The status quo is shifting in the Middle East. It’s been quite difficult to catch up with the fast moving political headlines there for the last six months. That’s quite unusual, I have to say. Political (and social) change has been a rare commodity in the Middle East, leave aside radical changes we are witnessing. After all, the Middle East and North Africa region (MENA) has been the focus of scholarly work for a long time on “resilience to change” and “politics of survival” and has earned its spot in the chapter of “durability of authoritarian regimes”.
Remember the Arab Spring that raised expectations for democratization of the region by regime change and reforms? Well, with the exception of Tunisia’s still struggling transition to democracy, we are pretty much back to default settings. The elites in the challenged regimes managed to stay on top of the tide with little reform and/or concessions.
However, lately things have been changing at a rapid pace. The difference is that the change is either coming down from the elites to adjust to the new changing realities of the region, or introduced by the external actors. Expect more of these surprising changes in the Middle East to keep coming in 2018.
Let’s recall the key events over the last six months and discuss their implications for the near future:
Gulf Cooperation Council (GCC)-Qatar crisis: Back in June, Saudi, UAE, Bahrain and Egypt cut diplomatic and economic ties with Qatar, accusing it of destabilizing the region and supporting terrorism. In retrospect, neither the isolation of Qatar yielded catastrophic results as GCC thought, nor the feared risk scenario of military intervention or palace coup played out. The crisis simply fizzled out.
However, the lasting impact has been the de-facto downgrade of GCC to a looser union and enhanced Saudi-UAE strategic partnership. Qatar, on the other hand, has moved closer to Iran, which is ironic given that the main reason behind forming GCC back in 1981 was the threat of the nascent Islamic Republic of Iran. This is another sign that regional power struggle transforms into a more complicated phase than the simple narrative of sectarian Sunni-Shia divide.
Mohammed bin Salman (MbS): First, we witnessed the surprising rise of MbS to the Saudi crown prince post in June, and then came his subsequent crack down on his rivals and Saudi businessmen with deep pockets, in November. The long tradition of consensus-based decision making in the House of Saud is changing. However, Saudi and its allies present the crack-down as an anti-corruption drive by the reformist young crown prince (32 years old) to modernise Saudi society and the economy.
It remains to be seen whether this is simply a power and asset grab or a long overdue reform initiative. However, the reported extravagances of the prince, including the impulse purchase of a second-hand yacht for €500mn, a $450mn Leonardo da Vinci painting (Salvator Mundi), and the $300mn French chateau (Chateau Louis XIV) undermine his “reformer image”, especially given that he champions anti-corruption and fiscal austerity at home.
Lebanon PM Hariri’s resignation: It came as a complete surprise when Lebanese PM Hariri resigned unexpectedly in Riyadh live on Saudi TV at the beginning of November. Reportedly he was under house arrest along with other Saudi royalties and businessmen. With some French mediation and cool-headed responses of Lebanese President Aoun and other political actors, including Hezbollah, the resignation was not accepted and PM Hariri changed his mind when he returned back to Beirut.
While the crisis seems to be over for now, the brief drama warns us against further Iran-Saudi proxy wars in the region. Now that Hezbollah has become a major player in regional affairs, Lebanon will likely be involved in those future proxy wars in one way or another.
The defeat of ISIS: After more than three and a half years of fighting, ISIS was finally defeated in Iraq and Syria. At least, this is what Russia, Iraq and Iran declared in late November. Russia and Iran’s active involvement in the fight against ISIS and other jihadist groups in Syria on the ground along with Assad’s Syrian Army has been the game changer.
This victory helps Russian ambitions to make a comeback as a global power. Iran is also vindicated in its proxy war with the GCC by maintaining and strengthening its so-called Shia axis into the Mediterranean Sea. The power vacuum left by the US foreign policy pivot to Asia (from the Middle East) was initially filled by ISIS and other radical Islamist groups in the region. Russia and Iran are filling that gap now. Losing the war in Syria and failing to bring down Assad, the Saudi bloc is likely to reposition itself against Iran in new regional endeavours.
The deadly twist in the Yemen war: Seen as one of the biggest miscalculations of the Saudi crown prince MbS in retrospect, Saudi-UAE led military intervention started in 2015. It was expected to be a swift operation to end the civil war and replace the ousted President Saleh with Saudi-supported President Hadi. However, the Saleh-Houthi alliance has managed to not only maintain control of the capital Sana’a, but has also started to threaten Saudi/UAE with long-range missiles lately. The Saudi move to cut a deal with the ex-president Saleh against Houthis did not work and switching sides cost President Saleh his life at the beginning of December.
Saudi/UAE coalition seems to be stuck between a rock and a hard place now. While international pressure to stop the humanitarian crisis increases, the remaining political actor Saudis are willing to work on the ground with Al-Islah, which is a Muslim Brotherhood-linked party. The very same Muslim Brotherhood that they ferociously asked Qatar to cut ties with. In the meantime, the Houthis threaten to hit strategic assets of Saudi and UAE with their longer-range missiles if the blockade and the conflict continue.
Jerusalem: US declaration of recognizing Jerusalem as the official capital of Israel is a major shockwave to the region. Back in 1980, Israel passed a law declaring Jerusalem as the united capital of Israel. The UN response was that it was a violation of international law given the annexation of East Jerusalem. There are no embassies in Jerusalem and President Trump’s decision suggests that US is going to be the first.
It is true that the US is not “any country”, but we should also acknowledge that Jerusalem is not “any city”. As the focus of all Abrahamic religions, Jerusalem is described as “the house of the one God, the capital of two peoples, the temple of three religions, and she is the only city to exist twice – in heaven and on earth”.
Leaving the celestial glories aside, there are quite complicated terrestrial politics around the status of Jerusalem, which was deliberately left to the final stages of the long overdue Arab-Israel peace plan. The US move not only denies the historical capital of Palestine, but also undermines the possibility of a peace process by giving out the main prize upfront to Israel.
The Organisation of Islamic Cooperation was quick to convene in an extraordinary summit in Istanbul denouncing the US move and declaring East Jerusalem as the capital of Palestine. However, the devil was in the details given the Saudi bloc (Saudi, UAE, Egypt, Bahrain) participated at a ministerial level whereas heads of states of Turkey, Jordan, Qatar, Iran, and Palestine were present in the summit along with more than 50 countries.
The US decision on Jerusalem may have possibly opened the next chapter in the region’s never-ending conflicts. However, a possible Saudi-Israel rapprochement against Iran, and a possible Hezbollah lead on the Palestinian cause, one of the flagship issues of Pan-Arabism, would go against pretty much every preconception we have about the Middle East.
This complicated outlook suggests that MENA credits are likely to trade with less beta to higher oil prices and reflect more risk premium going forward with the emerging idiosyncratic risks. The (geo)politics and increasing power struggle between Iran and the Saudi bloc is likely to feed into asset prices. This is also in line with our view that EM returns will be increasingly differentiated going into 2018 with politics or idiosyncratic risks, given the already compressed level of EMBIGD spreads. The possible political crises in MENA next year may create attractive investment opportunities such as Qatar and Lebanon did this year. We will be monitoring MENA domestic politics and geopolitics more closely next year. Watch this space.
 Montefiore, Simon Sebag, “Jerusalem: The Biography”