Eritrea Creaks Open the Door as Fears of War Recede

8 MINS READOct 12, 2018 | 09:00 GMT
The harbor in Massawa shows some of what Eritrea has to offer to investors as a transportation hub and tourism magnet.

A picture taken on July 22, shows a private boat with the Eritrea flag in Old Massawa harbor, 60km of the Eritrean capital Asmara. - Eritrea's dormant port hopes for revival after Ethiopia and Eritrea in July 2018 declared an end to two decades of conflict, rapidly restoring diplomatic ties and flights between their capitals. Decades of conflict, sanctions and isolationist policies have seen trade shrivel up in the port city, whose harbor is still lined with bombed-out buildings from Eritrea's war of independence from Ethiopia, achieved in 1993. 

  • Reconciliation between Ethiopia and Eritrea will be a boon for regional stability and enhance the investment profiles of both countries.
  • As the security threat from Ethiopia diminishes, Eritrea is likely to focus on developing its manufacturing, mining and tourism industries.
  • Foreign investment, however, will remain limited until the government in Eritrea enacts significant political and economic reform, including improving its human rights record.

Massive political and economic changes in Ethiopia are having an impact far beyond the regional heavyweight's borders. Nowhere have these changes been more evident than in Eritrea, Ethiopia's erstwhile nemesis. As renewed ties between the governments in the capitals of Addis Ababa and Asmara deepen, transportation arteries are open again, bilateral trade is up, and expensive-to-develop natural resources are in play. All of this prompts the question: Is Eritrea a frontier market worth digging into?

The Big Picture

In its 2018 Fourth-Quarter Forecast, Stratfor wrote that East Africa's regional powerhouse, Ethiopia, would push ahead with efforts to normalize ties with its neighbors, including with its most implacable foe, Eritrea. Thanks to the thaw in relations, Eritrea might now consider opening itself to greater engagement with the world.

Peace and Ports

Rapprochement between Ethiopia and Eritrea has come rapidly. Over the course of a few months, their heavily militarized border has opened, facilitating cross-border trade and the flow of civilians. In addition, reports indicate that both sides are repairing an Ethiopian road leading to the Eritrean port of Assab, on the Red Sea near Djibouti and the geostrategically vital Bab el-Mandeb strait. The moves mark a stunning reversal of years of animosity between the two sides and are helping to reduce regional tensions and the prospect of destabilizing border skirmishes.

The reconciliation also dramatically increases the trade options for landlocked Ethiopia and its 100 million people, who have previously relied on the port of Djibouti for 95 percent of their imports and exports. Simply put: By having the Eritrean ports of Massawa and Assab suddenly open to it, Ethiopia can now enjoy greater security over its supply chain. Additionally, the new port access reduces the cost of importing and exporting goods from areas that are further away from the rail line to Djibouti, including those in the northern Tigray region. These changes are likely to have positive, long-term effects on regional development.

But while Ethiopia and its huge internal market has understandably captured the attention of foreign investors in recent years, the recent opening has also shone a spotlight on isolated Eritrea, which remains largely unknown to the outside world. Indeed, the Red Sea country of roughly 5 million has suffered through many difficulties, particularly in the last century. In the middle of the 20th century, Eritreans launched an insurgency in response to Addis Ababa's heavy-handed rule, ultimately achieving liberation in 1991. Over time, the ascendancy of the Eritrean People's Liberation Front, an organization inspired by Marxist-Leninism, profoundly influenced the ethos of the future independent state and its relationship with its people.

Perhaps just as crucial was the impact of the 1998-2000 war between Eritrea and Ethiopia, which severed any remaining trade and political ties and killed tens of thousands. Open hostilities eventually ended, but the lack of a peace deal compelled Asmara to dig in and create a fortress state in order to resist the significantly larger Ethiopian threat. The sense of siege placed a tremendous burden on average Eritreans, as their government opted for repression and other tactics to retain its hold on power and direct its energies toward maintaining a modicum of military parity with Ethiopia.

The sudden dissipation of the all-pervading Ethiopian threat has allowed Eritrea to address its tattered economy for the first time in decades and inform foreign investors that it is open for business.

Opening Doors

In April, however, Abiy Ahmed became Ethiopia's prime minister, allowing him to purge Addis Ababa's old hard-liners and create a platform for both countries to turn the page on their acrimonious ties. The sudden dissipation of the all-pervading Ethiopian threat allowed Eritrea to address its tattered economy for the first time in decades and inform foreign investors that it is open for business. But as potential investors take a fresh look at Eritrea, the scale of the challenge is becoming apparent. First, the country's leaders will probably open some economic sectors to greater foreign investment while leaving others off-limits. Asmara appears intent on following an Asia tiger-style growth model by becoming a manufacturing hub in order to move up the production value chain and provide higher-paying jobs to its citizens — a strategy that would allow the country to take advantage of its location on the Red Sea.

