William D. Johnston

Chairman

Economic Commentary

As you can imagine, recent events such as the US drone attack that killed a top Iranian military commander, Qassem Soleimani, in Iraq has caused many questions from clients and readers of our newsletter. Nick Juhle and his research team have offered their perspectives and advice with respect to the economic and investment implications of increasing military actions between the US and Iran, and I will concentrate on the political origin of the conflict.

While we have referenced the Islamic schism in several previous articles over the past two decades of US military involvement in the Middle East, it is particularly important to refresh that discussion with respect to Iran. Before we get into the historical facts of the Islamic schism between Sunni and Shia, let us accept some fundamentals that apply to all religions throughout the history of our globe.

In every religion, there is a bandwidth of believers and followers. One end of the spectrum begins with those that identify with but do not regularly practice their faith. The polar opposite of that spectrum consists of devout faithful whose practice of their faith consumes their entire being, inclusive of family, social, political and economic selves. To those on this end of the spectrum nothing is compartmentalized, and secular life, or life outside of the faith context, is not acceptable. Their faith is clearly defined, and therefore fundamental in nature to them and dogmatic in application with no tolerance for interpretation. It is their fundamental devotion to the concept that non-believers are a threat to their faith and must either be converted to their interpretation of belief or eliminated. Because there is no tolerance for secularization, belief becomes the need for power and power becomes absolute. Every religious war ever fought has been done so in the thirst for power to control the faithful and to eliminate any secularization.

In AD 632, the death of Islamic prophet Muhammad created a void in the Islamic world order. History has revealed the dispute that occurred after Muhammad’s death and the multiple wars fought in the search for the most pure leader of Islam. Those wars resulted in the creation of two major sects of Islam, Sunni and Shia, and the followers of each sect believe their practice to be the most pure devotion to Islam, though both follow the fundamental teachings of the Quran. Globally, the population of Sunni followers represent 85% of Muslims while 15% are identified as Shia. Within each sect of Islam are the full spectrum of believers that would be found in any religion.

The two preceding paragraphs are important relative to our understanding of our two-decade-old military intervention and involvement in the Middle East. It is also important to understand that while Muslims identify as either Sunni or Shia there are many smaller sects within each that impact how individuals practice and live out their lives. Neither the Shia or Sunni sects are monolithic in religious, political, social or economic lives. That said, there are fervent fundamentalists in both the Sunni and Shia sects that view their faith role as converting all to their faith view and practice of religious life. For them, their existence is dogmatic purity at all costs.

The major players of the geopolitical life of the Islamic Middle East are Saudi Arabia, Iraq, Iran, Afghanistan, Kuwait, Turkey, Syria, the United Arabic Emirates, Bahrain and Qatar.

Over the past two decades, the vast majority of the Middle East Islamic conflict has been focused on Afghanistan, Iraq, Iran, Saudi Arabia and Syria. The source of the conflict is comprised of both secular and political power and the resolution of what Islamic sect will dominate and control that concentration of power.

Sunni dominated countries are Saudi Arabia, Kuwait, Turkey and Afghanistan while Shia populations dominate in Iran and Iraq. Among the dominant political players of these sects of Islam, Saudi Arabia is a monarchy, Iraq and Afghanistan have elected representative democracies and Iran is ruled by Islamic clerics who have ultimate authority over the Iranian elected legislative body and President.

The Taliban, Al Qaeda and ISIS fundamentalists are all Sunni in Islamic sect identification and all require absolute adherence to Sharia law. They differ in origination and goal. Al Qaeda believe all non-Islamic societies are a threat to Islam, and therefore, are enemies to be defeated. ISIS believe that fundamental Sunni Islam governed by Sharia law must return to Levant, a geographical area of Syria and Iraq that pre dates the creation of both of those countries and that geographical return to their Islamic roots will be the Caliphate that will rule all of Islam. The Taliban, while equally adhering to Sharia law, believe in a tribal system of government rooted in their Pashdan cultural lineage. While bound by Sunni sect and Sharia Law adherence, their goals and origins make them both allies and sometimes combatants.

History is important. For over two decades, the United States has been politically, economically and militarily involved in the war between Sunni and Shia in the Middle East. From time to time our interest has been economic (oil). At other times it has been focused on larger issues with Russia (Afghanistan became Russia’s Vietnam due to our support of Afghan rebels which evolved into the Taliban). In the last two decades, our interest became our military intervention to overthrow Saddam Hussein in Iraq, and stabilize Afghanistan to wipe out terrorist threats to the western world.

During our economic and military efforts in the Middle East over these decades, for a variety of specific reasons, the United States became viewed as a defender of Sunni and an enemy of Shia Islamic sects.

Iran, which is Shia sect dominated and ruled by religious clerics since the Shah of Iran was deposed, has consistently opposed any Middle East involvement by the United States. Our support of Israel and opposition to any nuclear advancement by Iran has amplified their feelings of Shia oppression. The recent multinational coalition to defeat ISIS allowed for increased stabilization of Iraq, but also allowed for increased political advancement within Iraq by Shia politicians who were becoming a larger majority in the Iraq legislative body. While Shia political influence was growing in Iraq, the relationship between the US and Iran continued to destabilize as previously negotiated nuclear agreements became fragmented and coalition-led economic sanctions drastically reduced Iranian GDP growth. With ISIS drastically weakened and United States–Taliban negotiations for Afghan stabilization progressing, Iran was becoming more desperate to be relevant in Middle East leadership while also finding leverage to end the economic sanctions that were increasing internal protests within Iran. Several Iran led and financed military actions aimed at Sunni countries deemed favored by the US, as well as actions taken at US forces in the region resulted in Qassem Soleimani’s death from a US initiated drone strike while he was in Iraq. The reaction thus far from Iran has been as expected. Revenge will be planned. Iraq’s increasingly Shia dominated government is aligning with Iran and requesting all US troops to leave their country. The future, of course, remains unclear. Will the United States solve a war within Islam that dates to AD 632? No, we will not. Will Iran’s religious clerics be able to retain control of Iran’s political leadership? The answer is not clear. What is somewhat clearer is that radical Islam, as practiced by the Taliban, ISIS and Al Qaeda, has been weakened substantially. What we also know is that economically destabilized countries are active breeding grounds for growth in radicalization and extremism.

The Sunni dominated countries within the Middle East are also the most economically stable and advanced countries in the region. They are in a position to continue the modernization and economic growth that limits the power of radicalization. The leadership of that modernization must begin in earnest with Saudi Arabia: a country experiencing its own issues with humanitarian rights. Currently, the standoff between Iran and the US is military in nature, how it progresses is yet to be answered. The diplomatic channels between the US and Iran will be more effective if the diplomatic channels of Iraq, Saudi Arabia, Turkey, Afghanistan and the UAE are actively engaged with Iran.

Coronavirus Weekly Update:

As of March 22

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