World Affairs

Did the Saudi Government Secretly Support ISIS?

On August 17, 2014, Clinton wrote to John Podesta, then Counselor to the President and later her campaign chair, outlining the intelligence on ISIS and laying out her policy position on how to deal with the challenge. Most of the stuff—on FSA, peshmerga, Turkey and so on—is clear from open sources but there was one particular bombshell. She claimed that the governments of Qatar and Saudi Arabia provided clandestine financial and logistic support to ISIS. Here’s the full paragraph:

Armed with proper equipment, and working with U.S. advisors, the Peshmerga can attack the ISIL with a coordinated assault supported from the air. This effort will come as a surprise to the ISIL, whose leaders believe we will always stop with targeted bombing, and weaken them both in Iraq and inside of Syria. At the same time we should return to plans to provide the FSA, or some group of moderate forces, with equipment that will allow them to deal with a weakened ISIL, and stepped up operations against the Syrian regime. This entire effort should be done with a low profile, avoiding the massive traditional military operations that are at best temporary solutions. While this military/para-military operation is moving forward, we need to use our diplomatic and more traditional intelligence assets to bring pressure on the governments of Qatar and Saudi Arabia, which are providing clandestine financial and logistic support to ISIL and other radical Sunni groups in the region. This effort will be enhanced by the stepped up commitment in the KRG. The Qataris and Saudis will be put in a position of balancing policy between their ongoing competition to dominate the Sunni world and the consequences of serious U.S. pressure. By the same token, the threat of similar, realistic U.S. operations will serve to assist moderate forces in Libya, Lebanon, and even Jordan, where insurgents are increasingly fascinated by the ISIL success in Iraq.

Now it is well understood that private donors in the gulf, including and especially rich Saudis and Qataris, have provided significant funding for ISIS. But Clinton said quite explicitly that the Saudi and Qatari governments were providing clandestine support. If the claim is true then this would be the greatest national security scandal in US history. For the United States government has gone out of its way to portray the Saudis as a valuable partner in the fight against ISIS.

The US has also gone out of its way to support the Saudis’ aggressive foreign policy in the region. Despite knowing that the Saudi terror bombing of Yemen would strengthen AQAP, the administration has provided blanket operational support for the air war. In Bahrain, the administration quietly acquiesced to the Saudi intervention to quell the uprising of the island’s majority Shia against the Al Khalifa. In Syria, the administration has repeatedly signaled its support for Saudi-backed salafist insurgents—often described as Western-backed—despite considerable concerns about their sectarian and ideological agenda.

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President Obama and Saudi Deputy Crown Prince Mohammed bin Salman

The systematic appeasement of the Saudis is presumably meant to mollify Saudi anger about US policy vis-à-vis Mubarak and the nuclear deal with Iran. But if it is publicly established that the Saudis directly supported ISIS, that would completely undermine domestic support for the US-Saudi alliance. Put simply, Saudi Arabia would become a pariah. Instead of talking about strengthening the alliance, we would be talking about containment. So this is an issue of considerable importance.

ISIS poses an existential threat to Saudi Arabia since the self-styled caliphate rejects the Saudis as the legitimate protectors of the two holy mosques; a job which would naturally fall on the caliphate if one were in existence. The Kingdom has also been the target of ISIS and its predecessors. The Saudis could conceivably use ISIS as a bludgeon against Assad and the Iranian-dominated regime in Baghdad. But such a policy would come with grave risks.

Even supposing that the Saudis could stomach the risk and bankroll ISIS, the second part of the claim is even less credible. For if US intelligence was aware of Saudi clandestine support for ISIS, that information would be extremely difficult to suppress. It is hard to imagine that the administration would bank on keeping the lid on this explosive affair. Indeed, if it ever came out it would ruin the career of every single person involved in the conspiracy to cover up a matter of such grave national security interest.

