Navigating the Red Sea: Emerging Opportunities Across a Shifting Geopolitical Landscape
The Red Sea region has seen an uptick in economic activity that suggests increased investment opportunities in the coming years. That said, the region has long been defined by instability, and will likely remain contentious as old conflicts continue to simmer and regional powers vie for economic footholds and market share. As regional powers continue to pursue economic interests across the Red Sea, specifically in the Horn of Africa, influential parties like Saudi Arabia, the United Arab Emirates (UAE), and China will be incentivized to limit and mediate inter- and intra-state conflicts. For those able to successfully navigate the complicated and shifting geopolitical landscape, opportunities in manufacturing, tourism, and infrastructure development will likely increase in the coming years.
At a Glance
- The modern history of the Red Sea has largely been dominated by proxy conflicts and geopolitical saber rattling. Consequently, the prospect of investment or expansion in the region was high-risk and, in many cases, unsustainable. Today, the conflicts that have defined the Red Sea region have settled into fragile states of stalemate and truce.
- As states across the Horn of Africa and eastern shores of the Red Sea push to settle inter- and intra-state disputes, regional and global powers are investing capital and resources to increase market share and establish geopolitical footholds in this emerging market.
- While US policy has focused on security matters in the southern Red Sea, foreign economic expansion along the western coast in the Horn of Africa suggests increased investment opportunities for the US private sector in years to come.
The Red Sea region is comprised of six littoral states: Egypt, Sudan, Eritrea, and Djibouti along the western shore; and Saudi Arabia and Yemen along the eastern shore. Beyond the littoral states, the United Arab Emirates (UAE) has been militarily involved in the Red Sea since 2015 and continues to expand its investment footprint across the Horn of Africa. Ethiopia, though not a coastal state, has also been expanding its presence along the Red Sea via infrastructure investments in Djibouti. China has also emerged as an influential force in the Red Sea, thanks in large part to the construction of its first overseas military base in Djibouti as part of the ongoing Belt and Road Initiative (BRI).
Historically, the United States has viewed the Red Sea through the lens of global and maritime shipping security. The United States' only permanent military base in Africa is Camp Lemonnier, which sits along the Horn of Africa in Djibouti. From here, the United States stages military operations into Somalia and Yemen as part of the Global War on Terror. US policy in the region has long been focused on military expenditures and counterterrorism operations.
Regional Conflicts Find Fragile Truce
The modern history of the Red Sea has largely been dominated by proxy conflicts and geopolitical saber rattling. Consequently, the prospect of investment or expansion in the region was high-risk and, in many cases, unsustainable. Today, the conflicts that have defined the Red Sea region have settled into fragile states of stalemate and truce.
Since 2015, the Houthi-Saudi Arabia conflict in Yemen presented significant threats to political and economic interests across the Red Sea. The Houthis demonstrated sea-denial capabilities through use of maritime mines, missiles, and explosive-laden seacraft. In 2018, Houthi forces targeted a Saudi shipping vessel, which led Saudi Arabia to temporarily halt maritime shipments via the Red Sea. Houthi aggression in the region has threatened global shipping lanes since the outset of the conflict. The Red Sea is one of the world’s most critical shipping lanes, with the Suez Canal accounting for 10% of the world’s total maritime trade. Houthi forces have also demonstrated sophistication and range via mainland strikes against Saudi Aramco facilities in 2019.
That said, war fatigue and the economic cost of continued hostilities have brought this conflict to a fragile truce. In 2020, the UAE withdrew its forces from Yemen and ceased ground operations against the Houthis. As of April 2022, Saudi Arabia and the Houthis agreed to a United Nations-brokered ceasefire. As of January 2023, Saudi and Houthi representatives engaged in back-channel dialogue to maintain the truce. As the UAE and Saudi Arabia shift their focus to economic expansion and competition, all parties are motivated to cut their losses and maintain stability along the Red Sea. For their part, China is similarly inclined to support an end to hostilities, given their emerging economic interests in the Horn of Africa and reliance on Red Sea shipping lanes to support the BRI. As such, China serves as an influential mediator to pressure Iran, and therefore the Houthis, to seek an off-ramp to end the conflict. With the March 2023 resumption of diplomatic relations between Saudi Arabia and Iran, which was brokered by China, it is likely all sides are more motivated than ever to bring the Yemen conflict to a close.
Ethiopia and Eritrea were also embroiled in a prolonged cross-border conflict that threatened regional stability. Beginning on November 2020, the governments of Ethiopia and Eritrea fought the Tigray People's Liberation Front (TPLF) in the Tigray region of Ethiopia, which abuts the Ethiopian-Eritrean border. However, on November 2, 2022, all parties agreed to a cessation of hostilities. This truce remains tenuous and Eritrea's willingness to end cross-border hostilities remains to be seen. That said, the cessation of hostilities in northern Ethiopia demonstrates the incremental move towards peace across the Horn of Africa. With the conclusion of regional conflicts, many states are now turning their sights to the region's nascent investment opportunities.
Targets of Regional Investment
As states across the Horn of Africa and eastern shores of the Red Sea push to settle inter- and intra-state disputes, regional and global powers are investing capital and resources to increase market share and establish geopolitical footholds in this emerging market. The most influential players in the region – Saudi Arabia, the UAE, China, and Ethiopia – are pursuing greater access to port facilities in order to support future trade opportunities, open access to new markets in Africa, and expand tourism. Meanwhile, the economies along the western coast of the Red Sea are showing indications of sustained growth and future possibilities. Eritrea, Ethiopia, and Djibouti have demonstrated some of the highest GDP growth in the world, each yielding more than 8% growth since 2018. Additionally, population growth along the Horn of Africa signals an expanding, untapped consumer market. More broadly, the Red Sea GDP is expected to more than triple by 2050 and increase from USD 1.8 trillion to 6.1 trillion. As a result, trade is expected to increase from USD 881 billion to 4.7 trillion.
