Chances of Brexit Undermining Sterling's Place in World FX Reserves

As fluctuations in hard cash reserves at global central banks tend to be glacial, the hit to sterling from a potential ‘hard’ UK exit from Europe’s single market after more than 40 years could ultimately undermine the pound’s position in their coffers. With one of the biggest current account deficits in the world, Britain needs hundreds of billions of pounds of capital inflows each year just to balance its books.

Central bank demand for sterling reserves has been a critical, stable and reliable source of that overseas funding, and even the slightest decline in percentage holdings of pounds could have a magnified effect on Britain’s fiscal well-being.

Its current account deficit, now running at around 5.1 percent of gross domestic product, last year hit 5.4 percent – the highest for a single year since records began in 1948.

That means that in nominal terms, Britain needs to attract around 100 billion pounds, or $122 billion at current rates, from abroad each year to balance its books.

Global FX reserves stand at $11 trillion, of which the currency composition of $7.51 trillion is known. Some 4.69 percent of that is in sterling, according to the International Monetary Fund.

IMF data indicates that central banks have accumulated up to $30 billion of additional sterling reserves on average each year since 2000 – funding at least a quarter of Britain’s annual overseas deficit.

Sterling’s share of FX reserves is a distant third behind the euro (20.18 percent) and the dollar (63.39 percent), and the concern is that its share could eventually slip more.

Ratings agency Standard & Poor’s last week said a fall below 3 percent would mean it would no longer classify sterling as a reserve currency, which could ultimately lead it to cut its UK sovereign credit rating again.

“Recent sharp falls in sterling’s value … could reduce confidence in sterling and eventually threaten its role as a global reserve currency. We could lower (Britain’s credit) rating if we conclude that sterling will lose its status as a reserve currency,” S&P said.

Brad Setser, senior fellow at the Council on Foreign Relations in Washington, D.C. and a former economist at the U.S. Treasury, said sterling has punched above its weight over the last decade as reserve managers saw it as an alternative to the dollar for diversification purposes and as a higher-yielding alternative to the euro.

“It became a significant reserve currency. It’s now an open question if it remains as significant. Three percent would be sterling punching a little bit below its weight,” he said.

As a reserve currency the pound is similar in significance to the yen, even though Japan’s economy is the third-largest in the world with an annual GDP of almost $5 trillion.

The yen’s share of global reserves is 4.54 percent, the highest since 2002. It was as high as 6.77 percent in 1995, but below 3 percent as recently as 2010.

Yet it’s hard to compare the impact on sterling and the yen from changes in global reserves data because while Britain runs a large, long-running current account deficit, Japan has run a surplus every year since 1980. It reached 5 percent of GDP in 2007.

All else being equal, this means the yen has a structural, natural tendency to strengthen, unlike the pound.

Chances of Brexit Undermining Sterling's Place in World FX Reserves

Iraqi Forces Battle ISIS inside Mosul

Iraqi troops entered the outskirts of Mosul on Tuesday taking the state television building and advancing despite fierce resistance by ISIS militants who hold the city, an Iraqi general said.

In over two years, this was the first time Iraqi forces have set foot in the city, Iraq’s second largest, as the two-week campaign to recapture the jihadists’ last main bastion in Iraq entered a new phase of urban warfare.

Artillery and air strikes pounded the city, still home to 1.5 million people, and residents of the eastern neighborhood of al-Quds said the ultra-hardline Sunni militants had resorted to street fighting to try to hold the army back.

Soldiers of the elite Counter Terrorism Service (CST) also stormed into the state television station in Mosul on Tuesday, the first capture of an important building in the ISIS-held city since the start of the offensive about two weeks ago, the force commander, Lieutenant-General Talib Shaghati, said.

“This is a good sign for the people of Mosul because the battle to liberate Mosul has effectively begun,” Shaghati said.

Iraqi troops, security forces, Shi’ite militias and Kurdish Peshmerga have been advancing on several fronts towards Mosul, backed by U.S.-led troops and air forces. Special forces units sweeping in from the east have made fastest progress.

“We are currently fighting battles on the eastern outskirts of Mosul,” CTS Lieutenant-General Abdul Wahab al-Saidi said. “The pressure is on all sides of the city to facilitate entry to the city Centre.”

