goldman sachs - the syrian quagmire implications of a u.s. attack

7/29/2019 Goldman Sachs - The Syrian Quagmire Implications of a U.S. Attack

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Investment Management Division

This material represents the views of the Investment Strategy Group (ISG) in the Investment Management Division of Goldman Sachs. It is not a product of Goldman Sachs Asset Management (GSAM) or

Goldman Sachs Global Investment Research. The views and opinions expressed herein may differ from those expressed by other groups of Goldman Sachs.

Investment Strategy Group

The Syrian QuagmireImplications of a US Attack

September 9, 2013


2/16

Investment

Management

DivisionThe Lay of the Land

1. Map of Syria

Source; Investment Strategy Group, Eurasia Group, Syria Needs Analysis Project1

2. Location of Syrian Rebels

Seculars: Most believe in a diverse Syria built on power sharing (~30% of opposition).

Islamists: Mainly the Muslim Brotherhood, most accept political diversity but hardliners are dogmatic.

Salafists: Religious Islamists that believe modern political systems are corrupt. Not supportive of

democracy and human rights, reportedly funded by Saudi Arabia and Qatar.

Jihadist: Extreme Salafists that desire to build an Islamic state, fight the west, and purify the region

from minorities.

Majority of

opposition

(60-70%)
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3/16

Investment

Management

DivisionSyria Crossed the US Administrations Red Line

US Governments Assessment of the Syrian Governments Use ofChemical Weapons on 8/21/2013

Source; Investment Strategy Group, The White House, Office of the Press Secretary2

US Administration Findings

Attack killed 1,429 people, including 426 children

Intelligence reveals regime activities associated with preparations for a

chemical weapons attack in the three days prior

Satellite evidence shows rockets launched from government-held areas

90 minutes before the first report of chemical attack

100 videos attributed to the attack show symptoms consistent with

exposure to a nerve agent

Communications intercepted involving a senior Damascus official who

"confirmed that chemical weapons were used by the regime on August

21" and was concerned about UN inspectors obtaining evidence

We have communicated in no uncertain terms with every player in the region that

thats a red li nefor us and that there would be enormous consequences if we start

seeing movement on the chemical weapons front or the use of chemical weapons.

President Barack Obama, August 20, 2012


4/16

Investment

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Why Seek Congressional Approval?

Limited International Support

Source: Investment Strategy Group, The New York Times, The Wall Street Journal3

France will be part of it.

France is ready.

French President Franois

Hollande, 8/30/2013

It is clear to me that the Britishparliament (...) does not want to

see British military action.

UK Prime Minister David

Cameron, 8/29/2013

We are deeply concerned that

some countries may take

military actions unilaterally.

Chinese Foreign Ministry

Spokesman Hong Lei, 9/2/2013

We should avoid further

militarization of the conflict

and revitalize the search for a

diplomatic settlement.

U.N. Secretary General Ban

Ki-Moon, 9/3/2013

The time has come to call on the world

community to bear its responsibility and

take the deterrent measure that puts a

halt to the tragedy.

Saudi Foreign Minister Saud al-Faisal,

9/1/2013

The statements containing

threats of the use of power

against Syria we heard from

Washington are unacceptable.

Official representative of the

Ministry of Foreign Affairs of

Russia Alexander Lukashevich,

8/30/2013


5/16

Investment

Management

Division

Why Seek Congressional Approval?

Limited Public Support

Recent Polls: Americans Opinions about a US Strike on Syria

Source: Investment Strategy Group, ABC News, NBC News, Pew Research4

42%

29%36%

50%

48%

59%

8%

23%

5%

0%

25%

50%

75%

100%

NBC News Survey (Aug 28-29) Pew Research (Aug 29 - Sep 1) Post / ABC Poll (Sep 3)

Favor Involvement Oppose Involvement Dont Know

Only about 1/3 of Americans are in favor of a US strike.


6/16

Investment

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Division

12

6

21

7

5

3

28

16

1

1

17

10

50

23

0

10

20

30

40

50

60

Against military action Lean no Undecided For military action

Senators

Repub licans Democra ts Independents

Will the Administration Win the Vote in Congress?

Source: Investment Strategy Group, The Wall Street Journal, The Washington Post

We should be focused on defending

the United States of America. Thats

why young men and women sign up to

join the military, not to, as you know,

serve asAl Qaedas air force.

Ted Cruz, September 3, 2013

I'm going to support the president's

call for action. I believe my colleagues

should support this call for action.

John Boehner, September 3, 2013

8777

62

8

2439

119

17

111116

181

25

0

20

40

60

80

100

120

140

160

180

200

Against military action Lean no Undecided For military action

Repres

entatives

Republicans Democrats

5

1. US Senate Stance on Syria 2. US House of Representatives Stance on Syria


7/16

Investment

Management

DivisionWhat Is the Endgame in Syria?

Type of Strike?

1. Limited strike

2. Modulated strike to intimidate Assad

3. Aggressive strike

Possible Outcomes?

1. Worsening civil war

2. Continued stalemate

3. Improved chances of a negotiated settlement

Possible Timetable?

Source: Investment Strategy Group6

What we do want is an articulation of a

goal to over time degrade Bashar Assads

capabilities, increase and upgrade the

capabilities of the Free Syrian Army and

the Free Syrian government so they can

reverse the momentum on the battlefield.

Senator John McCain, September 2, 2013


8/16

Investment

Management

DivisionImplications for the Iranian Nuclear Stalemate

1. Impact of Sanctions on Irans Currency 2. Timeline of Key Events

Source: Investment Strategy Group, Bloomberg, United Against a Nuclear Iran7

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13

USDIR

RSpot

Of fic ia l Rate Bla ck Ma rket Ra te

Weaker rial

Happy Rosh Hashanah.

