Libya’s Looming Contest for the Central Bank

April 1, 2019

Earlier this year, the armed coalition led by eastern-Libyan-based commander Khalifa Haftar took most of his country’s southwest, an oil-rich desert expanse three times as large as Syria called the Fezzan. This military operation has fueled speculation as to whether the aging general and former dissident is now considering a similar offensive into Tripoli, the capital on the Mediterranean coast. Haftar has not recognized the U.N.-backed Government of National Accord in Tripoli. Its prime minister Fayez al-Serraj and his cabinet coexist with a set of powerful militias there, but do not control them.

Although the seizure of the Fezzan has bolstered Haftar’s profile, a military takeover of Tripoli would be riskier. Haftar could increase his chances at ultimate victory by asserting greater sway over Libya’s oil money. To understand why this is, we need to look at the full picture, to include links between Libya’s petrodollars, feuding factions, and the foreign states backing them.

Libya’s Eastern-Based Army Moves West

The idea of Haftar’s self-proclaimed Libyan National Army invading the southwest before moving to the much-prized capital has been the subject of speculation for more than two years. In January, things came to a head. From northern Cyrenaica, where he is headquartered, the 75-year-old field marshal sent reinforcements, materiel, cash, and some of his most senior lieutenants into an airbase located near Sebha, the Fezzan’s largest city. From there, using a combination of peaceful entente deals, pecuniary promises, and brute force, the Libyan National Army, sometimes assisted by Darfurian mercenaries, proceeded to declare the allegiance of almost all cities in the long-neglected province, as well as that of its two main oil facilities, including the vital Sharara field, Libya’s largest. Haftar’s coalition has not, however, achieved full territorial control in every part of the Fezzan.

After meeting resistance late February in the Murzuq Basin, north of the border with Niger, many of the eastern-Libyan battalions moved back north into Jufra district in the center of the country, leaving a diminished level of security behind, including in the city of Sebha. While not a capitulation, the Libyan National Army’s partial withdrawal from the southwest is a reminder that Haftar’s hybrid tactics — peaceful co-option mixed with the use of violence — consumes a considerable amount of resources, not only military, but also financial. Concretely, this means that the psychological effect of the Fezzan operation may taper off if the Libyan National Army does not move to take advantage of it soon.

In Tripolitania, Friends and Foes Await Haftar

In Tripoli and its wide periphery, a tense mosaic of local armed groups could see local flashpoints flare up if Haftar is perceived to be progressing. Some actors have already assured their loyalty to his Libyan National Army. Others are undecided and are likely to side with Haftar if offered a small concession. Still others remain resolutely opposed to him and will fight his advance. Certain cities could slip into internecine violence. Those most at risk include Zawiyah, Gharyan, and Sirte, Qaddafi’s hometown in the central region. In Tripoli proper, select militia leaders are poised to suddenly “turn” pro-Haftar, while their peers don’t have that option. As a result, clashes among neighborhood militias could happen there, too.

Given the above, a shrewd way for Haftar to make headway may be to focus on Tripoli’s financial institutions while avoiding unnecessary risk-taking in the military sphere for the time being. The current frenzy on Libya’s financial frontline, including meetings abroad and white-collar arrests in Tripoli, indicates that such a logic may already be afoot indeed.

 

 

The financial heart of the country is the Central Bank of Libya, domiciled in the populous capital. Despite Haftar’s army holding eastern Libya’s main oil fields and terminals since 2016, the bank has thus far evaded his control. The paradox is a product of Muammar Qaddafi’s legacy. As a result of a system put in place under the late dictator, all proceeds from legal exports of hydrocarbons are received in U.S. dollars and funneled straight into accounts held at Western financial institutions. Sadiq al-Kabir, the incumbent governor based in Tripoli, has held the keys to those hard-currency accounts for more than seven years, and claims the Central Bank of Libya currently has more than $70 billion of foreign-exchange reserves in them.

The cash that would come with greater influence over the Central Bank of Libya combined with his existing army would offer Haftar the ability to coerce and co-opt powerful brigades in Tripolitania by modulating their access to public funds. By the same token, without affecting change at the helm of the bank, Haftar may not be able to seize power and rule. What happens next depends to a large extent on what Western powers and Gulf states agree on.

