Irans Iraq

Due to the upcoming Memorial Day holiday, the next geopolitical report will be published June 2. 

The last American combat troops left Iraq in December 2011.  It marked the end of direct U.S. involvement in a nearly eight-year war.  In the aftermath of the conflict, there have been a number of developments.  For the most part, the key outcome is that Iran has extended its influence in the region.   

In this report, we will discuss recent developments in Iraq, including elections that were held on April 30.  We will analyze Iran’s growing influence in the region and how the Iraq War furthered that influence.  As part of this analysis, we will examine how Iran’s growing power and America’s apparent withdrawal is changing the behavior of other nations in the region.  As always, we will conclude with market ramifications.  

Recent Developments

Despite increasing violence, Iraqis went to the polls on April 30.  Although official election results are not expected until month’s end, it appears that Shiite-affiliated parties will control about 55% of the seats.  The current PM, Nouri al-Maliki, is generally expected to be able to create a governing coalition and earn a third term in the position.  However, he is facing angry opposition from Sunni groups and even some Shiite parties are less than favorable toward giving him another term.  

Over his past term, Maliki has become increasingly autocratic.  He has virtually eliminated any Sunni involvement in the government and has attempted to reduce the influence of other Shiite groups.  His treatment of Sunni regions has led to an open rebellion in western Iraq.  The Anbar province, which was a hotbed for Sunni resistance and al Qaeda during the American occupation but was “turned” by the 2007 Surge, has reverted back to form.  Sunni jihadist groups are creating common cause with Sunni tribal leaders in Anbar to fight off Iraqi government troops.  From the Sunni perspective, the Shiite-dominated army is simply an Iranian proxy.  

As the Syrian civil war continues, the Assad regime has mostly lost control of its eastern border.  The Iraqi-Syrian frontier, in parts, has virtually ceased to exist.  In its place, a Sunni jihadist region is evolving.  Although support for the jihadists isn’t necessarily strong amongst the Sunni tribes, Maliki’s ham-fisted manner of dealing with Sunni opposition has mostly pushed the Sunni tribes into alliance with the jihadists.  As the Bush administration discovered last decade, it is easy to create conditions in which Sunnis band together with jihadists.  

In response to this insurgency, the Obama administration has sent military equipment, including Apache helicopters.  However, since American troops were withdrawn from Iraq, American influence has waned.  

Maliki’s political fate will almost certainly be determined by Tehran.  The Iranians do not appear terribly concerned about the intricacies of Iraqi politics.  Iran simply wants a Shiite-dominated government that will act as its ally in the region. 

If Maliki can best deliver that goal, he will continue to hold office.  If he isn’t that person, he will certainly be replaced with someone else. 

Iran’s Goals

Iran has three primary goals: 

Regional hegemony:  Iran wants to dominate the Middle East.  This is a goal shared by several other nations in the region, including Saudi Arabia, Egypt and Turkey.  Of these three, Turkey is the most formidable, but at this juncture the country most likely to achieve this goal is Iran.  Iraq was part of that list until after the first Gulf War.  After 1991, the Hussein regime was simply interested in survival.  Since WWII, none of these nations has achieved regional domination because the U.S. would not allow it.  America wanted to control the region to ensure an unencumbered flow of oil to the world and to prevent other outside powers (primarily the U.S.S.R.) from having influence in the region.  This interest intensified after the Cold War ended, especially as oil prices rose on the back of strong emerging economy demand.  However, after three wars since 1990 (including Afghanistan) and a surge in U.S. domestic energy production, the Obama administration has made a clear decision to reduce its “footprint” in the region.  Iran is trying to take advantage of America’s withdrawal to expand its influence. 

Protection from Iraq:  Saddam Hussein launched an unprovoked attack on Iran in 1980 and subjected the country to a bloody eight-year war that ended in a stalemate.  Thus, Iran wants to ensure that its neighbor will never be in a position to invade ever again.  

