Iran interim agreement: the Minotaur's labyrinth

In the story of the Minotaur, Daedalus was tasked with building a labyrinth under the order of King Minos of Crete to imprison the dreaded creature. The Minotaur, part man part bull, was an unnatural being. He was created when Pasiphae, King Minos’ wife mated with the bull sent by Poseidon; this was made possible by the wooden cow crafted by Daedalus into which Pasiphae climbed into. The Iran framework agreement, is in some respects like the labyrinth – an artificial solution to a man-made problem. As the tale goes, only a great Athenian hero (Theseus) is needed to finally slay the Minotaur.

On 2 April 2015, the P5+1 and Iran had agreed to the framework agreement against all odds. The details of the agreement were also more granular than had been expected by the international community. Initial expectations were that high level terms would be agreed by the end of March deadline, with the finer details to be thrashed out over the following months ahead of the ultimate 30 June deadline. Reaching a nuclear deal with Iran has been a desire for the US for decades, and following lengthy negotiations, it appears that things are now moving in the right direction. Iran has also been more willing to come to the table following years of sanctions which have crippled its economy.

The main elements of this interim deal are:

• Centrifuges: Reduce the number of centrifuges from 19,000 to around 6,000
• Enrichment: To no more than 3.37% for at least 15 years
• Stockpile: 10,000kg stockpile to be reduced to 300kg
• Facilities:
• Fordow to be converted for research purposes with no enrichment
• Enrichment only allowed at Natanz which will house 5,060 first generation centrifuges
• Arak to be redesigned as a heavy water research facility with no plutonium production capabilities
• Monitoring: IAEA to monitor supply, usage and sale of nuclear technology with inspections to last for up to 25 years

In return, sanctions on Iran will be suspended upon IAEA certification of compliance with the final terms of the deal. Any breach of the terms will result in immediate reinstatement of sanctions. However, cracks are already in sight with Iran declaring that there will be no deal unless sanctions are lifted immediately upon conclusion of the deal. Also, in the latest twist of events, the US Senate Foreign Relations Committee voted unanimously (19-0) on 15 April in support of legislations that would give Congress authority to approve any final deal thus undermining the President’s authority to conduct foreign policy with Iran.

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Suppressing the Brotherhood: Avoiding a Repeat of History

On 4 July 2013, the Egyptian military removed President Morsi and his Muslim Brotherhood from power after four days of intense street protests. General Sisi, the Egyptian defence minister at the time, quickly took the helm and announced the change in government in a televised address to fireworks and cheering crowds across the country. The US, UN and EU were reluctant to describe the ousting as a coup, although all voiced concerns about the situation.

Almost two years on, it is worth revisiting the above event and explore the context behind it in light of the current Houthi conflict in Yemen. Despite the lack of a label as a coup, it is widely accepted that Morsi's removal was an organised affair with Saudi Arabia (and the UAE) pulling strings in the background.

The Gulf States remember well the Nasser regime in Egypt where he toppled the monarchy in 1952 and then attempted to export the revolution throughout the Arab world, promoting nationalism as alternatives to the system of ruling monarchs in the Gulf. Between 1950 and 1970 the monarchies of Iraq, Yemen and Libya fell and in 1969, there was a failed attempt to overthrow the establishment in Saudi Arabia. In fact, Saudi Arabia was in the midst of a proxy war against Egypt in Yemen between 1962 and 1970 where the Saudis backed the return of Imamate rule (following their ousting in the republican revolution of 1962) and Egypt backed the revolutionaries.

It is against this backdrop that Saudi Arabia views the Muslim Brotherhood: an organised political movement that poses a threat to the remaining monarchies in the Gulf. Saudi Arabia made clear that it would welcome Morsi's ouster and a few days after the event actually happened, Saudi Arabia together with the UAE and Kuwait provided millions of dollars in financial aid to help "repair Egypt". This backing clearly demonstrates the Gulf States' support for the new regime in Cairo.

In Saudi Arabia, the Brotherhood is now designated as a terrorist organisation and any support to the group will result in imprisonment. In the UAE, a crackdown has effectively ended the Brotherhood'sactivities in Abu Dhabi and Dubai. Kuwait still has a Brotherhood presence, but is converting its stance to anti-Brotherhood.

Qatar remains a spanner in the works which continues to provided financial and political support to the Brotherhood. To show its disapproval, Saudi Arabia, the UAE and Kuwait withdrew their ambassadors from Doha in March 2014 in a move designed to force Qatar to reconsider its loyalties. However, whether Qatar will submit to its neighbours' desires remains to be seen as it continues to strive to be the premier Gulf State over Saudi Arabia.

