• Monetary Policy
    Bye, Bye Asian Oil
    "Asian Oil Exporters" always was a geographically accurate yet still somewhat misleading subcategory of the Treasury International Capital (TIC) data release. Technically, the Gulf is in Asia, and Asian oil exporters were a set of countries that could be differentiated from African oil exporters. But the title wasn’t terribly helpful either. Not for a set of countries—the GCC countries (Saudi Arabia, the United Arab Emirates, Qatar, Bahrain, Oman, and Kuwait), Iraq, and Iran—in what more commonly is called the Middle East. And, thanks to a wise decision by the U.S. Treasury to release the disaggregated data, it will soon be only of historic interest. The Treasury didn’t just release the current Treasury security holdings (or to be more precise, their holdings of Treasury securities in U.S. custodial accounts) for individual Gulf and Caribbean countries, it also released the historical time series. That is the way to immediately establish the credibility of a data series (Take note, for example, of the difficulty in interpreting China’s Special Data Dissemination Standard [SDDS] release, including the lines on China’s forward book, without back data). So, shock of all shocks, we now know Iran doesn’t own any Treasuries. At least not any in U.S. custodial accounts. The real story in the data, though, is the lack of any real story. The Gulf countries do not keep that many Treasuries in U.S. custodial accounts, so there wasn’t much for the disaggregated data to reveal. That has long been apparent from the aggregated data. The $250 billion or so of Treasuries held by “Asian oil exporters” was small relative to combined reserves of these countries (excluding Iran, for obvious reasons) of around $1 trillion. And after say 2010, the changes in the Gulf’s combined Treasury holdings haven’t even really moved with their reported reserves. This in some ways is quite surprising: most of the Gulf counties peg to the dollar and thus need a buffer of dollar liquidity, and reasonably would be expected to have a relatively large U.S. dollar portfolio. It thus has long seemed likely that the Gulf countries in aggregate either make extensive use of outside fund managers or make use of non-U.S. custodians (to state the obvious: Belgium, Luxembourg, and a few others hold way more U.S. assets than can be explained by high–saving Belgian dentists; for a discussion of custodial bias see page 9 of this Fed paper). There though is still a bit of information to tease out of the historical data dump. Saudi Arabia holds a small share of its reserves in U.S. custodial accounts (at least for Treasuries). Treasuries seem to account for only around 20% of its reserves. And Saudi Arabia, unlike the smaller Gulf states, doesn’t have a large sovereign wealth fund that invest large sums abroad. Most of Saudi “official” assets are managed by the Saudi Arabian Monetary Agency (SAMA). Which is a fancy way of saying that if Saudi reserves are invested like reserves rather than like a sovereign wealth fund, they should hold more Treasuries—or similar safe assets—than appear in the TIC data. Indeed, it seems like Saudi Treasury holdings (at least those in U.S. custodial accounts) barely correlate at all with Saudi reserves. If anything, Saudi Treasury holdings have gone up in times of stress in global financial markets and stress in global oil markets (stress from the Saudi point of view that is), and thus seem negatively correlated with Saudi reserves. Saudi holdings of Treasuries rose in late 2008, likely as SAMA moved funds out of riskier banks into safer U.S. custodial Treasuries, and perhaps hoarded safe assets in preparation for an extended period of low oil prices—and again in 2015. If you take the simple change in Saudi reserves and plot that against the change in Saudi Treasury holdings this is clear. Conversely, the smaller Gulf countries’ Treasury holdings seem reasonably correlated with their reserves. Of course, these countries have huge sovereign wealth funds whose total assets far exceed their comparatively modest central bank reserves. That explains why Treasury holdings of the smaller Gulf countries at times exceed their reserves.* And why reserves haven’t changed that much even as oil prices have come down. The bigger point though is the more important one. The real news in the “new” U.S. data is that the Gulf countries—who, even with the fall in oil prices have enormous reserves and wealth funds (Saudi Arabia’s reserves are larger than the reserves of all but two countries, and Kuwait and the United Arab Emirates have giant sovereign wealth funds)—simply do not currently make heavy use of U.S.-based custodians, and thus the U.S. custodial data doesn’t tell us all that much. Too bad. As those who remember my old blog know, I am a huge fan of trying to tease information out of the TIC data and would much rather have had an interesting story to tell. We still do not really know, for example, just how many Treasuries the Saudis could sell, if they really wanted too. * The TIC data for a given country covers both official and private holdings. In practice though, for many countries—not just the Gulf countries—there is often a close correlation between a countries total reserves and their total holdings of U.S. assets. Privately managed funds tend to disappear in the data—or rather to appear in places like the Caribbean or one of the various European custodial centers.
