houthi movement. On February 11, the bank management organized a demonstration of its staff in front of the bank headquarters to call for the release of its detained employees.

The Sana’a Center also learned that there had been a dispute between the authorities in Sana’a and Aden related to the Cooperative and Agricultural Credit (CAC) Bank. In February this led to central bank officials in Aden successfully petitioning the Society for Worldwide Interbank Financial Telecommunication (SWIFT) headquarters in Belgium to have the CAC Bank’s SWIFT access removed from Sana’a and placed in Aden.  

Restrictions on Cross-Border Banking and Compliance Challenges

In 2018, the Aden-based central bank attempted to have certain restrictions on Yemeni banks’ international financial transactions lifted. As of this writing, most American and European banks continue to refuse to interact with Yemeni banks. However, the central bank in Aden has resumed the full functions of the SWIFT network.6

The SWIFT network had been deactivated in September 2016, when the central bank headquarters was moved to Aden. President Hadi’s decision to nullify the authority of the staff handling SWIFT payments at the Sana’a-based CBY before arrangements had been made to relocate the network to Aden led to a freeze in the balances of commercial banks held by the central bank. This meant that Yemeni banks were unable to open food import credits, worsening the humanitarian situation in the country.

The SWIFT system was reinstalled at the central bank in Aden in April 2017, but limited transactions were made on the network because the central bank’s foreign currency reserves had not been replenished and restrictions on Yemeni banks by the international financial system remained. By the time the central bank in Aden resumed full operations on the SWIFT network, it had been disconnected from the global transaction system for more than a year.

Due to the withdrawal of international recognition of the Sana’a-based Financial Information Unit (FIU), moreover, foreign agencies have stopped sharing information with Yemen about money laundering. The FIU and the national anti-money laundering committee in Yemen have since been largely disconnected from global anti-money laundering agencies, such as the Financial Action Task Force and the Middle East and North Africa Financial Action Task Force. This leaves Yemen vulnerable to money-laundering and terrorism-financing risks. The current lack of cohesion over definitions, rules and regulations also makes it difficult for commercial and Islamic banks to abide by anti-money laundering and counter-terrorism financing standards.

The central bank in Aden is unable to fully ease the restrictions imposed on Yemeni banks by regional and international entities due to the failure of Yemen to comply with the requirements and procedures of these international parties. The existence of multiple authorities also precludes effective work to prevent money laundering, as well as making banks vulnerable to arbitrary decisions by the judicial, security, tax and zakat authorities of various parties to the conflict.

Furthermore, the Saudi-led military coalition imposed restrictions preventing Yemeni banks from transferring their surplus foreign currency to feed their accounts held abroad; previously, Yemeni banks had moved their cash holdings of foreign currencies to accounts in correspondent banks in other countries. Due to the coalition’s restrictions on transfers, Yemeni banks were unable to use their foreign currency holdings to finance imports of goods to meet the population’s needs. In November 2018, the Aden-based CBY informed commercial banks that it had reached an agreement with the Saudi Arabian Monetary Agency to facilitate the transfer of foreign cash holdings. As of this writing, however, this has not been implemented.7  


CEOs from Yemen’s commercial and Islamic banks join the Sana’a Center for a focus group at the Yemeni Banking Association in Sana’a, May 28, 2018. Banks represented at the meeting were: al-Amal Microfinance Bank, Arab Bank Limited, Cooperative and Agricultural Credit Bank (CAC Bank), International Bank of Yemen, Islamic Bank of Yemen for Finance and Investment, al-Kuraimi Islamic Microfinance Bank, Qatar National Bank, Rafidain Bank, Saba Islamic Bank, Shamil Bank Of Yemen And Bahrain, Tadhamon International Islamic Bank, Yemen Bank for Reconstruction and Development, and Yemen Commercial Bank.

Recommendations for Revitalizing the Yemeni Banking Sector

  • Reunify the Central Bank of Yemen

The absence of a single unified authority to implement coherent monetary policy and regulate the financial sector nation-wide is the most serious challenge facing Yemen’s commercial and Islamic banks.8 The international community must pressure all parties to the conflict to facilitate a reunified administration for the Central Bank of Yemen (CBY), which is currently divided between Houthi-controlled Sana’a and the internationally recognized Yemeni government’s temporary capital of Aden. The central bank’s reunification should be on the top of the agenda at the United Nations-led consultations between the warring parties in the next round of negotiations. The UN Security Council should adopt a resolution mandating that the UN Special Envoy for Yemen prioritize the reunification of the central bank, and include the threat of international sanctions against any party that attempts to impede the central bank’s reunification.

In the meantime, the following recommendations should also be pursued:

  • Reactivate Anti-Money Laundering and Counterterrorism Financing Mechanisms

The central bank’s Financial Information Unit (FIU) and the national anti-money laundering committee should be reactivated to resume anti-money laundering activities, while ensuring their neutrality and the exchange of information globally in accordance with international law and agreements.

Yemen’s classification as a high-risk country has led to Yemeni banks being unable to carry out normal financial transactions with foreign banks. This has curtailed their ability to finance international trade, most importantly the importation of basic commodities. Customers needing international financial transfer services have thus been forced to withdraw their funds from the formal economy and utilize informal networks to do so. The increased financial flows through these largely unregulated and unmonitored networks has in turn empowered the very same nefarious financial activities international anti-money laundering and counterterrorism financing policies are meant to prevent.

The reactivation of the FIU and the national anti-money laundering committee would begin the process of lowering Yemen’s risk category, which would allow banks to reconnect internationally and draw funds back into the formal economy. This is crucial for both Yemeni and international efforts to curb money laundering and terrorism financing.   

  • Release Banks’ Retained Balances

Efforts should be made to fully re-activate the central bank’s payment clearing house functions, through which Yemeni banks should be allowed to utilize their currently-frozen balances to meet the urgent demands of customers and pay government dues. Restoring clearing house functions would entail the central bank reapplying a former system in which banks could swap payments over the banking system through utilizing their accumulated balances held by the central bank. This allows banks to avoid cash payments or transfering rial banknotes between Yemeni cities to swap such payments.

In light of the banking sector’s need for foreign currency, the central bank in Aden should also work to release banks’ foreign currency balances and facilitate banks’ requests to transfer these balances abroad to enable international financial transactions and trade.

  • Facilitate Secure Transfers of Cash Holdings

The central bank in Aden should establish secure means for commercial banks to transfer their holdings of foreign and domestic currency both within the country and internationally.

Regarding domestic currency holdings: the central bank in Aden should arrange means for commercial banks to transfer Yemeni rial banknotes from Aden to Sana’a to help ease the liquidity crisis banks face in Houthi-controlled areas. Among the options the central bank should consider, at least initially, is arranging deliveries using UN aircraft.

Regarding foreign currency holdings: the agreement, announced in November 2018, with the Saudi Arabian Monetary Agency to facilitate the transfer of Yemeni banks’ foreign currency holdings through Saudi Arabia should be implemented as soon as possible. This would enable banks to increase their balances in correspondent banks and strengthen their ability to finance imports of basic commodities and medicines.

  • Ease Import Financing Requirements, Establish Cash Clearing System

The central bank in Aden and the Yemeni government’s Economic Committee should immediately alter their import financing regulations to allow banks to utilize a defined percentage of their frozen balances, besides cash, to underwrite letters of credit for the importation of basic commodities.

As well, the central bank in Aden should establish a cash clearing system to swap cash payments between banks, money exchange networks and businesses.9 This should also be set up to handle remittances and international aid funding, and to facilitate the delivery of salary payments made by the Yemeni government to public servants working in Houthi-controlled areas.

The above two actions would accelerate the entire importation process, reduce the risks associated with transferring physical banknotes between Houthi-controlled areas and Aden, and assist the banking sector in mitigating its liquidity crisis.   

  • Replace Damaged Banknotes

The central bank in Aden should prioritize the replacement of damaged banknotes currently stockpiled by the banking sector. A mechanism should be developed to mediate between the Aden and Sana’a central bank branches to facilitate the safe delivery of replacement banknotes to all Yemeni governorates. This could be included among the UN Special Envoy for Yemen’s economic deescalation measures. All efforts must be made to pressure the Houthi authorities to reverse their current policy of refusing to recognize as official currency newly printed banknotes issued from Aden.

  • Restart Partial Public Debt Servicing

As commercial and Islamic banks have been large investors in domestic debt instruments, the central bank in Aden should take steps to repay these investments. Initially, this should involve cash payments on accrued interest, while the central bank should endeavor to pay down the principal on matured debt once the government budget deficit improves. Importantly, the central bank should make cash payments, rather than use checks, in order to increase liquidity in the banking sector. This would allow banks to meet customers’ cash needs and attract financial flows back into the formal economy.

Farea al-Muslimi is chairman and co-founder of the Sana’a Center for Strategic Studies and an associate fellow at Chatham House.is He tweets @almuslimi.  


Endnotes

  1. In researching this paper, the author conducted a focus group with CEOs from Yemen’s commercial and Islamic banks at the Yemeni Banking Association in Sana’a in mid-2018. Banks represented at the meeting were: al-Amal Microfinance Bank, Arab Bank Limited, Cooperative and Agricultural Credit Bank (CAC Bank), International Bank of Yemen, Islamic Bank of Yemen for Finance and Investment, al-Kuraimi Islamic Microfinance Bank, Qatar National Bank, Rafidain Bank, Saba Islamic Bank, Shamil Bank Of Yemen And Bahrain, Tadhamon International Islamic Bank, Yemen Bank for Reconstruction and Development, and Yemen Commercial Bank.
  2.  In 2015, the central bank took actions to reduce transactions in foreign currency. For example, the central bank asked commercial banks to allocate part of their received remittances from Yemeni expats working abroad to cover imports and facilitate country’s external needs of foreign currency payments. Also, in July 2015 the CBY limited its lines of credit for fuel imports to avoid depleting foreign currency reserves.
  3. The central bank in Aden opened two accounts for each commercial bank: The first account holds cash and non-cash deposits made since the division of the central banks in September 2016; cash withdrawals from this account are restricted to the net balance of cash deposits. The second account holds deposits made before September 2016 that were transferred from Sana’a to Aden; commercial banks can only transfer or mobilize balances from this account to swap payments across their accounts in the central bank. The balances in this account cannot be used beyond this scope, for example to conduct cash transactions including customer cash withdrawals.
  4. Sukuks are a form of Islamic debt instrument issued by the central bank in behalf of the Ministry of Finance to attract the investment of Islamic banks. These public debt assets are used to fund government projects under agreed Islamic Sharia models.
  5. The Houthi-run National Security Bureau detained the Deputy Director of Shamil Bank of Yemen and Bahrain Abbas Nasser in January 2019 for several days in response to the bank’s dealings with the central bank in Aden.
  6.  The SWIFT network is the linchpin of international finance, used to transmit payments and letters of credit; without a functioning connection to the SWIFT system, no money could enter or leave Yemen through formal channels, hindering foreign trade and access to international support funds, and increasing money laundering and terrorism financing risks in Yemen.
  7. The impact of restrictions on the transfer of foreign currency has been mitigated by the use of smugglers to move cash across borders, although this workaround entails high risks and costs.
  8. In almost every interview or meeting the author conducted for this research, of all economic matters facing the country the reunification of the central bank was the most salient issue. As a CEO of one of the major private banks in Sana’a said in an interview with the author in May 2018: “If we have a unified central bank, 80 percent of our issues will be solved. Even when the war was ongoing in the first year, we still were able to work because we only had one central bank.”
  9. The cash clearing system is a mechanism to reduce the financial burdens and risks commercial banks incur in transferring Yemeni rial banknotes from Houthi-controlled areas to Aden to open letters of credits (LCs). These LCs were made available under the import financing mechanism established by the central bank in Aden and the associated Economic Committee in June 2018 to regulate the importation of five basic food commodities.

 

The Iran Nuclear Deal and Yemen’s War: An Opportunity for EU Statecraft

The Iran Nuclear Deal and Yemen’s War: An Opportunity for EU Statecraft

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By Farea al-Muslimi

Introduction

As the foreign military intervention in Yemen approaches its fourth year, world events have come together to create a rare window of opportunity to bring the conflict to an end. This, however, will require a powerful global actor to sheppard the process, and the European Union is currently the most well-positioned to take up the role.    

The killing of journalist Jamal Khashoggi at the Saudi consulate in Istanbul in October has brought global attention to focus on the conduct of Riyadh’s rulers, and in particular the Saudi-led military intervention in Yemen. The internationally recognized Yemeni government, supported by a coalition of Arab states with Saudi Arabia at the helm, are mired in a veritable stalemate with the armed Houthi movement, which took control of the capital Sana’a in 2014. The toll of the conflict has been shouldered chiefly by civilians, unleashing the world’s gravest humanitarian emergency and pushing the country toward what the United Nations predicts could be the “worst famine in living memory.” Successive attempts at peace talks have failed and over two years have passed since the warring parties last sat down together at the negotiating table.

Despite this apparent reticence to engage in efforts to find a political solution, the parties to this seemingly intractable conflict are in fact all seeking a route out. They cannot do so however, without a means to save face. The United States’ exit from the Iran nuclear deal this year has offered the opportunity for exactly this. With Washington’s withdrawal and reimposition of economic sanctions, Saudi Arabia – desperate to walk away from a war that is proving increasingly costly in both reputation and treasure – can claim a victory over its archrival Iran, at a time when its forces also have an upper hand militarily in Yemen. On the other side, Tehran is seeking to forge closer ties with Europe to counterbalance to its souring relationship with Washington. While their ties are often mischaracterized, Iran is the only state actor with the ear of Houthis and can be expected to calculate – given the peripheral importance of Yemen’s war for its national interests – that collaboration with Europe to end the war could be an astute move.

The European Union appears to be the only actor that can capitalise on this brief alignment of interests. The US has lost any remaining semblance of an impartial actor in the region and the United Nations’ Security Council is hamstrung by fault lines over the war. EU action would need to be complementary to the ongoing mediation efforts by the UN Special Envoy to Yemen, Martin Griffiths, lending its clout, legitimacy and resources in a guarantor-type role. Crucially, the union is held in regard by the conflict’s most powerful player, Saudi Arabia, and its leading member states are already in talks with Tehran over the future of the nuclear deal. An activation of these channels within the small window that has presented itself would act as a force-multiplier to UN-led efforts to find a political solution to Yemen’s war.  

The Iran Deal for the Yemen War

While the signing of the Iran nuclear framework in 2015 was a watershed moment for global diplomacy and a foreign policy legacy marker for United States President Barack Obama, little mentioned at the time was the price of the deal: the war in Yemen.

Saudi Arabia was incensed with the Obama administration for signing up to the Joint Comprehensive Plan of Action (JCPOA) – which granted Iran sanctions relief in return for capping and accepting international monitoring of its uranium enrichment program — as Riyadh saw the deal bolstering its arch-enemy across the Persian Gulf. The Houthi military expansion in Yemen through 2014 and early 2015 then only fuelled Riyadh’s paranoia that an emboldened Tehran was establishing a forward operating base on Saudi Arabia’s southern doorstep.

