John Mauldin's Outside the Box : Iran

Iran Sanctions (Special Series), Part 3

John Mauldin — Thu, 01 Oct 2009 19:36:00 GMT

Recently I had a discussion with a colleague about university athletes. I was previously unaware that NCAA colleges set up guidance programs that develop the well-roundedness of student athletes. 'Life coaches' ensure that these individuals balance their rigorous athletic commitments with personal and academic accomplishments. I'm not judging your ability to run a mile or catch a football, but well-roundedness is an element to being successful - whatever your area may be.

To be a solid investor, it's important to consider a variety of markets, and you must be well-informed in a myriad of sectors. This is where having the best information comes in, and one of the better places for intelligence is STRATFOR. They offer a straightforward recipe of news about global affairs - causes, outcomes and what to expect next based on a rational, time-tested methodology.

I'm including a STRATFOR report that discusses the possibility of gasoline import sanctions against Iran. It's an absolute must-read for anyone interested in energy, foreign relations, Russia, the Middle East, etc. I'd encourage you to sign up for their free weekly reports here, so you aren't limited to what I send you on occasion. Begin (or continue) your journey to well-roundedness... Now, get to the line and practice your free throws.

John Mauldin
Editor, Outside the Box

Iran Sanctions (Special Series), Part 3: Preparing for the Worst

September 25, 2009

Summary

Iran has long been preparing itself for U.S.-led sanctions against gasoline imports and is confident in its ability to circumvent them. But even if the sanctions did get Iran's attention, they would not necessarily bring it to the negotiating table. Iran takes resistance very seriously, and while extolling the virtues of self-sacrifice it could close the Strait of Hormuz, which would wreak havoc on the global economy.

Editor's Note: This is part three of a three-part series on what sanctions against Iran could mean for Iran, U.S.-Russian relations, Israel and the global economy.

As the Iranian regime continued apace with its nuclear program, it understood that it was only a matter of time before the West would aim for its gasoline imports, a potential Achilles' heel for Iran. Although Iran may be one of the world's top-five crude-oil producers and exporters, its rogue reputation isn't exactly good for business. The Iranian energy industry has been sagging under the weight of sanctions for decades as the foreign energy majors with the technical skill Iran so badly needs wait for the geopolitical storm clouds to clear before tapping the country's vast energy reserves.

To contain domestic political dissent, the Iranian regime has heavily subsidized the population's energy needs. The drawback to such a policy is that ridiculously cheap gasoline prices (gasoline in Iran costs around 9 cents per liter) tend to fuel rapid consumption and rampant smuggling. As Iran's population continued to grow, so did its appetite for gasoline, and the regime has now reached a point where it simply cannot keep up with domestic demand without importing at least one-third of its fuel.

So, while Iran's Arab rivals, such as energy heavyweight Saudi Arabia, profited immensely from record-high crude prices in 2008, the Iranian regime was still struggling to balance its accounts. Then came the global economic collapse, which sliced the country's oil revenues in half. And given the sponsorship by the Islamic Revolutionary Guard Corps (IRGC) of militant and political proxies in Iraq and Lebanon, Iranian President Mahmoud Ahmadinejad's repeated raids on the country's rainy-day oil funds for his political campaigning, and funding for the Iranian nuclear program, Tehran does not have much cash to spare.

Unreliable Allies

Iran is not oblivious to its gasoline vulnerabilities, but it also isn't left without options should Washington become more aggressive with its sanctions campaign. As discussed in detail in part two of this series, Russia — for its own strategic reasons — has developed a contingency plan, most likely involving Russia's former Soviet surrogate, Turkmenistan, to cover the gasoline gap should Iran start experiencing shortfalls. The Russians are certainly not planning to do this out of the goodness of their hearts and sincere loyalty to their allies in Tehran. On the contrary, sabotaging Washington's sanctions regime against Tehran is yet another way Moscow can turn the screws on the United States if the Obama administration refuses to take seriously the Kremlin's demand that the West respect its influence in the former Soviet sphere. Since the Obama administration backed down recently from its Ballistic Missile Defense (BMD) plans in Central Europe, there could be more room for Russia and the United States to engage in serious negotiations. That said, there is no guarantee that Washington would be willing to pay the price of Russian hegemony in Eurasia in return for Russia's cooperation on Iran, and Moscow will drive a hard bargain before it even thinks about sacrificing its leverage with Iran.

Iran could certainly use Russia's help in maintaining its gasoline supply, but Tehran is also quite wary of becoming that much more dependent on Moscow's good graces for its energy security. Russia and Iran have quite a tumultuous history (the Soviets briefly occupied Iran during World War II), and the Iranian leadership is fearful of being abandoned by Russia should Moscow reach some sort of compromise with Washington.

Iran's other energy-producing ally hostile to the United States is Venezuela, which recently announced it would come to Iran's aid in the event of sanctions and supply its Persian friends with 20,000 barrels per day (bpd) of gasoline starting in October for an $800 million annual fee. Beneath the revolutionary rhetoric of oppressed regimes sticking it to their imperialist foes, this Venezuelan-Iranian energy deal is filled with holes. For starters, Venezuela — much like Iran — is facing serious refining problems due to mismanagement and a severe drop in foreign investment. Also like Iran, Venezuela's populist regime heavily subsidizes its constituents (gasoline in Venezuela is even cheaper than in Iran at 4 cents per liter), sending consumption soaring over the past four years. While Venezuela is currently refining around 420,000 bpd, it still needs to import gasoline to help meet domestic demand.

Caracas could always go through a third party to supply gasoline to Iran from a source closer to the Persian Gulf, but finding a willing supplier could prove difficult and costly when insurance premiums and political risks are taken into account. Moreover, should push come to shove, Washington has substantial leverage over the Venezuelan regime given the abundance of assets that Citgo, the refining unit of Venezuelan state oil company Petroleos de Venezuela, has spread throughout the United States. The United States also is the largest recipient of Venezuela's crude exports and one of the few markets in the world with the technological capabilities to process Venezuela's heavy crude, leaving Venezuela without much of a viable alternative market.

Iran has already turned to China to help backfill its gasoline supply. Latest estimates show that starting in September, China began to directly supply up to one-third of Iran's total gasoline imports. Until now, Chinese involvement in the gasoline trade had mostly been limited to shipping companies. In the run-up to the Oct. 1 talks, China now has the extra incentive to poke the United States and profit from these gasoline shipments to Iran. After having boosted its refining capacity this year, China has surplus gasoline to sell on the international market. In August alone China exported 140,000 barrels of gasoline per day. Like Malaysia's Petronas, which began supplying Iran with gasoline in August, China sees an opportunity to profit off of Iran's gasoline trade at a time when political tensions are rising and major energy firms, such as BP, Reliance and Total, have already stopped or are cutting back their shipments to Iran. But Iran may not be able to rely on Chinese aid over the long term.

China currently is in a heated trade spat with Washington over a recent U.S. tariff on Chinese tire imports and could push back against Washington even further by flouting the threatened sanctions regime. However, this is a decision with major strings attached. Washington still has a great deal of leverage over Beijing in the form of Section 421, a U.S. law that was incorporated into China's accession agreement with the World Trade Organization in 2001 and allows the United States to legally impose tariffs on nearly any Chinese export until 2013. Now that Obama has put Section 421 to use in restricting tire imports, the Chinese have to think twice before making any moves that could compel Washington to go even further in slapping trade restrictions on China. Additionally, China is a massive energy importer itself, so shipping any sort of energy product to the Middle East, where its supply lines are unprotected, is something that works directly against most of China's energy security strategies.

The United States has not yet formalized the gasoline sanctions against Iran in the form of legislation or a U.N. Security Council resolution, and this may be providing Beijing a limited opportunity to hit back at the United States during the trade spat and demonstrate the limits of Beijing's cooperation. However, Beijing will be far more cautious than Russia when it comes to blocking sanctions against Iran and will keep a close eye on Russia's intentions in deciding its next steps. China has long been noncommittal when it comes to sanctions against Iran and will align itself with Russia in forums like the U.N. Security Council to demonstrate its opposition to punitive U.S. economic measures. Of course, if Russia folds and reaches some sort of compromise with Washington, China will comply with the sanctions and avoid being left in the spotlight as the sole sanctions-buster allied with Iran.

In short, Iran has friends that it can turn to if necessary, but the reliability of those friends is by no means guaranteed.

Fending for Itself

In the spirit of self-sufficiency, Iran has long been preparing itself for a U.S.-led offensive against Iranian gasoline imports. Over the past two years, as talk of gasoline sanctions intensified, Iran sought out willing suppliers to help stockpile its gasoline reserves. Iranian gasoline consumption currently stands at around 300,000 to 400,000 bpd, but over the past several months, Iran has been importing well in excess of that amount from mostly Swiss suppliers and now newcomers like Malaysia's state-owned Petronas, which are looking to replace the energy majors that are dropping out of the Iranian gasoline trade while political tensions are high. Iranian and U.S. intelligence sources claim that Iran currently has at least three months worth of gasoline needs (estimates average around 30 million barrels) stockpiled. The director of the National Iranian Oil Refining and Distribution Company claims Iran's gasoline storage capacity is about 15.7 million barrels, which gives Iran about four months of in-storage capacity. Some of the surplus gasoline is sitting on tankers off Kharg Island, but the bulk of the supply is stored on land, where it is less vulnerable to airstrikes.

The Iranian government continues to make bold claims about its ability to massively ramp up its refining capacity and become self-sufficient in gasoline production within four years, but this is mostly hot air. Iran simply doesn't have the capability to meet its gasoline production goals on its own without the necessary foreign investment. And even if Iran had willing partners in places like Central Asia, it would still need to overcome its extreme reluctance to actually foot the bill for such projects.

It may strike some as odd that Iran has acquired a capability to develop nuclear technology but still struggles to build and operate refineries on its own. There are a number of reasons for this, but the simple answer is that the technology for a nuclear program dates back to the 1930s and 1940s and has not changed much since, while refining technology is continually updated and Iran has been out of the global oil-and-gas mainstream for 30 years now. A nuclear weapons program requires a couple dozen or so highly trained scientists and engineers to operate it, and these personnel can be trained in any number of institutions around the world. On the other hand, a permanent staff for a refinery producing around 300,000 bpd would require some 1,200 highly trained technicians and petroleum engineers, and most of Iran's intelligentsia — particularly the group with strong technical skills — left the country following the Iranian Revolution. Iran's stated energy goals are full of delusion as well as ambition.

Confronting the Subsidy Problem

Iran thus has little choice but to figure out a way to reduce gasoline consumption at home. The Iranians started on this initiative in June 2007 when the regime implemented a rationing system. Though the move was extremely unpopular and instigated a spate of riots in Tehran, the backlash was swiftly contained and, according to energy industry sources, Iranian gasoline imports dropped from 40 percent of total domestic consumption to about 25 to 30 percent.

The next step is for the regime to start cutting untenable subsidy rates by raising the price of gasoline. This is a plan that has long been in the works but has been put off time and time again due to the regime's deep-rooted fear of sparking major social unrest. This especially became a concern following the June presidential election debacle, which gave scores of Iranian citizens the courage to pour into the streets to voice their dissent against Ahmadinejad. Though the protests have dramatically dwindled in size, they continue sporadically and are a persistent irritant to the regime. Iranian sources claim that the coming gasoline price hike will not be that dramatic in the beginning. The government would likely continue to subsidize domestically produced gasoline while allowing the cost of imported gasoline to rise so it can pass along a portion of the costs to the consumer and further dampen demand.

Besides the potential political fallout, there is another significant issue with this gasoline price-hike plan. Since gasoline prices are heavily subsidized in Iran and are, therefore, much cheaper than the gasoline sold in neighboring countries, Iran has a major problem with gasoline smuggling to these countries. Iranian sources claim that more than 750,000 barrels are smuggled every month from Iran to Turkey, Afghanistan and Iraq, and this puts a considerable drain on Iran's energy revenues. The smuggling rings are run by a variety of actors, from Iranian organized crime entities linked to the IRGC to Balochi tribesmen to Kurdish smugglers, and they are extremely difficult for the regime to dismantle. Moreover, Iranian officials tend to turn a blind eye to these smuggling practices in order to buy political patronage from non-Persian minorities (Kurds, Balochis and Azeris) in the borderlands who could otherwise cause serious trouble for the regime. With the political situation at home particularly dicey right now, the Iranian government will have to proceed cautiously with any future price hikes, which are sure to be applied unevenly across the country.

Natural Gas Relief?

Iran also has an alternative-fuel plan under way that capitalizes on the country's natural gas resources and reduces its reliance on refined crude, but the results have so far been limited. The plan involves encouraging the use of compressed natural gas (CNG) for Iranian motorists. Cars that can run on CNG, which are prevalent in South Asia and Latin America, can be more economical and environmentally friendly. In fact, the price of CNG retails at around 4 cents per cubic meter (roughly equivalent to one liter of gasoline). Moreover, the technology used to compress natural gas is far less complex than that needed to refine crude. Considering that Iran is the world's fourth-largest producer of natural gas, the switch to CNG makes sense, but there is one big drawback. Vehicles must be modified to run on CNG, and CNG stations would have to be built across the country. None of this would be quick or cheap for Iran.

Nevertheless, Iran has made notable progress since kicking off its CNG plan in 2007, when Iran Khodro Industrial Group — Iran's leading automaker — invested $50 million in low-consumption, flexible-fuel engine production lines. Former Iranian Oil Minister Gholam Hossein Nozari said in July that there are currently 880 CNG stations in Iran, with plans to build an additional 400 within the next several months. Since Iran Khodro started ramping up production of CNG-capable vehicles, Iran has become the world's fourth-largest CNG-vehicle producer following Argentina, Pakistan and Brazil, according to the International Association for Natural Gas Vehicles. As of May 2009, Iranian government officials claim the official count of CNG-capable vehicles on the road totaled 1.4 million. The total number of cars in Iran was estimated to be 11.7 million in 2008, according to the Global Market Information Database. All in all, estimated fuel replacement by CNG is currently around 7 percent of Iran's total automobile fuel consumption, up from zero five years ago. While Iran seems to be making steady progress in the CNG arena, it still has a way to go before the switch to CNG would make a significant dent in the country's gasoline imports.

Responding to Pressure

When STRATFOR speaks to Iranian sources, we get the sense that the regime is feeling fairly confident in its ability to slip the sanctions noose while continuing to work on its nuclear program, using the same rhetoric it has used for the past seven years to drag negotiations into a stalemate. This continued confidence may be due to the fact that the Iranians have yet to feel the pinch of Washington's quiet campaign against Iran's gasoline suppliers. Though the energy majors appear to be dropping out of the Iranian gasoline trade, the numbers we have seen indicate that Tehran is importing surplus amounts of gasoline in preparation for tougher days to come. However, should Iran fail to outmaneuver the P-5+1 come Oct. 1, those tougher days could arrive sooner than it thinks.

In the weeks and months ahead, Israel will likely determine whether Iran and the United States are headed for a collision course in the Persian Gulf. The Israelis were promised "crippling" sanctions against Iran by the Obama administration. If that promise goes unfulfilled, and the Iranians (as they are expected to do) refuse to freeze their enrichment activities, the Israelis are likely to turn to the military option and demand Washington's cooperation. Israel understands Russia's leverage over Iran — particularly its ability to arm the Iranians with critical defense systems and sabotage a gasoline sanctions regime — and would rather deal decisively with the Iranian nuclear issue while the program is still several steps away from a critical phase.

