Annapolis
Last week, the Bush administration hosted a meeting in Annapolis to discuss the situation between Israel and the Palestinians. Not only did the two interested parties attend, Saudi Arabia, Syria, European powers and other groups joined the talks. The two key parties agreed to continue discussions with the goal of creating a two-state solution by the end of President Bush’s term in office. In this report, Bill O’Grady examines what brought about this new initiative, why it occurred now, the outlook for peace and the market ramifications.
What happened?
In mid-July, President Bush announced that meetings between Palestinian President Abbas and Israeli Prime Minister Olmert would take place before year’s end. The initial focus of the meetings was to be on reform of Palestinian institutions, which were undermined due to Hamas’ seizure of the Gaza Strip. In addition, in the “roadmap” from the Oslo Accords, the Palestinians were supposed to create state institutions as a precondition of statehood. Because they were never able to meet this requirement, the peace process had been stalled for the past decade.Until recently, the Bush administration had mostly ignored the Palestinian issue. Most likely, Bush administration officials, observing the frustrating failure President Clinton faced near the end of his second term in trying to broker a peace deal, decided the situation didn’t warrant the attention. However, because of the split within the Palestinians between the West Bank (Fatah) and the Gaza Strip (Hamas), coupled with the growing influence of Iran in the Middle East, the Bush administration decided to make a peace initiative.After the July announcement, Olmert and Abbas began a series of talks. Unexpectedly, the two developed a good personal relationship that has fostered increased optimism about a peace agreement. By September, there were concerns that the Palestinian and Israeli leaders were “getting ahead of the peace process” and raising hopes beyond what could reasonably be accomplished. As U.S. Secretary of State Rice began to put an agenda together for last week’s meeting, optimism eased. Israeli, Palestinian and U.S. officials agreed to meet in November in Annapolis; however, expectations had been dampened.In addition to these three parties, the U.S. State Department officials aggressively moved to include Middle Eastern and European officials at the meeting. Most important, the Saudis, worried about the growing power of Iran, convinced the Arab League to support the meeting. In addition, Saudi officials agreed to personally attend, as did Syrian representatives. The Bush administration and Sunni states in the Middle East wanted to use the Annapolis meeting to isolate Iran and its supporters.Earlier “roadmaps” required the Palestinians to establish state-like institutions, such as security services, and called on Israel to halt building settlements and ease restrictions on Palestinian travel between the West Bank and Gaza Strip. In reality, neither side had the ability or the inclination to meet these intermediate steps. The Palestinians were deeply divided politically and lacked the resources to develop these institutions. Politically, Israel had no incentive to halt settlement activity, as more settlements were established, the greater the odds they would be part of Israel in a two-state settlement. And, for its own protection against terrorist acts, Israel persisted in restricting Palestinian travel through Israel.In order to avoid these obvious traps, Secretary of State Rice instructed Olmert and Abbas to begin at the end — to begin talks on statehood for the Palestinians. Both sides agreed to meet fortnightly during the next year and have a deal by the end of President Bush’s term in January 2009. It isn’t clear whether moving away from intermediate “confidence building” steps will be any more successful than earlier attempts, but at least both sides are talking.
Why now?
There are two basic reasons for the decision to start new talks on Palestine — geopolitical issues and politically impaired individual governments involved in talks.Israel, seeing the Palestinians divided — with Hamas controlling the Gaza Strip and Fatah holding the West Bank, has a great incentive to keep these divisions in place. From the outset, Israel has been quite supportive of the Abbas government and has worked to put Hamas in a state of siege. This policy will tend to undermine the development of a strong Palestinian state. In addition, any state that evolves from these divided circumstances will see its economy dependent upon Israel. Thus, negotiating a two-state solution when the Palestinians are hopelessly split makes good sense from an Israeli perspective.Israel’s domestic political situation also supports a deal. Prime Minister Olmert is the leader of the Kadima party, which was started by Ariel Sharon; to a great extent, it was a party based on the strong personality of Sharon. The party’s policy with regard to the Palestinians was based on partial unilateral withdrawal from territories held from the 1948 borders. In effect, Israel would unilaterally create a Palestinian homeland. If Sharon had been able to remain in office, current talks may have taken on the stature of the Begin-Sadat peace agreements at Camp David. However, Olmert does not have the political stature of Sharon and faced internal dissent within his coalition and external pressures from the left-wing Labor Party and the right-wing Likud Party. In addition to Olmert’s perception of being a caretaker for Kadima, his government has been racked with a series of corruption investigations. Given his political weakness, he needs “something” to improve his status. A historic deal with Fatah could be that something.President Abbas is in similar straights. His Fatah movement views Hamas’ takeover of Gaza as a coup that has undermined the party’s