To placate these fears and to stop Riyadh from scuttling the JCPOA, Obama essentially wrote Saudi Arabia and its allies a blank cheque for a military intervention in Yemen. The Obama administration, supported by the United Kingdom, provided the Saudi-led military coalition with warships to help enforce a sea blockade of Yemeni ports, air refuelling support for coalition warplanes, and military and intelligence personnel for the coalition’s military command complex in Riyadh. It also expedited sales of advanced weapons to the Saudi and Emirati militaries, and regularly blocked moves at the United Nations to censure or condemn the coalition as civilian casualties in Yemen mounted, the country’s economy collapsed and millions of people were driven toward famine. While it has become fashionable today for US Democrats to berate Obama’s successor for the free hand he gives the Saudis, what they fail to mention is that the Obama administration was essential to starting and supporting this disastrous Saudi-led military adventure in Yemen.

A War of Attrition and Strained Alliances

The Saudi-led military coalition officially launched its campaign to push back Houthi forces and reinstall the internationally recognized Yemeni government in the capital, Sana’a, on March 26, 2015. The effort, dubbed ‘Operation Decisive Storm’, has been anything but. While seeing some early successes through the summer of 2015 in pushing Houthi fighters out of the port city of Aden and southern governorates, in the three years since the conflict has largely been a grizzly stalemate. The country as a whole has descended into the world’s largest humanitarian crisis, while some estimates peg the cost of the war to Saudi Arabia alone at up to $6 billion per month.    

If one can ever say there is a honeymoon period in a war, it is now definitively over in Yemen. From a conflict resolution standpoint, this means a window of opportunity. Indeed, the belligerent parties today seem, in many ways, more tired of their allies than they are of their enemies. Throughout 2017, spates of violence regularly broke out between troops loyal to Yemeni President Abdo Rabbu Mansour Hadi and United Arab Emirate-backed paramilitary forces in Yemen. In early 2018, clashes engulfed Aden, the Yemeni government’s functional capital in the country, when forces affiliated with the UAE-backed separatist Southern Transitional Council (STC) routed government troops from the city. While Hadi has since intermittently returned to Aden, tensions have continued to simmer amid growing protests over the country’s economic crisis, culminating in a call from the STC for a popular uprising against the government in October.

It is also little secret that both UAE and Saudi officials view President Hadi with contempt, seeing him as a corrupt statesman and an impotent leader with little natural constituency in Yemen. Meanwhile, the Gulf monarchies have faced increasing international criticism and damage to their reputations over mounting evidence of war crimes. This bad press – such as the August 9 coalition airstrike on a school bus in Sa’ada governorate that killed 40 children – has seen opposition to the coalition intervention gain momentum in Europe, the US and at the UN. Khashoggi’s murder has only bolstered the conception of Saudi Arabia as a reckless actor in the region.        

The coalition’s current campaign along Yemen’s Red Sea coast to take Houthi-held Hudaydah city, launched in June this year, has displaced nearly half a million people. Even the coalition’s staunchest allies – including congressional leaders in Washington – have warned that the campaign will likely fail to achieve its goals while simultaneously unleashing a cascading humanitarian fallout. Hudaydah port is Yemen’s busiest and the entry point for most of the country’s commercial and humanitarian supplies. Interruptions in cargo ship deliveries would threaten to catapult millions of people into famine.

While the coalition announced a “pause” in the offensive on July – officially to allow time for the UN Special Envoy for Yemen to pursue conflict de-escalation efforts – the first days of November saw the coalition renew the offensive. A coalition victory would landlock the Houthis, though in the process likely instigate mass starvation on a scale unseen in modern times, and without necessarily precipitating an end to the conflict given Houthi forces’ demonstrated capacity for protracted guerilla warfare.

That said, however poor the outlook for the coalition, the Houthis are faring worse. In late 2017, their alliance with former President Ali Abdullah Saleh ruptured, leading to clashes in Sana’a in which Saleh was killed. While Houthi forces now exert more authority in territories they previously co-governed with Saleh, intelligence leaks from Saleh’s former networks have led to the assassination of high-ranking Houthi military and political figures.

Saleh and his General People’s Congress party had also maintained extensive diplomatic networks, which provided a valuable link between the Houthis and the West. The loss of these left the Houthi leadership feeling deeply isolated, with Tehran to only remaining option to carry their voice internationally. On the ground, the Houthis have been slowly losing territory for more than a year, and while their ballistic missile launches into Saudi territory or attacks on Red Sea shipping may be headline-grabbing, militarily they are insignificant. Increasingly oppressive governance in territory under Houthi control betrays the extent to which the leadership in Sana’a are feeling the heat. The war for the Houthis has become a test of how much continual punishment they can endure – not just along the frontlines but from relentless coalition bombing across northern Yemen.

All parties to the conflict are exhausted and looking for a way out. And yet, lugged along by the conflict’s momentum, the belligerents stand at the crossroads of an even more terrible phase of the war. It is in such moments, however, that the opportunity for a peace broker to intercede appears.  

Opportunities in Trump’s Belligerence Towards Iran

Successful conflict resolution requires that, in silencing the guns, the belligerent parties are able to save face. Whether or not a party to the conflict actually won is less important than whether that party is able to maintain the appearance of victory.

In President Trump’s withdrawing from the JCPOA and targeting Iran with new sanctions, the Saudis have in a sense already won, at least in terms of the zero-sum cold war the kingdom sees itself as waging with Iran. From this perspective, the victory Tehran achieved in securing the nuclear deal has become a defeat. Riyadh can now proffer the narrative that it has regained the initiative against its arch foe and the impetus for launching the military intervention in Yemen has receded. Whatever the  impact on future Saudi policy choices, the UAE — which entered the Yemen conflict out of solidarity with Riyadh — will follow.

Coalition-backed forces have quickly swept up Yemen’s western coast and made advances from the Saudi border into the Houthi heartland of Sa’ada governorate. Such gains, while still far from a decisive military victory, have given the coalition the initiative and would allow Riyadh and Abu Dhabi to enter peace negotiations from a position of strength – the only position that would be palatable to Saudi Crown Prince Mohammad bin Salman, widely seen as the architect of the coalition intervention in Yemen. International pressure following the killing of Khashoggi at the kingdom’s consulate in Istanbul in October may also make the conditions more amenable to a political solution. While Riyadh fervently denies allegations of a state-sanctioned operation, concrete signals of its commitment to a peaceful resolution to the Yemen war would help rehabilitate the kingdom’s beleaguered public image.

Across the Gulf, the JCPOA and the reelection of pragmatist President Hassan Rouhani in 2017 enabled a gradual, modest economic opening and took Iran out of its international isolation, boosting diplomatic relations with Western countries. Among the headline-grabbing deals following the JCPOA’s signing were the nearly $40 billion in aircraft sales with US-based Boeing and France-based Airbus, and a 20-year, five billion-dollar contract with French oil and gas major Total and China’s state-owned CNPC to develop phase 11 of Iran’s South Pars gas field.

With the US withdrawal from the JCPOA in May this year – and many multinational companies’ subsequently cancelling newly inked deals with Tehran – Iran’s hopes for an economic lift fell to earth. While hardliners in Tehran have since trumpetted that the US cannot be trusted and issued bellicose dictates directed at Washington, the government has signalled that it seeks to keep as much of the JCPOA alive as possible. With inflation soaring, the currency tanking and socioeconomic protests rattling the country, Iran can hardly afford going back to complete isolation and sanctions. Leaders from the UK, France, Germany and the European Union — all signatories to the JCPOA — have in public and behind the scenes shown their intent to try and uphold the deal as well, in spite of US threats to sanction European businesses doing trade with Iran.

Since the US re-imposed sanctions on Iran on November 5, Europe has stepped up efforts to establish a clearing house designed to circumvent the US-dominated banking system and enable firms to continue conducting business with Iran. While its details remain vague and feasibility dubious, such moves illustrate Europe’s calculation that the JCPOA must be somehow preserved and Tehran kept on side.

At the same time, while Iran has regularly offered public support for the Houthis in Yemen, it has actually invested little of its political, military or economic capital in the conflict. This is unlike Iraq, Syria and southern Lebanon, which Tehran views as crucial to its geopolitical positioning and security, and thus in which it has invested heavily to maintain its interests. The Houthis have been incredibly convenient for bleeding Saudi Arabia of treasure and reputation and the Iranians have in return been happy to offer piecemeal support as the opportunities have presented themselves. However, in the unlikely circumstance that Houthi forces folded tomorrow and the coalition “won,” Tehran would lose little. Indeed, Houthi officials make no secret of their viewpoint that, given the right assurances, they would be open to being long-term strategic partners with Saudi Arabia in Yemen.

This is where the opportunity arises to set the conditions for conflict resolution in Yemen: Riyadh’s ability to save face and Tehran’s desire to forge deeper ties with Europe open the door to effectively neutralizing the regional drivers of the Yemen conflict.

Why the US is Unable, and UN Insufficient, to Facilitate Peace in Yemen

It is widely agreed that there is no military solution to the Yemen conflict, only a political one. Among the world powers however, the US is not in a position to play the role of peace broker in Yemen. With a series of inflammatory moves in the region, including the withdrawal from the Iran deal and recognition of Jerusalem as Israel’s capital, Washington has lost under the Trump presidency what had arguably been its greatest capital in the Middle East: the assumption — valid or not — that it could be part of the solution.  

While the US has rarely been viewed as an impartial regional meditator, there has existed an implicit regard for the potential for American dynamism. This facilitated previous historic Washington-led diplomatic efforts in the region — among them the Camp David and Oslo Accords — whether or not these agreements met their stated goals, or were practical to begin with. Today, there is no longer the illusion of depth or altruism in US foreign policy. Neither is there much regard for Washington’s resolve to the hold to the commitments it makes.   

The United Nations also faces a crisis of credibility in Yemen. Jamal Benomar, the UN Secretary-General’s first Special Envoy for Yemen following the 2011 uprising, oversaw the country’s transitional phase, and its dissolution. While officially a mediator and facilitator between political parties, Benomar was widely seen as going beyond this role to become a central figure in decision making himself – a position from which he increasingly provided political cover for President Hadi as the latter’s failures as transitional head-of-state mounted. Benomar resigned shortly after the Saudi-led military coalition launched its initial foray to dislodge Houthi forces from Aden in March 2015. He was replaced by Ismail Ould Cheikh Ahmed, who over his tenure oversaw three rounds of failed peace talks and was banned from Houthi-held areas for the last year at his post due to accusations of bias. Meanwhile, as the war and economic crisis drove millions of Yemenis toward starvation and their country into ruin, the UN Security Council remained virtually silent – at one point going more than 14 months without issuing a council decision related to the conflict.

This is not to discount the efforts of Martin Griffiths, who took over as the new UN Special Envoy for Yemen in March 2018 and since has engaged with and been well received by all relevant stakeholders to the conflict. The cancellation of peace consultations between the warring parties in September, which were scuppered at the eleventh hour, owed to a logistical dispute over the Houthi delegation’s transportation to and from Geneva and did not represent a terminal blow to Griffith’s mediation efforts. However, as Griffiths himself said to UN Security Council member states during his first council briefing on April 17: “Mediation without the backing of diplomacy will fail. We will do whatever we can to find agreements that work between Yemenis. But it is for the members of this Council, and other Member States, from time to time, to put the force of international opinion behind these agreements. Your unity and your resolve will be decisive.”

Plainly speaking, the UNSC is far from united regarding Yemen. Indeed, as in Syria, Ukraine, Palestine and Israel, the war in Yemen has made it painfully apparent that permanent UNSC member states prioritize their vested geopolitical interests over international harmony and conflict resolution, regardless of the humanitarian cost. Specifically, the US and UK have an established track record of defending the position of the Saudi-led military coalition in Yemen-related UNSC discussions and decisions. As Griffiths said during his April briefing, successful peace negotiations will require compromises from all sides; however, it is likely that the US and UK will derail any process which Riyadh finds objectionable. Regardless of Griffiths’ mediation skills, any UN-led process will ultimately be held hostage to the conflict’s most powerful player: Saudi Arabia. Diplomatic backing for mediation thus requires a powerful international player that is also able to act independently of the belligerent parties’ vested interests.   

The Opportunity and Imperative for Europe to Step Up  

Talks between Iran, the UK, France and Germany regarding the Yemen conflict have been underway since February, with all sides noting progress and an Iranian willingness to facilitate talks with or regarding the Houthis. The European and Iranian delegations said following the most recent meeting in September that talks would continue. The Europeans have multiple motivations for pursuing this track. There are Europe-Iran business interests, while limited, that relate to the JCPOA and which the Europeans have an interest in maintaining. More importantly, it is a security interest for Europe to preserve the dialogue with Iran that was institutionalized by the JCPOA. Through this dialogue Europe has an avenue to push for wider de-escalation, and specifically de-escalating Saudi-Iranian rivalry that has been rapidly destabilizing much of the Middle East since the Arab Spring uprisings upended the regional status quo in 2011. Since then, waves of refugees and sporadic terrorist attacks across Europe have helped inflame latent nationalist populist movements that are now threatening the EU’s very unity. A stable Middle East would help remove much tinder from this fire, with a Saudi-Iranian de-escalation being key to regional stabilization. And of all the region’s conflict’s, the Yemen war is perhaps where the EU is best positioned to helped end the violence.  

Until recently, Antonia Calvo-Puerta, head of the EU delegation to Yemen, was the only Western diplomat to have been granted an audience with the Houthi leadership. Indeed, the only other Western diplomat granted access to Houthi leader Abdulmalik al-Houthi in recent years has been Griffiths. Calvo-Puerta has also led the EU’s Track II efforts involving tribal leaders from across Yemen. This saw more than 30 tribal leaders flown to Belgium for talks in September 2017, with another meeting with tribal leaders held during the EU delegation’s visit to Sana’a earlier this year.

Brussels’ ability to step up its engagement in the Yemen conflict has in many ways been freed up by London’s imminent departure from the union. As a diplomatic and military ally of Saudi Arabia, the UK would have been able to curtail deeper EU engagement in the Yemen conflict had it maintained its voting power. The importance of the EU’s relative independence from the conflict’s belligerent parties thus becomes apparent. Despite the Saudi leadership’s disagreements with the EU their continued regard for Brussels is apparent. Criticism of coalition actions in Yemen has been audible in many European capitals, and in the EU parliament itself, while the Saudi response to such has been relatively muted. Compare this to Riyadh’s scorched-earth response toward Ottawa in August after the Canadian embassy in Saudi Arabia issued a tweet calling for the release of imprisoned Saudi civil rights activists.    

However, the EU’s real geopolitical and diplomatic potential to contribute to conflict resolution in Yemen will only come to bear when it becomes official EU policy. This requires EU High Representative for Foreign Affairs and Security Policy, Federica Mogherini, to be willing to leverage the current circumstances to help champion the process, in collaboration with the UN Special Envoy. Should Iran’s support for a peace process in Yemen be packaged into the Europeans’ discussions for maintaining the JCPOA, the choice for Tehran would be obvious. Yemen is the most peripheral arena for Iran, important only as a card in the game; if Tehran saw benefit coming from playing that card, it would do so. Riyadh, meanwhile, could use the EU as cover to finally end its disastrous military intervention in Yemen with a veneer of victory.  

