Under pressure: Houthis target Yemeni government with economic warfare

Even as the Iran-backed Houthi rebels pursue back-channel talks with Saudi Arabia as Riyadh looks for a major de-escalation in the coming weeks, they have also been ratcheting up the pressure on the internationally recognized Republic of Yemen Government (ROYG). On Feb. 16, 2023, the ambassadors of the United States, France, and the United Kingdom issued a joint statement condemning Houthi drone attacks on vital Yemeni infrastructure, noting that, “Yemen possesses natural resources that enable it to meet the needs of its citizens if it is able to resume exporting oil and gas, without being attacked by the Houthis.”

Starting in late 2022, shortly after they refused to renew Yemen’s fragile six-month-old truce on Oct. 2, the Houthis began to escalate against the ROYG in an effort to exhaust its financial resources and provoke social unrest in government-held areas. On Oct. 21, the Houthis carried out two drone attacks against the al-Dhabba oil terminal in Hadramawt Governorate, disrupting the loading of Petromasila oil onto a Greek tanker. A similar attack took place a few day earlier, on Oct. 19, at the al-Nushaima oil terminal in Shabwa Governorate, without causing any reported damage. These attacks mark a significant change in Houthi tactics towards the use of economic and remote warfare. By deliberately targeting energy infrastructure in areas under ROYG control, the Houthis are trying to prevent the government from exporting oil. On Nov. 9 and Nov. 21, the Houthis launched similar drone attacks targeting Qena Port and al-Nushaima terminal in Shabwa, as well as al-Dhabba terminal in Hadramawt, damaging the oil pump at al-Dhabba and forcing the government to halt oil exports. Although no further attacks have been reported or acknowledged since then, the Houthis’ strikes on government-controlled critical infrastructure exhibit the same strategic use of Iranian-supported non-conventional warfare tactics seen in their previous cross-border attacks into Saudi Arabia and the United Arab Emirates.

Houthi objectives

The Houthis had previously warned the ROYG and oil companies that they would carry out such attacks unless they received a share of the oil revenues and/or the government began paying the salaries of civil, military, and security officials in areas under their control, including members of the militia. The Houthis’ objectives are three-fold. The first is to exhaust the ROYG’s financial resources, further weakening its already-fragile authority, increasing its budget deficit, and deepening social unrest in government-held areas. The second is to compel the ROYG, as Saudi-Houthi talks continue via Oman and other means, to reconsider the Houthis’ current demands, even if the government lacks the means to do so. The ROYG used to pay part of the salaries of officials in Houthi-held areas; however, due to a Houthi ban on new banknotes in 2019, it reportedly stopped doing so. The third is to make the ROYG increasingly irrelevant until part of their demands are met in the talks with Saudi Arabia.

In the past, Saudi-Houthi talks chiefly focused on border security measures, truces and cease-fires, the flow of oil to Hodeida’s ports, and the resumption of flights via Sana’a International Airport. The Saudis are now engaged in discussing economic matters, such as the payment of salaries, as they seek a major de-escalation before the next anniversary of the Arab coalition’s military intervention on March 26, 2023. Following the collapse of the truce in October, an Omani delegation visited Sana’a twice in late December 2022 and early January to discuss the Saudi proposal, the renewal and expansion of the truce and a permanent cease-fire, and Houthi demands for the payment of salaries and expansion of flight destinations from Sana’a Airport. In October 2022, a Saudi delegation reportedly visited Sana’a and a Houthi delegation visited Abha in a bid to thaw relations. Talks reportedly focused on a prisoner swap, but other issues were likely covered as well. A covert senior Saudi delegation reportedly visited Sana’a in January 2023, too, to develop communications channels and carry out discussions of the proposal on the table. Further Saudi visits to Sana’a as well as Muscat to complement Omani-facilitated talks cannot be ruled out.

In mid-February 2023, in an effort to develop trust through confidence-building measures, the Saudi-led coalition and the Yemeni government allowed the entry of additional commercial goods, including iron, into Hodeida port, the docking of several fuel ships at Ras Issa Port (north of Hodeida) for the first time in over five years, and a steady flow of fuel ships to Hodeida port, having fulfilled the Djibouti-based United Nations Verification and Inspection Mechanism’s (UNVIM) measures. According to UNVIM, food vessels spent a day on average in the coalition’s holding area (CHA) in January 2023, 63% less time than in January 2022. Meanwhile, fuel vessels spent an average of 4.3 days in the CHA, down 90% from January 2022 levels. This data shows that Houthi attacks on Yemeni oil and gas facilities have not translated into government or coalition countermeasures to restrict the flow of fuel into Hodeida, suggesting a push for de-escalation despite the Houthis’ escalatory measures on the military, political, and economic fronts.

