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ISIS and the Gulf Markets – Measured Calm or Foolish Complacency?

June 18, 2014


Why are the Gulf financial markets so sanguine about current events in Iraq? reports that credit default swaps have remained stable since ISIS advanced into Mosul and towards Baghdad:

“The calm reflects the Gulf’s progress in building up its financial resources on the back of high oil prices as a defence against regional instability, as well as its success in containing domestic political fallout from the Arab Spring uprisings over the past three years, economists and fund managers said.

“I think people now see the Gulf as well insulated from the politics around it,” said Jason Tuvey, Middle East economist at Capital Economics, a London-based consultancy.

He added that apart from Saudi Arabia’s Eastern Province, which has seen some low-level unrest among its Shi’ite minority, it was difficult to see how events in Iraq could have any direct impact on Gulf states. If there is any impact, governments have the monetary and security resources to deal with it, he added.”

I wonder if the leaders of the Gulf states and Saudi Arabia are as comfortable with the situation as Mr Tuvey. If so, they are surely misguided. Here are three scenarios that suggest why:

Scenario 1: The government in Baghdad drives ISIS out of central Iraq with the assistance of Iran’s Revolutionary Guard Quds Force. As the price for waging a proxy war on behalf of the west, Iran negotiates easier terms on their nuclear deal. The Islamic Republic gains increased influence in the region as the result of Iraq becoming a puppet state underpinned by Iranian military force. Iran’s ability to weaken the Gulf states by fomenting unrest in Kuwait, Bahrain and Eastern Saudi Arabia increases. ISIS retreats back towards Syria, depleted in numbers but much strengthened by captured weaponry and large amounts of currency looted from Mosul. The stalemate in Syria continues, but ISIS uses its replenished resources to foment uprisings by Islamist factions in the Gulf. This prompts further payments from the Gulf through unofficial channels. In effect the payments would be a form of Danegeld. Just as the Anglo-Saxons in 10th and 11th century England paid vast sums to the Vikings to keep them at bay, the deal is that “we will keep paying you if you leave us alone”. A similar implicit bargain allegedly left one Gulf state unscathed when over many years it acted as the money-laundering centre for Al-Qaeda.

Scenario 2: ISIS consolidates its hold on Iraq’s Sunni Triangle by drawing support from locals who fear sectarian reprisals in the event of the Iraq government re-taking the lost territory. The government is too weak to prevent a Kurdish declaration of independence. In order to prevent further gains by ISIS, the western powers provide military assistance to the Kurdish government. Turkey, despite its long-term opposition, reluctantly agrees to the creation of the Kurdish homeland. It sees an independent Kurdistan as a lesser evil than having to live with a militant jihadist entity on its borders. In a political settlement with the central government, the Sunni Triangle becomes a semi-autonomous region under the control of ISIS and its allies. ISIS fighters from the Gulf states return home to create cells in their own countries, including Saudi Arabia. Iraq is effectively partitioned. In addition to having to deal with jihadi-inspired unrest in its own country, Saudi Arabia now also has to contend with an Iranian puppet state on its northern border.

Scenario 3: The US puts boots on the ground, most likely special forces to support air strikes. It deploys drones and bombers to harass ISIS from the air. US support is sufficient to hold ISIS at bay while the Iraqi army recovers from its recent debacle. Backed up by Shia militia and Iranian forces, the army slowly beats ISIS back, but at a terrible cost in civilian lives. The conflict has escalated into a sectarian civil war, with the US perceived to be on the side of the Shia. Anti-US feeling once again spreads within the area. Extremists in the Gulf states feed on the discontent and launch terrorist attacks on governments and western expatriates, in the knowledge that such actions are bound to weaken the economies of the targeted countries. The chaos in Iraq demotes the nuclear issue down the agenda in western eyes, and Iran announces that it has developed an atomic bomb. Saudi Arabia takes immediate steps to acquire nuclear weapons from Pakistan.