In addition to coordinating with tribal factions in Yemen, the EU could also bring its weight to bear in support of the UN Special Envoy’s mediation efforts relating to Hudaydah port and Sana’a International Airport. Both are essential to the humanitarian relief effort and restarting normal economic activity, and in both cases it is Houthi control of these transport hubs that has the coalition either seeking their capture (in the case of Hudaydah port) or forcing their closure (in the case of Sana’a airport). The EU, with its experience in South Sudan, the Balkans, Serbia, and elsewhere, has demonstrated that it has the human and financial resources necessary to effectively oversee this type of major infrastructure in unstable environments. Relative to the UN, it has fewer bureaucratic obstacles to deploying the necessary manpower and finances, and most importantly the EU has enough credibility with both the Houthis and the Saudi-led coalition to take up this role. Another area for EU intervention would be in helping, via its connections with tribal networks, to arrange for prisoner exchanges and the release of journalists, activists and other civilians held by the various parties. This should be part of larger UN de-escalation and demobilization efforts.

All of the above should be seen as confidence-building measures between the warring parties en route to a final peace agreement, with the EU’s efforts dovetailing with, and supporting of, the UN Special Envoy’s mediation. Where Griffiths can lay out the roadmap and bring international legitimacy to the peace process, the EU can bring the clout and leverage necessary to act as a  guarantor, keeping the belligerent parties to their commitments on the ground and facilitating the de-escalation of hostilities.

Why the Moment is of the Essence

With all parties to the conflict searching for an exit route, now is the moment for the EU to champion peace in Yemen. The Khashoggi affair has also refocused world attention Saudi conduct, with even the US and UK now demanding that Riyadh’s end the war – the recent US move to end in-flight refueling for Saudi warplanes was a welcome step in this regard.

Through its access to the warring parties and legitimacy in the eyes of major stakeholders, Brussels is almost uniquely placed to play this role in the absence of alternative peace brokers. Leveraging Iran as the only remaining state actor with clout among the Houthis will be imperative to this effort. Already, regional security matters have been packaged in with talks to save the JCPOA, and Yemen’s war is the most likely front on which Tehran would show flexibility.

Yet here too, time is of the essence: for the moment, Iran says it remains willing to engage with Europe as counterweight to Washington’s punitive moves, but reformist voices advocating such a position will face further domestic pressure as sanctions start to bite. In August, Iran’s parliament impeached Masoud Karbasian, the country’s finance minister, citing the economic crisis that earlier this year spurred the country’s biggest protests since 2012. The supreme leader, Ayatollah Ali Khamenei — in whose hands political power in the Islamic Republic ultimately lies — has laid the blame for these economic woes firmly at Rouhani’s door and cast doubt on Europe’s ability to save the nuclear deal. France’s Total has already pulled out of the South Pars project and even if Europe establishes a mechanism to bypass the US banking system, businesses will still be wary of falling foul of new sanctions.

Most indicative of this urgency however, is the situation on the ground in Yemen. After more than three years of blood, disease and hunger, the renewed offensive on Hudaydah city and looming famine risks tipping the conflict in a new, even more devastating phase.

Farea al-Muslimi is chairman and co-founder of Sana’a Center for Strategic Studies.

About the Sana’a Center

The Sana’a Center for Strategic Studies is an independent think-tank that seeks to foster change through knowledge production with a focus on Yemen and the surrounding region. The Center’s publications and programs, offered in both Arabic and English, cover political, social, economic and security related developments, aiming to impact policy locally, regionally, and internationally.

Author’s note: This paper would not have come to reality without the extensive editing and reviews of Spencer Osberg and Holly Topham. I would like to express my utmost gratitude for their invaluable contributions.

What Does the New Head of the Internationally Recognized Government Mean for Yemen?

What Does the New Head of the Internationally Recognized Government Mean for Yemen?

Days ago, Yemeni President Abed Rabbo Mansour Hadi sworn in Maeen Abdul Malik as his new prime minister, making him the latest member of the government-in-exile in the Saudi capital of Riyadh. This followed Hadi’s sacking of the previous prime minister, Ahmed Obaid bin Dagher who, since his appointment in April 2016, had become the president’s partner in failure. Notably, bin Dagher had become prime minister following an implicit coup which he and Hadi had launched against his predecessor, Khaled Bahah. So what is the context and background of this new appointment, and what will its implications be?

Trump and the Yemen War: Misrepresenting the Houthis as Iranian proxies

Trump and the Yemen War: Misrepresenting the Houthis as Iranian proxies

By Adam Baron, Waleed Alhariri and Anthony Biswell

Executive Summary:

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The involvement of numerous foreign actors on all sides of the Yemen war has not changed the fact that fundamentally the conflict remains tied to local dynamics. This is particularly true with regard to the Houthis, the militant group currently controlling much of Yemen’s north and facing off against forces associated with the internationally recognized Yemeni government and the Saudi-led military coalition.

The administration of United States President Donald Trump has been a vociferous opponent of Iran – along with its Gulf Arab allies and the Yemeni government – and has advanced a conception of the Houthis as agents of Iran and a policy that aims to “hit Iran in Yemen.” Hawkish elements of the US Republican party and its supporters have also reinforced an understanding of the Houthis as one-dimensional Iranian pawns, framing them solely in regional sectarian terms.

This, however, obscures complex reality: the Houthis are a home-grown Yemeni group with popular support, self-sustaining social and financial networks, an independent leadership whose primary considerations are local power dynamics, and an affinity with Iran based far more in politics than religion. Simultaneously for Tehran, the ongoing Yemen conflict and the Houthis have provided a convenient, low-cost means to harass their main Gulf opponent, Saudi Arabia.  

Whether the Trump administration intends to pursue war or peace, failing to understand the motivations, actions and nature of the Houthis lays the groundwork for flawed foreign policy decision making, and makes it more difficult to exert political, diplomatic or even military pressure on the group.

Indeed, a policy that further isolates the Houthis internationally would likely push the group further under the influence of Tehran. As well, if the US government sees the Houthis as a proxy target for Iran, Iranian military planners will be highly incentivized to back the Houthis more substantially, given that the Iranians would have little to lose themselves, while their opponents – the US and Saudi Arabia – would be risking a great deal. Increased Iranian support for the Houthis would in turn elevate the security risks for Saudi Arabia.

Trump’s consistent framing of the Yemen conflict as the product of Iranian malfeasance also reduces Washington’s ability rally the international community into a united front regarding the conflict, or to pressure the main warring parties back to the negotiating table.

Rather than isolating the Houthis further, US diplomatic engagement presents a more promising option, as the Houthis have responded positively to the direct talks previously entered into with both Saudi Arabia and US officials.

Introduction: Yemen “peripheral” to current US foreign policy

United States President Donald Trump has been a vocal opponent of the previous administration’s policy regarding Iran, and antagonistic toward Tehran generally, since his election campaign. This has manifested in various ways: Trump’s criticism of the Joint Comprehensive Plan of Action (JCPOA), the so-called “Iran nuclear deal” brokered under former President Barack Obama; his fulminations against Tehran for backing various militia groups in the Middle East, as well as Trump’s public indignation regarding the rhetoric Iranian officials have directed towards US allies in the region.1

Even while the Trump administration’s broader Middle East policy has appeared somewhat inconsistent thus far, the White House has been fairly undeviating in its condemnation of perceived Iranian interference across the region. In this regard the Houthi movement in Yemen, and Iranian support for the group, has clearly been on the Trump administration’s radar. Such was on display on December 14, 2017, when the US Ambassador to the United Nations, Nikki Haley, staged a media event at a military base in Washington, DC. There she unveiled a raft of weapons allegedly manufactured in Iran and recovered by the US’ Gulf allies. These included missiles, drones, anti-tank weapons, among other items which, Haley said, testified to Iran “fanning the flames” of Middle East conflict.2 The centerpieces of the exhibition were the reassembled pieces of two missiles the Houthis had purportedly fired into Saudi Arabia – one of which had come close to hitting Riyadh’s King Khalid International Airport on November 4, 2017; Saudi authorities have claimed their air defence systems shot it down.

“The weapons might as well have had ‘Made in Iran’ stickers all over” them, said Haley, asserting that Tehran was in violation of the current United Nations arms embargo on Yemen. A UN panel of experts, which issued a report regarding the same missile fragments on November 24, stated that while they bore a resemblance to the Iranian-manufactured Qiam-1 missile, there was “no evidence as to the identity of the broker or supplier.”3 The missiles also contained an American-manufactured component.

Notable in the Trump administration’s escalating allegations against Iran and its involvement in Yemen is that discussions concerning Yemen itself have been almost entirely absent. In the words of several US diplomatic officials who spoke privately on the matter, Yemen is “peripheral” in current US policy making. This, at a time when Yemen constitutes the world’s largest humanitarian crisis, Washington is deeply mired in the country’s civil war through military, logistics and intelligence support for the Saudi-led coalition intervening in the conflict, and US counterterrorism operations in Yemen – that began under President George W. Bush in 2002 – have never been more robust. The US’ forthcoming foreign policy actions related to Yemen will thus profoundly impact the country and its ongoing conflict, yet such is blatantly missing from White House considerations.   

Intersections between the Houthis, Iran and the US – A brief overview

The Houthi rebel group emerged in the early 2000s out of a movement called The Believing Youth, a group focused on the revival of Zaidism, a brand of Shia Islam found nearly exclusively in northern Yemen. From the start the Houthis have been unabashedly anti-American, which as an ideological tenet has functioned as a basis for mobilization. The writings of key Houthi figures have framed US influence in the region as deeply malign, blaming it for the proliferation of Saudi-backed Sunni Islamist ideologies that have spread in the traditional Zaidi heartland.

In the movement’s nascent period, founder Hussein al-Houthi’s vociferous criticism of the US war in Iraq and then-president Ali Abdullah Saleh’s alliance with Washington earned al-Houthi both popular support and the ire of the government in Sana’a. Subsequent Yemeni Armed Forces (YAF) operations in northern Yemen against al-Houthi and his followers lead to his death in 2004 and sparked the Sa’ada Wars – a series of six armed conflicts between the YAF and the Houthis that lasted until 2010.4

Aiming to woo Saleh into counterterrorism cooperation against Al Qaeda in the Arabian Peninsula (AQAP), the US did little to dissuade the YAF’s counter-insurgency operations against the Houthis. Simultaneously, the Houthis’ vociferous anti-Americanism and anti-Semitism – epitomized by their signature chant, “God is great, death to America, death to Israel, damn the Jews, victory to Islam,” – did little to endear them to the Americans; nor did their alleged ties to Iran.

While cast as Iranian proxy forces by Saleh and his allies, US embassy cables from Sana’a at the time revealed that American officials saw little evidence of direct Iranian support for the Houthis beyond overly positive media coverage.5 Importantly, the ideological affinity between Tehran and the Houthis was based far more in politics than religion; seeing themselves as warriors against tyranny, the Houthi held Iran in esteem for standing against the perceived injustices of the Saudi, American and Israeli governments.6 At the same time, the Zaidi school of Islam can be viewed as being ideologically between Sunni and Shia – in many ways bearing more in common with Sunni Islam – and significantly distinct from the Twelver Shiism most prominent in Iran.

As the Sa’ada conflicts continued, however, the Iranian government came to see the Houthis as an opportunity to pressure Saudi Arabia, with Tehran ramping up the media rhetoric and increasing its networking with the Houthis. In 2011, popular protests against President Saleh – the Yemeni manifestation of the so-called ‘Arab Spring’ – eventually lead to him stepping down and handing the presidency to his deputy, Abdu Rabbu Mansour Hadi; following this, Iranian-Houthi interactions came to include limited financial support and military training.7 Houthi military forces entered Sana’a in September 2014 – backed by Saleh-allied troops – leading to the government being deposed and Hadi fleeing the capital in January 2015; the next month the Houthis signed a memorandum of understanding on air transport cooperation with Iran, allowing the two countries to undertake direct flights between Sana’a and Tehran for the first time.8

While the Houthis have largely shunned direct contact with the US, the Obama administration regarded them as part of Yemen’s societal fabric that should be included in any political process, in particular post-2011. Following the Houthi takeover of Sana’a in September 2014, the US established a system of coordination with the group, largely regarding stabilization and counterterrorism matters.9 US officials have also, on occasion, had direct contact with some Houthi leaders, particularly with regards to the ongoing peace negotiations.10 Washington has also on several occasions successfully negotiated the release of American citizens held by the Houthis.11

None of this, however, is to say that there was amity been between the two. Beyond ideology, rhetoric and the Iranian ties, the Houthis overthrew a government closely allied to the US; one that coordinated with the US on key counterterrorism matters to an even greater extent than Saleh.12 Simultaneously, even while recognizing American power and the need to negotiate with the US, the Houthis still saw Washington as essentially a destructive force in the region.

Construction of the Iran-Houthi narrative in the US

Although the US is deeply enmeshed in the Yemen conflict, the country was barely mentioned during the 2016 US presidential campaign. When Trump did mention Yemen, his remarks usually cast the country as indicative of two nodes: first, the Obama administration’s alleged failure to properly respond to the ‘Arab Spring’ and its aftershocks, and, second, the spread of nefarious Iranian influence in the Middle East in the wake of the Iran nuclear deal. In both regards, these stances put Trump within mainstream Republican Party foreign policy sentiments, irregardless of his ‘outsider’ status and general frequent expressions of disdain for ‘the establishment’.

While Obama’s policy toward Yemen was subject to little sustained or significant scrutiny for most of his time in office – save from a small number of progressive Democrats and the libertarian wing of the Republican party – it suddenly hit center stage in 2014, following two back-to-back events. The first was Obama’s declaration that the US counterterrorism strategy in Yemen served as a model for the wider fight against the Islamic State in Iraq and Syria (ISIS); US-Yemen counterterrorism and collaboration, Obama and administration officials argued, presented a model,low-footprint military operation in the region, pairing US military airpower with the intelligence potential of local ground forces.13 The second was the overthrow of the internationally recognized – and US-backed – government of President Hadi in Yemen, an embarrassing turn of events for Obama who had previously described Yemen’s political transition post-2011 as a monumental success and a model to emulate elsewhere.14

The failed political transition and the ousting of the internationally recognized government from Sana’a presented a golden opportunity for US Republicans and their supporters to critique Obama. A key US ally had been overthrown by anti-American rebels – something that served to epitomize, for some, the administration’s poor judgement in reacting to the Arab Spring. One indicative March 2015 Heritage Foundation commentary bluntly cast Yemen as joining Obama’s list of “Middle East disasters,” ridiculing the “success story” claim; another polemic National Review commentary described Yemen’s chaos as symptomatic of the fruits of Obama’s alleged Jihadist sympathies.15

The critiques were far from unique to conservative media: In the wake of the Hadi government collapse, numerous commentators from across partisan lines disparaged the so-called ‘Yemen model’.16 Its failure was compounded by the humiliating nature with which US troops and embassy staff were forced to evacuate the capital, in many cases leaving behind equipment that was eventually seized by the Houthis.

Throughout 2014 and 2015, the narrative of how Obama’s Yemen model failed began dovetailing with criticisms of the administration’s Iran policy, specifically that Obama being “weak” on Iran had paved the way for the events in Yemen. This cross-pollination of narratives raised consternation within the right-wing, and even some moderates in the American foreign policy establishment, regarding the talks that led to the JCPOA. Importantly, this worldview casts the Houthis as beholden to Tehran and extensions of Iranian power, rather than an indigenous Yemeni movement acting autonomously based on its own vested interests.

