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The New Reality in Iraq/ Oil Prices and the Middle East

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Update from AIJAC

July 18 , 2008
Number 07/08 #06


This Update offers some new and very optimistic assessments of the situation in Iraq. First up, if you haven't seen it in today's Australian, don't miss academic military experts Kimberley and Frederick Kagan, together with retired senior US General Jack Keane's report in the Wall Street Journal on the findings of their recent visit to Iraq, including that ethnic conflict there has essentially stopped, al-Qaeda in Iraq is on the run, the radical Shi'ite have been "disrupted," while the Iraqi government has met most benchmarks for political reconciliation and is gaining national support.

Below, we start with Michael Totten, a prolific independent journalist and blogger who has spent much of the past few years in Iraq, and discusses the evidence for a real transformation of the situation in Iraq. Quoting Michael Yon, another independent journalist based in Iraq who recently claimed the war is effectively over, he stops short of fully endorsing this sentiment, but quotes some dramatic statistics which seem to  support Yon's argument. Totten concludes that Iraq should now properly be seen as something different from what it was a year or two ago - it is now "a rough and unfinished peacekeeping mission." For this full argument, CLICK HERE. The statistics assembled by Yon, including a startling zero ethno-sectarian killings over the past two months, and a huge growth in arms caches found and dismantled, are available as a Powerpoint presentation, here.

Next up, the German magazine Der Spiegel looks more closely at the signs in Iraq that everyday life is returning to something approaching normalcy and the government is increasingly winning the support of Iraqis of all ethnic persuasions. While some pessimists persist, the paper points out that even strong sceptics, such as King Abdullah of Jordan, are now expressing optimism about Iraq's future. The piece is particularly good on the outcome of the recent confrontations between Iraqi security forces and Shi'ite militias. To read it all, CLICK HERE.

Meanwhile, on a separate topic, Kenneth Pollack, a former Clinton Administration official specialising in the Middle East now at the Brookings Institute, argues that while you might think the Middle East will benefit from current record high oil prices, this is actually unlikely to be the case. He says that while money is flowing in, it is unlikely to be spent in a way that will ameliorate the "the deep-seated political, economic and social problems" that lead to terrorism and instability. In fact, he argues, based on past history and current economic patterns, the money may worsen inflation, feed corruption, increase inequality, make food more expensive for the poor, and make little difference to unemployment. For his full diagnosis of what needs to be done with the money to avoid this outcome, CLICK HERE.

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Is the War Over?

Michael J. Totten

Commentary Online, July 16, 2008
     
Independent reporter Michael Yon has spent more time in Iraq embedded with combat soldiers than any other journalist in the world, and a few days ago he boldly declared the war over:

Barring any major and unexpected developments (like an Israeli air strike on Iran and the retaliations that would follow), a fair-minded person could say with reasonable certainty that the war has ended. A new and better nation is growing legs. What's left is messy politics that likely will be punctuated by low-level violence and the occasional spectacular attack. Yet, the will of the Iraqi people has changed, and the Iraqi military has dramatically improved, so those spectacular attacks are diminishing along with the regular violence. Now it's time to rebuild the country, and create a pluralistic, stable and peaceful Iraq. That will be long, hard work. But by my estimation, the Iraq War is over. We won. Which means the Iraqi people won.

I’m reluctant to say “the war has ended,” as he did, but everything else he wrote is undoubtedly true. The war in Iraq is all but over right now, and it will be officially over if the current trends in violence continue their downward slide. That is a mathematical fact.

If you doubt it, look at the data.

Security incidents, or attacks, are at their lowest level in four years. Civilian deaths are down by almost 90 percent since General Petraeus’ counterinsurgency “surge” strategy went into effect. High profile attacks, or explosions, are down by 80 percent in the same time period. American and Iraqi soldiers suffer far fewer casualties than they have for years. Ethno-sectarian deaths from Iraq’s civil war plunged all the way down to zero in May and June 2008.

Yon is braver than the rest of us for declaring the war over, but it’s important to understand that there are no final battles in counterinsurgencies and it’s impossible to pinpoint the exact dates when wars like this end. The anti-Iraqi insurgency – a war-within-a-war – really is effectively over. As long as another such war-within-a-war doesn’t break out, Yon will appear more perceptive than the rest of us in hindsight when the currently low levels of violence finally do taper off into relative insignificance.

