Tension in the Middle East

The Groundwork Is Laid for a Vast New Conflict

The Middle East appears to be sliding into a war that may have already begun. At its center are archrivals Saudi Arabia and Iran, their proxies and U.S. President Donald Trump. Regional stability hangs by a thread. By DER SPIEGEL Staff




In normal times, the Officers Club on Riyadh's King Abdul Aziz Road is a rather secretive place. But last Wednesday evening, there was a line of visitors snaking away from its door. Arabic could be heard, along with English and a few fragments of French.

After the security inspection, visitors enter a darkened hallway, reminiscent of a movie theater, that lead to a lecture hall: blue plush seats in ascending rows facing a brightly lit wood-paneled stage. It is generally a place where senior military officers gather to discuss their secret plans, but last week, it played host to around 80 diplomats and several international journalists, there at the invitation of the world's most important oil exporting nation. Among them were high-ranking officials in flowing robes. It was a rather unique event: The Saudi military was putting its wounds on display to the world.

A half-dozen pedestals had been erected onstage to present evidence: large steel fragments that had been twisted and bent by the force of the explosion. The objects were the remnants of cruise missiles and drones, some of the weapons Saudis claim set the country's two biggest oil facilities on fire earlier this month.

The attacks represent an unprecedented humiliation for the Saudis and it quickly became clear in the Officers Club that the kingdom feels disgraced, angry and injured. It also became clear that the Saudis are certain who was behind the attack: "Iranian parts and components," says military spokesman Colonel Turki Al-Maliki as he walks briskly among the pedestals. It is, Maliki said, "without a doubt" that his country's archenemy on the other side of the Persian Gulf was behind the attack.

"How will you respond to the attack?" a journalist asked Maliki. Will it be a military response? "That is not for me to decide," the military man responded. At almost precisely the same time, though, a man who is instrumental to the search for a response landed in the coastal city of Jeddah, 950 kilometers (600 miles) away. And prior to his arrival in Jedda, that man -- U.S. Secretary of State Mike Pompeo -- made it clear how he saw the attack. He called it an "act of war."

But what, exactly, will be the consequence?

It was three months ago that the Iranian Revolutionary Guard shot down a $100-million American surveillance drone over the Strait of Hormuz in the Persian Gulf. Washington initially planned a retaliatory strike, but President Donald Trump called off the operation at the last minute, supposedly because too many Iranians would have died as a result. Instead, the U.S. military reacted with a cyber-attack against the Iranian Revolutionary Guard.

Now, the biggest refinery in the world has been attacked, and even if there is no unassailable legal evidence, there is much to suggest that Iran was behind it. "I would say all the evidence points to Iran, not just forensic evidence, but logically," says Vali Nasr, a professor at Johns Hopkins University in Washington.

The attack fits into the "pressure against pressure" strategy that Tehran has been taking against the U.S. since the spring. In recent months, tankers and container ships have been attacked in the Gulf of Oman, a U.S. drone was shot down and a British oil tanker was seized. And now, the attack on the heart of the Saudi oil industry. It is almost beside the point whether Iran led the attack or whether it was an ally from the region. What counts is that Saudi Arabia and the U.S. believe that Iran was behind it.

The Middle East appears to be sliding into a war and it may even have already started. It is a new kind of war, a 21st century conflict for which there is no formal declaration of war, no clear fronts and a wide variety of battlefields. There are attacks the provenance of which may never be known, and while some of the fighting is conventional in nature, much of it is not and involves drones in the air and viruses in cyberspace. More than anything, it is a confusing war, in which nobody really has control, not even those who are ostensibly leading it.

A trio of leaders is in the process of setting the entire region on fire. It includes U.S. President Trump, whose aggressive and meandering policy has pushed the already fragile region into chaos. It also includes Saudi Crown Prince Mohammed bin Salman, or MBS for short, a young and unscrupulous leader who is involved in a gruesome war in Yemen. Finally, there is Iran's revolutionary leader Ali Khamenei, a Shiite fundamentalist who has been toughened by the Islamic Republic's four decades of battle against the "great Satan" in Washington.

Trump had insisted that his strategy of "maximum pressure" would force Iran to its knees. Now that the country has reacted with counter-pressure, it is becoming clear that he has maneuvered himself into a corner. Trump cannot start new wars. If he wants to be re-elected in November of 2020, he cannot allow himself to be dragged into a bloody armed conflict in the Middle East. Thus far, he has not even delivered on his election promise to bring home the U.S. soldiers from Afghanistan and Iraq.

On the other hand, Trump cannot look weak when the Iranians and their proxies seek to provoke, something that hawks in his party have made abundantly clear to him. Lindsey Graham, the Republican senator from South Carolina, recently tweeted: "The measured response by President regarding the shooting down of an American drone was clearly seen by the Iranian regime as a sign of weakness."

The president is torn. Over a week ago Sunday, he wrote that the U.S. military was "locked and loaded." A day later, he said he had never promised to protect the Saudis. Then, on Wednesday, he threatened to use the "ultimate option" -- only to contradict himself one sentence later.

