Safer energy facility - Marib (Reuters)
What are the Economic Ramifications of the Houthis Escalation?
Reports
Mon, 07-11-2022 07:17 PM, Aden
Abdullah Al-Shadli (South24)
During October of this year, the Houthis launched dozen of drone attacks, some of which targeted oil ports in South Yemen,
On October 21st, the group carried out its most impactful attack since the expiration of the truce on October 2nd. It targeted the Dabba oil port in Hadramout using two explosive drones concurrently with the arrival of a Greek oil tank.
Following the attack, the Yemeni government revealed that Radum oil port, in Shabwa governorate, was targeted by two Houthi drone attacks on 18/19 of the same month.
The Houthi attacks have raised questions about the fate of oil production operations in the areas controlled by the PLC amid the group’s threats of launching larger operations if the production of crude oil doesn’t stop.
In a country which suffers from unprecedented economic deterioration, concerns have emerged about the ramifications of halting producing and exporting oil along with its impact on the prices of food and basic commodities in addition to the local currency value.
Indeed, the initial consequences of the Houthi military escalation have already emerged. On October 31th, the Canadian oil company "Calvalley Petroleum" declared the status of “force majeure” and suspended its activities in Block 9 in the oil field of Al-Khashaa in Hadramout. [1]
In a statement seen by “South24 Center”, the company said: “We found ourselves forced to stop oil production due to the current political situation and the unavailability of oil storage capacity”.
Oil production
Yemen’s crude oil exports revenues remarkably climbed in 2021. This was the first rise in years as they reached the level of 1.418 billion dollars while they didn’t exceed 710.5 million dollars in the previous year with an increase of 707 million dollars, or 99.4%. [2]
This was due to the increase of the Yemeni government’s share of oil export revenues from 60.3% in 2020 to 75.1% in 2021 in addition to the increase of oil prices in the global markets in the second half of last year.
According to a World Bank report, the oil revenues contributed in achieving a 2% economic growth in 2021. [3]
In this regard, Moustafa Nasr, Chairman of Studies and Economic Media Center, told “South24 Center” that “the oil revenues reached their peak last year and were expected to touch a higher level in 2022 if the export volumes remained at their levels in the first half of the current year”.
However, economic expert Majed Al-Dairi doubts all these numbers.
He told “South24 Center”: “There are no real statistics about oil production size in Yemen since the oil explorations. There are fields and wells affiliated with influential figures. Moreover, a large part of the production does not enter the state budget”.
He added: “According to estimates, the oil production today is limited to the level of 2 million barrels per month from Al-Masila fields in Hadramout alone. However, the size of oil and gas production and the fate of its revenues in Shabwa and Marib have been unknown till now”.
Al-Dairi accused the Islah party of rejecting transferring oil and gas revenues to Aden’s Central Bank in the areas under its control, especially Marib.
The Houthis escalation
The Houthis link their attacks and threats against the companies and the oil facilities in South Yemen to the maximum demands adopted by the group which has hindered the extension of the UN truce in Yemen.
The Houthis demand paying the salaries of both civilians and military employees in their areas from the revenues of crude oil in the PLC’s areas. They also want to obtain a share of these revenues as a condition to renew the truce.
Despite the widespread regional and international condemnation of the Houthi attacks, it seems that the group is determined to carry out its threats which come concurrently with the global energy crisis and the tensions in regional countries such as the massive protests in Iran which backs the Houthis.
As for Moustafa, the Houthi attacks on oil ports constitute “a major and dangerous shift in the path of the events and war in Yemen. He added: “The Houthis conveyed a message that they are able to reach the exportation areas”.
Nasr believes that this “puts the PLC in front of a hard challenge because this threat targets the most important resources of the government. All of this makes it extremely important to find a mechanism to confront such escalation".
However, the Sanaa-based economist Rashid Al-Haddad believes that the Houthi attack was a result of “the lack of positive impact of the oil sales revenues”.
“South24 Center” said: “Therefore, Sanaa called on to allocate oil revenues for paying salaries to the state employees and the retirees’ pensions across the country based upon the 2014 payrolls”.
Ramifications
According to Moustafa, the Houthi escalation will be related to the ramifications at political, economic and humanitarian levels. He added: “The escalation will lead the legitimate government to lose the most important resource. In case of halting oil production, the government will fail to pay the salaries”.