The framing of Yemen through the prism of Iran is apparent in scores of commentary articles from the time regarding Houthi military advances; in most cases, the focus was regional politics while actual events in Yemen were treated as almost peripheral to the larger narrative. One particularly indicative Washington Times article published on January 23, 2015 opens by writing that:

The surge in Yemen this week by Shiite Muslim militants represents what some national security insiders are calling a “huge victory” for Iran, just as the Obama administration faces criticism for being too lenient in nuclear talks with the Islamic republic and appears — at least tacitly — to be coordinating with Tehran against Sunni terrorists in Iraq.17

Such thinking serves to elide much of the nuance of the Yemen conflict, all the while subsuming the differences between the political calculations, ideological motivations and strategic implications of three widely disparate happenings – the Houthi military advance, ‘Iran deal’ negotiations and US counterterrorism operations in Iraq. Perhaps ironically, the caricature of Iran as the hand behind all ills in the Middle East was fed by Iranian hardliners themselves. Iranian member of parliament Ali Reza Zakani, for instance, stated that the Houthi takeover of Sana’a meant that the Iranians controlled four regional capitals — Sana’a, Damascus, Beirut and Baghdad – and that Saudi Arabia was under imminent threat.18

Zakani’s statements were given wide play in both the Gulf and conservative US media which, along with other dramatic claims of Iranian expansionism, served the internal narratives of hardline Iranian leaders, hawkish Gulf rulers and anti-Obama Republicans, albeit, to different ends. Right-wing American pundits and many Gulf Arab commentators appeared to mirror each other’s statements, both speaking about the need to push back the Houthis to counter Iran.19 Both characterized the Houthis as an “Iran-backed Shia” grouping, effectively undermining any wider analysis of a rebel group’s overthrow of a standing government that many in the country viewed as illegitimate.20 Some American commentators went further, reducing the Yemen conflict to another example of the evils of Islam, tying Yemen’s failed government and collapsing state to the Obama administration’s inability to understand the “radical Islamist threat.”

Less bombastic and more nuanced analysis did appear in conservative outlets as well; for instance, both American Enterprise Institute (AEI) and Cato Institute-affiliated writers produced articles that offered depth and informed perspective of the Yemen crisis. Nonetheless, on the whole, two themes were reproduced in association so consistently that they became established as conventional wisdom: Obama’s failed policy had handed Yemen to Iran.

In that regard, Trump’s statements during the presidential campaign were within the GOP mainstream. While the few remarks he made on Yemen were vague – and at times almost baffling – the themes within them fell in line with what would have been expected from a more conventional candidate. This was the case, for example, for his much-maligned comments during a campaign speech in January 2016:

Now they’re going into Yemen, and if you look at Yemen, take a look… they’re going to get Syria, they’re going to get Yemen, unless… trust me, a lot of good things are going to happen if I get in, but let’s just sort of leave it the way it is. They get Syria, they get Yemen. Now they didn’t want Yemen, but you ever see the border between Yemen and Saudi Arabia? They want Saudi Arabia. So what are they going to have? They’re gonna have Iraq, they’re gonna have Iran, they’re gonna have Iraq, they’re gonna have Yemen, they’re gonna have Syria, they’re gonna have everything!21 

Many commentators have focused on the mangled language – which is indeed confusingly phrased and needlessly verbose – however, the statement also provides insight into Trump’s framing of developments in Yemen: in short, that an expansionist Iran had taken advantage of chaos in the country, putting itself in a position to threaten a key US ally, Saudi Arabia. The wording may have been inelegant, but nonetheless, it fell well within the mainstream of his party; indeed, it echoed the rhetoric and policy prescriptions of many Republican elites who opposed Trump.

Trump’s hawkish posturing on Iran, Houthis

In May 2015 the Iran Nuclear Agreement Review Act (INARA) was made law, giving the US Congress a degree of oversight of the Iran nuclear deal.22 The INARA requires the president to publicly certify every 90 days that Iran is in technical compliance with its commitments under the JCPOA. Should the president not give this certification, Congress then has a 60-day window in which it is able to rapidly re-impose economic sanctions on Iran, thus breaking the nuclear agreement.  

On October 13, 2017, some nine months into his presidency and against the advice of many of his key advisors, Trump announced that he would not certify the Iran deal.23 In a wide-ranging speech, Trump slammed Iran as a “terror state,” condemning its activities throughout the Middle East and the wider world.24 Trump directly noted Yemen, accusing Iranian government of “fueling” the ongoing civil war. This stance was echoed in a press statement released to accompany his announcement.25 In it, Trump cast the Houthis as tools of the Iranian Revolutionary Guard Corps (IRGC).

“In Yemen,” it reads, “the IRGC has attempted to use the Houthis as puppets to hide Iran’s role in using sophisticated missiles and explosive boats to attack innocent civilians in Saudi Arabia and the United Arab Emirates, as well as to restrict freedom of navigation in the Red Sea.”26

Unsurprisingly, Saudi Arabia, the UAE – the leading partner with Saudi Arabia in the military coalition – and the internationally recognized Yemeni government were pleased with Trump’s words, greeting them as a welcome change from Obama administration policies. While the US under Obama firmly backed the Saudi-led coalition’s operations against the Houthis – and, indeed, provided crucial military support – many Gulf and Yemeni officials grew resentful of what they saw as former Secretary of State John Kerry’s overhanded attempts to push the internationally recognized government to agree to peace terms. Many spokespeople of the Yemeni government publically slammed Kerry, accusing him of bias. In contrast, Yemeni officials characterized Trump’s October 13 statements as sending “positive signals.”27

These remarks were also the most blunt iteration of a Trump stance regarding Yemen, though they were far from the first time the president or members of his administration had made confrontational statements eluding to potential escalation of US involvement in Yemen to confront Iran. Shortly after Trump took office, the newly installed National Security Advisor General Michael Flynn (since resigned) said Iran was being put “on notice,” bluntly labeling the Houthis an Iranian “proxy terrorist group.”28 These remarks came in parallel with increased US military activity in Yemen through counterterrorism operations against AQAP, all of which indicated the Trump administration’s new hawkish approach.29 US government officials in Washington, DC, speaking privately, echoed this assessment, reporting that administration officials had stated their intent to go after “Iranian military targets” in Yemen in operations similar to those against ISIS in Iraq and Syria.30

All the while, Trump-friendly pundits have continued the chorus of claims that Yemen represents a forum for pushing back Iran expansionism. Many of these voices have gone as far as to argue for US involvement in any potential Saudi-led military coalition operation against the Houthi-held port of Hudaydah. Not only does such line of thinking dismiss the likely catastrophic humanitarian impact of such as attack – given that the vast majority of the country’s basic necessities are imported through Hudaydah port – but it casts the importance of the attack as beyond Yemen, in “countering” Iran. In one particularly indicative Breitbart piece published following Trump’s inaugural foreign trip to Riyadh in May 2017, the author posits US support for the Hudaydah offensive as a near necessity, as leaving it in the hands of the Houthis risked fulfilling an “Armageddon prophecy.”31

Beyond rhetoric, however, there has yet to be any decisive shift in US actions regarding Yemen. Following battles in Sana’a between the Houthis and forces loyal to former President Ali Abdullah Saleh at the end of November 2017 – leading to Saleh’s death early the next month – coalition-backed forces made new gains against the Houthis along Yemen’s Red Sea coast toward Hudaydah; there is no evidence, however, of direct US support for this offensive. Simultaneously, key administration officials, such as Secretary of Defense James Mattis and Secretary of State Rex Tillerson, have continued to support the renewal of peace talks.

Notably, in a surprise about face in Trump’s otherwise unwavering support for the Saudi-led coalition, the White House released a statement on December 6 calling on Riyadh to “completely allow food, fuel, water, and medicine to reach the Yemeni people who desperately need it” – a reference to the Saudi blockade of northern Yemen that is crippling commercial and humanitarian imports and exposing millions of people to potential famine.32 While ostensibly a humanitarian appeal, many observers doubted the move indicated a US policy shift; rather they saw it as Trump’s retribution against Riyadh for criticizing his announcement, days earlier, to move the US embassy in Israel to Jerusalem.   

Even if Trump’s otherwise hawkish posturing regarding Iran and Yemen remains at the level of rhetoric, however, it could still prove problematic: casting the Houthis as one-dimensional Iranian pawns and dismissing dynamic reality obscures analysis of developments on the ground and opportunities for conflict de-escalation that may emerge. Simultaneously, Trump’s anti-Iran vitriol empowers hardline actors on all sides of the conflict who have a vested interest in seeing the war continue.

Looking ahead: The implications of misrepresenting the Houthis

Regardless of the involvement of foreign actors on all sides of the war, Yemen’s conflict remains fundamentally tied to internal  dynamics. This is particularly true of the Houthis and their actions; despite their ties with and backing from Iran, Houthi leaders’ fundamental consideration is local power dynamics.33 Casting the Houthis as Iranian pawns and framing them solely in regional sectarian terms, with little identity otherwise, ignores the factors motivating Houthi supporters and elides the group’s ideology and decision-making process.

Whether the US administration intends to pursue war or peace, failing to understand the motivations, actions and nature of the Houthis — and instead treating them as puppets of a foreign power — lays the groundwork for flawed decision making; one cannot expect to effectively counter an adversary without understanding how and why they fight. The Trump administration’s erroneous framing of the conflict thus represents a significant danger: for instance, the failure to understand the Houthis, their motivations and how they consolidated their power in northern Yemen renders it all the more difficult to exert political, diplomatic or even military pressure on the group.

Proper foreign policy regarding the Houthis requires a deeper understanding of how the group functions. For instance, the Houthis have been able to continue prosecuting the conflict not because of Iranian support, but rather through their ability to capitalize on tribal networks under their control, their knowledge of the terrain, their control over key military installations and, increasingly, conflict-enabled revenue streams. Indeed, rather than being beholden to Tehran, numerous western diplomats having stated that when the Houthis entered Sana’a in September 2014 they did so against the advice of Iranian officials.34 Then in March 2016, the Houthis engaged in direct talks with Saudi officials that led to a de facto ceasefire along the Saudi-Yemeni border. The border ceasefire largely held until the breakdown of UN-sponsored peace talks in Kuwait in August 2016. Recent events surrounding Saleh’s death undoubtedly complicate peace efforts – among other things adding to the distrust between the Houthis and Saudi-led coalition members. Nonetheless, both the Houthis and Saudi Arabia are surely aware that any eventual sustainable peace agreement it will require the other’s buy in.

Thus, overemphasizing the Houthis’ foreign ties while ignoring local factors and the means of weakening or pressuring the Houthis is ultimately likely to breed policies that are ineffectual at best, and counterproductive at worst. This is particularly true with regards to the risk that the “pawn of Iran” framing becomes a self-fulfilling prophecy – that is, creating circumstances that prompt or even oblige the Houthis to further strengthen ties with Iran, or vice versa. In some regards, this has already been seen since the Saudi-led coalition launched its military intervention in Yemen in March 2015, under the name Operation Decisive Storm. According to a variety of western and Yemeni officials, following the coalition’s intervention Iranian support to and coordination with the Houthis expanded. Indeed, the Houthi reliance on this support increased as international isolation left them with few other potential partners.

US policy that casts the Houthis as an extension of Iranian interest will likely only lend momentum to this Houthi drift toward the Iranian sphere of influence. First, it would further isolate the Houthis internationally and continue to weaken incentives against greater cooperation with Iran. Second — and perhaps most importantly — it would increase Tehran’s incentives to expand its activities in Yemen.

At the moment, Iran’s involvement remains low-cost in large part because Yemen is not a priority for Iran, and as the Houthis remain generally autonomous and self-sustaining. While Iranian support for the Houthis does appear to have aided the group and, it would seem, their ballistic missile capacity in particular, this aid has not shifted the balance of power in the conflict, with the frontlines in Yemen having remained largely a grinding military stalemate since 2015.

However, a US policy that aims to “hit Iran in Yemen” may ultimately shift the Iranian government’s calculus with regards to Yemen’s importance. In short, if the US government sees the Houthis as a proxy target for Iran, Iranian military planners would be highly incentivized to back the Houthi much more substantially, given that the Iranians would have little to lose themselves, while their opponents – the US and Saudi Arabia – would have a great deal at risk. Iranian media and government statements already frequently highlight the US role in facilitating the Saudi-led coalition’s actions; increased US involvement would thus not only be a propaganda coup, but would bolster within the Iranian regime proponents of increased support for the Houthis.

Trump’s stance against the Houthis also threatens to bury the already moribund UN-led peace process. While the United States government has taken a firm stance in favor of the Saudi-led coalition and restoring the internationally recognized government, Washington has nonetheless been a key supporter of the peace process; notably, under the waning days of the Obama administration senior US officials exerted significant pressure on the Saudis and Emiratis to push President Hadi and his allies to agree to a peace settlement.

Since Trump took office, the peace track put forward by John Kerry was effectively put on pause, as key members of the coalition aimed to take advantage of the new administration’s more favorable leanings. Trump’s consistent framing of the Yemen conflict as the product of Iranian malfeasance reduces Washington’s ability to pressure allies back to the negotiating table. Additionally, it reduces the US’ ability to coordinate with other allies. Europe, and even the United Kingdom, have widely divergent understandings of the Yemen conflict from Trump’s. This will impede the international community’s efforts to maintain anything resembling a united front, thus weakening its leverage over Yemen’s various warring factions.  

Domestically in the US, criticism of the Trump administration’s policies regarding Yemen – including many that are roughly consonant with Obama’s – has become increasingly mainstream in many Democratic party circles; Moveon.org, for example, has recently sponsored numerous petitions critical of US support for Saudi-led military coalition operations in Yemen.35 US involvement in the Yemen conflict has also faced increasing criticism from Republicans. This comes notably from the GOP’s anti-interventionist libertarian wing and figures such as Representative Walter Jones (R-NC) and Senator Rand Paul (R-KY), who similarly opposed US intervention in other regional conflicts. Such figures have succeeded in generating across-the-aisle support in a series of bipartisan attempts to call attention to the war and limit the US’ involvement. In doing so, Republican politicians like Paul have made public statements consistent with those of the Democratic party’s progressive wing.

For instance, in speaking to the Yemen conflict, Senator Paul remarked in an interview with Breitbart:

That’s a whole new separate war, it’s not connected to any of the other wars. And I think there is a strong argument to be made that if we further the chaos in Yemen and we take one side against another, we make it to such an extent that a vacuum develops and Al Qaeda steps into that vacuum. I think there’s a chance. One, it’s not our war. We should vote on it, and there’s not a vital interest.36

Such bipartisan action is likely to deepen should Trump increase US involvement in Yemen. Indeed, GOP dissent has spread to less likely figures such as Senator Todd Young (R-IN), an otherwise mainstream Republican who has lead congressional criticism of the Saudi-led coalition on humanitarian grounds.37 That being said, a general Republican revolt against Trump over an escalation of the war is unlikely, given that the party’s grassroots seems largely uninterested in Yemen.38

 

Adam Baron is director for research and analysis and a co-founder of the Sanaa Center for Strategic Studies, as well as a visiting fellow at the European Council on Foreign Relations.

