Global Economy

This will be a year in which the United States achieves more success in its foreign policies than it has since the ousting of the Taliban from Afghanistan in late 2001. But the actions of others -- most notably a rising Russia -- rather than U.S. achievements will determine the tenor and fury of the next major global clash.

Annual

Middle East

The United States may have lost the Iraq war in military terms in that it has failed to impose a military reality on the region, but it has won the ensuing chaos in geopolitical terms by emerging as the dominant and most influential player throughout the entire Sunni world. In doing so, Washington has all but won the jihadist war that began Sept. 11, 2001, and can now use its solidified grip on the Sunni world to seek a deeper regional realignment to match its interests.The Middle East entered 2007 with the United States and Iran circling each other, searching for weaknesses and opportunities. Ultimately each attempted to convince the other that it stood ready to create the other&#39;s worst-case scenario. The Iranians&#39; threat was to use the Shiite militia to trigger so much violence that the U.S. military position in Iraq would be untenable, heralding a surge of Iranian military power that could conquer all of the Arabian Peninsula. The U.S. threat was to empower the Iraqi Sunni to the point that the Sunni would again rule Mesopotamia and serve as a check on Persian ambitions &mdash; and there also was the possibility of a U.S. air war against Iran itself. &nbsp; Ultimately these positions were the negotiation equivalent of baseball bats, and by year&#39;s end it became apparent that the two sides had chosen tools that were more surgical and less prone to acrimonious fallout. Instead of setting Iraq on fire using its militia allies, Iran dialed back, leading to the least violent period in post-Hussein Iraq. Instead of endlessly threatening Iran, the United States proclaimed that it no longer believed Iran had a nuclear weapons program &mdash; much less the weapons themselves &mdash; ending any serious talk of a U.S.-Iranian war. The stage was set for an accommodation. &nbsp; The broader tapestry of the Islamic world also shifted in 2007. Al Qaeda&#39;s ultimate goal with the 9/11 attacks was to provoke the United States to slam into the Middle East and generate such anger that the Muslim masses would overthrow the local regimes allied with Washington, ushering in a modern caliphate. In 2007 it became bluntly apparent that al Qaeda&#39;s dreams have been dashed, and American power is now tightly aligned to all of the Sunni Arab regimes throughout the region &mdash; regimes that, bolstered by record oil revenues and now married to American security plans, are feeling more secure than ever. &nbsp;Jihadist-inspired terrorism will continue, but in reaching its strategic goal &mdash; re-creating a caliphate &mdash; the ideology of jihadism has been an utter failure. &nbsp; STRATFOR underestimated the impact of the 2007 surge of American forces into Iraq. The surge ultimately proved successful not so much in reshaping Iranian perceptions, but in reshaping Sunni perceptions of how dedicated the United States was to Iraq. This is doubly so for the state that served as the ideological genesis and primary financial support for the jihadist movement: Saudi Arabia. Because of the Iraq war and fear of an American-Iranian military conflict &mdash; a dominant fear in 2007 &mdash; Riyadh has put its hardly minor strengths behind the American effort. Domestically, the Saudis are trying to reshape their religious establishment in order to move beyond extremism and terrorism. This is an extremely risky move, to say the least. In the coming year, the Saudis will be heavily engaged in this process and could experience some stiff resistance.In 2008 this re-alignment will reshape not just Iraq, but the Muslim world as a whole while the United States and its allies clamp down on those entities still resisting American power.&nbsp; &nbsp; The first of these powers is Iran. While Iran retains many levers in the Persian Gulf region in general and Iraq specifically, it lacks the strength to resist the United States when the United States is backed up by the full constellation of Sunni states. This hardly means that Iran will roll over. The Shiite militias, Tehran&#39;s relations with Moscow and Damascus, its nuclear program and a military that continues to build out &mdash; all give Iran the ability to exact from the Americans a price for Iranian cooperation in Iraq. The year 2008 will be about Iran using those tools to determine that price. Part of this process will formalize not only the drawdown of U.S. forces from Iraq, but also the level to which U.S. forces will remain in-country for the