Tension between Iran and its Gulf Co-Operation Council (GCC) neighbors continues to rise. The GCC was formed in 1981 by the Sunni controlled states to bolster security after the 1979 revolution in Iran and the subsequent war with Iraq. We have been writing about the tension between Iran and Saudi Arabia for over a year. Iranian leaders believe the majority Shia population in Bahrain would prefer to be part of Iran than subject to a Sunni monarchy related to the ruling al-Saud family of Saudi Arabia. Tension between Shiite Iran and Sunni Saudi Arabia escalated last year after Saudi troops entered Bahrain to quell protests. The latest escalation is in response to the meeting held by the six members of the GCC in Riyadh, Saudi Arabia on May 14. The members of the GCC held talks to discuss closer political, economic and military union. When GCC leaders convened in December, Saudi King Abdullah urged member nations to move “beyond the stage of cooperation and into the stage of unity in a single entity.”

Based on extracts from the Kayhan* Newspapers' International website, Iranian leadership seems to view the possibility of closer union between the GCC states generally and Bahrain and Saudi Arabia specifically as the first move to create a broader Gulf alliance against Iran. The English language version of Al Arabiya News reported “In response to a meeting held in the Saudi capital Riyadh by heads of state of the six members of the Gulf Cooperation Council, which focused on a possible union especially between Saudi Arabia and Bahrain, Kayhan published Tuesday a report that described Bahrain as “part of Iran” and called for its annexation.”

 

Bahrain is not the only subject of territorial tension. Al Arabiya also noted ”Both Iran and the United Arab Emirates (UAE) claim territorial sovereignty over Abu Musa and two other islands in the southern Gulf. — Abu Dhabi says the Iranians have since taken control of the entire island which controls access to the oil-rich Gulf and have installed an airport and military base on Abu Musa.”

 

We continue to believe that the risk of a significant increase in tension in the Gulf is underestimated by financial markets. Former Saudi intelligence chief, Prince Turki al- Faisal warned that if Iran obtained nuclear weapons, Saudi Arabia would too. Turki’s statement reflects a rising tension due to the perception among GCC’s leadership that the military balance is tilting sharply toward Iran. As Iran increases its influence over Iraq following the withdrawal of U.S. troops, that perception is likely to grow significantly.

 

The Rand Corporation** recently published a paper entitled How to Defuse Iran’s Nuclear Threat. The paper argues that “diplomacy and economic sanctions are better suited than military action to prevent the emergence of a nuclear armed Iran.” The Rand research team argue that an Israeli or American attack on Iranian nuclear facilities would “make it more, not less, likely that the Iranian regime would decide to produce and deploy nuclear weapons. — It is, after all, not Iranian aggression that its neighbors principally fear, but Iranian subversion. It is Iran’s ability to appeal to potentially dissident elements within neighboring societies — to the Shia populations of Lebanon, Iraq, Saudi Arabia, and the Persian Gulf states, and to the more radical elements within Palestinian society — that is of most concern to these states. — This is true even of Israel, whose principal vulnerability is not to Iranian military pressure but to attacks by Iranian-supported Hamas and Hezbollah.

Containing this sort of influence would almost certainly become more difficult in the aftermath of an unprovoked American or Israeli military attack. Reaction among neighboring populations would be almost uniformly hostile. The sympathy thereby aroused for Iran would make containment of Iranian influence much more difficult for Israel, for the United States, and for the Arab regimes currently allied with Washington. This would be particularly true in newly democratizing societies, such as Egypt, where public opinion has become less fettered and more influential. International sanctions would erode, and Iran would likely redouble its efforts to develop nuclear weapons.”

 

I tend to agree that a pre-emptive strike would be counterproductive. However, I fear that relying solely on economic sanctions may also have significant unintended consequences. President Theodore Roosevelt’s corollary to the Monroe Doctrine was "speak softly, and carry a big stick.” The phrase implies negotiating peacefully, yet simultaneously carrying a "big stick", or the implied threat of military intervention. Consequently, I believe there are lessons to be learned from the trade embargo imposed by the U.S. against Japan in 1940.

 

According to Niall Ferguson’s the War of the World, “The sole obstacle to Japanese hegemony in South East Asia was America. On the one hand, it was clear that the United States had scant appetite for war, in Asia or anywhere else. On the other hand, Americans had little desire to see Japan as sole master of China, let alone the whole of South East Asia. But those who ran U.S. policy in the Pacific believed they did not need to take up arms to prevent this, because of Japan's dependence on trade with the United States and hence its vulnerability to economic pressure. — The path to war in the Pacific was paved with economic sanctions. — Only one economic sanction was regarded in Tokyo as a casus belli and that was an embargo on oil. That came in July 1941, along with a freeze on all Japanese assets in the United States — a response to the Japanese occupation of southern Indo-China. From this point, war in the Pacific was more or less inevitable.”

 

 

In addition to the oil embargo, the State Department applied pressure on American firms to stop exporting technology to Japan that would facilitate the production of aviation fuel.

 

In response to U.S. trade sanctions, Japan pursued two simultaneous courses:

 

Try to get the oil embargo lifted on terms that would still let them take the territory they wanted, and

Prepare for war

 

In his History of the Peloponnesian War, Thucydides identified fear, honor and interest as the three primary reasons that wars are waged. Sanctions can just as easily trigger these reasons as direct acts of aggression.

 

Disclosure

 

The views expressed are as of 5/21/12, may change as market or other conditions change, and may differ from views expressed by other Columbia Management Investment Advisers, LLC (CMIA) associates or affiliates. Actual investments or investment decisions made by CMIA and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results and no forecast should be considered a guarantee either. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts are accurate.

 

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