Global Predictions, Part 2

OK, a couple of days ago I predicted what I thought was going to happen on the stock market during the coming 3-4 months -- a generally up market, as the world took a geopolitical breather, the Fed halted its interest rate rises for a while and hedgies and private equity buyout guys drove stocks up one last time, before signs of stagflation set in during the first half of 2007, corporate earnings start to slow in earnest, housing defaults start really looking serious (PS, I see the harbingers of this already in our (Full Circle's) subprime real estate lending portfolio, which was also reported in the Journal last week), and the geopolitical situation starts looking scary. Barron's came out this weekend totally disagreeing with me, seeing the rest of 2006 as being a non-event, but another uptick of a bull market in 2007. I hope they are right and I am wrong.

This article, Part 2 in this series, will talk about the geopolitical situation that we will face in 2007, and what we can or should be doing about it.

Where can we start other than with Iran. Sure, some other, potentially global crisis can arise in an unrelated part of the world. The most likely examples in my opinion center around East Asia, and in each case pointing to the urgent need for Japan to accelerate their efforts to strengthen their military and create a blue water navy:

--Taiwanese fighting words of independence as China approaches its 2008 coming out party at the 2008 Beijing Olympics (a bit too early, but possible),
--Japanese, Vietnamese or Taiwanese conflict with China over navigation and oil exploration rights relating to disputed islands, leading to uncertainty in Asian shipping lanes,
--Further unpredictable action from the North Koreans (so unpredictable are they that they have become predictable), or
--Russian muscleflexing conflict with Japan over contested islands.

However, I still believe that Iran will be the place upon which to focus in 2007.

The last time I was down in Washington, in May, the feeling was expressed by a panel of plugged-in experts that the Bush administration, tired and weakened by Iraq, was pursuing a diplomatic course on Iran simply in order to position the next administration to deal conclusively with Iran (the feeling being that no amount of diplomacy was going to wrest the Iranians from their nuclear destiny -- the talk was only to give the US and Britain, and perhaps NATO, diplomatic air cover to ultimately do what had to be done). Basically, recognizing their lack of international credibility to ultimately pursue military action (after all the multilateral talking), the Bush administartion was planning on kicking the can down the road.

Knowledgable insiders in Washington now believe that the Hizbullah-Israeli War changed this view by the administration, and that George Bush is now committed to seeing the Iranian nuclear situation through on his watch. George Bush is a man of very strongly held convictions, and he saw all that he needed to see in the Hizbullah war to conclude that the Iranians could not be trusted to be rational with nuclear weapons. The President is not only thinking about Israel's survival and likely reaction to a nuclear attack, but also about the viability of the West's oil supplies from the Arabian peninsula, and the further threat of nuclear proliferation throughout the Arab world (a pretty scary thought, huh?).

So what now? Likely, the slow grinding wheels of diplomacy and international sanctions for the next six months, at least. At the risk of sounding like my dear friend A.L., I hope the Bush administration "goes for broke" in reaching out directly to the Iranians with bilateral talks, putting alot of substance on the table, rather than hanging cautiously with the multilateral pack. I don't think he will do it, but I would like to see Bush reach out to Iran and offer the following grand deal:

1. We will not actively seek your violent overthrow if you limit your nuclear pursuits to peaceful and verifiable development in conjunction with full international supervision (the Russian plan is a good place to start). This Iranian regime, with restive Kurdish and Arab minorities and an unhappy, underemployed and vocal younger generation, lives in constant fear of overthrow by the US, following our invasions of Afganistan and Iraq, even though both those actions ironically worked in Iran's interests by deposing their Sunni enemies.

2. If you stop arming Hizbullah and the Shiite irredentist movement in Iraq, we will allow significant liberalization of economic and technolgical ties; and

3. If you genuinely democratize, we are willing to work to bring Iran fully into the community of nations.

Following the Libyan example, items 2 and 3 above may be combined, but you get the idea.

This would be bold action on the international stage, and to the extent that it was vigorously announced by the US to the world and the Iranian people, could start a potentially revolutionary internal debate in Iran about its future. For once, we would have taken the initiative and not be reacting to our enemy's agenda, but they to ours.

Optimistic talk without the application of pressure is not enough. One element of pressure is to keep the sanctions ball rolling (which the Iranians do not seem to take terribly seriously, given the lack of success of sanctions against Saddam Hussein and the venality and mercantilism of significant world players dependent upon Iranian oil and desirous of its trade, like Russia, China, India and Turkey). In addition, we must maintain the quickening drumbeat of public speculation as to military planning and our expected deadlines to attack Iran. At the same time, there are other actions that we should be taking to put the Iranians on the defensive, and take some of the wind out of their sails that has been provided by the Hizbullah "victory" in militarily stalemating the Israelis in battle. These actions would include:

