Wednesday, September 20, 2023

Yemen’s War Economy: A Key Factor in the Ongoing Conflict

Arab Center Washington DC - As Houthi negotiators leave Saudi Arabia after five days of talks with Saudi officials regarding the contours of a compromise solution to Yemen’s ongoing conflict, the country remains in the grip of certain war outcomes, specifically that of a war economy. Although the current conflict famously began with the 2015 Saudi and UAE military intervention against the Houthi armed group, it is in large part the pivotal juncture of many others: the 1994 Yemeni Civil War, the 2004 Houthi insurgency, the turbulent events of Yemen’s 2011 uprising, and the Houthi group’s takeover of Yemen’s capital, Sanaa, in 2014. Deep economic grievances primarily caused these conflicts, just as economic crises stemming from the current war are producing ever-growing poverty, suffering, and despair.

For example, discriminatory resource allocation, unemployment, and land rights violations were among the grievances that fueled the South’s role in the 1994 Civil War. Regarding the Houthi insurgency, historical grievances also played a significant role. The group’s members claim to belong to the sayyed class, which enjoyed ruling authority in North Yemen during the Mutawakkilite Kingdom of Yemen (1918–1962, with some vestiges of control until 1970). Following the initial defeat of the kingdom in 1962 by the revolutionary republicans at the start of the North Yemen Civil War, the group was discontented over its loss of power, and aimed to restore what was taken from it. Decades later, additional discontent due to the marginalization and impoverishment of the group’s home governorate of Saada in the North directly led to the Houthi insurgency in 2004. Yemen’s 2011 uprising was also driven primarily by economic grievances, such as corruption and rising poverty. Then, in 2014, the Houthi group protested the government’s fuel reforms, after which it carried out a coup against the Yemeni government, which prompted the Saudi-led coalition’s engagement in the conflict in 2015.

Decades of unaddressed economic grievances ​and conflicts ​have provided fertile ground for the emergence of a dynamic war economy in Yemen, characterized by complex networks of actors all competing for economic power and control. Yemen’s war economy is mainly about resource allocation, organization, and mobilization with the key purpose of sustaining the fighting. Hence, war profiteering and exploitation of the various dimensions of the war in Yemen have prolonged the conflict and impeded the achievement of a durable peace and lasting stability. Additionally, the far-reaching impact of the war economy has been changing the country’s landscape and socioeconomic structure in complex ways.

The War Economy’s Manifestations

The current conflict has been altering numerous aspects of the country’s economic system and activities, and has resulted in the creation of two essentially parallel economies, one in the North and one in the South. Some of the most significant manifestations of Yemen’s war economy include double tariffs and double customs duties, two different currency exchange rates, disputed oil revenues, aid divergence, and an extraction economy, all of which place immense pressure on the Yemeni people.

Disagreement between the belligerent parties, the Houthi armed group in the North and the internationally-recognized government of Yemen (IRGY) in the South, over taxation and customs duties has led to a divided tax system in the country, with each side enforcing its own system of tariffs and customs duties. The IRGY charges customs when any goods arrive in ports under its control. Then, when traders navigate inland crossings to deliver those goods to areas under Houthi control, they are charged additional customs as the Houthis claim to be the legitimate governmental authority in the North. In fact, in August the Houthis increased charges on traders when they import items to Houthi-controlled areas from IRGY-controlled ports, areas, or land crossings by a 100 percent levy. These double tariffs deplete traders’ economic power and exponentially increase the price of goods. The Houthis’ move is intended to boost the group’s economic power, and it is already raking in the profits, having collected at least $1.8 billion in taxes and state revenues in 2019 alone.

The two economies have also produced two considerably different currency values in the North and South, in large part because the Houthis and the IRGY have both been printing bank notes, albeit in different volumes. As of February 2023, the going rate was 600 rials to the US dollar in Houthi-controlled areas and 1,225 rials to the dollar in IRGY-controlled areas—more than double the value. The conflict and the North-South division have also impacted oil exports, leading to a standoff over oil revenue allocation between the Houthis and the IRGY. The Yemeni economy relies heavily on the production and export of crude oil, which generate the lion’s share of state revenues. Revenues from crude oil exports increased in 2021, reaching $1.418 billion, compared to $710.5 million the previous year, primarily due to a rise in oil prices in global markets.

Under the pretext of paying civil sector and military salaries, the Houthis are demanding a large share of oil revenues. The IRGY has refused to share those revenues, and in order to halt them the Houthis in 2022 attacked three oil loading terminals located in IRGY areas, at the al-Mukalla port on October 25, at a Shabwa Governorate port on November 9, and at the port of al-Dabah on November 21. These attacks were intended to weaken the IRGY’s finances. Additionally, the Houthis in June 2023 banned domestically produced gas cylinders coming from the IRGY-controlled city of Marib in order to undermine its revenue streams. The clear message in all the Houthis’ moves is that in the absence of the group enjoying its share of Yemen’s state revenues, no one will enjoy them. Obtaining oil revenues is one of the Houthis’ central economic objectives, and the group has repeatedly tried without success to capture Yemen’s oil-rich Marib Governorate.

