How the War in the Middle East is Changing: What Investors Need to Know

Guild Investment Management |

After almost five years of civil war, the conflict in Syria has spilled over to Europe in the form of an ongoing refugee crisis, and now through the terrorist attacks in Paris -- which, according to Islamic State claims, came as retaliation for French airstrikes. Now, with Russia’s involvement, the downing of a Russian airplane by Turkish forces, and the prospect of a conflict between Russia and NATO, there is an increasing threat that the conflict will widen further.

The potential consequences of a further deterioration in Syria and a wider Middle Eastern conflict depend on the alignment of regional and extra-regional forces. What those alignments are likely to be depends largely on the past century of Middle Eastern history, as well as on the deeper historical relationships of the various branches of Islamic faith. Such topics are rarely discussed in soundbite-obsessed media, so we’d like to offer some background and reflections to help readers orient themselves amidst the confusion of current events.

The current conflicts in the Middle East are sometimes viewed primarily as conflicts between the two great divisions of Islam, the Sunni and Shi’ite communities. Many commentators simply decry, in more or less sophisticated terms, the “tribal warfare” of rival groups which, they claim, have been killing each other for millennia. This is an interpretation which permits observers to piously throw up their hands and feel grateful for living beyond the pale of such primitive behaviors. However, it doesn’t illuminate the present crisis, or offer any insight into the potential economic and geopolitical implications that could be helpful for shaping one’s investment strategy. Useful analysis needs to start with the Shi’ite/Sunni split, but it shouldn’t end there.

Islamic Origins: The Shi’ite/Sunni Split

The life of Islam’s founder, the Prophet Muhammad, falls into two distinct phases: the first, during which he lived in the city of Mecca, and during which the revelations he received concerned a more personal, inward, and ethical spirituality; and the second, after the flight, or hijra, of his community to the city of Medina. During this latter phase, and until the Prophet’s death, his movement’s growing political power was accompanied by revelations stressing governance, jurisprudence, and the relations of Muslims with non-Muslims. (The migration from Mecca to Medina is so significant for Muslims that their chronology begins with it, with years designated as “A.H.,” that is, “after the Hijra.”)

During the formative period of early Christianity, the political implications of the new faith were not consciously reflected on, and were left to later generations to elaborate -- but this was not the case for Islam, where the religion’s foundational texts explicitly record and enshrine political and economic, rather than simply spiritual, principles. This is one reason Muslims view the Prophet as the completion and perfection of a long lineage of prophets who came before him. Muslims revere Jesus as a prophet and spiritual teacher, but point out that Muhammad brought teachings which are relevant not just to spiritual but also to temporal human concerns. Thus, Islam has always had the intrinsic character not just of a religious movement, but also of a political movement, throughout its history.

The deepest and most enduring division within Islam began fundamentally as a political division. After the prophet’s death, disagreement arose in the early Muslim community about leadership. One group of Muslims believed that leadership should pass to a figure chosen by the community, the “caliph”; these became the Sunnis. The other group believed that leadership should pass to a descendant of the Prophet; these became the Shi’ites. About thirty years after the Prophet’s death, the matter came to open war between the two groups, culminating in the death of the Prophet’s son-in-law Ali and the martyrdom of Ali’s son Hussain.

After this, the division of Islam was cemented. The Sunnis, always a numerical majority, continued to elect a caliph. Until the tenth century, Shi’ites instead identified an “Imam,” a living descendant of the Prophet, as the leader of their community; some believe that the last of these Imams will return at the end of time to usher in a messianic age. Although they differ in some points of doctrine and polity, the Shi’ites of Iran, Iraq, Syria, and Yemen view one another as kindred “Partisans of Ali.”