Waleed Alhariri is director of the United States office of the Sana’a Center for Strategic Studies.

Anthony Biswell is an assistant editor and researcher at the Sana’a Center for Strategic Studies.

About the Sana’a Center

The Sana’a Center for Strategic Studies is an independent think-tank that seeks to foster change through knowledge production with a focus on Yemen and the surrounding region. The Center’s publications and programs, offered in both Arabic and English, cover political, social, economic and security related developments, aiming to impact policy locally, regionally, and internationally.

This report was edited by Spencer Osberg


Notes

  1. The Joint Comprehensive Plan of Action (JCPOA) is an agreement that was reached between the P5+1 (China, France, Germany, Russia, the United Kingdom and the United States), the European Union (EU) and Iran on July 14, 2015. While the deal is complex and technical, essentially Iran agreed to severe restrictions on its nuclear program that preclude it from obtaining nuclear weapons in exchange the US and EU lifting economic sanctions; During his visit to Saudi Arabia on 20 May, Donald Trump condemned the role of Iran, “From Lebanon to Iraq to Yemen, Iran funds, arms and trains terrorists, militias and other extremist groups that spread destruction and chaos across the region,” see:
  2.  Jim Garamone, “Haley says Iran must stop destabilizing behavior,” DoD News, December 14, 2017, https://www.defense.gov/News/Article/Article/1397091/haley-says-iran-must-stop-destabilizing-behavior/source/GovDelivery/
  3.  Colum Lynch and Robbie Gramer, “Haley’s ‘Smoking Gun’ on Iran Met With Skepticism at U.N., Foreign Policy, December 14, 2017, http://foreignpolicy.com/2017/12/14/nikki-haley-yemen-houthi-rebels-iran-missiles-press-conference-pentagon-skepticism-united-nations-trump-nuclear-deal-diplomacy/
  4.  When Houthi forces killed Saleh in early December 2017, the event was celebrated as revenge for Hussein al-Houthis killing and the Sa’ada wars.
  5.  “Iran in Yemen: Tehran’s Shadow looms large but footprint is small,” Wikileaks cable 09SANAA1662_a, dated September 19th 2009, https://wikileaks.org/plusd/cables/09SANAA1662_a.html
  6.  Adam Baron Farea Al-Muslimi, ‘The politics driving Yemen’s rising sectarianism’, SCSS, May 30, 2016. Accessed December 17, 2017; available at http://sanaacenter.org/publications/main-publications/40#5
  7.  Author interview, UN official, August 2013.
  8.  As noted on the final report of the UN Security Council Panel of Experts on Yemen, “the deal allowed two Yemeni and Iranian companies, Yemenia and Mahan Air, respectively, to operate 14 flights per week per country. The first Iranian flight landed in Sana’a on 1 March, and a second on 6 March, beginning a series of flights that continued until 26 March, when the coalition imposed an air blockade.” See “Final report of the Panel of Experts in accordance with paragraph 5 of resolution 2204 (2015),” United Nations: Security Council, January 22, 2016, available at https://www.un.org/sc/suborg/en/sanctions/2140/panel-of-experts/reports
  9.  Jay Solomon, Dion Nissenbaum and Asa Fitch, “In Strategic Shift, US draws closer to Yemen Rebels,” The Wall Street Journal, January 29, 2015 https://www.wsj.com/articles/in-strategic-shift-u-s-draws-closer-to-yemeni-rebels-1422576308
  10.  Author interview, US official, July 2017.
  11.  Associated Press, ‘Yemen’s Houthi rebels have released 2 Americans, John Kerry says’, October 15, 2016. Accessed December 17, 2017; available at http://www.latimes.com/world/la-fg-yemen-houthi-releases-two-americans-20161015-snap-story.html; Matthew Rosenberg and Kareem Fahim, ‘2 Americans Among 6 Hostages Freed in Yemen After Months of Captivity’, New York Times, September 20, 2015. Accessed December 17, 2017, available at https://www.nytimes.com/2015/09/21/international-home/2-american-hostages-freed-in-yemen-after-months-of-captivity.html
  12.  Author interview, US official, February 2012.
  13.  Kathleen Hennessey, “In deivising a plan for Iraq, the US looks to its Yemen model,” The Los Angeles Times, June 22, 2014,  http://www.latimes.com/world/middleeast/la-fg-obama-iraq-yemen-20140622-story.html
  14.  Jeff Mason, “US tells G8 Syria’s Assad must go, cites Yemen as model,” Reuters, May 19th, 2012, https://www.reuters.com/article/us-syria-usa-whitehouse/u-s-tells-g8-syrias-assad-must-go-cites-yemen-as-model-idUSBRE84I0BC20120519
  15.  Peter Brookes, “Obama’s ‘sucess’ in Yemen joins list of oversees disasters,” The Heritage Foundation, March 25, 2015, http://www.heritage.org/middle-east/commentary/obamas-success-yemen-joins-list-overseas-disasters; Michelle Malkin, “Obama’s bloody Yemen disaster,” The National Review, January 23, 2015, http://www.nationalreview.com/article/397021/obamas-bloody-yemen-disaster-michelle-malkin.
  16.  See, for example, Zach Beauchamp, “These Obama administration quotes on Yemen are almost too cringeworthy to read,” Vox, March 27, 2015, https://www.vox.com/2015/3/27/8299721/obama-yemen-quotes.
  17.  Guy Taylor, “Yemen’s Shi’ite Rebels growing in Power,” The Washington Times, January 23, 2015, http://www.washingtontimes.com/news/2015/jan/23/yemens-shiite-rebels-growing-power/
  18.  For a write up of Zakani’s remarks, see “Sanaa is the fourth Arab Capital to join the Iranian Revolution, The Middle East Monitor, September 27th, 2014, https://www.middleeastmonitor.com/20140927-sanaa-is-the-fourth-arab-capital-to-join-the-iranian-revolution/.
  19.  See footnote 6, Amal Mudallali, “The Iranian Sphere of Influence expands into Yemen,” Foreign Policy, October 8, 2014, http://foreignpolicy.com/2014/10/08/the-iranian-sphere-of-influence-expands-into-yemen/
  20.  John Xenakis, “Shi’a al-Houthis threaten new Sunni Provinces in Yemen,” Breitbart, January 5, 2015, http://www.breitbart.com/national-security/2015/01/05/world-view-shia-al-houthis-threaten-new-sunni-provinces-in-yemen/
  21.  “Campaign Rally with Donald Trump and Sarah Palin”, C-SPAN, January 19, 2016.
  22.  Text of the “Iran Nuclear Agreement Review Act of 2015” is available at https://www.congress.gov/bill/114th-congress/house-bill/1191/text
  23.  The US Congress allowed the deadline to re-impose Iran sanctions to pass on December 13, 2017 without taking action. For more on this, please see Patricia Zengerle, ‘U.S. Congress to let Iran deadline pass, leave decision to Trump’, Reuters, December 12, 2017, available at https://www.reuters.com/article/us-iran-nuclear-congress/u-s-congress-to-let-iran-deadline-pass-leave-decision-to-trump-idUSKBN1E62HP?il=0  
  24.  “Trump’s remarks on the Iran deal,” NPR, October 13, 2017, http://www.npr.org/2017/10/13/557622096/transcript-trump-s-remarks-on-iran-nuclear-deal
  25.  The White House, ‘President Donald J. Trump’s New Strategy on Iran’, October 13, 2017. Accessed December 17, 2017; available at https://www.whitehouse.gov/briefings-statements/president-donald-j-trumps-new-strategy-iran/
  26. Ibid.
  27.  Holly McKaw, “America’s role in Yemen war must end, US lawmakers demand,” Fox News, October 24, 2017, http://www.foxnews.com/world/2017/10/24/americas-role-in-yemen-war-must-end-us-lawmakers-demand.html; also see http://sabanew.net/viewstory.php?id=23691
  28.  Julien Borger, David Smith, Spencer Ackerman and Saeed Kamali Dehghan, “Trump administration ‘officially putting Iran on notice,” The Guardian, February 1, 2017, https://www.theguardian.com/world/2017/feb/01/iran-trump-michael-flynn-on-notice
  29.  Noah Browning, “Trump risks deeper entanglement in Yemen’s murky war,” Reuters, February 7, 2017, http://www.reuters.com/article/us-yemen-security-trump/trump-risks-deeper-entanglement-in-yemens-murky-war-idUSKBN15M1HP
  30.  Author interviews, Washington, DC, July 2017. US government sources put the number of Iranian “advisors” present in Yemen in the dozens.
  31.  James Zumwalt, “Zumwalt: As Trump visits the Saudis, Yemen comes into focus to check Iran,” Breitbart, May 17, 2017 http://www.breitbart.com/national-security/2017/05/17/zumwalt-trump-yemen/
  32.  The White House, ‘Statement by President Donald J. Trump on Yemen’, December 6, 2017; accessed December 19, available at https://www.whitehouse.gov/briefings-statements/statement-president-donald-j-trump-yemen/
  33.  Throughout their alliance with the late Ali Abdullah Saleh, the Houthi leadership sought to protect the group and its political future, knowing Saleh would likely abandon the alliance if it was in his and his family’s interest to do so. Despite the formation of joint governing institutions, the Houthis refused to dissolve the Supreme Revolutionary Committee (SRC) headed by Mohammed al-Houthi. The SRC represented an effective insurance policy against Saleh. The Houthis’ suspicions were proved right when Saleh announced his willingness to open a “new page” with the Saudi-led coalition and confront the Houthis.
  34.  Ali Watkins, Ryan Grim, and Akbar Shahid Ahmed, ‘Iran Warned Houthis Against Yemen Takeover’, HuffPost, April 20, 2015. Accessed December 17, 2017; available at https://www.huffingtonpost.com/2015/04/20/iran-houthis-yemen_n_7101456.html
  35.  Robert Naiman, “Force House vote on Saudi war in Yemen to stop cholera and famine,” Moveon.org,  https://petitions.moveon.org/sign/house-back-un-call-for
  36.  Matthew Boyle, “Exclusive: Rand Paul on Afghanistan and Yemen: Trump should trust his instincts and stop listening to generals who talk in his ear,” Breitbart, September 15th, 2017, http://www.breitbart.com/big-government/2017/09/15/exclusive-rand-paul-on-afghanistan-yemen-trump-should-trust-instincts-stop-listening-to-generals-who-talk-in-his-ear/
  37.  Emma Kinery, “Indiana Senator pushes US to pressure Saudis on Yemen aid,” USA Today, July 18, 2017, https://www.usatoday.com/story/news/2017/07/18/indiana-senator-pushes-u-s-pressure-saudis-yemen-aid/490244001/
  38.  See, for example, Daniel Waiters, “Kootenai County rejects Yemen resolution but Labraor joins Yemen war skeptics,” The Inlander, October 25, 2017, https://www.inlander.com/Bloglander/archives/2017/10/25/kootenai-county-gop-rejects-yemen-resolution-but-labrador-joins-yemen-war-skeptics

Yemen after Saleh

Yemen after Saleh

Former Yemeni President Ali Abdullah Saleh’s killing last week reverberated throughout Yemen and the wider region. As the most dominant figure in the country for more than 30 years, the implications of his demise are formidable. To garner a deeper understanding of how the outlook has changed for the ongoing conflict and the country in general, the Sana’a Center asked seven experts on Yemen for their insight.

Maysaa Shuja al Deen | Yemeni journalist and non-resident fellow at the Sana’a Center for Strategic Studies

Prospects for peace with the Houthis controlling Sana’a  

At a time when the Houthi military’s grip on Sana’a has tightened – along with increased arrests, killings and censorship of social media and the internet – Houthi flirtations with external powers are noticeably different. The day after Saleh’s death, the head of the Supreme Political Council, Saleh al-Sammad, stated that the Houthis are willing to negotiate with Saudi Arabia.

While ostensibly this may seem to indicate a willingness to reach compromise to end the war, after gaining undisputed control over Sanaa any settlement the Houthis would accept would have to provide them political cover for their continued de facto rule.

If Saudi Arabia came under significant pressure from its Western allies then it would likely accept a political solution that could theoretically allow it to save face. While coalition-backed military operations on Yemen’s western coastline will probably not proceed inland, the blockade on Sanaa and Houthi-controlled areas will intensify. Meanwhile, the resulting human suffering will not put pressure on the Houthis but backfire on the coalition, especially Saudi Arabia.

A settlement, therefore, may yet be forthcoming, but the country has become divided along sectarian lines in an unprecedented and explosive way, and is unlikely to stabilize in the near future even after the regional intervention is over.

As for the wishful hopes of a popular uprising, people are unlikely to mobilize while exhausted, hungry and under severe Houthi oppression. War has weakened people’s capacity for resistance, especially in the absence of any leadership or organization. Furthermore, the Houthis, while still young and cohesive, may soon suffer the corrosive effects associated with absolute power, such as complacency, opportunism and of course corruption. Such hubris would erode whatever remains of the Houthis’ internal moral legitimacy, at which point their opponents will have an opening.

 

Helen Lackner | Author of ‘Yemen in Crisis: Autocracy, Neo-liberalism and the Disintegration of a State’

Saleh’s rise and fall

Ali Abdullah Saleh’s death on December 4, 2017 marks the end of an era for Yemen, and indeed for the region as a whole. He was the last of the Arab nationalist leaders. Whatever views one may have about his politics, Saleh demonstrated extraordinary political manoeuvring skills over more than 30 years and ended up as the longest serving leader of the country in modern history. Not only did he negotiate the complexities of Yemen’s social structure – facilitating the rise and fall of different social classes, non-tribal elements, various tribes and the Hashemites – he also navigated the management of a republic in the Arabian Peninsula where absolute monarchies prevail. He did so while retaining nationalist credentials against the rising tide of Islamism in the region, and balancing relations between East and West during the Cold War. Finally, in the post-Cold War era, he successfully ensured Yemen had a significant degree of independence from United States domination while giving the impression of supporting its ‘war against terror’ from 2001 onwards. His ability to manage these highly contradictory and conflicting interests deserves respect and even admiration.

When Saleh became president of the Yemen Arab Republic (YAR) in 1978, following the assassination of two of his predecessors, he was not expected to last more than a few weeks. Initially described as a semi-literate country bumpkin, he soon demonstrated that literacy and formal education are not necessarily indicators of political competence and cunning. It is now many years since I heard anyone mention his lack of academic qualifications. He not only lasted, but increased his grip on the country and demonstrated that being semi-literate did not prevent him from being an extremely sharp and effective operator: his prodigious memory for people’s names, faces and personal histories was often mentioned as one of the explanations for his success.

In the early years of his presidency, he survived not only attempts on his life, but military defeat in the 1979 war against the PDRY. In 1982, he created the General People’s Congress (GPC): this quasi-party brought under a single umbrella influential people of all political hues requiring only one thing, loyalty to himself, in exchange for practical benefits which they could use themselves or for their communities and followers. At a time when political parties were illegal, it was an institution which mobilised support while neutralising most opposition, as he brought into it many opponents, including members of the National Democratic Front who had benefited from the support of the PDRY in the 1979 war.

