Investors Should Look Past Libya and Keep an Eye on Syria

by: MLP Trader

In a previous article, I mentioned that Syria was a real risk for Middle East stability and global oil markets. Syria only exports about 80,000 bbl/day of oil. However, it is in a key position to trigger a sequence of events that could end with all-out conflict in the Middle East. Let's see how.

Since 1970, Syria has been ruled by the Assad family-- first Hafez and then his son Bashar. The Assads belong to a small sect known as Alawis (or Nusayris). While the Alawis only account for 10% of Syria's population, they completely dominate the upper ranks of its military and state bureaucracy. This is particularly irksome for Sunni Islamists, because they consider Alawis to be heretics. Islamist Sunnis lead by the Muslim Brotherhood have long resisted the Assads' government, but have been brutally suppressed, with the Syrian army massacring tens of thousands of them (along with many innocent women and children).

It is hard to gauge how deep opposition to the Syrian government is because, like Qaddafi's government, it controls the media and any form of public expression very tightly. The uprising in Libya took many Western governments by surprise because nobody had a good sense of what average Libyans were thinking and how deeply they resented Qaddafi. The situation could turn out similarly in Syria. I know from visiting the country years ago, that resentment among ordinary Syrians is comparable to that of the Egyptians and Libyans under Mubarak and Qaddafi. There have now been several small rebellions in southern Syria, with one in Deraa today causing 6 deaths.

A Sign of the Times
One of my tongue-in-cheek methods for divining the fate of Arab dictators is to examine their signage. The more self-images a dictator has on buildings, the more likely he is to be deposed. Based on the signage indicator, it looks like Assad might be next to go.

This isn't entirely tongue-in-cheek, since devout Islamists consider any depiction of people or animals to be idolatrous and portraiture to be downright apostacy. It's hard to claim you're a defender of the faith, as Qaddafi did, when you're putting your graven images all over the place.

So Why Is Syria Such a Big Risk?
The real risk Syria poses stems from its connection with Iran. Syria was the first Arab country to recognize the Iranian revolution and is just about the only country where ordinary Iranians can travel freely. Iran and Syria have exchanged weapons and other military favors for over 30 years. But most importantly, Iran's connectiona are specifically with the Assads and the Alawis, rather than the Syria itself. Arab Sunnis are potential enemies to Iran, but Alawis are practically kindred spirits. While many Sunni Islamists consider the Alawis to be heretics, Shiites tend to view them more favorably, with at least one mullah issuing a fatwa accepting them within the pale of Shi'a Islam.

The bottom line is that Iran views Alawi Syria as a critical ally and a conduit for influence in the Middle East. If it looks like Assad might be overthrown, there is a very good chance Iran will intervene directly. Sending arms-laden ships to Latakia (an Alawi stronghold) a month ago was the first step in this direction. Direct Iranian involvement in Syria would be unacceptable to not only Israel, but also several Arab nations. While there has been much discussion of a showdown over Iran's interference in the Gulf, it's far more likely to happen over its intervention in Syria.

Our Alawi or Yours?
Just to complicate things, Bashar Assad's uncle, Rifaat may also get involved. Rifaat has been living in exile since attempting a coup against Hafez. Rifaat is closely connected to Saudi Arabia, being related by marriage to King Abdallah. Both Rifaat and his son have made noises about returning to Syria. While Rifaat might have Saudi Arabia's support, he is unlikely to align with Islamists, having directed the massacre of the Muslim Brotherhood at Hama. He is is a wildcard in any possible conflict.

What to Do
The Syrian situation bears close watching. I don't know exactly how parlous Assad's situation is--I don't think anyone really does. However, if we see the rebellion reach a point where his regime is truly threatened, it's time for investors to take all risk off the table. The possibility of Iranian involvement and a subsequent response from Israel or other Arab countries is significant and extremely dangerous. The Libyan rebellion's effect on global markets and oil prices will seem trivial by comparison.

Disclaimer: I am not a Registered Investment Adviser and do not provide investment advice. I'm just a random guy on the Internet.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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