Stratfor's Latest Analysis On The Iraq Situation
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This week, we turn our focus to geopolitics and specifically, Iraq. With all the media bias and misreporting, it is difficult, if not impossible, for most of us to know how things are going in Iraq. Likewise, it is hard to know if there is even the possibility for a good, or at least acceptable, outcome to the war.

Then there is the question of Iran, which was invited into the Iraq settlement negotiations by the United States late last year. Many of us questioned that decision by the Bush administration. And why not, given that the news has been dominated with stories about Iran's obsession with producing nuclear weapons? Iran is clearly moving forward on the nuclear front.

So what is really going on in Iraq? As usual, we look for some clarity from our good friends at, the global intelligence experts. Long-time readers will recall that Stratfor emphasized from the beginning that the real reason the US went to war with Iraq was to ultimately establish permanent US military bases in Iraq, from which we could: 1) project power in the region; 2) spread democracy in the Middle East; and 3) be in position to block Iran from developing nuclear weapons. Ousting Saddam Hussein was merely a means to that end.

But as we all know, the US miscalculated the insurgency in Iraq, and we have been in a bloody war ever since, with no end in sight. Iraq has been unable to forge a coalition government. There are too many internal factions (Sunnis, Shiites, Kurds, etc.), and there are also too many external factions (US, Russia, France, Iran, etc.) to reach an agreement.

Yet for political reasons, the Bush administration badly needs for something (that at least looks good) to happen in Iraq. With the Republicans slumping badly in the polls, and the Democrats hoping to regain the House later this year, the Bush administration is now desperate.

Given the political situation in the US, and the admission by all of the players involved in Iraq that no perfect solution exists, Dr. George Freidman, founder of Stratfor, believes a settlement on a new Iraqi government could happen soon. While the odds are not great, Dr. Freidman believes there is a chance, at least in the near-term.

What follows is an excellent analysis of what is going on in Iraq, what the various internal factions may be willing to accept, and what the external factions, including the US, may be willing to accept. After reading what follows, I believe you will have a much better understanding of what is happening in Iraq, and perhaps when we could see a significant portion of our troops come home.

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Iraq: If Not Now, When?

by Dr. George Freidman

If there is an endgame to the American presence in Iraq, it is now. The Iraqis have reached a general compromise on the composition of a new government. The agreement was blessed by the joint visit to Baghdad of U.S. Secretary of State Condoleezza Rice and Secretary of Defense Donald Rumsfeld. There also have been statements -- though later retracted -- by Iraqi President Jalal Talabani that U.S. and Iranian officials have held meetings in Dokan, a city in the northern Kurdish region. Talabani also has said that he and American officials had met with the leaders of seven separate Sunni guerrilla groups and that he expected to meet with others who had taken up arms against the occupation.

The formation of the government was preceded and succeeded by a complex series of negotiations in which there are at least five sides, each of which (including the United States at this point) is factionalized. There are the three main Iraqi players -- Shia, Kurds and Sunnis -- plus the United States and Iran. That makes for a complex negotiation and one that can readily fail. The endgame could turn into the beginning of an entirely new round of warfare and chaos. But this much can be said: If no agreement can be reached now, it is hard to imagine how an agreement will be reached in the future. If not now, when? The times will not be more propitious than they are now.

Each party has an interest in a settlement. Each side could lose as much as it might gain in the future. The three internal factions -- Shia, Sunnis and Kurds -- are all getting substantially less than they wanted, but each could possibly lose even more if the fighting continues. The external powers, the United States and Iran, face similar circumstances. Certainly, everyone wants to explore what a settlement would look like, hence the flurry of very quiet and highly deniable meetings and discussions. It may work or it may fall apart, but it would seem to be the time to examine each side's bargaining position and what they are likely to settle for.

United States

The Americans came in with the goal of occupying Iraq, reshaping its society to suit them and using Iraq as a base from which to project power and influence throughout the region. However, the war did not go as they hoped or expected. The United States defeated the Iraqi army but found itself facing a Sunni insurgency and complex Shiite political maneuvers. The goal of reshaping Iraqi society is gone; the possibility of influencing the future structure and policy of any emerging Iraqi government remains. Iraq has not served as a platform from which to project power. Rather, it has served as a magnet that attracted outside forces. However, the possibility of some agreement that would allow the United States to base forces in Iraq is not out of the question.