Does Trump even have to react? Striking back with military force goes against Trump's own political instincts, but the political pressure could become so intense that he no longer feels like he has a choice. The Pentagon has apparently come up with plans to attack Iranian missile launch sites and arms depots from the air. Another possibility, according to U.S. media reports, would be to attack the refinery in Abadan, which isn't far from the Persian Gulf and is one of the largest such facilities in the world. The Pentagon is also discussing sending more troops to the Gulf. Even attacking Iranian positions in Syria, like Israel has done in the past, would be a possibili

But does Trump want to go that far? After the shooting down of an American drone in late July, the president decided against a military strike in favor of a cyberattack targeting computers of the Iranian Revolutionary Guard. This option is now on the table again. But, of course, Trump knows that the hawks in Congress would consider it weak.

On the other hand, Iran would hardly allow a direct attack to go unanswered. Foreign Minister Mohammad Javad Zarif has already stated that an attack against his country would trigger an "all-out war." And Iran has no shortage of options to draw the U.S. deeper and deeper into a bloody military conflict. It could disrupt oil transport in the Strait of Hormuz with mines, or it could encourage Shiite militias in Iraq to set IEDs for U.S. soldiers. Hezbollah in Lebanon has rockets that can easily reach Israeli cities -- Tehran need only say the word. Any one of these contingencies would necessitate a response from the U.S. For Trump, it would be a nightmare.

Regional Rivalries

The conflict between Saudi Arabia and Iran has shaped the entire region for decades. On the one side is the Shiite-dominated Islamic Republic, which has been expanding its power in the region for years. Indeed, Tehran has been working to establish a continuous sphere of influence from Damascus to Afghanistan. To achieve its goals, it has aligned itself with regimes and segments of countries' populations that also adhere to the Shiite faith.

The Shiite are a minority in Islam, but they are spread across the entire Middle East, existing in Lebanon and even in Saudi Arabia. Tehran doesn't only support the Syrian regime of Bashar al-Assad, but also the powerful Hezbollah militia, a kind of state within a state in Lebanon that deploys fighters to participate in wars and finances terrorists. Even the nuclear deal between Iran, Russia, China, the U.S. and the EU did little to diminish the group's influence and ability to create unrest in the region.

On the other side is Saudi Arabia, the self-proclaimed leader of Sunni Muslims. It justifies its claims by pointing to the fact that two of Islam's most important sites, Mecca and Medina, are within its borders -- that, and the immense wealth the country accumulated through oil in the second half of the 20th century. Saudi Arabia, too, has supported militias, states and terrorist organizations in the entire region. In that, the two rivals are the same. Militarily, however, Iran is far superior -- even despite the billions of dollars worth of armaments provided to Saudi Arabia by the U.S. Just how little Riyadh is capable of accomplishing with its army has been made evident by the Yemen conflict, which the regime has been conducting for four years with unthinkable brutality, but little success. Saudi Arabia is afraid of Iranian hegemony in the region -- and is totally dependent on its American allies.

In recent years, Riyadh has won another, rather unexpected ally: Israel under Prime Minister Benjamin Netanyahu. The Sunni kingdom and the hardline conservative Jewish administration find themselves on the same side in their opposition to Iran. Israel is just as afraid of Tehran spreading its influence as Saudi Arabia is. This is why Israel has been waging a shadow war against Iran and the forces associated with it in the region for years, most of all in neighboring Syria. Netanyahu has been among the most vocal to call for American attacks against Iran's nuclear facilities and it is one of the reasons he has sought proximity to Trump.

Farewell from Tehran

Nowhere are the American president's contradictions more apparent than in the Middle East. Trump promised to end the endless wars of his predecessors, but at the same time, he abolished the Iranian nuclear agreement, which was supposed to bring peace to the region. He named the hawk Mike Pompeo as his secretary of state and he strengthened his country's alliance with Iran's archenemy, Saudi Arabia -- and didn't even waver when the crown prince fell under suspicion of ordering the murder of the journalist Jamal Khashoggi in Istanbul. Together with Saudi Arabia and Israel, Trump hopes to redraw the political map of the Middle East. But he can't be a commander and a peacemaker at the same time.

The attack against Saudi Arabia's oil fields came at a time when Donald Trump once again had to manage without a national security adviser. Mere days before the attack, the president fired the third person who had taken the job since Trump entered office, John Bolton, the cantankerous, mustachioed hardliner. Bolton has never been cagey about his preference for simply bombing the regime in Tehran off the map. In enlightened Washington circles, he is regarded as a trigger-happy hothead, though among many conservatives, he enjoys an almost mythical reverence.

The new national security adviser, Robert O'Brien, was until recently the special presidential envoy for hostage affairs at the State Department. He, too, is considered a hardliner, but he managed to ingratiate himself with Trump by apparently calling him the "greatest hostage negotiator that I know of in the history of the United States." When it comes to his stance on Iran, chances are O'Brien won't differ that much from Bolton.

The timing of the attack on the Saudi oil refinery -- mere days after Bolton's expulsion -- was interpreted by Bolton's fans as a farewell from Tehran. "Mr. Trump might also apologize to John Bolton, who warned repeatedly that Iran would take advantage of perceived weakness in the White House," wrote the Wall Street Journal's editorial board, which is typically loyal to Trump.

Wrong About MbS

For now, the U.S. government is desperately trying to form an alliance against Iran. The crown prince in Riyadh would, of course, be onboard; the Israelis probably would be too, maybe even a few European countries. "The attack on the refinery offers Foreign Minister Pompeo the chance to join forces with the Europeans," says Peter Rough of the Hudson Institute, a conservative think tank in Washington. This week, the international community has convened in New York for the UN General Assembly, with German Chancellor Angela Merkel in attendance along with French President Emmanuel Macron. Iranian President Hassan Rouhani is expected to address the assembly on Wednesday.

