After weeks of warnings, Houthi authorities followed through on their threat to target Yemen’s oil and gas industry, striking near oil terminals in Shabwa and Hadramawt. There was no damage from the drone strikes, but they did result in a temporary halt in oil exports, diminishing revenues for the already cash-strapped government. If the attacks achieve their intended effect of preventing oil sales, the government will find itself unable to meet crucial fiscal obligations, including the payment of the salaries that support both populations and financing the food imports that find their way to both territories.
The country’s economic deterioration has already been exacerbated by the war in Ukraine and its effects on food and public service provision, and the timing of the strikes is particularly bad: the global spike in oil prices had promised the government some respite from its financial woes. Although these hydrocarbon revenues go primarily toward paying the salaries of Yemenis in areas under government control, some salary payments are distributed to civil servants in Houthi territory or make their way to support family members in the north. Energy sector salaries could also be affected: the two state oil operators, Safer and PetroMasila, run the most important producing blocks in Hadramawt, Shabwa, and Marib, and have continued regular salary payments to thousands of employees and their family dependents in Houthi-controlled areas. The Houthis have cause to fear the end of this arrangement: they govern a restive population that has shown an increasing willingness to speak out against the regime as economic conditions deteriorate. Houthi leader Abdelmalek al-Houthi has already been forced to warn against protest and disobedience.
The financial entanglement of Houthi- and government-controlled territories further links their economic fortunes. While the internationally recognized Central Bank of Yemen (CBY) relocated to Aden in 2016, maintaining international connections and the authority to issue new currency, Sana’a has kept its purview over the country’s largest consumer markets and financial centers. Since January 2020, the Sana’a authorities have refused to recognize money issued from Aden over concerns about inflation and seigniorage. Old rials have remained relatively stable, while new rials issued by the CBY-Aden have plummeted in value, creating a dual currency regime that complicates trade and opens the doors to arbitrage and profiteering. Recently, the government has supported new rials through weekly foreign currency auctions for Yemeni banks, who are mandated to use the funds to finance private sector imports.
If the government can no longer afford to hold the auctions, the knock-on effects will be felt across the country, as the basic imports they finance are sold nationwide. Without import financing, food prices would increase. The impact in government-held areas would be especially profound, as the value of new rials would dive again. The gradual recovery of oil and gas exports during the conflict has also allowed the government to resume some servicing of external debt obligations and begin restoring confidence among foreign creditors. The loss of natural resource revenues could erase this progress and increase the country’s exposure to external shocks and capital flight.
The seriousness of the port attacks was not lost on the government, which responded by designating the Houthis a terrorist organization. This may only make matters worse. There is still hope the designation will amount to no more than rhetoric, as the government has no mechanism with which to enforce it. The move has been met with silence and disinterest from regional and international actors. Saudi Arabia privately urged caution to prevent derailing ongoing peace talks, and the United States – which repealed its own terrorism designation in January 2021 – has made no public comment. But the Presidential Leadership Council appears to be moving ahead.
Attempting to enforce the edict in the current circumstances would play into the Houthis’ hands. It would be tantamount to completing the division of Yemen, undermining the government’s claim to represent the entire country and further establishing the Houthi authorities as an independent state actor. This is a project the Houthis themselves have sought to advance. The Houthi war on the oil and gas sector amounts to a war on Yemeni citizens, which will only bring more pain and suffering to people across the country. The situation will become critical if no agreement is reached within the next two months on the resumption of oil exports. The government also needs to shelve its rash decision to designate the Houthis as terrorists, which will only hinder any future negotiations to end the conflict. The matrix of social and economic bonds holding Yemeni society together has been worn thin. These crucial ties must not be targeted for political gain.