Conflict Prevention

Introduction As space systems increasingly perform and support critical operations, a variety of plausible near-term incidents in outer space could precipitate or exacerbate an international crisis. The most grave space contingencies—viewed from the perspective of U.S. interests and international stability—are likely to result from either intentional interference with space systems or the inadvertent effects of irresponsible state behavior in outer space. The threats to U.S. space assets are significant and growing, as potential adversaries continue to pursue and could soon acquire counterspace capabilities. The United States has strategic interests in preventing and mitigating dangerous space incidents, given its high reliance on satellites for a variety of national security missions and unparalleled global security commitments and responsibilities. Like other technology-driven global governance challenges, the longer the United States delays preventive and mitigating efforts, the less dominant its position will be in shaping rules of the road for space.   The Contingencies Based on capabilities, intent, and history of malicious or destabilizing behavior, the state most likely to undertake destabilizing actions is China, followed by North Korea, and Iran. Although Russia has robust counterspace capabilities, it has not recently demonstrated intent to direct malicious and destabilizing actions toward U.S. space assets. Increasingly prevalent types of interference include jamming, hacking, spoofing, and lazing of space- and terrestrial-based sensors, transmitters, and data links. Additionally, interference can entail direct ascent or "co-orbit" antisatellite tests (ASAT), and intentional or unintentional collisions that create a long-term problem of orbital space debris. An outlier scenario not covered in this report is one that U.S. officials consider unrealistic: an electromagnetic pulse event in space. The three most plausible scenarios that warrant concern are crisis-related interference, intentional peacetime interference, and inadvertent peacetime interference. Crisis-Related Interference China, North Korea, and Iran could conceivably be involved in dangerous space activities—such as a "direct ascent," or vertical launch, ASAT test from a ground-based missile system—during a crisis with the United States or one of its allies to gain bargaining leverage, to deter potential hostile acts, or for defensive reasons in anticipation of imminent conflict. The intent of these activities could be misinterpreted if they cause unintended harm to U.S. and ally satellites, and could thereby exacerbate or inadvertently escalate the crisis. China has the most active ASAT development program, having conducted at least six direct ascent, or vertical launch, ASAT missile tests since 2005. China has not yet intentionally interfered with U.S. space assets. However, it has conducted ASAT tests without warning and signaled intent to undertake malicious actions. People's Liberation Army (PLA) Air Force publications argue that shooting down U.S. early-warning satellites would be a de-escalatory and stabilizing action in a naval encounter with the United States. China might be tempted to demonstrate its ASAT capabilities during a major crisis to deter potential U.S. military involvement, such as during a confrontation with Taiwan or other neighboring states over unresolved territorial disputes in the East or South China Seas. The purpose would be to signal its resolve and willingness to escalate militarily and thus gain "escalation dominance." North Korea's record of provocative military behavior makes it a plausible candidate to conduct dangerous actions in space, possibly by leveraging a crude ASAT demonstration to extract concessions similar to how it has used nuclear and missile testing in the past. North Korea placed its first satellite in orbit in December 2012 using a rocket derived from the Taepodong II missile, which could alternatively be used to destroy an inactive satellite or maliciously target a U.S. satellite. Although less likely, North Korea could use the still untested road-mobile, medium-range Hwasong-13 ballistic missile. Given North Korea's history of confrontational behavior and provocative language, interference with or damage to a U.S. or allied satellite has the potential to escalate into a crisis and elicit a response from the United States. Iran also has a long history of engaging in military intimidation. In the past two years, there have been an increasing number of near misses in the Persian Gulf between Iranian Revolutionary Guards Corps (IRGC) tactical boats and U.S. Navy ships, and IRGC surveillance drones and navy helicopters, as well as multiple attempts by IRGC fighter jets to shoot down U.S. Predator surveillance drones. Since Iran already views space as a legitimate arena in which to contest U.S. military power, Tehran could use similar tactics against U.S. satellites during a major crisis, especially if it believes war is imminent—an assessment that could have self-fulfilling consequences. Should this significantly limit U.S. situational unawareness of the unfolding crisis, there would most certainly be a military response against the source of that Iranian interference. Additionally, like North Korea, Iran could attempt a direct-ascent ASAT test or co-orbital ASAT test, in which it detonates a conventional explosive near a targeted satellite. Iran's capacity to do this will likely improve if it follows through on its June 2013 announcement of plans to build a space monitoring center designed to track satellites above Iranian territory. Intentional Peacetime Interference Intentional acts of interference during peacetime include: probing the technical capabilities of U.S. space systems or ground-based sensors; spying on the location and capabilities of U.S. satellites; and denying or limiting U.S. intelligence collection from space satellites through electronic jamming, blinding optical systems, and issuing false instructions, known as "spoofing." These space disruptions are distinct from computer hacking—i.e., the unauthorized access to a network, or the manipulation of software source code, the originating source of which can be hidden through dummy IP addresses or server rerouting. These interferences are usually stand-alone demonstrations of national power, and are similar to the interferences that routinely affect air and sea systems on earth. However, no established "rules of the road," comparable to the UN Convention on the Law of the Sea, exist to regulate space operations. According to U.S. officials, Iran undertakes more purposeful