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Gulf of Aden: Dire Straits

The Gulf of Aden is a strategically important shipping route linking the Mediterranean Sea and the Indian Ocean. The port city of Aden controls the Bab al-Mandab strait, the gateway between the Red Sea and Gulf of Aden through which 21,000 ships pass through each year. According to the EIA, 3.8mmbbl/d of crude oil and refined products passed through this route in 2013 alone.

The capture of Aden by the Houthis on 25 March 2015 was therefore a huge concern to the international community, with the US, Saudi Arabian and Egyptian navies stepping up its forces in the region. At the beginning of April, the Chinese were reported to be diverting vessels to the region as well.

At first glance, the involvement of Egypt is unexpected. Egypt had learned not to meddle in foreign affairs after its previous military intervention in Yemen in the 1960s led to the death of 26,000 Egyptian soldiers. Back then, Egypt's President Nasser saw that Yemen was going through what Egypt went through a decade earlier - a revolution against the monarchy, followed by what would be an installation of a republic. Nasser, a champion of pan-Arabism, lent his support to the Yemini republicans. However, what was expected to be a swift war turned into "Egypt's Vietnam" that lasted almost a decade.

One of Egypt's key sources of income is now at risk. The Suez Canal contributed over USD5 billion in tariffs in 2013 to Cairo's coffers, now under threat, means Egypt can no longer turn a blind eye to the developments in Yemen. More importantly for Egypt, its participation in Operation Decisive Storm, allows it to demonstrate its loyalty to the Gulf States which have contributed over USD20 billion of aid in funds and oil products to an ailing Egypt since the ousting of Mubarak in 2011.

However, it would be wise to remember that the Saudis and Egyptians were once on opposite sides of the battlefield in Yemen. The Egyptians had backed the republicans in the 1960s civil way, whereas the Saudis lent their support to the ruling Imam monarchy. Saudi Arabia's policy how not changed though - it and its Gulf allies understandably view the protection of the status quo a priority, i.e. protection from any threat against the ruling monarchies. In the 1960s, it was against Nasser's spread of revolutionary ideology. Since 2011, it has actively worked behind the scenes to undermine the Muslim Brotherhood in Egypt, a moderate religious political group which the Saudi's saw could garner popular support in the Gulf if left unchecked. In 2015, the Iranian backed Houthi movement on the Saudi border is the next, and possibly not the last, challenge to the Gulf ruling system.

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Saleh: Enemies become allies

The Houthi movement was founded in the 1990s to revive a branch of Shia Islam known as Zaidism. Historically the Zaidis had ruled over North Yemen until their toppling in 1962 during the Yemen Civil War. Since then, they have been increasingly marginalised by the new regime which viewed Zaidism as a threat.

In the beginning, the Houthi movement was peaceful. It sought a voice in a regime where it was being opressed. It called for a partnership with President Saleh to work things out and not for his overthrow. However, the Houthis also saw the United States as an enemy of Islam and President Saleh’s alliance with the US on the “War on Terror” shaped the events that followed.

President Saleh was seen by the Houthis as a traitor; the Houthis were vocal in pushing for his ousting. In response, President Saleh stepped up efforts to repress the movement, including attacks on Houthi villages. The movement became increasingly military in order to defend itself with six wars being waged upon them by the Saleh Government between 2004 and 2010. The wars led to massive deaths in the Sadaa region, the stronghold of the Houthis, and had the effect of alienating much of the Northern Yemeni population.

The Arab Spring came at an opportune time for the Houthis who capitalised on the Yemeni’s discontent with the government and lack of progress on the economic and security fronts; the Houthis openly supported the protests against President Saleh. Following the removal of President Saleh, the Houthis stepped up as a candidate to fill the power vacuum and vowed to set up its own political party to participate in the country’s next elections. Support for the Houthis grew, although its appeal was probably less to do with its ideology and more of a common hatred against Saleh’s repressive regime.

The Houthis realised that in order to be heard and to make an impact, it would have to do so through the political arena which would legitimise the movement. However, it is now becoming evident that its extension into politics is part of a grander plan to gain governing and military dominance. Three years after the Arab Spring, Yemen’s interim government headed by President Hadi, had yet to make any noticeable improvements to the country. The Houthis saw this as the time to act and in 2014, launched an aggressive military campaign in the north of Yemen culminating in the capture of the capital Sanaa in September 2014. Government departments and the airport were seized and President Hadi was placed under house arrest. The capture of Sanaa was months, if not years in the planning. By mid 2014, the Houthi’s had already surrounded the capital and its final move into the city was executed at lightening speed.