For weeks, Trump has been trying to arrange a meeting with Rouhani on the sidelines of the summit, but even if Rouhani were open to the idea, he can't do anything against the will of Ayatollah Khamenei. And the Iranians have made it unmistakably clear that they are not thinking of sitting down with Trump. "Such a meeting will not take place," a spokesperson in Tehran said.

The Iranians believe they have nothing to gain from a one-on-one with Trump. So why negotiate at all? They have not forgotten how they agreed to the nuclear deal, only to have Trump come in and declare everything null and void. Now they are demanding that Trump first loosen sanctions and return to the nuclear deal before they agree to any more talks.

Trump, though, isn't ready for that. But without doing so, it's going to be difficult for Trump to form a coalition against Tehran. Trump, after all, angered the Europeans with his withdrawal from the nuclear agreement, a deal that Great Britain, France and Germany had been trying to reach with Tehran for 12 years before finally drawing up a treaty, along with China and Russia, on July 14, 2015. Then along came Trump and destroyed their work with the stroke of a pen. When it comes to the conflict with Iran, Trump is now very much on his own.

There are also German-Saudi relations to consider. Ever since the murder of the journalist Jamal Khashoggi, Berlin has been at maximum distance to Riyadh. Merkel had originally placed high hopes in the young crown prince in Riyadh, even visiting him at his private home in Jeddah. But then she watched with great dismay as the man known by his initials MbS -- letters that have come to stand for "Mohammed Bone Saw" since the Khashoggi murder -- began to eliminate his opponents with increasing brutality and wage a war in Yemen without any perceivable consideration for the population. "I must admit, we were wrong about MbS," says one of Merkel's long-standing top advisers.

A Transactional Friendship

Trump, on the other hand, can be very forgiving as long as the price is right. He doesn't require his allies to have moral principles; it's enough if they simply pay up. To be sure, Trump did say Khashoggi's death was a "terrible" crime, but business was more important. Saudi Arabia had agreed to invest $450 billion in the U.S., Trump announced last November, seven weeks after the murder in Istanbul. He said it would be "foolish" to cancel the contracts. As long as Saudi Arabia buys American weapons, it can count on Trump's support.

This week, Trump again made clear what his friendship with Riyadh was based on: If he decided to respond militarily to the attack against the refinery, he said, he expected the House of Saud to participate. "They'll be very much involved, and that includes payment," Trump said.

But what good to Trump are a few billion dollars when presidential elections are next year? Trump's politics don't follow any principles, though he does have certain political instincts. Trump sensed that most Americans were sick of wars, especially as the reasons for waging them seemed to grow thinner with each new conflict. This was one of the reasons he was elected president in 2016.

There are still around 19,000 U.S. soldiers fighting in Iraq and Afghanistan, a fact with which Trump will have to contend in the coming election campaign. The Democratic presidential candidate Elizabeth Warren announced last week that if she won, she would immediately withdraw all U.S. troops from Afghanistan. And now the country is supposed to defend the thoroughly corrupt royal house in Riyadh?

"Donald Trump doesn't want a new war in the region," says Peter Rough of the Hudson Institute in Washington. Trump wants to make deals -- with China, with North Korea and, if possible, with Iran. However, deals can only succeed if pressure can be exerted during negotiations. Trump's problem is that the intensity of the economic sanctions against Iran can hardly be increased -- and yet Tehran still refuses to sit down at the negotiating table, belying Trump's claims that the regime is desperate to make a deal.

In reality, the opposite appears to be true: It's Trump who desperately needs a deal that he can present to voters before the election in November 2020. But his Iran policy suffers from an irresolvable contradiction: He walked away from the nuclear agreement, yet he's not prepared to force the rulers in Tehran to the negotiating table -- with violence if necessary. In turn, the Iranian government is taking advantage of this weakness. "Trump has basically painted himself into a corner," Iran expert Nasr says.

America's Weakness Is Iran's Strength

When the missiles struck the oil fields of the state-owned oil company Saudi Aramco in Abqaiq and Khurais around 4 a.m. on Saturday, most people in Tehran were still sound asleep. In the past few months, the residents of this huge metropolis have grown accustomed to crisis alerts in their immediate vicinity.

Again and again, Iran's Revolutionary Guard or its allies have provoked the U.S. with pinprick attacks, but so far, Washington has yet to respond. In Tehran, despite the tense situation, there is no real fear of war breaking out.

Tehran is counting on Trump not being able politically to afford another war, which is why they believe they are in a position of strength. The Iranian regime, likewise, has nothing to gain from a major military conflict. The Islamic Republic would not stand a chance if it were to engage the strongest military power in the world in conventional warfare and Iran's economy has been crippled by U.S. sanctions -- a major concern for Iranian citizens, many of whom can't even afford to buy meat anymore. The U.S. has hoped this pressure would force the regime to the negotiating table, though so far these hopes have been in vain.

The power of the Iranian regime lies in the vulnerability of the Americans and their allies in the region. And they let Trump know it.

The president's policy of escalation over the past year and a half has only strengthened the hardliners in Iran. After Trump withdrew from the nuclear agreement in May 2018, moderate forces within the Iranian government initially managed to implement a strategy of "strategic patience." They hoped the Europeans would take action that would mitigate the consequences of U.S. sanctions. When that didn't happen, the Iranians changed their strategy: Since the beginning of the year, Iran has been gradually backing away from the nuclear agreement.