When Haftar Took the Fezzan, the United States Was Mum

Eight years ago, the United States led a wide-ranging coalition of allied and partner states to intervene in Libya’s burgeoning rebellion against Qaddafi’s rule. NATO members Italy and Turkey initially dissented but the United States pushed them into line. The first weeks of the campaign revealed further disagreement among America’s Arab friends as to what post-Qaddafi Libya should resemble. Those fault-lines only deepened in 2014, when the country descended into civil war.

France, unlike Italy, is not affected by irregular migration via Libya. It is also not nearly as dependent as Italy on Libya’s crude oil, natural gas, and other products. These and other asymmetries explain why Rome has been substantially more averse to a military solution to Libya’s problems than Paris. The latter sees in Libya an opportunity to enhance France’s prestige in the Arab world in a way that complements its existing sphere of influence in Africa. In contrast, the United States is leery of being dragged into the fratricidal conflict between Libyans and does not wish to see Libya destabilized or partitioned.

Since the United States helped install the Government of National Accord in Tripoli four years ago, it has supported it diplomatically. The Pentagon has tended to carry out its counterterrorism airstrikes in partnership with that particular government, not its eastern rival. Wary of disruptions, Washington has issued statements calling for restraint whenever either side has attempted to alter the balance of power by force. But this year has been different. Washington opted for silence as Haftar’s offensive unfolded.

The growing retrenchment of the U.S. government opens a previously obstructed avenue for France. Last spring, President Emmanuel Macron’s diplomatic push for swift elections in Libya was resisted by London, Rome, and Washington. Many policymakers in those capitals had seen in Paris’ unilateral rush towards elections a premature ploy to help install a military autocracy headed by Haftar.

Faced with much less Western dissent on Libya this year, France applauded Haftar’s military campaign for eliminating major terrorist targets near Sebha and disrupting human traffickers’ activities in the Murzuq desert. South of the border in Chad, Paris carried out airstrikes against rebels opposed to President Idriss Déby after they quit Libya, a relatively safe haven for non-state actors prior to the Libyan National Army’s push. The timing and location of the French military intervention suggests tight coordination with Haftar, whom Paris has backed militarily since early 2015.

Italy — usually a Haftar skeptic — has stayed out of the way. Rome’s new policy embraces the strongman and is in part attributable to the fact that the number of irregular migrants arriving via Libya into Sicily has become almost zero, down from thousands per month two years ago. Before the drop in migrant statistics, the Italians resisted Haftar because they feared his military approach would disrupt the arrangements they had struck with a motley array of local armed groups in the western half of the country. Nowadays, Rome, although still issuing token calls for caution, fully accepts that the anti-Islamist camp is winning, an eventuality it has been preparing for since 2016. As for Italy’s substantial energy interests, its right-wing populist government has utilized its rapport with Russia to help ensure they be looked after by the Libyan National Army. Moscow, too, has assisted Haftar for more than three years, and has his ear. Also, the Giuseppe Conte government exempted a $1.4 billion subsidiary of Libya’s sovereign wealth fund from a U.N. freeze in place since 2011, a move bound to indirectly increase the eastern-Libyan faction’s ability to raise cash through the sales of real-estate holdings in Italy.

The United Arab Emirates, a leader among Libya meddlers

More consequential and more determined than every other foreign state interfering in Libya is the United Arab Emirates. The Gulf federation has been propping up Khalifa Haftar militarily since late summer of 2014, a few months after Egypt and Saudi Arabia had helped him and his domestic allies launch Operation Dignity against revolutionaries, moderate proponents of political Islam and jihadi Salafists alike. “The Emiratis want the Muslim Brotherhood gone from Libya,” a former Western policymaker familiar with both countries told me in January, alluding to an ideological war Crown Prince Mohammed bin Zayed initiated in his own country on the eve of 2011’s Arab Uprisings and then expanded abroad. “The Emiratis cannot bear seeing oil money go into the hands of actors who sympathize with political Islam,” the official added, choosing to highlight the money aspect rather than the military one.