None of this means terrorism and violence in Iraq are over. Violence is never over in the Middle East, and Islamist terrorism will be with us for years, if not decades. There may yet be another war, a different war, in Iraq. It would be foolish to dismiss that possibility or assume there is no more work to be done. NATO is still not finished building a durable peace in Kosovo, and the war in that country ended nine years ago.

The 15-year civil war in Lebanon ended in 1990, but another low-grade civil war that eerily resembles the last is brewing again. The Algerian civil war between the secular police state and the Salafist insurgency quietly wound down years ago, but al Qaeda cells are doing their worst to crank it back up again. The Second Intifada was broken in Israel, but there is still no peace between Israel, Hamas, Islamic Jihad, or the Palestinian Authority. There are no clean endings to wars in the Middle East these days, and we shouldn’t expect one in Iraq either. But there is a point when a war becomes low-grade enough that “war” is no longer the best word to describe what takes place in the absence of absolute calm.

What most of us still think of as “war” in Iraq is, at this point, a rough and unfinished peacekeeping mission. Whether it is officially over or not, it has certainly been downgraded to something else, and it’s about time more analysts and observers are willing to say so.

Michael J. Totten is a freelance writer and blogger who has reported from Iraq, Lebanon, Egypt, Libya, Cyprus, Turkey, and Israel. His work has appeared in the Wall Street Journal, the New York Times, Reason, and numerous other publications.

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Optimism Grows in Iraq as Daily Life Improves

A BRIGHTER FUTURE FOR BAGHDAD?

By Bernhard Zand

Der Speigel, 07/02/2008

There is an unexpected air of normalcy prevailing in Baghdad these days, with consumption flourishing and confidence in the government growing. The progress is astonishing, but can it last?

Pork is available in Baghdad once again. Not just in the Green Zone, where US diplomats can enjoy their spare ribs and Parma ham, but also across the Tigris River, in the real Baghdad, at "Al-Warda" on Karada Street. Bassim Dencha, 32, one of the few Christians remaining in Iraq and the co-owner of Baghdad's finest supermarket, has developed a supply line from Syria. As a result, he now has frozen pork chops and bratwurst arranged in his freezers, next to boxes of frozen French fries and German Black Forest Cakes. And the customers are buying.

For four years, selling pork or alcohol in Baghdad was a security risk. But the acts of terror committed by Islamist fundamentalists, who once punished such violations of their interpretation of the Koran with attacks on businesses and their owners, have gradually subsided. The supply of imported goods is also relatively secure today, now that roads through the Sunni Triangle are significantly safer than they were only a few months ago.

"It's worth it again," says businessman Bassim Dencha. "All we need now is enough electricity to reopen our refrigerated warehouse."

Two kilometers down the street, business is booming late into the night at Ali Lami's roadside snack bar. Before the war the establishment, a Baghdad institution, was a favorite hangout for former dictator Saddam Hussein's henchmen and United Nations weapons inspectors alike. Today professors and students from the university, which is once again open every day, come here to eat shawarma, an Arab fast-food dish consisting of shaved meat and salad served in pita bread.

This fall the manager, Rassak Rashid, 44, plans to open an outdoor seating area in a grove of palm trees behind the snack bar. The lanterns are already hanging in the trees. "Maybe then the police will stop telling our customers to get off the street," says Rashid.

He isn't referring to parking violations, but to the fear of bombs that could be hidden in cars parked along the curb. The police patrolling the streets in front of places like Ali Lami's snack bar aren't entirely convinced that this fragile sense of normalcy will last. While there are certainly signs of improvement, the dangers of life in Baghdad haven't disappeared.

'Fragile and Reversible'

Despite the palpable changes in daily life in the Iraqi capital, people are still being killed, because the Islamic fundamentalists and terrorists are not willing to give in, nor have they been eliminated completely. Eleven people died in attacks last Tuesday, seven on Wednesday and 38 on Thursday.

Is the situation truly improving in Iraq? Is it possible to rely on these changes in everyday life or are they merely an illusion? According to the quarterly report that the Pentagon issued in mid-June, the number of armed incidents has declined by 70 percent since last summer, bringing it down to 2004 levels -- from about 180 daily incidents to 45. More than 320,000 of the 478,000 soldiers in the Iraqi Army, the report claims, are now capable of fighting without American support, and more than €3.8 billion ($5.9 billion) of Iraq's own reconstruction budget totaling €6.4 billion ($9.9 billion) has already been invested in projects. "The security, political and economic trends in Iraq continue to be positive; however they remain fragile, reversible and uneven," the report concluded.