Where the Real Power Lies

The hardliners are convinced there is only one way to get the U.S. government to loosen sanctions: They must drive up the cost of Trump's policy. "The goal is to show that the American strategy of maximum pressure has failed, and that the sanctions have not weakened Iran regionally but have created additional tensions," says Bijan Khajehpour, an Iran analyst and CEO of the Vienna-based management consultancy Eunepa.

He warns that an escalation of the conflict could further marginalize moderate forces in Iran and bolster the hardliners' political clout. The problem is that such a development would not only influence parliamentary elections next year and presidential elections in 2021, but also the decision over who should be the next revolutionary leader -- the decisive position in the power structure of the Islamic Republic of Iran.

Ayatollah Ali Khamenei has been the most powerful man in the Islamic Republic for 30 years, after succeeding the legendary revolutionary leader Ayatollah Ruhollah Khomeini, who led the overthrow of the Shah regime and kicked out the army of American advisers around Mohammad Reza Pahlavi. Khamenei is now 80 years old and is rumored to have cancer, making the question of his successor all the more pressing.

During the decades of his rule, Khamenei has leveled the balance of power between the different factions of the Iranian regime. For a long time, he ensured that neither the hardliners nor the moderates -- who would like to open the country through cautious reforms, a reversal of international isolation and an easing of tensions with the U.S. -- gained the upper hand.

But now, the hardliners are more powerful than ever before. Their leader, Qassem Soleimani, the head of Iran's elite Quds Force and a battle-hardened war hero, is the real architect of Iran's foreign and security policy in the region. What's more, the hardliners also occupy key positions in the judiciary and in the various religious councils that determine the country's policies.

A Loss of Face

The Iranian regime is made up of so many different factions that it is hard to identify who exactly gave the order to attack the refinery. Was Khamenei informed? Or would the Revolutionary Guard carry out such an operation without his explicit approval? These are questions that Western governments would like to find answers to.

Meanwhile, it is becoming increasingly clear that Iran's archrival Saudi Arabia is all bark but little bite. The Saudis know that without the U.S., they could never win a war against Iran and the recent attacks made clear their own weakness and military incompetence. Riyadh had invested hundreds of billions of dollars on Western military technology -- the six "Patriot" air-defense systems from the American manufacturer Raytheon alone cost around $6 billion -- yet they were apparently not even capable of protecting the country's most important oil plant.

Saudi Arabia is in crisis after the attacks on the oil fields, yet still, Crown Prince Bin Salman, the most powerful man in the country, has remained quiet. The prince met briefly with U.S. Secretary of State Pompeo, but has otherwise made himself scarce.

For MbS, the attack on the heart of the Saudi economy is a loss of face. He has presented himself as a strong man and a determined ruler ever since his father, King Salman, appointed him crown prince in 2017, thus transferring de facto rule over the kingdom to him. MbS enjoyed his role of young heir to the throne who was turning his country upside down. He gave women new rights and promised to liberate Saudi Arabia from its dependence on oil. Opponents were cast aside. But the discrepancy between ambition and reality has only gotten bigger in Riyadh lately. The prince has been steering his country from one crisis to the next, most of them self-inflicted.

A Quagmire in Yemen

A year ago, the regime critic Jamal Khashoggi was drugged and killed in the Saudi consulate in Istanbul, after which his body was chopped up with a bone saw and taken away. The kill team went about its work in such an amateurish way that some believed they were being intentionally conspicuous in order to intimidate anyone who would dare oppose the regime. But it's more likely that MbS simply has no one around him to curb his crazier impulses. Since Khashoggi's murder, MbS can try to present himself as a reformer as much as he wants -- many people around the world are still going to view him as a cold-blooded despot and a monster.

In Yemen, too, the young ruler has lost his way. MbS was still the country's defense minister, and had not yet been named crown prince, in 2015 when he ordered the intervention against Houthi rebels next door. At the time, the regime promised a lightning-quick campaign. All it would take is a few months, MbS boasted, and the Houthis would be expelled. Meanwhile, the war is now in its fifth year and has cost tens of thousands of lives, turned hundreds of thousands of people into refugees and caused children to die of malnutrition.

Now Saudi Arabia's closest ally, the United Arab Emirates, is pulling out its troops, mainly because it has achieved its goals of dominating the ports and the city of Aden. MbS, on the other hand, is stuck in a quagmire in Yemen, and now the Houthis have claimed that they were the ones to attack the refinery with their drones -- which hardly anyone believes.

MbS knows that he must act if he is to not appear weak and vulnerable. But he doesn't know how. Saudi Arabia doesn't have nearly enough well-trained armed forces to take on Iran, especially since its air force -- the backbone of the military -- is tied up in Yemen. Thus, MbS is at the mercy of Donald Trump. Former U.S. Secretary of Defense Robert Gates once quipped that Saudi Arabia "wants to fight the Iranians to the last American."

The Saudi security forces knew that the country's oil industry was vulnerable. But they expected attacks against tankers in the port of Ras Tanura or in the Strait of Hormuz, where ships transport one-fifth of the world's crude oil supply. If the strait were the artery of the world's energy system, the night-time attack went right for the heart.

