ISIS and the Regional Economy

Burning oil well

Moving away from the apocalyptic media coverage of events unfolding in Iraq, it is difficult to gauge, what the rise of ISIS means for the region.

There is no doubt that ISIS seems like Al-Qaeda on steroids. A deeply intolerant, narrow minded, impracticable political movement, which unfortunately controls large swathes of Syria and Iraq.

Is it a direct threat to the West? It surely will threaten Western interests, but that doesn’t mean there is an immediate threat to the UK or US. I find it hard to believe that jihadis that leave our shores, will want to return to the UK. Many of these ISIS volunteers are misfits in society, dreamy eyed idealists in search of an adventure.

What I find more interesting is the impact ISIS will have on the economic landscape of the Middle East. ISIS are well funded, media savvy, certainly unlike the Taliban of the 1990s’ banning all forms of media. They seem to revel in shock and awe of violence and brutality.

ISIS are acutely aware of the economic riches that both Iraq and Syria proffer. They already control around 50% of the oil fields and refineries in Syria. This is relatively minor compared to the riches on offer in Iraq. Even then, despite successes in the north and centre of Iraq, ISIS oil revenues from Iraq are estimated at around $720m annually. Iraq’s crude oil exports in 2012, were around $75bn, making ISIS’s share a drop in the ocean.

It is clear that ISIS has a lot more scope to expand and while it does control significant territory, much of it is sparsely populated desert, or cities with little economic significance such as Ar-Raqqa. Yes it has taken over Mosul, but Mosul has been of little significance (economically or politically) since the First World War.

Threats

The main losers from any expansion in ISIS power are the autonomous Kurdistan government, the Iraqi Central Government and Turkey.

Turkey has been a huge investor in Iraq and Kurdistan in particular. It has contributed greatly to the rebuilding of the Kurdish economy and has benefited with increased trade from that region and the securement of contracts (especially construction).

For obvious reasons therefore, Turkey stands to lose from any further plunge into civil war as it exports $12bn to Iraq annually (its second biggest export partner).

Recent comments from Turkeys Economics minister stated that the fall of Mosul was unlikely to affect the Turkish economy, and so long as there were no issues in areas such as Sulaimaniyah and Erbil (in Iraqi Kurdistan).

As opposed to other rebel groups in Syria which are funded by Turkey (and its allies), it would be impossible for Turkey to control ISIS and do business with them. Recent comments from the ISIS hierarchy calling on Istanbul to be liberated in the name of the caliphate sent shivers down the government’s spine.

Of course the biggest loser, is the central government in Iraq which has seen its authority brazenly challenged by the extremists, and it will be keen to beat them back. However it is very unlikely that Saudi or its western allies will allow its authority to further crumble, and allow ISIS to simply walk in. The most glaring reason is, they don’t want them controlling such huge oil revenues. Aside from the fact, that if they do, it is very unlikely they will be re-investing the income in social welfare, more likely to armaments! There is the very real and immediate threat they will destabilize crude prices, something the Kingdom is never appreciative of.

This has already been borne out by sabre rattling in the West and Saudi Arabia talking about the need for intervention. My own personal view is that if there is a concerted military intervention, Isis will morph into something far more extreme. Can you imagine ISIS on steroids? Al-Qaeda mark 3? It is deeply horrifying.

However in the interim what is patently obvious is that ISIS will not be allowed to significantly take over any of the significant economic infrastructure

Safe Haven Flows

There is a direct correlation between tensions in the Middle East, and rising property prices in Dubai and the Gulf States.

Dubai is to the Middle East, as London is to Europe. Any whiff of trouble and you have safe haven flows pouring into the tiny emirate. Of course this is an over simplistic analogy. Central London real estate is THE safe haven of choice for the world’s rich. However it has become slightly more difficult for non-EU citizens to purchase properties in London. Firstly prime central London property prices have increased by 60% over the previous 3 years. A one-bed apartment in South Kensington would fetch you £500k in 2011, it is more like £800k now. Then there has been an increase in stamp duty and the FCA is further increasing regulation.

Dubai has a few positives and negatives. On the positive side, barriers to investment are significantly lower than London, so you can purchase a 2-bed property in an affluent area for a fraction of the relative substitute in London – or for that matter in Hong Kong and Singapore. Secondly it is a far easier place to do business, and though regulation is tightening up, it is not as onerous as in London.

Of course the primary downside is that it suffers from greater cyclicality in pricing as opposed to London – the 2008 crash is testament to that.

But it is often – the first stop at the very least – refuge for the middle/higher income populace of the region fleeing from conflict. These factors create a ground reality whereas the mirage of the property boom in noughties didn’t.

And what is good for Dubai, will have a knock on effect to all the other Gulf States, such as Abu Dhabi, Qatar et al.

Conclusion

There is a threat of ISIS further destabilizing the status quo in the Middle East. However I see them confined to their desert strongholds, and find it hard to see them taking over the Iraqi central government. The solution in Iraq is political; the Sunni tribal leaders have thus far either stayed on the sidelines or tentatively supported ISIS. This is not due to any great love of ISIS or its ideology, but due to perceived discrimination by the Iraqi central government, which they see as serving Shia interests. These Sunni tribal leaders will be key, and I can see them behaving in a similar manner to how they did in 2008 during the Sunni uprising of Iraq when they withdrew support for Al-Qaeda and its affiliates.

Turkey stands most to lose, however it also has the most to gain. Iraq is far more important to Turkey than Syria, and therefore Turkey will always look after its interests there. It is already visible that Turkey is becoming more lukewarm in its support of Syrian rebels, lest arms inadvertently fall into ISIS hands. The Kurds in the North who have been more or less independent since the 2003, have an opportunity to negotiate for more concessions from Baghdad. This will allow them to negotiate directly with Turkey – it has already been doing so but fitfully. If this happens then Turkey will be the major beneficiary, as it will undoubtedly move to secure oil dependency on Kurdistan as well as continue its role in rebuilding the Kurdish economy. I would have thought that politically an independent Kurdistan and Turkey would be able to quash Turkeys own Kurdish rebellion.

Worried about the rise of ISIS? Invest in Gulf real estate, and sell some of the Turkish stocks with a view to buying them back in 6 months.

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