Israel, unlike the United States, never had much faith in the sanctions to begin with. The U.S. administration appears to be operating under the assumption that severe sanctions against Iran will create a dire economic situation in the country, galvanize the masses against the clerical elite and thus coerce the regime into making significant concessions on its nuclear program. More imaginative policymakers believe that such economic sanctions could build on the dissent that followed the election and produce a third front to challenge and topple the regime. But Tehran's actual actions are unlikely to mesh nicely with Washington's preferred perception of the regime's mindset. Iran — at least for now — has no intention of meeting the West's demands to curb its nuclear program and takes the idea of resistance very seriously.

A Doomsday Scenario

Israel is willing to see how the sanctions regime plays out, but it also knows that it has a limited menu of options. If the sanctions are blown apart with Russia's help, the Iranians will obviously feel little pressure to negotiate seriously and the Israelis will have to turn to alternative options. If the sanctions prove effective because of Russian cooperation, a U.S. willingness to risk trade spats to enforce the sanctions or a combination of the two, the Iranians will be left feeling extremely vulnerable. However, that vulnerability would not necessarily bring Iran to the negotiating table. On the contrary, the Iranians are more likely to turn increasingly insular and aggressive with their nuclear ambitions. While extolling the virtues of self-sacrifice for national solidarity, the Iranian regime would begin to seriously threaten to use its "real" nuclear option — closing the Strait of Hormuz with mines and its arsenal of anti-ship missiles.

This is an option of last resort for the Iranians, but if Tehran feels sufficiently threatened, either by sanctions or potential military strikes, it could wreak havoc on the global economy within a matter of hours.

Setting ablaze the Strait of Hormuz would undoubtedly inflict intense pain on the Iranian economy, but this may be a pain that the regime is willing to bear while it watches energy prices soar and the world's industrial powers plunge deeper into recession. At such a level of brinksmanship, the United States would have to seriously consider a military campaign to preempt an Iranian move to close the strait, providing Israel with an opportunity to strike at Iran's nuclear facilities. If the United States failed to act in time and Iran succeeded in mining this critical energy chokepoint, then the U.S. military would have to clear the strait. Either way, the Persian Gulf would become a war zone and the global ramifications would be immense.

This may be a doomsday scenario, but it is one of increasing credibility given that the main players — Iran, the United States, Russia and Israel — continue to raise the stakes in pursuing their respective national imperatives. A number of questions remain: Will the United States put its trade relations on the line and aggressively enforce sanctions? Will Russia go the extra mile for Tehran and bust the sanctions regime? Can the United States and Russia reach a strategic compromise that will leave Iran out in the cold? Has Israel's patience regarding Iranian diplomatic maneuvers run out? Will Iran resort to its real nuclear option and threaten the Strait of Hormuz?

STRATFOR does not know the answers, and neither do the main stakeholders in this saga. However, come Oct. 1 these stakeholders must begin making some critical decisions that could dramatically alter the geopolitical landscape.

Russia, Ahmadinejad and Iran Reconsidered

John Mauldin — Thu, 23 Jul 2009 17:13:00 GMT

I've mentioned a couple of schools of thought before: those who look at the big picture and those who pore over the details. Often, the major product is the result of its minor pieces. If you use good meat, good buns, and good vegetables- you're going to turn out a pretty good hamburger. The same goes for cars, businesses and portfolios.

One industry in which this methodology really doesn't seem to work is information. Mainstream sources of information almost always fail to connect the world's events. They do a great job telling you that former Iranian president Rafsanjani addressed his supporters, that anti-Ahmadinejad protestors outside chanted "Death to Russia", and that Israel sent a submarine through the Suez Canal. But they don't show how the incidents fit together in the geopolitical landscape, nor what they mean for the relationships between global powers. They give you the meat, the buns and the vegetables, but there's no hamburger.

This week I'm sending you an article AND a video on the Iran situation, from my friend George Friedman and his team of intelligence analysts at STRATFOR. Click here to watch "Rethinking Iran" and read the article below (They complement each other nicely). George connects the pieces and draws conclusions – so you can make better-informed decisions regarding investments, assets and travels around the world.

John Mauldin, Editor
Outside the Box

Russia, Ahmadinejad and Iran Reconsidered

July 20, 2009

By George Friedman

The Iranian Political Configuration

There are two factions claiming to speak for the people. Rafsanjani represents the first faction. During his sermon, he spoke for the tradition of the founder of the Islamic republic, Ayatollah Ruhollah Khomeini, who took power during the 1979 Iranian Revolution. Rafjsanjani argued that Khomeini wanted an Islamic republic faithful to the will of the people, albeit within the confines of Islamic law. Rafsanjani argued that he was the true heir to the Islamic revolution. He added that Khomeini's successor — the current supreme leader, Ayatollah Ali Khamenei — had violated the principles of the revolution when he accepted that Rafsanjani's archenemy, Mahmoud Ahmadinejad, had won Iran's recent presidential election. (There is enormous irony in foreigners describing Rafsanjani as a moderate reformer who supports greater liberalization. Though he has long cultivated this image in the West, in 30 years of public political life it is hard to see a time when he has supported Western-style liberal democracy.)

The other faction is led by Ahmadinejad, who takes the position that Rafsanjani in particular — along with the generation of leaders who ascended to power during the first phase of the Islamic republic — has betrayed the Iranian people. Rather than serving the people, Ahmadinejad claims they have used their positions to become so wealthy that they dominate the Iranian economy and have made the reforms needed to revitalize the Iranian economy impossible. According to Ahmadinejad's charges, these elements now blame Ahmadinejad for Iran's economic failings when the root of these failings is their own corruption. Ahmadinejad claims that the recent presidential election represents a national rejection of the status quo. He adds that claims of fraud represent attempts by Rafsanjani — who he portrays as defeated presidential candidate Mir Hossein Mousavi's sponsor — and his ilk to protect their positions from Ahmadinejad.

Iran is therefore experiencing a generational dispute, with each side claiming to speak both for the people and for the Khomeini tradition. There is the older generation — symbolized by Rafsanjani — that has prospered during the last 30 years. Having worked with Khomeini, this generation sees itself as his true heir. Then, there is the younger generation. Known as "students" during the revolution, this group did the demonstrating and bore the brunt of the shah's security force counterattacks. It argues that Khomeini would be appalled at what Rafsanjani and his generation have done to Iran.

This debate is, of course, more complex than this. Khamenei, a key associate of Khomeini, appears to support Ahmadinejad's position. And Ahmadinejad hardly speaks for all of the poor as he would like to claim. The lines of political disputes are never drawn as neatly as we would like. Ultimately, Rafsanjani's opposition to the recent election did not have as much to do with concerns (valid or not) over voter fraud. It had everything to do with the fact that the outcome threatened his personal position. Which brings us back to the question of why Rafsanjani's followers were chanting Death to Russia.

Examining the Anomalous Chant

For months prior to the election, Ahmadinejad's allies warned that the United States was planning a "color" revolution. Color revolutions, like the one in Ukraine, occurred widely in the former Soviet Union after its collapse, and these revolutions followed certain steps. An opposition political party was organized to mount an electoral challenge to the establishment. Then, an election occurred that was either fraudulent or claimed by the opposition as having been fraudulent. Next, widespread peaceful protests against the regime (all using a national color as the symbol of the revolution) took place, followed by the collapse of the government through a variety of paths. Ultimately, the opposition — which was invariably pro-Western and particularly pro-American — took power.

Moscow openly claimed that Western intelligence agencies, particularly the CIA, organized and funded the 2004-2005 Orange Revolution in Ukraine. These agencies allegedly used nongovernmental organizations (human rights groups, pro-democracy groups, etc.) to delegitimize the existing regime, repudiate the outcome of the election regardless of its validity and impose what the Russians regarded as a pro-American puppet regime. The Russians saw Ukraine's Orange Revolution as the break point in their relationship with the West, with the creation of a pro-American, pro-NATO regime in Ukraine representing a direct attack on Russian national security. The Americans argued that to the contrary, they had done nothing but facilitate a democratic movement that opposed the existing regime for its own reasons, demanding that rigged elections be repudiated.

In warning that the United States was planning a color revolution in Iran, Ahmadinejad took the Russian position. Namely, he was arguing that behind the cover of national self-determination, human rights and commitment to democratic institutions, the United States was funding an Iranian opposition movement on the order of those active in the former Soviet Union. Regardless of whether the opposition actually had more votes, this opposition movement would immediately regard an Ahmadinejad win as the result of fraud. Large demonstrations would ensue, and if they were left unopposed the Islamic republic would come under threat.

In doing this, Ahmadinejad's faction positioned itself against the actuality that such a rising would occur. If it did, Ahmadinejad could claim that the demonstrators were — wittingly or not — operating on behalf of the United States, thus delegitimizing the demonstrators. In so doing, he could discredit supporters of the demonstrators as not tough enough on the United States, a useful charge against Rafsanjani, whom the West long has held up as an Iranian moderate.

Interestingly, while demonstrations were at their height, Ahmadinejad chose to attend — albeit a day late — a multinational Shanghai Cooperation Organization conference in Moscow on the Tuesday after the election. It was very odd that he would leave Iran during the greatest postelection unrest; we assumed he had decided to demonstrate to Iranians that he didn't take the demonstrations seriously.

The charge that seems to be emerging on the Rafsanjani side is that Ahmadinejad's fears of a color revolution were not simply political, but were encouraged by the Russians. It was the Russians who had been talking to Ahmadinejad and his lieutenants on a host of issues, who warned him about the possibility of a color revolution. More important, the Russians helped prepare Ahmadinejad for the unrest that would come — and given the Russian experience, how to manage it. Though we speculate here, if this theory is correct, it could explain some of the efficiency with which Ahmadinejad shut down cell phone and other communications during the postelection unrest, as he may have had Russian advisers.

Rafsanjani's followers were not shouting Death to Russia without a reason, at least in their own minds. They are certainly charging that Ahmadinejad took advice from the Russians, and went to Russia in the midst of political unrest for consultations. Rafsanjani's charge may or may not be true. Either way, there is no question that Ahmadinejad did claim that the United States was planning a color revolution in Iran. If he believed that charge, it would have been irrational not to reach out to the Russians. But whether or not the CIA was involved, the Russians might well have provided Ahmadinejad with intelligence of such a plot and helped shape his response, and thereby may have created a closer relationship with him.

How Iran's internal struggle will work itself out remains unclear. But one dimension is shaping up: Ahmadinejad is trying to position Rafsanjani as leading a pro-American faction intent on a color revolution, while Rafsanjani is trying to position Ahmadinejad as part of a pro-Russian faction. In this argument, the claim that Ahmadinejad had some degree of advice or collaboration with the Russians is credible, just as the claim that Rafsanjani maintained some channels with the Americans is credible. And this makes an internal dispute geopolitically significant.

The Iranian Struggle in a Geopolitical Context

At the moment, Ahmadinejad appears to have the upper hand. Khamenei has certified his re-election. The crowds have dissipated; nothing even close to the numbers of the first few days has since materialized. For Ahmadinejad to lose, Rafsanjani would have to mobilize much of the clergy — many of whom are seemingly content to let Rafsanjani be the brunt of Ahmadinejad's attacks — in return for leaving their own interests and fortunes intact. There are things that could bring Ahmadinejad down and put Rafsanjani in control, but all of them would require Khamenei to endorse social and political instability, which he will not do.

If the Russians have in fact intervened in Iran to the extent of providing intelligence to Ahmadinejad and advice to him during his visit on how to handle the postelection unrest (as the chants suggest), then Russian influence in Iran is not surging — it has surged. In some measure, Ahmadinejad would owe his position to Russian warnings and advice. There is little gratitude in the world of international affairs, but Ahmadinejad has enemies, and the Russians would have proved their utility in helping contain those enemies.

From the Russian point of view, Ahmadinejad would be a superb asset — even if not truly under their control. His very existence focuses American attention on Iran, not on Russia. It follows, then, that Russia would have made a strategic decision to involve itself in the postelection unrest, and that for the purposes of its own negotiations with Washington, Moscow will follow through to protect the Iranian state to the extent possible. The Russians have already denied U.S. requests for assistance on Iran. But if Moscow has intervened in Iran to help safeguard Ahmadinejad's position, then the potential increases for Russia to provide Iran with the S-300 strategic air defense systems that it has been dangling in front of Tehran for more than a decade.

If the United States perceives an entente between Moscow and Tehran emerging, then the entire dynamic of the region shifts and the United States must change its game. The threat to Washington's interests becomes more intense as the potential of a Russian S-300 sale to Iran increases, and the need to disrupt the Russian-Iranian entente would become all the more important. U.S. influence in Iran already has declined substantially, and Ahmadinejad is more distrustful and hostile than ever of the United States after having to deal with the postelection unrest. If a Russian-Iranian entente emerges out of all this — which at the moment is merely a possibility, not an imminent reality — then the United States would have some serious strategic problems on its hands.

Revisiting Assumptions on Iran

For the past few years, STRATFOR has assumed that a U.S. or Israeli strike on Iran was unlikely. Iran was not as advanced in its nuclear program as some claimed, and the complexities of any attack were greater than assumed. The threat of an attack was thus a U.S. bargaining chip, much as Iran's nuclear program itself was an Iranian bargaining chip for use in achieving Tehran's objectives in Iraq and the wider region. To this point, our net assessment has been accurate.

At this point, however, we need to stop and reconsider. If Iran and Russia begin serious cooperation, Washington's existing dilemma with Iran's nuclear ambitions and its ongoing standoff with the Russians would fuse to become a single, integrated problem. This is something the United States would find difficult to manage. Washington's primary goal would become preventing this from happening.

Ahmadinejad has long argued that the United States was never about to attack Iran, and that charges by Rafsanjani and others that he has pursued a reckless foreign policy were groundless. But with the Death to Russia chants and signaling of increased Russian support for Iran, the United States may begin to reconsider its approach to the region.

Iran's clerical elite does not want to go to war. They therefore can only view with alarm the recent ostentatious transiting of the Suez Canal into the Red Sea by Israeli submarines and corvettes. This transiting did not happen without U.S. approval. Moreover, in spite of U.S. opposition to expanded Israeli settlements and Israeli refusals to comply with this opposition, U.S. Secretary of Defense Robert Gates will be visiting Israel in two weeks. The Israelis have said that there must be a deadline on negotiations with Iran over the nuclear program when the next G-8 meeting takes place in September; a deadline that the G-8 has already approved. The consequences if Iran ignores the deadline were left open-ended.

All of this can fit into our old model of psychological warfare, as representing a bid to manipulate Iranian politics by making Ahmadinejad's leadership look too risky. It could also be the United States signaling to the Russians that stakes in the region are rising. It is not clear that the United States has reconsidered its strategy on Iran in the wake of the postelection demonstrations. But if Rafsanjani's claim of Russian support for Ahmadinejad is true, a massive re-evaluation of U.S. policy could ensue, assuming one hasn't already started — prompting a reconsideration of the military option.

All of this assumes that there is substance behind a mob chanting "Death to Russia." There appears to be, but of course, Ahmadinejad's enemies would want to magnify that substance to its limits and beyond. This is why we are not ready to simply abandon our previous net assessment of Iran, even though it is definitely time to rethink it.

Iranian Elections, Israel and the United States

John Mauldin — Thu, 18 Jun 2009 15:13:19 GMT

Dear Friends,

In the midst of an economic crisis, we are inundated with data - information that often, a few years down the line, turns out to be wrong. Forecasts are made based on a single month's set of data or previous trends, and the public often doesn't know how to read the fine print about margins of error.