authority. If Abbas can craft a deal that gives Palestinian statehood to the West Bank, it would dramatically raise his stature and undermine Hamas.The United States has suffered significant setbacks in the Middle East. Although the situation in Iraq has improved of late, there is still little evidence to suggest a central government that can stabilize the country has developed. Afghanistan remains a problem. Pakistan is in turmoil. Relations with Turkey have deteriorated because of tensions between the Turks and the Kurds. Iran’s influence is increasing. Overall, the Bush administration needs a “win” to maintain its influence in the region.At the same time, the Sunni states, especially the Saudis, view the rise of Iran and the growing weakness of the United States with alarm. They fear the United States may take an isolationist turn in the next administration, which would create a power vacuum in the Middle East — a vacuum Iran would likely fill. Therefore, despite reservations about being seen as supporting Israel, the Saudis pushed the Arab League to support the Annapolis talks. As mentioned, the Saudis sent representatives to participate in the meeting.Both the United States and the Sunni Arab states want to isolate Iran and its minion, Hezbollah. The Annapolis talks were, in part, designed to weaken Iran’s influence in the region. The outlook
History shows that major meetings between Israel and the Palestinians tend to either be meaningless or explosive. If nothing substantial is on the agenda, they tend to be photo opportunities with handshakes. But, if nothing difficult is attempted, little comes from the gathering. On the other hand, when critical issues are tackled, neither Israeli nor Palestinian leaders have enough domestic support to “deliver the goods.” This leads to civil unrest, assassinations, etc., that tend to end progress.There is a temptation to characterize the Annapolis meeting as the former — a photo opportunity without consequence. However, there are some differences this time that may signal a change in trend:
• First, the fact that both parties have agreed to regular meetings means a forum will be available for discussions.
• Second, both Prime Minister Olmert and President Abbas need a deal to improve domestic political legitimacy.
• Third, Sunni regional governments have an interest in a deal being made, which means they will tend to push the Palestinians into an agreement.On the other hand, the issues remain daunting; if they weren’t, a deal would have already come to pass. The key issues are:
• Palestinians “right of return,” which would allow them to return to lands abandoned with the establishment of Israel
• Guarantees from the Palestinians and other regional powers to Israel’s security.
• Palestinian access to water
• The ending of new Israeli settlements on the West Bank and the dismantling of those established in recent years
• Jerusalem as a shared capital
• A decision on Israel’s official frontier, be they the 1948 or 1967 bordersAll these issues come down to two questions:
• Will the Arabs accept the existence of Israel? If so, this will mean abandoning “right of return” and force security guarantees. In addition, it likely precludes the 1948 borders, which were indefensible.
• Is Israel prepared to give up land? As Saudi Foreign Minister Saud al-Faisal said, “Israel can have land or peace, but not both.” There are two issues with territory.First, Israel must have enough land to have some modicum of “strategic depth.” In other words, if Israel’s territory is so narrow in some places it could be easily divided militarily, it will be too tempting for Israel’s enemies to invade. That was the problem with the 1948 borders. Thus, Israel will need enough land to feel secure. Of course, ironclad treaties that ensure peace with its Arab neighbors will tend to make this problem less critical. That is why getting Arab recognition of Israel’s right to exist is decisive; without it, Israel will likely never control enough territory to feel secure.Second, the Middle East has a long history and is the birthplace of three major religions — Islam, Judaism and Christianity. There are competing claims for land by these religions based upon ancient control of these regions. On the Israeli side, there is a religious element to controlling various regions that were part of ancient Israel. Thus, some Israeli religious parties (and some American evangelicals, for other reasons) oppose trading away land for peace.Although there is great hope that Annapolis will be successful, even a cursory examination of the history of the peace process is sobering. The issues to resolve are daunting, and there is a low probability of success. However, the fact that both parties are talking could mean at least some issues could be resolved, which could make the region a bit less unstable. Sadly, the closer the parties come to a deal, the greater the odds that Hezbollah, Iran and Hamas will work to undermine progress by violence. Thus, the paradox could be that the better the negotiations go, the more unstable the region becomes.Ramifications
In its present form, the promise of talks is modestly supportive for global equities and negative for oil prices. With the odds of a major breakthrough low, we would not expect this issue to have too much impact on the financial markets, at least in the short run.Investors should be aware, however, as 2008 passes. If negotiations begin to show promise, it will tend to undermine radical Sunni Islamic movements — such as al-Qaida and Hamas. And Iran would become further isolated. Thus, if talks appear to be close to a breakthrough, it could be bearish for equities and bullish for safety assets (e.g., gold, Treasuries, oil), as it would likely bring desperate attempts by the above-mentioned groups to prevent peace.
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