He said CTS forces had cleared ISIS fighters from most of the eastern district of Kokjali, a neighborhood inside Mosul’s city limits close to al-Quds, on Tuesday, “so now we are inside the district of Mosul”.

“The special forces have stormed in,” Maj. Gen. Sami al-Aridi of the Iraqi special forces said. “Daesh is fighting back and have set up concrete blast walls to block off the Karama neighborhood and our troops’ advance,” he said, using the Arabic acronym for the ISIS group. Bombs have been laid along the road into the city, he added.

Inside the village, white flags still hung from some buildings, put up a day earlier by residents eager to show they wouldn’t resist the Iraqi forces’ advance.

Reuters reported residents speaking by telephone of heavy clashes since dawn and “deafening and frightening” explosions.

“We can see Daesh fighters firing towards the Iraqi forces and moving in cars between the alleys of the neighborhood. It’s street fighting.”

Prime Minister Haider al-Abadi said on Monday that Iraqi forces were trying to close off all escape routes for the several thousand ISIS fighters inside Mosul.

“God willing, we will chop off the snake’s head,” Abadi, wearing military fatigues, told state television. “They have no escape, they either die or surrender.”

Commanders have warned that the fight for Mosul, which could be the toughest of the decade-long turmoil since the U.S. invasion which overthrew Saddam Hussein in 2003, is likely to last for months.

The U.S. military estimates IS has 3,000-5,000 fighters in Mosul and another 1,500-2,500 in its outer defensive belt. The total includes about 1,000 foreign fighters. They stand against an anti-ISIS force that including army units, militarized police, special forces and Kurdish fighters totals over 40,000 men.

The United Nations has said the Mosul offensive could also trigger a humanitarian crisis and a possible refugee exodus if the civilians inside in Mosul seek to escape, with up to 1 million people fleeing in a worst-case scenario.

The International Organization for Migration said that nearly 18,000 people have been displaced since the start of the campaign on Oct. 17, excluding thousands of villagers who were forced back into Mosul by retreating jihadists who used them as human shields.

U.N. human rights spokeswoman Ravina Shamdasani said ISIS fighters tried to force another 25,000 civilians from a town south of Mosul back towards the city on Monday. Most of the trucks carrying them turned back under pressure from patrolling aircraft, she said.

Iraqi Forces Battle ISIS inside Mosul

Opinion: Yemen- How Should We Deal With the Houthis?

The relationship between a small group of Houthis living in northern Yemen and Iran began nearly two decades ago with the encouragement of the then president Ali Abdullah Saleh. This was part of the game to establish balance in the context of other religious denominations like the Salafis competing against each other in the region. After a few years, the Iranians turned the group into a proxy group that was politically loyal to them, and they become a problem for the government of Saleh who linked them to religious groups in Iran and got them involved in five wars.

Saleh, whose presidency lasted nearly forty years, was ousted as a result of the uprising known as the Arab Spring in 2011 and the injuries that he sustained from an assassination attempt. After that, he allied himself with his opponents the Houthis and together they seized power. Today, they rule nearly half of Yemen. This is a summary of the Houthi’s story, and the group is now a party involved in the war in Yemen. This raises questions that cannot be underestimated during serious negotiations to find a solution to the war there.

Perhaps the most important question that should be asked is about the future of the Houthis because they are a dangerous team and are serving Iran’s interests in a large regional game. Iran is using its proxies in Iraq, Syria, Lebanon, Bahrain and Palestine in this game.

On the ground, the Houthis are a strong military team that have advanced until they reached Aden in the south which is 800km from their centre in the province of Sa’da. The first thing they did after the coup was to seize the Yemeni army’s weapons cache and transport it to their region. Overnight they became the owners of a large military arsenal. It is clear that the Iranians had been preparing them for this day, and there are reports that confirm that Hezbollah trained about 3,000 Houthi fighters in the period that followed their war with Saudi Arabia in 2009.