At this point, however, the primary American goal is to hand off responsibility for providing security in Iraq. The U.S. military has not been able to provide security under any circumstances. It clearly cannot suppress the Sunni insurgency -- but in its current posture, the United States continues to carry the burden of counterinsurgency operations without any real expectation of success. Leaving aside the fact that the United States continues to absorb casualties, there are now more than 100,000 troops in Iraq -- a number that is obviously insufficient for the mission, but which drains U.S. logistical and manpower resources to a degree that dealing with unexpected crises elsewhere in the world would be difficult.

Since this position is untenable, the United States must make a move.

One option would be to surge additional force into Iraq. The current political configuration in the United States does not make that an option for the Bush administration, even if this was wished, and even if a surge of troops would suppress the Sunni insurrection. Therefore, the United States has two pressing goals. First, it must abandon the mission of counterinsurgency, transferring it in some way to Iraqi forces. Second, it needs to withdraw its forces from Iraq. Ideally, the United States would not withdraw all forces but would leave behind enough to serve as a rapid-reaction force in the region. This force would be based outside of populated areas. However, the basing issue is secondary to the withdrawal issue.

In addition, and of great strategic importance to the United States, the government of Iraq must not become a client of Iran. Given the size of the Shiite population in Iraq, guaranteeing this outcome will not be easy, but it is clearly the focus of U.S. negotiations at this time. If Iraq were to become a client of the Shiite regime in Tehran, then the entire balance of power in the region would tilt in favor of Iran, putting the Arabian Peninsula at risk. That is something that the United States (not to mention others, like Saudi Arabia) would find intolerable. Faced with a choice of continued inconclusive warfare and an Iran-dominated Iraq, the United States would likely choose warfare. That is how high the stakes would be. Therefore, the key negotiating strategy for the United States is to find a way to withdraw its forces from Iraq -- possibly leaving a residual force behind -- after creating a government in Baghdad that would be able to balance or buffer Iran.

In other words, at this point, American policy in Iraq is to restore the status quo prior to 2003, with a different regime in Baghdad and the possibility of an ongoing, noninvolved American military presence in the country.


In Iran's ideal scenario, Iraq would become a satellite state. This would involve the installation of a Shiite-dominated government in Baghdad so beholden to Iran that Iraq essentially would be an extension of Iran. If that were to happen, Iran would have achieved the geopolitical goal of major-power status: It would be the unchallenged native power in the Persian Gulf. Given the existence of indigenous Shiite populations throughout the Arabian Peninsula, Iran not only would be in a position to influence events in other countries, but would have the opportunity to use direct force against them.

The prize would be Saudi Arabia. If Iraq fell under Iranian control, the road to the oil fields of Saudi Arabia and the other Gulf states would be wide open. Other than the United States, there would be no power in a position to block the Iranians.

For Iran, this would be more than a matter of oil. If Iraq belonged to Iran and no outside power intervened, Shiite power could be amplified in the region. Sunnis, of course, vastly outnumber Shia within the Muslim world -- a structural impediment that, realistically, constrains Iran's ability to project itself as the leader of the Islamic world. Nonetheless, Iran has a need to burnish its credentials in this area and to be viewed as a regional hegemon. Control of Gulf oil would make Iran a regional power, but a rebalancing of Sunni and Shiite influence within the region would be heady stuff indeed.

In order for Iran to achieve this goal, the United States would have to withdraw from Iraq without having created a force that could block Iranian ambitions. Having the United States invade Iraq was in the Iranian interest because it got rid of Saddam Hussein. Having the Americans bog down in an endless war was in the Iranian interest because it offered the best chance of achieving Tehran's ultimate ambition. Iran has, therefore, been torn between two realities: On the one hand, in order to achieve its ambition, Iran needed a strong Sunni insurgency in Iraq -- but on the other, if a strong Sunni insurgency existed, Tehran's desire for the complete domination of Iraq could be thwarted.

