Libya presents challenging geopolitical situation

The question of what’s in store for Libya in the future is more important than ever

Constructing a clear focus on Libya’s economic and political situation presents one of the major challenges of geopolitical storytelling. This is partially due to the country’s complexities, as well as the unclear foreign policy decisions of the United States and its new President Donald Trump; in particular, his relationship with Russian President Vladimir Putin at a time when it appears Putin is clearly bent on restoring Russia’s place at the global bargaining table.

The question of Libya’s future is more important than ever with the re-taking of Sirte from the Islamic State of Iraq and Syria (ISIS) last December following a seven-month struggle. ISIS had taken over Sirte in May 2015 as part of its sweep to expand both its physical territory and regional authority. ISIS fighters had brutally suppressed a rebellion by Sirte residents in August 2015, hanging and beheading its opponents and shelling residential neighborhoods, thereby underscoring both ISIS’ brutality and its determination to defy the country’s competing governments.

The question becomes more urgent in light of Libya’s economic situation. Its economy, always heavily dependent on oil, sank with the country’s descent into war during 2015. That scenario, exacerbated by the global plunge in oil prices and the conflict between groups pushing for control of the country’s oil facilities, led to a decline in production.

Any hope of resolving Libya’s future would mean somehow reconciling the competing priorities of the three main groups claiming the mantle of government. The Libyan Political Agreement (LPA), signed in Skhirat in December 2015, has only been partially implemented and it appears unlikely that there will be any forward momentum during the coming months, explains Fiona Barsoum, associate analyst – Middle East and North Africa for Control Risks Group, in her analysis prepared for Trends Magazine.

The LPA had been intended to unite what at the time were two competing governments and legislatures into a single administration, Barsoum recalls. These were the House of Representatives, based in the northeast, and the Tripoli-based General National Congress. Although the core of the government formed by the LPA moved to Tripoli in late March 2016 and is recognized by the international community, the House of Representatives has not endorsed the LPA and continues with its own government. Some members of the General
National Congress operate under this banner, while others co-operate with the internationally recognized government.

Further confusing the issue, the balance of power essentially lies with the various militias, according to Rhiannon Smith, managing director of Libya-Analysis and deputy director of “The way to think of it is that the militias have the power and are making the decisions,” she says. “It’s kind of like the governments are on the back of the militias rather than the other way around.”

Smith explains that, at the time of writing, various scenarios are possible in Libya. In one scenario, the conflict escalates between the military powers in the east and the west of the country. “[They] have now started to come into conflict in the south of Libya and it could be that that conflict will escalate,” she says. “That would mean increased civil war in the south, which would further destabilize the whole country.”

This would have a devastating effect, not only on the political process but on the economy as well and it will likely impact oil fields and installations in that part of Libya. In another scenario, although the United-Nations-backed political process is deadlocked and making little progress, there are bilateral deals and negotiations underway in the background, Smith explains: “Egypt, Russia and Algeria are trying to hold diplomatic talks and trying to get these rival parties to speak to one another.”

The urgency in arriving at a solution goes beyond geopolitical considerations. “The economy is probably one of the biggest issues currently. If things don’t change, Libya is going to be completely destitute,” Smith explains. “Liquidity is very bad – there is hardly any cash – and the exchange rate is falling almost daily. If anything is going to save Libya and get the different parties to work together, it will be the need to get more money into the coffers and work together to prevent a complete economic collapse.”
The heart and soul of the future of many countries in the region – Libya included – is their ability to attract foreign direct investment (FDI), which mainly consists of investments by foreign multinational corporations through joint ventures, solely owned company divisions, franchises and other commercial arrangements.

Not surprisingly, FDI coming into Libya has fallen in recent years. According to the World Bank, net inflows in 2012 rose to $1,425,000,000, falling to $702,000,000 in 2013 and then taking a steep drop to $50,000,000 in 2014 with a recovery to $725,667,000 in 2015. (The FDI total for 2016 has not been released at the time of writing.)

The competition between countries in the MENA (Middle East and North Africa) region has intensified with the drop in oil prices. Neighbors such as Tunisia make no secret of their willingness to welcome foreign direct investors.

Boosting FDI in Libya would require the authorities there to offer a clear regulatory framework for all sectors, Barsoum explains in her analysis. The authorities would also have to ensure that bureaucratic and state institutions function properly. Companies will need greater guarantees in terms of security and the ability of authorities to respond to unrest, she suggests.

Another confidence booster would be for authorities to demonstrate a willingness to curb public spending, which would increase the confidence of multinationals in government payment commitments. Another challenging aspect of FDI that Libya has in common with other oil-producing nations is the need to diversify its economy in order to reduce its dependence on oil revenues.

Given some measure of stability, companies with existing interests in Libya are likely to be among the investors in a stabilized economy, Barsoum says.

Also absolutely central to Libya’s future fiscal health, the port of Sirte needs substantial repairs in order to become a more viable shipping and transportation hub.
Much of Libya’s infrastructure has been destroyed and many of the residents who fled the battle zone have not returned, Smith points out. “It’s really unclear…what model of governance will provide the necessary stability, but (there are) unresolved issues about how it is to be governed,” she says. Libya’s strategic location and place in oil shipping mean that it has the potential be a strong commercial hub in the region. However, in the short term, it is very difficult to see how that could be realized in light of continuing political divisions.

The unfolding of several as-yet-unclear factors, among them the continuing presence of ISIS, could impact the short- and medium-term scenario in Libya. The threat posed by ISIS did not end with the re-taking of Sirte. Many ISIS fighters appear to have left Sirte, but reported attacks to the west and south of the city indicate that the militants are now operating outside and around Sirte, Barsoum says in her analysis, suggesting the likelihood of ongoing attacks by ISIS-affiliated fighters.
These activities could diminish ISIS’ ability to capture territory elsewhere, but in some areas they will continue to exploit local grievances, a hallmark of the ISIS sweep across Iraq.

Also in the short and medium terms, the policies of the new Donald Trump administration and its relationship with Russia will affect the future of Libya, according to an analysis by the Soufan Group, which advises governments and corporations. The US and Russia may see Libya as an opportunity to work together in the fight against terrorism.

The potential for collaboration in support of General Khalifa Haftar would necessitate a shift in the current American strategy. Haftar’s determination to defeat terrorism fits the priorities of both countries. Haftar commands the military forces in eastern Libya and his appeal is bolstered by their strength, the seizure of Libya’s oil infrastructure and the victories over jihadists in eastern Libya.

This combination makes him a seemingly ideal partner in some form of Russia-US cooperation. If that happens, it could contravene the policies of American allies in the United Nations and the European Union who have largely supported the Government of National Accord (GNA).

Meanwhile, as a possible clue about developing alliances, Haftar recently toured Russia’s aircraft carrier as it departed from operations in Syria. Soufan characterizes this as part of Russia’s intention to support Haftar even if that means contravening American, EU and UN policies.

The Soufan Group report emphasizes that the GNA has not succeeded in extending its authority outside of Libya. The refusal of the House of Representatives and other groups to recognize the GNA has left the feasibility of the GNA in an increasingly tenuous position and demonstrates its failure to achieve real change.

The chances of lasting cooperation between Haftar and the GNA appear remote, since they have both balked at any power-sharing arrangement. However, until all of the competing factions can find some common ground, the political and economic future of Libya remains
exceptionally confused.