Yemen presents a potent combination of problems for policy-makers confronting the prospect of state failure in this strategically important Red Sea country. It is the poorest state in the Arab world, with high levels of unemployment, rapid population. growth and dwindling water resources.

• President Saleh faces an intermittent civil war in the north, a southern separatist movement and resurgent terrorist groups. Yemen’s jihadi networks appear to be growing as operating conditions in Iraq and Saudi Arabia become more difficult.

• The underlying drivers for future instability are economic. The state budget is heavily dependent on revenue from dwindling oil supplies. Yemen’s window of opportunity to shape its own future and create a post-oil economy is narrowing.

• Western governments need to work towards an effective regional approach with the member states of the Gulf Cooperation Council, in particular Saudi Arabia.

• Future instability in Yemen could expand a lawless zone stretching from northern Kenya, through Somalia and the Gulf of Aden, to Saudi Arabia. Piracy, organized crime and violent jihad would escalate, with implications for the security of shipping routes, the transit of oil through the Suez Canal and the internal security of Yemen’s neighbours.

Introduction

The Arabian Peninsula’s first democracy stands at a crossroads. The poorest nation in the Arab world struggles with 27% inflation, 40% unemployment and 46% child malnutrition. Half of its 22 million citizens are under sixteen and the population is set to double by 2035. Seven million people live in poverty and the country is heavily dependent on food imports, making it especially vulnerable to global price shocks. Reserves of groundwater and oil are rapidly diminishing.

Yemen’s centralized democratic structures outstrip the political maturity of its rural, barely literate society.

Modern, Western-style government institutions are distorted by the influence of President Ali Abdullah Saleh’s northern tribal power base and a closely woven informal patronage network. Party politics are weak and vulnerable to manipulation. The development of the state is incomplete.

President Saleh has survived three decades at the top – first as leader of North Yemen and then, after a 1990 merger with the People’s Democratic Republic of Yemen, as head of the unified republic. He will be seventy at the time of the next election, in 2013, when his country is expected to attempt a peaceful transition of power. A clear successor has yet to emerge.

President Saleh’s divide-and-rule strategy enables him to govern by proxy through rival sheikhs but, after thirty years in power, his reputation as a master of crisis management is starting to slip. In the last eighteen months, an erratic stop-go civil war in the northern province of Sa’dah, a sympathetic rebel uprising on the fringes of the capital, riots throughout

the south, two fatal attacks on Western tourist convoys and twin car bombs outside the US embassy in the capital, Sanaa, have created fears that the government is losing its grip.

Yemen’s location on the southern edge of the

Arabian Peninsula means that it acts as a buffer zone between the Horn of Africa and Saudi Arabia.

Yemen’s coastguard has nominal control over the northern waters of the Gulf of Aden – criss-crossed with smuggling routes and witnessing an explosion of Somali piracy3 – as well the Bab al Mandab, an 18- mile-wide strait at the mouth of the Red Sea. An estimated 3.3 million barrels of oil pass through the strait every day, along one of the busiest shipping lanes in the world.

After a prolonged hiatus created by Yemen’s support for Saddam Hussein during the 1991 Gulf War, international donors have begun to pledge substantial sums.

Implicitly and explicitly, aid money is intended to encourage good governance, improve planning and mitigate the impending economic crisis caused by the projected decrease in oil revenues.

However, Yemen’s window of opportunity to shape its own future and create a working post-oil economy is narrowing as oil production falls closer to consumption levels. The scale of the problem and the speed of action required pose a challenge both to the international community and to advocates of reform within Yemen. The range of policy tools is limited, implementation is obstructed by poor capacity within the civil service and the consequences of possible measures are uncertain.

A ‘front-line’ state

The US Congress designates Yemen a ‘front-line state’ in the war on terror, and the State Department places a high priority on Yemen’s internal security because of its close proximity to Saudi Arabia and the Gulf states.

Yemeni armed forces receive counter-terrorism

training and direct military financing from the US.

President Saleh’s primary concern, however, is his own survival. He has awarded key army posts to relatives and allies within his own Sanhan tribe and has thrown a Sanhan ‘ring of steel’ around his palace. His son, Ahmed, commands the Republican Guard, while his nephews, Tarik and Yahya, control private presidential security and the central security forces.

In 2006, Yemen’s military expenditure was thought to be 6.6% of GDP, although the true figure is likely to be higher. Estimates of the number of guns in circulation in Yemen vary from six million upwards.7 During the last year, the government has successfully enforced a ban on the public display of AK47s in Sanaa by nonmilitary personnel. However, Yemen remains a conduit for international arms-smuggling, notably for weapons destined for Somalia.