One sector that Asmara is likely to liberalize is mining, because Eritrea is unable to foot the bill for large and longer-term investments in the industry. The country has a sizable number of mineral deposits, which include gold, copper, zinc and potash. The supply of this last resource (which is mostly used in agricultural fertilizers) has already enticed foreign investors. Danakali Ltd., an Australian mining company, secured rights to the Colluli mine and is looking to raise more than $300 million in the wake of the thaw in Eritrean-Ethiopian relations. Moreover, the combination of abundant mining reserves and Asmara's ambition to develop a manufacturing sector could attract greater Chinese interest in the country in the years ahead. At present, Chinese companies are exploring for minerals, while reports indicate that at least one firm, Sichuan Road & Bridge Mining Investment Development Corp. Ltd., will begin extracting zinc, gold, copper and silver in 2019.

Second, Eritrea could strive to develop its tourism industry with outside help. Already, the country has a number of factors in its favor. It boasts many beaches on the Red Sea that it could transform into holiday destinations similar to those in Egypt and Israel, and it has relaxed attitudes toward alcohol and clothing that might prove enticing to tourists. Also, the capital Asmara, nicknamed Africa's Little Rome, is likely to draw more visitors after it gained UNESCO World Heritage recognition in 2017 thanks to its many examples of Italian modernist architecture stemming from Rome's colonization in the early 20th century. Furthermore, tourists will enjoy easier access to the country as Ethiopian Airlines restarts flights from Addis Ababa and the ports of Massawa and Assab open up for more business.

A map shows the location of ports on the Horn of Africa and the Arabian Peninsula.

The Risks of Rushing in Too Fast

Eritrea's government has earned a controversial reputation in recent decades. In its all-consuming struggle against Ethiopia, the country's authoritarian rulers have trampled on press freedom and other human rights. Perhaps most contentiously, the government has imposed a harsh form of national service, which is essentially a vehicle to extract forced labor, and created an exodus of untold numbers of Eritrean youths — many of whom have perished in the Mediterranean Sea as they seek to reach Europe. For foreign investors and businesses looking at Eritrea, this compulsory service represents a potential reputational risk because it has often been described as a modern form of slavery. For example, Canadian mining company Nevsun Resources Ltd., which operates the Bisha zinc-copper mine, became embroiled in a controversy and lawsuit in 2014 amid reports that Asmara was using forced labor at the mine. As a result, many Western companies will probably wait for significant improvements on human rights before jumping into the new market. Similarly, the United States and other powers are unlikely to lift sanctions that the U.N. Security Council imposed on Asmara in 2009, due to its alleged support for militants in Somalia, until substantive change occurs in Eritrea.

Another important question centers on Asmara's ultimate intentions over its resources, because the state's enduring Marxist-Leninist ethos could be a harbinger of an eventual push for full nationalization. Such a prospect would undoubtedly worry many foreign investors in the mining sector, where Asmara already exercises 50 percent control over several mining fields; some officials have suggested that the state wishes to exert full control ultimately over the resources. As a result, Asmara will likely need to assuage investors' worries by abandoning some of the vestiges of its ideology, providing more safeguards for investors and overhauling other related regulations.

At the same time, the detente with Ethiopia is not guaranteed. Abiy's trip to Asmara did much to decrease the acrimony between the two countries, but a rupture in ties is always possible, especially if a leadership change in either capital ushers in a figure who adopts a harder line against the other country.

But Eritrea's most burning question might be its political future. Until recently, it could justify the profound sacrifices it demanded from its citizens by claiming to protect them from the Ethiopian menace lurking next door. With the ostensible reduction of this all-pervading threat, its exhausted citizens are likely to demand a new social contract from the state, but it is difficult to determine whether this will be an orderly or chaotic process. Equally troubling, President Isaias Afwerki, a reclusive leader who has ruled with an iron fist for decades, is in his 70s and does not have any evident successor in sight (though some rumors suggest he is grooming his son for the post). Afwerki's hold on power is so strong that his sudden demise would plunge the country into deep uncertainty and create a power vacuum.

Peace between Ethiopia and Eritrea has opened many doors, piquing the interest of foreign investors in one of the world's most closed countries. Eritrea's riches — mineral or tourist — will attract outside attention, but Asmara has a long way to go before it can truly capitalize on its advantages.

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