An empty market after a curfew was imposed to halt the spread of COVID-19 in the holy city of Najaf, Iraq, March 18, 2020

commentary

(The RAND Blog)

Economic Consequences of COVID-19 in the Middle East: Implications for U.S. National Security

An empty market after a curfew was imposed to halt the spread of COVID-19 in the holy city of Najaf, Iraq, March 18, 2020

Photo by Alaa Al-Marjani/Reuters

The global COVID-19 pandemic will have a dramatic impact on economies across the globe, but the Middle East may be particularly affected given the simultaneous fall in oil prices. The economic consequences of this pandemic are also likely to affect U.S. interests in the region.

COVID-19, the disease caused by a novel coronavirus that emerged late last year, will affect U.S. national security interests in the region in various ways. The pandemic is weakening Iran, where the economy—already strained by U.S. maximum pressure sanctions—is taking additional hits. Iraq may be similarly destabilized. Although not under sanctions, the country depends on oil revenue for almost its entire government budget, and its health system is in poor shape.

Iran's troubles may reduce its capacity to meddle in Iraq and the region. But the high budgetary costs of COVID-19 and the related need for countervailing economic stimulus may also reduce the capacity of the United States and Europe to sustain present levels of engagement in the region. COVID-19 could thus offer opportunities for China or Russia, or for the Gulf Cooperation Council (GCC), if such countries are able and willing to support countries at risk during the unfolding economic crisis.

These are the main consequences that national security planners need to be aware of:

  • Large economic effects for most Middle East economies. The aggregate economic impact of COVID-19 is likely to be very large, with the most recent data now suggesting that the global economic impact will be comparable to the 2008–2009 Great Recession, in which GDP contracted by more than two percent worldwide and in the Middle East countries by more than 11 percent. The comparison with the Great Recession is important (which too had collapsing global oil prices) because the Middle East economies did a pretty decent job weathering that crisis despite the dramatic economic contraction. That said, the combination of a recession and what is likely to be an unprecedented health crisis in these countries, given the terrible state of their health systems, is uncharted waters.
  • An increasingly weakened Iran. For Iran, the economic projections are more dramatic, with GDP projected to contract by 25 to 30 percent because of the virus. If correct, the COVID-19 impact could be at least twice the net impact of sanctions during the 2018–2020 time frame. In the near term, this is unlikely either to be destabilizing or to translate into more restrained regional activity, though it will likely limit the financial support Iran can provide its allies (as we have already seen with sanctions).
  • A potentially destabilized Iraq and Lebanon. For Iraq, the collapse of the price of oil alone is devastating, but COVID-19 is likely to reduce GDP by at least five percent as a result of only reduced religious tourism. Together, this threatens to unravel an already precarious political situation, and is likely to exacerbate the government's inability to bring employment and opportunity to its predominantly young population. It also could create greater freedom of action for the remnants of the Islamic State and derivative organizations. And in the midst of a financial crisis with an international default, the hosting of 1.5 million Syrian refugees (out of a non-refugee population of about 4.5 million), and political instability, there is no clear picture of how the Lebanese government can carry out any useful response to this crisis.
  • Collapse of small and medium-sized enterprises (SMEs) in many Middle East states. SMEs, seen by many as a critical component of the economic future of the region, will likely be devastated (as has been the experience in China) unless the GCC nations choose to intervene. Saudi Arabia and the United Arab Emirates are already following the example of China in setting up stimulus packages for their SMEs, but many of the countries where SMEs are particularly important—such as Egypt, Jordan, and Lebanon—may have much greater difficulty providing these businesses with the support that they need to weather the crisis. Saudi Arabia has already proven willing to support its regional neighbors during financial crises and may do so again, which could increase its influence in the region.
  • Exacerbated risk from internally displaced people (IDP) and refugees. The coming recession is likely to have a major destabilizing impact on IDP and refugee communities throughout the Middle East, which are already economically very precarious. Added to this economic challenge is the reality that these communities are likely to be particularly badly affected by COVID-19 given their density and the lack of means to control the spread of the outbreak or treat the people. This new source of instability in these communities could create opportunities for radicalization, and there are indications that some groups are already trying to “weaponize” COVID-19 to this purpose. But it could also set off—or aggravate—a new geopolitical conflict as refugees increasingly try to flee across the Turkish border.
  • Increased pressure (in the medium term) for the United States to seek efficiencies in security commitments in Middle East.There is great uncertainty regarding the full impacts of COVID-19 on the U.S. economy, although recent data suggest that the impact could be substantially larger than the 2008–2009 Great Recession. The recently passed stimulus may do much to mitigate the projected contraction in the U.S. economy, but recovery could be gradual or protracted over a number of years, and the stimulus could saddle the U.S. economy with a great amount of new debt. This may put new pressures on the defense budget and lead the Pentagon to refocus on National Security Strategy and National Defense Strategy priorities at the expense of activities in the Middle East. The top priorities in both documents are great-power competition with Russia and China.
  • New opportunities for expansionist China and Russia. Both of America's great-power competitors have increased their regional engagement over the past decade, and are anticipated to use COVID-19 to expand their access and influence as is being done now in Africa and Europe. The scale of this threat to U.S. interests depends on the accuracy of COVID-19 reporting from these two competitors, as available data (which may not be accurate) suggests that the impact on their economies might be mild. China, in particular, has started to send medical supplies worldwide, pitched as an expression of goodwill (though the quality of these supplies has been found to be a problem). Likewise, in the Middle East, medical aid as well as pledges of economic involvement could enhance China's influence. Russia's pathways of expanding influence are less certain, but assistance with arms purchases may be one mechanism.

The economic impacts of COVID-19, perhaps even more than the disease itself, are likely to rapidly accelerate existing trends in the region (rather than drive any major reshuffling of power or influence in the region). But this acceleration means that the United States ought to plan actions for maintaining U.S. influence in the region if budgets for operations, exercises, foreign assistance, and security cooperation activities are substantially reduced.


Daniel Egel is an economist, Howard J. Shatz is a senior economist, and Charles Ries is vice president, International at the nonprofit, nonpartisan RAND Corporation.

Commentary gives RAND researchers a platform to convey insights based on their professional expertise and often on their peer-reviewed research and analysis.