Report

The Re-Baathification of Iraq

The Islamic State has conquered much of Iraq with the help of Saddam’s cronies. Now the men America once discarded could help win the country back.

The Islamic State has conquered broad swaths of Iraq thanks to a surprising alliance with secular veterans of Saddam Hussein's military. But now that partnership is fraying -- giving Washington its first real opportunity to blunt the terrorist group's advance without relying solely on American airstrikes or ground troops.

The group of ex-Hussein loyalists, known alternatively as the Naqshbandi Army or by the acronym JRTN -- the initials of its Arabic name -- helped the Islamic State, formerly known as ISIS, win some of its most important military victories, including its conquest of Mosul, Iraq's second-largest city. It has also given the terrorist army, which is composed largely of foreign fighters, a valuable dose of local political credibility in Iraq. JRTN, which was formed as a resistance group in 2006, is made up of former Baathist officials and retired military generals, and is led by the former vice president of Hussein's revolutionary council, Izzat Ibrahim al-Douri, who was once one of the most-wanted men in the country during the U.S. occupation.

ISIS and JRTN aren't natural allies. The former wants to erase Iraq's current borders and establish a caliphate, while the latter has been a largely secular movement that seeks to regain the official power and influence it held before the U.S. invasion in 2003. But they are aligned in their opposition to, and hatred of, outgoing Iraqi Prime Minister Nouri al-Maliki's Shiite-dominated government. Each side wants him to go, and JRTN recognizes that ISIS stands the best chance of violently overthrowing the Iranian-backed regime in Baghdad.

"The Baathists and ISIS had a marriage of convenience at the start of the takeover of Mosul," said Letta Tayler, a senior researcher with Human Rights Watch and a former journalist, who has reported extensively from Iraq on ISIS's human rights abuses and persecution of Shiites and religious minorities. "Baathists got muscle from ISIS, and ISIS got local legitimacy through the Baathists."

But now that marriage may be fraying, to the possible benefit of Washington and Baghdad. Signs of late are pointing to a growing divide between the top leadership of JRTN and the Islamic State, whose brutal terror campaign has brought down the wrath of the U.S. military. If JRTN were to break with the Islamic State and help the Iraqi government and U.S. forces fight the terrorists, it would go a long way towards stabilizing the country and perhaps lead to a broader political reconciliation in which Sunnis who once helped run the country might be given powerful posts in a more inclusive Shiite-run government.

That would present a palpable, if not painful, irony for the United States, which went to war 11 years ago to depose the Iraqi dictator and then implemented a far-reaching "de-Baathification" campaign that rid the Iraqi government and armed forces of hundreds of thousands of experienced Sunni technocrats and military commanders.

U.S. officials have been closely tracking the Islamist-Baathist alliance for months. Almost as soon as Mosul fell, on June 10, it was obvious that JRTN forces had been waiting for their arrival. Reports from the scene said ISIS fighters quickly disappeared and were replaced with armed men loyal to the Baathists and former generals. The group already held sway in key Iraqi cities, including in Tikrit, which fell on June 11. But Mosul was the real prize, and a key strategic point because it's a historic seat of power for the ruling Sunni elites who want Maliki gone.

After taking the city, the Islamic State, then known as ISIS, installed a Baathist and former Iraqi army general, Azhar al-Obeidi, as the new governor. And another former general, Ahmed Abdul Rashid, was named governor of Tikrit, where he has been credited with leading an ISIS-Baathist defense against the Iraqi Army, analysts said. ISIS's new allies were an ideal political face for their occupation. JRTN's leaders "have a long history of running Iraq, so it just feels right and natural to the people that they should be in charge," said Kenneth Pollack, a senior fellow at the Center for Middle East Policy at the Brookings Institution.

But the match seemed destined to be short-lived. Just a few days after the Islamic State conquered Mosul, its fighters were involved in a shootout with ex-Baathists near Kirkuk that left 17 dead, the New York Times reported. Then, in early July, ISIS fighters were spotted driving around Mosul and abducting retired Iraqi generals, taking them from their homes draped in the Islamist black and white flag, and putting them into the backs of SUVs with tinted windows, according to Reuters. The generals' families and local residents said that ISIS took away as many as 60 ex-officers and Baathists whom they deemed opposed to their ultimate goal of establishing an Islamist caliphate and erasing Iraq's current borders.

