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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
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Investment
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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%)
http://www.google.com/imgres?start=106&sa=X&rls=com.microsoft:en-us:IE-SearchBox&biw=1280&bih=808&tbm=isch&tbnid=enFikPRfqr9HAM:&imgrefurl=http://bousla.net/&docid=SpqdMRfh2eAYqM&imgurl=http://bousla.net/wp-content/uploads/2013/08/16d94_chemical_weapons_symbol-796ff-150x150.jpg&w=150&h=150&ei=MO4pUq-JL4P54AOC94DwBw&zoom=1&iact=hc&vpx=584&vpy=368&dur=3219&hovh=120&hovw=120&tx=98&ty=73&page=4&tbnh=120&tbnw=115&ndsp=38&ved=1t:429,r:33,s:100,i:103 -
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Investment
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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
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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
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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.
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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
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Investment
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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
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Investment
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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
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Investment
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DivisionImplications of a Strike for the Rest of the Region
Israel
Turkey
Iraq
Jordan
Egypt
8
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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
Products: ~2.5 million b/d
Strait of Hormuz
Crude: ~16 million b/d
Products: ~2.0 million b/d
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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.
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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.
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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
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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.
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Investment
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DivisionImportant Information
14
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