The problem is faulty methodology. Most media and even government intelligence agencies assume the information they get from leadership figures is 100% correct, no questions asked - leading to defective analyses. Instead, underlying assumptions should be constantly vetted in the face of new facts. I'd encourage you to consider the intelligence produced by my friend George Friedman at STRATFOR - a trusted source in forecasting future geopolitical trends.

Click here to watch this video by George and his intelligence team. It looks beyond the current protests in Iran and delves into what policy changes could be on the horizon in this pivotal Middle Eastern state. George extrapolates what these recent events mean for President Obama's and Israel's options in terms of Iran and the peace process.

Anyone looking to gain a leg up in the world of finance needs to understand geopolitics and foreign investments. Take a look at STRATFOR, which offers a special deal for my readers. Barron's referred to them in a cover-story profile as the "Shadow CIA," but I would say that their methodology gives them much greater accuracy than their government counterpart.

To Intelligence,
John Mauldin

Iran: Using Oil as a Weapon, But Only Rhetorically

John Mauldin — Thu, 08 Jan 2009 15:33:13 GMT

Dear Friends:

The hottest media topic of the New Year is the Israeli-Palestinian conflict in Gaza. And as I was reading the New York Times on Tuesday, I came across this sentence in one of the articles that was staggeringly truthful and more than a little unsettling in its implications for me as an investor.

"There are other ways to construe the context of this conflict of course. But no matter what, Israel's diplomats know that if journalists are given a choice between covering death and covering context, death wins."

Now, I'm NOT trying to get into a debate about the rights and wrongs of either side, but if you're an investor, and you're trying to make decisions about where this conflict might drive oil prices, for example, then context is everything. And according to the New York Times, if you're relying on journalists for context, forget it.

But you do have an alternative: my friend George Friedman's company, Stratfor, is the unbiased source for insightful analysis of global events. George and his team are all about context – and they provide it without bias or an agenda. If you're my age, you remember "Just the facts, ma'am." Whether it's the conflict in Gaza, the war between Georgia and Russia, or the mayhem and violence in Nigeria, when I need to know how geopolitics is going to hit energy prices, I turn to Stratfor.

I'm including today one of their analyses on the conflict: Iran: Using Oil as a Weapon, But Only Rhetorically. In it, Stratfor showcases its strengths: unbiased analysis--and in this case, of a situation mainstream media has barely even registered. George has kindly arranged a special offer for my readers. Click here, and you'll get 2 years of Membership for the price of 1 for just $349. Plus George is including a free copy of his new book coming out later this month (I'll be reviewing it for you in a couple weeks.)

Your all-about-context analyst,
John Mauldin

Iran: Using Oil as a Weapon, But Only Rhetorically

Summary

Iran is calling for oil-producing states to launch an embargo against the West in protest of Israel's current military operations in Gaza. But while Tehran would love to see oil prices rise, it is in no position to cut production -- and neither, really, are its Arab neighbors. In reality, the embargo threats are mere atmospherics in the ongoing geopolitical rivalry between Iran and Saudi Arabia.

Analysis

Brig. Gen. Mirfeysal Bagherzadeh, a commander of Iran's elite Islamic Revolutionary Guards Corps (IRGC), on Jan. 4 called on Muslim countries to use oil as a weapon to end the ongoing Israeli offensive in Gaza, now in its 10th day. Bagherzadeh said Western dependence on the energy resources of the Islamic world should be used to put pressure on Israel's backers in Europe and the United States. His remarks come on the heels of similar calls from lawmakers in Bahrain, a country whose political landscape is dominated by its Shiite majority, which in turn has ties to Iran.

For a variety of reasons, however, such calls will not spark any serious attempts to use oil as a means to affect the Israeli-Palestinian conflict. Indeed, Iran's real purpose is not to spearhead an oil embargo against the West, but rather to score political points by emphasizing publicly that Tehran is the only player in the region trying to support the Palestinians during an Israeli military offensive. The primary goal is to make its Arab rivals look bad -- especially Saudi Arabia and its allies in the Gulf Cooperation Council. (Though if the markets were spooked by the threat and oil prices jumped, the Iranians would not mind at all.)

Tehran actually is no position to come to the aid of the Palestinians; only Saudi Arabia and the other, smaller Persian Gulf states would be able to make such an embargo work. These countries are more concerned about their bottom lines, however. At a time when the world is in the middle of a major financial crisis and the price of oil has fallen by some 70 percent from the record highs of July 2008, they need to sell oil just as much as the West needs to buy it. That is why Saudi Arabia, the main mover and shaker in the Organization of the Petroleum Exporting Countries (OPEC), is already having a hard time getting the other cartel members to abide by recently announced production cuts aimed at raising the price of oil to more acceptable levels.

The petroleum-rich Arab states still have massive reserves to keep them financially healthy for quite some time to come. In contrast, the Iranians are hurting badly from the slump in oil prices and desperately need more income. Thus, in reality, Tehran has much more to lose by cutting production than its Arab rivals do. And because of sanctions, Iran does not even sell oil to the United States -- so there is nothing Tehran can do to "implement an embargo" against the world's No. 1 oil consumer.

But Iran is hoping its threat will kill two birds with one stone, pushing prices up even if there is no embargo. Despite their long slide, oil prices have jumped some 25 percent in the 10 days since the Israeli operation began. It is not clear that this increase is actually related to the Gaza operation -- after all, Israel produces a mere 5,966 barrels per day (bpd) of oil, consumes only about 250,000 bpd and transits nothing worth mentioning. But Tehran is hoping that the markets are spooked, and that they will be spooked further by the threat of an embargo.

For oil prices to be affected significantly, however, the oil-rich Arab states would need to join Iran in making an issue of the Israeli operation -- which they are not doing. On the contrary, they are hoping that the assault will cut Hamas down to more manageable proportions and thwart Iran's attempts to use the Israeli-Palestinian conflict to its own advantage.

Obama's Challenge

John Mauldin — Thu, 13 Nov 2008 20:47:00 GMT

With the election of a new US President, everyone is focused on the "First 100 Days." How Obama transitions into the presidency impacts not just the U.S. but the entire global system. What happens to U.S. relations with Iraq, Iran, and Afghanistan? What's going to happen at Treasury and to all the programs addressing the financial crisis? What's going to emerge from the next G20 summit?

You need to read the analysis below, written by my good friend George Friedman at Stratfor. He details the immediate issues facing the president-elect, including one of the stickiest: Europe's desire for a global banking regulatory regimen. How will Obama respond to European pressure? George has built his company Stratfor and its reputation on forecasting the future, and I'm amazed at how often he's right -- on broad themes and specific events.

As we move into the next 100 days, George is way ahead of us with a book called The Next 100 Years: A Forecast for the 21^st Century. I've read an advance copy, and it's absolutely fascinating. In it, he maps out what geopolitical changes the world will see in the next hundred years: the rise of Mexico (and war with the U.S.!), Poland and Turkey returning to great-power status, and a second Cold War, among others. I can tell you, his arguments are as absolutely compelling as the conclusions are provocative.

George has arranged a special pre-publication offer for my readers. Click here to take advantage of a Stratfor Membership that also includes a free copy of George's new book. For insight into the next 100 days and the next 100 years, I'm relying on George Friedman and his team at Stratfor. I know you'll find as much value in George's forecasts as I do.

John Mauldin

Obama's Challenge

November 5, 2008 | 1202 GMT
By George Friedman

Obama's Agenda vs. Expanding His Base

U.S. President George W. Bush demonstrated that the inability to understand the uses and limits of power can crush a presidency very quickly. The enormous enthusiasm of Obama's followers could conceal how he -- like Bush -- is governing a deeply, and nearly evenly, divided country. Obama's first test will be simple: Can he maintain the devotion of his followers while increasing his political base? Or will he believe, as Bush and Cheney did, that he can govern without concern for the other half of the country because he controls the presidency and Congress, as Bush and Cheney did in 2001? Presidents are elected by electoral votes, but they govern through public support.

Obama and his supporters will say there is no danger of a repeat of Bush -- who believed he could carry out his agenda and build his political base at the same time, but couldn't. Building a political base requires modifying one's agenda. But when you start modifying your agenda, when you become pragmatic, you start to lose your supporters. If Obama had won with 60 percent of the popular vote, this would not be as pressing a question. But he barely won by more than Bush in 2004. Now, we will find out if Obama is as skillful a president as he was a candidate.

Obama will soon face the problem of beginning to disappoint people all over the world, a problem built into his job. The first disappointments will be minor. There are thousands of people hoping for appointments, some to Cabinet positions, others to the White House, others to federal agencies. Many will get something, but few will get as much as they hoped for. Some will feel betrayed and become bitter. During the transition process, the disappointed office seeker -- an institution in American politics -- will start leaking on background to whatever reporters are available. This will strike a small, discordant note; creating no serious problems, but serving as a harbinger of things to come.

Later, Obama will be sworn in. He will give a memorable, perhaps historic speech at his inauguration. There will be great expectations about him in the country and around the world. He will enjoy the traditional presidential honeymoon, during which all but his bitterest enemies will give him the benefit of the doubt. The press initially will adore him, but will begin writing stories about all the positions he hasn't filled, the mistakes he made in the vetting process and so on. And then, sometime in March or April, things will get interesting.

Iran and a U.S. Withdrawal From Iraq

Obama has promised to withdraw U.S. forces from Iraq, where he does not intend to leave any residual force. If he follows that course, he will open the door for the Iranians. Iran's primary national security interest is containing or dominating Iraq, with which Iran fought a long war. If the United States remains in Iraq, the Iranians will be forced to accept a neutral government in Iraq. A U.S. withdrawal will pave the way for the Iranians to use Iraqi proxies to create, at a minimum, an Iraqi government more heavily influenced by Iran.

Apart from upsetting Sunni and Kurdish allies of the United States in Iraq, the Iranian ascendancy in Iraq will disturb some major American allies -- particularly the Saudis, who fear Iranian power. The United States can't afford a scenario under which Iranian power is projected into the Saudi oil fields. While that might be an unlikely scenario, it carries catastrophic consequences. The Jordanians and possibly the Turks, also American allies, will pressure Obama not simply to withdraw. And, of course, the Israelis will want the United States to remain in place to block Iranian expansion. Resisting a coalition of Saudis and Israelis will not be easy.

This will be the point where Obama's pledge to talk to the Iranians will become crucial. If he simply withdraws from Iraq without a solid understanding with Iran, the entire American coalition in the region will come apart. Obama has pledged to build coalitions, something that will be difficult in the Middle East if he withdraws from Iraq without ironclad Iranian guarantees. He therefore will talk to the Iranians. But what can Obama offer the Iranians that would induce them to forego their primary national security interest? It is difficult to imagine a U.S.-Iranian deal that is both mutually beneficial and enforceable.

Obama will then be forced to make a decision. He can withdraw from Iraq and suffer the geopolitical consequences while coming under fire from the substantial political right in the United States that he needs at least in part to bring into his coalition. Or, he can retain some force in Iraq, thereby disappointing his supporters. If he is clumsy, he could wind up under attack from the right for negotiating with the Iranians and from his own supporters for not withdrawing all U.S. forces from Iraq. His skills in foreign policy and domestic politics will be tested on this core question, and he undoubtedly will disappoint many.

The Afghan Dilemma

Obama will need to address Afghanistan next. He has said that this is the real war, and that he will ask U.S. allies to join him in the effort. This means he will go to the Europeans and NATO, as he has said he will do. The Europeans are delighted with Obama's victory because they feel Obama will consult them and stop making demands of them. But demands are precisely what he will bring the Europeans. In particular, he will want the Europeans to provide more forces for Afghanistan.

Many European countries will be inclined to provide some support, if for no other reason than to show that they are prepared to work with Obama. But European public opinion is not about to support a major deployment in Afghanistan, and the Europeans don't have the force to deploy there anyway. In fact, as the global financial crisis begins to have a more dire impact in Europe than in the United States, many European countries are actively reducing their deployments in Afghanistan to save money. Expanding operations is the last thing on European minds.

Obama's Afghan solution of building a coalition centered on the Europeans will thus meet a divided Europe with little inclination to send troops and with few troops to send in any event. That will force him into a confrontation with the Europeans in spring 2009, and then into a decision. The United States and its allies collectively lack the force to stabilize Afghanistan and defeat the Taliban. They certainly lack the force to make a significant move into Pakistan -- something Obama has floated on several occasions that might be a good idea if force were in fact available.

He will have to make a hard decision on Afghanistan. Obama can continue the war as it is currently being fought, without hope of anything but a long holding action, but this risks defining his presidency around a hopeless war. He can choose to withdraw, in effect reinstating the Taliban, going back on his commitment and drawing heavy fire from the right. Or he can do what we have suggested is the inevitable outcome, namely, negotiate -- and reach a political accord -- with the Taliban. Unlike Bush, however, withdrawal or negotiation with the Taliban will increase the pressure on Obama from the right. And if this is coupled with a decision to delay withdrawal from Iraq, Obama's own supporters will become restive. His 52 percent Election Day support could deteriorate with remarkable speed.

The Russian Question

At the same time, Obama will face the Russian question. The morning after Obama's election, Russian President Dmitri Medvedev announced that Russia was deploying missiles in its European exclave of Kaliningrad in response to the U.S. deployment of ballistic missile defense systems in Poland. Obama opposed the Russians on their August intervention in Georgia, but he has never enunciated a clear Russia policy. We expect Ukraine will have shifted its political alignment toward Russia, and Moscow will be rapidly moving to create a sphere of influence before Obama can bring his attention -- and U.S. power -- to bear.

Obama will again turn to the Europeans to create a coalition to resist the Russians. But the Europeans will again be divided. The Germans can't afford to alienate the Russians because of German energy dependence on Russia and because Germany does not want to fight another Cold War. The British and French may be more inclined to address the question, but certainly not to the point of resurrecting NATO as a major military force. The Russians will be prepared to talk, and will want to talk a great deal, all the while pursuing their own national interest of increasing their power in what they call their "near abroad."

Obama will have many options on domestic policy given his majorities in Congress. But his Achilles' heel, as it was for Bush and for many presidents, will be foreign policy. He has made what appear to be three guarantees. First, he will withdraw from Iraq. Second, he will focus on Afghanistan. Third, he will oppose Russian expansionism. To deliver on the first promise, he must deal with the Iranians. To deliver on the second, he must deal with the Taliban. To deliver on the third, he must deal with the Europeans.

Global Finance and the European Problem

The Europeans will pose another critical problem, as they want a second Bretton Woods agreement. Some European states appear to desire a set of international regulations for the financial system. There are three problems with this.

First, unless Obama wants to change course dramatically, the U.S. and European positions differ over the degree to which governments will regulate interbank transactions. The Europeans want much more intrusion than the Americans. They are far less averse to direct government controls than the Americans have been. Obama has the power to shift American policy, but doing that will make it harder to expand his base.

Second, the creation of an international regulatory body that has authority over American banks would create a system where U.S. financial management was subordinated to European financial management.

And third, the Europeans themselves have no common understanding of things. Obama could thus quickly be drawn into complex EU policy issues that could tie his hands in the United States. These could quickly turn into painful negotiations, in which Obama's allure to the Europeans will evaporate.

One of the foundations of Obama's foreign policy -- and one of the reasons the Europeans have celebrated his election -- was the perception that Obama is prepared to work closely with the Europeans. He is in fact prepared to do so, but his problem will be the same one Bush had: The Europeans are in no position to give the things that Obama will need from them -- namely, troops, a revived NATO to confront the Russians and a global financial system that doesn't subordinate American financial authority to an international bureaucracy.