Resurgent terrorist groups

Yemeni mujahideen fought Soviet troops in

Afghanistan in significant numbers during the 1980s.

Yemenis continued to train in Afghanistan under al-Qaeda’s high command throughout the 1990s and make up the largest national grouping of remaining detainees at Guantánamo Bay. Foreign Minister Abu Bakr al-Qirbi claims Yemen is currently playing host to more than 1,000 jihadi fighters and al-Qaeda affiliates.

Veteran jihadis allegedly struck a ‘covenant of security’ deal with the security services on their return home from Afghanistan – freedom of movement in return for a promise of good behaviour inside Yemen’s borders. That deal held for several years before and after the 2000 attack on the USS Cole while it was refuelling

in Aden harbour (resulting in the deaths of seventeen sailors) and the maritime bombing of a

French oil tanker in 2002.

However, Islamist violence in Yemen has been escalating since a February 2006 jailbreak, when 23 terrorists tunnelled their way out of a high-security prison. The first attempted use of twin car bombs followed seven months later in thwarted attacks on two separate oil installations. Since summer 2007, the tempo of terrorist activity has steadily increased, with eight Spanish tourists killed in a suicide bomb in July

2007, two Belgians shot in an ambush on a tourist convoy in January 2008 and a low-level bombing campaign against Western targets in Sanaa during the spring of 2008.

Twin car blasts outside the US embassy on 17

September 2008 confirmed fears of a resurgent terrorist movement. Eighteen people died when six suicide bombers in two vehicles breached the outer perimeter of the security cordon and detonated their explosives at the main gate to the compound. It was the second assault on the embassy in six months.

Yemen’s jihadi networks appear to be growing as operating conditions in Iraq and Saudi Arabia become more difficult. In March 2008, a Saudi terrorist financier admitted that al-Qaeda’s branch in Saudi Arabia was defeated and called on his remaining associates to flee to Yemen. An influx of insurgents returning from Iraq and an ongoing active recruitment process within Yemen have energized al-Qaeda’s domestic support base.

In addition, a new mood has emerged among some active jihadis, who reject negotiation or compromise with the authorities. New recruits are targeting the security services, in retaliation for the alleged torture and humiliation of their captive associates. In July, a suicide bomber blew himself up outside a police station in Hadramawt. In a subsequent statement, a splinter cell pledged to continue attacks against security and intelligence structures.

The Sa’dah rebellion

Yemen’s bloody four-year revolt in Sa’dah, a mountainous zone on the border with Saudi Arabia, is led by members of the charismatic Houthi family. The Houthis condemn Yemen’s alliance with the US and President Saleh has repeatedly tried to portray the conflict as a battle against terrorism. But this complex stop-go civil war has its origins in the 1962 revolution that toppled the Zaydi Shi’a Imam and established the modern republic. The rebellion is also fuelled by bitter local grievances over economic marginalization, market access and the lack of service infrastructure in the Sa’dah region.

The Houthis are Zaydis, who practise a form of Shi’a Islam prevalent in northern Yemen’s highlands. The Houthis are calling for freedom of worship and social justice. They accuse the government of corruption, and of meddling with the delicate religious balance between Zaydi Shi’as and Salafi Sunnis. They are alarmed by Saleh’s perceived support for Salafi groups aligned with Saudi-styleWahhabi Islam. For his part President Saleh has cynicallymanipulated Saudi fears of Shi’a unrest on the Yemen–Saudi border to raise cash and munitions to prosecute his war.

The government’s military campaign is conducted by army commander and Salafi convert Ali Muhsin, a Sanhan kinsman of the president who is widely expected to play a powerful role as kingmaker during a future succession. Rumours abound of rivalry between Ali Muhsin and President Saleh’s son Ahmed, whose

Republican Guard has also deployed in Sa’dah. Several Yemeni newspapers have claimed there is a proxy war between the two men’s forces, under the cover of quashing the Houthis.

During spring 2008 the conflict appeared to be intensifying.

It spread from the northern governorate of Sa’dah to an eastern suburb of the capital, Bani

Hushaish. Just days before his thirtieth anniversary celebrations in July, President Saleh sent his family out of the country, supposedly in response to threats against his life, so his subsequent declaration that the Sa’dah war was ‘over’ took everyone by surprise. President Saleh promptly reshuffled the military, removing several allies of Ali Muhsin from leadership posts. In early August, state-run media reported that rebel leader Abdel Malik al-Houthi had accepted President Saleh’s peace terms. The rebels agreed to surrender their strategic mountain-top positions and hand over their heavy and medium weapons to the authorities.

However, sceptics doubt that the cessation of hostilities will hold and suspect that parties to the conflict are rearming.