It launched television stations and websites and helped them to manage their local areas. The Iranians are trying to manipulate the Houthis’ situation in Yemen so that they become like Hezbollah in Lebanon; a loyal military force that is managed from Tehran. The Houthis are an Iranian project in Yemen and southern Saudi Arabia. They are similar to Hezbollah which controls the Lebanese state and is used militarily by the Iranians against Israel for political purposes. This picture has become clear and is accepted by many of those who were sceptical about the authenticity of it at the beginning of the war in Yemen, just as they were sceptical about accounts of Iran’s military presence in Syria. Tehran later officially admitted its military presence there.

Despite this, the Houthi project is a failed one and they will not be like Hezbollah for a number of reasons. Tehran has done everything required to create similarities between the two organisations; it gave the Houthis’ armed organisation a similar name to Hezbollah (Ansar Allah) and taught them to use similar propaganda slogans like “Death to America, death to Israel”. Its religious curriculum was taught in Houthi schools, and it took over the training and selection of their leaders. It also provided them with military training and weapons.

Despite Iran’s persistence, the Iranians face a big obstacle, and that is the fact that Yemen is not like Lebanon, it is substantially different. Houthis are a small minority in a large society, and whether the war continues or there is peace in the coming years, it will not be easy for them to impose themselves as a dominant force. This is because they only account for five per cent of the total population and live in the province of Sa’da which is very far from the centre of the state. This will make their ability to play a central and dominant role in the country which has a difficult terrain an almost impossible task. Taking control will be almost impossible without fully seizing power in suitable circumstances. In addition to the fact that they are far away from the centre of Yemen and are a minority, they are part of a small sect that differs with Zaidi consensus, and most people follow Zaidism in northern Yemen.

The secret of Hezbollah’s influence is that Israel’s occupation of southern Lebanon has given it justification and legitimacy to resist. This is not the case with the Houthis as Saudi Arabia is Yemen’s biggest supporter, both when it was a monarchy and also after it became a republic.

Millions of Yemenis do not have an alternative to their neighbour Saudi Arabia. All of this puts the Houthis in a different situation to that of Hezbollah’s in Lebanon. I am confident that stability in Yemen will make them weaker as the war is what gives them a role and value. By cooperating with Yemen’s political and religious leaders, it is possible to reduce their presence and tame them.

Opinion: Yemen- How Should We Deal With the Houthis?

Ould Cheikh Seeks Support of Security Council

New York, Aden- The U.N. envoy for Yemen Ismail Ould Cheikh Ahmed said Monday before the U.N. Security Council that both Yemeni sides have rejected his roadmap; presented days earlier.

Ould Cheikh stated that he will immediately return to the region to try to clinch a peace deal in the coming weeks, asking the council and international community to support his plan.

Ould Cheikh presented earlier his plan to the rebels, Houthis and allies in Sana’a before moving to Riyadh to meet Yemeni President Abd Rabbo Mansour Hadi. However, the latter rejected to receive the plan because its items were not based on the three references: the Gulf initiative, the national dialogue outcomes and the U.N. resolutions, namely 2216.

The U.N. envoy asked the Security Council to support his plan, insist on a prompt ceasefire and release captives. He said that he had been informed unofficially that the parties have rejected a proposed roadmap paving the way for a peace agreement and that he planned to head back to the region with the aim of reaching a detailed agreement based on his plan.

Illustrating the severity of the crisis, Ould Cheikh said that only 45 percent of the country’s health facilities remain functional and the medical situation has been further exasperated by the prohibition of commercial flights into Sana’a, meaning many are not able to travel overseas to receive treatment.

He highlighted that the worsening economic situation could further complicate the humanitarian crisis.

Yemen’s ambassador to the UN Khalid Al-Yamani, from his part, warned of regional intervention in the Yemeni affairs such as Iran’s intervention. Yamani stressed that the Yemeni government continued to welcome U.N. efforts to solve the crisis.

Ould Cheikh Seeks Support of Security Council

The Battle of Eradicating ISIS

Beirut- The two past weeks have witnessed the launch of the anticipated attack against ISIS’s stronghold in Mosul. While the Iraqi government and U.S. forces have confirmed that it will be a decisive battle, some analysts see that it may not lead to a complete eradication of the terrorist organization, which has proved its capability on development and survival over the past years.