interference with U.S. military and commercial space systems using lasers and jammers than any other country. Although these actions have not resulted in irreparable damage to U.S. assets, this practice increases the possibility that the United States will misinterpret unintended harm caused by such interference. In the worst-case scenario, a routine lasing or jamming attack could cause unintended damage to U.S. or allied space assets—primarily due to untested and less advanced capabilities—precipitating a crisis with China, North Korea, or Iran at an acutely sensitive time, amid ongoing efforts to prevent Iran from acquiring nuclear weapons. Unlike in the cyber domain, attributing the source of intentional space interference is relatively easy to date. It requires identifying the source of a disruption to a datalink, or to space-based and terrestrial transmitters and receivers. Those sources provide a return address and usually offer a distinct signature. However, interference in space, particularly that which does not result in sustained damage to satellites, is less likely to arouse suspicion due to the distant nature of the domain, which can also encourage deliberate interference and shrouding of military purposes as civilian or scientific. Inadvertent Peacetime Interference The main form of inadvertent peacetime interference is the testing of ASAT systems that create space debris, which already threatens U.S. space assets and assured access to the domain. China's demonstrated disregard for the consequences of ASAT tests is the greatest threat to international space security. A January 2007 direct ascent ASAT test carried out by China against its defunct Fengyun-1C weather satellite instantly increased the amount of space debris in low earth orbit (LEO) by 40 percent. Debris is especially problematic in LEO, where half of the world's 1,100 active satellites operate. Space objects—even flecks of paint—travel as fast as eighteen thousand miles per hour and can cause catastrophic damage to manned and unmanned spacecraft—creating even more debris in the process. The U.S. National Research Council estimates that portions of LEO have reached a "tipping point," with hundreds of thousands of space debris larger than one centimeter stuck in orbit that will collide with other pieces of debris or spacecraft, thus creating exponentially more debris. Significant growth in the quantity or density of space debris could render certain high-demand portions of outer space unnavigable and inutile. Currently, there are no legal or internationally accepted means for removing existing debris. China could also test co-orbital antisatellite systems in which an interceptor spacecraft destroys its target by exploding in close proximity, creating even more debris. For several years, Beijing has conducted a series of close proximity maneuvers with its satellites in LEO; the most recent occurred after a July 20, 2013, launch of three satellites on the same rocket, which have since conducted sudden maneuvers toward other Chinese satellites. Human or operating errors during these maneuvers could inadvertently result in a collision that produces harmful debris. While these maneuvers could eventually be used for civilian purposes, most U.S. officials believe these experiments are primarily intended to demonstrate latent ASAT capabilities. An ASAT test that causes unintended damage to U.S. and ally satellites or an accident in space caused by debris could trigger a major international crisis between the United States and China. The risk is heightened by the fact that both countries have no pre–space-launch notification arrangements, similar to the U.S.-Russia agreement on notifications of intercontinental ballistic missile (ICBM) and submarine-launched ballistic missile (SLBM) launches. Management of such a crisis could also be hindered by a lack of direct communication between U.S. authorities and the PLA agency that oversees Chinese military space launches. Warning Indicators As China, North Korea, and Iran's space capabilities continue to grow, the following strategic and tactical warning indicators would suggest that a dangerous space event is forthcoming. Strategic warning indicators include statements of intention to interfere with or develop the capability to interfere with space operations of other powers during a crisis or wartime; evidence of such intent, including research and development or budget indicators, organizational changes, or intelligence collection; noticeably increased efforts to disrupt space communications using lasers or jammers against satellites or ground-based transmitters; or the sudden and unexplained launch of additional satellites into LEO, accompanied by an increase in aggressive or potentially hostile maneuvers. Certain indicators are suggestive of potential military escalation or onset of conflict. These include a heightened diplomatic crisis involving the United States and China, North Korea, or Iran that could result in terrestrial military escalation and trigger a crisis-related interference in space; militarized tensions or direct conflict between one of the three countries and the United States, a U.S. treaty ally, or a non-U.S. ally with known space capabilities, such as India or Russia; or an internal power struggle among governing elites in China, North Korea, or Iran, prompting space activities intended to consolidate domestic power or stoke nationalism. Tactical warning indicators tend to be more overt. They include significant changes in the alert status or operational readiness of military units associated with China, North Korea, or Iran's missile or space programs; the unexpected announcement of the closure of airspace to civilian aircraft over the territory of previous space launches; or preparations for missile tests from satellite launching stations which are usually detectable days, if not weeks, in advance. Space launches from road-mobile missile units, although closely monitored, would likely occur with less warning, if any. Additional indicators include specific space-related warnings or rhetoric, or the declaration of an antisatellite or ballistic missile defense test, although no warning would be issued. The 2007 Chinese ASAT test that destroyed an LEO satellite was not preceded by any specific warnings. Implications for U.S. Interests The United States has three primary national interests in preventing or mitigating the dangerous space contingencies detailed above, which would threaten U.S. or allied space assets and produce mass space debris, imperiling assured access to space. First, the United States depends on space systems more than any other