The Hard Road Ahead

Like any politician, Obama will face the challenge of having made a set of promises that are not mutually supportive. Much of his challenge boils down to problems that he needs to solve and that he wants European help on, but the Europeans are not prepared to provide the type and amount of help he needs. This, plus the fact that a U.S. withdrawal from Iraq requires an agreement with Iran -- something hard to imagine without a continued U.S. presence in Iraq -- gives Obama a difficult road to move on.

As with all American presidents (who face midterm elections with astonishing speed), Obama's foreign policy moves will be framed by his political support. Institutionally, he will be powerful. In terms of popular support, he begins knowing that almost half the country voted against him, and that he must increase his base. He must exploit the honeymoon period, when his support will expand, to bring another 5 percent or 10 percent of the public into his coalition. These people voted against him; now he needs to convince them to support him. But these are precisely the people who would regard talks with the Taliban or Iran with deep distrust. And if negotiations with the Iranians cause him to keep forces in Iraq, he will alienate his base without necessarily winning over his opponents.

And there is always the unknown. There could be a terrorist attack, the Russians could start pressuring the Baltic states, the Mexican situation could deteriorate. The unknown by definition cannot be anticipated. And many foreign leaders know it takes an administration months to settle in, something some will try to take advantage of. On top of that, there is now nearly a three-month window in which the old president is not yet out and the new president not yet in.

Obama must deal with extraordinarily difficult foreign policy issues in the context of an alliance failing not because of rough behavior among friends but because the allies' interests have diverged. He must deal with this in the context of foreign policy positions difficult to sustain and reconcile, all against the backdrop of almost half an electorate that voted against him versus supporters who have enormous hopes vested in him. Obama knows all of this, of course, as he indicated in his victory speech.

We will now find out if Obama understands the exercise of political power as well as he understands the pursuit of that power. You really can't know that until after the fact. There is no reason to think he can't finesse these problems. Doing so will take cunning, trickery and the ability to make his supporters forget the promises he made while keeping their support. It will also require the ability to make some of his opponents embrace him despite the path he will have to take. In other words, he will have to be cunning and ruthless without appearing to be cunning and ruthless. That's what successful presidents do.

In the meantime, he should enjoy the transition. It's frequently the best part of a presidency.

The New President and the Global Landscape

John Mauldin — Wed, 01 Oct 2008 21:26:38 GMT

In times of crisis, those with psychological fortitude discover opportunities that most people miss. A friend of mine in Houston tells me of unending piles of tree limbs broken down by the hurricane. The homeowner laments his disaster; the tree trimmer and the roofer order a new Mercedes. Most of the world sees a Wall St. meltdown. Buffett takes the opening to deploy billions from his cash hoard. They're all seeing the same thing, but they're reacting differently based on different visions of the future.

I've included a piece today from my friend George Friedman over at Stratfor about the landscape the next US President will face. This article is a perfect example of why I rely on Stratfor for my geopolitical intelligence. The newspapers and other media do better or lesser jobs of telling me about what's happening right now. But that's not what an investor needs. What I need - and I recommend for you - is an analysis of what we're going to be facing. That's where George and his team absolutely excel.

For at least the next month, the public conversation is going to be completely dominated by the November election and the political maneuvering to address the financial crisis. There will be tremendous drama. There will be dizzying swings back and forth in emotions, expectations, and more than likely the markets. And if you focus on it, you'll miss the real opportunities to position yourself for the emergence. George has made a special offer on a Stratfor Membership available to my readers, and I strongly encourage you to click here to take advantage of this opportunity. Now is the time to get positioned for future opportunities, while everybody else is wallowing in the here and now.

John Mauldin, Editor
Outside the Box

The New President and the Global Landscape

By George Friedman

It has often been said that presidential elections are all about the economy. That just isn't true. Harry Truman's election was all about Korea. John Kennedy's election focused on missiles, Cuba and Berlin. Lyndon Johnson's and Richard Nixon's elections were heavily about Vietnam. Ronald Reagan's first election pivoted on Iran. George W. Bush's second election was about Iraq. We won't argue that presidential elections are all about foreign policy, but they are not all about the economy. The 2008 election will certainly contain a massive component of foreign policy.

We have no wish to advise you how to vote. That's your decision. What we want to do is try to describe what the world will look like to the new president and consider how each candidate is likely to respond to the world. In trying to consider whether to vote for John McCain or Barack Obama, it is obviously necessary to consider their stands on foreign policy issues. But we have to be cautious about campaign assertions. Kennedy claimed that the Soviets had achieved superiority in missiles over the United States, knowing full well that there was no missile gap. Johnson attacked Barry Goldwater for wanting to escalate the war in Vietnam at the same time he was planning an escalation. Nixon won the 1968 presidential election by claiming that he had a secret plan to end the war in Vietnam. What a candidate says is not always an indicator of what the candidate is thinking.

It gets even trickier when you consider that many of the most important foreign policy issues are not even imagined during the election campaign. Truman did not expect that his second term would be dominated by a war in Korea. Kennedy did not expect to be remembered for the Cuban missile crisis. Jimmy Carter never imagined in 1976 that his presidency would be wrecked by the fall of the Shah of Iran and the hostage crisis. George H. W. Bush didn't expect to be presiding over the collapse of communism or a war over Kuwait. George W. Bush (regardless of conspiracy theories) never expected his entire presidency to be defined by 9/11. If you read all of these presidents' position papers in detail, you would never get a hint as to what the really important foreign policy issues would be in their presidencies.

Between the unreliability of campaign promises and the unexpected in foreign affairs, predicting what presidents will do is a complex business. The decisions a president must make once in office are neither scripted nor conveniently timed. They frequently present themselves to the president and require decisions in hours that can permanently define his (or her) administration. Ultimately, voters must judge, by whatever means they might choose, whether the candidate has the virtue needed to make those decisions well.

Virtue, as we are using it here, is a term that comes from Machiavelli. It means the opposite of its conventional usage. A virtuous leader is one who is clever, cunning, decisive, ruthless and, above all, effective. Virtue is the ability to face the unexpected and make the right decision, without position papers, time to reflect or even enough information. The virtuous leader can do that. Others cannot. It is a gut call for a voter, and a tough one.

This does not mean that all we can do is guess about a candidate's nature. There are three things we can draw on. First, there is the political tradition the candidate comes from. There are more things connecting Republican and Democratic foreign policy than some would like to think, but there are also clear differences. Since each candidate comes from a different political tradition -- as do his advisers -- these traditions can point to how each candidate might react to events in the world. Second, there are indications in the positions the candidates take on ongoing events that everyone knows about, such as Iraq. Having pointed out times in which candidates have been deceptive, we still believe there is value in looking at their positions and seeing whether they are coherent and relevant. Finally, we can look at the future and try to predict what the world will look like over the next four years. In other words, we can try to limit the surprises as much as possible.

In order to try to draw this presidential campaign into some degree of focus on foreign policy, we will proceed in three steps. First, we will try to outline the foreign policy issues that we think will confront the new president, with the understanding that history might well throw in a surprise. Second, we will sketch the traditions and positions of both Obama and McCain to try to predict how they would respond to these events. Finally, after the foreign policy debate is over, we will try to analyze what they actually said within the framework we created.

Let me emphasize that this is not a partisan exercise. The best guarantee of objectivity is that there are members of our staff who are passionately (we might even say irrationally) committed to each of the candidates. They will be standing by to crush any perceived unfairness. It is Stratfor's core belief that it is possible to write about foreign policy, and even an election, without becoming partisan or polemical. It is a difficult task and we doubt we can satisfy everyone, but it is our goal and commitment.

The Post 9/11 World

Ever since 9/11 U.S. foreign policy has focused on the Islamic world. Starting in late 2002, the focus narrowed to Iraq. When the 2008 campaign for president began a year ago, it appeared Iraq would define the election almost to the exclusion of all other matters. Clearly, this is no longer the case, pointing to the dynamism of foreign affairs and opening the door to a range of other issues.

Iraq remains an issue, but it interacts with a range of other issues. Among these are the future of U.S.-Iranian relations; U.S. military strategy in Afghanistan and the availability of troops in Iraq for that mission; the future of U.S.-Pakistani relations and their impact on Afghanistan; the future of U.S.-Russian relations and the extent to which they will interfere in the region; resources available to contain Russian expansion; the future of the U.S. relationship with the Europeans and with NATO in the context of growing Russian power and the war in Afghanistan; Israel's role, caught as it is between Russia and Iran; and a host of only marginally related issues. Iraq may be subsiding, but that simply complicates the world facing the new president.

The list of problems facing the new president will be substantially larger than the problems facing George W. Bush, in breadth if not in intensity. The resources he will have to work with, military, political and economic, will not be larger for the first year at least. In terms of military capacity, much will hang on the degree to which Iraq continues to bog down more than a dozen U.S. brigade combat teams. Even thereafter, the core problem facing the next president will be the allocation of limited resources to an expanding number of challenges. The days when it was all about Iraq is over. It is now all about how to make the rubber band stretch without breaking.

Iraq remains the place to begin, however, since the shifts there help define the world the new president will face. To understand the international landscape the new president will face, it is essential to begin by understanding what happened in Iraq, and why Iraq is no longer the defining issue of this campaign.

A Stabilized Iraq and the U.S. Troop Dilemma

In 2006, it appeared that the situation in Iraq was both out of control and hopeless. Sunni insurgents were waging war against the United States, Shiite militias were taking shots at the Americans as well, and Sunnis and Shia were waging a war against each other. There seemed to be no way to bring the war to anything resembling a satisfactory solution.

When the Democrats took control of Congress in the 2006 elections, it appeared inevitable that the United States would begin withdrawing forces from Iraq. U.S expectations aside, this was the expectation by all parties in Iraq. Given that the United States was not expected to remain a decisive force in Iraq, all Iraqi parties discounted the Americans and maneuvered for position in anticipation of a post-American Iraq. The Iranians in particular saw an opportunity to limit a Sunni return to Iraq's security forces, thus reshaping the geopolitics of the region. U.S. fighting with Iraqi Sunnis intensified in preparation for the anticipated American withdrawal.

Bush's decision to increase forces rather than withdraw them dramatically changed the psychology of Iraq. It was assumed he had lost control of the situation. Bush's decision to surge forces in Iraq, regardless by how many troops, established two things. First, Bush remained in control of U.S. policy. Second, the assumption that the Americans were leaving was untrue. And suddenly, no one was certain that there would be a vacuum to be filled.

The deployment of forces proved helpful, as did the change in how the troops were used; recent leaks indicate that new weapon systems also played a key role. The most important factor, however, was the realization that the Americans were not leaving on Bush's watch. Since no one was sure who the next U.S. president would be, or what his policies might be, it was thus uncertain that the Americans would leave at all.

Everyone in Iraq suddenly recalculated. If the Americans weren't leaving, one option would be to make a deal with Bush, seen as weak and looking for historical validation. Alternatively, they could wait for Bush's successor. Iran remembers -- without fondness -- its decision not to seal a deal with Carter, instead preferring to wait for Reagan. Similarly, seeing foreign jihadists encroaching in Sunni regions and the Shia shaping the government in Baghdad, the Sunni insurgents began a fundamental reconsideration of their strategy.

Apart from reversing Iraq's expectations about the United States, part of Washington's general strategy was supplementing military operations with previously unthinkable political negotiations. First, the United States began talking to Iraq's Sunni nationalist insurgents, and found common ground with them. Neither the Sunni nationalists nor the United States liked the jihadists, and both wanted the Shia to form a coalition government. Second, back-channel U.S.-Iranian talks clearly took place. The Iranians realized that the possibility of a pro-Iranian government in Baghdad was evaporating. Iran's greatest fear was a Sunni Iraqi government armed and backed by the United States, recreating a version of the Hussein regime that had waged war with Iran for almost a decade. The Iranians decided that a neutral, coalition government was the best they could achieve, so they reined in the Shiite militia.

The net result of this was that the jihadists were marginalized and broken, and an uneasy coalition government was created in Baghdad, balanced between Iran and the United States. The Americans failed to create a pro-American government in Baghdad, but had blocked the emergence of a pro-Iranian government. Iraqi society remained fragmented and fragile, but a degree of peace unthinkable in 2006 had been created.

The first problem facing the next U.S. president will be deciding when and how many U.S. troops will be withdrawn from Iraq. Unlike 2006, this issue will not be framed by Iraq alone. First, there will be the urgency of increasing the number of U.S. troops in Afghanistan. Second, there will be the need to create a substantial strategic reserve to deal with potential requirements in Pakistan, and just as important, responding to events in the former Soviet Union like the recent conflict in Georgia.

At the same time, too precipitous a U.S. withdrawal not only could destabilize the situation internally in Iraq, it could convince Iran that its dream of a pro-Iranian Iraq is not out of the question. In short, too rapid a withdrawal could lead to resumption of war in Iraq. But too slow a withdrawal could make the situation in Afghanistan untenable and open the door for other crises.

The foreign policy test for the next U.S. president will be calibrating three urgent requirements with a military force that is exhausted by five years of warfare in Iraq and seven in Afghanistan. This force was not significantly expanded since Sept. 11, making this the first global war the United States has ever fought without a substantial military expansion. Nothing the new president does will change this reality for several years, so he will be forced immediately into juggling insufficient forces without the option of precipitous withdrawal from Iraq unless he is prepared to accept the consequences, particularly of a more powerful Iran.

The Nuclear Chip and a Stable U.S.-Iranian Understanding

The nuclear issue has divided the United States and Iran for several years. The issue seems to come and go depending on events elsewhere. Thus, what was enormously urgent just prior to the Russo-Georgian war became much less pressing during and after it. This is not unreasonable in our point of view, because we regard Iran as much farther from nuclear weapons than others might, and we suspect that the Bush administration agrees given its recent indifference to the question.

Certainly, Iran is enriching uranium, and with that uranium, it could possibly explode a nuclear device. But the gap between a nuclear device and weapon is substantial, and all the enriched uranium in the world will not give the Iranians a weapon. To have a weapon, it must be ruggedized and miniaturized to fit on a rocket or to be carried on an attack aircraft. The technologies needed for that range from material science to advanced electronics to quality assurance. Creating a weapon is a huge project. In our view, Iran does not have the depth of integrated technical skills needed to achieve that goal.

As for North Korea, for Iran a very public nuclear program is a bargaining chip designed to extract concessions, particularly from the Americans. The Iranians have continued the program very publicly in spite of threats of Israeli and American attacks because it made the United States less likely to dismiss Iranian wishes in Tehran's true area of strategic interest, Iraq.

The United States must draw down its forces in Iraq to fight in Afghanistan. The Iranians have no liking for the Taliban, having nearly gone to war with them in 1998, and having aided the United States in Afghanistan in 2001. The United States needs Iran's commitment to a neutral Iraq to withdraw U.S. forces since Iran could destabilize Iraq overnight, though Tehran's ability to spin up Shiite proxies in Iraq has declined over the past year.

Therefore, the next president very quickly will face the question of how to deal with Iran. The Bush administration solution -- relying on quiet understandings alongside public hostility -- is one model. It is not necessarily a bad one, so long as forces remain in Iraq to control the situation. If the first decision the new U.S. president will have to make is how to transfer forces in Iraq elsewhere, the second decision will be how to achieve a more stable understanding with Iran.