Iran also learned a second lesson from the Iraq War—conventional warfare was not ever going to be a winning strategy.  The country was never going to be rich enough to compete with the West in conventional warfare and thus the country would need to become an asymmetric warfare powerhouse.  Iran has devoted most of its military spending to building an unconventional force.  The Quds Force of the Iranian Republican Guard Corp is one of the strongest covert forces in the world.  Along with allies such as Hamas and Hezbollah, Iran projects power in the Middle East and beyond. 

Support the revolutionary Shiite ideology:  A close reading of Iranian foreign policy behavior since the 1979 revolution would suggest a pragmatic power.  Iran has worked with virtually any group that would help further its goals, be they Western, Sunni, Shiite or secular.  For example, it supported the U.S. in its war in Afghanistan.  It works closely with Hamas, a Sunni group.  Although the Assad’s family is Alawite, which is considered by some to be an offshoot of Shiism, some Shiite theologians believe it is a heretical sect.  Still, Syria is one of Iran’s closest allies.  

What must be remembered about Iran’s seeming pragmatism is that the country takes a very long view in terms of accomplishing its goals.  It is willing to work with groups and nations that, in terms of ideology, it would be inclined to oppose.  However, it will enter into temporary alliances to further its long-term aims.  This persistence dovetails closely with its decision to use unconventional warfare tactics.  Unconventional warfare works by wearing down an opponent and undermining domestic support for the conflict by using terrorism, media disinformation and a willingness to suffer casualties to win wars. 

Iran has had these goals since the end of the Iran-Iraq War in 1988.  This isn’t to say that Iran hasn’t made tactical mistakes.  Aggressive terrorist activities in the 1980s led the state to become a pariah.  It is arguable that the nuclear program has been more of a burden than benefit.  It is worth noting that the regime panicked after the U.S. invaded Iraq and was suing for a treaty.  The Bush administration, heady with the early success of both missions, refused to talk.  Iran did cooperate with the U.S. on both conflicts; Iran was threatened by the Taliban, a radical Sunni group, and was more than happy to participate in ousting Saddam Hussein.  In addition, the U.S. was officially supporting a democratic government in Iraq, which, by design, would lead to a strong Shiite government simply because the Shiites were the majority sect in Iraq.  However, as the U.S. struggled to quell Sunni jihadists and some of the radical Shiite elements, Iran began to support these insurgencies in a bid to undermine U.S. power.  

The key point here is that Iran has goals but behaves in an opportunistic manner.  It was willing to cooperate with the U.S. to rid the region of Saddam Hussein.  The Mullahs had no reason to expect that the Bush administration would bungle the occupation by (a) not putting in enough allied troops, and (b) not getting more European nations to support the Iraq War, resulting in too small of a coalition.  However, when it became apparent that the U.S. had stumbled into these mistakes, Iran wasted no time in shifting its tactics to directing proxies in Iraq to attack American and British troops, regardless of whether these insurgents were Shiite or Sunni.  As part of this process, these insurgents were given training and weapons.  The deadly improvised explosive devices (IED) that were used effectively against allied armor were built in Iran.  On occasion, allied troops would capture IRGC operatives and hand them over to the Iraqi government.  The Iranians had so thoroughly penetrated the Iraqi government that these operatives were then simply turned over to Iran. 

The Ousting of the U.S.

Dexter Filkins of The New Yorker magazine has indicated that Iran brokered the formation of the last Iraqi government and in the process was able to ensure that all American troops would be forced to leave in 2011.[1]  The 2010 elections were inconclusive; although no party won a majority, a secular, pro-Western coalition led by Ayad Allawi, called Iraqiya, did win the greatest vote share.  On its face, this was a great victory for the U.S.  As the war was winding down, the U.S. had the opportunity to leave with a supportive, non-sectarian government in control of Iraq.  However, despite the apparent strong performance of Iraqiya, the Obama administration concluded that Iran would never support this outcome and thus allowed an Iraqi judge, likely under pressure from Maliki and the Iranians, to give Maliki the first try at forming a government, even though this decision violated the Iraqi constitution.  