ISIS has announced split from Al-Qaeda in 2013. U.S. President Barack Obama underestimated its powers and described it as a group of small players in the radical movement. Yet, ISIS suddenly controlled Mosul, the second biggest city in Iraq in June 2014. Over the two past years, the organization has succeeded in controlling the city and in advancing to seize many lands in Syria and Iraq supported by other extremist groups in the region. However, during the past months, ISIS has faced many major defeats and has lost 30% of its control areas, reported IHS JANE Center.

According to Syria Net, ISIS has loosed the following cities in Syria and Iraq:

* Ain al-Arab (Kobani): it is a Syrian city of a Kurdish majority, located in the far Northeast of Aleppo, on the Turkish borders. The city has witnessed heavy battles launched by Kurdish fighters against ISIS for more than four months. In January 2015, they have succeeded in Kicking out ISIS’ militants with the support of the U.S.-led International Coalition forces.

* Tell Abyad: located in Raqqa on the Turkish borders, which was controlled by the Kurds in June 2015. This city has been considered an important point used for the transit of weapons and fighters between Turkey and Raqqah, ISIS’s stronghold in Syria.

* Tadmur: ISIS siezed Tadmur in Homs in May 2015 and destroyed many of its historic monuments included in the UNESCO list. Supported by the Russian air force, Assad’s troops have succeeded in recapturing the city on 27 March 2016.

* Manbij: Syrian city recaptured by Kurdish militias on 6 August 2016 supported by the U.S. forces, after it fell under the control of ISIS since 2014.

* Jarablus: recaptured by Syrian fighting factions including the Free Syrian Army supported by the U.S. forces on 24 August 2014, as part of the “Euphrates Shield” operation launched by the Turkish forces against ISIS and the Kurdish militias at the same time.

* Syrian-Turkish borders: on 4 September, the Turkish forces and factions it supports succeeded in clearing ISIS from the last area it controls on the borders.

* Dabiq: Recaptured by Syrian opposition factions on 18 October.

Iraq

* Tikrit: on 31 March, Iraqi forces have announced the recapture of Tikrit after a massive military operation.

* Sinjar: on 13 November 2015, Kurdish militias have released the city from ISIS’ control with the support of the International Coalition. This liberation succeeded in breaking a strategic route the extremist groups were using for transit between Syria and Iraq.

* Ramadi: Liberated on 9 February 2016.

* Fallujah: which was among the first Sunni cities seized by ISIS in 2014; the Iraqi Army has recaptured it on 26 June 2016.

* Al-Kayyara: Supported by the International Coalition, the Iraqi Forces have liberated it from ISIS members on 9 July 2016 to pave the way for the Mosul battle.

Battle of Mosul

Experts expect the battle of Mosul to last for two to three months and to be the toughest, particularly in the old neighborhoods of the city. Ghanem al-Abed, an expert from Mosul, told Asharq Al-Awsat he expects ISIS members to move toward Syria when they lose control.

Not the end

Despite all these incidents that have weakened ISIS, Mosul’s fall is not expected to lead toward the organization’s eradication. According to figures, ISIS still has 10,000-15,000 fighters compared to 30,000 in 2014. In a report released on “War on the Rocks” website, analysts have warned the parties combating ISIS from announcing a total collapse of ISIS, because over the past year, this latter has proved a remarkable capacity in working discretely.

The ongoing Battle in Mosul in no more than the first phase of “cleaning, returning stability and construction” campaign, which will be launched in the coming months or years. According to sources, the Iraqi army should focus of destroying not only the military infrastructure of ISIS, but also its secret cells and networks.

The Battle of Eradicating ISIS

UAE, Bahrain Adopt New Measures against Hezbollah’s “Agents”

Manama , Abu Dhabi – The United Arab Emirates and Bahrain adopted on Monday new legal measures against people accused of spying and working for Iran and Hezbollah.

Seven people in the UAE were convicted of forming a cell linked to Lebanon’s Hezbollah movement on Monday, according to local news agencies.

One Emirati national and two Lebanese were sentenced to life imprisonment, while an Iraqi and another Lebanese man were each sentenced to 15 years prison time, state news agency WAM said.

An Egyptian woman and another Emirati citizen were each handed a 10-year sentence, it added.