While backchannel, and perhaps direct, discussions continue, the head of the Presidential Leadership Council (PLC), Dr. Rashad al-Alimi, reaffirmed his commitment to paying the salaries of civil servants in Houthi-held areas over the new year. It is worth noting that the Houthis are believed to generate more revenue than the ROYG — an estimated minimum of $2 billion annually, chiefly from taxes, custom duties, levies, and free Iranian oil. For instance, the Houthis generated an estimated $453 million (or YER 271.94 billion) in custom revenues from fuel entering Hodeida port between April and November 2022, according to latest U.N. Panel of Experts report for 2023. Despite their financial resources and hefty levies, including “khums (one-fifth) tax on many economic activities, including in the mineral, hydrocarbon, water and fishery sectors,” they have refused to pay civil servants in areas under their control the salaries they deserve.

Implications in brief

The ROYG’s finances have been tight for a long time and Saudi Arabia recently pledged more than $3 billion in assistance, conditioned on “reforms.” According to two informed sources, the Houthis have made the suspension of Saudi support for the ROYG one of their core demands in an effort to further weaken it. While the government continues work to fix the oil pump at al-Dhabba terminal, which will cost an estimated $50 million and take up to six months, it will face several challenges.

First, it will soon have serious problems paying civil, security, and military personnel in territories under its control. In 2021 and 2022, the ROYG is thought to have generated an estimated $1 billion in oil revenues per year, accounting for more than 50% of its total revenues, according to a senior government official. The government was able to cover the salaries of more than 200,000 people in the civil service and more than 300,000 in the military and security sectors largely using this money. With Houthi attacks denying the ROYG the ability to export oil and slashing its revenues by more than half, the government will soon be unable to pay salaries. Service delivery, debt servicing, and national programs account for a considerable share of the budget. In a bid to offset the Houthis’ economic warfare, the ROYG announced a 50% increase in customs duties on non-essential goods on Jan. 8, from YER 500 to YER 750. This increase, which stirred up public anger given the resulting rise in the cost of basic goods and services, remains below the official exchange rate against the dollar, of between YER 1,100 and YER 1,300. This follows a previous increase in customs duties from YER 250 to YER 500 in July 2021, aimed at boosting non-oil revenues. It is unclear how much this move will benefit the government as the Houthi-held port of Hodeida looks to boost traffic.

Second, the growing economic challenges could further deepen social unrest. The security situation in Hadramawt has been on the verge of escalation, chiefly between forces loyal to the Southern Transitional Council (STC), the Arbitration of Hadramawt Tribes, and the ROYG. On Jan. 5, 2023, the Arbitration of Hadramawt Tribes issued a statement rejecting the “entry of forces from outside Hadramawt,” referring to those aligned with the STC, including in newly established bases in the governorate’s wadi and desert regions. The mounting economic pressure on the government is likely to further fuel this unrest and exacerbate the fight over resources and territorial control.

Third, the Houthis’ economic warfare and attacks on vital oil infrastructure will undoubtedly worsen poverty and exacerbate the humanitarian crisis in government-held areas. Given that Yemeni households have an average of 6.7 people, according to pre-war state figures, the livelihood of nearly 3.4 million people is now on the brink. In February 2023, the Houthis attacked the ROYG’s customs duties, exploiting its recent hike, to undermine traders’ trust in the government and divert commercial traffic from Mukalla and Aden ports to Hodeida, thereby increasing their own revenues. This, coupled with the Houthis’ hefty levies, taxation, and looting, further extends their campaign of economic warfare. The Houthis’ dual war against both the internationally recognized government and Yemeni civilians in areas under their control comes at a time when international humanitarian funding is increasingly strained. Between 2018 and 2022, humanitarian funding for Yemen fell by half from $5.2 billion to $2.6 billion due to the global impact of COVID-19, the war in Ukraine and associated shift in focus, and declining confidence in humanitarian organizations due to a lack of transparency amid credible reports of significant Houthi diversion of aid.

Fourth, the current government’s strained financial resources will also reduce its capacity to maintain effective military logistics, armament, operations, and overall coordination. The Houthis remain set on capturing Marib, home to the Safer Oil Company, and there is a high likelihood that they will launch another military campaign in 2023 or 2024, having spent the six-month-long truce last year expanding their recruitment, mobilization, and stockpiling of arms. Combined with the weakness and fragmentation within the PLC, it remains unclear whether the government, given its strained resources, split control over military and security institutions, and the lack of a clear path to integrate them, will be able to carry out effective offensive and defensive operations.