This is particularly pressing in the context of a more assertive Russia that might reach out to Iran. The United States will need Iran more than Iran needs the United States under these circumstances. Washington will need Iran to abstain from action in Iraq but to act in Afghanistan. More significantly, the United States will need Iran not to enter into an understanding with Russia. The next president will have to figure out how to achieve all these things without giving away more than he needs to, and without losing his domestic political base in the process.

Afghanistan, Pakistan and the Taliban

The U.S. president also will have to come up with an Afghan policy, which really doesn't exist at this moment. The United States and its NATO allies have deployed about 50,000 troops in Afghanistan. To benchmark this, the Russians deployed around 120,000 by the mid-1980s, and were unable to pacify the country. Therefore the possibility of 60,000 troops -- or even a few additional brigades on top of that -- pacifying Afghanistan is minimal. The primary task of troops in Afghanistan now is to defend the Kabul regime and other major cities, and to try to keep the major roads open. More troops will make this easier, but by itself, it will not end the war.

The problem in Afghanistan is twofold. First, the Taliban defeated their rivals in Afghanistan during the civil war of the 1990s because they were the most cohesive force in the country, were politically adept and enjoyed Pakistani support. The Taliban's victory was not accidental; and all other things being equal, without the U.S. presence, they could win again. The United States never defeated the Taliban. Instead, the Taliban refused to engage in massed warfare against American airpower, retreated, dispersed and regrouped. In most senses, it is the same force that won the Afghan civil war.

The United States can probably block the Taliban from taking the cities, but to do more it must do three things. First, it must deny the Taliban sanctuary and lines of supply running from Pakistan. These two elements allowed the mujahideen to outlast the Soviets. They helped bring the Taliban to power. And they are fueling the Taliban today. Second, the United States must form effective coalitions with tribal groups hostile to the Taliban. To do this it needs the help of Iran, and more important, Washington must convince the tribes that it will remain in Afghanistan indefinitely -- not an easy task. And third -- the hardest task for the new president -- the United States will have to engage the Taliban themselves, or at least important factions in the Taliban movement, in a political process. When we recall that the United States negotiated with the Sunni insurgents in Iraq, this is not as far-fetched as it appears.

The most challenging aspect to deal with in all this is Pakistan. The United States has two issues in the South Asian country. The first is the presence of al Qaeda in northern Pakistan. Al Qaeda has not carried out a successful operation in the United States since 2001, nor in Europe since 2005. Groups who use the al Qaeda label continue to operate in Iraq, Afghanistan and Pakistan, but they use the name to legitimize or celebrate their activities -- they are not the same people who carried out 9/11. Most of al Qaeda prime's operatives are dead or scattered, and its main leaders, Osama bin Laden and Ayman al-Zawahiri, are not functional. The United States would love to capture bin Laden so as to close the books on al Qaeda, but the level of effort needed -- assuming he is even alive -- might outstrip U.S. capabilities.

The most difficult step politically for the new U.S. president will be to close the book on al Qaeda. This does not mean that a new group of operatives won't grow from the same soil, and it doesn't mean that Islamist terrorism is dead by any means. But it does mean that the particular entity the United States has been pursuing has effectively been destroyed, and the parts regenerating under its name are not as dangerous. Asserting victory will be extremely difficult for the new U.S. president. But without that step, a massive friction point between the United States and Pakistan will persist -- one that isn't justified geopolitically and undermines a much more pressing goal.

The United States needs the Pakistani army to attack the Taliban in Pakistan, or failing that, permit the United States to attack them without hindrance from the Pakistani military. Either of these are nightmarishly difficult things for a Pakistani government to agree to, and harder still to carry out. Nevertheless, without cutting the line of supply to Pakistan, like Vietnam and the Ho Chi Minh Trail, Afghanistan cannot be pacified. Therefore, the new president will face the daunting task of persuading or coercing the Pakistanis to carry out an action that will massively destabilize their country without allowing the United States to get bogged down in a Pakistan it cannot hope to stabilize.

At the same time, the United States must begin the political process of creating some sort of coalition in Afghanistan that it can live with. The fact of the matter is that the United States has no long-term interest in Afghanistan except in ensuring that radical jihadists with global operational reach are not given sanctuary there. Getting an agreement to that effect will be hard. Guaranteeing compliance will be virtually impossible. Nevertheless, that is the task the next president must undertake.

There are too many moving parts in Afghanistan to be sanguine about the outcome. It is a much more complex situation than Iraq, if for no other reason than because the Taliban are a far more effective fighting force than anything the United States encountered in Iraq, the terrain far more unfavorable for the U.S. military, and the political actors much more cynical about American capabilities.

The next U.S. president will have to make a painful decision. He must either order a long-term holding action designed to protect the Karzai government, launch a major offensive that includes Pakistan but has insufficient forces, or withdraw. Geopolitically, withdrawal makes a great deal of sense. Psychologically, it could unhinge the region and regenerate al Qaeda-like forces. Politically, it would not be something a new president could do. But as he ponders Iraq, the future president will have to address Afghanistan. And as he ponders Afghanistan, he will have to think about the Russians.

The Russian Resurgence

When the United States invaded Afghanistan in 2001, the Russians were allied with the United States. They facilitated the U.S. relationship with the Northern Alliance, and arranged for air bases in Central Asia. The American view of Russia was formed in the 1990s. It was seen as disintegrating, weak and ultimately insignificant to the global balance. The United States expanded NATO into the former Soviet Union in the Baltic states and said it wanted to expand it into Ukraine and Georgia. The Russians made it clear that they regarded this as a direct threat to their national security, resulting in the 2008 Georgian conflict.

The question now is where U.S.-Russian relations are going. Russian Prime Minister Vladimir Putin called the collapse of the Soviet Union a geopolitical catastrophe. After Ukraine and Georgia, it is clear he does not trust the United States and that he intends to reassert his sphere of influence in the former Soviet Union. Georgia was lesson one. The current political crisis in Ukraine is the second lesson unfolding.

The re-emergence of a Russian empire in some form or another represents a far greater threat to the United States than the Islamic world. The Islamic world is divided and in chaos. It cannot coalesce into the caliphate that al Qaeda wanted to create by triggering a wave of revolutions in the Islamic world. Islamic terrorism remains a threat, but the geopolitical threat of a unifying Islamic power is not going to happen.

Russia is a different matter. The Soviet Union and the Russian empire both posed strategic threats because they could threaten Europe, the Middle East and China simultaneously. While this overstates the threat, it does provide some context. A united Eurasia is always powerful, and threatens to dominate the Eastern Hemisphere. Therefore, preventing Russia from reasserting its power in the former Soviet Union should take precedence over all other considerations.

The problem is that the United States and NATO together presently do not have the force needed to stop the Russians. The Russian army is not particularly powerful or effective, but it is facing forces that are far less powerful and effective. The United States has its forces tied down in Iraq and Afghanistan so that when the war in Georgia broke out, sending ground forces was simply not an option. The Russians are extremely aware of this window of opportunity, and are clearly taking advantage of it.

The Russians have two main advantages in this aside from American resource deficits. First, the Europeans are heavily dependent on Russian natural gas; German energy dependence on Moscow is particularly acute. The Europeans are in no military or economic position to take any steps against the Russians, as the resulting disruption would be disastrous. Second, as the United States maneuvers with Iran, the Russians can provide support to Iran, politically and in terms of military technology, that not only would challenge the United States, it might embolden the Iranians to try for a better deal in Iraq by destabilizing Iraq again. Finally, the Russians can pose lesser challenges in the Caribbean with Venezuela, Nicaragua and Cuba, as well as potentially supporting Middle Eastern terrorist groups and left-wing Latin American groups.

At this moment, the Russians have far more options than the Americans have. Therefore, the new U.S. president will have to design a policy for dealing with the Russians with few options at hand. This is where his decisions on Iraq, Iran, Afghanistan and Pakistan will intersect and compete with his decisions on Russia. Ideally, the United States would put forces in the Baltics -- which are part of NATO -- as well as in Ukraine and Georgia. But that is not an option and won't be for more than a year under the best of circumstances.

The United States therefore must attempt a diplomatic solution with Russia with very few sticks. The new president will need to try to devise a package of carrots -- e.g., economic incentives -- plus the long-term threat of a confrontation with the United States to persuade Moscow not to use its window of opportunity to reassert Russian regional hegemony. Since regional hegemony allows Russia to control its own destiny, the carrots will have to be very tempting, while the threat has to be particularly daunting. The president's task will be crafting the package and then convincing the Russians it has value.

European Disunity and Military Weakness

One of the problems the United States will face in these negotiations will be the Europeans. There is no such thing as a European foreign policy; there are only the foreign policies of the separate countries. The Germans, for example, do not want a confrontation with Russia under any circumstances. The United Kingdom, by contrast, is more willing to take a confrontational approach to Moscow. And the European military capability, massed and focused, is meager. The Europeans have badly neglected their military over the past 15 years. What deployable, expeditionary forces they have are committed to the campaign in Afghanistan. That means that in dealing with Russia, the Americans do not have united European support and certainly no meaningful military weight. This will make any diplomacy with the Russians extremely difficult.

One of the issues the new president eventually will have to face is the value of NATO and the Europeans as a whole. This was an academic matter while the Russians were prostrate. With the Russians becoming active, it will become an urgent issue. NATO expansion -- and NATO itself -- has lived in a world in which it faced no military threats. Therefore, it did not have to look at itself militarily. After Georgia, NATO's military power becomes very important, and without European commitment, NATO's military power independent of the United States -- and the ability to deploy it -- becomes minimal. If Germany opts out of confrontation, then NATO will be paralyzed legally, since it requires consensus, and geographically. For the United States alone cannot protect the Baltics without German participation.

The president really will have one choice affecting Europe: Accept the resurgence of Russia, or resist. If the president resists, he will have to limit his commitment to the Islamic world severely, rebalance the size and shape of the U.S. military and revitalize and galvanize NATO. If he cannot do all of those things, he will face some stark choices in Europe.

Israel, Turkey, China, and Latin America

Russian pressure is already reshaping aspects of the global system. The Israelis have approached Georgia very differently from the United States. They halted weapon sales to Georgia the week before the war, and have made it clear to Moscow that Israel does not intend to challenge Russia. The Russians met with Syrian President Bashar al Assad immediately after the war. This signaled the Israelis that Moscow was prepared to support Syria with weapons and with Russian naval ships in the port of Tartus if Israel supports Georgia, and other countries in the former Soviet Union, we assume. The Israelis appear to have let the Russians know that they would not do so, separating themselves from the U.S. position. The next president will have to re-examine the U.S. relationship with Israel if this breach continues to widen.

In the same way, the United States will have to address its relationship with Turkey. A long-term ally, Turkey has participated logistically in the Iraq occupation, but has not been enthusiastic. Turkey's economy is booming, its military is substantial and Turkish regional influence is growing. Turkey is extremely wary of being caught in a new Cold War between Russia and the United States, but this will be difficult to avoid. Turkey's interests are very threatened by a Russian resurgence, and Turkey is the U.S. ally with the most tools for countering Russia. Both sides will pressure Ankara mercilessly. More than Israel, Turkey will be critical both in the Islamic world and with the Russians. The new president will have to address U.S.-Turkish relations both in context and independent of Russia fairly quickly.

In some ways, China is the great beneficiary of all of this. In the early days of the Bush administration, there were some confrontations with China. As the war in Iraq calmed down, Washington seemed to be increasing its criticisms of China, perhaps even tacitly supporting Tibetan independence. With the re-emergence of Russia, the United States is now completely distracted. Contrary to perceptions, China is not a global military power. Its army is primarily locked in by geography and its navy is in no way an effective blue-water force. For its part, the United States is in no position to land troops on mainland China. Therefore, there is no U.S. geopolitical competition with China. The next president will have to deal with economic issues with China, but in the end, China will sell goods to the United States, and the United States will buy them.

Latin America has been a region of minimal interest to the United States in the last decade or longer. So long as no global power was using its territory, the United States did not care what presidents Hugo Chavez in Venezuela, Evo Morales in Bolivia and Daniel Ortega in Nicaragua -- or even the Castros in Cuba -- were doing. But with the Russians back in the Caribbean, at least symbolically, all of these countries suddenly become more important. At the moment, the United States has no Latin American policy worth noting; the new president will have to develop one.

Quite apart from the Russians, the future U.S. president will need to address Mexico. The security situation in Mexico is deteriorating substantially, and the U.S.-Mexican border remains porous. The cartels stretch from Mexico to the streets of American cities where their customers live. What happens in Mexico, apart from immigration issues, is obviously of interest to the United States. If the current trajectory continues, at some point in his administration, the new U.S. president will have to address Mexico -- potentially in terms never before considered.

The U.S. Defense Budget

The single issue touching on all of these is the U.S. defense budget. The focus of defense spending over the past eight years has been the Army and Marine Corps -- albeit with great reluctance. Former Defense Secretary Donald Rumsfeld was not an advocate of a heavy Army, favoring light forces and air power, but reality forced his successors to reallocate resources. In spite of this, the size of the Army remained the same -- and insufficient for the broader challenges emerging.

The focus of defense spending was Fourth Generation warfare, essentially counterinsurgency. It became dogma in the military that we would not see peer-to-peer warfare for a long time. The re-emergence of Russia, however, obviously raises the specter of peer-to-peer warfare, which in turn means money for the Air Force as well as naval rearmament. All of these programs will take a decade or more to implement, so if Russia is to be a full-blown challenge by 2020, spending must begin now.

If we assume that the United States will not simply pull out of Iraq and Afghanistan, but will also commit troops to allies on Russia's periphery while retaining a strategic reserve -- able to, for example, protect the U.S.-Mexican border -- then we are assuming substantially increased spending on ground forces. But that will not be enough. The budgets for the Air Force and Navy will also have to begin rising.

U.S. national strategy is expressed in the defense budget. Every strategic decision the president makes has to be expressed in budget dollars with congressional approval. Without that, all of this is theoretical. The next president will have to start drafting his first defense budget shortly after taking office. If he chooses to engage all of the challenges, he must be prepared to increase defense spending. If he is not prepared to do that, he must concede that some areas of the world are beyond management. And he will have to decide which areas these are. In light of the foregoing, as we head toward the debate, 10 questions should be asked of the candidates:

If the United States removes its forces from Iraq slowly as both of you advocate, where will the troops come from to deal with Afghanistan and protect allies in the former Soviet Union?
The Russians sent 120,000 troops to Afghanistan and failed to pacify the country. How many troops do you think are necessary?
Do you believe al Qaeda prime is still active and worth pursuing?
Do you believe the Iranians are capable of producing a deliverable nuclear weapon during your term in office?
How do you plan to persuade the Pakistani government to go after the Taliban, and what support can you provide them if they do?
Do you believe the United States should station troops in the Baltic states, in Ukraine and Georgia as well as in other friendly countries to protect them from Russia?
Do you feel that NATO remains a viable alliance, and are the Europeans carrying enough of the burden?
Do you believe that Mexico represents a national security issue for the United States?
Do you believe that China represents a strategic challenge to the United States?
Do you feel that there has been tension between the United States and Israel over the Georgia issue?

The Real World Order

John Mauldin — Thu, 21 Aug 2008 13:44:44 GMT

"But this time it's different!!!" Any time you hear that from a financial analyst, you should run. Or better still, take the other side of his trade! If you're numerically oriented, you know that patterns tend to revert to the mean. If you're historically oriented, you know that the more things change, the more they remain the same. Can companies really make money selling a product for less than it costs to make - even in volume? Ask Buffett why he sat out the tech boom....