However, it wasn’t clear that Maliki could form a coalition as the Sadrist movement, led by the mercurial cleric Muqtata al-Sadr, did not want to cooperate with Maliki.  In this critical moment, Qassem Suleimani, the head of the Quds Force of the IRGC, stepped in, breaking the deadlock by “encouraging” al-Sadr to join a Shiite coalition led by Maliki.  Maliki would give several key government posts to al-Sadr’s associates.  In addition, he would give the pro-Iranian Kurdish leader, Jalal Talabani, the presidency and disband the Iraqi National Intelligence Service, a CIA-developed government agency.  And, in addition, Maliki would agree to expel all American forces by the end of 2011. 

Filkins indicates that the Obama administration had the transcripts of the meeting and knew the terms of the agreement.  Despite this knowledge, the administration did not protest.  The president campaigned on ending U.S. involvement in the Iraq War and thus it appears was willing to accept this ouster.  

As the exit point approached in 2011, Iraqi leaders became increasingly uncomfortable with the prospect of a full American exit.  Filkins reports that even Maliki, uncomfortable with Iran’s growing influence in Iraq, was supportive of leaving some troops in Iraq and was willing to finesse the issue of allowing American troops to remain immune from Iraqi law, a significant sticking point.  Filkins indicates that the president had little interest in retaining combat troops in Iraq.  According to Sami al-Askari, a member of Iraq’s parliament, “the American attitude was: let’s get out of here as quickly as possible.”[2] 

The day after the last American soldier left Iraq, Maliki order the arrest of VP Tariq al-Hashemi, the highest ranking Sunni Arab in his government.  He was charged with running a death squad and has been sentenced to death in absentia and remains in exile.  From this point, Maliki has systematically eliminated Sunnis in the Iraqi government.  

And so, as Sunni unrest has mounted in western Iraq, and the jihadist threat grows, Maliki has been forced to ask for help from Iran to contain the insurgency.  This means, of course, that Iran’s influence will increase even further. 

To some extent, as long as Iran has an unimpeded path to Lebanon and its ally, Hezbollah, it probably doesn’t care that western Iraq is ungovernable.  Iran can ensure that the eastern part of Iraq, where most of the known oil is located, will be under its control, for no other reason than it is mostly Shiite.  Although many Shiite Arabs are uncomfortable with Iran’s influence in Iraq, they need the protection that Iran can provide against the radical Sunni insurgency. 


Evidence of Iran’s regional hegemony is growing.  Recently, U.S. Defense Secretary Hagel spoke at a meeting of the Gulf Cooperation Council and told the members that they could no longer rely solely on American security guarantees and would need to provide more of their own defense.  He offered the assurance that the U.S. would help but made it clear that the support the region has received over the past 70 years is coming to a close.  Just before Hagel’s speech, the Saudi foreign minister, Prince Saud al-Faisal, announced that he had made an offer to his Iranian counterpart to visit the kingdom.  Although this meeting will likely cover areas of common interest, such as containing the jihadist extremists in Syria and Iraq, we suspect that the Saudis have seen the future and need to begin negotiations to deal with the new rising power in the region.  

What does this mean for markets?  For years, the Saudis have acted as a moderating influence on oil prices.  Since Saudi Arabia is a high reserve/low population country, it benefits from rising long-term oil demand.  High prices tend to discourage demand and encourage non-conventional oil production.  Iran, on the other hand, is a high reserve/high population country—it needs revenue and habitually supports high prices.  Iran’s growing influence likely means that OPEC production will be less than normal and thus supports higher prices over time.  

At the same time, China, which would prefer lower oil prices, may become more active in the region as U.S. influence declines.  China may be more likely to support Saudi independence to curb higher oil prices.  At this point, it isn’t obvious that China has the military assets to act as a balancing power against Iran at this time.  However, the incentive to build its navy will quickly increase if the U.S. continues on its current path of withdrawal.  Increasing Chinese influence in the region would be an added complication and may, paradoxically, lead to even higher prices. 

Bill O’Grady

May 19, 2014  

[1]Filkins, Dexter. “What We Left Behind in Iraq,” 4/28/2014, and “The Shadow Commander,” 9/30/2013. The New Yorker.

[2]Filkins, Dexter. “What we Left Behind in Iraq,” 4/28/2014, page 15. The New Yorker.

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