Since 2018, Saudi Arabia has pledged more than USD 3 billion in aid to a joint investment fund in Sudan, with a focus on energy, electricity, mining, transport and communication, fishery, and railways sectors. Domestically, the Public Investment Fund (PIF) is pursuing large-scale tourism projects along Saudi Arabia's Red Sea coastline. The PIF has committed USD 500 billion to develop the NEOM economic zone, which is being built as a cognitive city and one that will be completely run on renewable energy. PIF has invested an additional USD 15-16 billion in the Red Sea Project, which will be developed into a luxury tourism destination along 90 Saudi islands in the Red Sea. In March 2022, PIF subsidiary the Jeddah Central Development Company acquired property for the Jeddah Central Project, an endeavor estimated to cost USD 20.4 billion.
United Arab Emirates
The UAE has launched a vigorous campaign to expand its port presence along the western coast of the Red Sea. Led by Dubai Ports (DP) World, the UAE has concentrated its port development projects in Ain Sokhna along the Egyptian coast, Berbera along the coast of Somaliland, and Senegal. In total, the UAE committed to spending USD 1.72 billion on port infrastructure in Africa between 2021 and 2023. Of note, DP World plans to establish a free zone in Berbera, which would emulate the Jebel Ali Free Zone in Dubai. Through this effort, the UAE plans to turn Berbera into a maritime hub that will serve the landlocked countries of the region, to include Ethiopia. Ultimately, the UAE seeks to establish a logistics network through the Red Sea to siphon a portion of the market share away from China’s BRI.
Access to the Suez Canal, Gulf of Aden, and the Red Sea is an integral component of China's Maritime Silk Road (MSR). As a result, most of China's investment in the region has thus far focused on port and storage facility construction. Notably, in 2017 the People's Liberation Army (PLA) opened its first overseas base in Djibouti to secure Chinese shipping through the Red Sea and the Bab al-Mandab. This strategic foothold allows China to maintain access to and security along strategic shipping lanes across the Red Sea. In support of the BRI, China has also expanded its commercial presence across the Red Sea. Specifically, China has focused a significant amount of attention and resources on Egypt's port facilities. China's COSCO Shipping Ports Limited owns a 20% stake in the Suez Canal Container Company in Egypt. China is also the largest investor in the Suez Canal Area Development Project.
Ethiopia is also pursuing investment and development in port facilities along the western shores of the Red Sea via its nascent sovereign wealth fund Ethiopian Investment Holdings (EIH). Specifically, Ethiopia is attempting to expand its presence and influence in Djibouti, as this provides landlocked Ethiopia with reliable access to the Red Sea. As such, EIH has secured 30% ownership of a new port facility in Djibouti. EIH is also pursuing expansion of Djibouti's oil terminal facilities in order to improve Ethiopia's access to oil shipments.
The United States' focus in the Red Sea region has been dominated by military and security interests. Washington's approach to the Red Sea has been focused on a narrow list of priorities, which include securing shipping lanes through the Suez Canal, Red Sea, and Bab al-Mandab. To this end, the United States established the Combined Maritime Task Force 153 in 2022 to combat smuggling and weapons trafficking and secure waterways in the Red Sea. Beyond naval security, the United States announced the Red Sea Initiative in November 2022, which aims to protect the Red Sea’s coral ecosystem and promote eco-friendly tourism. That said, the United States Government has not prioritized investment in the Red Sea at the same scale as Saudi Arabia, the UAE, or China.
As competition for influence and geopolitical advantage grows in the Red Sea region, greater investment will likely open new markets and opportunities in the region. As is often the case in post-conflict emerging markets, infrastructure projects will be an early priority along the western shores of the Red Sea in order to develop the coastline, increase deep-water ports, and increase accessibility to the growing markets in the Horn of Africa. The "Horn of Africa Initiative," which was drafted by the Intergovernmental Authority on Development, has prioritized investment and development of interconnection links across the Horn of Africa to support transport and energy interconnectivity. For their parts, the governments of Ethiopia, Eritrea, and Djibouti have outlined in their national strategies the desire to increase infrastructure investment. In the near-term, opportunities exist in infrastructure projects, to include construction of ports, roadways, and coastal development. For those able to navigate the ever-shifting geopolitical tides of the Red Sea, opportunities in this region are likely to increase in the years to come.
The US private sector is well-positioned to capitalize on the growing opportunities in the region. African nations are becoming increasingly leery of China's perceived "debt trap diplomacy." Between 2000 and 2020, Africa's external debt increased fivefold to USD 696 billion. Chinese lenders hold 12% of that debt. Meanwhile, African states are also cautious of the Gulf's perceived efforts to dole out significant investments as a means of purchasing alliances. The 2017 Saudi-Qatar rift concerned African leaders that Gulf investments came with implicit loyalty agreements. As a result, US private investment stands to benefit as a preferred partner in the region. In the near term, investment in infrastructure projects will be welcomed by littoral states along the western Red Sea. As these markets develop, such projects will be essential to link the western Red Sea states with the broader international economy.