While the majority of the world was in a sleepy mood courtesy of closed core capital markets, events in Syria were anything but. From Reuters: "Syrian security forces killed almost 90 protesters on Friday, rights activists said, the bloodiest day in a month of escalating pro-democracy demonstrations against the rule of President Bashar al-Assad." Yet while many are quick to dismiss "yet another MENA revolution", Emad Mostaque, MENA strategist at UK's Religare Capital Markets begs to differ. "The market implications of a breakdown in Syria would be profound, but likely not be felt immediately as it doesn’t tick the boxes for proximity (such as Bahrain) or oil production (such as Libya). Iran’s influence would be curtailed, as would support for Hezbollah and Hamas." But the mittelspiel does not end there, and will likely have even greater consequences on Israel: "A third intifada between Israel and Palestine is already likely following a series of rather unpleasant attacks from both sides and a Syrian breakdown would heighten the chances of an Israeli attack on Lebanon, particularly given the success thus far of their new Iron Dome anti-ballistic system (even stops mortars)... A conflict like this would raise the chances of a follow up attack on Iranian nuclear facilities, particularly if Hezbollah’s retaliatory rocket capabilities were neutered." So it appears that the old bogeyman from the summer of 2010, Iran's nuclear power - the source of so much Stuxnet (of unknown origin( consternation, is about to come back front and center all over again. And when one factors in the ubiquitous presence of CIA operatives (flipflops on the ground) in the region (always disclosed well after the fact) one wonders just how staged this latest "revolution" truly is.
Full note from Emad Mostaque of Religãre Capital Markets
1. The situation in Syria has deteriorated rapidly with protests spreading from the poorer classes, thirsty after a four year drought in Deraa and elsewhere, toward the middle class. President Bashar’s improved performance in his April 16th speech and suspension of the emergency law have not slowed the momentum of the protests, with no real move toward addressing the key issue of the concentration of wealth amongst a privileged elite and lack of political freedom. Indeed, the government stance that lifting the emergency rule should remove the need for additional protests seems to be missing the mark.
The security forces control Syria and have a largely minority makeup in contrast to the Sunni majority. This has been the primary mechanism for Alawite control through the Baath party, with an implicit agreement with the prominent merchant families for rule in return for economic favours. With the Syrian economy already suffering from food inflation, the current drop in tourism and FDI will start to hit the pocket books of this group, weakening their support.
In addition, foreign influence is likely to increase. While it is easy to mock the comments of the government, directly out of Qaddafi’s book, of blaming the deaths on Salafist groups (membership of the Muslim brotherhood is still punishable by death), there may be some grain of truth in this, particularly as armed forces fatalities increase. There has been a clear move toward sectarianism in the region to negate the increasing Iranian influence highlighted in past notes. While stability of the Alawite regime in Syria was previously beneficial for almost all groups, this dynamic has now changed somewhat, with a Sunni leadership preferable to some, particularly as the alternative ruling structure is unlikely to be Islamist or extreme..
Assad believed that his credentials as a reformer and member of the resistance bloc would inure him from the protests seen elsewhere and allow him time for reform. This has been reiterated in his comments and actions, but it is clear that public belief is waning. An escalation in the violence will only make things worse and a repeat of the siege of Hama, where 20,000 died, scaring off past protests, is unlikely in today’s connected world. Broad-based populist reform and ceding of power by the regime will be difficult to enact given their delicate position atop the pyramid and the opposition of party hardliners, but one possible avenue may be for Assad to reassert his popular support by having a free Presidential election. Given the cult of personality in Syria and lack of alternatives, he would win a mandate and time to push through some of the reforms he has claimed to wish for, while taking the heat out of the protests and halt the rise of the opposition.
The market implications of a breakdown in Syria would be profound, but likely not be felt immediately as it doesn’t tick the boxes for proximity (such as Bahrain) or oil production (such as Libya). Iran’s influence would be curtailed, as would support for Hezbollah and Hamas. Indeed, at the end of March we saw weapons from Iran to Syria via cargo plane seized by the Turkish authorities.
A third intifada between Israel and Palestine is already likely following a series of rather unpleasant attacks from both sides and a Syrian breakdown would heighten the chances of an Israeli attack on Lebanon, particularly given the success thus far of their new Iron Dome anti-ballistic system (even stops mortars). The current sorry state of affairs in Lebanese politics would also contribute to this as the increasing sectarian split could easily lead to a replay of 2006 when Israeli bombs conveniently stopped where the Christian areas started. A conflict like this would raise the chances of a follow up attack on Iranian nuclear facilities, particularly if Hezbollah’s retaliatory rocket capabilities were neutered. Aside from this, there might be some read across to Turkey should the Kurds in the north push for independence. Kurdish activists in Turkey have been raising their voices recently, with a death in the last few days of protests.