Persepolis

In October 1971, a time when Mao ruled China, Brezhnev was in charge in the USSR and Nixon president of the USA, Maxim’s, the famous Parisian restaurant closed for two weeks so that staff could prepare the restaurant’s greatest order – the feast organised by the Shah of Iran to celebrate the 2500th anniversary of the establishment of the Persian empire by Cyrus the Great.

The Shah’s celebration became known as the greatest party of all time (Life magazine called it ‘the party of the century’) and became highly controversial for its lavishness. For instance, nearly 300 red Mercedes were used to ferry guests around a large, tented city and in the end Maxim’s and other establishments sent some eighteen tonnes of food to Iran. Waiters had to open and taste all of the bottles of Chateau Lafite Rothschild 1945 for poison. Many of the world’s royal families attended, as did a range of social and political figures from Grace Kelly to Tito to Haile Selassie, to Imelda Marcos. It’s perhaps no surprise that this display of excess was followed a few years later by the Iranian Revolution.

The spectacle of the Shah’s party, his ties to foreign governments and the cruelty of his secret police and a drawn-out recession contributed to months of protests in the late 1970’s, which then led to the Revolution. One of the best accounts of the Revolution is a somewhat accidental one – Desmond Harney’s excellent eyewitness account of the revolution “The Priest and the King.” At the time, Harney worked in Tehran. He had been ready to leave Iran on vacation, but for work-related reasons he remained, and then witnessed the eruption of the revolution around him.

My other Revolution-related thought is of former Ayatollah Khomeini, who, on disembarking the Air France aircraft that took him back to Tehran on the outbreak of the revolution, was asked by ABC anchorman Peter Jennings how he felt about his return to Iran. “Nothing. I feel nothing,” was the alleged response. It gave a pointer as to the austere image Mr. Khomeini wanted to portray and of his cold single-mindedness. The fact that the man who translated Khomeini’s comments, was executed three years later, was another clue as to what would follow.

The regime that Khomeini created has outlasted many others – perhaps only the late Fidel Castro and especially so the late Queen Elizabeth II of England have seen as many US presidents, German chancellors, among others, pass on and off the world stage. While Iran has until recently been a dominant player in the Middle East from a geostrategic point of view, it has, to be polite, not been an economic success.

Thus, in keeping with the template of revolutions, high prices, scarcity of food and fuel, and a broken economy, are triggering protests across Iran, that have become so vast, that expectations are growing that Iranians may eject their leadership. That moment may not be too far off, but the path to an Iran that benefits its people remains a difficult one.

Not only are its geriatric rulers stubbornly cut off from its people and the outside world, they have historically, to a worrying extent (this was especially the case under former prime minister Mahmoud Ahmadinejad), relied on heightened tension with the US, Israel and other ‘enemies’ for political oxygen. Also, economically, Iran is like Russia in that most of the assets and resources in the economy are held by a small number of people (IRG, business owners, clerics) who form a sclerotic elite around the theocrats. Breaking their hold on the economy will be difficult, even under a new regime.

Neither is regime change obvious. The name of the Shah’s son Reza Pahlavi is circulating widely (in the West) as a possible figurehead, but the story of the ‘greatest party’ and the memories of his brutality are at least two reasons why he will not lead a ‘new’ Iran. At the same time, it is not obvious what individuals or groups might replace the regime, if it came to that.

A further complication is that Iranians are highly distrustful of interventions from abroad, indeed some people joke that Iran is the only country in the world where MI6 is still considered to be a force to be reckoned with. Military intervention by the US or other states may not be welcome.

The EU is slightly less distrusted than the US and the UK, and it should take a more active stance – in terms of further sanctions, asylum for the hundreds of young people who have been jailed, organise the supply of communication technology into Iran (VPN’s, satellite technology), and potentially begin to plan to assist and shape a transition process.

