The Era Of ISIL Caliphate Terror by Dan Steinbock, Difference Group
While the brutal expansion of the Islamic State of Levant (ISIL) has triggered great fears in popular imagination, Dr. Steinbock says that the ISIL’s — and its potential successors’ — claim to a territorial caliphate is likely to pose enduring economic, political and strategic challenges to the international community.
To paraphrase Dr. Kissinger’s old bon mot about Europe: Who do you call if you want to talk to ISIL?
Even if the ISIL can ultimately be subdued through the kind of broad-based cooperation that Russia’s President Putin has long advocated, the violence the group has inspired will not easily go away and has potential to spread, deepen and escalate — especially if its financial funds truly amount to the reported $2 billion.
At the end of October, the value investor Mohnish Pabrai gave a presentation and took part in a Q&A session at Boston College and Harvard Business School on the Uber Cannibal Investor Framework, which he has developed over the past decade. Uber Cannibals are the businesses “eating themselves by buying back their stock,” the value Read More
The way to defuse terrorism is not regime change and interventionism, as evidenced by the ongoing meltdown of the US-led Middle East. Rather, a sustained solution requires stability, jobs and economic development. Unfortunately, none of the three is in the cards, at least in the short-term.
The French 13/11
On Friday evening, November 13, 2015, a group of assailants carried out a series of coordinated attacks at several locations in Paris. As a peaceful Friday evening in the city of light morphed into a darkness of bloodshed in a concert theater, sporting event and several restaurants, more than 120 people were killed and over 350 injured. After the Islamic State of Iraq and the Levant (ISIL) claimed responsibility for the attack, the perceived threat of terror grew elevated in France. The trend line is clear. Between 1970 and 2014, some 2,600 terrorist attacks took place, killing some 270 people in France. In the 1980s and 1990s, most were still non-lethal and carried out by Corsican separatists. In the 2000s, France has had a relatively high number of attacks carried out as part of coordinated events internationally. These accelerated in the first half of the year, when 17 terrorist attacks took place in France, including a dozen killed at the Charlie Hebdo newspaper offices.
In this view, the magnitude of the 13/11 attacks was new, but not the event itself. Strategically, the goal of the assailants was to undermine Parisians’ sense of security and to radicalise local Muslims. Today, an estimated 5-10% of the 66 million French are Muslims. The country has also seen the rise of vitriolic anti-Semitism in the past decade.
Certainly, political implications will be many, as evidenced by President Hollande’s draconian security measures in France and increasing tensions between European states that are already coping with substantial economic, political and strategic pressures. While the new “law and order” measures have boosted Hollande’s lingering ratings (as 9/11 aided President George W. Bush in the US), the benefits are likely to be short-term. Hollande did little that Marine Le Pen and her Front National (FN) have not demanded for years.
.Indeed, current political winds are likely to support Le Pen and the FN, which made the predicted big gains in the regional elections. Next objective is Le Pen’s presidency in 2017. These trends have been amplified by France’s multiyear economic stagnation.
Indeed, the assailants’ economic objective was to reverse recent signs of recovery following the Eurozone’s cyclical rebound, the European Central Bank’s (ECB) record-low interest rates and quantitative easing, the plunge of oil prices and changes to the amount of fiscal cuts required by the EU’sStability and Growth Pact. Yet, French prospects are fragile.
Last year, real GDP growth was less than 0.2%. Before the attacks, it was expected to climb to 1.1% and stay there until the end of 2010. After 13/11, stagnation is likely to be coupled with new economic uncertainty.
In the Eurozone, the attacks contributed to new monetary easing. However, the ECB Chief Mario Draghi’s stimulus package disappointed markets, which expected more, and divided the ECB policy makers, which means higher obstacles for further efforts to stimulate inflation. In fiscal policies, the attacks triggered expanded military intervention in Syria, which unleashed more security spending at home, while reinforcing relaxed fiscal policies.
