Over the past two weeks, the insurgent group called the Islamic State of Iraq and the Levant (ISIL) has made stunning inroads into Iraq, moving within 50 miles of Baghdad. The combination of ISIL insurgents, Sunni tribal fighters and Baathist remnants of Saddam Hussein’s military routed Iraqi government troops in a series of smashing victories, moving rapidly and gaining territory. In doing so, they captured a significant amount of military equipment and raided banks, procuring millions of dollars.
ISIL represents a new threat to the region. In this report, we will offer a historical analysis of how the modern Middle East was constructed and why the construct is coming under pressure. One of the keys to understanding why ISIL is so potent is to differentiate it from al Qaeda; we will analyze the differences. Finally, we will offer the strongest reason why we believe ISIL has staying power—simply put, the regional powers are generally concerned about the group but are trying to use its presence to boost their own specific goals. We will also note two other key issues, ISIL’s greatest weakness and the possibility of a broader sectarian conflict. As always, we will conclude with market ramifications.
The Ottomans ruled most of the Middle East and the Levant until after WWI.
The Ottomans did not conquer most of modern Saudi Arabia since it was considered mostly wasteland and thus did not warrant control; the empire did control the coast of the Red Sea and the western side of the Persian Gulf.
Ottoman rule was generally considered a “light touch.” The leaders in Istanbul tended to use proxies in the areas it ruled who were required to send tribute to the capital. Local conditions were determined by the proxies in power. The Ottoman rulers became convinced that sectarian, tribal and ethnic differences in the region made centralized control impossible.
As the Ottoman Empire began to break down at the beginning of the 20th century, European powers cautiously planned to manage its disintegration. WWI marked the end of the Ottoman Empire.
The Europeans were not enamored with the Ottoman’s ruling methods, preferring to establish separate nation-states. During WWI, France and Britain began secret meetings to allocate interests in the region. Sir Mark Sykes and François Georges Picot met in 1916 to establish colonial regions. The Sykes-Picot Agreement became the basis for European colonization.
The actual dividing lines were not established until the San Remo Conference in 1920.
(Source: University of Michigan)
Britain’s primary goal was to secure oil in Persia (Iran) and Iraq. It had sent Gertrude Bell into Iraq as a spy during the war to gather intelligence on the region. She managed to slip past Ottoman officials because they believed she was an archeologist. In addition, during the war, T.E. Lawrence organized local tribes to attack Ottoman positions; Lawrence promised these tribes independence after the war, unaware that Sykes and Picot had already bargained away that vow.
Since the Hashemite leaders were denied the opportunity to rule in what became Syria and Lebanon because the French controlled that area, Bell managed to install Faisal, a member of the Hashemite royal family, as king of Iraq. She even managed an election of sorts; reports indicate that Faisal won “96%” of the vote, which became standard operating procedure for the region. The lines drawn by both Sykes-Picot and the San Remo Conference showed little regard for conditions on the ground. In fact, both colonial powers had a tendency to put minority groups in power, Sunnis in Iraq, Alawites in Syria and Christians in Lebanon. This meant the local rulers would be dependent on the colonial powers to maintain control.
The insistence on creating nation-states in a region riven by religious and ethnic divisions has been a recipe for tyranny and autocratic governments. Although Iran is nominally democratic, control of the state is held by an unelected cleric. Only Israel can be considered a functioning democracy. Essentially, the Europeans wanted to create political divisions that they believed worked in their continent, but created artificial boundaries that were more suited for colonial control than statehood.
Although the borders established remain the recognized ones (de jure), the functioning boundaries (de facto) are quite different. For example, Lebanon and Syria are no longer centrally controlled. Although Libya isn’t part of the Levant (it’s part of the Maghreb), it is no longer a functioning state either. It appears that Iraq is moving into a similar situation.
ISIL versus al Qaeda
Although the media and many political figures are treating these two groups as the same, ISIL has evolved into a significantly different entity. ISIL emerged out of al Qaeda in Iraq, which, during the American occupation, was run by Abu Musab al-Zarqawi, a Jordanian. Al-Zarqawi was a controversial figure even among jihadists. He had numerous disputes with al Qaeda’s leadership over his methods, which included terrorist attacks against Shiites. The leadership in Afghanistan did not want al-Zarqawi attacking other Muslims regardless of belief. Al-Zarqawi held a special hatred for Shiites, considering them the worst of apostates.