country, which is unlikely to change in the future. No other state spends as much on its space activity (75 percent of global space funding is by the United States), or has a greater stake in a safe and secure space (43 percent of all active satellites are U.S. owned). Threats to U.S. satellites would reduce the country's ability to attack suspected terrorists with precision-guided munitions and conduct imagery analysis of nuclear weapons programs, and could interrupt non-cash economic activity depending on the severity of the attack and number of satellites disrupted. Moreover, although space debris threatens all international space assets, the United States depends especially on satellites in the portions of LEO where the greatest debris is found for encrypted communications, reconnaissance over Afghanistan, missile defense, and other missions critical to national security. Second, as the most active global security manager with unmatched commitments, the United States would be more affected by an unstable or insecure space commons than any other country. In January 2012, the Obama administration announced its commitment to help broker an International Code of Conduct on Outer Space Activities, which would be an informal arrangement based on freedom of access to space for peaceful purposes, preservation of the security and integrity of space objects in orbit, and due consideration for the legitimate defense interests of states. Third, as the primary guarantor of space access, the United States has a strong interest in promoting responsible behavior in space or at least preventing space activities that have the potential to become a source of international instability or potential conflict, in space or on the ground. Intentional or crisis-related interference in space would undermine the norm of equal access to space for all by introducing space as a domain for crisis bargaining, as well as prompting its further militarization—both of which would be highly destabilizing to international political dynamics. The U.S. Strategic Command's Joint Space Operations Center (JSpOC) helps to protect the space domain by providing conjunction assessment notifications to government and commercial space operators when their satellites are predicted to collide with other satellites or space debris. JSpOC gathers this information with its "space fence" of ground-based radars and optical sensors located throughout the world. Threats to military or civilian satellites could limit the timely and accurate information available to civilian decision-makers and military commanders during crisis situations. This is compounded by how difficult it would be for officials to quickly interpret whether a satellite malfunction was caused intentionally or inadvertently by humans, a damaging space phenomenon (such as solar flares), or routine mechanical failure. Attributing who or what is responsible for such a disruption in space is usually possible, but requires equipment, analysts, and time—all of which may be in short supply during a crisis. This situation could also create a first-strike incentive for U.S. decision-makers seeking to act before its understanding of a terrestrial dispute or its space situational awareness—the ability to view, characterize, and predict the location of manmade objects in space—is interrupted or further degraded. Preventive Options The United States has several unilateral, bilateral, and multilateral options for preventing dangerous space events most detrimental to U.S. interests. In addition to taking further steps to improve the survivability and redundancy of U.S. space assets and enhance its ability to detect dangerous space activities and debris, the United States could undertake other unilateral measures, such as declaring a moratorium on all ASAT testing to pressure other states to do the same. The United States could also promote a nontreaty prohibition of direct ascent ASAT tests. However, given that this would limit the operational requirements of mid-range U.S. ballistic missile defenses, such an agreement would be infeasible because of intense domestic political opposition. Moreover, while an ASAT and direct ascent ASAT ban would be beneficial to U.S. security, it is unlikely that China, North Korea, or Iran would agree to, let alone abide by, such agreements. Additionally, emerging space powers, such as Russia and India, may prioritize the development of space capabilities in an effort to match those of other space powers. The United States could issue clear and specific public warnings to deter malicious activity in space. As of yet, U.S. deterrent threats are confined to Pentagon planning documents, or have been applied with little specificity to cyber and space domains contemporaneously. If the space event was detected during the planning stage by the U.S. intelligence community, or it became clear that a country developing space capabilities intended to use them maliciously and the resultant space debris could be predicted by JSpOC, the United States could publicize the costs that such debris would pose to the world's satellites in an attempt to marshal international condemnation to prevent it. Military options to deter impending actions, or respond if necessary, include deploying naval assets toward a potential adversary, placing regionally based bombers on high-alert status, attempting to intercept a space launch with the sea-based Aegis ballistic missile defense system (a near impossibility for far inland China launches), or attempting to preemptively strike the space launch platform with long-range bombers or conventionally armed ballistic missiles. Though the United States possesses advanced direct ascent ASAT capabilities, employing them against Chinese, North Korean, or Iranian space systems would signal that such acts were normal behavior and create space debris threatening to U.S. space assets. Beyond these unilateral options, the United States could issue private demarches to warn and educate China, North Korea, or Iran of the consequences of a direct ascent or co-orbital ASAT test. The United States could initiate trust-building measures with specific countries to reduce the risk of inadvertent conflict. For example, U.S. officials could work with Chinese military leaders to establish rules of the road for space, such as announcing space launches and implementing emerging industry standards for debris mitigation, which could be included as part of the U.S.