The Houthi’s could not have achieved all this without military support. In a twist of events, this support is coming from ex-President Saleh, who once upon a time, aggressively tried to crush the Houthis during his reign. Saleh’s loyal followers, including those in the country’s army and security services have aided the advance of the Houthis, or in some cases actively chose not to protect against their advances. The Houthi alliance with Saleh is a strange one, but one that has allowed the former to widen and strengthen its grip and the latter to orchestrate the destruction of the new regime and the Hadi government, an act of revenge against those who overthrew him.  How long this alliance lasts, only time will tell, but probably for no longer than one needs the other.

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Yemen: The Islamic Chessboard

Houthi take Sana (check), 

Saudi airstrike,

Next move...

Since the start of the year, the Houthis have risen to fame in the drama that is the Middle East. There was little media coverage of the group previously due to their modest beginnings, but also the difficulty of doing serious investigative journalism in Yemen (due to safety and security). However, the increasing threat of the Houthis is now taking centre stage and the international community is paying more attention.

Yemen: The Islamic Chessboard is a series examining the rise of the Houthis and the conflict in Yemen. For now, Yemen appears to be the battle ground in the continuing fight between the Shias and the Sunnis.

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Iran negotiations: the US conundrum

The intensifying rift between President Obama and Congress poses a risk that could derail the Iranian nuclear talks.

Republican Bob Corker, Chairman of the Senate Foreign Relations Committee, has sponsored the Iran Nuclear Negotiations Act of 2014 which calls for the President to submit any Iranian deal to Congress for approval. The bill would remove the President’s current authority to waive any sanctions imposed by the legislature. In short, Congress will have the final vote on any deal with Iran.

The Foreign Relations Committee will vote on the bill on 26 March and if approved, would move to a vote in the Senate. Should it progress beyond the Senate, Obama retains the right to veto the bill, however, given the Republican majority and signs of Democrat support for the bill’s measures, the bill could become veto proof.

The passing of such a bill would more than throw a spanner in the works and could seriously scupper the negotiations as well as reverse the progress made to date. It would raise further questions around President Obama’s authority in international negotiations which have already been partly undermined by the Republican letter to Iran on 9 March.

A scenario that could play out, should the bill be implemented, is the blaming of the US by the international community on the breakdown of the nuclear negotiations (should it occur). The US would no longer be seen as a reliable and trustworthy partner which would make it difficult for the US to garner future support for additional sanctions against Iran.

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Iran framework agreement - Kerry makes the rounds with the P5+1 and Gulf States

Over the past few weeks, John Kerry has been busy meeting with his P5+1 counterparts and members of the Gulf States in the run up to the 31 March 2015 deadline for the framework agreement on the Iranian nuclear programme.

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Iran negotiation: an untimely letter

On 9 March 2015, Republican senators issued an open letter to Iran that essentially warned the latter any deal entered into with President Obama would be considered an "executive agreement" that would require Congress ratification and more importantly, could be revoked by the next president.

The message it clearly sends out is that the US could back out of any agreed nuclear deal, raising serious doubts on whether the US will keep up its side of any bargain, including the lifting of sanctions. The letter was drafted by freshman Republican Senator Tom Cotton and signed by 46 other Republican senators. The timing of the letter is a major blow to the framework agreement which is due to be made by the end of March.

Hilary Clinton has denounced the letter saying that "these senators were trying to be helpful to the Iranians or
harmful to the commander-in-chief in the midst of high-stakes international diplomacy", while John Kerry called it "absolutely calculated...and unthought-out". Even Iran's foreign minister, Mohammad Javad Zarif, found the move by the select Republicans distasteful.

Cotton defended the letter and said that Obama is "negotiating a deal that is going to put Iran on a path to a
bomb". This in itself is a weak argument as the lack of action by the international community could also see Iran ramping up its enrichment programme and further developing nuclear capabilities. Whilst Iran could argue in future that any slight slip up by the US as reneging on an agreement, it is likely that this would be one of a myriad of excuses that they could use.

It is also worth scrutinising the letter further.