  • Egypt
    This Land Is Your Land, This Land Is Saudi Land
    On April 9, the Egyptian government announced that it was returning the Red Sea islands of Tiran and Sanafir to Saudi Arabia. The disposition of these two islands has the potential to sow trouble for President Abdel Fatah al-Sisi.
  • Middle East and North Africa
    Israel and Saudi Arabia: Good Neighbor Policy
    The recent announcement that Egypt was returning control over Tiran and Sanafir islands in the Gulf of Aqaba to Saudi Arabia has gotten some attention, but deserves more. It is a moment that reveals much about current Middle Eastern politics. In 1950 the Saudis transferred control, but in their view never sovereignty, over the islands to Egypt to protect them from what it claimed was the threat of an Israeli takeover. During a visit to Egypt by King Salman this past week, control was transferred back. (There is a reasonably fierce debate in Egypt over whether in fact President Sisi has unconstitutionally abandoned sovereign territory-- or anyway as fierce as debates can be given repression and censorship in Egypt.) During the past few years we have heard repeatedly that relations between Israel and the Gulf Arab states were greatly improved because today they have common enemies in Iran and ISIS, and a common concern about the disappearance of American hegemony in the region. What happened with the two islands this week is proof that the improved relations really do exist. For one thing, Saudi Arabia has apparently agreed to respect the terms of the Egyptian-Israeli peace treaty of 1979. When that treaty was signed in 1979, the Saudis denounced it and broke relations with Egypt. Times have changed. The treaty contains this clause: The Parties consider the Strait of Tiran and the Gulf of Aqaba to be international waterways open to all nations for unimpeded and non-suspendable freedom of navigation and overflight. The parties will respect each other’s right to navigation and overflight for access to either country through the Strait of Tiran and the Gulf of Aqaba. So the Saudis are implicitly but clearly guaranteeing that they will not interfere with Israeli use of the Gulf of Aqaba, which provides access to the Israeli port city of Eilat. Moreover, there is much talk of a bridge over the Gulf of Aqaba, from Sinai to Saudi Arabia. Discussions of this potential construction have apparently taken place, and Israel, Egypt, and Saudi Arabia seem to be acting like.....neighbors. That is, common sense is prevailing, rights are being respected, and while Israel and Saudi Arabia have no direct public contacts at all they are able to communicate and get business done. This is a huge change, and of course a welcome one-- though the background story of their common fears about American policy and the growing power of common enemies is not at all comforting.
  • Global
    The World Next Week: April 14, 2016
    Podcast
    The U.S. Supreme Court hears arguments on an immigration case, President Barack Obama travels to Saudi Arabia and Europe, and the UN holds a special session on the global drug problem.
  • Middle East and North Africa
    The President Gratuitously Damages American Alliances
    American alliances are not in good shape these days, with many countries worrying that President Obama does not value the alliances, their own role in those alliances, or the commitments our alliances imply to the safety of states that are to some degree dependent on the United States. It is therefore mysterious why the president decided to inflict further damage in interviews with The Atlantic.  One can think easily of two famous moments when such comments, and those not even by a president, had dire effects. In January 1950, Secretary of State Acheson spoke about the American defense perimeter in Asia, saying our "defensive perimeter runs along the Aleutians to Japan and then goes to the Ryukyus....The defensive perimeter runs from the Ryukyus to the Philippine Islands." Excluded here was Korea, and many analysts have said this speech contributed to the decision by the North to invade South Korea several months later. On July 25, 1990, the U.S. ambassador to Iraq met with Saddam Hussein and said "We have no opinion on your Arab – Arab conflicts, such as your dispute with Kuwait. Secretary (of State James) Baker has directed me to emphasize the instruction, first given to Iraq in the 1960′s, that the Kuwait issue is not associated with America." Eight days later Saddam invaded Kuwait. Words have consequences. In these recent interviews, the president undermined trans-Atlantic relations and relations with Saudi Arabia and other Gulf allies. Take his comment on the Russian invasion of Ukraine: The fact is that Ukraine, which is a non-NATO country, is going to be vulnerable to military domination by Russia no matter what we do. This is an example of where we have to be very clear about what our core interests are and what we are willing to go to war for. Well, it is actually an example of saying something off the cuff that can only encourage further Russian aggression and demoralize Ukrainians fighting for their country. Why say it, even if you think it? Take this description of Mr. Obama’s words from The New York Times: The Saudis, Mr. Obama told Jeffrey Goldberg, the [Atlantic] magazine’s national correspondent, “need to find an effective way to share the neighborhood and institute some sort of cold peace.” Reflexively backing them against Iran, the president said, “would mean that we have to start coming in and using our military power to settle scores. And that would be in the interest