Iran has been weakened economically by sanctions, humiliated by Israel and had its military capability enfeebled but sadly, the state still has an array of resources with which to repress its people.

My sense is that the brutal repression in Iran will continue now (with very little visible public support in the US and Europe), and the economy will weaken further. An opening may come when the Supreme Leader, Khamenei dies – he is 86 and suffers from cancer. This event could provide the cover for a discrete but meaningful shift in policy, and the start of negotiations on sanctions and Iran’s nuclear program, and the beginning of a more promising era.

Have a great weekend ahead, Mike

Persepolis

Those lucky enough to visit Persepolis will know that not far away is an impressive monument to the Persian king Artaxerxes I, who like his even more famous antecedent (and I think distant relative) Cyrus the Great, played an important role in the liberating the Jewish community in Mesopotamia and establishing them in Jerusalem. Since then, the link between Persia and the Jewish people has been strong right through the Pahlavi dynasty years up to 1971, which marked the 2500 anniversary of Cyrus’ establishment of the Persian empire.

This date is controversial for the lavish party that the Shah hosted to celebrate the anniversary, and by some accounts (notably the Guinness Book of Records), it was one of the great parties of all time – for instance nearly 300 red Mercedes were used to bus guests around a large, tented city and Maxim’s in Paris closed for two weeks so that staff could cater for the event. Many of the world’s royal families attended, as did a range of political figures from Tito to Imelda Marcos. It’s perhaps no surprise that this display of excess was followed a few years later by the Iranian Revolution.

Even at this time, there were over 100,000 Jews living in Iran, many of whom would soon leave for Israel, so much so that one quarter of the cabinet of Israeli prime minister Ehud Barak (1999) were born in Iran.

While I don’t intend to comment directly on the recent entanglement between Israel and Iran – which is the culmination of a lengthy covert conflict – the Iranian attack on Israel reinforces a number of emerging geopolitical trends.

The first is the problem of elites in the sense that Iran’s theocratic elite is stubbornly cut off from its people and the outside world, and to a worrying extent (this was especially the case under former prime minister Mahmoud Ahmadinejad) relies on heightened tension with Israel and other ‘enemies’ for political oxygen.

On the Israeli side, it is worth recalling that not so long ago its society was convulsed by a crisis of democracy, and that by any standards its government has in recent years veered to the extreme right, notably so in terms of its willingness to bend Israel’s institutions to their own will.

The extension of this thought is to highlight the values of well made, functioning democracies but to also worry about the damage that the likes of Boris Johnson and Donald Trump has caused to them, how little these individuals value democracy, and how easily they have been manipulated by autocrats.

It is increasingly clear that in a divided, technology driven world, it is very easy for bad actors to undermine other states (a recent BBC documentary ‘The Empire Strikes Back’ made the point that Russia’s foreign policy is to act as a ‘spoiler’), and equally difficult for the lynchpins of the democratic world to repair this damage. Whilst this makes for a testing diplomatic world for the US and EU, not enough attention is given to the lack of any effort on the part of China to improve the state of international relations.

In particular, many of the larger, populous emerging nations of the world should pay more attention to this, and question China’s rhetoric that it wants to be a world diplomatic power.

This group of nations, who suffer under the banner of the ‘Global South’ should rightly feel alarmed that the world is becoming a more dangerous place and that military exchanges between nuclear armed states risk an existential event. They might also be fascinated by advances in drone warfare (the war in Nagorno-Karabakh was instrumental in this respect), the use of AI in military systems and the evolution of covert warfare. The danger is that instead of being repelled by this trend, they want to be part of it and a world arms race begins.

Another trend worth commenting on is that the clubs and gangs of the geopolitical world are becoming more clearly defined. Last week we wrote about the ‘golf playing nations’, and in my view the attack by Iran should convince Israeli strategists that China and Russia are not friends, and that it needs to pursue the normalisation of relations with the Gulf states and Saudi Arabia, and that it needs to be even more appreciative of the role that Jordan plays in the region.

