Last weekend the already tense situation escalated materially in the Israel-occupied Gaza Strip area of the Palestinian state. Apparently, the Hamas controlled militia launched a massive ariel and ground attack on Israeli territories, killing over 700 people and injuring many more, including several civilians - women and children. In retaliation, Israeli forces attacked the Palestinian territories in the Gaza Strip, killing over 300 people, including women and children, and destroying several civilian targets. This is the deadliest episode since 1967, in the conflict that started in the late 1940s.
The government of Israel has formally declared war on Hamas, committing to a “mighty vengeance” and “a long and difficult war.” They have received support and solidarity from all their traditional allies like NATO members, Australia, and strategic partners like India. As per the latest reports 84 nations have issued formal statements supporting Israel’s right to self-defense. On the other hand, Hamas has also received open support from Islamic countries like Iran, Qatar, and Lebanon.
Not surprisingly, two major countries – Russia and China – have not openly taken any side in the recent escalations. After being nudged by the US, the Chinese foreign ministry spokesperson stated that "the fundamental way out of the conflict lies in implementing the two-state solution and establishing an independent State of Palestine" while urging the relevant parties to remain calm and end hostilities against civilians".
Russia also expressed its support for an independent Palestinian state within the borders of 1967. "We regard the current large-scale escalation as another extremely dangerous manifestation of a vicious circle of violence resulting from a chronic failure to comply with the corresponding resolutions of the UN and its Security Council and the blocking by the West of the work of the Middle East Quartet of international mediators made up of Russia, the United States, the EU, and the UN," Russian Foreign Ministry Spokesperson said.
The war is also being seen as a setback to the fast-improving Israel-Saudi relationship. In an official statement, The Saudi foreign ministry stated, “The Kingdom of Saudi Arabia is closely following the developments of the unprecedented situation between a number of Palestinian factions and the Israeli occupation forces, which has resulted in a high level of violence on several fronts there.” The statement recalled, “its repeated warnings of the dangers of the explosion of the situation as a result if the continued occupation, the deprivation of the Palestinian people of the legitimate rights, and the repetition of the systematic provocation against the sanctities” and renewed “the call of the international community to assume its responsibilities and activate a credible peace process that leads to the two-state solution to achieve security and peace in the region and protect civilians.”
Arab League representatives are reportedly visiting Russia for further discussions on the matter.
Many readers and friends have asked for my views on the latest episode of the Israel-Palestine conflict and its likely impact on the financial markets. I claim no knowledge of global strategic affairs, politics, or international relations. Nonetheless, I am happy to share what I see as an observer of current affairs and a student of financial markets. Many may find these thoughts as naïve. Notwithstanding I feel strongly about my view and would like to hold these till I see any strong evidence of the contrary emerging.
In my view, as of this morning, the world is divided more than ever on the issue of the rights of the Palestinian people, Israel’s right to self-defense, and the legitimacy of violence against civilians on both sides.
I believe that the latest escalation may be just another manifestation of the wider trend of the rebalancing of the world order that had evolved after the Second World War and was particularly dominated by the US and its strategic allies since the disintegration of the USSR in 1991.
The unified Germany (that dominates the European Union), China (the leading force in the global economy and strategic sphere), Russia (the traditional US enemy), Saudi Arab (looking to free itself from petrodollar dominance), and Iran (striving to unshackle its economy from the US influenced economic sanctions), etc. have been actively striving to enhance their influence in a mostly unipolar world.
China’s Belt and Road Initiative and China-Pakistan Economic Corridor, Russia’s occupation of Crimea in 2017 and invasion of Ukraine in 2022, Iran’s open support to Hamas, and Saudi Arabia’s decision to initiate Yuan trade with China and INR trade with India are some of the many initiatives taken to rebalance the unipolar world order.
The recent Hamas attacks on Israel appear just an extension of these initiatives. The intensity of Hamas attacks is clearly aimed at highlighting that (a) Israel (and Mossad) may not be as invincible as it has been made out to be. Of course, Israel would retaliate strongly to protect this perception, inflicting devastating injuries to Hamas; (b) The US (and CIA) has been totally ineffective in the Afghanistan and Ukraine conflicts and would lose many more points in its standing as the unchallenged global strategic leader.
Notably, unlike the past instances, there is significant civilian support for Palestine in countries like the US, UK and France. This could also result in the hardening of right-wing stand on the policies regarding immigration and refugees in these countries, further diminishing their acceptance as global leaders.
Obviously, the conflict will not only intensify but avoid any sustainable resolution till the larger issue of global rebalancing is addressed.
Insofar as the financial markets are concerned, this will just add to the extant level of uncertainty and volatility. The mountains of debt, rising borrowing costs, still elevated inflation and faltering growth are keeping the global financial markets jittery. This escalation could add to this jitteriness, especially if it causes a sharp spike in crude oil prices or disrupts global trade, especially the movement of cargo through the Suez Canal.
It would be highly imprudent, in my view, to believe that the Indian economy and financial markets will escape the damage, especially when the stress on fiscal and current account balances is already visible and RBI has cautioned about inflation in its latest policy statement. A 25bps hike in policy rates from here could materially disturb many Excel sheets.