After 1990, the GPC survived and thrived in the united Republic of Yemen where it became a formal political party and expanded into the southern governorates. Its lack of a clear political programme was not a hindrance to its development as it was primarily a tool of Saleh’s patronage system, used to distribute benefits as necessary. Indeed, other rulers have copied the model, Sudanese authorities, for example, didn’t even bother to change the name.

Had he retired gracefully in 2012, perhaps more people would remember some of his achievements, such as unification and the modernisation of Yemen’s infrastructure. Instead, his anger and frustration at being ousted led him into a particularly unsavoury alliance with his former enemies, the Houthis, in which he was gradually weakened and eventually lost his life. Since the Saudi-led coalition’s intervention in March 2015, his role also contributed to destroying much of what he had built in the first place, whether infrastructure or a degree of national cohesion in some parts of the country at least.

Saleh was a determining element of the lives of all Yemenis and, indeed, most foreigners involved with Yemen for decades. The mass demonstrations held in August to mark 35  years since the establishment of the GPC proved that he still had very impressive popular support in the country, despite the negative aspects of his rule. His legacy will continue to affect Yemeni politics and society for some time to come.

 

Jamila Ali Raja | Yemeni Diplomat and director at Consult Yemen

Houthi empowerment

Regardless of the shock, disgust and anger that accompanied Saleh’s brutal death, it will not have a significant impact on the likelihood of reaching a peace agreement and ending the war in the short term. This is because the Houthis are the party primarily responsible for stalling political and diplomatic negotiations since the end of the last round of UN-sponsored peace talks in Kuwait over a year ago. No progress has been made since, despite UN Special Envoy to Yemen Ismail Ould Cheikh Ahmed’s many efforts. Now, following Saleh’s death, the Houthis have complete control over state institutions, revenues, and decision-making in the country’s north.

Houthi euphoria at their victory over the ally of yesterday and the enemy of the distant past is apparent in their public rejoicing for finally avenging their slain founder, Hussein Badr al-Din al-Houthi. The Houthi movement and its militias will continue to create a police state that suppresses any dissenting political expression. Despite their expressed willingness to return to “peer” negotiations, as stated by the head of the Supreme Political Council, Saleh al-Sammad, the group’s military leaders will make sure to thwart this path.

The Houthis are betting on there being no decisive military victory, given the enormous humanitarian cost that such would entail, and which the international community would not allow. Already the escalation in Saudi-led coalition airstrikes in Sana’a and other areas following Saleh’s death have raised concerns among the coalition’s Western allies.

On the military level, regardless of the unknown fate of Saleh’s nephew, Tariq Mohammed Abdullah Saleh – and the signs suggesting that he is still alive – there is a growing expectation that the remaining members of the Republican Guard will join the Houthi militias, perhaps with the exception of those in Taiz. Meanwhile, the military situation has changed little on the crucial frontlines in Nihm and Mokha districts, in eastern Sana’a and western Taiz, respectively, despite pro-government forces making gains in Al Khawkhah, Marib and Shabwa.

The Houthis are also betting that the citizens and tribes under their rule will be more amenable to following them after Saleh’s death. The south is no longer the focus for the Houthis, but they share with many southern leaders a desire to turn the page on the internationally recognized Yemeni President Abdo Rabbu Mansour Hadi; this includes, perhaps, dividing Yemen into two regions or two countries.

Meanwhile, Saleh’s General People’s Congress (GPC) party appears headed for a crisis. Its movements, meetings and statements herald a split within the GPC, between factions on the ground in Yemen (particularly Sana’a) where the party members will have to ally with the Houthis, and another abroad, notably in Riyadh, given ongoing political maneuverings there. A possible third branch might also emerge, a development being expressed by the GPC-affiliated Yemen Today TV channel, which is now broadcasting from Sanaa, Cairo and Riyadh. Concurrently, the status of Ahmed Ali Saleh, the son of the late president, is still under discussion in the United Arab Emirates, in the presence of other parties from Cairo and Riyadh.

 

Peter Salisbury | Senior Consulting Fellow, Chatham House, Nonresident Fellow Arab Gulf States Institute in Washington (AGSIW)

The Houthis without their paymaster

It remains unclear to what extent the Houthis are able to fund their war sustainably after Saleh’s death. During his 33 years in power, the former president created a huge patronage network that enriched his allies and, of course, the president himself. A large amount of the money made from graft was stowed abroad in tax havens and secret jurisdictions, hidden behind shell companies and trusts. From the beginning of the war, Saleh and his inner circle were able to access these funds, probably billions of dollars’ worth.

Since the beginning of the civil war in late 2014-early 2015, a United Nations Panel of Experts has identified tens of millions of dollars belonging to Saleh’s family, and the transfer of funds within his financial network. Khaled Ali Abdullah Saleh, the former president’s son, is said by the UN Panel to have laundered almost $84 million through a bank account in the UAE over the course of a week in 2014, while a reputed Saleh ally, businessman Shaher Abdulhaq, was found to have transferred around $3 million dollars to Raydan Investments Limited, another Saleh family-controlled financial vehicle.

The Houthis claim to have seized large sums of money and gold from the homes of the former president and his family, and say that they will transfer the funds to the Central Bank of Yemen (CBY) branch in Sana’a to pay wages – likely those of fighters rather than civil servants. But this will be a one-off cash injection. With the coalition working to squeeze the northwest of Yemen even harder now that the Houthis are in sole charge in Sana’a, and with cash transfers from Iran under growing scrutiny and access to Saleh’s international financial networks cut off, it is unclear how well placed the group is to sustain itself financially. The Houthis have consolidated control over customs and tax authorities, and are the main beneficiary of inbound smuggling routes, but running a war is expensive.

 

Maged Al-Madhaji | Executive Director, Sana’a Center for Strategic Studies

An irreplaceable dictator

Ali Abdullah Saleh was a true dictator, and after three decades as the most influential man in Yemen, the wheels he set in motion and how he met his end will shape the country far into the future.

The Saleh era was a naked expression of realpolitik, defined by his ruthlessly pragmatic political maneuvering aimed at, above all, preserving his own authority. As opposed to furthering public interests Saleh – one of shrewdest Arab politicians of the modern era – managed to radically transform a country as complex as Yemen to serve his bidding.

From the reigns of power he was constantly in conflict with the common people and effectively crushed their dreams for a better life, and then departed this world without being held accountable for the suffering he sowed. And yet many in the country grieved for his death, even some of his fiercest opponents; first, because they had hoped he could save them from the Houthis; second, because of the brutal way he was killed.

The impact of Saleh’s death will be felt most in the unravelling of the networks of interests which he used to preserve his power, such as those embodied in the General People’s Congress (GPC) party. In Saleh’s absence, the GPC is likely to disintegrate. Neither Saleh’s son, Ahmed, nor any of Saleh’s family members can compensate for his loss, despite their highly symbolic status in the eyes of GPC supporters. The GPC needs more than just symbols now; to survive the party needs a leader with personal dynamism, effective presence, and the ability to build alliances, stake calculated positions and exploit prevailing circumstances.

It is difficult to foresee any party inheriting his legacy and authority, including the Houthis who cut him down. Replacing Saleh will require more than brute force alone.

 

Iona Craig | Freelance journalist and Orwell Fellow

Checkmate for the master

Saleh was, to the end, perceived in Yemen as the master game player. He loved Yemen’s often-deadly political contest and played it by rules that he himself established over more than three decades as president. When I met him after he ceded the presidency to Hadi in 2012 it was clear that, despite his claim of being a retiree from politics, the playing political game impassioned him as much as the power and money it had provided him with for so many years.

In our meeting he swung from moments of anger to the point of rage and then laughter when I mentioned his son, Ahmed Ali, in the same sentence as his erstwhile ally-turned-opponent, Ali Mohsen al-Ahmar. When he stated that the memoirs he was supposedly penning would not be published until after his death, because they contained too many secrets, I asked if people should be afraid of the day he died. Saleh’s eyes lit up at the thought as he responded through a chilling cackle: “Inshallah,” he said, God willing.

In the aftermath of Saleh’s death – the circumstances of which demonstrate that he had been superseded as the linchpin in his own handcrafted stratagem – the Houthis are creating new rules of the game. Most immediately, the Houthi campaign of arrests, purported killings and the shutting down of internet access indicate they are turning Sana’a into what looks and behaves troublingly like a mini police “state.” What happens next in Yemen throws up a myriad of possible scenarios, none of which look positive. A week on from Saleh’s death and the tone the Houthis have set so far is an ominous one for the capital’s residents.

In the longer view, I wonder how Yemeni history will come to record Saleh’s killing. Will his death at the Houthis’ hands somehow absolve him of responsibility for starting the war? That will likely depend on who gets to write that history and under whose authority it will be taught to Yemen’s future generations. Many in the country, particularly those in the south, would argue that he got his comeuppance. What is beyond doubt, however, is that the millions of Yemenis who have outlived Saleh are now left to burn in a living hell of war, famine and disease, and that Saleh played an essential role in the creation of this tragedy.

 

Dr. Abdulrahman al-Saqqaf | Secretary General of the Yemeni Socialist Party

International community must act to avoid disaster  

Prior to the killing of former Yemeni President Ali Abdullah Saleh, Yemen was faced with three possible scenarios: continued civil war; a de facto partition that is not fully recognized by the international community; or increased momentum to resolve the war through a peaceful resolution.

This last scenario is the least likely of all three at the moment. The likeliest scenario is one where partition occurs amid a civil war that can only be brought to a close if there are cohesive local, regional and international peace efforts.

This requires the international community and regional actors engaged in the war to abandon their reluctance to end the war. Time is not on the side of a solution, and its passage carries serious risks to peace in the region and internationally  given Yemen’s strategic location.

About the Sana’a Center:

The Sana’a Center for Strategic Studies is an independent think-tank that seeks to foster change through knowledge production with a focus on Yemen and the surrounding region. The Center’s publications and programs, offered in both Arabic and English, cover political, social, economic and security related developments, aiming to impact policy locally, regionally, and internationally.

“There are many devils” – A conversation with Governor of Taiz Ali al-Mamari

“There are many devils” – A conversation with Governor of Taiz Ali al-Mamari

Taiz city and the wider governorate have been an active frontline in the Yemeni conflict for more than two and a half years. Fighters from the Houthi movement and allied forces of former President Ali Abdullah Saleh first stormed Taiz in early 2015, with local resistance groups soon taking up arms against them. Fighting has raged since, with the anti-Houthi forces receiving nominal support from the internationally recognized government of Yemen and the Saudi-led military coalition backing it.

Ali al-Mamari, an esteemed former member of the Parliament of Yemen, became the official local government representative of Taiz in 2016, when President Abdo Rabbu Mansour Hadi appointed him governor of Taiz.

Al-Mamari was in Beirut, Lebanon last month and spoke at an event entitled “The Paths of Conflict in Yemen and Opportunities for Peace”, co-hosted by the Sana’a Center for Strategic Studies and the Issam Fares Institute for Public Policy and International Affairs at the American University of Beirut on October 16.

During a question and answer session with Sana’a Center Chairman Farea al-Muslimi, al-Mamari spoke about the political, strategic and economic importance of Taiz. In particular, he described how Houthi-Saleh forces have used industrial areas around the city as a source of revenue generation, and thus why they have made such heavy troop commitments to try and hold these areas.

Al-Mamari spoke about the devastating siege Houthi-Saleh forces applied for more than a year on government-held areas of Taiz city. During this almost total blockade and constant shelling, he outlined how food, water and access to healthcare ran scarce, the collapse of the local economy and how the inability to dispose of waste created dire environmental hazards.

The Yemeni government and its coalition partners have also heavily neglected Taiz, said al-Mamari, pointing to the lack of funding that has caused public services to deteriorate and led to the absence of police and security on the streets in government held areas. In particular, he said the governor of the Central Bank of Yemen has made it a point to obstruct financial support from reaching Taiz.

Al-Mamari said military support for the local resistance has also been vastly inadequate, with anti-Houthi fighters being left heavily disadvantaged against the Houthi-Saleh forces’ better armed and better trained brigades. Al-Mamari said in large part this is due the United Arab Emirates, which has curtailed military support to Taiz due to fears it may aid the Islah Party, affiliated with the Muslim Brotherhood in Yemen; al-Mamari insisted these fears are overblown.

In an exception to this rule, however, the UAE has provided the Abu al-Abbas brigades in Taiz special treatment, said al-Mamari, which has led to divided loyalties amongst anti-Houthi forces. Notably, the UAE, whose affiliated forces seized control of Mokha Port along Taiz’s Red Sea coast in early 2017, has refused to relinquish control of the port and even denied al-Mamari permission to visit it.          

The following is a translated transcription of the conversation between al-Muslimi and al-Mamari, edited for clarity and length:

Farea al-Muslimi: First, what has hampered the battle for Taiz?

Second, I know you have submitted your resignation on more than once – indeed, the president rejected your resignation just two days ago – and that one of your biggest concerns was the need to pay public sector employee salaries. Could you provide… insight into the situation in Taiz, especially economically and militarily.

Governor Ali al-Mamari: As for the question why was the battle for Taiz has been hampered, there are many factors. As I noted earlier, Taiz has been a driving force for change and its peoples have been leaders at critical junctions in Yemen’s modern history. The sons of Taiz had an important role in the September 26 [, 1962, Republican] Revolution. Among those who were harmed by this revolution were the Houthis, and this is why they have a true vendetta against Taiz city. Then came the events of February 11, [2011 uprising] which eventually led to the departure of Ali Abdullah Saleh and his regime. The two, the Houthis and Saleh, are now joined in a battle against the sons of Taiz in a personal vendetta against the city.

Prior to February 11, [2011] there were already 11 significant military brigades stationed around the city – such as those stationed at the Khaled bin al-Waleed camp, which fell recently and is a camp of a similar importance to that of the al-Anad Camp in the south. These brigades, such as those commanded by Abdullah al Kadhi that were loyal to Saleh, surrounded the city to ensure it did not revolt. Saleh understood the danger of the city and that it wouldn’t remain patient forever.

Thus, when the Houthis and Saleh initially besieged Taiz it was besieged by all of these brigades, including members of [Saleh’s] special forces and military police. The concentration of these forces around the city made a swift liberation very difficult.

The resistance in Taiz was initially formed by untrained young men who are not battle hardened; teachers, doctors, pharmacists, skilled workers that were forced to defend themselves, their families and their city… Thus, the resistance had inadequate training, as well as armaments.

Imagine, today we are conducting a battle along hundreds of kilometers with only 10 old tanks. A war of these dimensions with 10 tanks… while Houthi-Saleh forces have hundreds of tanks in camps located in western Taiz. Hence, the military balance is tilted towards the Houthis and Saleh…

Another reason, is the [Saudi-led] coalition. I think that the coalition believes that Taiz has more of an Islah presence [than it actually has], and thus it is not in the interest of some coalition members for the battle of Taiz to be won by Islah, [as they believe] that would strengthen it. A particular coalition member sees Islah as an adversary, even though we reiterate the point that there is no one individual, group or party in Taiz that could dominate or control Taiz. All of the sons of Taiz have fought in the national armed forces, including members of different parties and affiliations.