Today I'm passing along a piece from George Friedman, Chief Intelligence Officer at Stratfor. He makes the absolutely compelling argument that issues of war and peace follow these same guidelines. There are ebbs and flows, but war between countries is an inevitable part of history, and it's driven by simple geography. The recent war between Russia and Georgia was precisely such a "reversion to the mean," double-entendre fully intended.

Navigating financial markets requires an understanding of the geopolitical issues - the war & peace - that drive them. What does this war mean for Russian gas supplies to Europe? What does this war mean for the future of the BTC pipeline? Does this war make Iranian inclusion in global markets more or less likely? Is Russia just "vertically integrating" its control of energy flows with less-than-subtle tools?

You may have seen Stratfor quotations recently in the New York Times, Bloomberg, and Barron's. But personally I need more than just snippets. Quite simply, George's team is the best out there, and I encourage you to take advantage of the special offer that George makes available for my readers. The old Cold War is heating up, and this is no time to be without intelligence on what's coming next and analysis of what it means.

Read the analysis below and get a solid reminder that it's not different this time - or any other.

John Mauldin, Editor
Outside the Box

The Real World Order

By George Friedman

On Sept. 11, 1990, U.S. President George H. W. Bush addressed Congress. He spoke in the wake of the end of Communism in Eastern Europe, the weakening of the Soviet Union, and the invasion of Kuwait by Saddam Hussein. He argued that a New World Order was emerging: "A hundred generations have searched for this elusive path to peace, while a thousand wars raged across the span of human endeavor, and today that new world is struggling to be born. A world quite different from the one we've known. A world where the rule of law supplants the rule of the jungle. A world in which nations recognize the shared responsibility for freedom and justice. A world where the strong respect the rights of the weak."

After every major, systemic war, there is the hope that this will be the war to end all wars. The idea driving it is simple. Wars are usually won by grand coalitions. The idea is that the coalition that won the war by working together will continue to work together to make the peace. Indeed, the idea is that the defeated will join the coalition and work with them to ensure the peace. This was the dream behind the Congress of Vienna, the League of Nations, the United Nations and, after the Cold War, NATO. The idea was that there would be no major issues that couldn't be handled by the victors, now joined with the defeated. That was the idea that drove George H. W. Bush as the Cold War was coming to its end.

Those with the dream are always disappointed. The victorious coalition breaks apart. The defeated refuse to play the role assigned to them. New powers emerge that were not part of the coalition. Anyone may have ideals and visions. The reality of the world order is that there are profound divergences of interest in a world where distrust is a natural and reasonable response to reality. In the end, ideals and visions vanish in a new round of geopolitical conflict.

The post-Cold War world, the New World Order, ended with authority on Aug. 8, 2008, when Russia and Georgia went to war. Certainly, this war was not in itself of major significance, and a very good case can be made that the New World Order actually started coming apart on Sept. 11, 2001. But it was on Aug. 8 that a nation-state, Russia, attacked another nation-state, Georgia, out of fear of the intentions of a third nation-state, the United States. This causes us to begin thinking about the Real World Order.

The global system is suffering from two imbalances. First, one nation-state, the United States, remains overwhelmingly powerful, and no combination of powers are in a position to control its behavior. We are aware of all the economic problems besetting the United States, but the reality is that the American economy is larger than the next three economies combined (Japan, Germany and China). The U.S. military controls all the world's oceans and effectively dominates space. Because of these factors, the United States remains politically powerful - not liked and perhaps not admired, but enormously powerful.

The second imbalance is within the United States itself. Its ground forces and the bulk of its logistical capability are committed to the Middle East, particularly Iraq and Afghanistan. The United States also is threatening on occasion to go to war with Iran, which would tie down most of its air power, and it is facing a destabilizing Pakistan. Therefore, there is this paradox: The United States is so powerful that, in the long run, it has created an imbalance in the global system. In the short run, however, it is so off balance that it has few, if any, military resources to deal with challenges elsewhere. That means that the United State s remains the dominant power in the long run but it cannot exercise that power in the short run. This creates a window of opportunity for other countries to act.

The outcome of the Iraq war can be seen emerging. The United States has succeeded in creating the foundations for a political settlement among the main Iraqi factions that will create a relatively stable government. In that sense, U.S. policy has succeeded. But the problem the United States has is the length of time it took to achieve this success. Had it occurred in 2003, the United States would not suffer its current imbalance. But this is 2008, more than five years after the invasion. The United States never expected a war of this duration, nor did it plan for it. In order to fight the war, it had to inject a major portion of its ground fighting capability into it. The length of the war was the problem. U.S. ground forces are either in Iraq, recovering from a tour or preparing for a deployment. What strategic reserves are available are tasked into Afghanistan. Little is left over.

As Iraq pulled in the bulk of available forces, the United States did not shift its foreign policy elsewhere. For example, it remained committed to the expansion of democracy in the former Soviet Union and the expansion of NATO, to include Ukraine and Georgia. From the fall of the former Soviet Union, the United States saw itself as having a dominant role in reshaping post-Soviet social and political orders, including influencing the emergence of democratic institutions and free markets. The United States saw this almost in the same light as it saw the democratization of Germany and Japan after World War II. Having defeated the Soviet Union, it now fell to the United States to reshape the societies of the successor states.

Through the 1990s, the successor states, particularly Russia, were inert. Undergoing painful internal upheaval - which foreigners saw as reform but which many Russians viewed as a foreign-inspired national catastrophe - Russia could not resist American and European involvement in regional and internal affairs. From the American point of view, the reshaping of the region - from the Kosovo war to the expansion of NATO to the deployment of U.S. Air Force bases to Central Asia - was simply a logical expansion of the collapse of the Soviet Union. It was a benign attempt to stabilize the region, enhance its prosperity and security and integrate it into the global system.

As Russia regained its balance from the chaos of the 1990s, it began to see the American and European presence in a less benign light. It was not clear to the Russians that the United States was trying to stabilize the region. Rather, it appeared to the Russians that the United States was trying to take advantage of Russian weakness to impose a new politico-military reality in which Russia was to be surrounded with nations controlled by the United States and its military system, NATO. In spite of the promise made by Bill Clinton that NATO would not expand into the former Soviet Union, the three Baltic states were admitted. The promise was not addressed. NATO was expanded because it could and Russia could do nothing about it.

From the Russian point of view, the strategic break point was Ukraine. When the Orange Revolution came to Ukraine, the American and European impression was that this was a spontaneous democratic rising. The Russian perception was that it was a well-financed CIA operation to foment an anti-Russian and pro-American uprising in Ukraine. When the United States quickly began discussing the inclusion of Ukraine in NATO, the Russians came to the conclusion that the United States intended to surround and crush the Russian Federation. In their view, if NATO expanded into Ukraine, the Western military alliance would place Russia in a strategically untenable position. Russia would be indefensible. The American response was that it had no intention of threatening Russia. The Russian question was returned: Then why are you trying to take control of Ukraine? What other purpose would you have? The United States dismissed these Russian concerns as absurd. The Russians, not regarding them as absurd at all, began planning on the assumption of a hostile United States.

If the United States had intended to break the Russian Federation once and for all, the time for that was in the 1990s, before Yeltsin was replaced by Putin and before 9/11. There was, however, no clear policy on this, because the United States felt it had all the time in the world. Superficially this was true, but only superficially. First, the United States did not understand that the Yeltsin years were a temporary aberration and that a new government intending to stabilize Russia was inevitable. If not Putin, it would have been someone else. Second, the United States did not appreciate that it did not control the international agenda. Sept. 11, 2001, took away American options in the former Soviet Union. No only did it need Russian help in Afghanistan, but it was going to spend the next decade tied up in the Middle East. The United States had lost its room for maneuver and therefore had run out of time.

And now we come to the key point. In spite of diminishing military options outside of the Middle East, the United States did not modify its policy in the former Soviet Union. It continued to aggressively attempt to influence countries in the region, and it became particularly committed to integrating Ukraine and Georgia into NATO, in spite of the fact that both were of overwhelming strategic interest to the Russians. Ukraine dominated Russia's southwestern flank, without any natural boundaries protecting them. Georgia was seen as a constant irritant in Chechnya as well as a barrier to Russian interests in the Caucasus.

Moving rapidly to consolidate U.S. control over these and other countries in the former Soviet Union made strategic sense. Russia was weak, divided and poorly governed. It could make no response. Continuing this policy in the 2000s, when the Russians were getting stronger, more united and better governed and while U.S. forces were no longer available, made much less sense. The United States continued to irritate the Russians without having, in the short run, the forces needed to act decisively.

The American calculation was that the Russian government would not confront American interests in the region. The Russian calculation was that it could not wait to confront these interests because the United States was concluding the Iraq war and would return to its pre-eminent position in a few short years. Therefore, it made no sense for Russia to wait and it made every sense for Russia to act as quickly as possible.

The Russians were partly influenced in their timing by the success of the American surge in Iraq. If the United States continued its policy and had force to back it up, the Russians would lose their window of opportunity. Moreover, the Russians had an additional lever for use on the Americans: Iran.

The United States had been playing a complex game with Iran for years, threatening to attack while trying to negotiate. The Americans needed the Russians. Sanctions against Iran would have no meaning if the Russians did not participate, and the United States did not want Russia selling advance air defense systems to Iran. (Such systems, which American analysts had warned were quite capable, were not present in Syria on Sept. 6, 2007, when the Israelis struck a nuclear facility there.) As the United States re-evaluates the Russian military, it does not want to be surprised by Russian technology. Therefore, the more aggressive the United States becomes toward Russia, the greater the difficulties it will have in Iran. This further encouraged the Russians to act sooner rather than later.

The Russians have now proven two things. First, contrary to the reality of the 1990s, they can execute a competent military operation. Second, contrary to regional perception, the United States cannot intervene. The Russian message was directed against Ukraine most of all, but the Baltics, Central Asia and Belarus are all listening. The Russians will not act precipitously. They expect all of these countries to adjust their foreign policies away from the United States and toward Russia. They are looking to see if the lesson is absorbed. At first, there will be mighty speeches and resistance. But the reality on the ground is the reality on the ground.

We would expect the Russians to get traction. But if they don't, the Russians are aware that they are, in the long run, much weaker than the Americans, and that they will retain their regional position of strength only while the United States is off balance in Iraq. If the lesson isn't absorbed, the Russians are capable of more direct action, and they will not let this chance slip away. This is their chance to redefine their sphere of influence. They will not get another.

The other country that is watching and thinking is Iran. Iran had accepted the idea that it had lost the chance to dominate Iraq. It had also accepted the idea that it would have to bargain away its nuclear capability or lose it. The Iranians are now wondering if this is still true and are undoubtedly pinging the Russians about the situation. Meanwhile, the Russians are waiting for the Americans to calm down and get serious. If the Americans plan to take meaningful action against them, they will respond in Iran. But the Americans have no meaningful actions they can take; they need to get out of Iraq and they need help against Iran. The quid pro quo here is obvious. The United States acquiesces to Russian actions (which it can't do anything about), while the Russians cooperate with the United States against Iran getting nuclear weapons (something Russia does not want to see).

One of the interesting concepts of the New World Order was that all serious countries would want to participate in it and that the only threat would come from rogue states and nonstate actors such as North Korea and al Qaeda. Serious analysts argued that conflict between nation-states would not be important in the 21st century. There will certainly be rogue states and nonstate actors, but the 21st century will be no different than any other century. On Aug. 8, the Russians invited us all to the Real World Order.

Mediterranean Flyover: Telegraphing an Israeli Punch?

John Mauldin — Thu, 07 Aug 2008 20:15:49 GMT

Kudos to my friend George Friedman and his crew at Stratfor. If you didn't see the article in this week's Barron's about Stratfor's analysis of the geopolitical risk premium built into oil prices, you missed a really good piece of work. You've probably heard Napoleon's quote that "Amateurs discuss strategy, and professionals discuss logistics." If you want a perfect example of how that quote plays out for the markets, take a look at Stratfor's article below. It's precisely the kind of sober, fundamental research that makes Stratfor my invaluable source for geopolitical intelligence.

No matter where you're looking at putting your money today, the impact of energy prices simply can't be overstated. The commodities trade, US and foreign equities, debt and interest rates, everything is being driven by energy prices right now. Whether you're trying to factor energy as a direct input into the price and consumption of manufactured goods or dealing with monetary policy's impact on the dollar and debt markets, you're implicitly making an energy trade.

I've said it before and I'll say it again, if you're trying to trade today's markets without geopolitical intelligence, it's like trying to trade the juice futures market without a weather forecast. You can do it, but good luck to you.

George has kindly passed me the article that was the basis of the Barron's story. You'll notice right away that unlike many of the so-called experts out there, Stratfor doesn't airily dismiss underlying logistics in favor of handwaving. But better than taking my word for it, click here to get your own Stratfor Membership at the discounted rate for my readers. Every day you'll receive the same forecasts and intelligence guidance that I use to shape my thinking on where the world is going - and especially on energy prices.

John Mauldin, Editor
Outside the Box

Mediterranean Flyover: Telegraphing an Israeli Punch?

By George Friedman

On June 20, The New York Times published a report saying that more than 100 Israeli aircraft carried out an exercise in early June over the eastern Mediterranean Sea and Greece. The article pointed out that the distances covered were roughly the distances from Israel to Iranian nuclear sites and that the exercise was a trial run for a large-scale air strike against Iran. On June 21, the British newspaper The Times quoted Israeli military sources as saying that the exercise was a dress rehearsal for an attack on Iran. The Jerusalem Post, in covering these events, pointedly referred to an article it had published in May saying that Israeli intelligence had changed its forecast for Iran passing a nuclear threshold — whether this was simply the ability to cause an explosion under controlled conditions or the ability to produce an actual weapon was unclear — to 2008 rather than 2009.

The New York Times article, positioned on the front page, captured the attention of everyone from oil traders to Iran, which claimed that this was entirely psychological warfare on the part of the Israelis and that Israel could not carry out such an attack. It was not clear why the Iranians thought an attack was impossible, but they were surely right in saying that the exercise was psychological warfare. The Israelis did everything they could to publicize the exercise, and American officials, who obviously knew about the exercise but had not publicized it, backed them up. What is important to note is that the fact that this was psychological warfare — and fairly effective, given the Iranian response — does not mean that Israel is not going to attack. One has nothing to do with the other. So the question of whether there is going to be an attack must be analyzed carefully.

The first issue, of course, is what might be called the “red line.” It has always been expected that once the Iranians came close to a line at which they would become a capable nuclear power, the Americans or the Israelis would act to stop them, neither being prepared to tolerate a nuclear Iran. What has never been clear is what constitutes that red line. It could simply be having produced sufficient fissionable material to build a bomb, having achieved a nuclear explosion under test conditions in Iran or having approached the point of producing a deliverable nuclear weapon.

Early this month, reports circulated that A.Q. Khan, the former head of Pakistan's nuclear program who is accused of selling nuclear technology to such countries as Libya, North Korea and Iran, had also possessed detailed design specifications and blueprints for constructing a nuclear weapon small enough to be mounted on missiles available to North Korea and Iran. The blueprints were found on a computer owned by a Swiss businessman, but the reports pointedly said that it was not known whether these documents had been transferred to Iran or any other country. It was interesting that the existence of the blueprints in Switzerland was known to the United States — and, we assume, Israel — in 2006 but that, at this point, there was no claim that they had been transferred.