neither of the United States nor of the Middle East.” Saudi Arabia has been an American ally since 1945, and now faces an aggressive Iran with troops and proxies all over the Arab world (Lebanon, Iraq, Syria, Yemen) and with a nuclear weapons and ballistic missile program. Other American allies border it and share its fears: Jordan, Kuwait, Bahrain (where the Fifth Fleet is located), and the United Arab Emirates. What does the president have to say to calm their fears? Nothing. Instead he builds them, and suggests that he looks upon growing Iranian power with indifference--or even with approval. To those comments he added criticisms of the United Kingdom and France, as if he were concerned lest any key allies be left out. It’s worth mentioning as well this line from The Times: The portrait that emerges from the interviews is of a president openly contemptuous of Washington’s foreign-policy establishment, which he said was obsessed with preserving presidential credibility, even at the cost of blundering into ill-advised military adventures. As to credibility, those advisers who told him he was sacrificing his when--for example--he failed to enforce his red line on Syria were right. Presidential credibility can never be the goal of American foreign policy, but it is an important asset. Foreign leaders, whether hostile or friendly, must be able to trust that when the president says something, he means it and will stick to it. Allies rely on the United States, but "the United States" is an abstraction. In fact they rely on the words of the top officials with whom they interact; for them, in this sense the president IS the United States. Mr. Obama’s deprecation of presidential credibility is alarming for Americans, and dangerous for our friends. Mr. Obama seems "openly contemptuous" of anyone who disagrees with him, and has for seven years. The problem in his eyes is not that there are tough policy questions, and difficult decisions, and several sides to hard questions; nope, there is his view and there are the ignorant, unintelligent views of those who differ, of whom he is indeed "openly contemptuous." Those who think the tone of American politics is ugly because participants disrespect each other might consider how much of that tone originates with or is worsened by the president. In any event, his comments in this interview will not help the national security interests of the United States. They will undermine the confidence of allies. It is anyone’s guess why felt that these thoughts should have been spoken now.         _________________________________________________________Note: Elliott Abrams is a member of the foreign policy advisory group for Sen. Marco Rubio
  • Saudi Arabia
    Assessing Saudi Arabia's Future
    Play
    Experts discuss Saudi Arabia's escalating tensions with Iran, as well as its relations with its regional neighbors and the United States.
  • Saudi Arabia
    World’s Largest Payoff
    World’s largest payoff? Not really. In Malaysia, hundreds of millions of dollars turned up in the personal bank accounts of prime minister Najib Razak. The facts appeared to suggest that the money had been siphoned off from 1Malaysia Development Berhad (1MDB), a state investment fund. Not coincidentally, the prime minister was also finance minister and the chief advisor to 1MDB. The affair has rocked Malaysian politics. As one news account of the scandal stated: The Attorney-General said documents showed that US$681 million (S$973 million) was transferred to Mr Najib’s personal accounts between March 22 and April 10, 2013 from the Saudi royal family, and the PM returned US$620 million in August the same year as the funds had not been put to use. The Financial Times tells us more: The attorney-general said three investigations by the anti-corruption commission, which were completed last month, had uncovered no evidence of crimes committed by Mr Najib. The attorney-general gave no further details about the source of the $680m, nor any explanation about the purpose of the transfer. He said the prime minister had returned $620m in August 2013. “I am satisfied with the findings that the funds were not a form of graft or bribery,” he said. “There was no reason given as to why the donation was made to PM Najib, that is between him and the Saudi family.” No independent evidence has been produced to show the funds came from Saudi Arabia. It would be surprising if any donation would be as much as $680m, observers in the kingdom said. Indeed, the Saudi Foreign Ministry has denied the story. The Attorney General’s story is preposterous, and Malaysia’s anti-graft body will appeal his ruling. That is not to say that in the real world money never changes hands, including between rich Gulf monarchies and political leaders. When I was involved with UN affairs in the Reagan and George W. Bush administrations, we heard often about vote buying in the General Assembly and Security Council. For some years there were frequent rumors that when prime ministers and foreign ministers visited the Gulf, they rarely came away empty-handed. Palms were greased, or to be more exact suitcases were handed over. But palms were greased with a million here or five million there. Even when oil prices were high, a gift of $681 million is a laugh, not a defense. And if it was a gift, why did the PM return $620 million of it? Better question: what has he done with the $61 million to which he seems to have grown attached? Malaysians may find out the truth one of these days. But sadly or not, they will not go into the Guinness Book of World Records under "the world’s largest payoff."  