A much more credible interpretation is that Clinton was being flippant. What she meant to say perhaps was that the indiscriminate support provided by the Saudis and the Qataris (as well as Turkey) for the insurgency against Assad was helping ISIS. Specifically, that the flow of weapons and funds from the gulf regimes to the insurgents was ending up with ISIS. There is considerable evidence to suggest that weapons and monies meant for other insurgent groups ended up in ISIS’ hands through raids and defections. The addition of a single word, inadvertently, would rehabilitate her claim:

While this military/para-military operation is moving forward, we need to use our diplomatic and more traditional intelligence assets to bring pressure on the governments of Qatar and Saudi Arabia, which are [inadvertently] providing clandestine financial and logistic support to ISIL and other radical Sunni groups in the region.

I believe this is the correct interpretation of the email. If I am wrong and Clinton’s words can be taken literally, then we may be facing a true game-changer in the Middle East. But pending further revelations, it would be unwise to give it much credence.

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World Affairs

A Confession of Sorts from Saudi Arabia

Saudi Arabia has threatened the United States with grave consequences if lawmakers were to pass a bill revoking part of a 1976 law that gives foreign nations some immunity from lawsuits in American courts “in cases where nations are found culpable for terrorist attacks that kill Americans on United States soil.”

The Saudi threat amounts to a de-facto confession that Saudi officials or princes had ties to Al Qaeda at the time of the September 11, 2001 attacks. Why else would they panic and issue ultimatums? Even if it was not senior officials and just some energetic royals, they might have good reason to worry. US courts could be persuaded that senior princes are part of the Saudi monarchical state—there is surely legal precedent from the nineteenth century.

After Saddam’s invasion of Kuwait in 1990, bin Laden met with King Fahd and offered to raise a mujahideen army to defend Saudi Arabia. The monarch rebuffed his offer and instead accepted a deployment of US forces (Operation Desert Shield). It was at this point that bin Laden turned on the Al Saud, against whom he raged for two years before being exiled to Sudan. But there is some evidence to show that Saudi intelligence continued to maintain contacts with Al Qaeda during the mid-1990s. The question is: Did this relationship last into 2001 and beyond?

A priori, it seems unlikely that there was active support for Al Qaeda at the official level and in the upper echelon of the Saudi royalty circa 2001. But then, why the panic?

On the related, broader question of support in Saudi moneyed circles for Al Qaeda, and more generally, salafist jihadism, there is no doubt whatsoever. It is very well-understood that the bulk of the money powering global jihadism originates in the gulf monarchies, in particular, the Kingdom of Saudi Arabia.

Global jihadism does not grow in a vaccum. It is intrinsically tied to salafism. Indeed, global jihadism is synonymous with salafist jihadism. And it is here that one finds the real challenge posed by Saudi Arabia. For the Kingdom is the principal propagator of salafi ideology worldwide.

The Saudi state has invested its vast oil wealth, and utilized its pivotal position as the host of the annual Muslim pilgrimage, to promote a vicious ideology that combines Sunni supremacism with puritanical fanaticism. The ideology demands a return to the version of Islam practiced under the first four caliphs. That is, it demands a return to the practice of the Jihad-State at Medina, before the caliphate moved to Damascus (and presumably got corrupted).

The innovation of the salafist jihadists is merely to point out the essential incompatibility between the Saudi state ideology and its de-facto alliances with the near, Zionist enemy and the far, Crusader enemy; and therefore to demand armed revolt instead of obedience to the Al Saud. This is an argument that the Al Saud are quite possibly rigged to lose. Indeed, if there is a state that is not already engulfed in a civil war that is at risk of being overrun by ISIS, it is Saudi Arabia. No one is more at risk; not even Pakistan.

As for the Saudi threat to sell their hoard of US Treasuries. First of all, Saudi Arabia does not have $750 billion as the paper of record alleges, it has slightly less than $600 billion in reserves. Second, if the Saudis were to dump all $600 billion in Tbills, it would not make much of an impression: It would amount to less than 1 per cent of total dollar credit outstanding (about $60 trillion). Even as a share of daily funding in the wholesale market (about $4 trillion onshore and an even larger amount offshore), it would be a drop in the bucket. At best, it would make for an interesting day in global money markets.