Clearly, the existence of these documents — if Iran had a copy of them — would have helped the Iranians clear some hurdles. However, as we have pointed out, there is a huge gap between having enriched uranium and having a deliverable weapon, the creation of which requires technologies totally unrelated to each other. Ruggedizing and miniaturizing a nuclear device requires specializations from materials science to advanced electronics. Therefore, having enriched uranium or even triggering an underground nuclear device still leaves you a long way from having a weapon.

That's why the leak on the nuclear blueprints is so important. From the Israeli and American point of view, those blueprints give the Iranians the knowledge of precisely how to ruggedize and miniaturize a nuclear device. But there are two problems here. First, if we were given blueprints for building a bridge, they would bring us no closer to building one. We would need experts in multiple disciplines just to understand the blueprints and thousands of trained engineers and workers to actually build the bridge. Second, the Israelis and Americans have known about the blueprints for two years. Even if they were certain that they had gotten to the Iranians — which the Israelis or Americans would certainly have announced in order to show the increased pressure at least one of them would be under to justify an attack — it is unclear how much help the blueprints would have been to the Iranians. The Jerusalem Post story implied that the Iranians were supposed to be crossing an undefined line in 2009. It is hard to imagine that they were speeded up to 2008 by a document delivered in 2006, and that the Israelis only just noticed.

In the end, the Israelis may have intelligence indicating that the blueprints did speed things up, and that the Iranians might acquire nuclear weapons in 2008. We doubt that. But given the statements Iranian President Mahmoud Ahmadinejad has made over the years, the Israelis have to be planning based on worst-case scenarios. What the sum total of their leaks adds up to is an attempt to communicate widely that there is an increased urgency in dealing with Iran, based on intelligence that the Iranian program is farther along than previously thought.

The problem is the fact that the Israelis are communicating. In fact, they are going out of their way to communicate. That is extremely odd. If the Israelis were intending to strike Iran's nuclear facilities, they would want to be absolutely certain that as much of the equipment in the facilities was destroyed as possible. But the hard truth is that the heart of Iran's capability, such as it is, does not reside in its facilities but in its scientists, engineers and technicians who collectively constitute the knowledge base of Iran's nuclear program. Facilities can be replaced. It would take at least a generation to replace what we already regard as an insufficient cadre of expertise.

Therefore, if Israel wanted not simply to take out current facilities but to take Iran out of the nuclear game for a very long time, killing these people would have to be a major strategic goal. The Israelis would want to strike in the middle of the workday, without any warning whatever. If they strike Iran, they will be condemned widely for their actions. The additional criticism that would come from killing the workforce would not be a large price to pay for really destroying the Iranian capabilities. Unlike the Iraqi reactor strike in 1981, when the Israelis struck at night to minimize casualties, this strike against a more sophisticated program could not afford to be squeamish.

There are obviously parts of Iran's nuclear capability that cannot be moved. There is other equipment that can be, with enough warning and with more or less difficulty, moved to unknown locations. But nothing would be easier to disperse than the heart of the program — the people. They could be moved out of harm's way with only an hour's notice. Therefore, providing warning that an attack was coming makes very little sense. It runs counter to basic principles of warfare. The Israelis struck the Osirak reactor in Iraq in 1981 with not the slightest hint of the attack's imminence. That was one of the reasons it was successful. Telegraphing your punch is not very smart in these circumstances.

The Israelis have done more than raise the possibility that an attack might be launched in 2008. They have publicized how they plan to do it. Based on the number and type of aircraft involved in the exercise — more than 100 F-15 and F-16 fighter jets — one Israeli attack scenario could involve a third of Israel's inventory of fourth-generation strike aircraft, including most of its latest-model F-15I Ra'am and F-16I Sufa fighter bombers. If Greece were the target in this exercise, then the equivalent distance would mean that the Israelis are planning to cross Jordanian airspace, transit through Iraq and strike Iran from that direction. A strike through Turkey — and there is no indication that the Turks would permit it — would take much longer.

The most complex part of the operation's logistics would be the refueling of aircraft. They would have to be orbiting in Iraqi airspace. One of the points discussed about the Mediterranean exercise was the role of Israeli helicopters in rescuing downed flyers. Rescue helicopters would be involved, but we doubt very much they would be entering Iranian airspace from Israel. They are a lot slower than the jets, and they would have to be moving hours ahead of time. The Iranians might not spot them but the Russians would, and there is no guarantee that they wouldn't pass it on to the Iranians. That means that the Israeli helicopters would have to move quietly into Iraq and be based there.

And that means that this would have to be a joint American-Israeli operation. The United States controls Iraqi airspace, meaning that the Americans would have to permit Israeli tankers to orbit in Iraqi airspace. The search-and-rescue helicopters would have to be based there. And we strongly suspect that rescued pilots would not be ferried back to Israel by helicopter but would either be sent to U.S. hospitals in Iraq or transferred to Israeli aircraft in Iraq.

The point here is that, given the exercise the Israelis carried out and the distances involved, there is no way Israel could do this without the direct cooperation of the United States. From a political standpoint in the region, it is actually easier for the United States to take out Iran's facilities than for it to help the Israelis do so. There are many Sunni states that might formally protest but be quite pleased to see the United States do the job. But if the Israelis were to do it, Sunni states would have to be much more serious in their protestations. In having the United States play the role of handmaiden in the Israeli operation, it would appear that the basic charge against the United States — that it is the handmaiden of the Israelis — is quite true. If the Americans are going to be involved in a strike against Iran's nuclear program, they are far better off doing it themselves than playing a supporting role to Israel.

There is something not quite right in this whole story. The sudden urgency — replete with tales of complete blueprints that might be in Iranian hands — doesn't make sense. We may be wrong, but we have no indication that Iran is that close to producing nuclear weapons. Second, the extreme publicity given the exercise in the Mediterranean, coming from both Israel and the United States, runs counter to the logic of the mission. Third, an attack on Iran through Iraqi airspace would create a political nightmare for the United States. If this is the Israeli attack plan, the Americans would appear to be far better off doing it themselves.

There are a number of possible explanations. On the question of urgency, the Israelis might have two things in mind. One is the rumored transfer of S-300 surface-to-air missiles from Russia to Iran. This transfer has been rumored for quite a while, but by all accounts has yet to happen. The S-300 is a very capable system, depending on the variety (and it is unclear which variety is being transferred), and it would increase the cost and complexity of any airstrike against Iran. Israel may have heard that the Russians are planning to begin transferring the missiles sometime in 2008.

Second, there is obviously the U.S. presidential election. George W. Bush will be out of office in early 2009, and it is possible that Barack Obama will be replacing him. The Israelis have made no secret of their discomfort with an Obama presidency. Obviously, Israel cannot attack Iran without U.S. cooperation. The Israelis' timetable may be moved up because they are not certain that Obama will permit an attack later on.

There are also explanations for the extreme publicity surrounding the exercise. The first might be that the Israelis have absolutely no intention of trying to stage long-range attacks but are planning some other type of attack altogether. The possibilities range from commando raids to cruise missiles fired from Israeli submarines in the Arabian Sea — or something else entirely. The Mediterranean exercise might have been designed to divert attention.

Alternatively, the Israelis could be engaged in exhausting Iranian defenders. During the first Gulf War, U.S. aircraft rushed toward the Iraqi border night after night for weeks, pulling away and landing each time. The purpose was to get the Iraqis to see these feints as routine and slow down their reactions when U.S. aircraft finally attacked. The Israelis could be engaged in a version of this, tiring out the Iranians with a series of “emergencies” so they are less responsive in the event of a real strike.

Finally, the Israelis and Americans might not be intending an attack at all. Rather, they are — as the Iranians have said — engaged in psychological warfare for political reasons. The Iranians appear to be split now between those who think that Ahmadinejad has led Iran into an extremely dangerous situation and those who think Ahmadinejad has done a fine job. The prospect of an imminent and massive attack on Iran could give his opponents ammunition against him. This would explain the Iranian government response to the reports of a possible attack — which was that such an attack was just psychological warfare and could not happen. That clearly was directed more for internal consumption than it was for the Israelis or Americans.

We tend toward this latter theory. Frankly, the Bush administration has been talking about an attack on Iran for years. It is hard for us to see that the situation has changed materially over the past months. But if it has, then either Israel or the United States would have attacked — and not with front-page spreads in The New York Times before the attack was launched. In the end, we tend toward the view that this is psychological warfare for the simple reason that you don't launch a surprise attack of the kind necessary to take out Iran's nuclear program with a media blitz beforehand. It just doesn't work that way.

The Geopolitics of Iran

John Mauldin — Thu, 24 Jul 2008 19:39:52 GMT

For nearly 30 years, long before it was a charter member of the "Axis of Evil," Iran and the US have been locked in a hate-hate relationship. Walk down the street any Friday afternoon, and you're as likely to hear "Death to America!" as "Hi Ali, how are you?" Three decades of animosity, an externally opaque society, and no trade relations between the two countries mean that many of us have just the barest understanding of what's really going on over there. But whether it's a negotiated settlement with the US over Iraq, or a war-risk premium for crude oil, to threats and counterthreats with Israel and the US, Iran's decisions have enormous impact on the global economic system. All of the sudden, the picture of the "mad mullahs" you get from the papers seems expensively inadequate.

To understand Iran's impact on the world you need someone that wades through the complexities and distills out the salient facts. My friend George Friedman and his intelligence team at Stratfor are my go-to source for this kind of insight and understanding. For your financial analyses (I certainly hope!) you don't rely just on your daily newspaper's business section; if that's where you're getting your news on global events, well, hmmm....

Take a look at George's latest Geopolitical Monograph on Iran in the Special Edition of Outside the Box. This is part of a special series for Stratfor Members only - that George was kind enough to share this week. It's just stunning to me how the battles between Persia and Babylon are playing out yet again with Iranian involvement in Iraq. If you've ever wondered why the Iranians seem to have a bunker mentality, read this Monograph, and you'll see why. Want to understand why Iran works through proxies like Hezbollah? Here's your answer. Spend a few minutes on an invaluable investment in understanding Iran's global role.

The Geopolitical Monograph series is just one of the features of my Stratfor Membership that makes it so valuable to me. George's team also puts out daily analyses and a weekly Intelligence Guidance that highlight the critical geopolitical events that can move markets. You can get the same geopolitical intelligence I use via this special offer available to my readers. Click here for the full details, and start adding an intelligence perspective to your investing.

John Mauldin, Editor
Outside the Box

The Geopolitics of Iran:
Holding the Center of a Mountain Fortress

By George Friedman

To understand Iran, you must begin by understanding how large it is. Iran is the 17th largest country in world. It measures 1,684,000 square kilometers. That means that its territory is larger than the combined territories of France, Germany, the Netherlands, Belgium, Spain and Portugal - Western Europe. Iran is the 16th most populous country in the world, with about 70 million people. Its population is larger than the populations of either France or the United Kingdom.

Under the current circumstances, it might be useful to benchmark Iran against Iraq or Afghanistan. Iraq is 433,000 square kilometers, with about 25 million people, so Iran is roughly four times as large and three times as populous. Afghanistan is about 652,000 square kilometers, with a population of about 30 million. One way to look at it is that Iran is 68 percent larger than Iraq and Afghanistan combined, with 40 percent more population.

More important are its topographical barriers. Iran is defined, above all, by its mountains, which form its frontiers, enfold its cities and describe its historical heartland. To understand Iran, you must understand not only how large it is but also how mountainous it is.

Iran's most important mountains are the Zagros. They are a southern extension of the Caucasus, running about 900 miles from the northwestern border of Iran, which adjoins Turkey and Armenia, southeast toward Bandar Abbas on the Strait of Hormuz. The first 150 miles of Iran's western border is shared with Turkey. It is intensely mountainous on both sides. South of Turkey, the mountains on the western side of the border begin to diminish until they disappear altogether on the Iraqi side. From this point onward, south of the Kurdish regions, the land on the Iraqi side is increasingly flat, part of the Tigris-Euphrates basin. The Iranian side of the border is mountainous, beginning just a few miles east of the border. Iran has a mountainous border with Turkey, but mountains face a flat plain along the Iraq border. This is the historical frontier between Persia - the name of Iran until the early 20th century - and Mesopotamia ("land between two rivers"), as southern Iraq is called.

The one region of the western border that does not adhere to this model is in the extreme south, in the swamps where the Tigris and Euphrates rivers join to form the Shatt al-Arab waterway. There the Zagros swing southeast, and the southern border between Iran and Iraq zigzags south to the Shatt al-Arab, which flows south 125 miles through flat terrain to the Persian Gulf. To the east is the Iranian province of Khuzestan, populated by ethnic Arabs, not Persians. Given the swampy nature of the ground, it can be easily defended and gives Iran a buffer against any force from the west seeking to move along the coastal plain of Iran on the Persian Gulf.

Running east along the Caspian Sea are the Elburz Mountains, which serve as a mountain bridge between the Caucasus-Zagros range and Afghan mountains that eventually culminate in the Hindu Kush. The Elburz run along the southern coast of the Caspian to the Afghan border, buffering the Karakum Desert in Turkmenistan. Mountains of lesser elevations then swing down along the Afghan and Pakistani borders, almost to the Arabian Sea.

Iran has about 800 miles of coastline, roughly half along the eastern shore of the Persian Gulf, the rest along the Gulf of Oman. Its most important port, Bandar Abbas, is located on the Strait of Hormuz. There are no equivalent ports along the Gulf of Oman, and the Strait of Hormuz is extremely vulnerable to interdiction. Therefore, Iran is not a major maritime or naval power. It is and always has been a land power.

The center of Iran consists of two desert plateaus that are virtually uninhabited and uninhabitable. These are the Dasht-e Kavir, which stretches from Qom in the northwest nearly to the Afghan border, and the Dasht-e Lut, which extends south to Balochistan. The Dasht-e Kavir consists of a layer of salt covering thick mud, and it is easy to break through the salt layer and drown in the mud. It is one of the most miserable places on earth.

Iran's population is concentrated in its mountains, not in its lowlands, as with other countries. That's because its lowlands, with the exception of the southwest and the southeast (regions populated by non-Persians), are uninhabitable. Iran is a nation of 70 million mountain dwellers. Even its biggest city, Tehran, is in the foothills of towering mountains. Its population is in a belt stretching through the Zagros and Elbroz mountains on a line running from the eastern shore of the Caspian to the Strait of Hormuz. There is a secondary concentration of people to the northeast, centered on Mashhad. The rest of the country is lightly inhabited and almost impassable because of the salt-mud flats.

If you look carefully at a map of Iran, you can see that the western part of the country - the Zagros Mountains - is actually a land bridge for southern Asia. It is the only path between the Persian Gulf in the south and the Caspian Sea in the north. Iran is the route connecting the Indian subcontinent to the Mediterranean Sea. But because of its size and geography, Iran is not a country that can be easily traversed, much less conquered.

The location of Iran's oil fields is critical here, since oil remains its most important and most strategic export. Oil is to be found in three locations: The southwest is the major region, with lesser deposits along the Iraqi border in the north and one near Qom. The southwestern oil fields are an extension of the geological formation that created the oil fields in the Kurdish region of northern Iraq. Hence, the region east of the Shatt al-Arab is of critical importance to Iran. Iran has the third largest oil reserves in the world and is the world's fourth largest producer. Therefore, one would expect it to be one of the wealthiest countries in the world. It isn't.