1. The letter suggests that a "mere executive agreement" holds little sway in terms of power, yet it is worth remembering that the withdrawal of US forces from Iraq was by such executive agreement and not a treaty.
2. It is also untrue to say that "future Congresses could modify the terms of the agreement at any time" - Congress cannot renegotiate such an agreement, but can pass legislation to contradict it and therefore nullify its terms.
3. Also, the claim that the next president "could revoke the agreement" neglects the fact that the agreement will become binding international law through a UN Security Council resolution.

The letter muddies the water at a bad time (or a good time as some may say) as the negotiations intensify over the next few weeks. Although the damage to the negotiations and to President Obama's authority can be contained, it further chips away at the delicate pillars which have supported the efforts of the P5+1 which have progressed the discussions with Iran to the point they are at today.

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Saudi Arabia - joining the dots: Part 6 - Emergency meeting

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 6 - Emergency meeting

OPEC's traditional strategy has been to cut production to maintain prices, but recent behaviour of the cartel or at least that of its largest member (and swing producer) shows a marked deviation from the strategy.

Saudi Arabia has been a key driver of the protect market share strategy, convincing other OPEC members that a period of low prices would cut US supply and therefore restore the supply-demand dynamics of the market. However, Al-Naimi's stance of keeping to this strategy "even if prices hit USD20 a barrel" (December 2014) has scared the other OPEC members, who do not have the deep pockets to keep their countries afloat.

Nine months into the oil price decline, many of the members are feeling the pressure with fiscal reserves running low. Saudi Arabia and its Gulf neighbours are the exception with their vast monetary reserves, but with large social spending programmes, these countries are now running deficits and chipping away at those reserves.

Discussions between the various OPEC members on the next course of action are ongoing with the next meeting scheduled for June 2015. However, in February 2015, Ms Alison-Madueke, president of OPEC said in an interview with the FT that if the oil price "slips any further, it is highly likely that I will have to call an extraordinary meeting of OPEC in the next six weeks or so". Extraordinary meetings have to be agreed upon by all 12 members.

Ms Alison-Madueke also admitted that "When you cede market share continuously, you drive yourself into oblivion...many OPEC members are going to suffer greatly from a a drastic fall in the price". There-in lies the dilemma - the OPEC members' problem lies in the deeply rooted dependence on oil revenues and large social programmes; cutting production risks further loss of oil revenue, while maintaining production keeps the oil price low...and no-one wants to be first mover. Huge structural reforms are needed but these will not be easy, especially in the aftermath of the Arab Spring and will likely take many decades to achieve.

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Saudi Arabia - joining the dots: Part 5 - Breakeven, OPEC's downfall

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 5 - Breakeven, OPEC's downfall

The above chart, taken from the Wall Street Journal, paints a grim picture.  It shows the oil price required by the various OPEC members to meet their budgets. As of 10 October 2014, Brent was at USD90/bbl; today it is at USD62/bbl. All the OPEC countries are in the red, and some are in a worse position to handle this low oil price environment than others.

Saudi Arabia, for now, will be able to survive. Others are crying in pain - Venezuela, Iran and as of late, Nigeria as it enters into a period of elections with campaigns funded by oil money and the corrupt paid off with oil money. As an interesting aside, Iran (a Shiite power) blames its neighbour and rival, the Sunni Kingdom of Saudi Arabia for using the oil prices as a political weapon and keeping prices low by refusing to cut production.

After years of high oil prices, Saudi Arabia has managed to amass over USD750bn in reserves. However, it also has a large social programme and a high youth unemployment rate; keeping its citizens content and off the street has been in the aftermath of the Arab Spring. Following the ousting of Egypt's Hosni Mubarak, King Abdullah implemented $130bn in new social programmes including unemployment payments, housing and scholarships for Saudi's to study abroad. 

Most worryingly, Saudi Arabia tends to outspend its budget and the Kingdom will need to run a deficit in a USD50-60/bbl oil price environment.

Saudi Arabia has issued a record budget of USD229bn for 2015, with a 5% deficit forecast. The split is as follows: 25% education, 19% health and social, 7% transport and infrastructure, 7% water and agriculture, 5% municipal and 36% "other priorities". Other priorities is largely composed of military spend, which is of increasing importance with the ongoing ISIS conflict in the region.

Al-Naimi's policy has been to defend market share, to the annoyance of King Salman, at the expense of allowing oil prices to fall. However, with oil prices at their current low levels, Saudi Arabia is chipping away at its massive monetary reserves with an over-inflated and hard to cut back spending programme. This policy (or Al-Naimi) may need to be changed in the absence of an oil price rebound in 2015.