The state-owned company Saudi Aramco processes roughly 70 percent of oil produced in the country at the attacked Abqaiq refinery, making it the largest such facility in the world. The second target, the Khurais oil field, is a so-called "elephant," as the biggest oil reserves in the world are referred to in industry jargon.

The precision attacks were able to abruptly put a stop to the flow of some 5.7 million barrels per day. With a single strike, over 5 percent of the oil that humanity needs on a day-to-day basis suddenly went missing. "What was a risk scenario has become reality," says energy expert Daniel Yergin, vice president of the Washington, D.C.-based analysis company IHS Markit. Never before had a single event deprived the global market of such a large amount of oil. Even in fall 1973, during the first large oil crisis, Arab oil states only withdrew around 4.3 million barrels from the market each day -- an intentional move at the time.

The U.S. was dependent on Saudi oil for decades, with the foundation for the cooperation being laid by President Franklin D. Roosevelt, who met in February 1945 with King Abdul Aziz Ibn Saud on the heavy cruiser USS Quincy in the Suez Canal. The meeting secured U.S. access to the largest oil fields in the Gulf region.

But the U.S. has since managed to free itself of this dependence. Thanks to significant advances made in fracking technology -- which is environmentally controversial but economically lucrative -- the U.S. now plays a leading role as a supplier in the global energy industry. The country produces 12.1 million barrels of oil a day, putting it at the very top of the list, ahead of Russia (10.7 million barrels) and Saudi Arabia (9.9 million barrels).

Bad News for China

When the markets closed last Monday, American oil companies were among the biggest winners, with share prices of Hess climbing by 11.2 percent and that of Apache by 16.9 percent. They benefit from higher crude prices and can now ramp up production to take full advantage. In other words, on the short term, the U.S. has been a beneficiary of the attack on the Saudi oil industry. Why, then, should American soldiers risk their lives?

The question is now how long it will take for Saudi Aramco to repair the facilities and ramp production back up to pre-attack levels. The company was quick to promise that things would return to normal by the end of September. But the folks at IHS Markit believe that it will most likely take between one and four months.

Until then, both consumers and suppliers will have to rely on their reserves to plug the supply gap. Huge amounts of oil are stored in tank farms around the world. Saudi Arabia alone has sufficient storage capacity to ensure its normal export supply for 35 days.

It used to be that the U.S. was the primary victim of such a massive shortfall, but these days, it is China -- as the largest consumer of oil from the Persian Gulf -- that has the biggest problem. Furthermore, Beijing is right in the middle of a trade war with the U.S. The country can hardly afford the additional economic strain of rising oil prices.

Should this attack remain a one-off, the global economy will likely be able to absorb the shortfall. The current price of $64 for a barrel of Brent is tolerable and is still around 20 percent less than it was at this year's peak in April. But if further attacks follow, and potentially even counterattacks, the risk premium on oil is likely to skyrocket, which would pose significant dangers to the global economy. And for the American economy, on which Donald Trump's chances for re-election rest.

Europe Has Tried, and Failed, to Help Trump

Can the attempt to repair the damage to U.S.-European relations on Iran policy actually succeed? There certainly hasn't been a shortage of admonitions from the U.S. side. "Now is the time for our European allies and Middle East friends to step up and lead," tweeted U.S. Ambassador to Germany Richard Grenell earlier this month. "Iran's behavior is not just a problem for the US."

In Berlin, though, such reprimands produce little more than eye-rolling. It was Trump, after all, who escalated the situation to its present state by backing out of the Iran deal, say Berlin officials. And now, having maneuvered himself into a corner, he is begging for help.

From the European perspective, an attempt has already been made to build a bridge to the Trump administration. At the G-7 summit in Biarritz in late August, French President Emmanuel Macron tried the risky maneuver of inviting Iranian Foreign Minister Mohammad Javad Zarif to the summit, knowing full well that the U.S. government had placed Zarif on a terrorist list. Macron's invitation could have ended up backfiring, but the French president presented Trump with the idea during a private lunch right at the beginning of the summit. Macron was apparently seeking to take advantage of Trump's preference for making deals.

Macron's stunt was successful insofar as Trump didn't turned his back on the summit due to the presence of Zarif. But ultimately, nothing came of it. Macron presented the idea of providing Iran with a 15 billion-euro loan to help the country's struggling economy. But Trump rejected even this small concession and Zarif was forced to head back to Tehran with nothing to show for his efforts.

A Bad Situation Gets Worse

Now, following the attack on the Saudi refinery, the situation has become even more intractable. Trump's initial reaction was to ratchet up sanctions against Iran even further, a move that makes direct talks even less probable. There likely won't even be a meeting this week in New York between Pompeo and his Iranian counterpart Zarif, Berlin officials believe.

On the other hand, the Europeans aren't particularly interested in joining the U.S. in upping the pressure on Tehran. The Americans apparently want to present a dossier that is supposed to prove that Iran was behind the attacks on the Saudi oil industry. But the Germans, at least, aren't likely to level accusations against Tehran. Even if it should emerge that the drones were, in fact, constructed in Iran, that proves nothing, says a government source in Berlin preemptively.

Comments from Paris have also been guarded. Following a telephone call with MBS, Macron announced he would be sending French experts to Riyadh in an effort to learn more about who may have been behind the attack. But the Élysée strategy has not changed in any meaningful way. De-escalation should be the priority, French Foreign Minister Jean-Yves Le Drian says.