In spite of the violent way in which Sunni and Shi’ite Islam initially split from one another, their history has not, in general, been characterized by endless, bitter strife. Although there have been periods of conflict, there has been a deeper pattern of coexistence, with minorities largely tolerated even to the point where traditional etiquette made it rude to ask about someone’s sectarian affiliation. Neighbors in multicultural melting pots such as the ancient Syrian city of Aleppo often didn’t know one another’s religious traditions, and intermarriage was common. (A thoughtful and conciliatory examination of traditional Sunni and Shi’ite relations can be found by interested readers in Ideals and Realities of Islam by Georgetown University scholar Dr Seyyed Hossein Nasr.)

Aleppo’s Old Souk -- Where Merchants of All Sects and Faiths Traded Peaceably for Centuries, and Which Now Lies in Ruins

Source: Wikipedia, PRI

This has all changed decisively as a result of 20th century history, with old sectarian divisions being exploited and inflamed by new movements and rulers.

Modernity Meets the Old Divisions

When the Ottoman Empire was partitioned after the First World War, the first president of Turkey abolished the caliphate in 1924. The end of the empire and the abolition of the caliphate launched the half-century long ascendancy of secular regimes and dictators in the Middle East.

Flag of the Ba’ath Party -- A Symbol of Secular Pan-Arab Nationalism

The leadership of the Muslim world now passed to the rising proponents of pan-Arab nationalism and socialism. The founders of pan-Arabism were secular, came from various sects and faiths, and were strongly influenced by Marxism (the pan-Arabist Ba’ath Party motto was “unity, liberty, socialism”). Pan-Arabism served as a glue for the Arab world for nearly half a century; the U.S.-backed Shah provided an equivalent secular ballast in Iran, having ousted his Soviet-leaning predecessor, Mohammad Mossadegh, in a CIA-sponsored coup. During this whole period, the conflict-driving divisions in the region were not primarily between Sunni and Shi’ite Muslims, but between those who looked to the West and those who looked to the Soviet Union. Political divisions did not generally break along sectarian lines. In the 1960s, for example, in stark contrast to current events, the conservative Sunni rulers of Jordan and Saudi Arabia backed Shi’ite rebels in Yemen against invading troops from Nasser’s secular, pan-Arabist, and socialist Egypt.

While the United States and the Soviet Union contested the region and its oil riches through their local proxies, those local proxies themselves vied to use their patrons’ power to establish themselves as regional hegemons. It was simply the same pattern that played itself out across the world during the Cold War.

So what happened to give us the current landscape in which alignments fall decisively along the Sunni/Shi’ite divide?

How We Got Here

First, the disastrous Six-Day War with Israel in 1967 decisively exposed the fractious and ineffective nature of secular pan-Arabism. The failure of Egypt’s Gamal Nasser, and of the Arab world’s splintered Ba’ath socialists, to bring the Arab nationalist dream to fruition left a vacuum. However, the decisive shift occurred in 1979, when Shi’ite revolutionaries overthrew the Shah of Iran and established a theocratic Islamic republic.

Grand Ayatollah Khomeini -- Architect of Revolutionary Shi’ism

Source: Wikipedia

Shi’ism, as a minority faith in most parts of the Muslim world, has usually shied away from political engagement. A number of theoretical proponents of revolutionary Shi’ite politics arose in exile during the Shah’s rule, including Dr Ali Shariati and Ayatollah Khomeini; this was a new development in Shi’ism.

With a revolutionary religious government ruling Iran, there was now a new aspirant for regional hegemon, and a new claimant for the mantle of leadership of the Muslim world. Although it was a Persian and Shi’ite regime, it aimed to rally the Muslim Middle East around its leadership by making an anti-imperialist appeal against the United States and Israel. But its rivals quickly responded by playing on the Shi’ite character of the Iranian regime to mobilize popular resistance to Iran’s ambitions. Secular Ba’athist Saddam Hussein sold the Iran/Iraq war to his people by stoking sectarian fears -- and indeed, he launched the war partly because he feared that his own Shi’ite population might wish to follow their co-religionists in Iran and overthrow his government. Syria, which had a significant Shi’ite minority and had long been ruled by secular Shi’ites, eventually supported Iran in that war. Saudi Arabia, for its part, poured huge sums into a global education network that inculcated the most extreme anti-Shi’ite sentiments (sentiments, we should note, without any mainstream support in traditional Sunni jurisprudence).