Iran wound up with its own worst-case scenario. First, the Sunni insurgency swelled, creating a force that could not easily be controlled by the Shia. Second, the United States showed more endurance than the Iranians had hoped. In due course, the Iranian threat actually created a bizarre circumstance in which the United States and the Sunnis were simultaneously fighting and working together to block Iranian aspirations -- the Sunnis by demanding participation in the Iraqi government, and the United States by supporting their demands. Out of this came a third undesirable outcome: The Iraqi Shia, seeing themselves trapped between Iranian geopolitical ambitions and the threat of civil war without American protection, moved away from dependency on Iran and toward a much more complex position.

Unless the Sunnis were suddenly to collapse and the Americans were simply to withdraw, Iran no longer can expect to create a protectorate in Iraq. Its current goal must be much more modest: It must have an Iraq that is no threat to Iran. To this end, the Iranians need several things:

1. Guarantees as to the size and armament of the future Iraqi armed forces; they can be sufficient for internal security and defense but must not have offensive capability.

2. A degree of control over the makeup of the Iraqi government -- in particular, the right to block any appointment that is too close to the former Baathist elite and would have too much control over the defense or intelligence establishments.

3. Strict limits on Kurdish autonomy in order to guarantee that Kurdish separatism does not spill over into Iran. In this, the Iranians have an ally in Turkey.

4. A tight timeline for the withdrawal of all U.S. forces.

In the back of their minds, the Iranians will accept these conditions as a major improvement over the status quo of 2003, but they will always see this as a springboard for their deeper ambitions. They will take a deal that keeps Iraq weak and gets the Americans out.

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The Shia

As we have noted previously, the Shia are fragmented and have a complex bargaining position as a result. However, two irreducible elements are present. First, the Shia do not want the Sunnis to return to a dominant political position in Iraq. This is essential and non-negotiable. Second, they want to be in a position to control Iraq's oil economy and the various industries that support it. In other words, the Shia want to control Iraq's government.

Until the first battle of Al Fallujah, it appeared that Washington would give them that prize -- but when the Americans entered into negotiations with the Sunni insurgents, it became clear that the United States was not going to simply play that role. The Shia then counted on Sunni intransigence -- which evaporated in December 2005, when the Sunnis participated in elections. The vigor of the Sunni rising eliminated the likelihood that it could be suppressed, except at a price to the Shia that they were unwilling to pay. The Shia, therefore, had to face either perpetual and uncertain civil war or accept the idea of Sunni participation in the government.

They had already abandoned the idea of complete control of Iraq's oil when they entered into an alliance with the Kurds. It was not clear who would control the northern oil regions, but it was not going to be the Shia. With the entry of the Sunnis into the government, the Shia accepted the idea that they would lead but not control the Iraqi government. Therefore, their position on oil became a regional rather than national position. For the Shia, the key now is to guarantee that a substantial portion of southern oil wealth remains under Shiite control and is not simply controlled by the government.

The Iraqi Shia remain heavily influenced by Iran, but they understand that playing Iran's game could decimate them. They will settle for control of the key ministries in Baghdad and a large piece of the southern oil economy. When the Americans leave, and in what sequence, is of far less interest to them than the control of the economy.

The Sunnis

The Sunnis have gone from being the dominant power in Iraq to being a minority ethnic group, and the only one of the three with no oil clearly in their territory. At the same time, their insurgency has achieved what it was designed to do: The Sunnis have not become an irrelevant force in Iraq. The ability to sustain an insurrection against the Americans as well as to strike against the Shia established that it would be better to include them in a political settlement than to exclude them. Their skillful use of the jihadist threat particularly drove home the fact that they could not simply be ignored. By portraying the jihadists as an uncontrollable outside force, the Sunnis set themselves up as the only force that could control the jihadists. That was their key bargaining chip, and they used it well.

The interests of the Sunnis are relatively simple. First, they want to participate in the Iraqi government. Second, they want a share of Iraq's oil income and a degree of control over the northern oil fields. Third -- and this will complicate attempts to convince insurgents to give up weapons -- they want American forces to remain in-country in order to guarantee that the Shia don't attack them, that Iran does not intervene and that the Iraqi government does not fall under Iranian control. The Sunnis may dream of regaining the power and privilege they enjoyed in Baathist Iraq, but in practical terms, they have shed a huge amount of blood simply in order not to be dismissed while Iraq's future is shaped.