This sounds like realism underscored by cautious optimism. An interim report by the US Government Accountability Office (GAO), which caused a stir in Washington last week, is more pessimistic. The authors are critical of the Iraqi government for still not having passed a law that would regulate the development of oil fields and the distribution of profits among the country's 18 provinces. They also criticize the US war effort in Iraq for consuming $400 million (€258 million) a day and point out that there is no evidence "of a strategic plan" by the US government.

The pessimists have strong arguments and experience on their side. And experience has shown that things usually go downhill in Iraq, with only brief uphill periods. Nevertheless, the number of optimists is growing, and the administration of US President George W. Bush no longer has a monopoly on confidence. After years of resistance, the United Arab Emirates, Bahrain and Saudi Arabia have now announced that they will be sending ambassadors to Baghdad. Thanks to the high oil price, the economy in Iraq, which produces 2.5 million barrels a day, is also improving. The government has now been able to give its civil servants a generous pay increase, and it also expects to cut the price of gasoline, currently at €0.60 a liter ($3.52 a gallon), in half. Fittingly enough, German automotive giant Daimler plans to open an office in Baghdad and build trucks there in the future -- 18 years after Saddam Hussein's invasion of neighboring Kuwait.

Building Confidence with a Fiasco


King Abdullah II of Jordan, who was opposed to the US invasion and then voiced his fears of a "Shiite Crescent" developing in Iraq, recently said something astonishing in an interview with the US magazine Newsweek: "I am actually optimistic for the first time on Iraq. It's the first time that I have felt that Iraqis have, as much as they can, bound themselves together into a unity."

The unexpected change of mood benefits Prime Minister Nouri al-Maliki. He was long considered weak and was extremely controversial, viewed as a friend of Iran by the Sunnis and as America's lackey by the militant Shiites. But today even the Arab ultra-nationalist and opinion leader Abd al-Bari Atwan, editor-in-chief of the London-based Arabic daily Al-Quds Al-Arabi, concedes that Maliki has shown an "amazing ability to survive in a turbulent country."

Paradoxically, this new confidence in Maliki began with a fiasco. In March, he ordered 30,000 men to march into the southern Iraqi port city of Basra to oust the militias, especially the Mahdi Army of Shiite leader Muqtada al-Sadr. The outcome was depressing at first. One thousand Iraqi soldiers deserted, and it was only after the Americans and the British intervened in the fighting and additional Iraqi divisions arrived that calm return to the city.

Nevertheless, these assaults on the Shiite militias in Basra and in eastern Baghdad, dubbed Saulat al-Fursan, or Operation Charge of the Knights, eventually paid off, especially when Maliki followed them with similar offensives against Sunni militias in Mosul and later in the Shiite-dominated province of Meisan. And he recently announced plans to clamp down on Sunni militias in Diyala. These efforts are evidence of the Baghdad central government's new approach of building a monopoly on power in the provinces.

Because of his determination, Shiites accuse Maliki of being as brutal as Saddam. But Iraq's Sunnis see his changed behavior as evidence of his strength as a leader.

It is a deep irony that moderate Sunnis now refer to Maliki, a Shiite, as "batal" -- "a hero." He appears, at least for the time being, to have shed the stigma of religious partisanship.

The prime minister has recognized that the internal war on two fronts provides a strategic opportunity. At first, his activism irritated General David Petraeus, the commander of US forces in Iraq, but now Petraeus supports Maliki's operations. The general is even allowing it to seem as if, in fact, it is the prime minister and not Petraeus who is calling the shots in Iraq.

Maliki has also shown surprising skill on the foreign policy front. Instead of bemoaning the fate of being dependent on both Tehran and Washington, currently two of the world's bitterest enemies, he is using his trumps on both sides. In Washington, he is campaigning for moderation in the nuclear dispute with Tehran, arguing that Iran could otherwise invade southern Iraq. In Tehran, he has promised to do everything in his power to ensure that the upcoming security treaty with the United States will not infringe on Iran's sphere of influence.

Iraq and the United States have been negotiating this security pact for months. It is essentially a military agreement meant to stipulate how many American soldiers will remain in Iraq, and for how long. Time is short, because the United Nations mandate for the presence of the coalition troops, established in June 2004, will expire at the end of this year.