foreseeable future. Ultimately, 2008 will be about Iran crafting a compromise that it can stand, and then preparing its people for a rapprochement with the &quot;Great Satan&quot; (a difficult task that will be mirrored in the United States). &nbsp; The second power is Syria, which participates in this drama as both an object and an actor. Iran uses Syria as a token in its wider dealings with the United States, and yet Syria&#39;s ability to influence Lebanon, Israel and Iraq directly enables it to negotiate in its own right as well. In 2008, Syria will seek a deal with Washington that will allow Damascus pre-eminence in Lebanon and a leg up in negotiations with Israel in exchange for an end to activities that complicate the American position in Iraq. Assuming that negotiations between Washington and Tehran do not fall apart, Damascus will get its wish. One associated development of this will be a desire on Syria&#39;s part to avoid provoking Israel on one hand and to reduce the ability of Hamas to maneuver on the other. Though Damascus will obviously still closely coordinate its actions with Iran, for its own reasons Syria could seem to start acting like a U.S. ally.&nbsp; &nbsp; If there is a state that would suffer from a U.S.-Iranian rapprochement, Syrian domination of Lebanon and the unification of the Sunni powers of the Middle East into a singular power bloc, it is Israel. Israel&#39;s midterm goal is to keep the Palestinians ideologically, militarily, geographically and organizationally divided between Fatah in the West Bank and Hamas in the Gaza Strip in order to preclude absolutely the formation of a meaningful Palestinian state. For its own reasons, however, the United States needs to see at least a modicum of progress on this front.&nbsp; &nbsp; That places American and Israeli interests in stark opposition in 2008. A bizarre alignment of interests will see Israel working to keep the United States engaged in hostilities in Iraq, for while the United States is tied down in Mesopotamia and a deal with Iran remains elusive, U.S. pressure on Israel to deal with the Palestinian issue will be light. STRATFOR does not see this as a deal-killer for Washington and Tehran, but it is bound to generate unexpected complications for U.S. efforts to stabilize its Middle East policies. Israel also will need to keep its eye on Hezbollah this year while the Shiite militant organization rebuilds itself in southern Lebanon and works with Syria to force a withdrawal of the U.N. Interim Force in Lebanon. The pieces are in place for another outbreak of hostilities between Israel and Hezbollah, but as long as Israel feels unprepared to deal with Hezbollah politically and militarily, this conflict could be pushed off another year.&nbsp; &nbsp; The final entity that will see its fortunes reshaped by the shifting alignments are the jihadists themselves. For years, many Sunni powers have exported their militants in order to prevent the eruption of problems at home. As Iran and the United States begin cooperating in Iraq, Iraq will no longer be a theater of operations for these jihadists. The year 2008 will see sharply higher success rates in eliminating these jihadists in Iraq, and rising security problems in the states of their origin as many jihadists attempt to return home to unwelcoming governments.&nbsp; &nbsp; Largely separate from the ongoing Iraqi drama a new power will arise &mdash; or, more accurately, an old power will re-arise. For nearly the past century Turkish power in the Middle East and Eastern Mediterranean has been quiescent as the Cold War has dictated Ankara&#39;s security parameters. But since the Cold War&#39;s end the Balkans have evolved violently, Russia has retreated and now is resurging into the Caucasus and Central Asia, the Arab world has witnessed a huge influx of American power, Iran is seeking to expand its sphere of influence and Iraq has collapsed.&nbsp; &nbsp; In the center of this storm of activity, Turkey has strengthened its military and economy and achieved a degree of political coherence it has not known in decades. For the first time since the end of World War I, Turkey has the need to be involved in its immediate neighborhood independent of its alliance structure and the means to be involved decisively. Yet none of the challenges and opportunities clamoring for Turkey&#39;s attention is mission critical; all could be ignored. What Ankara lacks is a direction to focus its efforts. The year 2008 will be about Turkey selecting that direction &mdash; specifically, deciding whether its chosen goals can be pursued within the structure of alliance with NATO and the United States. Turkey&#39;s full force will not be brought to bear &mdash; and its impact upon the alliance not felt &mdash; until at least 2009.