To illustrate the Emirati rationale, international officials often cite a June 2018 incident whereby Abu Dhabi encouraged Haftar as he sought to export Libya’s oil outside of U.N.-approved channel. “And France certainly didn’t mind him trying,” adds another Western diplomat privy to the Libyan file. Amid Haftar’s oil blockade last summer, the field marshal expressed his desire to see a change of leadership at the Central Bank, not at the National Oil Company.

In that instance and several previous others, Washington thwarted eastern-Libyan actors in their attempt to force Kabir out of the bank or weaken his control over the financial system based in Tripoli. The United States acted as a bulwark against change partly out of prudence. The conflict-torn country was dislocated enough as it was, the thinking went in Washington. Any abrupt overhaul at one of the Libyan economy’s most vital linchpins was feared as yet an additional source of anarchy.

More generally, the U.S. government long championed an inclusive government in Tripoli; i.e., it tolerated within the machinery of the Libyan state a diverse array of political currents, including the Muslim Brotherhood and its allies — a philosophy the United Arab Emirates has deemed unacceptable.

Soon after becoming president, Donald Trump made clear his unwillingness to continue U.S. engagement in Libya. Nevertheless, both the Pentagon and the State Department maintained remnants of the Obama administration’s Libya policy, including support for the officially recognized authorities in Tripoli. After the mid-term elections in 2018, however, an already-aloof Washington appeared more inclined to “farm Libya out” to the numerous states betting on an ascendant Haftar.

The opinion of the United States is of paramount relevance to Libya’s finances because of their dollar-based and highly centralized nature. It is, in effect, difficult for Libyans to replace their central banker unless and until Washington approves of it. A clear example of this reality was on display four years ago. In the autumn of 2014, the eastern-Libya government, which at the time was internationally recognized, sacked Kabir. Yet, the United States carried on dealing with him and his signature remained the only authorized signature capable of releasing hard-currency funds. An American businessman familiar with the Obama administration’s attitude towards Libya’s economy circa 2015 confided to me: “Kabir would be invited to Washington as a mere subordinate of the official governor but, once here, he was talked to as the real boss.”

Washington’s unwavering support for Kabir has frustrated Libya’s eastern faction. Aref Ali Nayed, an electoral hopeful, former ambassador to the Emirates, and vocal critic of the Muslim Brotherhood, described the Central Bank of Libya chief as “an Islamist-facilitating governor.” The characterization is simplistic and anachronistic, but it captures the long-standing determination of the eastern-Libyan camp to take hold of the national purse strings.

One Governor, Several Periods

Sadiq al-Kabir did begin his tenure at the helm of Central Bank of Libya as a revolutionary close to the Muslim Brotherhood. In the autumn of 2011, influential Brotherhood figure Abdurrazag Mukhtar Abdulgader played a pivotal role making sure the then-chairman of the National Transitional Council Mustafa Abdel Jalil put forward no candidacy other than Kabir’s to the central-banking job. That year, Abdulgader became the Libyan ambassador to Turkey, a position he still holds today. According to a U.N. Panel of Experts, Ankara has supported Haftar’s enemies militarily.

During the first few post-Qaddafi years, the abovementioned officials, and others, used the financial system of Libya as a means of supporting Islamist-leaning causes. The Central Bank of Libya deposited $2 billion with its Egyptian counterpart during Muslim Brother Mohammed Morsi’s embattled presidency, and gave money to the Syrian National Council, an anti-Assad structure in which the Muslim Brothers were the strongest component. Libya’s public funds were also used to purchase weapons directly delivered in southern Turkey for the purpose of being handed to anti-Assad rebels next door. In Libya itself, a large number of militias, including Islamist militias of varying degrees of extremism, were formed thanks to the willingness of state authorities, including the Central Bank of Libya, to pay gunmen civil-servant salaries. Among the groups benefiting from those salaries, some formed the Shura Council in June 2014 to fight the Libyan National Army in Benghazi, and others attacked the country’s oil terminals in December 2014.

That era is over, however. As of today, it would be inaccurate to depict the Central Bank of Libya as an Islamist haven or imply the dynamic hasn’t changed at all since the immediate wake of the Arab Uprisings.

After Libya’s newly-elected parliament, and the executive associated with it, chose in 2014 to be based in Cyrenaica, the eastern part of the country, the Central Bank of Libya did not discontinue the payment of state salaries and subsidies for the province. “Politically, governor Kabir felt he had to pay both sides in order to keep the country together,” opined a Turkish diplomat familiar with Libyan affairs in a 2016 interview.