No one can claim that one party is in control or has superior power in the city, but this is the fear and anxiety of one coalition member that is responsible for the fourth [military] district [which includes Abyan, Aden, Dhalea, Lahj and Taiz]. Our Emirati brothers are the ones overseeing the battle and supplies in the fourth district, which includes Taiz. This fear means the supplies reaching the national armed forces are just for sustenance. They are not provided the capacity that could enable them to achieve significant battlefield victories. They [the UAE] are not in a hurry. Maybe one of their objectives is to try and make sure all warring parties are eventually exhausted so the governorate becomes easier to control.

When the Houthis attempted to control Taiz they did not dare enter the areas that are highly populous and highly educated, such as Maafir, Mawaset, Shamatein and Jabal Habashi. They positioned themselves in coastal districts,  and while they control 75 percent of Taiz, these areas have a lower population count and a lower level of education.

The Houthis concentrate on areas around the city with high economic activity for tax collection, such as the industrial area called Hawaban. The factories [there] provide an annual revenue of around 25 billion Yemeni rials (YR), or around $50-60 million (US). This area of economic activity, where the 22nd republican guard brigade is based, has always been controlled. The Houthis are fighting there so as not to lose this revenue. Towards the west of Taiz city there are factories such as al-Shaybani as well as the paint and soap factories, among others. The Houthis allocated their best forces, arms and equipment towards these areas because they know for certain that if they were to lose control they will suffer. This is one of the reasons why it is not easy for the national armed forces to progress in Taiz, because it is home to important areas for the Houthis and Saleh.

As for my resignation, I’ve said that the issue in Taiz is that while his excellency the president, and other esteemed ministers, are responsive and give orders whenever we go to them, we then find that many of those orders are obstructed by bureaucracy and low-level employees, especially at the central bank in Aden.

I remember a cabinet meeting I was invited to that related to the 40 billion in Russian-printed Yemeni rial sent to Aden airport. I heard the ministers talk about how the money should only go to liberated areas. I said at the time that this money belongs to all Yemenis, and it’s not right to consider only spending it in liberated areas. At the end of the day, this is an obligation of the Yemeni state towards its citizens across all of Yemen.

There was contention around this point. When it came to the distribution of security salaries in Taiz, my colleague, the minister of the interior, said salaries should only be given to those affiliated with the legitimacy, to which I said that a security officer’s salary is a right that does not relate to the conflict.

We were very careful to get salary disbursements for all the sons of Taiz. We have 54,000 public employees in Taiz,  and we disbursed salaries across all districts, whether under the control of the legitimacy or Houthi-Saleh forces. Citizens do not deserve to be deprived of their salaries. A salary is a right and people should not be punished on the basis of party or region.

As for my resignation, we were promised the salaries for the sons of Taiz. When the central bank headquarters was relocated to Aden in October [2016] we demanded the salaries be paid… We kept struggling from October until March 2017, and finally in March we managed to obtain the salaries for the month of December 2016. But when we finally came to collect the salaries for December, we received only YR 3 billion, and only for the education sector. They refrained from allocating the YR 750 million for other sectors, including the health sector.

In July this year I met the president and gained a clear order that Taiz was to be placed on an equal footing with liberated areas such as Aden and Shabwa, which now receive [public sector] salaries on a regular, monthly basis. In September, the moment arrived for the collection of August salaries, and the first transgression arrived when they told us to forget the salaries of August and to instead focus on the salaries for September. We agreed… When we arrived in September to receive the salaries, we were surprised that the governor of the central bank was refusing to disburse salaries for all sectors and was only approving salaries for the education sector.

I could not remain governor so long as people’s salaries and their rights were not being granted. After the resignation, the central bank disbursed one month’s salary for all employees across all different sectors in Taiz. We hope this month we will witness the same.

During the last week, after I submitted my resignation to the president, he summoned me to Riyadh and said that I must continue my work. I set a group of conditions to return as governor, regarding the liberation of Taiz, the central bank, salaries, and support for security services in Taiz.

Security services in Taiz are given no support. When the former director of security went to the Ministry of Interior in May to receive the operational security budget for Taiz he was surprised to find that the allocated budget for Taiz for three months was YR 1.9 million, the equivalent of $4,000 to $5,000 USD… $5,000 dollars as an operational budget for a governorate the size of Lebanon during wartime.  

When we created a special forces [unit comprised of] 3,000 well-trained officers and a facility and military police camp for them we used funds from other budgets, including the health budget, not those allocated for security.

In short, the president insisted that I remain in my post and pledged YR 2 billion for security in Taiz as well as YR 5 billion from the central bank. These are presidential orders, and we will go to Aden, to the government or the central bank, and hope that these orders are implemented.

Regarding the economic and military conditions in Taiz, imagine when the public employees have not been paid for 10 to 11 months, with economic mobility in Taiz dependent on this money circulating into the economy. Shop owners are owed huge debts. As I noted, the factories are not under our control and must pay a high, 25 percent tax directly to the Houthis. Wholesale traders are outside the city, and after two and half years of conflict people have run through all their savings.

For those who may not know, Taiz was totally besieged for a year. Even water and air was restricted – oxygen tanks were not allowed in and as a result 15 Yemenis from Taiz died. The King Salman Center had to airdrop medicine and food into Taiz because it was completely under siege. Regarding water, there aren’t any water projects in Taiz. Water used to arrive through mobile water tanks from outside the governorate. When the siege was partially lifted life improved but the economic situation and conditions in Taiz are dire. Hundreds of thousands of city residents have been displaced to other rural areas and regions.

Militarily speaking the national army makes progress every day but it’s not the progress we anticipate or hope for. They are making slow progress. Although the battle is not immensely difficult it requires resources, such as armaments that the government doesn’t have. The coalition is the only source of military support. We try to apply pressure so that our brothers in the coalition provide more support… and try where we can to press the government, which is not very responsive to Taiz.

Al-Muslimi: Who has more space within Taiz to operate, you or Abu al-Abbas, and what is the scope of competition between armed groups and the local authorities, especially those formed as a direct result of the war?

Is support from the coalition channeled through you as the local authority or do external powers deal with different groups on the ground directly?

How do you run a governorate in a time of war and what about crisis management?

Al-Mamari: Of course the role of the local authority might be more war-oriented than development oriented. Throughout a year and half we only demanded salaries. We didn’t dare to dream of saying we need operational budgets for construction, water or electricity projects. At a time when people are not receiving their salaries, and we are unable to demand an operational budget. Our offices work at minimum capacity. Taiz is living through a time of war and so crisis management is the most prominent form of administration.

We do not have the budgets or capacities to initiate water or electricity projects. Sanitation projects are supported by UNICEF and others. The city is living through terrible environmental conditions. The city’s main landfill is in the west in the old airport district where the Houthis are. On numerous occasions we requested that they allow garbage trucks to reach the landfill. Initially, they would not allow any truck to return [from the landfill]. Now, in a small area of the city, all we have are water runoffs. We place the waste in the way of the runoff so that it’s taken by the water to unknown locations. We also burn waste. It’s a true environmental catastrophe in Taiz.

One of God’s blessings is that we discovered unused wells in different areas. People started using them with the help of Kuwaiti, Emirati and Qatari organizations, among others, that provided generators or subsidized fuel.

Regarding Abu al-Abbas, I believe that he listens to me as governor and complies but only insofar as it doesn’t cause friction between him and the UAE supporting him. The UAE provides adequate support to all brigades and the military leadership axis. Abu al-Abbas is an exception though as he is supported personally by the UAE. If you note the message that the Emirati commander sent to the military leadership axis, he saluted the leaders of the 22nd, 35th, 17th, 170th and Abu al-Abbas brigades. That was in the official memo that Al Jazeera and other websites circulated.

No one denies that Abu al-Abbas was among one the first to join the resistance and fight the Houthis in Taiz. He has personnel as well as arms and nominally falls under the [command of] the 35th brigade. Nonetheless, he receives special attention from our Emirati brothers. As I said, the support the coalition provides arrives through the military leadership axis to all brigades, except for Abu al Abbas to whom it arrives directly.

Initially, I could not leave the city of Taiz for a year before my appointment [as governor]. I could only leave for Aden on foot through the Mishraa and Hadnan district toward Mashrakh. Taiz city was totally besieged. There was no way of getting materials to the city, but after that we carved a path. If you could see how supplies used to reach Taiz, I think the prices of donkeys in Sabr reached YR 60,000 to YR 80,000, because the only way goods were able to reach the city was on the backs of donkeys.

This continued for six months, and while I was on my way from Sabr, I saw children in very sad circumstances. Imagine a child climbing a very steep 3 km to 4 Km incline for three to five hours with a box of food, juice, or flour on their back only to make YR 1,500 rials, or around $3 to $4.

We have seven public hospitals in Taiz city, and only three operate at minimum capacity. Schools were also devastated. At the beginning of this year, students began the school year in either destroyed buildings or ones with armed groups. Teachers are not available. The education sector has been completely halted because teachers did not receive their salaries for 10 months. Children are not going to school and the sick cannot find medicine or hospitals. It is disastrous in Taiz, and this hurts to say as a man of the governorate. But no one helps… the only aid is through the King Salman Center. But for a governorate of 4 million, no matter the amount of aid from the King Salman Center, it cannot cover all needs in the city…

To be honest, it has reached the point of feeling like you’re begging from the government. When the president, the prime minister and the governor of the central bank agree that you will receive YR 3.75 billion for people’s salaries, and then in the same day you disagree with them over the sum and complain. You deal with the president, the vice president and the prime minister… and eventually, they tell you that the governor of the central bank says there isn’t 3 billion. You feel like a beggar in their offices. I told [them] I’m not there to beg, I’m demanding people’s rights. This city is fighting on the behalf of all Yemenis, and for legitimacy. If this city were to halt the war, what legitimacy would you have left?

Al-Muslimi: Is Mokha Port under the control of the local administration?

Al-Mamari: The Mokha Port was liberated and UAE forces are there. Now you only have long range missiles striking from long distances. The UAE have positioned patriot batteries that prevent missiles falling on Mokha city.

The port will make a huge difference if activated. It could bring large revenues for the city that might alleviate our grievances – when we talk about hospitals, we are not talking about many millions of dollars; we said that with a few million dollars we can resolve the health or education issues in Taiz.

If Mokha Port is made functional it might resolve the economic problems in the city too. A month and a half ago I met with Saudi officials working on the Yemen file, specifically Taiz. I asked them for Mokha port to be activated, as businessmen in Taiz are prepared to send their goods and fuel through the port.

[But] the UAE still hasn’t transferred the port. The UAE has, however, done a great thing in Mokha. We had a 160 megawatt (MW) power plant in Mokha that was nearly totally dysfunctional due to the war, and they [the UAE] restored it with a capacity of 120 MW. It previously had four turbines, 40 MW each, and they activated three of them. The power from one turbine is used for lighting and other needs in Mokha, and the rest feeds into Taiz, though the electrical network was damaged during the war.

Eight months ago, though, when I went to inaugurate the power plant in Mokha and asked to visit the port, they declined. They said the commander wasn’t there.

Al-Muslimi: What are the coalition’s considerations, as far as you believe, or the UAE specifically, regarding the suspension of salaries. Do they think there is a possibility that salaries might go to Saleh-aligned fighters in other brigades? Do they believe this adds pressure to the battlefronts? For example, the Mokha Port, do they believe that this relates to smuggling, despite the fact that their forces are at the port?

Al-Mamari: The coalition and the UAE have nothing to do with the salary issues. The problem is with the governor of the central bank. From my experience with him, from when he was the Minister of Finance and until he became governor of the central bank, he puts obstacles in the way of anything related to Taiz.

Mokha is still a war zone and there is still fighting in the vicinity of the city. Let’s not exaggerate by saying if we receive the port it will be immediately functional. Not true. The area is one of conflict, and the UAE is present there. At the end of the day, the war is over a few areas… the UAE, Saudi Arabia, Iran and the US are all involved in a struggle over the strategic area [that includes] Mokha, Dhabab, Bab al Mandab. I do not think the UAE is providing all this support to eventually just say, “go ahead and take it.” It is more complicated than we think. It is possible for them to achieve their interests, and for us as well; however, the fact that I couldn’t enter the port was problematic.

For the record, Mokha port was subject to penalties for 35 years. It is an area of smuggling – of “parallel trading.” Ali Abdullah Saleh made billions of dollars from this area as he wanted this area to remain in the dark as a passage for smuggled goods, narcotics and all other prohibited materials. Yemen was a transit for these materials to Saudi Arabia and Gulf states. Mokha and its environs are underdeveloped because more development means a larger population and more monitoring. This is why for 35 years it hasn’t been functional.

Now we expect the Emiratis in Mokha and areas adjacent to Hudaydah. This has been the case for the past few months, as we anticipate a battle in Hudaidah through Mokha. We also hear that the UAE is interested in Mokha as it is located at the center of a triangle between Taiz, Aden and Hudaydah; and is close to the Bab al Mandab Strait. I think the UAE will stay there, but we say to them. “stay there but let us work.” We never asked for them to leave, but to only let the governorate benefit from the activation of the port and the generation of revenue for hospitals and education.

Al-Muslimi: Have you requested from the coalition any justification for striking civilians and civilian facilities in Taiz?.

Are needs in Taiz primarily in the humanitarian field, such as education and health, or in the security sector?

Al-Mamari: There is no doubt that humanitarian needs are grave, but over the past year the loudest voices in Taiz are asking us to save them from violent groups and other security issues. The humanitarian aspect is a severe need, but there were at least active hospitals and [humanitarian] organizations, but the security sector was nonexistent in Taiz. We have no active security institutions in Taiz. This is why people voiced their concerns over their security needs. The government is not paying attention to the security aspect, no organizations are helping either. There are many organizations helping with humanitarian needs, but regarding security concerns no one helps – not the coalition nor the government.

Regarding the issue of airstrikes in which civilians are killed, there is no doubt that in a war of this scale mistakes are made. We affirmed and condemned the mistakes made. The coalition is, however, cautious on the matter of airstrikes. For example, in Taiz there is an operations control room that provides coordinates to the coalition. Coalition aircraft do not target anything unless they’ve been given assurances and precise coordinates from the control room.

We’ve seen the facilities and buildings that are being bombed. The problem is not the coalition, it is those residing in these buildings – the coup forces. They remained in Sofitel for two years, and the coalition was reluctant to destroy this building. It would conduct airstrikes near it and people in Taiz would say on a daily basis: “Why don’t they strike the Sofitel building? Tank shells and artillery fire are killing our sons every day and they are reluctant to destroy the Sofitel building.”

The coalition used to say that, “if we strike Sofitel, they would say we are targeting facilities.” Eventually they struck it after people and the local authorities insisted. Houthi-Saleh forces take over institutions in Taiz and station their artillery and tanks in there and fire. In Taiz University, they took over the buildings such as the Faculty of Medicine and kept shelling the city. Eventually we said that people’s lives are far more important to us than buildings that can be reclaimed. [The targeting of facilities] does not happen until it these attacks are repeated for months. For example, Houthi-Saleh tanks kept shelling from the Sofitel building for two years.

There are even people in some control rooms across the republic that have personal issues. I heard that in Aden and Sana’a some people that had with a personal issue with a merchant or someone gave the coordinates of [that person’s] factory and it was hit. Even personal issues matter. At the end of the day, the coalition uses the intelligence it has, and the people in the army are not angels – there are many devils.