Amidst all of this, the military exchange between Israel and Iran has obscured the fate of Gazans where a famine is deepening. For them, the best outcome of the events of last week is that it accelerates a durable peace process that encompasses the diplomatic realignment of the countries of the region.

Have a great week ahead,

Mike

The Fracturing continues – from Tehran to Taiwan

A friend of mine, who is also a successful sportsman (rower) once told me that he trains every Christmas day, just in case his competitors take that day off. It is a quirky piece of advice but one that I have long since borne in mind.

Thus, as I returned home from my Christmas morning run, I was interested to read that Russia, China and Iran – were using the Christmas period for a naval training mission in the Gulf of Oman. Presumably, like my friend, they thought the US and its allies were taking Christmas day off.

The exercise points to the emerging rivalries of the 21^st century. China and Russia are members of the Shanghai Cooperation Organisation (SCO), which readers of the Levelling will know that I consider to be one of the geopolitical ‘gangs’ of the future. Their rival regional gang is the ‘Quad’ (India, USA, Japan and Australia).

The significance of the SCO, and the recent exercise with Iran, has now been heightened by the killing of Iranian general Quassem Soleimani. Indeed, it is just one of many implications (by the way in my last missive before Christmas I noted that in 1998 Bill Clinton had responded to impeachment by launching an airstrike on Iraq, and that another President might try the same tactic).

The immediate one is that the USA will find its moral and diplomatic power diminished, and both its allies and foes again demanding whether the White House has a coherent approach to policy making (Israel’s muted reaction was telling).

For example, the missile strike on Soleimani cuts across an increasingly successful financial and clandestine war against Iran that was producing inflation, unrest and a surge in crime across the country. The airstrike will now allow the Iranian regime to paint its socio-economic troubles as being generated by the hand of the CIA and MI6 (there is a long held, view across Iran that foreign spy agencies are behind political and economic turmoil in the country).

The killing of Soleimani also means a likely diminution in the American presence in Iraq, that Americans are less rather than more safe, and an altogether more uncertain outlook for some of the smaller states in the region, notably Bahrain, Dubai and Abu Dhabi. While the tension between both Iran and the US is perceived to have diminished following the Iranian riposte, I think this dispute is not over, and the event itself will lead to a hardening of attitudes.

To return to the SCO, Soleimani’s death will underline the rationale for this grouping and we should expect to see it become more prominent. Russia in particular may now look to play a stronger role in the long term future of Iraq and Syria (potentially with the backing of Chinese capital).

Russians will underline how the Kremlin was both concerned and emboldened by the 2003 invasion of Iraq, that it later took aggressive measures to defend what it perceived were threats to its hinterland (in Georgia and Ukraine).

At a grander level, the killing of Soleimani will cause tension within NATO, and will heighten calls by many for an EU army, that can at some stage have the capacity to act alone, though with the US under the NATO umbrella. It should also, at least in terms of the security and foreign policy push the UK towards rather than away from the EU, and in my view this partnership could well be one of the more stable pillars in the post Brexit relationship.

In sum, this critical event points to some near-term event risk, notwithstanding the apparent de-escalation (Iran’s public de-escalation points to stealth retribution), and an elevation of longer-term geopolitical risk (and by extension political risk in the US in the context of the election).

Geopolitical risk, or rather geopolitical events, rarely trouble broad equity and debt markets but my worry is that we are now seeing a fracturing of the world order (this weekend’s Taiwan election is a case in point and expect the newspaper pundits to talk of Taixit from Sunday), and the emergence of a one where geopolitical friction becomes the norm. Expect this to be increasingly reflected in the securities of pan-global companies, certain emerging market debt securities and in safe haven assets.

The real reason for calm across markets is central bank liquidity. They are the monetary battleships of the 21^st century, more powerful than many armies. What might happen if they are deployed in a conflict?

Have a great week ahead,

Mike