Revolutionaries had taken over much of Libya as February came to an end, stretching their control from the epicenter of the uprising in the eastern city of Benghazi to the outskirts of Tripoli in the west, with pro-government forces still holding the capital, several cities scattered around it and others in the south.

More than 2,000 people are thought to have been killed, many more wounded and tens-of-thousands have fled their homes in the first two weeks of the uprising against the 42-year reign of Colonel Muammar al-Qadhafi. The erratic and repressive ruler has been accused of deploying mercenaries, helicopter gunships and warplanes against mostly unarmed protesters.

Since the revolt began mid-February, scores of army personnel have also defected to the opposition, joining a growing armed insurrection in a confrontation that is ever more resembling a civil war. 

World leaders have called for Qadhafi to step down and threatened charges of crimes against humanity. The United Nations Security Council has imposed sanctions and many countries are freezing foreign assets associated with the regime and those of the Libyan Investment Authority, the country’s sovereign wealth fund, which alone are estimated at some $70 billion. Additionally, the regime-run Central Bank of Libya has $80 billion in foreign assets, according to the International Monetary Fund.

Though the United States and NATO allies were redeploying military assets to the area at the end of February and mulling the possibility of interceding, signs had appeared in Benghazi saying “No to foreign intervention — Libyan people can do it alone.” A consistent demand, however, of the Libyan opposition and human rights groups has been for the United Nations Security Council to impose a no-fly zone and deny Qadhafi the use of his air force to attack the anti-government side and resupply his troops — cited as key reasons why his forces have not been routed.

As foreign companies have been evacuating thousands of their workers, major oil companies were shutting down operations. Libya puts out 2.3 percent of the world’s oil and the country’s reserves — estimated at 44 billion barrels — are the largest in Africa. Libyan oil production was down 75 percent at the end of last month, according to the Wall Street Journal, and Brent crude pushed past $112 per barrel, rattling financial markets and threatening the global economic recovery.

For an on-the-ground perspective, Executive contacted Fatma Morayef, a researcher with Human Rights Watch who is normally based in Cairo but traveled to Libya to document the upheaval. She crossed the border on February 23 and spoke via telephone as she drove from Tobruk to Benghazi in the recently-liberated east of the country:

• What’s the general situation in Tobruk now?

It’s very calm in Tobruk — there have been no problems with security for the past three days. Right now we can see the army patrolling and policing the street with people — when I say the army I mean individual members of the army who are working together with the informal [armed civilian] patrols. Everybody is really welcoming, especially when they realize we’re journalists and human rights people; everybody wants to talk about what happened. 

In Tobruk, [the uprising] started on the 15th and there were a lot of arrests [that day]. It didn’t see as much violence as Baida or Benghazi. People are still camped out in the main square downtown that used to be called Malik Aziz Square. They were saying ‘this is our Meydan Tahrir’ when they recognized my Egyptian accent. Everyone here is just saying ‘for the first time we feel free, we can talk to you and we just need for [Qadhafi] to go.’

• How are supply levels holding up?

So far it’s okay, but the shops are still closed.  Today was the first day that some of the banks have opened so people can withdraw their salaries. But it’s all happening very informally. I was talking to some [people] who were very concerned going forward, talking about food supplies but also about the longer term because both Tobruk and Darna rely on desalination, which needs to be maintained for their farms. People are worried about how long this will last.

• Are people optimistic about the situation?

They are feeling optimistic because they’re not scared. They’re feeling empowered. The welcoming of foreigners and journalists is partly due to the fact that they feel now that they can speak securely.

I’ve been on missions to Libya before and generally people who don’t know you will never speak to you because they’re freaked out by the reprisals of the state. I think the fact that internal security is no longer breathing down people’s necks here has changed the general mood and that has contributed to the sense of optimism.

People feel [here] that they have had a great victory and they liberated the east [of Libya], but everyone I’ve spoken to in Tripoli was very freaked out by what may come and also about the very strong security presence there.

• When you crossed the border were Libyans fleeing the country along with foreigners?

There were some Libyan families but mostly just Egyptians. 

• Is there a reason for that?  Do Libyans feel that eastern Libya is safe?

