By Timothy Ash
All the focus at present is on the on-going war between Israel and Iran, but this just reminds us again of the importance of geopolitics and its ability to impact on markets and the global economy.
Uncertainty and risks are back with us. The fear is that we see escalation, with potentially devastating impacts on global markets. For example, if we see regional energy sector assets subject to attack, the closing of the Straits of Hormuz could see a repeat of events in the 1970s with potential for an oil price shock to the global economy?
Markets have a difficulty in figuring out geopolitics, and we saw the impact of that with Putin’s full-scale invasion of Ukraine in 2022, when the market was largely unprepared and the result was a big move in global markets, a further inflation shock, higher central bank policy rates in response and a negative hit to global growth.
Explanations as to why markets struggle with geopolitics are varied but I think it is partly the fact that geopolitics is a multidisciplinary subject, often involving foreign affairs, but understanding domestic factors influencing decision making in a range of countries, defense and security, even environmental issues, geography, economics, trade, markets, and now cyber and AI looking forward. There are many moving parts, and few people have all the tools to accurately call events.
I think also in markets, and analysis, there is often a desire to see the glass half full, hope for the best, and not want to think about the uncomfortable and difficult to fathom results of out-of-the-box or black swan events. A bias to mean reversion when, actually politics globally appear to be going the other way, with more extremism, and likely more extreme, even systemic risks looming.
Often, I also think there is a bias to think that we all share the same information set, have the same objectives and apply the same kind of logic. That’s a mistake, I think, if we look back at Putin’s full-scale invasion of Ukraine, as one example. think also people ignore the impact of “opportunity” in the decisions that our leaders make.
Just explaining all that around Putin’s decision to invade Ukraine. I think most people failed to understand the existential importance of Ukraine to Putin, and what he was willing to sacrifice in his decision to invade.
Most outside observers heard the warnings of crippling Western sanctions on Russia and assumed that Putin would not be crazy enough to risk the Russian economy in order to invade and capture Ukraine. But for Putin, Ukraine was an important enough prize to take that very risk.
We could also argue that he had a different information set or evaluated the risks differently – either he did not expect aggressive Western sanctions or, even if he did, he had spent the last decade building up Russian buffers, and assumed they provided enough insulation, should he decide (I would argue he decided long before) to invade.
But for Putin the opportunity presented itself in 2022. He saw the West as weak and divided, with limited military capability to intervene on Ukraine’s part. The US withdrawal from Afghanistan sent a signal that the Biden administration was weak and uninterested in foreign military adventures.
He saw himself as having leverage on Europe as it remained reliant on Russia for energy supplies – and he had spent the past twenty years buying and corrupting Western politicians and interests. On the issue of energy, he saw the energy card as potentially weakening with the carbon transition – the longer he left it, the weaker his leverage over Europe would become. He saw the Ukrainian military as relatively weak still, but rebuilding – and the longer he left it, the greater defense capability they would present, and more able to resist invasion.
And he still thought the Russian military were capable and had overwhelming superiority over its Ukrainian counterpart. For Putin, it was a now-or-never moment – in his mind, the stars aligned in 2022.
Others (not yours truly – I argued back as far as 2015 that a defining war between Ukraine and Russia was inevitable) simply failed to see that, or did not want to see the obvious. The obvious being the huge Russian troop build-up in 2021 and then early in 2022, and Putin even writing his essay in mid-2021 on why Ukraine was not really a state, and Russia and Ukraine were one nation. He even spelt out – quite literally – what was coming.
One might also look at Azerbaijan’s defining wars with Armenia in 2000 and then 2023, the latter in particular reflected opportunity. Opportunity from the fact that Russia, which had a security alliance with Armenia, was tied up in Ukraine and had little military capability to intervene against Azerbaijan, and its military backer, Turkey, which Russia needed to maintain access to markets given Western sanctions. But also, the opportunity provided by technology, and the advantage provided by Turkish drones. Relating all this now to events in the Middle East – and drivers for events from Oct. 7, at least. First, Israeli PM, Netanyahu needed an opportunity to turn the news cycle against his own political and legal problems building up to Oct. 7. This could have been a political disaster for him, given criticism of the lack of preparedness of Israel for that attack – on Netanyahu’s watch.