Tweet from Iranian Foreign Minister

Javad Zarif, September 5, 2013

We are ready seriously and without wasting timeto engage in

serious and substantive [nuclear] talks with the other sides. I am

certain the concerns of the two sides would be removed through talks

in a short period of time.

Iranian President Hassan Rouhani, August 6, 2013

Date Event

January 2013 Israeli legislative elections

June 2013 Iranian presidential elections

Fall 2013 New round of P5+1 nuclear talks

?? Iran reaches nuclear capability

November 2014 US mid-term elections


9/16

Investment

Management

DivisionImplications of a Strike for the Rest of the Region

Israel

Turkey

Iraq

Jordan

Egypt

8


10/16

Investment

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DivisionImpact on Oil Markets

1. Syrian Oil Production

Source: Investment Strategy Group, Bloomberg, US Department of Energy, IEA9

404

50

0.5%

0.05%

0.0%

0.1%

0.2%

0.3%

0.4%

0.5%

0

50

100

150

200

250

300

350

400

450

2008 2009 2010 2011 2012 1Q13 2Q13 3Q13

%ofWorld

Production

Volume(thousandb/d)

Volume (left axis) % of World Production (right axis)

2. Key Energy Transit Chokepoints

Suez Canal + SUMED Pipeline

Crude: ~2 million b/d

Products: ~1.2 million b/d

Bab el-Mandab

Crude: ~0.8 million b/d


Strait of Hormuz

Crude: ~16 million b/d



11/16

Investment

Management

DivisionImpact on Oil Markets

1. Global Oil Disruptions Caused by Events in the Middle East (1956-2013)

Source: Investment Strategy Group, Bloomberg, Oxford Institute for Energy Studies10

Date Oil Supply Disruption

Loss of

Production

(mn barrels)

Change in

Oil Prices

11/1956 - 03/1957 Suez War 2.0 9%

12/1966 - 03/1967 Syrian transit fee dispute 0.7 1%

06/1967 - 08/1967 Six Day War 2.0 1%

05/1970 - 01/1971 Libyan price controversy; damage to tapline 1.3 6%

04/1971 - 08/1971 Algerian-French nationalization struggle 0.6 0%

03/1973 - 05/1973 Unrest in Lebanon; dam age to trans it facilities 0.5 0%

10/1973 - 03/1974 October Arab-Israeli War; Arab oil embargo 2.6 135%

04/1976 - 05/1976 Civil war in Lebanon; dis ruption to Iraqi exports 0.3 0%

11/1978 - 04/1979 Iranian Revolution 3.5 7%

10/1980 - 12/1980 Outbreak of Iran-Iraq war 3.3 1%

08/1990 - 02/1991 Gulf Crisis - 75%

02/2011 - 10/2011 Libyan civil war 1.6 35%

2. Oil Prices Through September 6, 2013

111.23

116.56

103.93

110.62

95

100

105

110

115

120

1-Jul 13-Jul 25-Jul 6-Aug 18-Aug 30-Aug

Pric

e($)

Brent WTI

8/21 Attack

In addition to the escalating Syrian tensions, several other factors have recently conspired to push oil prices higher:

Libya: Disruptions to oil production and exports have worsened. In August, production averaged just 0.6

million barrels/day (b/d), down from 1.6 million b/d a year ago and 1.4 million b/d in Q1 2013.

Iraq: Output fell below 3 million b/d for the first time in 6 months and could fall another 0.5 million b/d this

month and next.

Inventories: The IEA revised down OECD oil inventories.


12/16

Investment

Management

DivisionNo Discernable Impact

Equity Returns (8/21/2013 = 100) Through September 6, 2013

Source: Investment Strategy Group, Bloomberg, Datastream11

101

100

99

97

92

94

96

98

100

102

104

21-Aug 23-Aug 25-Aug 27-Aug 29-Aug 31-Aug 2-Sep 4-Sep 6-Sep

8/21/2013=100

S&P 500 MSCI Emerging Markets MSCI Turkey MSCI Israel

The major global equity markets, including the S&P 500, actually trade at higher price levels now (as of

Fridays close) than the day of the red line attack.


13/16

Investment

Management

DivisionImpact of a Strike on Syria on US Fiscal Policy Timeline?

12Source: Investment Strategy Group

US Fiscal Debate: Upcoming Milestones

Date Event

Mar 1 Implementation of the sequester

Mar 21 House passes FY 2014 budget

Mar 23 Senate passes FY 2014 budget

Mar 26 2013 Budget Continuing Resolution (CR) signed into law

May 19 Debt ceiling raised to $16.7tn

Sep 30 2014 Budget CR deadline

Late Oct/Early Nov Debt ceiling could be reached

Q4 2013 (?) Renewal of Possible Short-Term CR for 2014 Budget

Dec 31 Expiring unemployment benefits, doc fix, etc.

Jan 2014 Another round of sequestration

Nov 2014 Mid-term elections


14/16

Investment

Management

DivisionKey Takeaways

13

The likelihood of a strike is high.

A strike is likely to be limited and followed by a return to the status quo. The preferred

end game is likely to be a move towards diplomatic engagement.

Economic growth and Federal Reserve policy with respect to tapering will have much

greater economic and market impact.

We recommend riding out market volatility caused by any strike.


15/16

Investment

Management

DivisionImportant Information

14

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Investment

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goldman sachs - the syrian quagmire implications of a u.s. attack

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