In short, new political blocs in the region, abetted by the failure of secular Arab nationalism, have exploited and exacerbated sectarian differences in their efforts to secure regional dominance. Religion as such is secondary, and has not been a source of deep conflict for centuries as some pundits claim. It has only become a consistent source of conflict over the past 35 years, and has risen to prominence due to political manipulation.

The Current Landscape

The decades spent by regional powers fueling sectarian conflict have borne evil fruit. The multicultural societies that were an echo of Ottoman cosmopolitanism -- societies which many older Lebanese and Syrians can still vividly remember -- have broken under the weight of lengthy and brutal sectarian civil wars. Now, almost all the region’s conflicts seem to fall directly along sectarian lines. What is similar to the past is the presence and influence of outside powers fomenting proxy wars -- Russia backing Iran and Syria’s embattled Shi’ite rulers; the U.S. until recently backing Saudi Arabia, the Gulf States, and such western-leaning rebels as it could find. (The recent U.S. effort to topple or destabilize secular dictators in the name of “democracy” seems only to have liberated the new sectarian extremists from the last vestiges of the old 20th century secular movements which preceded them.)

How the Landscape May Shift… And What It Means

The conflict may continue to progress in this same direction. But we note one very significant development, and that is the effective retreat of the United States from its former regional role. National fatigue with long, destructive, and ineffective wars in Iraq and Afghanistan, as well as two U.S. presidential terms characterized by a profound reluctance to project U.S. military power in the Middle Eastern theater, have resulted in yet another power vacuum like those that arose from the end of the caliphate, and from the end of the secular pan-Arab dream.

One of the contenders for regional influence has abandoned the field, and that leaves only Russia standing. Europeans, their minds marvelously concentrated by an overwhelming influx of Syrian refugees and by the imminent prospect of jihadist violence in their cities, are now inclined to follow Russia’s lead in the region rather than take up the U.S.’ mantle.

The Saudis remain the critical component of this equation. Feeling encircled by a growing Shi’ite axis and abandoned by their U.S. protectors, the Saudis may be open to Russian overtures. Russia, Iran, and Saudi Arabia all have one powerful common interest: that will permit them to better meet their domestic spending needs and avoid fiscal ruin or domestic unrest. If Russia could broker an agreement between Iran and Saudi Arabia -- that is, between the centers of the Shi’ite and Sunni blocs, respectively -- it could achieve this goal and cement its own role as regional power-broker.

If you believe that the civil war currently raging within the Islamic world is the direct result of a fierce, intractable, centuries-old religious hatred, the prospect of a Saudi/Iranian détente may seem fantastic. But if you see that the current hot sectarian war is in fact merely the product of several decades of political propaganda, such a détente may look much more possible.

Will it come to pass? Obviously, we don’t know. However, if we continue to see the same trends playing out -- and particularly if we see evidence of deeper communication between Russia and Saudi Arabia -- we will be careful to evaluate the implications, particularly for the price of oil.

Investment implications: Although some observers believe the Middle East is experiencing the most recent chapter in a centuries-long sectarian war, the reality is different. Sunni/Shi’ite conflicts of this severity have not characterized the longer history of the region; rather, they are the product of political maneuvering that followed the collapse of secular Arab nationalism and the rise of Iran’s theocratic regime. With the U.S. retreating from its role as decisive regional power broker, and Europeans seemingly ready to get on board the Russian bus, Russia has an opening to increase its regional stature -- or even to broker a détente between the Sunni and Shi’ite blocs. Either could have profound implications for the price of oil.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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