I think that’s part of it and some Libyans think ‘why would we leave? Our families are here.’ The Egyptians are leaving because they’re worried — they don’t know what’s going to come and all their families in Egypt are very worried.

It was quite endearing really because the Egyptian security — the people processing at the immigration point — when they heard my Egyptian accent they kept saying ‘be careful, it’s very dangerous’ because a lot of the Egyptians coming across the border have stories about having either witnessed or got caught up in violence.

Also, some of the Egyptians — not people I’ve spoken to, but I’ve heard this from other journalists and colleagues — have stories of being attacked themselves.

• Is there cooperation between different opposition groups in different cities? Is there any leadership that is emerging?

No, I mean there is no formal opposition in Libya. All political parties are banned; it’s a crime to try to set up a political party. So right now it’s a very organic, popular uprising and rebellion.

• What do people want going forward?

Right now they just want Qadhafi to leave because they’re still in the middle of the crisis.  People are happy but they’re still feeling insecure.

Bahrain is known more for its sleek steel and glass skyscrapers of high finance than the unpaved alleys of the disenfranchised tucked behind them. Indeed, the kingdom has worked hard to polish this veneer in recent years with a glossy international advertising campaign luring investors to “business friendly Bahrain.” But rosy adjectives were the first victims of the state security services’ repeated attempts to put down peaceful protests last month with truncheons, tear gas, rubber bullets and live ammunition, which left more than half a dozen dead and hundreds injured. 

While economic incentives such as the possibility of 100 percent foreign ownership of businesses, low taxes and easy access to Saudi Arabia and other Gulf markets are certainly draws for foreign investors, blood and tanks on the streets of Manama are not.

“If this [crisis] carries on, I’m sure it will have a more lasting effect,” said Salman Shaikh, the director of the Brookings Doha Center. “Right now, what I can say is that investor confidence is a little bit shaky.”

A diversification drive’s fender bender

Before the current turmoil, Bahrain had done an impressive job at putting out the right signals to foreign investors. In the 2011 Index of Economic Freedom published by the Heritage Foundation the country was ranked as the freest economy in the Middle East and 10th freest in the world. The International Finance Corporation ranked Bahrain as the 28th easiest place in the world to do business, putting the country behind only Saudi Arabia in the region and well ahead of the United Arab Emirates.

Bahrain’s rulers have long recognized that building a competitive business environment was necessary to diversify the government’s revenues away from hydrocarbon dependence and the economy away from relying on public spending. The public sector already employs some 25 percent of the workforce and is simply unable to absorb the 100,000 new jobseekers projected to enter the labor market over the next decade. This is coupled with the fact that at current extraction rates Bahrain’s oil reserves will be depleted in less than 20 years and oil production, refining and processing currently account for some 28 percent of gross domestic product.

The government has thus been actively promoting banking and finance as growth sectors and today they make up about a quarter of the economy. Unrest in Bahrain, however, creates doubt regarding the country’s stability; threatening its reputation and in turn its future as a destination for international capital and status as a financial center. As perhaps a worrying sign of things to come, the decision to cancel the annual Formula One season opener scheduled for March 13 is not just a blot on the country’s prestige; as major advertising and tourism draw its cancellation is anticipated to lose Bahrain $600 million in total revenue, according to the Abu Dhabi newspaper The National.

How blood makes markets queasy

The barbarism of Bahraini authorities seems to have directly contributed to the consternation the country is earning recently on international financial markets.

In the early hours of February 17, riot police descended on the Pearl roundabout where thousands of protesters were sleeping in a make-shift encampment; reports regarding the ensuing onslaught vary, but what is clear is that at least a handful were killed and hundreds were injured, with the authorities the next day again firing live ammunition into the funeral processions of those killed the night before, killing one and injuring more. Financial markets reacted swiftly: the cost of insuring Bahrain’s debt jumped 19 percent the day following the assault on the Pearl roundabout as the country’s five-year credit default swap spread hit an 18 month high of 310 basis points, according to Reuters. Three days later Standard and Poor’s (S&P) lowered its long and short-term credit ratings on Bahrain, its central bank, its Mumtalakat sovereign wealth fund, Ahli United Bank — Bahrain’s largest bank by market cap at $3.6 billion at end-February — and BMI Bank. S&P also issued a “CreditWatch negative” warning of a possible future downgrade for Bahrain’s Baraka Banking Group. Moody’s, which downgraded the kingdom’s sovereign rating last year, also announced it was concerned about the ongoing turmoil and was observing the situation closely. Fitch Ratings warned it may downgrade Bahrain’s credit ratings in the next few months if anti-government protests escalate.