Third and lastly—and this one is the kicker—it would be outright beneficial to the global financial system which has had a structural shortage of Tbills for years! Indeed, it would bring down the premium now being paid for Tbills in Europe. Figure 1 shows euro/dollar cross-currency basis swap spreads which capture the liquidity premium. (When they fall below zero it implies that there is a shortage of Tbills.)

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Figure 1: Euro/USD cross-currency basis swap spreads (Source: ECB).

The bigger issue at stake here is the future of the US-Saudi relationship. It is time to go back to basics: It is in the US interest to protect the Kingdom from external aggression. But it is not in the US interest to go along with the Al Saud’s regional adventures (re Yemen). And it is certainly not in the US interest to watch the Saudis propagate their vicious ideology worldwide. The United States needs to stand firm on these issues. To that end, Congress should pass the 9/11 bill and the Obama administration should shelve its ill-thought opposition to the same.

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World Affairs

A Dangerous Inflection Point in the Syrian War

Tensions between Russia and Turkey have escalated dramatically in the past few weeks, so much so that direct military confrontation cannot be ruled out.

Under the cover of Russian air power, Assad’s forces have almost completely encircled Aleppo. Assad plans to repeat the siege-and-starve tactic he followed to regain control of Homs City is May, 2014. The coming siege has prompted some 150,000 residents to flee towards Turkey, which has closed its border to the refugees.

US-backed Syrian Kurds are hoping replicate the achievement of the Iraqi Kurds and forge a statelet along the Syro-Turkish border. YPG forces exploited the opportunity opened up by regime gains north of the city to seize territory held by Turkish-backed rebels near the border, including the Menagh Airbase. Ankara responded by shelling their positions; ignoring US calls for restraint. Moscow has been effectively supporting the YPG by conducting airstrikes on non-Kurdish rebels in the region.

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Aleppo City is held by a motley collection of some fifty odd Turkish, Saudi and Qatari-backed rebel groups. Most of these groups are no more than neighborhood militias with dozens or hundreds of fighters. The biggest is Turkish-backed salafist outfit Ahrar al-Sham, which has tens of thousands of fighters and controls the strategically important Bab al-Hawa crossing, the only remaining line of communication into Aleppo.

Ahrar competes with Jabhat al-Nusra (JN) for leadership of the Aleppo rebels. JN controls the main water and power plant in the city and enjoys a degree of leverage over other groups.  It has disarmed and absorbed at least three US-backed groups in the past year.

Both JN and Ahrar have a significant presence outside the city and are likely to survive and perhaps even make strategic gains as a result of the siege. Other US and Turkish-backed groups are at risk of annihilation and absorption by the big two. The same goes for the Saudi-backed Jabhat al-Shamiya and Jaysh al-Mujahideen.

That the loss of Aleppo would be a turning point in the proxy war is not lost on the Saudis. Mohammad bin Salman, the 30-year-old Deputy Crown Prince and Defense Minister, is “willing to take military, financial and political risks in order not to fall behind in regional politics,” according to German intelligence.

The Kingdom’s aggressive new foreign policy was on display in Yemen, where the Saudis rashly intervened to push the Houthis back to the hills and restore their man to the helm. It is on display again in Syria: Riyadh is deploying fighter jets to the southern Turkish airbase of Incirlik.

Turkey is considering a military intervention in northern Syria. This is not because Ankara has any illusions that it can put up a fight with Russia, with or without Saudi help. Turkey is counting on Article V of the North Atlantic Treaty which states that “an attack on one Ally shall be considered an attack on all Allies.” In other words, Turkey may be betting that the United States will deter Russia from directly attacking its Nato ally.

The situation is starkly similar to the July Crisis. Back then, German guarantees prompted Austria to attack Serbia, a Russian protectorate. Today, US guarantees may prompt Turkey to attack Syria, a Russian ally.

