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Middle East Conflicts and Tensions Persist: The Middle East will remain a source of conflict for years to come. Many countries have weak or collapsing nation-state structures with varying degrees of civil war. As Zalmay Khalilzad, former ambassador to Afghanistan, Iraq and the United Nations, and president of Gryphon Partners, wrote recently, “the national borders devised by Western powers for Iraq and Syria, in particular, are not standing up well to the test of time ... and Pakistan’s policies have contributed to Afghanistan’s precarious condition.”” Iran and Saudi Arabia compete for influence in the region, and the Sunni-Shia divide that was not a geopolitical factor 40 years ago will continue to escalate tensions in the region. Another potential risk in the region is the dismantling of the Iran nuclear deal by the Trump administration.”° In the absence of a deal, Iran would return to building its nuclear capabilities, thereby increasing the risks of a military strike by Israel or the US. We assign a low probability to such an event for two reasons. First, we point to comments made by secretary of defense nominee retired General James Mattis, which suggest a different approach in dealing with Iran.”’ In a speech in April 2016 at the Center for Strategic and International Studies, Mattis said “there is no going back” on the deal “absent a clear and present violation.”’* Second, other signatories to the deal, including Russia and China, would not support a unilateral dismantling of the deal by the new administration.” That is not to say that tensions between the US and Iran will not continue this year. Turmoil in the region will continue into 2017 and beyond. While the direct impact of such conflicts on global growth and world equity markets is limited outside a war among major powers, the threat posed by terrorism is significant and growing. Terrorism Escalates Another high-probability but uncertain-impact risk is increased terrorism. The Middle East has been the main source of terrorism even before the September 11, 2001, attack on the World Trade Center. The majority of the 9/11 perpetrators, 15 out of 19, were from Saudi Arabia, with the rest from other Arab countries in the region.®° Since then, the spread of ISIL, the Syrian civil war, extremism in Pakistan and Afghanistan, and the immigration of Arabs and North Africans to Europe and, to a lesser extent, the US, have increased the incidence of terrorism in the West. In 2016, there were five key terrorist incidents in the US and 15 in Europe, including a December 19 attack when a truck rammed into a Christmas market in Berlin.** Some of the terrorists responsible were inspired by ISIL,** and some were lone-wolf Islamic extremists who had lived in their respective countries for years.* With a growing number of refugees in Europe, it is highly likely that this pace of terrorism will continue. Terrorist attacks and geopolitical tensions in the Middle East take more than their immediate human toll. While consumer confidence in the US is now above the pre-global financial crisis peak of July 2007 (see Exhibit 25), Gallup Poll data shows that dissatisfaction remains at a very high level, similar to that at the beginning of the global financial crisis. As shown in Exhibit 26, the dissatisfaction rate increased steadily in the aftermath of the 9/11 terrorist attacks and the US wars in Afghanistan and Iraq. It had already reached current levels before the global financial crisis. Former Federal Reserve Chairman Ben Bernanke has named traumatic national shocks such as 9/11 along with political polarization and “shrill” political debates as possible culprits of the contradictory signals between the high levels of consumer confidence as measured by the Conference Board and the high levels of dissatisfaction as measured by Gallup Polls. Risks of continued terrorism are very high, but the broader economic impact of the type of terrorist acts we witnessed in 2016 is limited. We can only hope that large attacks such as 9/11 do not occur again. Cyberattacks Continue High-profile cyberattacks or cyberattack announcements were a regular feature of 2016. The highest-profile attacks were those perpetrated by the Russian government on the Democratic National Committee computer network, according to a joint statement from the Department of Homeland Security and Office of the Director of National Intelligence on Election Security.® The US government expelled 35 Russian officials and imposed sanctions on four high-ranking members of the Russian military intelligence unit as a result.*° 30 | Goldman Sachs | JANUARY 2017 HOUSE_OVERSIGHT_014563