But events of October 7 provided an opportunity for Netanyahu by removing the constraints on Israel for military campaigns, against Hamas in Gaza, in the West Bank, in Lebanon, Syria and now Iran. Fortunately for Netanyahu, the Biden administration was weak, going into a difficult election. Biden faced internal pressure from the left of the party, more pro-Palestinian in orientation, and this forced Biden to adopt a much more hawkish pro-Israeli line. It gave Netanyahu almost Carte blanche to act in Gaza et al, with the one constraint then being not to escalate to an all-out war with Iran – Biden did not want higher oil prices as he headed to elections. But that removed the constraints on Netanyahu elsewhere – Gaza, West Bank, Lebanon et al.
And technology added to the opportunity for Netanyahu – which we saw in the pager attacks in Lebanon against Hezbollah, but also now against Iran proper. The same Western technological advantage seen in Ukraine – third generation NATO kit, beating fourth generation Russian kit, plus use of drones, AI et al, is also playing out for Israel against Iran.
Netanyahu escalated to attack Iran over the past few weeks not because Iran was closer to moving to build a nuclear weapon but because events and technology, and Iran’s own weakness, presented him with an opportunity for an all-out victory.
This was not about taking out the latent, but not real, nuclear threat but about removing a long-term strategic threat from Iran to Israel, and it’s about regime change. The opportunity was just too good for Netanyahu not to let up on.
Now we can debate whether or not the Trump administration was involved or supportive of the decision by Israel to strike. But whether it knew, or approved or not of the attacks, I think Netanyahu knew that this US administration contains so many ardent religious supporters of Israel, that whatever it did, there would be no sanction on Israel for its actions. And understanding the egotistical personality of Trump, he knew that as long as the mission was successful – which he was sure of – that Trump would eventually fall in line, and behind Israel, as he has done so far.
Now as events are transpiring, it seems that Israel does not quite have the military capacity to take Iran’s full nuclear capacity out, or to deliver regime change given the Islamic regime is entrenched, and has durability built over many years of being tested by the U.S. and its allies, plus Iraq under Saddam.
Netanyahu needs the US to complete the job – albeit it is unclear whether regime change will produce a better, more sustainable long-term outlook, and the experience there from US past intervention in Iran, Iraq, Libya, Syria, etc., is not good.
The question is whether Trump will join Israel now in its fight with Iran.Will the U.S. get involved?
Trump’s America First mantra for MAGA suggests no more foreign adventures. And this week, the likes of Bannon, Carlson, Gabbard, et al have pleaded with Trump to hold fire, and not get dragged into another Iraq.
But I sense here that Trump cannot help himself – and Netanyahu is playing to Trump’s ego. Likely the pitch from Netanyahu to Trump will be that this can be his place in history. By providing a limited military intervention, with limited risks given the Islamic Republic is on its last legs, Trump can save the world from Iran’s nuclear threat and free Iran of a brutal regime. It can be final payback for the Iran embassy hostage siege, for the US embassy in Lebanon and marine barracks bombings.
And while Trump’s peace efforts in Ukraine and Gaza are failing, Netanyahu will be presenting this as low hanging fruit and an opportunity for Trump, gifted to him by Netanyahu himself. Meanwhile, the Christian fundamentalists in the GOP, and the Iran hawks will be lobbying aggressively for Trump to seize the opportunity.
Can he resist in favor of cutting a diplomatic deal with Iran, which might fall short of the mark, and leave him open to criticism that TACO – that Trump had the ability to end Iran’s nuclear program once and for all, and to bring down the regime, a long run enemy of the US, and he bottled it?
I have my doubt, the opportunity, or temptation just looks too enticing for Trump.
• This article was first published in www.kyivpost.com