The Eurozone’s cyclical rebound suffered from downside risks before the 13/11. Real GDP growth will not exceed 1.5% in the late 2010s. Stronger rebound would require more fiscal support, which is lingering, and more investment, which remains subdued. Growth depends on Germany and Spain, whereas both France and Italy are at crossroads, despite the current cyclical upswing. Rather than exports as in the past, German growth relies on consumption and investment, which have lower output potential. Spanish growth rests on 21% unemployment (and a whopping 48% youth unemployment rate).
The Eurozone political environment is growing more challenging. If entrenched governments fail to execute planned structural reforms, new protest parties will gain popularity from France to Spain. At the same time, geopolitical risks from Greece, Ukraine and the soaring refugees are contributing to increasing economic, political and strategic unease.
In the early days of the debt crisis, elusive stability prevailed as long as the crisis involved small economies, such as Greece, Portugal and Ireland, which each accounted for less than 3% of the regional GDP. As the crisis spread to Spain and Italy and then to France, structural reforms can no longer be avoided. Together, these three economies account for half of the Eurozone. If they shift closer to the edge, so will the region.
In this menacing domino reaction, France has a pivotal role – which made it an attractive target to the jihadists.
Meltdown of US-led Middle East
Over a decade ago, President George W. Bush portrayed the fall of Saddam Hussein as the first domino to tip other autocratic states in a march toward Western-style democracy. In reality, war costs amounted to $1.4-$3.5 trillion, according to different congressional investigators. While President Obama declared Iraq “sovereign, stable, and self-reliant”, it was unstable and reliant on US aid which exceeded $57 billion in 2003-2012. Predictably, unresolved differences led to new battles between the armed Sunni (Al Qaeda, ISIL, Naqshabandi Order, ex-Saddam military, Sunni tribal leaders), Shiites (Sadr faction, Shiite Militias) and Kurds.
As the ISIL began to take control of Iraqi cities, from Fallujah to Mosul, it moved to Syria and Turkish border, and closer to oil fields. As a result, Syria’s civil war escalated into a Hobbesian nightmare and massive international humanitarian crisis in which every second Syrian has been forced to leave home and most refugees in the world are from Syria.
Bashar al-Assad’s Ba’athist government relied on the support by Russia and Iran, the Lebanese Hezbollah and Syrian-based Palestinian splinter groups. In contrast, opposition coalition received support from major Sunni states, including Turkey, Qatar and Saudi Arabia, as well as the US, France, and Britain. Meanwhile, Qatar, Saudi Arabia and Turkey backed a coalition of rebels, which include the al-Qaeda linked al- Nusra Front, and other groups. In turn, the ISIL received support from many non-state groups across the region.
As international peace talks in Vienna ended, diplomats called for a nationwide ceasefire. Instead, the White House announced it would send “special forces” to Syria, and a new US-backed umbrella alliance — the opposition, Syrian rebel groups and Kurdish militia — launched an offensive against the ISIL. While high-level US military leaders called for a US-Russian partnership to defeat ISIL, Washington was cooperating with forces that were responsible for September 11, 2001.
These controversial policies have a long, dark history in the region. In the 1980s US-supported mujahideen militants in Afghanistan – who were then seen as “freedom fighters” in Washington — eventually gave rise to Osama bin Laden and his Wahhabi al-Qaeda extremists. In the 2000s, the ISIL evolved as a response to President Bush’s invasion of Iraq, while US efforts to use the so-called “moderate jihadists” against Syria’s al-Assad further contributed to the ISIL’s expansion.
In addition to Iraq’s turmoil and Syria’s nightmare, the big picture includes the Sunni/Shiite division in the Arab world; Cold-War era tensions between US and Russia and their ‘client states’; Israel/Palestine stalemate that has undermined US credibility as an honest broker; the aftermath of the Arab Spring, which has undermined economic growth in the region. Concurrently, a Saudi-led coalition has been battling the Shia Houthi rebels in Yemen. In Egypt, the popular overthrow of President Mubarak and a brief democracy under the Muslim Brotherhood led to the controversial, brutal reign of President Abdel Fattah el-Sisi.
