MENA Snapshot Update - Is Al Qaedistan Forming In Yemen?

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With all the recent excitement in Japan, some may have forgotten that the entire MENA region is currently experiencing a historic, and in many cases very violent, revolution. Conveniently, Emad Mostaquew of Religãre Capital Market has shared an extended overview of the current snapshot in the Middle East and North Africa region. Of particular note is the section on Yemen. As was disclosed yesterday it now appears that the US is directly funding "flickers" of Al Qaeda in Libya, and possibly will be arming such factions in the future, it now appears that Yemen's internal response to instability will also gravitate around the Al Qaeda strawman: "After several prominent defections following the death of 52 protestors at the hands of government snipers, President Saleh began negotiations to step down. This appears to have been a ruse to gauge opposition strength and once he was offered a host of concessions to leave, he withdrew his offer, using the time to solidify ties with key tribes. Saleh’s key tactic has been to emphasize the chaos that would follow his departure, with Al Qaeda in the Arabian Peninsula (AQAP) central to US and Saudi concerns. To  play on these fears, security forces have been pulled from key governorates, which are now no longer under government control and have been releasing rebel leaders...The end game is difficult to see as while his position appears untenable, Saleh appears determined to stick things out, looking for support from Saudi Arabia given the possibility of Al Qaedistran and sudden Shia control of northern Yemen, even though this group belongs to a different sect to those in the Eastern province of Saudi/Iran (US and Saudi officials fail to make this distinction given official comments. Yemen, as previously noted, has over 3 guns per person and while care is taken not to use these, once fighting starts it could get very messy indeed." Then again, perhaps judging by recent developments in Libya, the US may not be all that concerned about Al Qaeda after all.  Much more in the full report below.

From Emad Mostaque of Religãre Capital Markets

Regional stock markets have bounced nicely since the start of the month and look somewhat overbought at the moment, although there is plenty of medium/long-term upside for the patient investor. Key general takeaways:

1. Signs of a counter-revolution from authoritarian regimes, playing the sectarian card and dispensing largesse to quell dissension
2. Israel-Palestine violence flaring up once more, may escalate rapidly
3. Easy wins are over for democratic reform, particularly with monarchies

Things have been quiet in Algeria with protests regularly broken up by the security forces. There have been some clashes in poorer areas with lack of housing a key demand.

Bahrain : The government took the surprising decision of declaring a state of emergency and calling in the Peninsula Shield Forces (essentially the Saudis) to crush the protestors, sweeping them out of the Pearl roundabout before knocking it down. The impetus for this was the refusal of the PM to step down and the occupation of the financial district by some protestors, suspending a major portion of the economy. The situation was presented to the US and Saudi in a sectarian light with the monarchy replaced by a Shia parliament heavily influenced by Iran, who would stir up the Shia in the Eastern Province of Saudi Arabia and push the US out of its naval base. The Shia/Sunni distinction is something that will come to the fore as Iranian influence increases and a topic we will revisit in a future note. Flights to Iran, Iraq, Syria and Lebanon have been banned and Iranian diplomats expelled.

While the leading al Wefaq party has now dropped its demands that the PM resign as a precursor to negotiations and have decided not to organize any more large protests (particularly as injured protestors were unable to receive treatment at several hospitals), their support base has been diminishing and we are likely to see an increase in reactionary, extremist elements, particularly as bulldozers make their appearance at impoverished Shia villages. A number of opposition leaders (those who haven’t fled/gone into hiding) have also been arrested. It is difficult to see how Bahrain can maintain its financial sector as a result, particularly with Dubai only a short hop away and DIFC rents reasonable at last.

Egypt : As per our recent note (“An Egyptian Reopening”, 22nd March), major change is unlikely as constitutional amendments were pushed through, with another 5 elections lined up this year. The Muslim Brotherhood and Salafis will not look for a majority or put forward a Presidential candidate, leaving the field open to members of the old regime as new parties will not have time to gain traction. Amr Moussa is in the lead for the top spot at the moment and doesn’t represent much of a break from the past.

We have seen some sectarian violence and protests against the army’s new ban on protests/strikes (state of emergency not yet lifted), but this is unlikely to spread as election fever grips the nation (candidates even campaigned hard for previous, fixed elections). Also, while he is under house (palace) arrest, Hosni Mubarak will almost certainly not be put on trial. In terms of foreign relations, we have seen positive comments toward Hezbollah and Iran and nothing much on Egyptian-Israeli relations.

