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(Bloomberg) —Captain Mohammed Houssein Omar patrols one of the most dangerous coastlines in the world. Until the Israel-Hamas conflict reignited seven months ago, it was largely people smugglers and drug traffickers that occupied his fleet of nearly 70 coastguard patrol boats. But since Houthi militants from neighboring Yemen began attacking commercial ships in the Red Sea, the coastguard officer has never been so stretched. 

“Nobody deserves to be attacked with missiles,” he says. “Those targeted in the Red Sea are innocent, so we are there to help.”

Djibouti, an authoritarian former French colony of just one million people, only gained independence in 1977 and is surrounded by bigger, more unstable neighbors. It is bordered to the north by Eritrea, a pariah state for the best part of two decades; to the south by Somalia, which has been ravaged for years by an Islamist insurgency; and to its west by Ethiopia, recovering from a brutal civil war that killed more than 500,000 people in just two years, according to US and European Union estimates. 

The location of the tiny East African nation, at the point where the Red Sea meets the Gulf of Aden, has made Djibouti — a predominantly Islamic country — a strategic priority for major powers. It’s home to Chinese, French, Italian, Japanese and US military bases. Germany would like its own naval base in the country too, according to diplomats in the region. Tokyo has recently supplied new coastguard patrol vessels. 

In parallel, it has developed a reputation as an intelligence hub, say Western diplomats. Imagine a Cold War Berlin on the Horn of Africa, but this time acting as an intersection between the West and the Arab world. The up market Djibouti Palace Kempinski Hotel is popular with the tight-knit intelligence community.

“There’s an old saying: ‘where goods flow, information flows’. This place is a harbor,” one diplomat says. “Intelligence officers need hubs.”

These international investments in military hardware and intelligence gathering have never looked more important. The Iran-backed Houthi militants, who say they are targeting Israeli-linked cargo ships, have caused the most significant diversion of seaborne trade in decades. In the first two months of 2024, trade through the Suez Canal, which sits at the top of the Red Sea, dropped by 50 percent from a year earlier, according to the International Monetary Fund. 

Djibouti — an area the size of Massachusetts — has successfully positioned itself over the last two decades as an indispensable asset in the region. That gives it some leverage, but it will need to walk a diplomatic tightrope to retain its neutrality which has been under pressure since the Red Sea crisis erupted. 

Critical of Israel’s military action in Gaza, which has left more than 35,000 people dead, according to the Hamas-run health ministry in the territory, Djibouti has nevertheless quietly allowed naval vessels from the EU’s Aspides mission — with orders to protect cargo ships in the Red Sea — to refuel and use its port facilities. Several vessels damaged by Houthi missiles have been repaired by local workers in Djibouti. 

As a direct consequence of the Houthis’ violent campaign, Djibouti’s container port is undergoing an economic boon. More ships now dock to unload goods onto smaller vessels — part of the country’s growing transshipment business — to take them through the perilous Red Sea. On a recent visit, dozens of engineers and crane operators were hastily loading containers onto vessels, as four recently-purchased, state-of-the-art German cranes hovered overhead.

“We are doing good business because of the bad luck of others,” says Aboubaker Omar Hadi, Chairman of the Djibouti Ports and Free Zones Authority. He estimates that the country’s port revenue will increase by a third to about $600 million this year compared to 2023.

Since November there have been more than 150 attacks on commercial and military vessels in the Red Sea, according to data published by the EU naval force operating in the region. A 10-day lull in incidents in the middle of April has given way to renewed attacks in recent days, with 11 in May so far. 

“We want to have this crisis stop as soon as possible,” says Hadi, “so we can see where we are going business-wise.” 

If Djibouti’s economy is built around its ports and location, its survival depends — say officials and ministers — on its neutrality. And that is being severely tested.

Prime Minister Abdoulkader Kamil Mohamed says that after the Houthi missile attacks began in October, the US asked for permission to conduct operations against the group from inside its naval base in Djibouti. The government said no. 

“It’s been very clear since the beginning. We do not want to be brought into a war,” Mohamed tells Bloomberg News. “The US is there and we have told them ‘be careful, don’t bring the war here’.” Djibouti remains “on good terms with the US”, he adds. It is also renegotiating a defense co-operation treaty with France, that includes a commitment by the former colonial power to provide military help if Djibouti needs it.

The US has been allowed to install an anti-missile defense system in the country to protect its base, but isn’t authorized to launch surveillance drones to monitor the Houthis from Djibouti, or fire missiles. Separately, China asked the Djiboutian government not to allow American planes to fly too low over its naval base, diplomats say, underlining the delicate balancing act the authorities are having to play. The Chinese embassy in Djibouti did not respond to request for comment.

Asked if Washington had been refused the right to conduct offensive operations from Djibouti, the US Department of Defense said it was taking steps to “bolster regional deterrence” against Houthi attacks. “Djibouti has proven itself to be a willing and able partner in the fight against violent extremist organizations,” said a DoD spokesperson. “Houthi attacks against commercial shipping are an international problem demanding an international solution.”