The charges included “passing classified information about a governmental department to Lebanon’s Hezbollah terrorist (group) and for the benefit of a foreign country,” the agency reported.

The defendants were also accused of passing information about “oil production in one of the emirates as well as maps of oil and gas fields,” it said.

The charges also included “forming and managing an international group belonging to the (Hezbollah) party without a license from the government”.

In another hearing, the court jailed an Emirati man, 24, for seven years for “fighting with a terrorist group in Syria,” The National daily reported.

His sister, 34, was sentenced to five years for posting insulting tweets against the state, the paper said.

Meanwhile in Bahrain, the Public Prosecution referred 11 suspects, including nine in custody, to the High Criminal Court for trial on December 7, in relation to the terror explosion that occurred in Al-Nuwaiderat area, on June 30, and in which a Bahraini woman was killed.

Terror Crime Prosecutor Khalid Al Temimi said on Monday that the Public Prosecution had completed its investigation into the crime, adding that the suspects were accused of premeditated murder and sharing intelligence information with a foreign country, as well as other terror crimes.

Bahrain News Agency reported that one of the suspects, a fugitive in Iran who works for the Iranian Revolutionary Guard, tasked the two perpetrators of the crime to carry out the explosion in order to target police patrols and kill their members.

The agency added that the suspect has provided the perpetrators with the explosive device and after surveying police movement at the site of the incident, the two perpetrators placed the bomb and detonated it killing the Bahraini woman, who was driving her car, and injuring her children.

One of the suspects managed to escape after committing the crime and was harbored by other suspects who were arrested according to legal procedures and questioned by the Public Prosecution, BNA added.

The local agency also noted that the public prosecution relied in its investigation on verbal evidence, including the witnesses’ testimonies, technical evidence, reports by the Criminal Investigation Directorate (CID), a video footage by CCTV cameras and the suspects’ confessions.

UAE, Bahrain Adopt New Measures against Hezbollah’s “Agents”

Aoun Starts his Presidential Term with the Important Challenge of Forming a new Cabinet

Beirut- The new cabinet lineup is the first challenge the newly elected Lebanese President Michel Aoun is expected to face, and it constitutes a first test to measure the seriousness of the agreements forged prior to his election.

Political forces had discussed before agreeing on nominating Aoun the idea of forming “a national unity government that must include all parties” without tackling the cabinet lineup in details. Their agreement only stipulated the nomination of former Prime Minister Saad Hariri to head the new cabinet.

According to Lebanon’s Constitution, the current cabinet of Prime Minister Tammam Salam acts as a caretaker following the election of a new president.

On Monday, after Aoun arrived to the Presidential Palace, the Directorate General of the Presidency issued a statement saying: “The President expressed his thanks to the Prime Minister and all ministers, and requested that the Cabinet acts as a caretaker until the formation of a new Cabinet.”

The formation of the new Cabinet would not be an easy task because the deal reached prior to Aoun’s election did not involve all Lebanese parties, mainly Speaker Berri, who had requested an agreement on the new cabinet lineup and the electoral law prior to the election of a president.

But, observers do not expect such a mission to take a long time, similar to what happened with Salam’s cabinet, which took 8 months before seeing the light.

Aoun yesterday kicked off his term by setting Wednesday and Thursday as the date for holding the binding parliamentary consultations to nominate a prime minister who will form the new government.

A source from the Free Patriotic Movement told Asharq Al-Awsat: “We are starting a new ruling era. The General would not allow things to take a long time.”

He added: “It is time to work now and not to start a tug-of-war.”

The source denied the presence of an already forged agreement between political forces concerning the lineup of the next government. “There would not be a clear picture of the next cabinet before we know which political parties would participate in it,” the source said.

Although Berri was not part of the political agreement that brought Aoun to power, there is a chance he will participate in the next government.

Member of Berri’s parliamentary bloc, MP Michel Musa told Asharq Al-Awsat that the speaker would study the suggestions of the next cabinet lineup before announcing his position.

Musa however said that the party is ready to stretch its hands to facilitate the recovering of the country’s political life.

“I believe that no one will place obstacles in the face of the cabinet lineup,” he said.

Aoun Starts his Presidential Term with the Important Challenge of Forming a new Cabinet