Back to Iraq – Weekly Geopolitical Report by Bill O’Grady, Confluence Investment Management

President Obama has decided to build a coalition to dislodge the Islamic State (IS).1 The U.S. is leading the coalition, but American efforts will be limited to air power. In this report, we will offer a short synopsis of the war plan. This analysis will be followed by a broader discussion of U.S. Middle East strategy, including a history of American policy. We will move to discuss the most likely outcome from these efforts and conclude, as always, with market ramifications.

The Plan

President Obama has been reluctant to increase American involvement in the Middle East. One of his key goals was to end the Iraq War; another was to “pivot” toward Asia, which would require less involvement in the Middle East. Even a brutal civil war in Syria didn’t prompt strong American action. Perhaps more interesting, Bashar Assad’s use of chemical weapons in Syria, which crossed President Obama’s “red line,” didn’t bring a military response (see WGR, Syria and the Red Line, 5/6/2013). Thus, two weeks ago, when the president declared a new offensive against IS, it marked a major change in foreign policy. However, it is a rather limited response. The U.S. does not intend to deploy ground troops beyond advisers and spotters. Instead, Secretary of State Kerry is trying to put together a coalition to destroy IS.

The response thus far has been less than enthusiastic. Syria is very supportive of the program, assuming that the Assad government approves airstrikes in its territory. However, the regime has indicated that any military activity not approved by the Syrian government will be considered as an attack on Syria. Russia has supported Syrian’s position on airstrikes. The Assad government would love to see the U.S. use air power to attack all the rebels, including IS but also other Islamic and secular groups. The U.S. has no interest in supporting the survival of the Assad regime but doesn’t want to create conditions that will be worse than the Assad government.

Turkey’s participation has been limited. IS had held 49 Turkish government workers hostage and fears for their safety left Turkey reluctant to participate. However, even with the recent release of these hostages, it appears that Turkey is not planning a full-throttled response to IS; it is possible the deal that released the hostages led to this limited action.

Egypt has also declined the invitation to join the coalition, suggesting that it is occupied with its own terrorist movement, the Muslim Brotherhood (MB). This, of course, is a direct slam against the Obama administration, which supported the Arab Spring that brought the MB to power in the first place. In addition, the Obama administration was not very pleased with Gen. Sisi’s ouster of the MB and his takeover of the government.

Jordan will also remain on the sidelines, suggesting that it has to manage Palestinian concerns in the aftermath of the recent conflict in Gaza between Israel and Hamas. This position is a way of expressing displeasure with the lack of U.S. influence over Israeli policy. At the same time, the U.S. has operated training camps for friendly Syrian opposition groups in Jordan for some time. We suspect King Abdullah is worried about sparking an IS reaction in Jordan and thus has demurred.

Iraq is officially supportive, although comments from leaders suggest that support only exists if U.S. policy doesn’t harm their particular religious affiliations, Shiites or Sunnis. The president did wait until Iraq had formed a government before holding his nationally televised address to the U.S. to announce his policy against IS.

The Arab League offered tentative support, prepared to assist “in many aspects” but without specification. These nations, which include Saudi Arabia and the Emirate States, have two concerns. On the one hand, they fear an IS backlash in their own nations if the insurgency were to grow. At the same time, IS acts as a strong proxy against Iranian designs for the region and thus there are reasons to support the insurgent group.

Iran isn’t part of the coalition but may be the most important nation in the region in terms of dealing with IS. The U.S. is negotiating with Iran over its nuclear program and appears to be working to normalize relations. Confronting IS would clearly help stabilize Iraq and support Iran. However, opposition from Sunni states has prevented Iran’s inclusion into the coalition fighting IS. This situation will reduce the odds of success.

Although the U.S. invited NATO to join the coalition, only the U.K., Germany and France have expressed interest thus far. None would be expected to make a major contribution.
There is clearly a lack of enthusiasm for this mission. The difficulty in creating a strong coalition is due mostly to divisions within the region. We view the primary division as sectarian. The Sunnis and Shiites are in opposition across the region and are trying to woo the U.S. into “tipping the scales” against the other. For example, airstrikes that keep the Assad regime in power will be opposed by the Sunni states and supported by the Shiites. Both sides use non-state proxies to undermine the other, although it is rather obvious that the Iranian-backed Shiites are generally better organized. Hezbollah, the primary Iranian proxy, is better controlled than the Sunni jihadists, who have a history of turning against the authoritarian Sunni regimes in the region. Still, the Sunni states support various jihadist groups simply because they are useful in combatting Shiite influence.

U.S. Strategy in the Middle East: A History

America’s primary interest in the Middle East is to ensure that the West has access to the region’s oil. During the Cold War, preventing the Soviets from gaining control of these key oil flows was critical. Since the end of the Cold War, the U.S. wants to ensure that no regional power dominates the area. Ideally, the U.S. wants to stand as a balancing power. When properly executed, the powers in the region are balanced against each other and a type of armed peace exists. When one power becomes dominant, the U.S. will generally intervene. The U.S. was willing to allow Iran and Iraq to fight a bloody, eight-year war to a stalemate; by fighting each other, the U.S. was able to maintain order at a relatively low cost. During the war, the U.S. aided both sides on several occasions.

Maintaining balance is why the U.S. intervened to oust Saddam Hussein’s forces from Kuwait in 1991. Allowing Iraq to absorb Kuwait would have changed the balance of power in the region and could have led to further belligerence from the Iraqi leader. At the same time, President Bush refrained from ousting Hussein for fear of creating a power vacuum and upsetting the balance of power in the region.

For the most part, one could argue that the U.S. was serving the interests of the Sunni states during the Cold War. Relations with Iran were completely broken by the hostage crisis and remain so today despite ongoing nuclear talks. However, in the aftermath of the first Gulf War, belligerent behavior from Saddam Hussein against ethnic and sectarian opponents, the Kurds and the Shiites, led the U.S. to establish “no-fly” zones. Although this action did not

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