Chancellor Merkel, for her part, is intent on avoiding being pulled into a military adventure by Trump. Last Tuesday, she called on the American president to return to the Iran deal. In private, German diplomats have begun describing their U.S. counterparts as having little idea as to where the administration intends to go.

"I can't tell you much," is a standard response in conversations with leading American diplomats, they say. Or: "Our policy is currently being reviewed." Indeed, they say, it would seem that even senior Washington officials don't really know what Trump actually wants.


By Christiane Hoffmann, Alexander Jung, Susanne Koelbl, René Pfister, Maximilian Popp, Alexandra Rojkov and Britta Sandberg

Quantum Economics

By John Mauldin

• All men are mortal

• Socrates is a man

• Therefore, Socrates is mortal

What Will It Take to Rescue Argentina’s Economy?

University of Pennsylvania's William Burke-White and Manuel Balan from McGill University discuss Argentina's upcoming election and the economic challenges facing the country.

 

Argentina’s economic crisis has reached a tipping point with all indications that the reforms begun by President Mauricio Macri are failing, kicking the can down the road to a new government that will be formed after a general election set for October 27. Macri’s bid for a second presidential term was imperiled in primaries on August 11, when he ended up 16 points behind the ticket of left-wing Opposition leader Alberto Fernandez with Cristina Kirchner as his running mate for vice president.

The primaries are generally seen as an indication of the outcome in October. Investors panicked, fearing a return to the populist policies of the previous regime of Kirchner. They triggered a free fall in stocks and bonds, and rush for dollars, weakening the Argentine peso by about 20% since then.

Macri responded last week by imposing new restrictions on foreign currency purchases in a bid to stabilize the financial markets. In mid-August, rating agencies Standard & Poor’s and Fitch had downgraded Argentina’s sovereign debt, and raised fears of a sovereign debt default after the Macri administration failed to roll over $100 billion in short-term debt with the private sector.

Repeated Rescues and Bailouts

Argentina has come to “the verge of collapse” every few years or at least every decade, said William Burke-White, law professor and director of the Perry World House at the University of Pennsylvania. Each time, “the Argentine people have looked to Peronist governments as a kind of rescue and bailout,” he noted.

Peronism is the term used for the political ideology called “justicialism” that was propounded by Juan Peron, who was Argentina’s president for three terms between 1946 and 1974, and that of the Justicialist Party he founded in 1947. Justicialism rejects communism and capitalism, and stresses social justice, economic independence and political sovereignty; it is generally seen as worker-friendly.

However, the policies successive of Peronist governments have landed the country in trouble, according to Burke-White. “What we’ve seen in Peronist governments is an increase in social spending and policies that improve people’s daily lives, usually at the expense of the Argentine economy over the long term,” he said. Argentina’s late president Nestor Kirchner, who served between 2003 and 2007, and his wife Cristina Fernández de Kirchner, who succeeded him and was president until 2015, followed that policy, which many have seen as left-wing populism.

“It’s not surprising that as the economy starts to spiral downward, people are looking in the next round of balloting in October to the Peronist partnership between Fernandez and Kirchner to rescue them once again,” Burke-White noted.
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According to Manuel Balan, professor of political science and international development at McGill University in Montreal, it is premature to determine whether the Peronism that Argentinians now seek is “a good idea or a bad idea.” He noted that Peronism is neither a leftist nor a right-wing movement, and that it has “a populist feel to it, even though not all Peronists are populists.” Even so, he agreed with Burke-White that “people are turning towards Peronism in a moment in which the economy has gone south over the last few years under the Macri administration.”
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Argentina’s GDP of about $500 billion contracted 2.5% in 2018 and is expected to shrink a further 1.3% this year, according to a World Bank report. Inflation has ranged between 48% and 57% this year. The peso had plunged nearly 24% against the dollar since Macri’s loss in the primaries; it recovered some ground after last week’s announcement of capital controls.

Macri rode to power in 2015 after promising to revive the economy following an initial austerity hump he hoped Argentines would absorb. He held out hopes of replacing the alleged corruption and free-spending populist policies that marked the Cristina Kirchner administration, which are blamed for Argentina’s economic woes. Last year, he also persuaded the International Monetary Fund to provide Argentina $57 billion in a bailout, even as Argentinians have blamed the IMF for its economic crisis in 2001; the IMF has since acknowledged its failed role at that time.
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Macri’s plan could have been successful if Argentinians were prepared to make some short-term sacrifices. However, the country was facing shortcomings elsewhere in the economy in addition to a debilitating drought last year. Marci’s plan was to cut spending, which would entail a period of adjustment with increased poverty and unemployment. The economy would then be in better shape to attract international investors.

“There was going to be a rain of external investment in the country that would help the economy grow,” said Balan. Expectations were for those gains to “trickle down to people eventually and solve what were going to be short-term economic issues that these adjustment policies would generate,” he added. “This cycle was never actually realized.” The Macri government was able to convince the International Monetary Fund to grant a $57-billion loan deal, “but foreign investment never really made it to Argentina in any significant way,” he said.

Burke-White agreed, and said that the initial plans of the Macri government “made good sense” in that they were about stabilizing the economy, cutting spending and attracting investment. They worked out “relatively well” in the early stages, but they also called for sacrifices, he noted. “Those stages are painful. Those involve budget cuts. Those involve paying back bondholders in a way that’s necessary to re-engage the global economy, but they put strains on the domestic population.”

