No End in Sight to Saudi Arabia’s Costly Intervention in Yemen

November 11, 2016

Saudi Arabia’s military intervention in the Yemeni civil war has already put a sizable dent in the Saudi government budget, and there is no end in sight. Since Saudi Arabia intervened in 2015, its military campaign against the Iranian-backed Houthis has little to show for it, al-Qaeda has gained a strong foothold in southern Yemen and the war is threatening the future vitality of the Saudi economy.

Saudi Arabia’s intervention in the Yemeni civil war in 2015 has proven an expensive commitment, taking up a sizable amount of the Saudi budget. While Saudi Arabia has the third largest defense budget in the world, second only to the U.S. and China, they are spending tens of billions (USD) on the war in Yemen. In addition to the budgetary strain, the criticism of Saudi Arabia’s prosecution of the war by prominent human rights groups could also negatively affect Saudi plans to revitalize their economy. A detailed National Transformation Plan released earlier this year includes plans to increase private sector and foreign direct investment. Yet Saudi air strikes in Yemen have indiscriminately targeted hospitals, businesses, and a wedding. This could discourage investors who do not want to be seen as indirectly financing attacks on civilians.

However, at this point withdrawal could be even more economically damaging to the Kingdom in the long run. The conflict has given al-Qaeda in the Arabian Peninsula (AQAP) the opportunity to seize and hold territory in the southern part of the country, including the port city of Mukalla which they held for months until they strategically retreated earlier this year. The group had taken over the bank, extorted the national oil company, and was earning an estimated $2 million a day using armed speedboats to impose transit fees and taxes on the goods and fuel coming through the port. By most estimates, AQAP is stronger than it has ever been in its 20-year existence. Furthermore, its campaign of fixing roads and abolishing taxes for locals has earned it at least the acceptance of the population, if not outright support. AQAP’s growing power in such an important area will have a serious impact on Saudi and international trade if left unchecked.

A strong AQAP in the South also increases the threat of terrorist attacks within the Kingdom. This threat traditionally discourages foreign businesses from working inside the country. Al-Qaeda as a whole has been making progress across the Middle East, taking advantage of global focus on its rival, the Islamic State. While al-Qaeda affiliate Jabhat Fateh al-Sham in Syria has made tremendous strides, as has al-Qaeda in the Islamic Maghreb, AQAP is the most powerful al-Qaeda branch. As they further secure their position in Yemen, they will likely attempt to reestablish external operations against both Saudi Arabia and the West. The remerging threat of terrorist attacks will likely deter some foreign businesses from initiating or increasing operations in the Kingdom.

As Saudi Arabia pursues its National Transformation Plan, to include an anticipated Initial Public Offering of up to 5% of Saudi Aramco in 2018, decisions on how to further prosecute or extract itself from the war in Yemen will become ever urgent in 2017.