The Hamas Problem by Bill O’Grady, Confluence Investment Management

On June 12, three Israeli teenagers were abducted in the West Bank and killed by unknown kidnappers. The Netanyahu government blamed Hamas who denied the charge. It is unclear if Hamas was involved as there are numerous groups that operate in Palestine that engage in kidnapping. On the other hand, Hamas has also kidnapped Israelis in the past and so it isn’t a huge stretch to assume that the group was involved. In retaliation, in early July, Israeli settlers allegedly ambushed a Palestinian youth and killed him as well.

The Israeli government responded to the kidnapping of its citizens by arresting scores of Hamas members, some of which had been released as part of the prisoner swap that returned Israeli Defense Force (IDF) Corporal Gilad Shalit to Israel. As days passed, conditions deteriorated. Hamas began a campaign of rocket1 launches into Israel; Israel responded with an air campaign. On July 17, Israeli forces began a ground offensive into Gaza that continues to date.

In this report, we will begin with a basic geopolitical analysis of Palestine. Using this background, we will examine how changes in the region have created conditions in which a ceasefire is almost impossible to arrange. We will also examine the U.S. position in the conflict. As always, we will conclude with an analysis of market ramifications.

The Geopolitics of Palestine

The British offered the Zionists a homeland as part of the Balfour Declaration in 1917. It was less than clear what exactly the British were offering Jewish Zionists; although the Zionists were pressing for a state, at least some British officials were thinking more of a homeland. This was because the area that was being considered was mostly occupied by Arabs. After WWI, the British and French were more concerned with the Sykes-Picot Agreement, which created mandates out of the defunct Ottoman Empire. The area “promised” to the Zionists was never fully defined by the British; to some extent, due to the promises made by T.E. Lawrence to garner Arab support to fight the Ottomans, the British had promised lands in the region to multiple parties. In 1947, after WWII, as part of the steady unwinding of European colonization, the U.N. divided Britain’s Palestinian mandate into Jewish and Arab sections. Conflict immediately ensued between the two groups and periodic wars have been part of the region ever since.

The map below shows how the region’s population has changed over time. Of particular note is the second panel of the map, the initial partition implemented by the U.N. This partition was unsustainable at its core. Neither the Palestinian nor the Israeli land areas were defensible.

In fact, the Israel that emerged after a series of conflicts from 1947 to 1949 was not defensible either. In the case of the initial partition, it was simply too easy for either side to isolate large areas of the other’s land. In fact, what emerged after 1949 made more sense, except that the Palestinian-controlled West Bank left a narrow strip of land that a determined invader could leverage to split Israel into two parts. The Six-Day War in 1967 essentially resolved that issue as Israel took control of the West Bank. As the last panel shows (and there is great dispute over the actual degree of Israeli control in this area), Israel has seriously reduced the threat of an outside power splitting the nation into two parts.

palestine hamas

This is only one part of Israel’s geopolitical situation. The second is the problem of strategic depth. Even with controlling the West Bank, Israel is a relatively small nation surrounded by potential Arab enemies. If these enemies moved en masse against Israel, it is highly doubtful the country could prevent being overrun. That was the Arab plan before the Six-Day War. The IDF, in a brilliant tactical maneuver, launched a multiple front surprise attack on its enemies and won a smashing victory. However, such surprise attacks are rarely repeatable because one’s enemies take steps to prevent a reoccurrence of such events. Think of it this way…Imperial Japan only had one Pearl Harbor.

The Yom Kippur War in 1973 showed the problem of strategic depth. In this war, Israel, underestimating its enemies, was nearly overrun. Without massive material support from the Nixon administration, Israel may have lost.

To solve the issue of strategic depth, Israel has sought outside powers for support. From 1947 to 1967, the French played that role, providing the country with arms and allegedly a nuclear reactor and reprocessing plant that fueled its suspected nuclear weapons program. However, the French abandoned Israel after the 1967 war and the U.S. assumed that role.

Thus, Israel’s geopolitical situation requires that it has defensible space and support from an outside power to deter regional powers. Furthermore, if Israel can negotiate peace with its immediate neighbors, its position is additionally stabilized. We believe understanding Israel’s situation helps explain Israel’s behavior toward the Palestinians, regional powers and its outside sponsor, the U.S.

Israel’s Position

Since its inception, Israel has faced regional powers that wanted to eliminate its existence. However, due to its battlefield successes and American support, it has managed to build lasting peace arrangements with Egypt and Jordan. Its relations with Syria are stable; although enemies, the Assad regime generally avoids provoking Israel, clearly afraid of a fullblown conflict with the IDF. Israel does face a threat from Iran, although we have our doubts as to how real that threat is. The rhetoric coming from Iran is obviously hostile, but we suspect Iran is more interested in subduing the Sunnis rather than eliminating Israel.

Thus, Israel’s primary threat comes from non-state groups, mostly from either Palestinian-linked groups or Hezbollah, the Shiite terrorist group supported by Iran. Neither group is an existential threat in the conventional sense. The Palestinian Authority, Hezbollah, Hamas, Islamic Jihad, et al. will not overthrow the Israeli government through invasion. The primary threat from these groups comes from terrorism and civil unrest.

The goal of these groups isn’t to invade Israel and take territory. It is to degrade living conditions to prevent Israelis from being comfortable. Hamas, Hezbollah, etc. win if they can convince an Israeli living in Tel Aviv that his modern city will never be like London, New York or Paris. In other words, if indiscriminant rocket attacks, suicide bombings, random shootings and other such terrorist acts can lead Israelis to believe that they will always be under siege of some sort, these groups hope that the Israelis will “give up” and emigrate to Western nations and allow the Arabs to retake Palestine.

This is why the “two-state” solution is a non-starter. To create a viable Palestinian state would require that Israel give up enough territory to allow for an economic base. As the initial partition showed, creating a viable Palestinian state would almost certainly leave Israel in an indefensible position. Ariel Sharon was attempting to create a de facto Palestinian nation by unilaterally building walled areas that would become the Palestine nation that Israel would accept. This state would not have been workable for Palestinians.

Instead, it would have created a nation that was more of an economic colony for Israel; it would have

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