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 a Palestinian Arab government but an economy mostly dependent on Israel and would be almost impossible to secure militarily.

By walling off areas between the Israelis and the Arabs, Israel is engaging in a form of separation that mostly addresses the first problem of Israel’s nationhood, which is a defensible space. However, the Arabs that were removed from this area are not happy with the outcome and thus engage in terrorist activities against Israel. In effect, both sides claim the same land and need nearly all of it to have any hope of creating a functioning nation.

However, solving the defensible space issue puts Israel at odds with its outside patrons. The French ended their support for Israel because Israel acted as the aggressor in the Six-Day War. The U.S. always defends Israel’s right to its self-defense but has to manage the fallout that invariably comes from its actions. For example, when the U.S. supported Israel in the Yom Kippur War, the cost to the U.S. was a recession triggered by the OPEC oil embargo. Israel’s actions have, on several occasions, led to strained relations with other Middle East allies and with European nations. The U.S. has often used its veto on the U.N. Security Council to protect Israel from censure or sanction.

In order to manage its superpower role, the U.S. will try to curb Israel’s activities against Palestinian groups. When Israeli operatives poisoned Khaled Mashaal in 1997 in Jordan, its agents were captured and King Hussein threatened to put them on trial for murder if Mashaal died. PM Netanyahu was forced to make a personal apology to Jordan, and President Clinton forced the Israelis to give doctors in Jordan the antidote to save the life of Hamas’s leader of its Political Bureau. On the other hand, Israel successfully bombed two nuclear sites that stopped proliferation in the Middle East, including Iraq’s Osirak reactor southeast of Baghdad in 1981 and one in Syria in 2007.

There are times when Israel takes actions that benefit the U.S. For the most part, however, the U.S. wants to support Israel and wants stability. It understands that the country faces a persistent terrorist threat, but it wants to avoid being associated with the negative image of Palestinian civilians dying due to attacks by Israel. What happens, on a periodic basis, is that terrorist groups provoke Israel to attack and use tactics that will certainly bring civilian casualties and suggest disproportionality. And so, the U.S. will only tolerate a certain degree of Israeli retaliation and then presses to end the fighting before any resolution is reached.

The Current Situation

Hamas’s situation has deteriorated. It gained control over Gaza after the Bush administration allowed Hamas to participate in the 2006 elections. President Bush and his national security cabinet had an almost mystical faith in the power of the ballot box, but allowing an avowed terrorist group to run as a legitimate party was a blunder.

Hamas won in a landslide. The following year, the U.S. supported a Fatah-led coup in Gaza that Hamas easily thwarted. Since then, Hamas has had unquestioned in power in the Gaza Strip. This outcome was clearly unfortunate; the U.S. considers Hamas a terrorist group and Hamas is officially dedicated to the eradication of Israel. The Arab Spring revolutions that led to the ouster of Egyptian President Hosni Mubarak was a boon for Hamas as it led to a new Egyptian government led by Mohamed Morsi of the Muslim Brotherhood (MB).

Since Hamas is an offshoot of the MB movement, Egypt was supportive of Hamas. It allowed for a mostly free and open border and the Gaza economy improved. However, Morsi was ousted last year by Gen. Sisi, who, like Israel, views Hamas as a terrorist group. He resealed the border, cutting off Gaza from the outside world. At the same time, other sponsors of Hamas reduced support as well. Hezbollah, Syria and Iran have all provided aid to Hamas. However, Hamas protested when Assad began attacking Sunni groups in Syria and Hezbollah contributed to the civil war on the side of the regime. This led to a split. Iran, busy with trying to save Assad and prevent Iraq from falling into Sunni arms, was too preoccupied to help.

Hamas found itself isolated with an economy that was steadily deteriorating. Hamas leaders tried to forge a unity government with Fatah, which controls the Palestinian areas of the West Bank, but the combination of Israeli interference and differences between Hamas and Fatah failed to bring changes on the ground. In addition, several of the Sunni states refused to support Gaza due to their opposition to the MB. Saudi Arabia and most of the Gulf States withheld support. Only Turkey and Qatar offered to support Hamas and, thus far, funding has been modest.

In the face of isolation and a weakening economy, Hamas lashed out through a series of indiscriminate rocket attacks. Hamas wants to inform the world of its plight and relieve the economic blockade it faces. It hopes Israel will react with overwhelming force and allow Hamas and the Palestinians to appear the victims.

So far, Hamas has had mixed results. There is no doubt that Israel’s image is taking a beating and the Obama administration would like to see the fighting end. Secretary of State Kerry probably blundered when he pressed for a ceasefire that appeared to give equal footing to Hamas. The Netanyahu government was incensed and the Obama administration came under strong criticism from not only the right-wing but also moderate to left-wing commentators in the media. However, despite these negatives, the war continues.

Unfortunately for Israel, as the U.S. found in Vietnam, Afghanistan and Iraq, and the Soviets found in Afghanistan as well, a stronger power facing a determined insurgency cannot really defeat it without complete annihilation. In a world of widespread media and internet connectivity, such total war against an unequal enemy probably isn’t possible.

Ramifications

A solution to this crisis isn’t likely. At heart, two groups have claims to land that, if not controlled in its entirety, is probably indefensible. Outside powers tend to be sympathetic to one side or the other but none are necessarily comfortable with a solution that would bring genocide. So, this means that the area will be subjected to periodic wars that won’t necessarily resolve the core problem, which is that neither side can control the region without eradicating the other.

Since this has been a condition since 1947, the financial markets have generally taken the stance that as long as conflicts are contained, the impact is minor. Clearly, the Six-Day War and the Yom Kippur War both had wider ramifications. But, since the Camp David Accords that ended the conflicts between Egypt and Israel and the treaty with Jordan and Israel in 1994, the only conflicts have tended to be between Israel and non-state entities. As long as this is the case, these conflicts, though regrettable, have minor market effects.

If a non-state entity opposing Israel were to pull in outside powers that would force the U.S. into a Middle East war, it would likely have a major market impact. This possibility is why Israel is concerned with Iran’s activities in the region. At present, however, Iran has other concerns to deal with, including managing a deteriorating Iraq, the potential emergence of a Kurdish state, a return of the Taliban in Afghanistan and a nuclear deal with the West. It simply doesn’t have the “bandwidth” to deal with Hamas. Turkey and Qatar have been supportive of Hamas, but the former probably won’t attack Israel and the latter can’t attack Israel. Thus, the odds of another outside power being drawn into a war with Israel are very low.

Thus, for now, the problem in Palestine really cannot be resolved but probably won’t have broader market effects. Israel will be forced to engage in periodic conflicts with non-state actors but, for the foreseeable future, we do not expect a major state-tostate conflict affecting Israel. If this assessment is correct, these periodic conflicts won’t have a long-term impact on financial and commodity markets.

Bill O’Grady

August 4, 2014