Russia is jumping into the civil war in Syria with both feet. We would like to look at what this means to the region and what the Russia-Syria connection means to markets. First let us look at an update on Russian involvement in the Syrian civil war. The New York Times reports that Russia is supporting Syrian troops with cruise missile attacks launched from the Caspian Sea inside the Russian Federation.
Russian warships in the Caspian Sea fired cruise missiles as Syrian government troops launched a ground offensive Wednesday in central Syria, in the first major combined air-and-ground assault since Moscow began its military campaign in the country last week.
The missiles, launched from a Russian flotilla in the Caspian Sea, travelled 1,400 kilometers (900 miles) over “unpopulated areas” to target militants, according to a Russian officer.
The latest developments – exactly a week after Russia began launching airstrikes in Syria – add a new layer to the fray in the complex war that has torn this Mideast country apart since 2011.
Moscow has mainly targeted central and northwestern Syria, strategic regions that are the gateway to President Bashar Assad’s strongholds in Damascus, and along the Mediterranean coast. But the strikes appear to have given Assad new confidence to try to retake some lost ground.
The Assad family has ruled Syria by way of the Baath Party for decades. When Syrian citizens in the city of Homs peacefully demonstrated in 2011 the demonstrations were put done forcefully and thereafter the demonstrators took up arms and thus began a 4 year long civil war. More than 4 million people have fled the country and a quarter million people have died. The Assad government only controls about a tenth of Syrian territory but most of the population. Kurdish forces have staked out territory in the north and east of the country and a terrorist state, the Islamic Republic of Iraq and Syria has sprung up and controls most of northern and eastern Syria as well as large parts of Iraq. Russia has always backed the Assad dynasty and Russian president Putin contends that the Assad government is the only thing left before total chaos in the region. Thus Russian bombers and missiles are used in supporting a new ground offensive in Syria with the goal of saving the Assad regime. What does all this have to do with markets?
A Powder Keg on Top of a Pool of Oil
The risk to governments in the Middle East is not the Assad regime but various terrorist organizations with the Islamic State as the foremost. Half of the recoverable crude oil in the world is in the Middle East. If unstable governments fall and chaos reigns, oil supplies will fall, prices will rise and economies will suffer. On the other hand countries like Venezuela, Colombia, Mexico, Brazil, Nigeria and Angola will prosper because they will not be subject to social and political chaos and they have oil to sell. In addition, as developing economies based on oil fall into chaos those who do business with them suffer as well.
Germany Feels the Effects of Reduced Developing Market Demand
Bloomberg Business reports that German industrial output fell by 1.2% last month.
German industrial production unexpectedly declined in August, signaling that Europe’s largest economy is vulnerable to risks including weaker growth in emerging markets.
This is happening simply due to slower global growth, especially in China. If the Middle East truly descends into chaos the effects on industrial production and services will be felt globally with stock and commodity markets affects across the globe.
Hoping Russia and Syria Win
An accurate consensus is that the Assad regime is a brutal dictatorship. The USA and EU as well as neighboring Turkey and other regional powers want him to be gone. The problem is that there is not viable alternative. Russia is engaging in realpolitik, the German word for a realistic and practical approach to solving regardless of moral concerns. Newsweek writes about how Putin wins in Syria.
At a moment when the United States appears to be washing its hands of the increasingly bloody and chaotic region, it gives Russia an expanding military presence in the Mediterranean on the doorstep of a NATO ally (its newly established airfield at Latakia in eastern Syria sits just 75 miles from the border with Turkey), and the gambit may yet serve as leverage with the West as Putin seeks to get out from under economic sanctions imposed as a result of Moscow’s annexation of Crimea in Ukraine.
The only hope for the Assad regime is that a combination of Russia, Iran and Hezbollah will help reestablish control. This will probably calm the markets for the time being despite being a morally repugnant solution.