Iran has the 28th largest economy in the world but ranks only 71st in per capita gross domestic product (as expressed in purchasing power). It ranks with countries like Belarus or Panama. Part of the reason is inefficiencies in the Iranian oil industry, the result of government policies. But there is a deeper geographic problem. Iran has a huge population mostly located in rugged mountains. Mountainous regions are rarely prosperous. The cost of transportation makes the development of industry difficult. Sparsely populated mountain regions are generally poor. Heavily populated mountain regions, when they exist, are much poorer.

Iran's geography and large population make substantial improvements in its economic life difficult. Unlike underpopulated and less geographically challenged countries such as Saudi Arabia and Kuwait, Iran cannot enjoy any shift in the underlying weakness of its economy brought on by higher oil prices and more production. The absence of inhabitable plains means that any industrial plant must develop in regions where the cost of infrastructure tends to undermine the benefits. Oil keeps Iran from sinking even deeper, but it alone cannot catapult Iran out of its condition.

The Broad Outline

Iran is a fortress. Surrounded on three sides by mountains and on the fourth by the ocean, with a wasteland at its center, Iran is extremely difficult to conquer. This was achieved once by the Mongols, who entered the country from the northeast. The Ottomans penetrated the Zagros Mountains and went northeast as far as the Caspian but made no attempt to move into the Persian heartland.

Iran is a mountainous country looking for inhabitable plains. There are none to the north, only more mountains and desert, or to the east, where Afghanistan's infrastructure is no more inviting. To the south there is only ocean. What plains there are in the region lie to the west, in modern-day Iraq and historical Mesopotamia and Babylon. If Iran could dominate these plains, and combine them with its own population, they would be the foundation of Iranian power.

Indeed, these plains were the foundation of the Persian Empire. The Persians originated in the Zagros Mountains as a warrior people. They built an empire by conquering the plains in the Tigris and Euphrates basin. They did this slowly, over an extended period at a time when there were no demarcated borders and they faced little resistance to the west. While it was difficult for a lowland people to attack through mountains, it was easier for a mountain-based people to descend to the plains. This combination of population and fertile plains allowed the Persians to expand.

Iran's attacking north or northwest into the Caucasus is impossible in force. The Russians, Turks and Iranians all ground to a halt along the current line in the 19th century; the country is so rugged that movement could be measured in yards rather than miles. Iran could attack northeast into Turkmenistan, but the land there is flat and brutal desert. The Iranians could move east into Afghanistan, but this would involve more mountain fighting for land of equally questionable value. Attacking west, into the Tigris and Euphrates river basin, and then moving to the Mediterranean, would seem doable. This was the path the Persians took when they created their empire and pushed all the way to Greece and Egypt.

In terms of expansion, the problem for Iran is its mountains. They are as effective a container as they are a defensive bulwark. Supporting an attacking force requires logistics, and pushing supplies through the Zagros in any great numbers is impossible. Unless the Persians can occupy and exploit Iraq, further expansion is impossible. In order to exploit Iraq, Iran needs a high degree of active cooperation from Iraqis. Otherwise, rather than converting Iraq's wealth into political and military power, the Iranians would succeed only in being bogged down in pacifying the Iraqis.

In order to move west, Iran would require the active cooperation of conquered nations. Any offensive will break down because of the challenges posed by the mountains in moving supplies. This is why the Persians created the type of empire they did. They allowed conquered nations a great deal of autonomy, respected their culture and made certain that these nations benefited from the Persian imperial system. Once they left the Zagros, the Persians could not afford to pacify an empire. They needed the wealth at minimal cost. And this has been the limit on Persian/Iranian power ever since. Recreating a relationship with the inhabitants of the Tigris and Euphrates basin - today's Iraq - is enormously difficult. Indeed, throughout most of history, the domination of the plains by Iran has been impossible. Other imperial powers - Alexandrian Greece, Rome, the Byzantines, Ottomans, British and Americans - have either seized the plains themselves or used them as a neutral buffer against the Persians.

Underlying the external problems of Iran is a severe internal problem. Mountains allow nations to protect themselves. Completely eradicating a culture is difficult. Therefore, most mountain regions of the world contain large numbers of national and ethnic groups that retain their own characteristics. This is commonplace in all mountainous regions. These groups resist absorption and annihilation. Although a Muslim state with a population that is 55 to 60 percent ethnically Persian, Iran is divided into a large number of ethnic groups. It is also divided between the vastly dominant Shia and the minority Sunnis, who are clustered in three areas of the country - the northeast, the northwest and the southeast. Any foreign power interested in Iran will use these ethnoreligious groups to create allies in Iran to undermine the power of the central government.

Thus, any Persian or Iranian government has as its first and primary strategic interest maintaining the internal integrity of the country against separatist groups. It is inevitable, therefore, for Iran to have a highly centralized government with an extremely strong security apparatus. For many countries, holding together its ethnic groups is important. For Iran it is essential because it has no room to retreat from its current lines and instability could undermine its entire security structure. Therefore, the Iranian central government will always face the problem of internal cohesion and will use its army and security forces for that purpose before any other.

Geopolitical Imperatives

For most countries, the first geographical imperative is to maintain internal cohesion. For Iran, it is to maintain secure borders, then secure the country internally. Without secure borders, Iran would be vulnerable to foreign powers that would continually try to manipulate its internal dynamics, destabilize its ruling regime and then exploit the resulting openings. Iran must first define the container and then control what it contains. Therefore, Iran's geopolitical imperatives:

Control the Zagros and Elburz mountains. These constitute the Iranian heartland and the buffers against attacks from the west and north.
Control the mountains to the east of the Dasht-e Kavir and Dasht-e Lut, from Mashhad to Zahedan to the Makran coast, protecting Iran's eastern frontiers with Pakistan and Afghanistan. Maintain a line as deep and as far north and west as possible in the Caucasus to limit Turkish and Russian threats. These are the secondary lines.
Secure a line on the Shatt al-Arab in order to protect the western coast of Iran on the Persian Gulf.
Control the divergent ethnic and religious elements in this box.
Protect the frontiers against potential threats, particularly major powers from outside the region.

Iran has achieved four of the five basic goals. It has created secure frontiers and is in control of the population inside the country. The greatest threat against Iran is the one it has faced since Alexander the Great - that posed by major powers outside the region. Historically, before deep-water navigation, Iran was the direct path to India for any Western power. In modern times, the Zagros remain the eastern anchor of Turkish power. Northern Iran blocks Russian expansion. And, of course, Iranian oil reserves make Iran attractive to contemporary great powers.

There are two traditional paths into Iran. The northeastern region is vulnerable to Central Asian powers while the western approach is the most-often used (or attempted). A direct assault through the Zagros Mountains is not feasible, as Saddam Hussein discovered in 1980. However, manipulating the ethnic groups inside Iran is possible. The British, for example, based in Iraq, were able to manipulate internal political divisions in Iran, as did the Soviets, to the point that Iran virtually lost its national sovereignty during World War II.

The greatest threat to Iran in recent centuries has been a foreign power dominating Iraq -Ottoman or British - and extending its power eastward not through main force but through subversion and political manipulation. The view of the contemporary Iranian government toward the United States is that, during the 1950s, it assumed Britain's role of using its position in Iraq to manipulate Iranian politics and elevate the shah to power.

The 1980-1988 war between Iran and Iraq was a terrific collision of two states, causing several million casualties on both sides. It also demonstrated two realities. The first is that a determined, well- funded, no-holds-barred assault from Mesopotamia against the Zagros Mountains will fail (albeit at an atrocious cost to the defender). The second is that, in the nation-state era, with fixed borders and standing armies, the logistical challenges posed by the Zagros make a major attack from Iran into Iraq equally impossible. There is a stalemate on that front. Nevertheless, from the Iranian point of view, the primary danger of Iraq is not direct attack but subversion. It is not only Iraq that worries them. Historically, Iranians also have been concerned about Russian manipulation and manipulation by the British and Russians through Afghanistan.

The Current Situation

For the Iranians, the current situation has posed a dangerous scenario similar to what they faced from the British early in the 20th century. The United States has occupied, or at least placed substantial forces, to the east and the west of Iran, in Afghanistan and Iraq. Iran is not concerned about these troops invading Iran. That is not a military possibility. Iran's concern is that the United States will use these positions as platforms to foment ethnic dissent in Iran.

Indeed, the United States has tried to do this in several regions. In the southeast, in Balochistan, the Americans have supported separatist movements. It has also done this among the Arabs of Khuzestan, at the northern end of the Persian Gulf. And it has tried to manipulate the Kurds in northwestern Iran. (There is some evidence to suggest that the United States has used Azerbaijan as a launchpad to foment dissent among the Iranian Azeris in the northwestern part of the country.)

The Iranian counter to all this has several dimensions:

Maintain an extremely powerful and repressive security capability to counter these moves. In particular, focus on deflecting any intrusions in the Khuzestan region, which is not only the most physically vulnerable part of Iran but also where much of Iran's oil reserves are located. This explains clashes such as the seizure of British sailors and constant reports of U.S. special operations teams in the region.
Manipulate ethnic and religious tensions in Iraq and Afghanistan to undermine the American positions there and divert American attention to defensive rather than offensive goals.
Maintain a military force capable of protecting the surrounding mountains so that major American forces cannot penetrate.
Move to create a nuclear force, very publicly, in order to deter attack in the long run and to give Iran a bargaining chip for negotiations in the short term.

The heart of Iranian strategy is as it has always been, to use the mountains as a fortress. So long as it is anchored in those mountains, it cannot be invaded. Alexander succeeded and the Ottomans had limited success (little more than breaching the Zagros), but even the Romans and British did not go so far as to try to use main force in the region. Invading and occupying Iran is not an option.

For Iran, its ultimate problem is internal tensions. But even these are under control, primarily because of Iran's security system. Ever since the founding of the Persian Empire, the one thing that Iranians have been superb at is creating systems that both benefit other ethnic groups and punish them if they stray. That same mindset functions in Iran today in the powerful Ministry of Intelligence and Security and the elite Islamic Revolutionary Guards Corps (IRGC). (The Iranian military is configured mainly as an infantry force, with the regular army and IRGC ground forces together totaling about 450,000 troops, larger than all other service branches combined.)

Iran is, therefore, a self-contained entity. It is relatively poor, but it has superbly defensible borders and a disciplined central government with an excellent intelligence and internal security apparatus. Iran uses these same strengths to destabilize the American position (or that of any extraregional power) around it. Indeed, Iran is sufficiently secure that the positions of surrounding countries are more precarious than that of Iran. Iran is superb at low-cost, low- risk power projection using its covert capabilities. It is even better at blocking those of others. So long as the mountains are in Iranian hands, and the internal situation is controlled, Iran is a stable state, but one able to pose only a limited external threat.

The creation of an Iranian nuclear program serves two functions. First, if successful, it further deters external threats. Second, simply having the program enhances Iranian power. Since the consequences of a strike against these facilities are uncertain and raise the possibility of Iranian attempts at interdiction of oil from the Persian Gulf, the strategic risk to the attacker's economy discourages attack. The diplomatic route of trading the program for regional safety and power becomes more attractive than an attack against a potential threat in a country with a potent potential counter.

Iran is secure from conceivable invasion. It enhances this security by using two tactics. First, it creates uncertainty as to whether it has an offensive nuclear capability. Second, it projects a carefully honed image of ideological extremism that makes it appear unpredictable. It makes itself appear threatening and unstable. Paradoxically, this increases the caution used in dealing with it because the main option, an air attack, has historically been ineffective without a follow-on ground attack. If just nuclear facilities are attacked and the attack fails, Iranian reaction is unpredictable and potentially disproportionate. Iranian posturing enhances the uncertainty. The threat of an air attack is deterred by Iran's threat of an attack against sea-lanes. Such attacks would not be effective, but even a low-probability disruption of the world's oil supply is a risk not worth taking.

As always, the Persians face a major power prowling at the edges of their mountains. The mountains will protect them from main force but not from the threat of destabilization. Therefore, the Persians bind their nation together through a combination of political accommodation and repression. The major power will eventually leave. Persia will remain so long as its mountains stand.

War Plans: United States and Iran

John Mauldin — Thu, 01 Nov 2007 19:41:28 GMT

This week in our Special Outside the Box, George Friedman of Stratfor addresses what many believe to be the looming war with Iran, the potential wars' strategic futility, the underlying geopolitical implications, and the inherent threats that abound...(read more)

Russia's Great-Power Strategy

John Mauldin — Thu, 15 Feb 2007 22:01:00 GMT

Introduction Today's special edition Outside the Box discusses the long-term strategy that Russian President Vladimir Putin is setting in place. Stratfor President George Friedman has written an intriguing article on what he sees as some motives,...(read more)

Rhetoric and Reality: The View from Iran

John Mauldin — Thu, 18 Jan 2007 22:17:00 GMT

Introduction Today's Special Edition of "Outside the Box" by my friends at Stratfor gives us a very insightful analysis of the difference between the rhetoric of Iran and the reality of the world they face. George Friedman, President of...(read more)

Israel's Options Against Iran

John Mauldin — Thu, 04 Jan 2007 22:19:00 GMT

Introduction As a set-up to this week's special edition of Outside the Box from Stratfor, let's take a look at a blog from the Middle East Media Research Institute which discusses some recent allegations from the Iranian leadership that the Holocaust...(read more)

Back to Iraq

John Mauldin — Thu, 09 Nov 2006 22:43:00 GMT

Introduction The past couple of days have been filled with anticipation over the outcome of which party will emerge victorious during this year's elections. Adding to the flurry of activity, Defense Secretary Donald Rumsfield unexpectedly announced...(read more)

John Mauldin's Outside the Box : Iran

Iran Sanctions (Special Series), Part 3

Iran Sanctions (Special Series), Part 3: Preparing for the Worst

Summary

Unreliable Allies

Fending for Itself

Confronting the Subsidy Problem

Natural Gas Relief?

Responding to Pressure

A Doomsday Scenario

Russia, Ahmadinejad and Iran Reconsidered

Russia, Ahmadinejad and Iran Reconsidered

The Iranian Political Configuration

Examining the Anomalous Chant

The Iranian Struggle in a Geopolitical Context

Revisiting Assumptions on Iran

Iranian Elections, Israel and the United States

Iran: Using Oil as a Weapon, But Only Rhetorically

Iran: Using Oil as a Weapon, But Only Rhetorically

Summary

Analysis

Obama's Challenge

Obama's Challenge

Obama's Agenda vs. Expanding His Base

Iran and a U.S. Withdrawal From Iraq

The Afghan Dilemma

The Russian Question

Global Finance and the European Problem

The Hard Road Ahead

The New President and the Global Landscape

The New President and the Global Landscape

The Post 9/11 World

A Stabilized Iraq and the U.S. Troop Dilemma

The Nuclear Chip and a Stable U.S.-Iranian Understanding

Afghanistan, Pakistan and the Taliban

The Russian Resurgence

European Disunity and Military Weakness

Israel, Turkey, China, and Latin America

The U.S. Defense Budget

The Real World Order

The Real World Order

Mediterranean Flyover: Telegraphing an Israeli Punch?

Mediterranean Flyover: Telegraphing an Israeli Punch?

The Geopolitics of Iran

The Geopolitics of Iran:Holding the Center of a Mountain Fortress

The Broad Outline

Geopolitical Imperatives

The Current Situation

War Plans: United States and Iran

Russia's Great-Power Strategy

Rhetoric and Reality: The View from Iran

Israel's Options Against Iran

Back to Iraq

The Geopolitics of Iran:
Holding the Center of a Mountain Fortress