More recently, the ideological fissures in the alliance have become pronounced. In late July, JRTN put out a statement condemning sectarianism and the persecution of religious minorities, including Christians and Yazidis, who would ultimately run for their lives from ISIS marauders in Sinjar, prompting President Barack Obama to launch airstrikes to stop a possible genocide. While the JRTN statement didn't signal out its Islamic State allies -- they never do -- analysts said it showed that the Baathists and former ruling elites are distancing themselves from the terrorist group and are indirectly condemning its tactics. "It's very roundabout, but it's clear what they're talking about," said Daveed Gartenstein-Ross, a senior fellow with the Foundation for Defense of Democracies.

Both sides must know that their marriage of convenience is now heading for a divorce. "Baathists want the ouster of Maliki, to regain some of the stature and political participation that they've been denied since the fall of Saddam Hussein. And that's a very different goal from setting up a caliphate," Tayler said. "Many Baathists see ISIS as puritanical terrorists, and one can understand why. And ISIS certainly sees the Baathists as smoking, drinking ne'er do wells.... I think the Baathists are starting to get it that this potentially is a gross miscalculation" to think the two sides could work together, Tayler said.

"It's unequivocally a good thing" if the two sides have a falling out, said Daniel Byman, the director of research and a senior fellow in the Center for Middle East Policy at the Brookings Institution. An even better outcome, he said, would be for a new Iraqi government to bring less fanatical Sunnis -- which the Baathists arguably represent -- into a new government.

But that won't be easy, because JRTN includes more than just technocrats and erstwhile generals. The group also is composed of Sunni nationalists, who fought a bloody campaign against U.S. forces, and tribal militias. "JRTN is a nasty group of people," Pollack said, and includes elements so violent and sectarian that U.S. military commanders dubbed them "the irreconcilables," during the 2007 American-led surge.

The good news is that whatever deal JRTN thought it could make with its terrorist muscle, it appears to be going south. "It absolutely has not held," Gartenstein-Ross said of the tenuous alliance. "They had mutual interests. But JRTN has completely underestimated how dangerous ISIS is."

The group's tactics are so brutal that it was expelled from al Qaeda and split off from opposition fighters in Syria, who wanted to focus their efforts on overthrowing strongman Bashar al-Assad, not creating a new Muslim state. The question now is how JRTN would separate from the Islamic State without igniting an all-out war, which it could it very well lose. "ISIS is stronger than JRTN overall," Gartenstein-Ross said.

But there's a rift now that the United States could exploit. It would almost certainly require making some political alliances with ex-Hussein loyalists. Yet that may be the least bad option, and the one that could keep the United States from drifting deeper into a new war in Iraq. "It's great news if Baathists and other Sunni elites disentangle themselves from a repugnant alliance," Tayler said. "It's great news not just politically, but in stopping the scourge of ISIS taking over vast portions of Iraq and terrorizing the population."

Salah Malkawi / Getty Images News

Report

Developing Nations Anxiously Watch Fed at Jackson Hole

Central bankers fueled an emerging-market credit boom that could deflate when they change course.

Emerging markets used to be for the few brave investors willing to trade high risk for high rewards. Countries even riskier, like Zambia and Pakistan, were for the real cowboys. No longer. Since the financial crisis spurred central bankers to hold down interest rates, investors have poured billions of dollars into emerging and frontier markets.

Now, all eyes are on the U.S. Federal Reserve and its annual conference in Jackson Hole, Wyoming, which begins Friday and will feature speeches by Federal Reserve Chairwoman Janet Yellen and European Central Bank President Mario Draghi. The Fed is expected to end its stimulus program this fall and start raising interest rates next year; any sign that Yellen is changing course and raising rates sooner could rattle investors, not only in emerging markets, but across all assets.

As developed economies stagnated after the financial crisis, the Fed pushed more money into the system to try to spur growth. Interest rates on safer assets in the United States and Europe fell and investors started looking for higher returns from riskier assets. That's how they ended up buying bonds from Ivory Coast, Cyprus, Ecuador, and similar nations.