About the Sana’a Center:

The Sana’a Center for Strategic Studies is an independent think-tank that seeks to foster change through knowledge production with a focus on Yemen and the surrounding region. The Center’s publications and programs, offered in both Arabic and English, cover political, social, economic and security related developments, aiming to impact policy locally, regionally, and internationally.

Yemen Economic Bulletin: Renewed rapid currency depreciation and diverging monetary policy between Sana’a and Aden

Yemen Economic Bulletin: Renewed rapid currency depreciation and diverging monetary policy between Sana’a and Aden

Summary:

Through October Yemen’s domestic currency, the rial (YR), lost almost 10 percent of its value relative to the United States dollar (USD) in market trading, dropping from YR 375 to the USD to YR 412. This drop was roughly equivalent to the loss in value over the previous six months and the second time in 2017 that the rial has experienced rapid devaluation.

As the Sana’a Center has previously documented, in the first half of February Yemen’s domestic currency lost some 20 percent of its market value. In both these instances, the authorities in Sana’a, (where the Houthi movement and the allied forces of former President Ali Abdullah Saleh hold sway,) and those in the southern city of Aden, (the de facto capital of Yemen’s internationally recognized government,) quickly implemented stop-gap measures to reduce the instability and slow the rial’s decline.

The latest currency instability highlights the continuing deterioration of the rial’s supports in the face of more than two-and-a-half years of civil war and regional military intervention, and has sparked widespread fears that the rial is on the cusp of further steep depreciation, and possibly hyperinflation. In a country that is overwhelmingly dependant on imports to meet the population’s nutritional needs – and which the United Nations has declared the world’s worst humanitarian crisis – the extreme loss of local purchasing power that hyperinflation entails would leave most Yemenis unable to buy food and other basic necessities.

Furthermore, Sana’a Center sources have confirmed that the authorities in Sana’a, in an effort to halt the rial’s depreciation, are preparing to impose a fixed currency exchange rate in areas of the country’s north which they control. While the Central Bank of Yemen (CBY) had previously maintained a fixed official exchange rate, CBY headquarters – relocated to Aden in September 2016 – announced in August this year that it would allow the domestic currency to float according to the market rate.

Should the authorities in Sana’a follow through on their plan and try to enforce a separate monetary policy, it would formalize the rupture of the CBY as an institution across the conflict’s frontlines. This formalization of North Yemen and South Yemen as distinct economic entities could represent a significant step towards the division of the country into separate statelets.

The Sana’a Center also foresees significant difficulties in operating one currency with differing monetary policy between the north and south. Separate monetary policies would likely precipitate a significant shift in remittances from Sana’a to Aden, incentivize massive currency smuggling between the areas, and shift ever greater financial flows away from the official economy.

Background

Over the course of more than two-and-a-half years of civil war and regional military intervention, Yemen has seen tens of thousands civilians killed and wounded, millions of internally displaced peoples, billions of dollars of damage to property and infrastructure, and the widespread collapse of economic activity, government services, security and humanitarian conditions. In specific regard to economic activity, the World Bank estimates that between 2014 and 2016 alone Yemen’s gross domestic product shrank 37 percent.1

The conflict has thus weighed heavily on the value of the Yemeni rial. Concurrently, the cessation of oil exports – previously the largest source of foreign currency and government revenue – has led to the depletion of foreign currency reserves and undermined the central bank’s ability to intervene to support the rial.

Yemen is overwhelmingly a cash economy, and the CBY has also been experiencing a severe shortage in domestic currency banknotes; in the third quarter of 2016 most public sector workers – roughly a quarter of Yemen’s employed – lost their income due to the CBY not having enough physical banknotes with which to pay them.2

In September 2016 President Abdu Rabbu Mansour Hadi, head of the internationally recognized government of Yemen, ordered the relocation of CBY headquarters from Sana’a to Aden. The central bank’s subsequent dysfunction further complicated the country’s fiscal and monetary management.3 Consequently, between early 2015 and November 2016 the rial lost more than half of its value relative to the USD.

Major currency instability in early 2017

Following the arrival of new rial banknotes from printers abroad in January 2017, the CBY in Aden began distributing public sector salaries. The market, however, quickly began to anticipate the injection of the full monthly public sector salary bill into the economy. Before the civil war began, this amount was roughly 65 billion rials nationwide, excluding the Ministry of Defence payroll. The market, aware that the central bank lacked the foreign currency reserves to support the rial, began short selling the domestic currency. This led to the rial’s market value diving as much as 20 percent in the first half of February.

In response, officials at the CBY in Sana’a convened meetings with private banks and financial institutions to coordinate currency stabilization efforts. Houthi-Saleh authorities forced currency traders to close and secured arrangements with major food and fuel importers to temporarily refrain from buying foreign currency from the market. In Aden, the CBY froze the distribution of public sector salaries, with the rial’s market value rebounding to YR 340 to the USD by mid-February.

Shortly thereafter President Hadi announced that the Saudi government had committed $10 billion in aid to Yemen – $2 billion of which would be direct currency support. The rial then experienced a gradual depreciation in market trading to YR 355 to the USD by end-March.   

Precursors of renewed currency instability

The Saudi funding that President Hadi promised was not forthcoming, and to date has not arrived. Meanwhile, the intensifying war through 2017 has ensured that the rial has remained under downward pressure since the first round of currency instability in February.4

However, increased foreign currency remittances to Yemen for the month of Ramadan, which ran between May and June, and for the Eid al Adha holiday at the beginning of September, helped slow the rial’s decline. As is normal for the period following Eid al Adha, remittances then began to decline through September. The end of this support for the rial was shortly thereafter followed by a number of new downward pressures.

Importers, seeking to replenish stocks of goods following the end of the holidays, began selling their rials in the market to purchase foreign currency. In Sana’a, this trend was accompanied by a particular complication: to compensate for their inability to pay public sector wages, the authorities had, in the second quarter of this year, paid civil servants in vouchers that they could use at selected business to buy goods.5 To cover the cost of these vouchers, the CBY had digitally created some 45 billion rials that it lent to the authorities to pay the businesses. After Eid al Adha, these businesses went to the market with these rials to purchase foreign currency to restock their inventory. Given the liquidity crisis there is currently a premium for physical cash relative to bank transfers in financial transactions, thus increasing the cost for businesses buying foreign currency using these digitally manufactured rials.

On September 24, Prime Minister Ahmed Obeid bin Daghr of the internationally recognized government announced that it would begin regularly paying public sector salaries across all governorates under their control, as well as the entire Taiz governorate. The Sana’a Center estimates that the monthly public sector payroll across southern governorates, plus Taiz, is some YR 20 billion, in addition to more than YR 20 billion in salaries for the army and police. Following a shipment of newly printed rials from abroad in September, the government began distributing public sector salaries on September 29. Notably, there had been no increase in government revenue or foreign currency reserves that prefaced the increased government expenditure on salaries.

The cumulative macroeconomic effect of the above-mentioned events in September was a decrease in rial demand concurrent with an increased rial supply. Thus, at the beginning of October the rial then began to rapidly depreciate in market value.   

The response in Sana’a

Through October Houthi-Saleh security services began arresting currency exchangers en masse in an effort to halt currency trading and speculation. (As of publication, most of the exchangers had been released from custody.)

On October 18, the deputy prime minister for economic affairs in Sana’a, Hussein Maqbouli, convened a meeting involving representatives from the National Security Council, the Saleh-allied General People’s Congress party, leading public and private banks, currency exchangers and major importers to discuss ways to halt the rapidly falling currency. (Notably absent from the meeting was a representative of the CBY in Sanaa.)

Following the meeting Maqbouli’s office released a six-point action plan. The first two points involved the parties committing to scheduling and facilitating the sale of foreign currency to the largest wheat and oil importers through CAC Bank, Yemen’s largest public bank. Specifically, fuel importers committed to immediately providing YR 6 billion to CAC Bank, which the bank would use to shop for foreign currency wholesale, rather than having the importers go individually to the market.

Points three and four of the action plan involved the implementation of currency controls. Specifically, the plan prohibits the exit of foreign currency from areas controlled by Houthi-Saleh forces – except with permission from the CBY in Sana’a – and bans the importation of large sums of rials from South Yemen, specifying that no one transfer should exceed YR 5 million.   

In the action plan’s fifth point, banks, fuel importers, telecommunications companies, tobacco merchants and basic commodities traders committed to not purchasing foreign currency on the market until at least the end of October. The sixth point stipulated that the security services would pursue and punish those who violated any of the previous points.

The prospect of one currency with two monetary policies

According to Sana’a Center sources, the authorities in Sana’a are also planning to publically announce a fixed currency exchange rate, at below market value, in areas under their control, and force money exchangers and banks to adhere to such. While ostensibly a move to halt currency depreciation, if implemented the Sana’a Center foresees it having myriad unintended consequences.

Among the immediate impacts will likely be a large-scale shift in Yemen’s remittance deliveries from Sana’a to Marib and Aden, with senders and receivers alike seeking a better exchange rate for arriving foreign currency. Given that Yemen’s largest population centers are in the north, and thus the north will remain the final destination for most remittances, large-scale currency smuggling is likely to ensue in order to subvert the newly-imposed currency controls.

Throughout the conflict trust in the banking system has waned and its economic clout has in large part shifted to the currency exchangers, many of whom are semi-official or entirely black market entities. The empowerment of new currency smuggling networks would thus entail the continued decline of the official economy.

Marib, held by nominally pro-government groups yet less than 200 kilometers from Sana’a, would likely play a prominent role is such smuggling, given the pre-existing tribal dynamics of the area that are already facilitating rampant smuggling between Yemen’s north and south. As a result, Marib’s relative economic ascendency through the conflict – thanks to businesses and capital relocating there from Sana’a – would likely continue, and thus further empower the aspirations of Marib’s political elite for autonomy from both Sana’a and Aden.  

Until its relocation last year, Yemen’s central bank had essentially been the last state institution truly acting as a national entity. The implementation of distinct monetary policy between the country’s north and south would formalize the schism of Yemen’s central bank. This creation of distinct economic areas would be in addition to the military and political division of the country, and thus should be understood as a significant step toward the creation of independent statelets.

A shared currency with distinct monetary policies, especially in the context of Yemen today, is also almost certain to wildly distort market mechanisms.  

Government reaction to currency depreciation

October 21, Prime Minister Bin Daher called a meeting with the CBY in Aden and the directors of private banks in the city to discuss ways to stabilise the rial. Following the meeting the internationally recognized government implemented a number of new policies; among the most immediate was to prohibit large transfers of both foreign and domestic currency to northern Yemen, and to dispatch security agencies to force the closure of unlicensed currency exchanges in the governorate.

The prime minister also announced that the internationally recognized government would continue to purchase fuel from abroad for electricity generator consumption, and thus partially cover the market’s needs.

As of this publication, the market was trading the rial at between YR 406 and YR 412 – the buy and sell prices, respectively – to the USD. However, in anticipation of further weakness in Yemen’s domestic currency, and thus increased costs in restocking inventory, many Yemeni business owners were pricing goods based on an exchange rate of YR 500 to the USD.

Looking ahead: Recommendations

It is in the best interests of all Yemenis that the authorities in both Sana’a and Aden refrain from flooding the market with rials. Both parties must recognize that increased spending in the absence of increased revenue risks triggering rapidly accelerating inflation, which would have catastrophic implications for millions of Yemenis.

Both parties should also refrain from enacting policies that are deeply problematic for the banking sector – such as a fixed currency rate and currency controls between northern and southern Yemen.

The Yemeni government and members of the Saudi-led coalition intervening in the war must expedite efforts to restart Yemeni government revenue streams – such as natural gas exports through Bilhaf terminal in Shabwa governorate, currently under the control of United Arab Emirates-affiliated forces. In the interim period, the Yemeni government should also repatriate the foreign currency holdings it has abroad, which amount to hundreds of millions of dollars. Saudi-led coalition member states should also provide the CBY with foreign currency funds to prop up the rial, support the import of basic commodities and pay public sector salaries.

When conditions permit, it is incumbent upon the CBY to begin paying commercial banks the interest they are due on deposits held in treasury bonds. This would help re-empower the banks in the market again, allowing them facilitate normal business, play a role in stabilizing the currency, and help restore public trust in the banking system.   

As previously detailed by the Sana’a Center, the CBY offices in Sana’a and Aden should coordinate to implement a dedicated exchange rate for humanitarian funds entering Yemen. This could be calculated using a moving average of the market rate of the previous three months. Given the size of foreign aid funds entering Yemen from international nongovernmental organizations and UN agencies, the use of such an exchange rate would help stabilize the domestic currency and the price of imports on the local market, as well as provide humanitarian organizations with a fair price for their foreign currency and curtail excessive arbitrage.

As the global currency authority, the International Monetary Fund should also bring its influence to bear on all parties in Yemen and the Saudi-led coalition regarding the above points.

About the Sana’a Center

The Sana’a Center for Strategic Studies is an independent think-tank that seeks to foster change through knowledge production with a focus on Yemen and the surrounding region. The Center’s publications and programs, offered in both Arabic and English, cover political, social, economic and security related developments, aiming to impact policy locally, regionally, and internationally.


Notes:

1 The World Bank, ‘Data; Yemen Rep.’; accessed October 30, 2017, available at https://data.worldbank.org/country/yemen-rep

2 Mansour Rageh, Amal Nasser and Farea Al-Muslimi, ‘Yemen without a functioning central bank: The loss of basic economic stabilization and accelerating famine’, Sana’a Center for Strategic Studies, November 2, 2016. Accessed October 30, 2017, available at https://sanaacenter.org/publications/main-publications/55

Ibid.

4 The Yemen Protection Cluster – a coordination body for humanitarian organizations led by the UN High Commissioner for Refugees – reported in August that through the first half of 2017 the frequency of coalition airstrikes per month in Yemen had tripled, and the frequency of frontline battles had increased roughly 56 percent relative to 2016. For more see: Protection Cluster Yemen Situation Update August 2017. 

5 For details regarding the initiation of the voucher program, please see the Sana’a Center’s Yemen at the UN – April 2017 Review; for details on the demise of the voucher program, please see the Sana’a Center’s Yemen at the UN – July 2017 Review.

The evolution of militant Salafism in Taiz

The evolution of militant Salafism in Taiz

The rise of Salafi militias in the Yemeni city of Taiz has contributed to the now frequent outbursts of violence there between ostensibly pro-government factions. It has also helped foster an environment conducive to extremist groups such as al-Qaeda in the Arabian Peninsula (AQAP). If not addressed directly, these developments are likely to continue destabilizing the city and wider governorate well after any potential resolution to the larger conflict in Yemen.

Yemen Economic Bulletin: How currency arbitrage has reduced the funds available to address the humanitarian crisis

Yemen Economic Bulletin: How currency arbitrage has reduced the funds available to address the humanitarian crisis

The disparity between the official exchange rate and the market exchange rate of the Yemeni rial that developed during the current conflict led to large-scale profiteering through currency arbitrage. In particular, Yemeni banks exchanging foreign funds for international humanitarian organizations reaped significant profits at the expense of the intended aid recipients in Yemen.