In response, Central Bank Governor Rasheed al-Maraj publicly offered words of reassurance: “All financial transactions are at the normal level and the dinar continues to trade at the same level,” he said, adding that the monetary authority would provide banks all necessary support to facilitate banking operations.

“It is normal following any political or economic development that the credit rating agencies would review the ratings,” Maraj said. “However, we believe that the economic fundamentals of the kingdom of Bahrain remain strong and that the short-term economic and political developments should not entirely reflect on the review.” The Bahraini stock exchange, for its part, seemed to mirror Maraj’s sentiment — the market took some relatively minor hits as the protests began but as Executive went to print it appeared to have stabilized.

Root of the unrest

The principal source of instability in Bahrain is rooted in the country’s sectarian and socio-economic makeup: in a population of some 500,000 Bahrainis (not including the more than 200,000 expat workers also residing in the country), roughly seven in 10 are Shia Muslim, yet Bahrain is ruled by the Sunni al-Khalifa family and Sunnis have much greater affluence and influence in the country.

“If you compare the Sunni villages and the Shia villages, you will see how Shia villages are ignored,” says Nazeeha Saeed, a Bahraini journalist working for France 24 and Radio Monte Carlo. 

Bahrain’s Shia community have long felt politically and economically marginalized, unable to play any significant role in governance and regularly denied opportunities for professional advancement in both the public and private sector. For the Shia, such inequalities bring up questions of racism, but, Saeed says “[the Shia] don’t hate the Sunnis for that, they hate the government for that.”

Supporters of the protest movement say that Bahrain’s wealth has not been spread around evenly and that disparities in income appear across the country. “The middle class has been disappearing in Bahrain and the gap between the poor and the rich has been increasing,” says Amal Jaffar, a marketing executive in Manama.

Attempting to assuage resentment over economic disparities and dissuade protesters from taking to the street, the Bahraini monarchy announced in the week leading up to the first protest, on February 14, that it would hand out $2,600 to every Bahraini family as a gift.

The Bahraini government has been accused by protesters and observers of fueling divisions along sectarian lines, by portraying the mostly Shia protesters as a fifth column, loyal not to Bahrain but to Iran. “This is what the government is trying to tell the whole world and [to] make it happen, actually,” says Saeed. After Bahraini forces stormed the Pearl roundabout on February 17, the government defended their actions by claiming that the protesters were armed supporters of Hezbollah. These allegations were not corroborated by any independent sources.

A different tomorrow?

Following the failure of the heavy-handed crackdown, the government seems to have softened its stance, committing to talks with opposition leaders, allowing protestors to encamp again at Pearl roundabout, releasing dozens of political prisoners and pardoning Hassan Mushaima, the exiled leader of the Shia Haq opposition movement. As Executive went to print, questions over whether the government would make a genuine effort to reach a compromise remained unanswered. To some, the unprecedented protests in themselves signify that Bahrain is a changed country. “We [Brookings] think that Bahrain has already changed,” says Shaikh. “The question will be how much will this change the nature of the entire culture and the role of the ruling family?”

However the socio-political situation is addressed, whether “business friendly” Bahrain can repair the damage to its reputation is perhaps of equal, if not greater concern in the long run. Protracted negotiations over constitutional reform and accompanying demonstrations would undoubtedly wear on investor confidence, leading to an exit of foreign capital. This in turn would send the government’s economic diversification successes into regression — meaning a contraction of the private sector and increased unemployment — and an increase in Bahrain’s dependence on its hydrocarbon resources which, barring new finds, will run dry within the foreseeable future.

Less revenue would limit the government’s ability to fund its generous welfare programs and employ its expansive public service, introducing new fuel to the public’s discontent. Though both the United States — which bases it navy’s Fifth Fleet in Bahrain — and neighboring Saudi Arabia would likely step in to cover any shortfall in state funding, the increased influence of either of these countries over this island kingdom would be unlikely to sit well with the majority of Bahrainis.