The IMF estimates that investments in bonds from emerging-market countries like Brazil, China, and South Africa have more than doubled over the past few years. Since 2010, foreign holdings of emerging-market debt have expanded from $400 billion to $1 trillion. Frontier markets, a rough set of countries even newer to the international market than "emerging" countries, are also expanding like never before. That group, which includes Kenya and Ecuador, sold $20 billion worth of bonds last year, according to the Financial Times -- twice what was issued in 2012. Fourteen countries issued their first bonds in 2010 or later, for a total of $8.5 billion worth of debt, according to a recent IMF paper.

That dynamic has economists worried that when the Fed raises rates, investors could pull their money out of emerging-market countries and put it back in the United States, where they would be getting solid returns for far safer assets. That kind of move could wreak havoc on the economies of developing countries because a drop in the value of their currencies would mean they would have a harder time paying back their bonds, which are usually denominated in dollars or euros.

Nicholas Spiro, a sovereign-debt analyst in London, said investors have plowed money into far-flung markets because of the Fed's easy-money policies. When the investment tide flowing into emerging markets recedes, it will reveal who took on bets that were too risky or who is "swimming naked," he said, paraphrasing Warren Buffett's famous line.

"It's already clear which of the swimmers have skimpy bathing suits," said Spiro, the managing director of his own Spiro Sovereign Strategy. "None of these swimmers want to put on full-fledged diving suits."

Beyond overexposed investors, experts worry about what will happen to the countries that are borrowing money by issuing bonds. Charles Blitzer, a private consultant who previously worked on sovereign-bond defaults at the IMF, said he's particularly concerned about small African countries that have less experience selling bonds.

"There's a lot of dumb borrowing going on and, of course, dumb lending," Blitzer said. "Some of that is going to end up in trouble."

Blitzer said leaders who make mistakes setting up their bond offerings in the beginning make it harder for their governments to pay the money back over time. Sometimes, for instance, officials structure the debt to come due all at the same time, which makes it more likely that one bad economic event will force a country into default.

"None of the finance ministers want to admit that they don't have the experience," he said.

Blitzer points to Angola, which has chosen in the past to issue debt through expensive private placements with investors, rather than selling bonds on the open market. Private placements make it harder to track the debt, Blitzer said, because the details of the sales aren't public. Angola borrowed $1 billion this way in 2012, but the government has long discussed issuing publicly-traded bonds.

"Angola would be well advised to take whatever rating they can get from the rating agencies and proceed into public markets," said Blitzer.

Despite being the third-largest economy in Africa, Angola has dismal ratings on corruption. Transparency International ranked Angola 153rd out of 177 countries in its corruption perceptions index. The Angolan government recently put off opening a stock market until 2017, according to Bloomberg, so that its companies can clean up their finances.

Though corruption threatens to get in the way in some places, each country's situation is different. The flood of cheap debt also gives governments the chance to invest in boosting economic growth. Senegal, which has a higher credit rating than many other frontier markets, including Angola, sold $500 million worth of bonds this year. Senegalese officials told Bloomberg the money will go to building roads and improving access to electricity in order to better attract foreign investment in the country's mining sector.

Gabriel Sterne, head of global macro investor services at Oxford Economics Ltd. and a former IMF and Bank of England economist, warned in a recent paper that investors have been so eager to buy emerging-market debt that it has made it cheaper for those countries to borrow. Lenders usually demand higher interest rates from borrowers -- countries, companies, or individuals -- that are considered more likely to default on their loans. But when there are lots of lenders in the market, or lots of bond buyers, interest rates drop. Stern warns that, historically, 24 percent of countries that are rated as riskier investments by credit ratings firms end up defaulting.

"Eventually, when the Fed and the ECB start raising rates, they're not going to be able pay it back," said Diego Ferro, co-chief investment officer at Greylock Capital Management, based in New York.

Ferro has reason to be more sanguine about the risk, however. His firm makes money when a country can no longer pay its bills. He buys up bonds on the cheap when other investors flee and then negotiates with governments to get the best deal possible. His firm negotiated with Greece, Ivory Coast, and Belize when those countries defaulted on their debt.

"We should think about the positive side: In the past they weren't able to get money; now they can get it," said Ferro. "Is it bad? No one's forcing them to get the money."

JIM WATSON/AFP/Getty Images