Political Stalemate Erupts into Civil War, or Does it?
The 10-month political impasse over government formation, as a consequence of the surprising results of the October 2021 parliamentary elections, deteriorated sharply at the end of the month. Unlike last month, the melodrama of the occupation of parliament by the supporters of the Sadrist Movement (the apparent winners of the elections), and the counter-demonstration by their opponents, the supporters of the Coordination Framework (the apparent losers of the elections), evolved beyond the theatrics of street demonstrations into a night of intense armed conflict in Baghdad’s Green Zone. The fighting on the night of 29th-30th August revived Baghdadis’ worst memories of the civil war of 2006-2008 that almost tore the city apart.
The conflict - as ugly, terrifying, and real as it was - was nevertheless an unlikely epicentre in Baghdad’s Green Zone for the much feared and anticipated war between the two opposing sides. The Green Zone, apart from the presence of the two opposing demonstrators over the last few weeks, does not house either party of the conflict, and as such only a fraction of the militias of either side took part in the conflict, with some heading to it from strongholds elsewhere in Baghdad. However, as the seat of the government and the location of most of the foreign missions, its choice for staging an armed clash is symbolic, highly visible, and crucially draws attention to the potential costs of a failure to reach an agreement over the 10-month impasse over government formation.
Moreover, the high probability of a violent clash in the Green Zone was telegraphed three-days earlier through social media, stating that a failure to meet the latest demands of the leader of the Sadrist Movement would lead to his withdrawal from politics and allow the movement’s followers the freedom to follow through with their demonstrations as they saw fit without the earlier constraints imposed on them to avoid violent clashes.
The conflict ended the next day, following a speech by the leader of the Sadrist Movement instructing the movement’s followers to withdraw from the Green Zone. That was quickly followed by a series of synchronized conciliatory statements from most, but not all, of the political leaders of the Coordination Framework, heads of other political parties, as well as by the holders of the highest offices in the government, that hailed the withdrawal and called for new national dialogue to resolve the conflict. Shortly afterwards, almost like clockwork, the government ended a curfew imposed earlier, removed road barriers and blocks, and life swiftly returned to normal in Baghdad.
As discussed here last month, both parties in the conflict, irrespective of their fierce rivalry, have been members of the all-inclusive governments formed following successive elections post the US invasion in 2003. Importantly, as major players in the post-2003 ethno-sectarian political system, both parties have built substantial patronage networks, and consequently could risk the loss of the wealth and sources of economic rent created by these networks if their conflict evolved into a civil war.
Following through with this argument, it is logical to conclude that the contours of a re-negotiation of the post-2003 elite bargain either took, or more likely is taking, place that ended the clashes with a redistribution of power and re-allocation of resources to accommodate the increased relative strength of the Sadrist Movement. However, the less than conciliatory statements by some of the leaders of the Coordination Framework indicates that they are likely to have been losers in the re-negotiated elite bargain, and as such the political impasse is hardly over with likely negative surprises in the offering – but highly improbable to be anywhere as violent as the clash that just ended.
This implies that a continuation of the status-quo, despite the continued political uncertainty, would be a preferred solution for all political parties, as it would preserve the country’s ethno-sectarian parties’ share of the state’s resources achieved in the 2018 elections, while they work on the torturous process of modifying the recently renegotiated elite bargain to accommodate the dissenting parties.
Markets Discount and Look Through the Violent Conflict
The market was down for most of the month, with the Rabee Securities RSISX USD Index down as much as 5.0% for the month by the start of the third week of August; but it turned around as the month came to a close, ending up 2.0% – with the best daily gains happening in the three days following the telegraphing of the imminent conflict (above). This discounting and looking through the violent conflict were repeated in the currency market of exchange rate of the Iraqi Dinar (IQD) versus the USD. The spread between the official exchange rate and the parallel market exchange rate (delta in chart below), narrowed significantly throughout the month – with the sharpest decline taking place in the days following the storming of parliament late last month.