Al-Zarqawi was killed by a U.S. airstrike on June 6, 2006. The following year, President Bush ordered the Iraq Surge, where 20,000 soldiers were deployed into the country. Gen. David Petraeus was able to effectively implement a counterinsurgency strategy in which Sunnis that had become disenchanted with the jihadists for their brutality and their harsh implementation of sharia law were built into a unified force that turned on groups like al Qaeda in Iraq. Within a couple of years, al Qaeda in Iraq was virtually eliminated. Sunni tribal leaders were promised representation and power sharing in future Iraqi governments for their role in stabilizing the previously ungovernable areas in western Iraq.
However, as we noted in a recent report (see WGR, Iran’s Iraq, 5/19/2014), Iraqi PM Maliki steadily excluded Sunnis from his government and then worked with Iran to ensure that U.S. troops would not remain. After the U.S. left, Maliki essentially eliminated Sunnis from any important role. Feeling threatened, the Sunnis began to protest against their plight. Maliki’s ham-fisted response essentially prepared the ground for an insurgency.
ISIL, which was built from remnants of Zarqawi’s group, is led by Abu Bakr al-Baghdadi (a nom de guerre, it is not clear what his actual name is), an Iraqi cleric from Samarra. His group, which began in Iraq, began to move into Syria to contribute to the fight there. He began to take control of another al Qaeda-related body, Jabhat al-Nusra (JN). ISIL, at times, attacked JN and other rebel groups in Syria that ISIL did not deem as sufficiently “pure.” Ayman al-Zawhari, the current leader of al Qaeda, ruled that ISIL should be subordinate to JN in Syria but ISIL would be dominant in Iraq. Al-Baghdadi rejected that decision and his group was ousted from al Qaeda by al-Zawhari.
ISIL is different from al Qaeda in two key ways. First, ISIL, in the spirit of al-Zarqawi, is focused on eliminating Shiism by conversion or death. Although the group has attacked Christians and other less devout Sunnis, al-Baghdadi sees Shiites as the worst of apostates and believes that exterminating them should be the focus of his group. Al Qaeda does not approve of Shiism but views them as fellow Muslims who should not be the target of hostility. Second, ISIL is focused on actually gaining and holding territory. The region ISIL controls is larger than Israel and spans the Syrian-Iraq frontier.
Thus, ISIL is running a proto-state in Iraq. Bin Laden’s position was that if al Qaeda performed spectacular terrorist acts then spontaneous rebellions would develop in the Islamic world and lead to a Caliphate. Although the Arab Spring seemed to offer that promise, in fact, it hasn’t occurred to date.
With ISIL’s success, it is beginning to look like al Qaeda is “big hat, no cattle.” ISIL, rejected by al Qaeda’s leadership, is now running an area larger than Israel. It has its own funding from kidnapping, bank robberies and taxation. It is providing services in the regions it controls. Essentially, ISIL is doing what al Qaeda promised—it has begun the creation of an Islamic state. Admittedly, it has had lots of unaffiliated Sunni support. As noted above, tribal leaders and former Baathists have worked together to push the Iraqi army out of the Sunni regions. But, even with these compromises, ISIL is offering an alternative to al Qaeda that is less terrorist but more profound—it is giving jihadists of all stripes a country to join. For that reason, it may be much more dangerous.
The Regional Game
Despite all that ISIL has accomplished, it could not have made these strides without the power vacuum that has developed in the region. We will recap how regional powers are handling this issue. In nearly every case, the nations surrounding ISIL have not been fully opposed to, or have inadvertently facilitated, ISIL’s development.
Turkey and the Kurds: Under the Erdogan government, Turkey has begun to shed its exclusive focus on “Turkishness” to expand its influence. Although it would be a stretch to suggest that Turkey is trying to recreate the Ottoman Empire, it is vying to become a regional hegemon. As part of this process, Erdogan has been trying to improve relations with the Kurds. For years, Kurds in Turkey have faced intense discrimination, including attempts to stamp out the Kurdish language and culture. For political reasons, Erdogan is supporting Kurdish aspirations in an attempt to garner Kurdish votes in future elections.
In addition, by supporting Kurdish autonomy in Iraq, Turkey is weakening the government in Baghdad and, indirectly, its sponsor in Tehran. And, if the Kurds can dominate northern Iraq and its oil riches, then Turkey can benefit by diversifying its energy sources away from Russia and through transit fees from transporting Kurdish-controlled oil.