-China military discussions on common understandings for international airspace, the open seas, and cyberspace. Currently, no legal or nonbinding instruments governing outer space exist other than the Treaty on Principles Governing the Activities of States in the Exploration and Use of Outer Space. U.S. diplomats could also request greater clarity from North Korea and Iran about the intent of their space activities. Multilaterally, the United States could continue to develop and promote bilateral and multilateral transparency and confidence-building measures in outer space, expanding on the UN Group of Governmental Experts' roadmap published in July 2013. This would include information exchanges and notifications, consultative mechanisms, shared space situational awareness, and the publication of national space policies. Likewise, the United States could seek to advance discussions in the UN Committee on the Peaceful Uses of Outer Space, which is developing best practices for space debris and collaborative space situational awareness. Mitigating Options The United States has several options to mitigate the consequences of a dangerous space event. If JSpOC characterized the space debris threat accurately in advance, high-demand U.S. satellites could undertake debris avoidance maneuvers to relocate to safer orbital slots. Predictive conjunction notices could be provided to all spacefaring nations and satellite operators. In preparation for such an event, policymakers could develop contingency plans to shift high demand military or civilian satellite communications from threatened U.S. satellites to available commercial satellites. The United States could mandate that government and commercial satellites include enhanced resilience and recovery capacities, such as passive shielding, hardening electrical circuits, and turn-off systems. Additionally, the U.S. military could expand training for operating in GPS-denied or communications-denied environments, in case military or military-dependent satellites are disabled. The United States could attempt to establish a dedicated, bilateral crisis communications channel between JSpOC and its equivalent Chinese, North Korean, and Iranian space agencies, to issue warnings and demarcations, and facilitate cooperation in times of crisis to prevent escalation and mitigate damage to space assets. This might be unlikely in the near term, but could be pursued over time. JSpOC already has a time-delayed mechanism to provide this information to China, and the U.S. military and its Iranian counterpart communicate in real time to prevent misunderstandings. This is even less feasible in the case of North Korea, given there is no current direct communications mechanism with the United States. The United States could work with other spacefaring nations to develop multilateral and international legal agreements, strategies, and plans for safely removing existing or future space debris. The reduction of space debris in orbit would make additional debris-creating space events less of an immediate and long-term threat to all space assets. Recommendations Due to its reliance on space and unmatched space situational awareness and demonstrated record of leading global action, the United States has a unique obligation to lead international efforts to prevent or mitigate a dangerous space event by implementing the following recommendations: Upgrade the JSpOC space fence radars and sensors, which are aging and strained, and provide limited coverage of the southern hemisphere. This is estimated to cost up to $2 billion. Expand the scope of data-sharing agreements with other countries and commercial space operators—beyond the thirty-five current agreements with commercial operators and five with countries (Australia, Canada, France, Japan, and Italy)—to improve overall space situational awareness. Establish regulations mandating best practices for space debris mitigation for all U.S. government and commercial space assets, such as requiring that satellites be maneuvered into "graveyard orbits" at the end of their lifespan so they burn up in the atmosphere. Test and develop large debris removal techniques through bilateral and multilateral pilot programs with other spacefaring nations. Increase transparency and confidence-building by announcing that the United States will not test or deploy antisatellite capabilities. This would be similar to the unilaterally declared U.S. Nuclear Weapons Testing Moratorium of 1992, which the United States has adhered to since. The moratorium was emulated in the Comprehensive Nuclear Test Ban Treaty ratified by 161 states including Russia. Publicize growing concerns about China's ASAT capabilities, mirroring what has been done to address Chinese threats to the maritime and cyber domains; no senior U.S. government official has issued a statement on space since January 2012, signaling that threats are not a priority. Dedicate more assets to improve intelligence collection and analysis of the command-and-control arrangements for China's, Iran's, and North Korea's space assets to better understand which officials would authorize a dangerous space incident and how they could be influenced. Undertake contingency planning for a diplomatic and military response if such a threatening antisatellite test occurred, similar to planning that has been conducted for catastrophic cyberattacks on U.S.-based critical infrastructure; this has yet to be undertaken at a senior level. Ask allied and partner countries with stronger diplomatic ties to China, North Korea, and Iran to raise specific U.S. concerns about those countries' potentially destabilizing behaviors in space. Begin formal discussions with Chinese government leaders to increase transparency and predictability for both American and Chinese actions in space, as part of the U.S.-China Strategic and Economic Dialogue process. Work with Congress to repeal the 2011 provision that prevents Chinese officials or experts from visiting the National Aeronautics and Space Administration's facilities to allow for bilateral civilian space cooperation with China. Increase focus on brokering an International Code of Conduct on Outer Space Activities with the largest number of states, to improve stability in space by promoting rules of the road for responsible space behavior. Conclusion Though the United States has limited leverage over the actions of China, North Korea, and Iran in space, it does have numerous options available to mitigate or prevent dangerous space incidents and limit the multiplication of space debris that threaten U.S. space assets and assured access to the domain. Some policymakers will argue that these recommendations require too much transparency into U.S. space operations and could pose operational constraints. Others will contend that these do not go far enough to address the reality of space threats and that the United States will waste its diminishing lead role if it does not take more proactive and radical steps. But U.S. policy must balance both demands by implementing the practical set of recommendations provided in this report. On the current path, the likelihood of potentially dangerous space incidents will only increase, whereas a renewed focus on preventing and mitigating such events would markedly reduce this threat. If the United States wishes to better guarantee its access to space as China, North Korea, and Iran advance their capabilities and other space powers emerge, it must intensify its efforts to have an impact or forsake its role in shaping rules of the road for space.