The Kurds

The Kurds want, ideally, an independent nation. That means going to war with Iran, Turkey and Syria -- therefore, they will not get an independent nation. They can gain a degree of autonomy in Iraq, but the degree will depend less on the Sunnis and Shia, who have other issues to worry about, than it will on Tehran, Ankara and Damascus, none of whom want the Kurds to have too much autonomy. The Americans have been the guarantors of autonomy for the Kurds in Iraq since 1991. However, the Americans also want to get out of the business of guaranteeing things in Iraq. The Turks and Iranians both have leverage with the Americans. Therefore, the United States, as part of its exit strategy, might well become the force to contain the Kurds.

The second issue for the Kurds is oil. They are the dominant population in the north, where some of Iraq's significant oil fields are located, and they want to consolidate their hold. Some Shia are amenable to this, but the Sunnis want a share in Kurdish oil. The Sunnis ultimately will not participate in an arrangement in which the Shia and Kurds draw oil wealth directly but in which the Sunnis have access to it only after it is disbursed through the central government. Had the Sunnis not fought so tenaciously, they perhaps could have been ignored. Ignoring them now is dangerous. Therefore, the issue for the Kurds is precisely how much they will have to give the Sunnis directly. This is a matter of money and, in the end, money matters are negotiable.

The Kurds know they will not get a Kurdish state that incorporates Iranian and Turkish Kurds at this time. They also believe that if they gain a degree of autonomy and oil wealth, they will be in a position to take advantage of other opportunities later. If not, there is still the oil wealth.


There is a basic understanding of what is possible currently in Iraq. Everyone has their plans for the future, but right now, the idea of a coalition government is a given. But two issues remain outstanding.

The first is the status of U.S. forces in Iraq. The United States will not permit its forces to remain as targets for guerrillas, although the Sunnis and Shia might find this useful. Therefore, there will be a withdrawal, with a substantial drawdown this year. However, the Sunnis and Kurds both want an American force to remain, and the Americans want that, too. The Iranians and Iraqi Shia want the Americans out earlier. So the timing is one issue to negotiate.

The other issue is oil -- how the revenues and resources are divided up among the three ethnic communities. As we have said, that is about money and, when it gets down to that, compromise is possible. However, the Sunnis and Kurds are afraid of Shiite strength, which means they want the Americans to remain in place. The Shia can charge for that in terms of oil revenues. Treaties have been based on less.

The problem with the endgame in Iraq is not so much the divergence of interests among the players -- they tend to converge now more than to diverge. The problem is that there are so many parties to the negotiations and that these parties are themselves divided, the Americans not least among them. In other words, there are too many players to create a stable basis for negotiations. On the one side, reality pulls them together; on the other side, the sheer mechanics of the negotiation are mind-boggling.

We think that something will be worked out, simply because the logic of each player requires a settlement. It will result in a diminishment of violence, not its elimination. That is the best that can be hoped for. But we also believe that the train is leaving the station. If an agreement cannot be reached now that allows for a phased and managed withdrawal of U.S. forces, then the only remaining options for the United States will be to continue to fight a counterinsurgency indefinitely, with insufficient force, or a unilateral withdrawal.

Let's Hope Dr. Freidman Is Correct

In the article above, Dr. Freidman does a very good job of laying out what is at stake for all the players in Iraq, including the external factions such as the US and Iran. He also makes clear what are the best-case and worst-case scenarios for each of the players. And he explains why all the parties might be willing to compromise and make a deal soon. Let's hope he is correct.

In any event -- deal or no deal -- it looks almost certain that the US will begin to draw down our troop levels later this year, perhaps significantly. Gone, apparently, are the US plans early-on to maintain a sizable permanent military force in Iraq to spread democracy in the region and block Iran's efforts to produce nuclear weapons.