The Kurds, who have been pressing for a homeland for well over a century, are closer now than they have been since the end of WWI. Although Turkey will be reluctant to see a new state develop, it will certainly support enhanced autonomy. In effect, the Kurds will likely be a de facto, rather than de jure, state. The Kurds have recently seized the key oil city of Kirkuk, which some Kurdish writers refer to as the “Jerusalem for Kurds.” In fact, the Kurdish region has expanded by about 30% since ISIL began its recent offensive. The Kurds also have a formidable military, called the peshmerga, which should be able to protect the Kurdish region from ISIL.
For Turkey and the Kurds, the establishment of a radical Islamist state by ISIL is a threat, but if ISIL continues to undermine Baghdad then the benefits of ISIL overwhelm the costs.
Iran: The country’s most important goal is to be the regional hegemon and to accomplish that aim it has worked to build a “Shiite Crescent” from Iran to Lebanon. America’s ouster of Saddam Hussein and the decision to attempt to create a democracy, which meant that Shiites would dominate due to their majority status in Iraq, clearly worked to further its building of the Shiite Crescent. However, Iran made some key mistakes. First, its decision to support Maliki was clearly a blunder, unless Iran wanted to start a sectarian conflict (which we doubt is the case). Maliki is a Shiite partisan who structured his government to exclude Kurds and Sunnis. This led to Sunni unrest and paved the way for ISIL. In addition, fearful of the army, he fired most of the professional officers, replacing them with political loyalists. The poor performance of the Iraqi Army in recent key battles strongly suggests that Maliki has failed to build an effective military, opting instead for a politically loyal one. The mistake was that Iran insisted that the U.S. remove all its soldiers from Iraq and pressed the Maliki government to ensure that the Americans left. This has proven to be a disastrous error. Iran likely believed that as long as the U.S. was in Iraq it could never exercise sufficient influence, but the Maliki government became impossible for Iran to control without the U.S. military in place to support the Iraqi army and restrain Maliki’s sectarian tendencies.
Iran is getting a “taste” of hegemony, having irresponsible allies that drag a regional power into unwanted conflicts. Although Iran can probably contain ISIL, it will cost resources and offer other powers a tool to weaken Iran in return. In fact, the more Iran supports Maliki, the easier time ISIL will have in recruiting and fundraising.
Syria: Although Assad has been generally gaining control over some parts of Syria, it is highly unlikely that Syria will ever be unified again. Instead, we expect Syria to become fragmented in the same fashion as Lebanon. Interestingly enough, Assad has studiously avoided attacking ISIL, relying on the group to attack other rebel forces in Syria. For the most part, this tactic has worked, although such a policy is clearly not in the best interests of Iraq or Iran. As ISIL develops a stronger base of operations in Iraq, al-Baghdadi may be inclined to increase attacks in Syria. And, given ISIL’s recent success, more rebels in Syria may decide to join the group, which could prove to be a problem for Assad.
Saudi Arabia and the Gulf Cooperation Council (GCC) States: The Saudis are not huge fans of ISIL. Radical Sunni groups tend to view the Gulf States as irreligious, corrupt regimes that should be overthrown. At the same time, a strong Sunni force that is disrupting the Shiite Crescent, undermining Iran and his “puppet,” Maliki, is seen as a good thing.
The Saudis have been quite uncomfortable with the apparent détente between Iran and the U.S. Anything that undermines that process is also a benefit to the kingdom and other GCC nations. At the same time, it would not want to see ISIL become a strong state. There have been reports that ISIL has attempted to sponsor terrorist activities in the kingdom and it has conducted some fundraising in the GCC with some reported success.
There are reports that in early June, Russian President Putin and his foreign minister Lavrov met with the Saudi foreign minister, Saud al-Faisal in Sochi. Although no details of the meeting emerged, both Russia and Saudi Arabia would like to undermine the American-Iranian détente and keep oil prices high. Russia would like to keep the U.S. distracted in the Middle East so it can extend its influence into its near abroad. For this to occur, the level of turmoil needs to remain elevated, meaning that both Russia and Saudi Arabia have an interest in supporting ISIL in order to achieve their goals. Clearly, neither would benefit from ISIL taking control of Iraq, but keeping tensions elevated would be beneficial.
The other key issue is that tensions in Iraq could trigger higher oil prices. For now, we would not expect ISIL to invade the southern oil fields, so an actual disruption to production is unlikely. However, if ISIL were able to oust the Maliki regime from Baghdad, we could see a period in which the oil industry has no governmental infrastructure in Iraq to process oil sales. This is a situation similar to one we have seen in Libya. If there are outages, the Saudis have typically increased output to keep oil prices stable. However, given the current frosty relations between the U.S. and Saudi Arabia, we would expect the kingdom to be less sensitive to the U.S. goal of keeping oil prices stable.