Introduction Egypt is experiencing a deep economic crisis. The country's foreign currency reserves are less than half of what they were before the January 2011 uprising, threatening Egypt's ability to pay for food and fuel. Egypt's budget deficit is 14 percent of gross domestic product (GDP) and its overall debt, which is the result of accumulated deficits, is more than the country's economic output. In this difficult economic climate, roughly 45 percent of Egyptians live on less than two dollars per day. Inflation, which reached as high as 12.97 percent after the July 2013 military coup, is currently at 11.4 percent. Tourism revenue—traditionally a primary source of foreign currency along with Suez Canal tolls and remittances from Egyptians working abroad—is less than half of what it was in the last full year before the uprising. Foreign direct investment has dried up outside the energy sector. Unemployment remains high at 13.4 percent. Among the unemployed, 71 percent are between fifteen and twenty-nine years old. This economic weakness makes it politically difficult to address the problems that contribute to a potential solvency crisis because the necessary reforms will impose hardship on a population that is already experiencing economic pain. Despite these problems, the state of Egypt's economy has received less attention since the July 2013 coup d'état because of an influx of financial support from Saudi Arabia, the United Arab Emirates, and Kuwait. Yet Egypt's economy remains shaky and the threat of a solvency crisis lingers. Indeed, the continuation of violence, political protests, and general political uncertainty—even after planned presidential and parliamentary elections—along with a hodgepodge of incoherent economic policies, all portend continuing economic decline. This in turn could create a debilitating feedback loop of more political instability, violence, and economic deterioration, thus increasing the chances of an economic calamity and yet again more political turmoil, including mass demonstrations, harsher crackdowns, leadership struggles, and possibly the disintegration of state power. The Contingency Insolvency is the inability of an entity—a person, corporation, or country—to meet its financial obligations to lenders. It comes in two forms: balance sheet insolvency and cash flow insolvency. The former occurs when an entity has total liabilities whose value exceeds that of its total assets. Egypt is at greater risk of experiencing the latter, meaning that it cannot meet specific obligations as debt payments are due, and thus defaults. Although its causes were different, Greece's sovereign debt crisis that began in 2009 provides a baseline comparison of a heavily indebted country that had periods of macroeconomic performance, but ultimately was unable to meet its obligations. The overall picture of the Egyptian economy is deeply worrying. Egypt's foreign currency reserves stand at approximately $16 billion to $17 billion, not all of which are liquid. This means that Egypt is just above the $15 billion critical minimum threshold of foreign reserves, which is the amount required to cover costs of food and fuel for approximately three months. Chart 1. Egypt's Foreign Exchange Reserves Due to the unsettled and violent political environment, tourism dropped sharply in 2013. In early 2014, Minister of Tourism Hisham Zazou told the newspaper Al-Hayat that "2013 was the worst year on record for Egypt's tourism industry." Foreign and domestic investment also declined, in comparison to the five years before the January 2011 uprising. In addition, Egypt's central bank announced a cut in interest rates with little warning in late 2013, as part of an effort to spur domestic investment. This makes good economic sense, but the move is also potentially inflationary, putting pressure on the currency and foreign reserves as well as on Egyptian consumers. Government debt is 89.2 percent of GDP and overall debt is more than 100 percent of GDP. It is important to note that the national debt and fiscal deficit are particularly problematic for Egypt because of its debt rating (even though it was recently upgraded from CCC+ to B-). Unlike the United States, Germany, or Canada, each of which has significant levels of debt, it is costly for Egypt to finance its deficit and debt through borrowing. As a result, Egypt has financed its deficit through domestic borrowing from public sector banks and the central bank. According to Fitch Ratings, "bank claims on the government account for 67% of total bank assets." Immediately following Mohammed Morsi's ouster, Saudi Arabia, the Emirates, and Kuwait committed $12 billion to Egypt. The Gulf countries have committed an additional $8 billion as of early 2014. The Egyptians can also tap into an $8.8 billion grant from the Gulf Cooperation Council (GCC) that dates back to the 1990s. This assistance is intended to provide budget relief, replenish foreign currency reserves, finance construction projects, pay for the production of medicines, and make petroleum resources available (though fuel rationing continues). For all of these resources, however, Gulf assistance has provided Egypt with only a bare minimum of relief. For example, there is still an estimated annual $10 billion gap in financing the government deficit. There are two reasons why infusions of more money from foreign donors will not fix Egypt's economic problems. First, by financing new spending with grants from the Gulf, Egypt is merely shifting fiscal problems into the near future. Second, receiving more assistance only masks problems that are rooted in irrational and conflicting economic policies. These policies—including food and fuel subsidies, a still-robust state-owned sector, and a tax policy that does not produce enough revenue—are the primary reasons why the government burns through anywhere from an estimated $1 billion to $1.5 billion of its reserves per month paying for