“The most important point is related to the stability of currency and Yemen's access to foreign exchange. In my opinion, this is the most dangerous and the most important point, not to mention the impact on tens or hundreds of thousands of beneficiaries, whether regarding the salaries or the currency circulation," he continued.
Moustafa indicated that the oil revenues have been used to achieve relative stability for the currency. He added: ”These revenues have reduced part of the deficit in Yemen's foreign reserves. This has achieved a form of relative stability of the Yemeni riyal”.
On the other hand, Al-Dairi downplayed the damages resulting from the suspension of oil production.
Al-Dairi said: ”The contribution of oil revenues in strengthening the Yemeni economy and preserving the value of the local currency is very limited. The reason is that the revenues are transferred to a governmental account in the Saudi National Bank and are not transferred to the Central Bank in Aden to feed the market with foreign currency”.
Al-Hadad believes that “there is no direct or obvious impact of oil and gas revenues on the Yemeni economy in both South and North”
“Oil revenues for example represent the top source of the national income by foreign currency. They can reduce the decline of the local currency value against the dollar if these sales become part of the national economy".
However, the expected economic ramifications due to the Houthi military escalation are not limited to the suspension of oil production but they include the damages related to the flow of commodities to the Yemeni ports.
A statement issued by the European Union after the Dabba port attack warned that the Houthi attacks "jeopardize the freedom of navigation through the region’s waterways and block access to Yemeni ports. They deprive Yemenis the ability to afford fundamental necessities and could impact the flow of essential goods into Yemen". [4]
The PLC's moves
On October 22nd, the Yemeni National Defense Council issued its first decision this year to designate the Houthis as a "terrorist organization" after they attacked the Dabba and Radum oil ports.
The PLC instructed the Yemeni government to take the necessary measures to complete the implementation of the decision at military, security, economic and diplomatic levels. Moreover, the PLC threatened to withdraw from the Stockholm Agreement regarding Hodeidah and the truce negotiations.
At the economy level, the government’s moves in case of the continuous Houthi escalation and the negotiation impasse include several measures such as halting monetary exchange and remittances between the liberated areas and those controlled by the Houthis in addition to halting cash flow to the port of Hodeidah.
Talking about this, it is important to indicate that the maritime ports which are controlled by the PLC receive materials and food products, most of which go to the highly-populated areas via overland crossings between North and South.
Moustafa believes that "the decision of the National Defense Council is related to economic costs as the group controls an important part of the Yemeni economy, which is estimated to be nearly two thirds if not 60-70%".
He added: "The government will have to provide alternatives to such a situation, and to be prepared for some of the changes that will accompany this decision, whether in terms of financial dealings with the countries of the world or on the humanitarian level".
Commenting on this decision, Al-Dairi said: "It will remain futile without being recognized by the UN Security Council and the international community in addition to giving the government military support to confront the Houthis".
Al-Dairi believes that "it is necessary to apply all the economic sanctions related to halting financial transactions with the Houthis and blocking any engagement between them and the government institutions in addition to obstructing their various funding sources which come to them via ports as well as sea and land crossings".
He elaborated: "All of these moves should be made to deplete their finances resources which exceed the Yemen legitimate government".
Nonetheless, Al-Haddad believes that "the arrangements by the Yemeni government to tighten the grip against the Houthis depend on the Saudi and UAE approval".
He added: "The PLC's designation of the Houthis as a terrorist group won't have any impact without the Coalition's green light".
Al-Haddad indicated that the international concerns towards the deterioration of the humanitarian situation and the collapse of the peace endeavours in Yemen will prevent the implementation of any escalation steps by the government in Aden".
However, Al-Haddad believes that any moves "may have catastrophic ramifications on most people in the Northern governorates if more sanctions are carried out under the pretext of the designation. I believe that this may lead to the return of the military escalation with a higher level".
In spite of the expected consequences of the Houthi escalation, it is more likely that they won't be worse than surrendering to the Houthi conditions and demands as well as sharing the revenues of the oil wealth in South Yemen with them.
Experts believe that a move of this kind in favor of the Houthis can explode the situation in South Yemen where people suffer from very hard conditions regarding services and livelihood along with the feelings of injustice and resentment towards the lack of the expected effect of resources on the residents there".
Although the currency exchange rates and the prices of materials in the Houthi areas are relatively stable compared with the PLC' ones, the living conditions there are not better. Moreover, the Houthis are accused of imposing unlawful taxes against people.
South YemenHadramoutDabba portRadum portHouthis attacksDrones