The Big Issues
There are two other important issues to note.
Issue #1: The recipe for undermining ISIL is well known. Because of the harsh and puritanical nature of ISIL and similar groups, it is difficult for these insurgents to maintain control. Eventually, ordinary people rebel if they are offered a reasonable alternative. The success of the aforementioned Surge in 2007-08 was mostly due to offering Sunni tribal leaders an alternative to al Qaeda. The reason Sunni tribal leaders and Baathist remnants are supporting ISIL is that they believe Maliki represents a genocidal threat. And, since Maliki was Iran’s choice, even if he is ousted it is unlikely that any replacement will be much of an improvement. And so, even though Maliki might fall, it is hard to imagine that Iran would support anyone but a sectarian Shiite to run Iraq. The idea of Iran supporting a Sunni running Iraq after the bloody Iran-Iraq War is almost impossible to countenance. In fact, ISIL will be at most risk if, or when, it solidifies its gains and less puritanical Sunnis tire of ISIL’s radical behavior. In the long run, ISIL’s gains may not hold unless it modifies its behavior. At the same time, the threats against Sunnis are strong enough to insure that, at least for the time being, ISIL will remain well supported.
Issue #2: Although Christians generally get along today, the period after the Reformation was generally one of great turmoil in Europe. In fact, one of the bloodiest conflicts in European history, only eclipsed by the industrialized warfare of the 20th century, was the series of religious wars fought from 1618-48 called the Thirty Years War. The war engulfed most of Central Europe and was, at its core, an attempt to resolve the differences between Protestantism and Catholicism through the force of arms. The war ended with a series of treaties and conferences, known as the Peace of Westphalia. The Peace of Westphalia established the concept of national sovereignty and the ban on foreign intervention in another nation’s domestic matters. It also boosted the concept of an ethnic nation and stood against personal empires in Europe. In other words, the Peace of Westphalia tried to support the concept of the nation as a people and downplayed the role of the charismatic personal emperor. This peace, for the most part, ended religious wars in Europe. By the war’s end, Christians had abandoned military conflict as a “conversion tool,” and the war led to a religious “sorting” that created homogenous religious regions.
The Middle East has never had a similar catharsis. In fact, the nations created by the Europeans had characteristics similar to those in Europe pre-Westphalia, including the cult of personality necessary to rule disparate groups. The Arab Spring and ISIL may be starting a similar process; unfortunately, this may also trigger a long conflict in a manner similar to the Thirty Years War. If this is the context of what is evolving in the Middle East, we are looking at a significant and long-term increase in regional turmoil that will have global implications. In fact, we would expect outside powers to attempt to prevent the process from reaching a catharsis because of the short-term costs. However, the only alternative may be returning to the rule of the strongmen and their cults of personality. This option may no longer be possible.
The most obvious beneficiary of the turmoil in the region is oil prices. Energy-consuming industries, such as airlines, may be under some pressure from elevated oil prices. Russian assets will likely benefit as well due to the rise in oil prices and the distraction that the ISIL situation will provide, allowing Putin to solidify his gains in Eastern Europe.
If war becomes persistent in the Middle East, the defense industry should also benefit. And finally, risk assets, such as Treasuries, the dollar and precious metals, should also find support.
June 23, 2014
1There is some confusion over the proper name of this group. The most direct translation is the “Islamic State of Iraq and al-Sham,” or ISIS. Al-Sham refers to a region that includes parts of Iraq, southern Turkey, Syria and Egypt, along with the area of Lebanon, Israel and Palestine, which is sometimes called “Greater Syria.” This region is also called “the Levant,” which translates to the “Islamic State of Iraq and the Levant,” or ISIL. Although the terms are generally interchangeable, for consistency purposes we will use the latter as it better reflects the aspirations of the insurgency, which are to not only control modern-day Syria as might be implied by the term ISIS, when in fact it represents a much broader region.
2Some estimates suggest that the population of the German states fell by 40% through battlefield deaths, famine and emigration. Other regions of Europe experienced similar calamities.
3It should be noted that the war wasn’t purely religious but was also affected by nation leaders trying to use the conflict for political gain.
This report was prepared by Bill O’Grady of Confluence Investment Management LLC and reflects the current opinion of the author. It is based upon sources and data believed to be accurate and reliable. Opinions and forward looking statements expressed are subject to change without notice. This information does not constitute a solicitation or an offer to buy or sell any security.
Confluence Investment Management LLC
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