Monday, 2 March 2015

EFG Hermes Head of Research Wael Ziada conducts Q&A with Stratfor’s George Friedman, EFG Hermes One-on-Conference 2015

[Note: The following is not intended as a verbatim transcript, but rather notes on the comments of each of the speakers.]

ZIADA: George Friedman is the founder and chairman of leading global intelligence firm that counts tens of thousands of influencers among its subscriber list. He’s also someone I like to think of as a geopolitical philosopher. He has developed a unique framework for analysis that helps him and his team predict and dissect many unfolding events we see today, from energy to geopolitical issues to security. Stratfor consults to organizations, governments and Fortune 500 companies globally.

Let’s begin with something very relevant to this region. Geopolitics and oil. In the space of three months, oil prices halved. Was this economics at play, or politics?

FRIEDMAN: It’s easy and perhaps tempting to imagine oil decisions being made in a dark room by politicians, but there are more profound — and much simpler — market forces at play. It starts with the fact that we never really understood what kept prices up in the past several years. What happened was that it finally occurred to everyone that China wasn’t going to return to previous growth rate. That the China myth — that it would continue to grow exponentially — was just that: a myth. Suddenly, a forecast began to appear on China that said 7.5% GDP growth can’t be maintained, that 6 or 6.5% is more reasonable — and, frankly, we think it’s substantially lower than that, in reality.

At the same time, Europe, a major center of the global system, continues to struggle with an economic and employment crisis on par with the Great Depression in the United States last century. So you had pillars of the global economy unable to soak up the growing reserve reservoir of energy.

And, in parallel, the US was increasing its energy output.

In the fall, these China numbers started to come out, and people started to see that expectations of a return to 7+% growth in China were unrealistic. There’s no geopolitical impetus for it, but there are geopolitical consequences from its failure.

Is the US concerned about prices for its domestic producers? Yes. But is it pleased to see Russia squeezed? Also, yes. Fundamentally, though, low oil prices are about China. They’re about years of misunderstanding the “new normal” for china.

That “new normal” for China was the core myth of the global system from 1992 until quite recently. That’s when the global growth boom began; the expansion happened for more than a decade, and demand for energy skyrocketed with it. Then came the global recession of 2008 and there was this sentiment of, “Oh, we’ll go back to normal. 1992-2008 is normal.”

Well, 1992-2008 wasn’t normal. It isn’t normal. The BRIC countries are no longer as dynamic. The United States is now a significant producer of oil. Markets are always rational in the long-run. They get killed in the short run, but they’re right in the long term. 1992-2008 was a long “short term,” but it was an interregnum.

ZIADA: Talk to us about OPEC’s decision not to cut production.

FRIEDMAN: The reality is that, globally, there are really three major producers: Saudi Arabia, the U.S. and Russia, and it’s difficult for them to act in harmony — or for any one major player to change production to the extent that it would force the hand of any of the others.

Ultimately, every one of them have reasons for wanting to maintain production. The United States doesn’t make the decision to raise or drop production at the government level. It’s the market. Russia doesn’t want a price cut — it needs to continue to spend across the country. And the MENA region faces a continued imperative to spend on social stability and defense in view of regional challenges — so I don’t think you’ll see any major country on the Arabian Peninsula eager for a price cut. But by the same token, they need the cashflow.

ZIADA then turned the conversation to the region and geopolitical developments.

FRIEDMAN: MENA is a vast and highly differentiated place. It’s important to remember that. But there’s still a lesson from Arab Spring: What I learned is how resilient the governments are. Syria fragmented, but that’s a special case. What happened in Libya was fundamentally about about outside intervention. All other regional governments have managed their issues.

Think about it: What was expected was a series of regime failures. What we’ve seen has been a return to “normal,” even if that was after a period of disruption. These are resilient regimes. Despite the Arab Spring, governments remain.

Look at what I call the crisis “from Lebanon to Iraq” and you’ll see that despite fears it would spread to Turkey, to the GCC, it has been contained. You need to disaggregate the region.

I see a region that has withstood a tremendous test and which is now facing new tests. It’s responding to the new test in a more unified fashion than I had expected to see. Indeed, I see resilience in the region that is not often visible outside the region — or even in it, sometimes.

The Arab spring wasn’t a “spring,” but it did remind governments that they must maintain social stability. And events in Syria and Iraq remind us that governments need to attend to the military dimension.

It’s not about fragility of the MENA region, but about its robustness, and the rest of the world doesn’t really see that. This test, which wounded the Soviet Union, has not wounded MENA — except for Syria. That’s robust. Egypt is managing its way out of a situation politically. The GCC countries have had a strong response to regional threats with a very self confident and assertive response.

It is a vast place with many different solutions — and that shouldn’t surprise us.

ZIADA: Looking across the region, we see turmoil on the geopolitical front. What are the roots? When did that happen and why?

FRIEDMAN: It goes back to Sykes-Picot. Lebanon saw complete collapse of central government in the 1970s. You saw a series of factions, and not just religious-based. Within religions, you saw clans and parties. Lebanon became not a country, but an arena for conflict.

What we’re seeing now is the “Lebanese disease” spreading to two other Sykes-Picot countries — Syria and Iraq — countries created by the British and French. These countries don’t exist anymore in practical terms. Assad is a warlord among other warlords. The government of Iraq has minimal control, and the Iraqi Army is in many respects an army for Shia.

Isis is one of these warlord forces now emerging from Iraqi and Syrian politics, and we speak of it only because of the horrible things it does and the public ways it does them. It is not nearly as powerful as it pretends or as it would like to be.