International humanitarian aid has become a means for economic benefit for the warring parties. Reports by various international organizations, including the United Nations, humanitarian agencies, and human rights organizations have revealed a pattern of interference in humanitarian aid distribution in Yemen. Humanitarian aid divergence, restrictions, and obstruction are some of the economic strategies that the warring parties have used to strengthen their influence. The IRGY and the secessionist Southern Transitional Council have interfered with and obstructed humanitarian assistance in Yemen’s Aden Governorate. In 2020, the IRGY reportedly engaged in money laundering and corruption practices, which had negative consequences on people’s ability to access adequate food supplies. Additionally, the government devised a scheme to divert funds from Saudi deposits, resulting in an illegal transfer of $423 million in public funds to traders. The Houthis have also been implicated in the exploitation of humanitarian aid, and the World Food Program has acknowledged the group’s aid divergence in the areas under its control. This diverted aid then makes its way into the Houthis’ own war effort.

Simultaneously, ordinary citizens’ financial resources have also gone toward filling the warring parties’ pockets. The high tariffs and the skyrocketing prices of essential commodities are part of an “extraction economy” perpetrated by the warring factions on the population at large. As thousands of civil workers have had difficulties receiving their salaries for years, they have been living off of their hard-earned savings, which in many cases have likely been thoroughly depleted. It is almost certain that the majority of people in Yemen have spent all their savings, considering that Yemen is one of the world’s poorest countries. Their money was taken by greedy warlords who wield both arms and power. The systematic extraction and depletion of people’s wealth, or rather the transfer of wealth from the citizenry to the political and military elite is one of the key manifestations of the war economy, and has led to a widening gap between the rich and the poor.

The Impact on Yemen’s Future

The war economy in Yemen holds two potential effects on the country’s future: structural transformations and the perpetuation of conflict. Players and networks that emerged and gained influence under the conflict have created new economic dynamics, leading to structural changes in the fundamental mechanisms of the country’s economic functions. An evident demonstration is the diverging economic systems between Yemen’s northern and southern regions. The structural changes have also profoundly changed capitalist elite formation in the country. For instance, prior to the conflict, former Yemeni President Ali Abdullah Saleh and his entourage sat at the top of the capitalist hierarchy in Yemen. Today, people from diverse factions—including the Houthi armed group, the IRGY, and the Southern Transitional Council—who dominate and control key economic domains such as the oil and fuel trade have become major players in the economy, and are rapidly becoming Yemen’s new capitalist elite.

The other significant effect of the war economy on Yemen’s future is the protraction of the conflict. The economic gains the warring parties continue to make during the war provide little impetus for ending the conflict, as demonstrated by the fact that a truce that expired in October 2022 has yet to be renewed. In this disheartening scenario, the outlook for Yemen’s future is darkened by persistent conflict.

Tomorrow’s Destiny

Decades of unresolved economic grievances and discontent compounded by a series of conflicts have formed the perfect environment for the emergence of a robust war economy. Double tariffs and customs duties, differing currency values, shrinking oil revenues, the exploitation and diversion of international humanitarian aid, and the extraction of the population’s wealth are some of the most significant economic activities emerging under the ongoing conflict. The warring parties have made economic gains through opportunism during wartime, making them unwilling and less likely to seek a peaceful resolution to the conflict. Meanwhile, the war economy has been transforming the country’s socioeconomic structure. Consequently, Yemen’s future looks bleak, and is likely to be characterized by protracted conflict, deepening poverty, and economic devastation.

Yemen’s war economy represents a critical factor sustaining the conflict, and addressing the war economy is thus essential to ending it. Given that the continuation of the war economy is in the interest of the warring parties, an external party must intervene. Here, the international community’s role is profoundly vital. It must take a multifaceted approach to Yemen’s economy, putting pressure on the warring parties to reach an agreement that addresses Yemen’s economic woes on two levels: historical economic grievances and contemporary economic challenges. Although the latter is an extension of the former, there must be a nationwide discourse to address these issues in order to pave a path toward national economic reconciliation. The outcomes of such deliberations could lay the groundwork for a more stable and prosperous Yemen in the long run. Although it must be said that any nationwide discourse should avoid the shortcomings and pitfalls of the previous National Dialogue Conference (2013–2014).

Regarding the country’s pressing contemporary economic challenges, the international community should press the warring parties to implement tangible measures to address the war economy’s many manifestations by unifying the tax system and exchange rate, resolving the oil revenues dispute, ensuring better and more transparent oversight of humanitarian aid, and redressing economic disparities. The international community also needs to support a ​​preemptive post-conflict economic recovery plan so that once the conflict ends, a plan will be ready for swift implementation. Certainly, reaching a comprehensive peace agreement is the fundamental first step before launching a post-conflict economic recovery plan. At every step, international diplomatic efforts must push the warring parties to prioritize the well-being of the Yemeni people over their own economic interests. Tackling the root causes of economic grievances and dismantling the war economy’s underpinnings are essential for ending the protracted conflict. Doing so may provide hope for a brighter future for Yemen and its people.

*This policy analysis paper was written for and published first on the Arab Center Washington DC website.