Currently, the United Nations Security Council is considering whether to enact sanctions against Iran for its failure to abandon its uranium enrichment program. Unfortunately, Russia and China are expected to block such sanctions, not that they would really work in the first place. That would leave only the US, Israel and possibly Great Britain to take action against Iran.

A major military action against Iran, or even airstrikes, would be very difficult to get approved in the current political environment. As discussed in my April 25 E-Letter, the American people have turned against the war in Iraq, and Bush's handling of same. Tony Blair's approval ratings are almost as low as President Bush's. Neither leader has any "political capital" left to win support and approval for an attack on Iran.

Fortunately, Iran may not be nearly as close to producing nuclear weapons as we have been led to believe. In early May, Dr. Freidman told me that Stratfor's intelligence indicates that Iran will not be capable of producing nuclear weapons for 3-5 years. George says that Iran's rhetoric about producing nukes imminently is nothing more than hype. George also pointed out that Iran does not have any missiles capable of delivering nuclear warheads (or other warheads) outside of the region.

While it is good to know that it will likely be several more years before Iran is producing nukes, it makes it no less of a concern. And in some ways, more of a concern. 3-5 years puts us into the next White House administration, which could be a Hillary Clinton administration. I seriously doubt that Hillary, or any other Democrat president, would take military action against Iran.

It is sad and alarming that it looks like nothing will be done to stop Iran from producing nukes. And, unfortunately, Russia and China will probably be stupid enough to sell Iran the missiles to launch them at their enemies. This is very depressing.

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In last week's E-Letter, I discussed at length the recent comments by new Fed chairman Ben Bernanke suggesting that the Fed may decide at tomorrow's FOMC meeting to raise interest rates one more time to 5% and then go on hold. That news has since sent the US dollar into a nosedive. The slumping dollar may have Bernanke rethinking the Fed's position.

According to CNBC's Maria Bartiromo, she spoke with Bernanke at the recent White House Correspondents dinner. She reported that Bernanke told her that, even if the Fed goes on hold at the June 28/29 FOMC meeting, it would almost certainly resume raising rates at the following policy meeting on August 8.

The stock markets have risen to new highs of late, largely on the assumption the Fed will go on hold after tomorrow. This assumption has also helped to accelerate the runaway bull markets in precious metals and certain other commodities.

Yet if the Fed fails to give the good news the markets are looking for tomorrow, we could see some nasty setbacks. Specifically, if the Fed doesn't hint that it is going on hold for a while, that will very likely be bad news for the equity markets, metals, etc. Tomorrow (Wednesday), and especially Thursday, should be very interesting!

Very best regards,

Gary D. Halbert

Gary Halbert is the president and CEO of the ProFutures companies, a diversified investment advisory firm located in Austin, Texas. ProFutures offers professional financial planning services to a nationwide base of clients. Mr. Halbert's firm specializes in tactical investing, and its recommended investment programs include mutual funds, managed accounts with professional Investment Advisors and alternative investments. For more information about the programs offered, call 800-348-3601.


Iran: Don't take the road of the past (very good read).

Why was Porter Goss canned at the CIA?

The Economy: The Boom Goes On

Copyright © 2006 ProFutures Capital Management, Inc. All Rights Reserved.


"Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc. are not affiliated with nor do they endorse, sponsor or recommend any product or service advertised herein, unless otherwise specifically noted."

Forecasts & Trends is published by ProFutures, Inc., and Gary D. Halbert is the editor of this publication. Information contained herein is taken from sources believed to be reliable, but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgment of Gary D. Halbert and may change at any time without written notice, and ProFutures assumes no duty to update you regarding any changes. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Any references to products offered by Halbert Wealth Management are not a solicitation for any investment. Such offer or solicitation can only be made by way of Halbert Wealth Management’s Form ADV Part II, complete disclosures regarding the product and otherwise in accordance with applicable securities laws. Readers are urged to check with their investment counselors and review all disclosures before making a decision to invest. This electronic newsletter does not constitute an offer of sales of any securities. Gary D. Halbert, ProFutures, Inc. and all affiliated companies, InvestorsInsight, their officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Securities trading is speculative and involves the potential loss of investment. Past results are not necessarily indicative of future results.

Posted 05-09-2006 5:31 PM by Gary D. Halbert