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Saudi Arabia - joining the dots: Part 4 - The price wars, defending market share

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 4 - The price wars, defending market share

The sudden fall in the oil price in the middle of 2014 and the subsequent lack of response by OPEC is a stark reminder of its members' policy of defending market share, although the cartel may openly deny it .

Forgotten in recent years and beyond recollection for those who are still young, the 1980s was the last time Saudi Arabia demonstrated its significant power in the oil markets in its efforts to defend market share. In hindsight, one questions whether Saudi emerged victorious from that war and whether it was worth fighting.

In the early 1980s, oil prices fell to record lows after hitting highs in the 1970s. Consumers (namely the US) vowed to reduce reliance of on oil given the high prices and actively implemented policy to switch to substitute energy sources, such as coal for power generation. 

In an effort to shore up oil prices caused by falling demand, Saudi urged its fellow OPEC members to cut production. Saudi cut its own production by c.80% to 3.5mmbbl/d, but many of the other members refused to follow suit. Saudi was furious as by taking action, it had lost out on revenue and market share. In retaliation to the non-compliers, Saudi ramped up production to full capacity and flooded the market with crude. The excess production caused oil prices to slump to c.USD7/bbl and it was another 20 years, before oil price began to recover to pre 1980 levels.

That part of history continues to haunt Saudi today and one can see its remnants in Saudi's stern policy of maintaining production, communicated to the world in that all important OPEC meeting on 27 November 2014.

Luckily for Saudi, and other OPEC members, its low cost of production (<USD20/bbl) means that production remains profitable even at USD50/bbl oil price. The current price war will see much production around the world being choked with high cost North American unconventionals and mature North Sea production being hurt.

Whether Saudi still holds (or wishes to hold) its nominated role of swing producer is a key question to ask. For now, it still has the ability to retrench production, but its low cost production base will mean it can withstand lower oil prices for longer whereas its non-OPEC counterparts will fall over one-by-one unless prices rebound in the near future.

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Saudi Arabia - joining the dots: Part 3 - The reshuffling has begun

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 3 - The reshuffling has begun

Ali al-Niami's job remains safe...for now

In a further move which signals King Salman's tightening grip over the Kingdom's affairs since coming to power,  Salman promoted his son Prince Abdulaziz bin Salman from the position of Assistant Minister for Petroleum Affairs to Deputy Oil Minister at the end of January 2015.

The move, although unexpected, should not be seen as a surprise given Salman's desire to place members of the Sadairi branch of the family into key positions.

Ali al-Niami's post as Oil Minister remains safe for now but his power in dictating Saudi oil policy, arguably the one of the most important roles in the Kingdom, is quickly diminishing. The re-shuffling is also symbolically important as it could be the first in a number of moves by Salman to sideline al-Niami and his policy of defending Saudi market share and letting oil prices fall to USD50/bbl - a policy which does not sit well with factions within the Saudi governing circle.

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Saudi Arabia - joining the dots: Part 2 - Scandal

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 2 - Scandal



In 2006, the then King Abdullah created the Allegiance Council in 2006 to help select future rulers. In March 2014, Prince Muqrin was appointed by Abdullah to be the next in line after Salman, placing Muqrin to be the third in line to the throne at the time. Prince Muqrin has now been elevated to second in line following the death of Abdullah. 

However, the appointment of Muqrin was not an unanimous decision by the Allegiance Council. It was in fact, somewhat of a surprise given Muqrin's mother is of Yemeni origin and not of Saudi Arabia. It is believed that Muqrin was selected by Abdullah as he was the most likely to continue Abdullah's domestic reform policy, which he was unable to fully devote his time to when he became King.

Since King Salman's crowning, Salman has appointed his nephew Prince Mohammed Bin Nayef to the post of Second deputy Premier, the post also held by Muqrin. This essentially places Salman's nephew to be next in line to the throne, potentially undermining Muqrin's rise. Furthermore, it is now unknown whether Salman will demolish the Allegiance Council altogether.

Muqrin

vs

Bin Nayef

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Saudi Arabia - joining the dots: Part 1 - The return of the Sudairis

Saudi Arabia - joining the dots is a series of blog entries exploring Saudi Arabia's role in the oil markets with a brief look at the history of the royal family and politics that dictate and influence the Kingdom's oil policy.

Part 1 - The return of the Sudairis

On Friday 23^rd January 2015, King Abdullah passed away paving the way for the Sudairi branch of the Royal Family to consolidate power and strengthen its grip over the country. 

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