Actually, the short-term outcome could contain elements of each scenario. Some are already falling into place. Britain’s announcement that it will re-open its embassy in Tehran, for example, is unlikely to be a coincidence. President Obama has stated that all options in dealing with the Iraq crisis will be open, though he has not yet been foolish enough to define any red lines. General Suleimani of the Iranian Quds Force has arrived in Baghdad with a team of “advisers”. And at the behest of Ayatollah Sistani, Iraq’s senior Shia cleric, who has issued a call to arms, thousands of volunteers have signed up to assist in the fight against ISIS.

Britain, however, states that it will not take part in military action against ISIS. Not surprising, considering that the last Iraq intervention destroyed the reputation of Prime Minister Tony Blair. But I suspect that right and wrong are no longer considerations in British foreign policy. Despite the fact that ISIS is pursuing its objectives with a violence that makes Saddam Hussain look like a teddy bear, our concern will be that further military intervention with an uncharted outcomes would further expose us to the risk of home-grown terrorism from returning jihadis. But if the unrest were to spread south to the Arabian Peninsula, would Britain (and the US) fight to preserve the power of the Gulf autocrats? Almost certainly, because that would be the expedient thing to do, as it was in 1991.

So I suspect that the complacency of the Gulf markets is largely because of the implicit western guarantee that it would go to any lengths to prevent those countries from being destroyed from within by kuffur-hating jihadis. Yes, Saudi Arabia and the other Gulf Cooperation Council members have pretty efficient internal counter-terrorism operations. Several of them have declared the Muslim Brotherhood – who are considerably lower on the extremism scale than ISIS – a terrorist organisation. Yet they don’t seem able to prevent wealthy individuals from funding ISIS. Or some, Saudi Arabia excepted, are not trying. So either their competence is limited to detecting internal plots, or there is ambivalence at the highest level driven by a desire to find the most effective way of deposing Bashar Al-Assad. The problem is that ISIS seem to have little interest in ridding Syria of its leader. Their focus seems to be on carving out a Sunni caliphate across the borders imposed under the Sykes-Picot agreement.

In the longer term, anyone who thinks that ISIS have no designs on the world’s richest oil fields and the holy places of Saudi Arabia is naïve in the extreme.

The financial wise men should stop to consider that the last time a relatively small force of highly motivated soldiers overran the region, they came out of Madinah in the 7th century. And before that, Alexander the Great overcame huge numerical odds to conquer Mesopotamia and the lands to the east. Admittedly, Khalid Ibn Al-Walid and Alexander didn’t have to face drones and thermobaric bombs, but force does not have to be overwhelming to prevail, as the US and its allies have discovered in Afghanistan.

And so long as there are common interests, there will be alliances many will see as unholy: private financiers in Saudi Arabia, Qatar and Kuwait funding jihadis in Syria, former Baathist officers working with jihadis on the ground in Iraq, the US and the UK finding common cause with Iran. The problem with tactical alliances is that they can lead to unforeseen consequences far beyond the short-term objectives.

You would need to be divinely inspired to work out what the Middle East will look like in five years time, let alone ten. Compared with the current Iraq-Syria crisis, the Arab Spring – though bloody enough – was handbags. This is daggers drawn in multiple directions.

I hope I’m wrong, because I wouldn’t wish what is happening in Iraq and Syria on my worst enemy, let alone on my many friends in the Gulf. In my humble opinion, no part of the Middle East can consider itself immune to the consequences of the lethal game being played out in the old killing grounds of Mesopotamia. If the financial markets are “calm” right now, perhaps it’s because the analysts are looking no further than the end of their noses. And maybe that’s as far as anyone can reliably see. As Donald Rumsfeld would say, there are too many unknown unknowns waiting to unfold. Calm is better than panic, but unless this crisis is resolved quickly, the financial implications should give world markets  – not just local ones – increasing cause for concern.

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