A few months later, Kabir enforced austerity measures that helped reduce overall public expenditures greatly. He also weakened several revolutionary and Islamist militias by slashing the funds allocated to them. After the U.N.-backed Government of National Accord arrived in Tripoli in March 2016, a specific set of armed groups there have grown stronger by — among other things — penetrating the process whereby the Central Bank of Libya distributes hard currency. Despite their fraudulent schemes, said militia leaders have received relatively little criticism from the international community because they have provided local security and combated the Islamic State. Those actors aren’t connected to the Muslim Brotherhood. In fact, the most powerful armed groups in the capital today are committed enemies of political Islam and, as such, have been in dialog with the United Arab Emirates, Saudi Arabia and France for the last three years at least. One of these super-militias is Radaa (or “Deterrence”), known for its Saudi-inspired Salafist ideology and fierce opposition to the Muslim Brotherhood.

While other Tripoli militias dominate their own swath of the black market for dinars and dollars, Radaa’s own currency-trading operation is somewhat different. Members of Radaa have sway over how the country’s main official issuer of hard currency is run. Also, a Radaa commando provides daily personal security for governor Kabir. In addition, Meytiga, the capital’s sole operational airport, is in part controlled by the same militia. According to informal market operators interviewed last year, Radaa uses its advantages to convert large sums for Haftar-aligned actors based in eastern Libya. Sizeable transactions of this kind require the complicity of managers within the official banking system.

Taken in sum, the above dynamics paint a far more complex picture of the Central Bank of Libya than the oft-peddled image of an institution beholden to the Muslim Brotherhood or complacent with jihadism. To be sure, several Brotherhood-linked figures still hold senior positions in the Central Bank of Libya, including on its board of directors. Moreover, Kabir refused to allocate additional salary money to help Haftar grow his self-styled army. Interviews conducted in 2016 with International Monetary Fund and World Bank officials familiar with Libya’s state budget confirmed that Kabir opposed any increase in the wage bill.

Yet the central banker has also been a pragmatist and an opportunist vis-à-vis Haftar’s camp. He never forcefully impeded the Libyan National Army when it resorted to unorthodox, often illicit, schemes to fund itself. These include the eastern executive’s issuing of 32 billion dinars’ worth of debt over the last four-and-a-half years, and its importation of 10 billion dinars in the form of Russian-manufactured banknotes over the last three years. In responding to these ventures, Kabir walked a careful line between protesting their illegality rhetorically and allowing them on a de-facto basis.

In light of this nuance, eastern Libya’s current demonization of Kabir must be seen as no more than a calculated attempt by eastern politicians to achieve supremacy over state coffers, a scenario that is now a distinct possibility. The groundswell of psychological and political momentum wrought by Haftar’s campaign combined with the passivity of Washington, one of Kabir’s longtime backers, have thrust the Central Bank of Libya onto new terrain. A replacement of the governor, or even the mere restructuring of the bank’s cadres — with Kabir staying — on terms more favorable to the anti-Islamist camp backed by the United Arab Emirates, would have far-reaching ramifications for the Tripoli area.

Haftar’s inner circle would become able to curb the rent-capturing activities of its adversaries. It also would be tempted to cultivate more clients based on political and tribal criteria, a practice already manifest in the east. Domination of public finances would furthermore boost Haftar’s controversial attempt at militarizing the reconstruction of Libya inspired by the Egyptian army’s outsized role in the economy.

These trends combined not only fail to curtail corruption but also run the chance of stoking conflict since they are bound to create new sets of losers. As Washington offloads Libya to European and Gulf powers, its ability to influence the conflict-torn country may diminish irreversibly. Lack of leverage is a policy challenge that faces the European Union and its member states, too. The E.U., out of eagerness to see a strongman “hold” Libya, may let Haftar and his faction control the state coffers without checks or balances. Once that hegemony falls in place, what diplomatic tool will remain to help promote transparency, accountability and the rule of law in Libya?

 

 

Jalel Harchaoui is a research fellow at the Clingendael Institute in The Hague. His work focuses on Libya’s politics and security.

Image: Wikimedia Commons