Southern separatism

Like the Sa’dah rebellion, Yemen’s southern separatist movement has a regressive element. Protestors hark back to the 1970s and 1980s, to the time before the unification of the North Yemen Republic and the People’s Democratic Republic of Yemen (South Yemen).

Demonstrations started in Aden in the summer of 2007 when retired officers from the disbanded southern army demanded higher pension payments. The regime’s heavy-handed response inflamed latent separatist sentiment, which spread over the following months to Al Mukalla, Ma’rib, Radfan, Ad-Dali’, Abyan and Lahij. Demonstrators hoisted the flag of South Yemen, tore the modern unified Yemeni flag and chanted revolutionary slogans. Army tanks appeared on the streets, at least seventeen people died and many hundreds were arrested.

Underpinning these separatist gestures is the

perceived exclusion of southerners from northern patronage networks in business, politics and the military.

Yemen’s oil-producing zones lie within the former boundaries of South Yemen but southerners complain that the Sanaa regime is hogging the profits. In recent months, a number of activist leaders have been released from jail but underlying grievances continue to fester.

Spasmodic grenade attacks and bomb blasts target military checkpoints throughout the south, leading to confusion over what is and what is not terrorist activity.

An impending economic crisis

The underlying drivers for future instability in Yemen are economic. ‘The economic element of any scenarioplanning exercise points to collapse within four or five years,’ according to one European energy expert.

However, the trajectory is hard to predict because public data on oil exports and energy revenue are so unreliable. Oil was discovered in Yemen in the 1980s. The country has the lowest output of all the Middle East oilproducing states and the extraction trend has turned downwards, as two mature fields, Masila and Ma’rib, approach the end of their life cycle. Crude oil production has declined from a peak of 460,000 barrels per day in 2002– falling by 12% in 2007– to the current rate of 300–350,000 barrels per day.

Yemen’s oil sector provides 90% of export earnings and 75% of government revenue. It will be difficult for the economy to maintain its modest 3–4% growth rate, which is barely keeping ahead of population growth, as oil exports fall.

The World Bank predicts that state revenues from oil and gas sales will plummet sharply during 2009–10 and fall to zero by 2017, but Yemen’s crunch point will come long before the oil wells finally run dry. The government currently needs to cover rising domestic consumption, as well as a fixed allocation to oil companies to cover their initial and ongoing investment costs. As production levels drop towards consumption levels, the share of crude oil sales available to support the national budget is shrinking. During the first half of 2008, Yemen increased production to benefit from high prices – oil export revenues jumped from $1.2 billion during the same period in 2007 to $2.6 billion. However, high global prices place a unique strain on the national budget.

Owing to limited refining capacity, Yemen pays market rates to import more than half of the diesel required for domestic demand and subsidizes the sale at 72 rials a litre.

The World Bank estimates diesel subsidies will

cost $3.5 billion in 2008 – about 12% of GDP.

Only twelve of Yemen’s 87 oil blocks are in production, with less than a dozen of these under active exploration. It is possible that high profit margins will make future

extraction viable in sites that were previously considered too expensive or technically challenging. The expansion of the pipeline infrastructure in recent years has also increased the potential for commercial extraction where transportation costs were initially prohibitive.

Yemen’s government is relying on new finds, and hoping that offshore exploration will identify sizeable oil fields. However, the rising number of piracy attacks

in the Gulf of Aden has the potential to inhibit offshore oil exploration and disrupt liquefied natural gas (LNG) shipping. Yemen LNG’s plant will come online in 2009,

bringing roughly $10.9 billion into the state coffers during the course of the 20-year production agreement.

The anticipated LNG revenue will provide a welcome cushion but it will not make up the shortfall from the impending decline in oil exports.

Effective intervention

Aid is a crude tool and donors are caught in a double bind.Western diplomats frequently articulate the urgent need for transparency, accountability and genuine political participation but they also recognize the need to find traction within the system as it currently stands. Donors are cautious about pushing hard and fast for change in a country where internal security remains paramount and vigilante Islamists, linked to Islah, recently flexed their muscles through the creation of a self-appointed Saudistyle ‘vice and virtue’ authority.

Optimists point to the success of the Social Fund for Development – an innovative quasi-governmental body that delivers community services to meet local needs – as well as to the formation of the Supreme National Authority for Combating Corruption. Pessimists complain that, despite impressive rhetoric, the early momentum on reform has slowed, and argue that President Saleh may tolerate cosmetic measures but will never sanction reforms that would dismantle elite patronage networks.

‘Look at the Supreme National Authority for Combating Corruption – they’re trying to move forward on a couple of corruption cases but the level that they’re targeting is well below where the actual major graft is happening. I don’t think they have any authority to go to that level. There’s no way that this regime would let them

do that,’ concludes one of the pessimists.