But there is one very significant element of uncertainty in the Iraqi power struggle: Maliki's rival Muqtada al-Sadr. It is difficult to tell whether he withdrew his forces to spare them a defeat against Petraeus' troops or whether he is waiting until after a partial US withdrawal to settle scores with the Sunnis and the government.

Two weeks ago Sadr issued a statement, presumably from his Iranian exile, which revealed much of his worldview but little of his intentions. The statement begins with the following florid introduction: "A message from the humblest servant Muqtada al-Sadr to his loved ones in the army of the Imam al-Mahdi, and to all honorable Iraqis who reject the occupation."

The Mahdi Army has not ended its resistance, Sadr writes, but it will be split in two from now on. Some of the faithful members of his militia, "men of experience, organization, knowledge and the willingness to make sacrifices," are authorized to continue to carry weapons and use them "against the occupation, and no one else," and must do so in "absolute secrecy," writes the militia leader. The others, he continues, "thousands, rather millions," are obligated to fight in "cultural, social and religious" ways against "secular thoughts, against Western hegemony and globalization."

Sadr's sermon ends with a threat: "Those who refuse to abide by this assignment of duties are no longer with me, because they seek only worldly politics and are addicted to hypocrisy. I, however, am a peacemaker, and you are my brothers."

From a sectarian warrior to a foe of globalization -- it would be an astonishing about-face. For the first time since he stepped onto the political stage five years ago, the grim Shiite leader elicited amused response. Perhaps it was premature, perhaps it was a misunderstanding, or perhaps it was simply a good sign of things to come.

Translated from the German by Christopher Sultan

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Drowning in Riches

By KENNETH M. POLLACK

New York Times, July 13, 2008


YOU might think that $140 per barrel oil would be good for at least one part of the world, the Middle East. It’s too soon to tell for certain, but the region may well turn out to be the part of the world that suffers the most.

As painful as the current (or coming) oil-driven recession will be for Americans, it does seem to be convincing us to make the sacrifices necessary to diminish our reliance on oil. Over the long term, that could prove a huge boon for our economy, our environment and our national security.

In the Middle East, the situation may be reversed. Right now, the region is experiencing an economic boom, creating the opportunity to address the deep-seated political, economic and social problems that have spawned terrorist groups like Al Qaeda. That’s certainly what the people of the region hope.

The danger is that the way that the rising revenues are being spent will more likely worsen the region’s instability over time.

And that’s a problem, because problems in the Middle East have a bad habit of becoming big problems for the rest of the world. The Middle East isn’t Las Vegas: what happens there doesn’t stay there.

In the 1970s and ’80s, during the first great oil boom, the Middle Eastern producers largely squandered their wealth. Some did set up vast social-welfare networks that improved health care (an important reason for the explosive population growth of the past 30 years). But by and large they sent the money overseas, putting it in foreign real estate and Swiss bank accounts. This did nothing to develop (let alone diversify) their economies, and so when the boom turned to bust in the 1990s, economic problems mushroomed. With them came political discontent, terrorism and rebellion.

This time around, some Middle Eastern oil producers are trying to be smarter. They are investing billions of dollars at home, building industries, repairing roads and factories, and expanding social services. This has led regional elites and many in the international financial community to proclaim a new era in the Middle East — one in which the new oil revenues will diversify the region’s economies, create jobs for everyone, and make the Arab states the world’s economic superpower.

If this sounds unlikely, it’s because it almost certainly is. More oil money is being re-invested in the region, but it is not being spent where it is most needed. As a result, it is having little impact on what really matters, and is even creating problems.

The macroeconomics often do look great: gross domestic product, trade and foreign direct investment are all rising substantially. But unemployment and underemployment have declined very little and inflation is rising quickly. At a microeconomic level, critical problems belie the rosy picture painted by the superficial macro indicators.

In addition, much of the money is being re-invested in projects intended to produce quick profits for investors rather than long-term political and economic gains. A great deal of it is going into non-productive sectors like real estate and oil refining. Many of the factories being built with the new oil revenues will be heavily automated plants that will employ few people.

The industries that create lots of new jobs, like tourism, agriculture and construction, import workers from southern and southeastern Asia rather than hire locals. Similarly, the oil revenues are being used to expand educational systems but, with a few exceptions, not to reform them. Consequently, more students are being educated — and their expectations of a better life whetted — only to find out that they lack the skills to get the jobs they believe their schooling entitles them to. Across the region, youth unemployment averages at least 25 percent, close to double the global average.