As luck would have it, a drought in 2018 hurt the economy, even as the Macri government was dealing with a fiscal crisis, Burke-White noted. “[Those problems] hit at exactly the wrong time so that the broader plan could never be realized, and Macri found himself in a very difficult position earlier this year.” Burke-White has served as an expert witness in litigations involving international investment disputes for Argentina, among other countries.

According to Burke-White, Macri’s poor showing in the latest primaries reveals that he has “alienated really both sides of the Argentine political debate.” A key factor in that was his about-face on capital controls. “Macri had long been in favor of removing the capital controls that were in place under President Kirchner before him with the goal of allowing people to save in dollars and allowing businesses to operate and to exchange currencies freely,” he said. “And then he had to reverse course. [He had to] take a big IMF loan and put in place the same currency controls that he had been advocating against for a long time because the economy was in such dire straits.”

The new capital controls limit purchases or bank transfers of foreign currency by Argentinians to $10,000 a month, and those by nonresidents to $1,000 a month while disallowing bank transfers abroad. Corporations would need prior authorization before purchasing foreign currency, and exporters are required to repatriate all foreign hard currency earnings, The Wall Street Journal reported.

Macri had no choice other than to reimpose capital controls, according to Burke-White. “There’s not enough money in the Argentine banks to continue to prop up the peso and to meet external demands for dollars,” he said. “Every time Argentina goes into one of these downward economic spirals, it tends to impose some version of what in Argentine parlance is called a Corralito — restrictions on removing U.S. dollars from the country to protect its bank accounts, and preventing people from changing their pesos into dollars.”
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Argentines encountered Corralito for the first time in December 2001, when the government almost completely froze bank accounts and dollar withdrawals to prevent a run on banks, initially for three months, but it was officially withdrawn only a year later. Although the latest capital controls are a milder version of what was in place under Kirchner four years ago, “they’ve come back and hit [Macri’s] political base because part of his promise was this liberalization,” said Burke-White.
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The capital controls have a wider impact than one might imagine. “Argentines are smart and have saved money in dollars over the years because inflation always ends up spiking again at some point,” said Burke-White. “So, this hits both the small Argentine investor or just an Argentine family trying to save money, as well as the business sector that needs to be able to move capital in and out of the country to function. Macri’s early administration was built on removing those capital controls because investors want to be able to expropriate their capital and individuals want to be able to save in dollars.”

Unrealistic Expectations

According to Balan, it was unrealistic of the Macri government to expect foreign investors to come rushing in. Weak infrastructure gets in the way, “and foreign investment rarely will help solve those issues,” he said. He pointed, for instance, to Argentina’s oil sector, which has vast reserves that have not yet been exploited. “They require investment in order to do so.
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[However], that external investment is not going to provide that infrastructure of roads, of trains, of different things in order to actually get that oil out in an efficient and effective way.” In one particular case of the Vaca Muerta oil field, foreign investment did come in, “but then everything around it [such as] the roads were so messed up that they couldn’t really take advantage of that,” he added.

The Trump administration’s announcement last week of a $400 million investment to finance roadway projects in Argentina “is a drop in the bucket,” said Balan, adding that the country’s infrastructure problems would need more than one government term to be solved. “This is not a four-year thing. It is something where investment needs to come for a long period of time, and in a steady way — there needs to be a long-term project,” he explained. “And the words ‘long-term project’ in Argentinian politics are almost oxymoronic.”

Burke-White traced the “false hope of foreign investment” to a deeper aspect of how Argentines’ perception of their country conflicts with ground realities. On the one hand, Argentina “has an awful lot going for it,” he said, citing its “incredibly well educated and engaged population,” a robust agricultural sector, and energy resources. “Historically, it has been among the richest countries in the world at times,” he continued.
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“So, it has a population that expects to be in in the G-20 and part of the global economy in a big way and to reap the benefits of that, but it also continues to miss out on long-term infrastructure development, and on the stability of an economic system that is necessary for [such] investment to flow and flourish. That tension makes it politically even harder [to address] than in typical developing countries. Argentina has to confront this dual reality of a population that expects to be wealthy and part of the world and an infrastructure, and an economy that looks very different.”
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The Re-emergence of Cristina Kirchner
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One twist in the emerging political landscape is the re-emergence of Cristina Kirchner as Fernandez’s vice-presidential running mate. While she was expected to be the main challenger to Macri, she made a surprise announcement in May that she would join Fernandez as his running mate. “Cristina realized that she was a very polarizing figure, loved by some, despised by others,” said Burke-White. “Coming in as vice-president avoids some of the anti-Cristina movement that would be there if she were running for president.” She has also been able to overcome 11 indictments on charges of corruption, he noted.

Both Burke-White and Balan said Fernandez will not be a puppet to Cristina Kirchner. “But the relationship there is complicated,” said Burke-White. “It leads to even greater instability in the markets because no one quite knows whether they’re going to get a Kirchner presidency Take 3 or if Fernandez really represents something new, which is what he is claiming as we move toward the final balloting.”

Short-term and Long-term Challenges

Burke-White put the challenges facing Argentina’s economy in two buckets: short-term and long-term. In the short run, one problem is the political uncertainty in the run-up to the October election, which he hoped would go away if Fernandez wins. The other short-term problem is a fiscal crisis the Macri government faces. “It doesn’t have money in the bank accounts, and that is going to get exacerbated to some degree when Fernandez comes to power, because he will be expected to placate some of his political support, particularly from the Kirchner side of the ticket that’s going to expect an increase in government spending,” he said.