Economic indicators will deteriorate this year, with observers keeping a close eye on foreign reserves (released monthly) as the central bank defends the Egyptian pound. Poor numbers this year create a low base for growth next year, which will be a fillip for the incoming administration.

Iraq has continued to see violence with dozens of deaths in the last few weeks and attacks on hydrocarbon infrastructure. A mess.

Iran has been very quiet indeed with not a smidgeon of a protest, indeed, the press there has declined to cover the Syrian protests/deaths.

Jordan has seen continued protests and fracas between government loyalists and protestors, with the first death last week. The Islamic Action Front (Muslim Brotherhood) has been organizing most of the protests and demanding that the reform process promised by King Abdullah be accelerated. The King seems secure, but the adjustment of the parliament below him will take time. Increased participation by the Islamists and Palestinian section of society is unlikely to be favorable to the Israelis.

Kuwait has not seen any resumption of protests by the stateless non-civilians, although they did sentence three Iranian spies to death today, with several MPs calling for the Iranian ambassador to be kicked out and their own ambassador in Tehran be brought back. There are also reports of thousands of other Lebanese Shia potentially being deported from Kuwait and other GCC states.

Libya : With the no-fly zone fully in place (soon to be handed over to NATO) and Qaddafi’s forces pushed by to his home town of Sirte, the exact aim of the allies will soon be clear. It is clear that recent action has been closer to a no-drive zone/aiding the rebels than the originally envisioned no-fly zone, but given the UN resolution prohibiting civilians from being attacked, we must infer that if the rebels attack Sirte, the allies would have take action against their forces (the non-armed supporters of Qaddafi are civilians too). Misrata looks about to fall, leaving us with East and West Libya fighting over the key oil terminals (Brega, Ras Lanuf) in the middle that pump oil from the Sirte basin (where most of Libya’s oil is located). 

Small protests have reemerged in Morocco as doubts over the effectiveness of the reforms announced by King Mohammad resurfaced. These have been led by the unions and may increase in size in the coming weeks.

The protests in Oman do appear to have been an abhorrence and things have become relatively calm with some small reforms going through, although the issue of succession is still a worry.

Palestine : With the Israeli-Palestine having been pushed out of the news, recent rocket attacks and retaliatory Israeli air strikes on Gaza are pushing to get it back on the radar. Given its increasing isolation and fears of rapidly increasing Iranian influence, the Israelis have adopted increasingly aggressive rhetoric (such as possibly annexing the West Bank). We have seen a dozen Palestinians killed in the last week or so (the ratio in the 2008/9 conflict was 100:1, with 13 Israeli deaths versus 1,300 Palestinians), which should keep rocket attacks going particularly as Hamas is looking to boost its local popularity. The Israeli vice PM/Minister of Strategic Affairs (essentially in charge of looking after the Iranian situation) today highlighted Iran as being behind the recent attacks, reiterating that they were a “messianic, apocalyptic regime”. With nuclear weapons a year or two away, the scenario outlined in our 8th March note (“Short-term pain, Long-term gain”) of an Israeli attack on Iranian nuclear facilities remains a possibility. There is also a possibility of a renewal of violence between Israel and Lebanon, particularly given the current situation destabilizing in Syria and Hezbollah gaining control of the coalition government of Lebanon.

Saudi Arabia : King Abdullah has been active in distributing more of Saudi Arabia’s wealth, with almost $100bn in packages (against  an economy of $400bn) announced. Most of these are over a number of years and aren’t necessarily transfers to the public (for example, the 500,000 houses being built for $66.7bn are unlikely to be free). Looking at the detail of the packages, we can see a key shift back toward the conservative elements of society, with additional funding for interior security (60,000 more) to quell any uprisings and significant support to the clerical class. The Saudi government has a quasi-religious status, with the foremost title of King Abdullah being as Guardian of the Two Mosques (Makkah and Medina). The government used religious institutions as a major support for their legitimacy in the 1980s and 90s (particularly after the 1979 siege of the Grand Mosque in Makkah), but this support waned in recent years, with King Abdullah pushing through reform measures that challenged judicial system.

While new municipal elections have been called, the promise that women would be allowed to vote made in the last elections (2005, also the first in Saudi) has been scrapped and we may see a regression in social freedom (hopefully not back to the days of the stick-wielding virtue police on every corner). Saudi Arabia is in a difficult transition period thanks to youthful demographics and an authoritarian, paternalistic government. However, progress may be slower than many think as many societal elements support the structure of the current government and the desire for increased political participation is not as fervent as in other, less hydrocarbonally-blessed countries.

