Baghdad comes to Cairo’s rescue, but at what cost?
Washington - Iraq is throwing the cash-strapped government of Egyptian President Abdel Fattah al-Sisi an economic lifeline by selling oil to Cairo effectively on credit. In the process, Baghdad — and by proxy, Iran — will be gaining a political edge over regional rival Saudi Arabia as diplomatic ties between Cairo and Riyadh have deteriorated.
Saudi Arabia has felt betrayed by Egyptian actions that counter the expectations of political loyalty that Riyadh demands as a large-scale financial patron. Given Riyadh’s own concerns as it tries to get its financial house in order, the Saudi government must have decided that a rift with Egypt was worth it when it abruptly stopped providing Cairo with contracted discounted refined oil products in the fourth quarter of 2016.
Egypt, for its part, has resented feeling beholden to the Saudis for financial assistance and has bristled at the expected political subjugation as the cost of the kingdom’s patronage. Part of this frustration for Egypt is its diminished leadership role as a regional Sunni power following the toppling of Hosni Mubarak as president six years ago.
Saudi Arabia has been one of the biggest financial supporters of the Sisi regime, with Riyadh providing the Egyptian economy with $25 billion in aid and an oil products supply deal valued at $23 billion signed during Saudi King Salman bin Abdulaziz Al Saud’s visit to Cairo last April.
Egypt’s economy has been hard hit by domestic political upheaval since the “Arab spring” of 2011. As part of a $12 billion loan approved by the International Monetary Fund (IMF) in November, the Sisi government introduced a value-added tax and reduced energy subsidies, steps that were mandated by the IMF but are unpopular with the Egyptian people.
The deal signed last spring involved Saudi state oil giant Saudi Aramco providing Egyptian state oil firm Egyptian General Petroleum Corporation (EGPC) with 700,000 tonnes of refined oil products. In October, Saudi Aramco abruptly halted the supplies over the increasing diplomatic differences between the two countries, forcing EGPC to scramble to fill the void by making purchases from international traders.
Shortly after Saudi Aramco stopped its supplies to EGPC, Egypt and Iraq moved to strengthen their oil ties. In late October, Egyptian Petroleum Minister Tarek al-Molla visited Baghdad, at which time deputies of Iraq’s Shia National Alliance demanded that the Iraqi government export crude to Egypt on credit to counter Riyadh’s “blackmailing” of Cairo.
In late December, Molla, at an Organisation of Arab Oil Exporting Countries (OAPEC) meeting in Cairo, said that while Egypt already purchased Iraqi oil through international markets, “we hope to have a direct government-to-government agreement”.
The minister indicated that the volumes that Egypt would import from Iraq could range between 1 million and 2 million barrels of crude per month and that the two governments hoped to have an arrangement finalised during the first quarter of 2017.
In an interview January 11th, Iraqi Ambassador to Egypt Habib al-Sadr said an agreement to supply Cairo with 1 million barrels per month of Basra Light crude with facilitated payment terms would go in effect within days.
One of the defining moments in the souring Saudi-Egyptian relationship came in October when Egypt backed a Russian-crafted UN Security Council draft resolution on Syria that called for a ceasefire but specifically did not address ending air strikes or enforcing a no-fly zone, both aspects included in a rival French draft resolution meant to respond to the escalating humanitarian crisis in Aleppo.
In addition to Cairo’s warmer ties with Moscow, the Saudi regime was unhappy with Egypt’s unwillingness to send ground troops to Yemen to support Riyadh’s fight against Iran-backed Houthi rebels as well as Cairo’s continued poor economic performance despite heavy financial help from Riyadh and its Gulf allies.
A long-running dispute involving ownership of the Red Sea islands of Tiran and Sanafir has also been a thorny issue for the two governments, becoming part of the public debate within Egypt. During King Salman’s Cairo visit last April, the two governments signed an agreement ceding Egyptian sovereignty of the islands to Saudi Arabia, a move that prompted protests in Egypt. On January 16th, Egypt’s Higher Administrative Court revoked the April agreement.
It is not uncommon for powers such as Saudi Arabia, Iraq and Iran to offer preferential terms for oil supplies to regimes in need to shore up partisan influence with the clear understanding that these deals come with political expectations. For these patrons, accepting late payments for crude deliveries or even forgiving oil debt is routine as long as the recipient country tows the correct political line.
The questions for Baghdad is how patient it will be if Cairo’s ongoing financial woes prevent it from making good on oil payments in a timely fashion and whether Egypt will bend to its political will. For Cairo, the questions are whether the political trade-off in patrons will be worth it and how deeply Baghdad will be willing to dig into its pockets should Egypt’s economy require serious shoring up.