The US response to Djibouti’s rejection of its request was the establishment of Operation Prosperity Guardian, a multinational coalition force based out of Bahrain and intended to deal with Houthi-led attacks, according to diplomats in Djibouti who asked to remain anonymous discussing national security issues.

“At the time of the Cold War you either had to be for the West or the East,” says Alexi Mohamed, a senior adviser to Ismail Omar Guelleh, Djibouti’s 76 year-old president, emphasizing why neutrality is critical to the country. “The state of mind of Djiboutians and the foreign policy of the president is to have an objective position on any situation, whether it’s Gaza or what’s happening on the Red Sea.”

At the forefront of those government policy objectives will be ensuring that the ruling party remains in power and doesn’t fall victim to either outside or domestic pressures. Guelleh — one of only two presidents since independence — is expected to step down in 2026 after five terms in office with speculation over whether his successor will be able to guarantee stability. 

He won the last election with more than 97 percent of the vote, according to the Interior Ministry, but opposition parties boycotted the poll, claiming that the election was not going to be free and fair, according to Freedom House.

The ruling party dominates the state apparatus and uses security forces and other administrative resources to marginalize, disrupt, and suppress independent political activity, say critics, something denied by the government. The population is strictly monitored, with for instance imams having their speeches reviewed by the authorities before they are delivered. Officially this is to stop extremism but it also helps smother criticism.

Strong economic growth in recent years has masked the government’s failure to tackle joblessness and extreme poverty which could make it vulnerable to dissent, say diplomats. Yet there are few visible signs of that in a tightly-controlled society. More than 75% of the population is aged under 35, and nearly half of those of working age are unemployed, according to the World Bank, which also found that at least one in five of the population is living in extreme poverty — surviving on less than $2.17 a day.

At the same time, the billions of dollars poured into the ports has brought only limited spillover benefits for the wider population, with many jobs filled by expatriates due to the lack of qualified local workers. The Dutch engineering and defense conglomerate Damen Group is currently building a new shipyard to handle demand from the Red Sea. The Djibouti Ports Authority, which will own the facility, insists that it will open in June and be properly staffed. 

Djibouti’s service sector, which incorporates its port, transport and logistics facilities, accounts for 80% of growth in the country, according to the World Bank, making the economy highly reliant on infrastructure investment. That has had a knock-on effect, with sovereign debt levels rising from 35% of gross domestic product a decade ago to 70% today as state-owned companies borrowed to fund expansion. At the same time, trade with Ethiopia accounts for 80% of Djibouti’s port activities, leaving it highly vulnerable to shocks inside its larger neighbor. 

“The strategy behind diversifying our economy is to bring Djibouti out of only being a service economy to one that is much more active and innovative,” says Mohamed, the presidential adviser. He cites the example of Fortescue Future Industries Ltd, the Australian investment company, which is working with the government on a project to develop a green hydrogen sector and activities in construction and fisheries as ways the government is looking to refocus the economy.

On Feb. 18, the Belize-flagged MV Rubymar was 11 miles from the Djibouti coast when it was hit by Houthi ballistic missiles. At 10:45pm, the captain radioed the coastguard for help. The vessel, carrying 21,000 tons of fertilizer, was sinking. Its 24-strong crew abandoned ship and the coastguard quickly hatched a rescue plan.

Within 24 hours the crew — made up of 11 Syrians, six Egyptians, three Indians and four Filipino sailors — had been fished out of the water and brought back to port by Omar’s coastguard team. 

“Our job is to save people,” Omar says as he offers up prayers for a safe return at the start of the daily patrol of Djibouti’s 195-mile (314 kilometer) coastline, “wherever they come from.”

Not everybody is as fortunate as the rescued crew of the Rubymar. About 200,000 people every year fleeing conflict, oppression and climate change across East and North Africa travel to the Djiboutian port town of Obock — a four hour drive north of the capital Dijbouti City. From there people smuggling networks take them across the Bab al-Mandab Strait to Yemen and on to the Gulf states where they hope to find work.

In April, the Djibouti coastguard rushed to a capsized boat just 200 meters offshore close to Khôr ‘Angar, south of Eritrea. At least 38 people including children returning home from Yemen drowned.

“We helped recover the bodies and facilitate burials,” Omar says, explaining how Djibouti has become a haven for migrant families. “It’s terrible work. It’s so sad to see what some people are forced into doing.”

As they leave harbor the coastguard crew move past Moucha Island and into the Gulf of Aden where several large vessels from the Arabian Sea are waiting to dock. A blue, green and white Djiboutian flag flutters off the back of the patrol boat. The country’s future, Omar says, depends on its ability to keep the surrounding chaos at bay. But that could be difficult. 

“Djibouti is the eye of the cyclone,” says Hadi, from the Free Zones Authority. “In the middle it’s calm. But Somalia, Yemen, Eritrea and Ethiopia are around the eye.”

© 2024 Bloomberg L.P.