Yemen, however, remains protective of its international image and is sensitive to accusations of corruption. Western donors can use their leverage to support individual Yemeni reformers and provide technical assistance to maintain reform momentum inside key ministries.They can also press Yemen to complete its promised implementation of the Extractive Industries Transparency Initiative (EITI). The government of Yemen has already taken steps to improve donor coordination by establishing the Aid Harmonization and Alignment Unit. The UK, the EU and the US now need to work towards an effective

regional approach with the Gulf countries, in particular Saudi Arabia, which have far greater access to and influence over President Saleh.

Options for Western governments

Having told Yemen’s government that the nation’s future stability depends on political and economic reforms,Western donors need to demonstrate commitment and consistency. Brussels, London and Washington must resist the temptation of knee-jerk reactions to short-term security violations. In particular, they must avoid volatile aid flows, which make it hard for ministers to manage their budgets and which compromise Yemeni reformers who are pushing for controversial measures.

Western governments must also accept that as long as they view Yemen primarily through the prism of security, the authorities there will play on those fears – appealing for aid money and political legitimacy to pursue their own internal agenda. Selective insistence on the rule of law creates cynicism about donors’ motives in a country that is widely hostile to US foreign policy. Yemen is already suffering a blowback effect, in which the arrest and assassination of suspected terrorists have provoked violent retaliation.

Yemen’s civil society is still in an early growth phase, but donors should continue to encourage non-profit and pressure groups that could play an important role in strengthening democratic institutions in the future.

Conclusion

Yemen faces several complex and intertwined challenges in the coming decade: an economic crisis forced by declining oil reserves, the strain on political stability posed by the impending transition of power andmultiple internal threats to security. Whether the country coheres and progresses or reverses and fragments depends on the foresight of the ruling elite, the position adopted by Yemen’s neighbours and the policies pursued by the international community.

Eighteen years after unification, a fully democratic nation-state is still in formation. Yemen has demonstrated significant features of stability in adjusting to the introduction of universal suffrage, overcoming civil war and averting the threat of US military intervention after 9/11. The traditional social fabric remains intact, especially in the north, offering informal, flexible

forums for crisis management and conflict resolution.

Yemen’s collapse has been predicted for years but the country has muddled through. However, it remains an incomplete state where the majority of the population live without reference to laws made in Sanaa. A corrupt, self-interested government that fails to provide the bare minimum of social services has little relevance and legitimacy outside, and even inside, the major

urban areas.

With a nascent civil society sector and a flimsy

middle class, Yemen is unable to generate sustained momentum for political change. Low literacy rates, unreliable public data and the absence of grassroots democracy inhibit a genuine national debate that would create sustained internal pressure for accountability and reform.

Yemen’s electorate should expect to vote for a new head of state in five years’ time, but proposed constitutional amendments may extend President Saleh’s lifeline.

A replacement candidate is most likely to emerge eventually from within the president’s family, but in its current fragile condition Yemen remains vulnerable to unexpected shocks – such as Saleh’s sudden death or a contested succession.

If oil exploration reveals substantial new reserves, Yemen will be able to leverage loans and a support package to underpin the annual budget until those new fields become operational. Even in the absence of extensive new finds, as domestic oil production draws closer to red-line levels, Yemen’s neighbours and international institutions may judge that it is cheaper to subsidize a fragile state than reconstitute a failed one.

In the meantime, uncertainty over Yemen’s future prevents sustained, integrated investment on a scale that would salvage the economy. With the exception of a handful of recent business deals, the cash-rich member states of the Gulf Cooperation Council (GCC) show no signs of sinking significant sums into commercial ventures in Yemen. Yemen’s longed-for admission to the GCC also remains out of reach.

‘In order to avert disaster, there are so many things that need to happen simultaneously and they’re all interconnected,’ says one Western diplomat in Sanaa.

‘Growing a non-oil-based economy doesn’t happen overnight and the country’s prospects get worse with every month that goes by,’ says another. ‘Failed state is an emotive term which Yemeni officials don’t subscribe to but they do recognize that there are serious challenges ahead. Yemen is fragile but we don’t know whether Yemen will fail as a state,’ says a third, senior diplomat.

Future instability in Yemen could expand a lawless zone stretching from northern Kenya, through Somalia and the Gulf of Aden, to Saudi Arabia. Piracy, smuggling and violent jihad would flourish, with implications for the security of shipping routes and the transit of oil through the Suez Canal. State failure in Yemen would reduce any chance of progress towards

peace in Somalia and further endanger the security of countries throughout the Arabian Peninsula and the Horn of Africa.

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