critical needs and defending the currency. The policies place significant pressure on the government's budget. Subsidies, for example, account for 29.67 percent of the government's expenditures. Chart 2. Egypt's Subsidies Yet, the prevailing political uncertainty in Egypt makes it difficult for the government to undertake meaningful reform. The rigidity of Egypt's system of subsidies, for example, is a critical component of the Egyptian social safety net and an important means of political control. Making fundamental changes to subsidies risks mass demonstrations similar to the 1977 Bread Riots, which erupted after Anwar Sadat proposed alterations to food subsidies consistent with recommendations from the International Monetary Fund (IMF). Despite pledges to reduce the government budget deficit to 10 percent of GDP (it reached 14 percent of GDP in 2012–2013), Egyptian officials have increased spending, including on a stimulus program and the introduction of a minimum wage for public sector workers. Yet, it will be difficult to reduce the deficit while pursuing expansionary fiscal policy. The new minimum wage of $172 per month will put further pressure on the budget. Likewise, additional economic stimulus packages will also increase the deficit. It may very well be that an expansionary fiscal policy is necessary, but the Egyptians do not have the means to finance it. In addition, despite much discussion of subsidy reform and some rather modest headway in means-testing energy subsidies, the effort to address this major problem is more theoretical than real. Distortions in the markets for bread, fruit, and vegetables also persist, but are unlikely to be addressed for political reasons. This type of ad hoc policymaking seems aimed more at temporarily mollifying various interests than establishing economic sustainability and is a sign of the leadership's inability to arrest Egypt's economic decline. The foreign reserves problem is exacerbated by Egypt's sensitivity to changes in commodity prices, given that it is a net importer of oil and natural gas and the world's largest importer of wheat. Consider, for example, a run-up in wheat prices, which are critically important given the Egyptian government's commitment to subsidizing bread. An external shock such as drought, extreme heat, wildfires, political instability, or some other cause of a poor harvest in the major global producers—the United States, Canada, Australia, Ukraine, and Russia—would result in a substantial increase in the global price of wheat, placing an additional burden on Egyptian finances. Another potential shock is the rapid depreciation of the Egyptian pound, resulting from any number of factors including the central bank's decision to cut interest rates, a move by foreign donors to decrease (though not end) their financial assistance to Cairo, or an unforeseen political event that encourages Egyptians to change pounds into dollars. With limited foreign reserves at its disposal, Egypt's central bank would be hard-pressed to defend the currency, resulting in inflation. Under these circumstances, Egypt might be forced to print money, which would compound the inflationary pressures associated with depreciation. No single event alone would trigger a solvency crisis, but multiple political and economic factors already present could potentially make Egypt default. Saudi Arabia, the United Arab Emirates, and Kuwait seem willing to underwrite Egypt with few conditions or limits. Yet, Gulf support may not be sustainable over the longer term, if Egypt's financial needs prove to be greater than anticipated, if political rifts develop with Cairo, if the priorities of the Saudis, Emiratis, and Kuwaitis change, or if any of the three Gulf states face budgetary or political pressures of their own. A reduction or suspension of the aid would certainly precipitate a solvency crisis. The most likely trigger for insolvency, however, is the continuation of current economic policies, which place significant and ultimately unsustainable pressure on the country's finances. Egyptians may enjoy a respite with an upcoming presidential election and the false sense of "turning the corner" it might provide. As the Egyptian government continues to pursue incoherent fiscal and monetary policies, the foreign reserves situation will deteriorate, rendering Egypt insolvent. The onset of this crisis may be long in the making, but its effects will likely be felt quickly. Egyptians would once again be unable to buy fuel, medicine, basic foodstuffs, and other important goods. Such a situation could potentially bring large numbers of people into the streets in opposition to the government. Given the tendency of Egypt's internal security services to respond to demonstrations with too much force—which encourages people to join protests—rallies could spread throughout the country. This revolutionary bandwagon could overwhelm the government, but this time it may be even more difficult for the military to maintain stability and its control of the state. The Gulf states would likely again provide financial support to Cairo to avoid this outcome. However, infusions of aid will neither resolve nor mitigate the adverse effects of economic policies that have led to the solvency crisis. Warning Indicators The following warning indicators should help U.S. officials and other observers determine whether Egypt is facing an imminent solvency crisis: The government tightens currency controls. Should the government prevent individuals and firms from transferring certain amounts of hard currency out of Egypt, it would be a clear signal that Egyptian officials are concerned about the country's solvency. Beginning in January 2014, individuals can transfer up to $100,000 in hard currency out of the country, which is a relaxation of previous controls established during the Supreme Council of the Armed Forces–led transitional period after former president Hosni Mubarak's ouster that limited transfers to $100,000 over a lifetime. Egyptian officials have left open the possibility of changing exchange-rate controls in 2015. A tightening of restrictions would preserve foreign currency, but at the expense of scaring away current and potential investors. The government restructures its debt, forcing banks to buy debt instruments. Restructuring government debt would require the Egyptian government to force banks to exchange old debt for new debt or to impose new taxes on their returns. Imposing debt restructuring on the banks would place additional pressure on Egypt's financial sector. In addition, the extent to which authorities are forcing banks to buy bonds and treasury bills to finance