It is time to diffuse this dangerous confrontation. It would be extremely damaging to US credibility to back-off after the event. On the other hand, unlimited guarantees to Turkey could embroil the United States in a major military confrontation with Russia that would serve no conceivable US interest. The US needs to inform Turkey post-haste that the United States is not going to war to protect Turkish interests in Syria.

 

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Markets

Careful What You Wish For

 WTI

For the US stock market, good news is bad news. The Fed is waiting for the recovery to strengthen to exit the zero lower bound. When it does, we’ll see a market correction and an end to the current financial boom driven by yield-seeking investor behaviour. The magnitude of the correction will depend on the balance between the extent of the bubble in asset prices on the one hand, and the continuing positive impact of the Oil Price Counter-Revolution on the other. Let’s not get this wrong: the expectation of a genuine recovery in the non-financial economy, such as it is, is almost entirely driven by the near-collapse in the price of energy.

The Oil Price Counter-Revolution is better than a Middle Class tax cut, which does not affect the poor or the really rich, both of whom don’t pay much in income tax; but whose consumption is now a larger share than that of the Middle Class. It is a decline in the cost of making every input except people and capital for everyone except the energy firms. Since oil is used in almost every single industry, the impact is very broad, making the oil price the dominant variable for the economy. Hence, the implication of a genuine recovery. Which brings us to what is happening in the energy markets.

The cost of producing solar and wind energy has collapsed to levels last prevailing in the cost of making energy from oil and natural gas in early 2014. The shale boom has continued apace, pushing down the price of gas in the United States to a third of that prevailing in Europe, and a fourth of that in Japan. US tight oil production is increasing relentlessly, so much so that the United States is likely to briefly replace Saudi Arabia as the largest producer of crude. The Kingdom declined to accept lower quotas in the last Opec meeting. The Saudis reckoned that a brief period of benchmark prices in the sixties (Brent is now at $62 and West Texas Intermediate at $58; both were above $100 for a long time) will drive many American tight oil producers with their high costs out of the market, and undermine Iran. It is wrong on both counts.

Brent

Some of the impact of higher than anticipated gulf production will be absorbed by a divergence between Brent (Eurasian) and West Texas (American), thereby softening the impact on American producers. And unlike petrostates with their fiscal burdens, private American oil firms can survive at much lower margins by cutting costs; expanding capacity when prices revive. A prolonged period of cheap oil will lead to a consolidation of industrial structure, with marginal firms being absorbed by their stronger rivals. But it is unlikely to diminish capacity in the long term. Since tight oil fields get exhausted in a short year or two (regular fields like those in the gulf last more than a decade), American oil production is much more flexible than Opec production in the medium term. Oil firms can easily postpone capacity expansion and let existing capacity erode, thus responding relatively quickly to price signals. Since capital is cheap and credit easily secured, firms do not face a financial constraint on capacity expansion either. And if prices continue to slide, they can shelve plans to expand capacity and buy back their own shares to maintain their stock prices. The United States has too deep of bench of innovative oil firms. The Saudis cannot eliminate American competition by aggressive price-cutting.

Aggresive price-cutting can certainly hurt Iran. But that is at least as likely to backfire geopolitically on the Saudis as otherwise. Iran is already in dire straits economically due to the sanctions regime. Further pressure will quite likely undermine the hawks who are holding back on a nuclear deal with the United States. American and Iranian geopolitical interests have converged remarkably since the rise of the Islamic State. Both now very nearly want the same thing in Iraq and Syria. A greater willingness to compromise on the part of the ayatollahs, a likely result of great fiscal pressure, is very likely to clench the deal. Iranian businessmen are already rubbing their hands.

More generally, the revival of American oil production has dethroned Opec. The cartel no longer enjoys the extraordinary power it wielded in its heyday. If Iran returns to the market and Western capital underwrites an expansion of Iranian capacity, Opec itself would become bipolar. Without a thaw in Saudi-Iranian relations, it would become defunct. In either case, if Iran returns to the market in force, Saudi Arabia’s status as the swing producer will assuredly be undermined. And with it perhaps, the leverage that the Saudis have enjoyed against their protector since the Islamic revolution.

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