The underlying problem is that in a very practical way, Iraq and Syria no longer exist. They are arenas for warlords and factions. There is room for hope, but it is a long-term thing. In Lebanon, it took 20 years of conflict before the fighters reached a consensus — not a perfect one — that they needed a government.

Syria and Iraq will be long-term battles. The factions can’t be destroyed. This is a regional problem to those bordering Iraq and Syria, but the way we should think of it is that it is the last act of European imperialism. Lebanon, Syria, Iraq — and Jordan and Israel — are all at risk of internal fracture. Jordan is managing well, and Israel is a different case. But the countries to the north have collapsed into warlordism and the question is how the bordering countries (Turkey, KSA, GCC, Iran) will respond.

This much is clear: The United States is not prepared to return to Iraq and be defeated again. 130,000 troops aren’t enough to pacify 25 million Iraqis. Remember the definition of insanity: Do the same thing over and over and expect a different outcome. The US won’t do this. It will provide air power and support to some factions. It will train troops. But it won’t send troops.

Primary responsibility will rest with regional powers, and for the US that will have to include the Iranians, with whom we’re working because we share a common interest in stability. The U.S. also wants to see Turkey to take a bigger role, though they’re resisting. They’ll have no choice but to do so eventually.

ZIADA: What is shaping the United States’ geopolitical views on the region right now? How engaged will it become in the Syria-Iraq turmoil?

FRIEDMAN: The U.S. goal after 9/11 was to prevent further major attacks on U.S. We lacked adequate intelligence. We lacked a clear understanding of Al-Qaeda.

The U.S. is also learning its lessons from Iraq. In war, there is something called spoiling attack. You don’t intend to defeat opponent, but to drive him off-balance. It’s a difficult maneuver. When carried out properly, it appears you’re succeeding — and having succeeded, you say “Hey, I can go further.” This is the temptation of the successful spoiling attack. That happened in Iraq. The US went in to destabilize Saddam and then decided it could do nation-building.

The outcome that resulted was civil war. That bred terrorism, and it made it difficult to meet US geopolitical goals.

Air attacks on Isis are spoiling attacks. They won’t destroy Isis, but keep it off balance. The responsibility of defeating Isis lies with regional powers. The UAE is doing this — militarily and politically — for its own reasons and for for very good regional reasons.

ZIADA: Three countries: Russia. Iran. Turkey. Rank them according to their likely influence on the MENA region.

FRIEDMAN: Russia is now fighting for its life, in a way. Ukraine is a fundamental challenge to Moscow. Russia has held Ukraine since 1720. That’s a long time. Whether the US intends invasion or not, Russia assumes the worst case. At the same time, Russia’s internal revenues have declined significantly because of falling oil. Moscow sends money to the regions — they’re loyal to that money, not to communism, Moscow or Vladimir Putin. And that money isn’t flowing.

So there’s two simultaneous crises.

Iran is a country that learned from the North Koreans that the Americans respond it you have a nuclear program — but hammer you if you have a nuclear weapon. Moreover, Iran has issues. They fought a war with Iraq and have an obsession with that country. It must help the US because of the problems they have right now, they share right now in Iraq.

Turkey is by far the most important of the three. It has grown at a fantastic rate. It has a massive economy and it’s a very sophisticated country with a substantial military force. Substantial independence from the US and Israel, its traditional allies.

The chaos on the southern border is a fundamental threat to Turkey. It impacts the ruling party, and they certainly don’t want to see the installation of a pro-Iranian government in Iraq. At the same time, though, they don’t want to have responsibility for Iraq. But they’ll have to become involved.

ZIADA: What are your predictions on a 5 year horizon?

FRIEDMAN: The disengagement of the United States from this region is the most important element. That disengagement won’t be absolute, but it will be significant. Iraq and Syria will be a big issue. Turkey is going to become particularly affluent and influential. Turkey is going to be a major regional power not just in this region but in the Black Sea and the Balkans. There is a neo-Ottomanism that’s pulling them in all these directions.

Iran is going to face an internal crisis. Their ability to manage Iraq calls into question the legitimacy of this government. The generation that fought the war with Iraq won’t be happy with being dragged back into it — or for instability to spill over.

North Africa is perhaps more interesting, and that’s the question of Egypt. Egypt has withstood the test of recent years because the army stood united. The army was there even when the Muslim Brotherhood came to power. The military is the foundation of the 1950s state, and from where I sit, this institution has survived — it did not fragment or fail as others have. Egypt is the center of gravity of the Arab world, and you’re going to see a lot of GCC interest in seeing Egypt continue to be stable.

Seen in that context, I think the air strikes in Libya were significant.

As to Israel? It will never be more powerful than it is today. There are governments in Cairo and Amman who share regional security concerns and chaos in Syria. If there is a moment for the Israelis to negotiate a settlement, it is now. You do it when you’re strong, but their internal politics is such that this will be very difficult to formulate.

US-Israel challenges are very significant. US interests in Egypt are being redefined.

We will see in the next 5-10 years some substantial changes in what we had assumed would be true.

Ultimately, the United States wants stability, but it lacks the power to stabilize. It will take stability however it can get it. The United States formed an alliance with the Stalinist Soviet Union to defeat Hitler. With Communist China to defeat the Soviet Union. Nations have their beliefs and they have their interests, and it is now clear that the U.S. wants stability in the Middle East, but that it doesn’t want to have to manage the region any more.

What the U.S. wants is a balance of power between Saudi Arabia, Turkey, Iran and Israel. These four countries have deep interest in regional stability. Some hate each other — officially and unofficially. It’s complicated. But from the U.S. point of view, good relations with all four countries would leave them in a position to do their own thing.

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