the deficit, or the Central Bank of Egypt is financing government purchases, indicates that the country is nearing a solvency crisis. Egypt's arrears rise. Observers should pay careful attention to Egypt's arrears. A rise in Cairo's overdue debts is perhaps the clearest indicator that Egypt is headed toward insolvency. A rise in arrears may be the result of settling certain obligations before others, but it does indicate that default is a strong possibility. Egypt suddenly demonstrates an interest in an International Monetary Fund standby agreement. The Egyptian government is counting on Gulf assistance to float the economy. In addition, an IMF standby agreement is a politically difficult proposition for Cairo. Thus, although signing a deal with the Fund seems—from the outside—to be prudent, it is politically difficult. Under these circumstances, a sudden Egyptian interest in negotiating with the IMF would indicate that Cairo is worried about its solvency Implications for U.S. Interests Insolvency in Egypt would damage U.S. interests, threatening the safety of American citizens and U.S. property while putting U.S. business assets at risk. The largest American investor in Egypt, the Houston-based oil exploration and production company Apache Corporation, reduced its exposure to Egypt by bringing on Sinopec as a partner in late 2013. Egypt's total share of Apache's overall production declined from 26 percent to 16 percent. Other large multinationals such as Coca-Cola continue to operate in Egypt with little disruption, but an economic crisis and the concomitant political instability might negatively affect those firms. Breakdown in Egypt would also affect U.S. forces and military posture in the Persian Gulf. The U.S. Navy places a premium on expedited transit through the Suez Canal. In addition, multiple daily U.S. Air Force overflights through Egyptian airspace en route to the Gulf could be curtailed or halted as a result of an Egyptian collapse. Finally, the United States and other interested parties, including European and Gulf states, would confront a major humanitarian crisis in Egypt, which would have trouble securing basic necessities for its eighty-six million people. An economic collapse triggered by insolvency and the subsequent political fallout in Egypt would also threaten Israeli security. The northern Sinai, where the military is fighting a low-level insurgency, has become a staging ground for attacks on Israel's southern cities and towns. If one of those attacks killed or injured large numbers of Israelis, it would force the Israelis to respond, potentially compromising the Egypt-Israel peace treaty—a pillar of U.S. policy in the Middle East. Preventive Options Although the United States has its own fiscal problems, it can still pursue several discrete measures that could help prevent a solvency crisis and potentially stave off Egypt's economic collapse. Provide loan guarantees. The United States, European Union (EU), and Asian allies could pool resources and provide loan guarantees for Egypt. The United States has successfully pursued a similar policy in Jordan. Loan guarantees offer two primary benefits to donors and recipients: they are an effective way of leveraging large amounts of money with a limited commitment of resources—unless Egypt defaults—and they allow Cairo to borrow on commercial markets at significantly lower interest rates than a country with a B- rating would otherwise be able to obtain. Recognizing the sensitivity in the United States to offering the Egyptians what some consider a "blank check," there would need to be a prior agreement with Cairo that the loans would be used for Egypt's greatest needs, specifically food, fuel, and medicine. There are also some practical problems associated with loan guarantees. The loan guarantees involve expenditures that would require authorization from the U.S. Congress and subsequent spending cuts to offset the resources spent guaranteeing loans for Egypt. In addition, even with the backing of the United States, Europe, China, Japan, South Korea, and other global economic actors, Egypt's ability to borrow on commercial markets with its poor rating represents a significant challenge. Relieve the debt. Egypt's foreign debt is $47 billion as of the end of January 2014, of which $3.5 billion is owed to the United Sates. This external debt is relatively small as a percentage of GDP compared to domestic debt. Still, it could send an important signal to other holders of Egyptian debt if the United States took steps to relieve Cairo's financial burden. In 2011, the United States sought to "swap" Egypt's dollar-denominated debt for payment in Egyptian pounds that would then be used to pay for programs like education and youth employment. This scheme was dropped over objections from the Egyptian government. But the Obama administration proposed a debt swap for good reasons—specifically, to encourage Egyptians to invest in areas that were in dire need of resources and would benefit Egypt in the future. Given developments over the last three years and the state of the economy, relieving Egypt's debt to the United States is still prudent. It is important to note that debt relief, like loan guarantees, requires congressional authorization and spending cuts to offset this assistance, though it would be less than the amount of the debt. Pay down domestic debt. The United States should encourage the Egyptians to use foreign assistance to pay down public domestic debt, which stands at $240 billion, instead of increasing expenditures on subsidies, a minimum wage, and a stimulus package that Cairo has no way to finance. Keep the lights on. Although not as acute as they were in the spring and early summer of 2013, fuel shortages and blackouts in Egypt continue. In early June 2013, the Saudis and Egyptians signed an agreement to share energy by linking the two countries' power grids. This is a step toward relieving shortages, but the project will take two to three years to complete. Gulf fuel transfers since the coup have helped mitigate the problem, but demand remains high and Egypt's production of natural gas has declined. Rather than leaving the issue to Saudi Arabia, the United Arab Emirates, and Kuwait, the United States could establish a consortium of international donors to facilitate Egypt's import of the natural gas necessary to generate electricity, freeing up money in the budget to focus on longer-term threats to Egypt's economic stability. Once again, the U.S. Congress might be reluctant to assist Egypt in this manner given the need for budget cuts with any new expenditure. Mitigating Options In the event that Egypt defaults