The longer-term challenge is to restore the Argentine economy and to get it moving forward, said Burke-White. “That needs political stability and political economic discipline over time. Fernandez has to figure out a political way to achieve the goals that Macri set forward four years ago, but in a much softer and more populist version. The question is: Is he willing to do that? Is that where he wants to take the country? And is he politically able to do it?”
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According to Balan, while Fernandez will face challenges both on the political front and to his economic policies, “he is uniquely positioned to navigate [them].” Fernandez was a key political figure in the Nestor Kirchner administration (2003-2007), which was successful on many levels, he noted. “[Fernandez] has the Peronist credibility. He has so far the support of Kirchnerism,” he said. At the same time, Fernandez positioned himself against Cristina Kirchner and Macri when he disagreed with their policies, he added.
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Fernandez is “a more moderate, centrist version of the Kirschner dynasty, in a sense,” said Burke-White. He noted that if Fernandez were to win, he would face pressures to increase subsidies and government spending. Balan expected a Fernandez government to impose “further controls on the dollar,” continuing on the same path as the Macri government on that front. Fernandez, it appears, wants to retain the peso’s value at a competitive level that would meet his goal of stimulating both industrial production and agricultural output, he added.

“But the question is, can he invent slightly different economic policies that aren’t going straight back to Kirchnerism and that also aren’t the austerity that Macri represents?” Burke-White wondered. “We don’t know whether he has the political wherewithal or if there is an economic path that sort of marries those two agendas.”

The myth of a unified world populism

Donald Trump will find it ever harder to corral his supposed brethren from London to Manila

Janan Ganesh


India’s Narendra Modi has a good relationship with US President Donald Trump yet the US has still stripped Delhi of preferential trade status © AFP


Populists are amassing an empire on which the sun never sets. Leaders of their stripe govern as far east as the Philippines and as far west as the US. The European branch now has no less a nation than Britain as its unofficial garrison. When Jair Bolsonaro was elected president of Brazil almost a year ago, several more time zones were folded into the widening realm.

Naturally enough, then, liberals fear encirclement and subversion by a kind of Popintern, run or at least egged on by Washington, just as the Comintern took orders from Soviet Moscow.

The idea of liberalism penned in under an American-led siege is not the Bizarro World plotline it seems. Donald Trump really has been friendlier with strongmen than with more conventional allies. The US president’s former aide Steve Bannon really is working on what he calls a “global populist movement”.

The trouble is that the first and second of those words repel each other like magnets. Several years after its breakthrough, we still talk of populism as something of a monolith. To continue to do so is to give it too much credit. What its adherents have in numbers and geographic spread, they lack in cohesion. And of all their differences, the deepest is between the US and the rest.

It should not need saying that what Mr Trump jeers as “globalism”, much of the world thinks of as Americanism. To be a nationalist in, say, France or parts of Asia, is to renounce a recognisably American (or least Anglo-Saxon) cast of mind: commercial, individualist, morally liberal.

Populists in these places might look to Mr Trump for lessons in how to win elections. They certainly value the cover he gives them for behaviour his predecessors often scolded and punished. But there will always be a limit to their affinity. Their interests can only overlap so much with a man who sees the world as a web of potential openings for US business and US power.

This tension does not just exist in theory. Examples of intra-populist schism are multiplying.

Few world leaders resemble Mr Trump in style and idiom as much as the Philippine President Rodrigo Duterte. And still the pair clash over the latter’s closeness to China.

Few get on with Mr Trump as naturally as Indian Prime Minister Narendra Modi. And still the US has stripped Delhi of preferential trade status. As for Turkey’s President Recep Tayyip Erdogan, he has upset the White House by turning to Russia for defence purchases.

Even in Mr Trump’s dealings with the UK, cracks show as soon as the superficial bonhomie gives way to anything of substance. British voters, fans of Brexit included, will not countenance a trade deal that exposes the National Health Service to what they see as a feral American profit motive. Their government ignores them at mortal political cost.

The wonder is not that such splits happen among populist kin. The wonder is that they do not happen more often. They probably will.

Populism is not much of a binding agent. The fact that two governments share a commitment to the nation state and a kind of tonal belligerence is not enough to bind them. If anything, it makes them likelier to assert their raw interests until they clash.

No doubt, populists can act as spoilers of the existing world order. But whether they can forge another one, with a Davos or Bretton Woods of their own, must be more doubtful. Their animating premise, after all, is the essential separateness of nations. Their diplomatic style — that air of permanently offended amour propre — makes for inherent rockiness. The idea of a multinational populist movement is not quite a contradiction in terms, but it is getting there.

There are lots of populisms. To speak of them in the terrifying singular is alarmist.

Even if populists could act in something approaching concert, the US will always make for an awkward leader. Versed in the history and thought of the European right, Mr Bannon must know how much it fears the debasement of the continent’s culture by the capitalism that Mr Trump incarnates.

When the leaders of Singapore and Malaysia asserted “Asian values” in the 1990s, it was likewise in opposition to a US-flavoured materialism. Whatever their personal fondness for Mr Trump, populists in these regions still have the same qualms about American influence. He will find it ever harder to corral his supposed brethren from London to Manila.

When the Soviets found worldwide revolution too difficult, they settled for the consolidation of their ideology at home. It was more than enough to be getting on with. Mr Trump will end up in the same place. Call it populism in one country.