1. Seriously stepping up our actions and support of the Arab minorities that have been perpretrated bombings and other terrorist actions in Iran (while Shiites make up over 90% of the population, Iran has an Arab minority that suffers from discrimination and other pressures). For more on the problem potentially posed to Iran by irredentist Arab groups, see http://www.rferl.org/features/features_Article.aspx?m=04&y=2005&id=CA90306F-22A2-4DB7-947D-464ED56495C0 ;

2. encouraging more assertive action and talk by the Kurds, who pose their own irredentist threat to Iranian territories. This is not going to make the Turks too happy, who are hypersensitive about our support for the Kurdish autonomous region in Iraq and anything that might be construed as encouraging Kurdish nationalism that could spill across the border into Turkey. That being said, this Turkish government has taken Turkey a tremendous step backwards in its relations with the US, undoubtably reinforced by Turkey's ruling party's Islamic value system (where is Ataturkism when you need it?), it has been unsupportive of our mission in Iraq and diplomatically and economically supportive of Iran, and a little pressure on Turkey at this time could help put more pressure on Iran; and

3. Make the best of a terrible situation in Iraq. Following the November election, we announce our plan to begin drawing down troops in Iraq more vigorously in 2007, to be replaced by Iraqi forces, but planning on maintaining a significant force in the area for some time to come by repositioning to the Kurdish region of Iraq and to other Arab states that ask for our presence. At the same time, we would announce to our Sunni friends in Saudi Arabia and Jordan that it is up to the Arab world and the Iraqi leadership to decide whether they believe that Iraq would best be served by national unity or division into Sunni, Shiite and Kurdish cantons, and work together towards that goal with them. Perhaps the Arab League will be prepared to replace US troops as peacekeepers in Iraqi hotspots, perhaps not. Perhaps the Iraqi governemnt can keep things together, undoubtably requiring them to unsheath their swords (it will be messy), but it will be hard for us to judge the morality and "proportionality" of their actions at that point. This course of action will achieve several objectives. We have to get our boys and girls out of Iraq, the sooner, the better, and this Iraqi civil war is not getting any better with us sitting in the middle of it. It is regrettable what we have done to that country, but it wasn't in such great shape beforehand, and arguable we have given it a chance at its own self-determination. Let the Arab world and the Iraqi leadership pick up the pieces. To the extent that the Iranians stir up trouble and try to capitalize at the further expense of the Sunni Iraqis, our military sits in Kurdistan, a dagger pointed at the heart of the Iranians (in their minds), and they run the risk of further alienating themselves from Sunni elements of the Arab world.

The last point is one that has to be stressed -- we must create wedges between the Persian Iranians and the Arab world, and between Sunnis and the Iranian Shiites. We cannot allow a common anti-US attitude in the Arab world to give Iran more of a leadership position than they already possess, following the success of Hizbullah/Iran against Israel. We are not going to eradicate that anti-US sentiment overnight; but we can instead work to sow the seeds of division between the Iranians and Arab nations, between Sunnis and Shiites. Saudi Arabia's remarkable, tacit support for Israel's cutting Hizbullah (and Iran) down to size points to a wedge that can be driven in the Arab world between bad and worse. In addition, Syria becomes irrelevant with a tamed, or at least more cautious Iran.

How will Iran react to this carrot and stick approach, and multi-task the range of choices it faces in this high stakes game of chess?

No one knows. If they try to go on the attack, they can redeploy Hizbulla against Israel, but this time firing over the heads of Europeans in Lebanon (not terribly helpful to their cause) or attack Israel directly, in a shrill attempt to consolidate their support in the Arab Street (and reinforcing the need, and giving the US and Israel the jsutification, to destroy their nuclear capbility). They can employ a European-wide string of terrorist attacks, to cow the weak-kneed Europeans into submission.

Notwithstanding these possible results, which could lead to a full blown, military conflict, a critical rule of conflict resolution is to allow your adversary an escape hatch where they are permitted to maintain their honor, while retreating. The "carrot" part of these tactics, employed to a great extent publicly, leaves Iran an exit point with honor and tacit protection of their regime from outside (though not from the ferment that will grow from within), and gives them the opportunity to attain an even stronger position in Iraq (at the cost of putting them in greater conflict with the Arab world -- a good balance, from our perspective). It could get messy in Iraq, but it was going to be messy there anyway -- we are not going to stay there forever. The Sunni Saudis and the Arab gulf states will beg us to stay in the region to protect them. The Arab world has the opportunity to recapture a bit of pan-Arab honor by being part of the solution to our Iraq mess by deploying their own peacekeepers to shore up a last hope, unified Iraqi governemnt.

Hopefully this is how it plays out, but if it doesn't, I anticipate a strong military attempt to set back Iran's nuclear program by NATO, the US and/or Israel, by the end of June 2007. After that gets too close to what some analysts believe may be the "point of no return" for the Iranians, from a nuclear technical ability perspective. Israel cannot accept a nuclear Iran, and I do not believe that the West can afford that result either. Fortunately, I believe that George Bush is of the same opinion.