on its debts, the United States has several options to alleviate the consequences and reduce the likelihood of a political collapse in the country and its attendant strategic and humanitarian problems. Support the military. In the event of a solvency crisis and its attendant political consequences, it is likely the military would intervene in politics. The United States should offer political and diplomatic support to the senior command to prevent Egypt from becoming a failed state. This means recognizing any new government that results from such an intervention and using Washington's diplomatic clout with allies in the region, Europe, and Asia to do the same. It will also entail additional economic support. American support for the Egyptian military, along with Washington's response to the 2013 coup, is controversial in both Egypt and the United States. The unpleasant fact, however, is that the armed forces remain the only truly national institution Egypt has. Its civilian political class lacks dynamism, and its other government ministries barely function and command few resources. In the event of insolvency, the officer corps will be the only relatively organized and coherent force capable of preventing a descent into chaos. Provide immediate infusions of financial assistance. The United States could establish an Egypt Contact Group so that wealthy countries can extend immediate financial assistance to Egypt. The Group would include the United States, EU, major Asian countries, and the Gulf states. As noted above, Egypt could potentially experience a solvency crisis even with assistance from wealthy countries in the Gulf, which is why it is incumbent on the rest of the world to marshal even greater resources to refloat the Egyptian economy. Restore food aid. Food aid to Egypt ended in 1992; it could be started again. Egypt is particularly sensitive to changes in the global price of wheat. Indeed, between 2009 and 2011, food insecurity in Egypt increased by 3 percent. Economic collapse would only increase food insecurity. Recommendations The United States has limited diplomatic and economic tools at its disposal to help the Egyptians. Even if Washington could bring billions to bear on Egypt's economic difficulties, it would do little to mitigate the underlying economic problems that place the country at risk of a solvency crisis. It is up to the Egyptians to undertake reforms to forestall this outcome. Given the fact that the Egyptians have done little in this regard, a solvency crisis is entirely plausible. Consequently, the United States has a strategic responsibility to do what it can in Egypt to prevent the causes of insolvency and its attendant political consequences. In addition to implementing the preventive measures outlined above, the Obama administration should do the following: Work with the U.S. Congress to support Egypt with additional aid. There is resistance in Congress to increasing aid to Egypt. But the $250 million in economic support funds is a paltry sum given Egypt's needs. Again, additional funds will not by themselves resolve Egypt's economic problems, but they will give Egyptian policymakers time to undertake politically controversial reforms. Ideally, the United States would condition this new assistance on much-needed economic reform. This is unlikely to work given that Gulf aid is available without explicit prerequisites, which is why Washington should focus its diplomatic efforts on convincing wealthy Arab states and others to encourage Cairo to undertake meaningful reforms. Still, the Obama administration and legislative branch should take a long view of Egypt; while the status of Egypt's Copts, the government's commitments to human rights and democracy, and Egypt's relations with Israel are important, they are secondary to a solvency crisis that threatens Egypt's collapse, which would surely affect all of the issues over which Congress has expressed concern. Establish an interagency Egypt crisis monitoring group. The U.S. State Department, Central Intelligence Agency, Department of Defense, and Treasury Department should increase their surveillance of the Egyptian economy in order to better prepare the government to respond to an Egyptian crisis. This interagency group would be particularly important given that the Egyptian government tends not to be forthcoming with accurate economic data. The United States should share its information and findings with friendly governments that are also committed to preventing an Egyptian solvency crisis. Push others to do their part. The United States should prepare for the moment when Egypt's economic problems overwhelm even Gulf-based aid and use its diplomatic clout in other parts of the world to secure additional assistance for Egypt. Countries in Asia and Europe are understandably reluctant to commit resources to Cairo without Egyptian policy reform, which is why Washington should also encourage Egyptian officials to resume negotiations with the IMF. The Fund should play an important role in assisting the next government to redraw Egypt's social contract in a way that is both politically acceptable at home and can command the strong support of the rest of the world. Central to the plan is the development of a bridge to a new system that better targets subsidies while providing a safety net for those who no longer qualify for subsidized goods and one that establishes a transparent and regular mechanism of price and subsidy changes, thus reducing their political toxicity. This means that foreign donors will need to accept a slower reduction in subsidies than under a conventional IMF program in order to increase the likelihood that Egyptians can make headway on reforms in a coordinated and more coherent manner. Conclusion Egypt is perilously close to becoming insolvent. Despite Gulf assistance, the combination of the country's economic needs, the legacies of Cairo's incoherent economic policies of the past along with their continuation today, the political challenges to economic reform, and the potential for exogenous economic shocks all make a solvency crisis a significant possibility. The United States and its allies in the Persian Gulf, Europe, and Asia should be prepared for this outcome. Increased attention to this issue among policymakers and plans to prevent or mitigate the consequences of Egypt's default are focused principally on infusions of additional aid. This will certainly help Egypt to purchase food, fuel, and other critical goods, but external aid will not resolve the problem. At best, it will give Egyptian policymakers some breathing room and thus an opportunity to undertake economic reforms.