The real value of Davos is in making connections - not just in the sense of networking and schmoozing with important people, but also in relating seemingly disparate events and ideas. Overtly the main themes at Davos today were terrorism and Iraq – and the story, as presented publicly by Iraqi and US politicians and officials, was all about wresting back control of Baghdad from terrorists, with al-Qaeda and Shia death squads bearing equal blame. In contrast to American officials, who simply repeated President Bush’s mantra that "failure is not an option", Iraqi politicians have a more realistic and nuanced view.
As Abd Al-Mahdi, the Vice-President, noted privately after his appearance at a plenary session: "The Americans actually have two options: either they stay or they withdraw. But we Iraqis don’t have any options. If we don’t succeed on ending the violence with the present strategy, we just have to be patient and keep trying. Unlike the Americans, we don’t have an exit strategy from Iraq." The same was true, he noted, of Iraq’s neighbours Iran, Syria, Turkey and Saudi Arabia. This was why Iraqi politicians were constantly urging President Bush to start talking to Iraq’s neighbours and warning the White House that any military attack on Iranian nuclear installations, whether by America or Israel, could spill over catastrophically into Iraq.
Why, then, did President Bush refuse to start talking to Iran and Syria, as recommended by the Baker-Hamilton commission? Why instead did he seem to be increasing military tensions with Iran? Iraqi officials wouldn’t speculate on this beyond the obvious remark that "firmness from America could be a way of bringing Iran to the negotiating table". But delving beneath the surface of this self-evident objective, three strands of a more interesting and hopeful strategy begin to emerge in conversations with Middle Eastern analysts and politicians at Davos.
Start with the premise that America is indeed being tough on Iran in order to strengthen internal opposition to the extremist confrontational policies of President Ahmadinejad. The purpose is not necessarily to trigger the removal of Ahmadinejad, but rather to shatter Iran’s present grandiose delusions of regional hegemony and bring Iran into negotiations from a position of relative weakness, rather than its present perceived strength.
Three strands of policy are now being directed to achieving this internal shift in Iranian politics. The first is, obviously, the US effort to reduce violence in Iraq – or failing that, at least to mount a show of strength against the Iranian-backed Shia militias and to remind Tehran that America retains its capacity to deploy overwhelming military power.
The second is the sabre-rattling over Iran’s nuclear programme, especially the semi-public threats of Israeli bombing, perhaps even with tactical nuclear weapons. America’s announcement that two aircraft carrier battle groups will move to the Gulf within a month or so are clearly a reminder that Washington still has plenty of firepower to attack Iran directly or to back Israeli bombing – and also to protect international oil shipments through the Gulf against Iranian retaliation. These deployments and public warnings do not necessarily suggest that an actual attack on Iran is likely but rather that America wants Iran to realise that it is playing for very high stakes in its confrontation with the West.
The third strand of America’s Iranian policy is less visible, but may well turn out to be more important. The idea is to thwart Iran’s threatened hegemony with an economic pincer movement consisting of financial diplomacy on one side and energy policy on the other. The main responsibility for this strand of policy rests not with America or Israel but with the third member of the unlikely new anti-Iranian alliance: Saudi Arabia.
The financial diplomacy consists not just of the sanctions against Iran agreed last month by the UN Security Council but also in the donors’ conference for Lebanon in Paris this week. The toughened UN sanctions are beginning to have some impact on Iran’s domestic economy and on its ability to do business and raise money internationally. Meanwhile, the Lebanon conference is demonstrating that the US-Saudi coalition can easily match and exceed the financial subsidies channelled by Iran to Hezbollah, Hamas and its other regional proxies. In doing this the Saudis’ involvement is crucial because of their ability to spend large sums of money without the budgetary and political oversight faced by Washington. At best, Saudi open-handedness would persuade key players, not only in Lebanon but also in Iraq and Syria, to desert the Iranian camp. At a minimum, Saudi efforts to buy support in the region would tempt Tehran into a bidding contest which the Iranian economy could simply not afford.
This brings us to the final and most interesting strand in the anti-Iranian policy nexus: the price of oil. Iran’s economy depends entirely on oil sales, which account for 90 per cent of exports and a roughly equal share of the Government’s budget. Since last July, a barrel of oil has fallen from $78 to just over $50, reducing the Government’s revenues by one third. If the oil price fell into the $35 to $40 range, Iran would shift into deficit, and with access to foreign borrowing cut off by UN sanctions, the Government’s capacity to continue financing foreign proxies would quickly run out. Iran has reacted to this threat by calling on Opec to stabilise prices but, in practice, only one country has the clout to do this: Saudi Arabia. Earlier this month, in a highly significant statement, Ali al-Naimi, the Saudi Oil Minister, publicly opposed Iranian calls for production cuts to halt the decline in prices. Mr Naimi's pronouncement was cast as a technical matter unconnected with politics, but it seemed to confirm private warnings by King Abdullah that his country would try everything to thwart Iran’s hegemony in Iraq and throughout the region, whether by military intervention or more subtle economic means.
This policy was spelt out with surprising precision in an article by Nawaf Obaid, a senior Saudi security adviser, in The Washington Post: "King Abdullah may decide to strangle Iranian funding of the Iraqi militias through oil policy. If Saudi Arabia boosted production and cut the price of oil in half, the kingdom could still finance its current spending. But it would be devastating to Iran, which is facing economic difficulties even with today's high prices. The result would be to limit Tehran's ability to continue funnelling hundreds of millions each year to Shiite militias in Iraq and elsewhere."
This article attracted huge attention in the Middle East and Washington, but was hardly noticed in the financial markets and the business community. But that was when the bulls still thought that they commanded the oil market and most analysts believed that the only direction for oil prices was up. Maybe they should think again.