Fifth, currency stability might be affected were oil to be the only source of foreign currency. At present, it is one of the largest sources of foreign currency for the government, in addition to Saudi support. The Central Bank of Yemen may be able to leverage part of the International Monetary Fund’s special drawing rights allocation to cover its weekly foreign currency auctions and maintain the stability of the Yemeni riyal in the YER 1,100-1,200 range in the short term, but that would only help for three to four months. Although Riyadh channeled $1 billion of its $3 billion pledge for Yemen via the Arab Monetary Fund in November 2022, the amount will be slowly disbursed over the course of 2023-25 and is contingent on reforms. This, like the rest of the Saudi pledge, makes support for the ROYG conditional, slow, and inadequate.

Sixth, the expanding range of Houthi threats to international maritime commerce and navigation will continue to raise the stakes, not only for the ROYG, but also for regional and international stakeholders as well. The Houthis’ ostentatious military parade in Hodeida in September 2022 signaled their heightened presence and military capabilities overlooking the southern Red Sea, where the insurgency had previously harassed and hijacked several Arab, Asian, and Western commercial vessels.

Condemnations aren’t enough

The European Union, the U.K., the U.S., France, and the Gulf Cooperation Council have all clearly condemned the Houthi attacks on Yemen’s energy and maritime infrastructure. The EU Delegation to Yemen, in a rare move, “strongly condemn the November 9 Houthi attack targeting Qena commercial port.” The statement added, “Houthi repeated attacks on international shipping are an affront to core principles of the Law of the Sea. The Houthis demonstrate once again their failure to prioritize the Yemeni people. Economic warfare will only exacerbate the humanitarian crisis.” In response, a member of the Houthis’ negotiating delegation, Abdul-Malik al-Ajri, said, “Western statements about the operations of [the Houthi militia] lack any political value.”

While such condemnations and clear language are useful, there is more that can be done. The following policy moves, aimed at the ROYG, Saudi Arabia, the U.S., and other Western allies, would also help as well.

1. The Yemeni government and its friends in Saudi Arabia, the UAE, the U.S., the U.K., France, and elsewhere should work collaboratively to address the vulnerability of Yemen’s oil infrastructure to Houthi drone and missile attacks, in line with the security measures taken in Saudi Arabia and the UAE. In mid-February 2023, a senior U.S. security and defense delegation visited Riyadh to convene strategic U.S.-Gulf talks on regional security and defense, inclusive of discussions on integrated air and missile defense and maritime security. Given Yemen’s geostrategic location and the strategic threats posed by the Houthis, the ROYG should be included in such talks. It also needs defensive capabilities and capacity-building programs that can help deter future Houthi attacks so it can safely resume oil exports, along with early warning systems and improved intelligence and intelligence sharing.
2. The Gulf states and the West must develop a strategy to address the long-term implications of the Houthis’ drone and missile program as part of Iran’s broader threats to cross-regional security and stability. Houthi attacks on Yemeni energy and maritime infrastructure have serious implications for the humanitarian crisis and are used as weapons of starvation in violation of international law. The implementation of sanctions by the U.S. and its allies targeting the Islamic Revolutionary Guard Corps, which backs the Houthis and supplies them with weapons and technology, over the transfer of drones and missiles to Russia will be an integral part of this strategy. Between December 2022 and February 2023, the American and French navies announced the seizure of three Iranian arms shipments destined for the Houthis.
3. The ROYG must intensify reforms to increase international confidence and expedite funding, but the international community must not repeat the mistakes of conditioning aid given the level of volatility. The government should also work to boost non-oil revenues and ensure that customs duties reflect commodity prices to protect consumers.
4. Given the government’s tough economic position and Houthi demands, Saudi Arabia, which has already spent more than $100 billion on the war, should extend economic support for salary payments and continue to back economic recovery, reconstruction, and development projects.
5. The current military imbalance of power has enabled the Houthi militia to strike vital Yemeni infrastructure without any risk of retaliation. The Houthis have signaled that they could resume cross-border attacks if and when they decide, as well as strike domestically. In a post-ceasefire context, such a capability could be used to target high-level officials akin to how Iran-linked Iraqi paramilitary groups targeted the Iraqi prime minister’s residence in Baghdad’s Green Zone in late 2021. Therefore, improving the defensive capabilities of the Gulf states and the Yemeni Armed Forces, mainly against low-altitude flying drones and complex, hybrid attacks, should continue to be a Gulf-wide priority, integrating Yemen.
6. It is highly likely that Houthi attacks on Yemeni ports will increase the militarization and securitization of the Arabian and Red seas. This will require the ROYG to improve its naval and coastguard capabilities, including by means of cooperation with Arab and Western states, to interdict the flow of Iranian arms and equipment. If allies in the West are genuine, the prospect of sending captured arms to the ROYG’s Yemeni Armed Forces rather than elsewhere should be explored. Unless they are seriously and adequately addressed, the Houthis’ multi-range and non-conventional capabilities will present a long-term threat to Yemenis, the wider region, and beyond.