Think of each one of these moving parts of the big picture as a potential lightning rod. Combine them and you have all the elements of a perfect storm. Unfortunately, there may be worse ahead.
From Plunging Oil Prices to Fed’s Hikes
In the past year, oil prices have taken a dramatic hit, due to US shale revolution; slowing demand from China and other large emerging economies; rising costs of gas in several Asian economies that have been phasing out fuel subsidies; but particularly the rising dollar and the consequent halving of the oil prices in fall 2014.
In November, the International Energy Agency projected that more cheap oil could cause the revenue of the Organization of the Petroleum Exporting Countries (OPEC) to plunge from the $1 trillion average in the past five years to $550 billion in the coming year. The group still accounts for some 40% of total production globally.
In the recent OPEC Summit, cash-strapped producers — Venezuela, Ecuador and Algeria — lobbied Saudi Arabia to cut production. As Iran and Indonesia will return to OPEC, the group’s real production could exceed 32 million barrels a day, despite huge overcapacity. As a result, oil price is down close to $40 a barrel where it last fell amid the global crisis in 2008/9. However, Saudi Arabia believes that a sharp oil price recovery could revive some US shale production, which would displace OPEC crude. As a result, Riyadh will not cut production on its own.
However, there’s more to come. Dollar and oil have an inverse relationship. When dollar goes up, oil tends to come down. In turn, oil is denominated in US dollar, which is intertwined with the policy rate. As Janet Yellen is likely to initiate the Fed’s rate hikes soon, turbulence is likely to increase in emerging economies — as evidenced by the recent slump of emerging market currencies to 15-year lows — particularly in those that are highly reliant on oil exports.
Let’s take just one example: Egypt and its 82 million people. Sisi’s regime, which has sought to contain a run on the Egyptian pound, is heavily reliant on funding by the United Arab Emirates (UAE), which along with Saudi Arabia supported Sisi’s military coup. Reportedly, UAE has given Cairo $13.9 billion and pledged $3.9 billion more. Some put the total closer to $25 billion; half of the entire Gulf aid to Egypt. Yet, much of the aid has been exhausted with few results.
If oil revenue shrinks further, the Gulf countries could tighten the terms of their financial support. However, that would require phased-out petrol subsidy, layoffs in the bureaucracy and shaping of monetary policy in Cairo; that is, measures that could boost opposition in Egypt. However, if the Gulf countries cease funding Egypt, it would spell the demise of Sisi’s rule. Behind both scenarios, there looms a growing concern for Egypt’s further economic decline and a new kind of radicalization.
Need for Stability and Development
After mid-November, the Pentagon responded to ISIL’s globally-released “Kill List”, asking law enforcement to give extra protection for military personnel whose personal information was released. Ironically, these lists follow years of intensified “war against terror” in which the number of killed terrorists is often taken as a measure of success.
Despite assurance to the contrary, such attacks, particularly those by drones, have caused significant “collateral damage”. Whether the dead are jihadists or civilians, each has parents, siblings, relatives, extended family, and friends. In each case, death comes with pain, anger, and occasionally willingness to take revenge and an ability to act upon it.
Violent regime change, military interventions and drone attacks should not be regarded as the prime policy path in the Middle East. True success should be measured in terms of stability achieved, jobs created, and schools built — not in terms of life destroyed, but in terms of life saved.
likely to spread — whether by old or new jihadist groups, or lonely wolves pledging allegiance through social media — as recent wars and the aftermath of the Arab Spring continue to generate massive destabilisation across the Middle East and North Africa. After 13/11, most analysts saw only restricted reactions and anticipated pro-cyclical policy responses against any deflationary impact. In the short-term, that’s likely. But in the absence of drastic de-escalation, jobs and economic development, the medium- and longer-term reverberations of 13/11 — and what has already ensued — could prove far more adverse.