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The Middle East's Unfinished Business

NEW YORK, NY (KWR) February 24, 2011 - The Middle East and North Africa are undergoing the kind of political transformation that marked the end of communism in Eastern Europe in the late 1980s and early 1990s. It has come like a storm, sweeping across a region largely defined by seemingly well-entrenched autocratic regimes, long on security apparatus and short on civic societies.

Tunisia's "Jasmine Revolution" began the process in January 2011, followed by the overthrow in February of Egypt's strongman Hosni Mubarak. This rattled oil markets, pushing prices up to recent highs (with Brent Crude climbing over $100 a barrel). The contagion did not end in Egypt - demonstrations and agitation for change came to Yemen, Jordan, Algeria, Bahrain, and Libya. The last broke another round of shock to global markets as the contagion had at last spread to a major oil producer as Libya accounts for roughly 2% of global output. For economies in Europe and the United States seeking to maintain an economic recovery, the risk of higher oil prices is not welcome. In many regards, the Middle East's unfinished political business - the transformation of its political systems from the long ossified structures of authoritarian regimes failing to deliver socio-economic benefits to its citizens - is now boiling over. This is a long-term process that will maintain a degree of volatility and uncertainty into oil prices and global equity and debt markets.

The Egyptian story is significant for three reasons. First, it represents an unexpected government change in a country that is geo-strategically important - the Suez Canal is under Egyptian control as are critical oil pipelines between the Red and Mediterranean seas. It also borders the U.S. ally Israel and the problematic Gaza Strip. Mubarak's overthrow opens up an entirely uncertain political future for Egypt. The military remains in control, but elections are scheduled in six months. In between, a new constitution has been promised, political parties are expected to emerge and Egyptians are waiting for the rebirth of a civic society long warped by an authoritarian state. It is difficult to foresee if popular aspirations will successfully mesh with military concerns of maintaining a secular state and its predominant role in the country's political and economic development.

It should also be noted that Egypt was not so much a revolution, which implies a system change, but a popularly-backed military coup. The military was the key force before popular forces demonstrated and it remains the core political player in Egypt. Elections are scheduled for September 2011. This is a long period in politics. Despite the rhetoric, political change has a long way to go before Egypt becomes a democratic, civilian-administrated country. Much was done to gut the opposition, both secular and religiously-based. As many nervous Western commentators point out, the most organized political force is the Muslim Brotherhood, which raises the issue of what happens if this party wins the upcoming elections? Does the West still want an Egyptian democracy if it results in an Islamic state? Considering that the military sees itself as a guardian of the secular tradition, the stage could be set for considerable political friction between civilian leadership and the military. Or does the Turkish option open up in which a powerful military grudgingly accepts a moderate Islamic party? The potential for further political upheaval is therefore not off the table.

The second factor is that Mubarak's fall represents an end to the American-supported Middle East. Since Tunisia's revolution and Egypt's forced retirement of Mubarak demonstrations have rocked Jordan, Bahrain, Yemen and Algeria, all U.S. allies and authoritarian regimes of one type or another. Both Bahrain and Yemen play an important role in providing bases for the U.S. Navy, the former being home to the Fifth Fleet in the Persian Gulf. Jordan's king already changed his government in the face of public demonstrations over economic conditions and political rights, while Yemen runs the risk of a full-blown uprising. It has also led to a greater sense of nervousness among other U.S. allies, including Saudi Arabia, a more affluent society but equally beset by corruption and underemployment issues among the young, over the extent of Washington's unpopularity with many of the citizens, if not the rulers.

Anyone watching events in the Middle East must wonder if some of the political turmoil taking place in Bahrain, in which a minority Sunni ruling family, military and bureaucracy are confronted by a majority Shiite population, spills across the causeway into Saudi Arabia. Saudi Arabia has its own minority Shiite population, which at times has complained of discrimination. Although Saudi Arabia's security forces have managed to ride through tough challenges in the past, the ruling family presides over a population that is largely urban (82%), increasingly better educated, young (the median age is 24.9 years), and underemployed (official unemployment is around 10%). It is also very interconnected via the social network and aware of events outside the country. What is the future path for a young, restless and underemployed population facing a regime that regarded as highly corrupt and repressive, when the rest of the region is aflame with change?

The rewriting of the Middle Eastern map raises significant challenges for the Obama administration. In many regards, Washington was caught flat-footed by the scope of change occurring in the region. Moreover, President Barrack Obama had moved away from the Bush era's approach to seeking to rewrite the Middle East's political map to form a new group of democracies. Earlier efforts were mixed, resulting in the election of Hamas in Gaza, gains by the Muslim Brotherhood in parliamentary elections in Egypt, and Iraq's elections which occurred despite considerable violence against the government. The Obama administration's more cautious stance left the U.S. in the position of playing catch-up to events on the ground. Although support was eventually given to the "people" in Egypt and the ouster of Mubarak, there is nothing simple about future policies moves as new actors are surfacing and political arenas are being reconfigured.

Related to the other two factors is the contagion factor to oil-producing countries. While Tunisia and Egypt are not major oil exporters, Libya, Yemen and Algeria are. Algeria is the seventh leading exporter of oil to the United States, while Saudi Arabia is third behind Canada and Mexico. But the contagion issue is not limited to the U.S. set of relationships - Iran faces similar pressures as Egypt and Tunisia. Iran's theocratic-dominated state already faced down one round of opposition fury in 2009, but Tunisia and Egypt appear to have given the opposition new impetus. And Iran remains a major oil exporter, which means a disruption there could help push up oil prices, even if a more secular regime would ultimately be more friendly to the United States.

Libya's regime is in its death throes. The North African country is a major oil exporter, accounting for roughly 2% of the world output, much of it heading north to Europe, Italy in particular. Libya has been the domain for Colonel Muammar Gadhafi since he came to power in 1969, ruling the North African country in a largely personalistic fashion. The challenge in Libya will be the post-Gadhafi era - there are no political parties, only a societal opposition and hatred for the dictator and his henchmen. Building a civic society will be a substantial challenge for any new government.

If events assume greater momentum, drawing more countries into the geo-political vortex of regime changes, the outlook will change, especially if Saudi Arabia is hit by unrest. An unstable Middle East for an extended period would give inflationary forces a push. While the Middle East remains "over there" for most Americans, potential supply pressures would show up at the gas pump and filter into the supply chain in the form of higher transportation costs. Higher oil prices will also filter into risk scenarios for Asia which is heavily dependent on Middle Eastern oil and Europe.

Not to be overstated at this juncture, but the Middle East is now one more significant factor to consider in forecasting the U.S. economy and markets. Many U.S. investors prefer to discount political risk, but it is back with a vengeance and the Middle East's political make-over is just starting.


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