  • Human Rights
    “Closing that Internet Up”: The Rise of Cyber Repression
    Brandon Valeriano is a Senior Lecturer at the University of Glasgow, and author of Cyber War versus Cyber Realities on Oxford University Press. Allison Pytlak is a policy and advocacy specialist at Control Arms. Donald Trump calls for “closing that Internet up” due to the rise of Islamic extremism, Hillary Clinton says the same thing, just a bit more diplomatically, asking the great disrupters to go to work disrupting the so-called Islamic State. Given that it is impossible to shut down the Internet in the United States, even if Russian submarines were to cut transatlantic cables, this move by Trump to enter the arena of information security demonstrates one of the most pernicious challenges in our digital era: the rise of cyber repression. Even the New York Times is exploring challenging the First Amendment in the age of digital extremism, which suggests Trump’s ideas are not at all fringe. While the actions of the Islamic State and other malicious actors online pose security problems, especially in their ability help recruit and promote offensive ideologies, the rush to react to this threat may harm civil liberties, or as Trump says “oh freedom of speech, freedom of speech.” The great hope of the Internet as a path to digital freedom has quickly given way to the reality of the structural control imposed by states on activists in cyberspace. The danger posed by digital threats is not severe enough to warrant a challenge the freedoms and liberties inherent in Western political ideologies. There has been a precipitous rise in malicious hacking but it is not exhibited between states, rather it is from within them by governments seeking to maintain control over their populations. There is increasing utilization of cyber technology to silence dissent, often in direct contradiction with human rights law. The dramatic rise of digital control by the state is a development that has been relatively overlooked by both mainstream media and the United Nations compared to the concern exhibited for the as of yet mythical cyberwar. The latest Citizen Lab report exposes the efforts of an espionage team named Packrat to silence dissent in Ecuador, Venezuela, and Argentina. The group used malware, phishing and disinformation, even going so far as to threaten an investigator looking into their activities. The scope, funding, and targets suggest this group is either directed or serves as a proxy for state interests. The story of Hacking Team, which made headlines earlier this year, also illustrates the ability of governments to use malicious code to target activists. Based in Italy, Hacking Team is an information technology company that sells intrusion and surveillance capabilities to governments, law enforcement agencies, and corporations. While it claims to not sell to governments with poor human rights records, evidence from a counter hack points to the contrary. Hacking Team software was found on the office computers of Mamfakinch, an award-winning Moroccan news website that is critical of the Moroccan government. The Hacking Team’s products have also surfaced in Ethiopia, a country notorious for its repression and strict governmental control over all channels of communications, as well as in Sudan, Bahrain and Saudi Arabia. Digital tools clearly have as much potential for harm as good because governments, with their many resources, can leverage these tools to suppress dissent as described. As well, the ability of social media to facilitate rapid organization or protest, or to share video or photo footage is tremendous but not foolproof. Governments have been known to respond to digitally organized protests with traditional weapons. For example, agents of the Thai government killed dozens of protesters after the Red Shirt uprising, which was coordinated largely via Twitter. There are similar examples from Iran and Belarus. This kind of digital repression may not seem as dire, dramatic, or tragic as other crimes that occur regularly against civilians, but it does constitute a human rights violation. This is largely based in Article 19 of the International Convention on Civil and Political Rights guarantees the “freedom to seek, receive and impart information and ideas of all kinds, regardless of frontiers, either orally, in writing or in print, in the form of art, or through any other media of his choice.” The question then is, what must be done to help activism flourish and protect civil liberties? The first step should be collect better data to obtain a realistic picture of how and when cyber repression happens. Valeriano and Maness catalog attacks between states but now the focus must shift towards collecting data on domestic attacks perpetrated by states and their proxies. Data collection should start with defining a list of actions that constitute cyber repression, the perpetrator, target, degree of severity, goal of operation, and method of attack. This goes beyond Freedom on the Net’s ranking of countries based on Internet openness or the former OpenNet Initiative’s measuring of information controls, instead we must catalog specific abuses and methods. Once this information is collected, like any human rights abuse, action can be taken. Parties cannot be credibly named and shamed without evidence. Repression by digital means deserves attention and action. Our future is not one of constant cyber war between countries, tracing dots as they bounce around the digital map between countries, but rather one of digital violence and repression directed at both internal and external enemies. To address digital repression, we first need better awareness of the extent of the problem, followed by actions seeking to end the harm. This is a call for a control over the digital arms of repressive regimes, and the need to construct a digital society that even Russia, China, and the United States could agree to.
  • Saudi Arabia
    What’s Driving Saudi Actions?
    The fallout that has followed Saudi Arabia’s execution of a Shia protest leader is likely to tamp down dissent at home while provoking regional conflicts, says expert Toby Matthiesen.