While the announced packages help assuage some of the key concerns of the young Sunni population (employment and housing), this section was never likely to revolt violently or in numbers. The requests of the Shia population, particularly those in the Eastern province (those in the South and West are similar to Sunnis) in terms of release of political prisoners and more freedom to practice their religion have not been addressed and with increased funding to the religious establishment and the Saudi action in Bahrain (predicated on fears of increased Iranian influence), we may see some of their recent freedoms rolled back and any further protests forcibly extinguished (indeed, 1.5m fatwa’s banning protests have just been printed).

Economic reform is likely to continue with mega-projects accelerated and a new mortgage law stimulating lending and asset prices within the kingdom and a renewed focus on nuclear power has been announced to address the chronic power shortage, with $100bn earmarked for conventional power plants.

Syria : We have seen curious actions by the government as they have called for peace and reform before attacking protestors with deadly results. Bashar Al-Assad retains mass public support (10,000 protesting for him today), but the rule of his predominantly Alawite (offshoot of mainstream Shia) Baath party is predicated on maintaining the support of the elite families of the Sunni population and the security forces. We have just seen the government resign and indications that the harsh state of emergency laws will be repealed, but it remains to be seen what new proposals will be bought in (possibly harsh anti-terrorism laws to replace them). Syria is a key regional player as an effective transmission mechanism between a number of different groups and external support for the regime is likely to remain strong. It is unlikely that we will see significant power-sharing in the absence of a significant pickup in protests across the region. Worth keeping a close eye on.

Qatar has been nice and stable, concentrating on designing artificial clouds for the World Cup and bringing down the Qaddafi regime (the Colonel made fun of Shaykh Al Thani’s weight last year). The outlook for their natural gas output in the wake of a global backlash against nuclear power will also be positive.

The UAE has been quiet, with the only news of note an acceleration of Abu Dhabi’s nuclear program. This should be the main beneficiary of regional unrest as a safe haven for expats with critical mass and excellent transport links.

Yemen :  After several prominent defections following the death of 52 protestors at the hands of government snipers, President Saleh began negotiations to step down. This appears to have been a ruse to gauge opposition strength and once he was offered a host of concessions to leave, he withdrew his offer, using the time to solidify ties with key tribes. Saleh’s key tactic has been to emphasize the chaos that would follow his departure, with Al Qaeda in the Arabian Peninsula (AQAP) central to US and Saudi concerns. To  play on these fears, security forces have been pulled from key governorates, which are now no longer under government control and have been releasing rebel leaders.

Al Jawf (area 7, 500k of Yemen’s 24m population) and Saada (18, 750k) are now under the control of Shia Houthi rebels, who will be difficult to shift given the nature of the terrain. This will concern Saudi Arabia as these areas are on their Southern border, leading them to bomb rebel installations there in recent years.

AQAP are now reported to control almost all of Abyan (3, 450k) and Shabwa (20, 500k), as well as significant portions of Mareb (16, 250k). The recent explosion at an ammunitions factory that killed 150 people was in Abyan. Air strikes and security force attacks have helped build AQAP support in these areas and with the current unrest they provide a stable organizational framework that many villages might look to for leadership.

The capital city, Sana, is in region 10, Amanat Al-Asemah (2m people) and AQAP have also been increasing activity in region 19, also called Sana (1m people). As a note, while areas 12 (Hadramat ) and 8 (Al Mahrah) look large, they hold 1m and 100k people respectively out of 24m.

The army is split in two, but the faction led by General Mohsin has indicated they will stop attacks on peaceful protestors as opposed to militarily overthrowing the current regime. Many of the elite wish to retain the status quo with perhaps Saleh and his family making way for them, particularly the other army generals and members of the Hashid tribal confederation (Saleh is from a small tribe within the Hashid, the Sanhan).

The end game is difficult to see as while his position appears untenable, Saleh appears determined to stick things out, looking for support from Saudi Arabia given the possibility of Al Qaedistran and sudden Shia control of northern Yemen, even though this group belongs to a different sect to those in the Eastern province of Saudi/Iran (US and Saudi officials fail to make this distinction given official comments. Yemen, as previously noted, has over 3 guns per person and while care is taken not to use these, once fighting starts it could get very messy indeed.