Both the rise in energy prices and the flood of oil revenues have stoked inflation. Qatar’s current rate is 14 percent, up from 2.6 percent in the 2002-2004 period. As always, inflation hits the middle and lower classes hardest, and in many Arab states it is destroying the middle class, driving its members to the levels of the poor. That is pushing many into the arms of Islamist extremists seeking to overthrow the regimes.

The rise in global food prices has also hit the Middle East hard. Bread riots have convulsed Egypt and Yemen (not major oil producers, but two of the Arab world’s most populous states and cogs in the regional economy). In Saudi Arabia, fear of riots led the government to threaten to detain or confiscate the businesses of bakers and store owners who sell flour above the government-set subsidized price.

To combat the effects of inflation, Saudi Arabia, Qatar, Oman and the United Arab Emirates have raised government salaries by 15 percent to 70 percent. In the short run this could help civil servants, but it also further increases inflation and does nothing to deal with the structural economic problems.

The foreign workers whom Arab states increasingly rely on because they tend to be cheaper and more productive than their own citizens are also beginning to show signs of unhappiness with their shoddy treatment. Foreign workers, who make up 80 percent to 95 percent of the private sector work forces in the small Persian Gulf states, have gone on strike in recent months in Bahrain and the United Arab Emirates to protest inflation, which is eroding their earnings. With foreigners making up roughly 40 percent of the population of the Arabian Peninsula, such labor unrest is ominous.

Meanwhile, the region’s rich have grown obscenely more wealthy through their ability to tap into the windfall oil profits, both legally and illegally. The wealthiest measure their wealth in the billions, while the poorest are so poor that growing numbers cannot even afford to marry.

Money pouring in but not trickling down tends to create a dangerous social imbalance. People hope their country’s oil windfall will alleviate their own economic problems only to find that vast sums are being siphoned off into graft; redirected out of the country to private accounts; spent on luxury items, military hardware or “white elephant” projects; or simply wasted.

It is worth keeping in mind the worst case from the history of the first Middle Eastern oil boom. Under Shah Mohammed Reza Pahlavi, Iran tried to use the influx of oil revenues after the 1973 oil-price increases to build new industries, eradicate unemployment, transform the economy and modernize society.

On paper, the shah’s efforts seemed superbly enlightened. As in the Arab states today, the macro indicators of Iranian progress — per capita gross domestic product, education expansion, foreign investment — seemed phenomenal. But the projects were mismanaged and riddled with graft. The royal cronies became fabulously wealthy while the plight of the average Iranian worsened because of protracted unemployment coupled with soaring inflation. Rather than solving Iran’s problems, the oil boom sparked the Iranian revolution.

A few in the region seem to be heeding that lesson. King Abdullah of Saudi Arabia continues to demonstrate a keen grasp of what is in his country’s best long-term interests. He has poured money into economic cities that serve as “centers of excellence” to attract the kind of meaningful investment that, over time, could lift the Saudi labor force out of its dangerous doldrums. He is establishing the King Abdullah University, bringing in professors from all over the world to develop a curriculum emphasizing science, technology and innovation. But even here there is a dark lining: Abdullah is 83, and it is doubtful that his successors would continue such projects with the same progressive determination.

How can the region turn things around? For starters, those charged with managing its sovereign wealth funds and private investments need to shift from bankrolling capital-intensive industries that guarantee a high return for the investor to financing labor-intensive industries that could increase employment and develop a more capable work force.

At some level, this means thinking of regional investment as a form of deliberate wealth redistribution, social engineering and charity. It will certainly cut into the bottom lines during the short term, but if those who hold the purse strings are wise enough to do it, it should yield priceless political rewards in the years ahead — political rewards that are probably going to be necessary if they are to avoid being swept out of power by angry mobs.

Avoiding those kind of internal upheavals and eliminating much of the anger and despair upon which the terrorists and extremists prey would be a major boon to a world that is likely to remain addicted to Middle Eastern oil, and therefore vulnerable to its vicissitudes, for decades to come.

Kenneth M. Pollack, a senior fellow at the Brookings Institution’s Saban Center for Middle East Policy, is the author of the forthcoming book “A Path Out of the Desert: A Grand Strategy for America in the Middle East.”

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