Former Soviet Union

Russia enters 2008 in the strongest geopolitical position it has known since the Cold War&#39;s end. The rampant decay of its military has largely been halted, new weapons systems are beginning to be brought on line, the country is flush with petrodollars, its debt has vanished, the Chechen insurgency has been suppressed, the central government has all but eliminated domestic opposition, the regime is popular at home, and the U.S. military is too locked down to make more than a token gesture to block any Russian advances. &nbsp;&nbsp; Yet Russia faces challenges to match its power. Chinese pipelines to Kazakhstan and Turkmenistan (to be constructed in 2008) threaten to divert the energy that until now could only flow northward and serve Russian purposes. NATO and the European Union occupy Russia&#39;s entire western horizon and are flirting with expanding their memberships. Rising defense modernizations in Asia&nbsp;are forcing Russia to deal with two military fronts &mdash; something at which Moscow never really succeeded during Soviet times. And the European Union plans to separate Kosovo from Serbia, making a mockery of the Kremlin&#39;s efforts to keep the province attached. Finally, while Russia&#39;s military is improving, it still faces massive challenges &mdash; ranging from a bloated and unskilled conscription force to mass corruption within the officer corps that siphons away a sizeable minority of resources the Kremlin is allocating to the military.If Russia is to secure its long-term future in the face of a rising China and ever-expanding EU and NATO, 2008 must be the year of action.&nbsp; &nbsp;&nbsp; The former Soviet Union region will have three main developments in 2008. First, the consolidation that began in Russia&#39;s energy sector in 2003 will culminate. This will be the year that state giants Rosneft and Gazprom swallow up &mdash; whether formally or through &quot;alliances&quot; &mdash; most of the remaining independent players in the country&#39;s energy industry.&nbsp;This is being done not just to solidify central control &mdash; although that is a leading reason &mdash; but also to strengthen what has become Russia&#39;s most reliable foreign policy tool. The year 2007, however, could well have been the high point in Russia&#39;s ability to influence Europe with control of its energy policies. In 2008 a number of natural gas import projects will begin operation in Western Europe, reducing that region&#39;s dependency on Russian energy and allowing the Western European states to be more dismissive of Russian interests.&nbsp; &nbsp;&nbsp; Second, and far more important, the Russians need a defining confrontation with the West. Russian power is at a relative peak, and American power at a relative low. It is a temporary circumstance certain to invert as the United States militarily extricates itself from Iraq, and one that Russia must exploit if it seeks to avoid replicating the geopolitical retreat of the 1990s. By &quot;confrontation&quot; we do not necessarily mean a war &mdash; simply a clash that starkly lays bare Russia&#39;s strengths against Western weaknesses.&nbsp; &nbsp; This requires adjusting EU and NATO attitudes so they both deeply consider Russian national interests in their decision-making. The Kremlin must publicly display that it can make the West back down. Success would adjust perceptions of pro-Western forces throughout the former Soviet Union and significantly boost Russia&#39;s efforts to expand its influence. Failure would entrench the opposite.&nbsp; &nbsp;&nbsp; There are a number of places where Russia might create such a decisive challenge, but the most logical place is Kosovo. While the West is prepared to rubberstamp Kosovo&#39;s independence, there is little of military, economic or political value there for the West. For Russia &mdash; which has publicly invested much political capital in opposing Kosovar independence &mdash; European success would be more than a slap in the face. It would undermine Russian power at a fundamental level and demonstrate that even the European Union &mdash; whose unity on issues of foreign policy is shallow and whose military capability as a coherent whole is negligible &mdash; can simply ignore Moscow.&nbsp; &nbsp;&nbsp; Moscow must prevent this from happening, and it is likely that some sternly quiet conversations with the Europeans will be successful at (yet again) pushing back a final decision on Kosovo. Simply put, for the Western world, Kosovo is not even remotely worth an escalating conflict with Russia.&nbsp; &nbsp;&nbsp; There are many other options, of course. The former pro-Western Soviet republic of Georgia, long a thorn in Moscow&#39;s side, has two secessionist regions that rely on Russia for their economic and military existence. Russia could easily absorb them outright and thus break the myth that American protection in the Caucasus is sustainable. Gazprom could swallow up Russian-British joint oil venture TNK-BP, destroying billions in U.K. investment in a heartbeat. Union with Belarus would return the Red Army to the European frontier and turn the security framework of Eurasia inside-out overnight.&nbsp; &nbsp;&nbsp; And once again there is Ukraine, which just finally elected the anti-Russian Yulia Timoshenko as prime minister. Timoshenko has sworn to counter Russian influence in Ukraine&#39;s energy sector and push back against Russia&#39;s natural gas price hikes. The year 2008 could look eerily similar to the end of 2005, when Gazprom cut natural gas supplies to Ukraine, hitting Europe particularly hard. Then again, Russia could use the Ukraine conflict as an excuse to cut supplies to Europe anyway.&nbsp; &nbsp;&nbsp; However, the third trend of 2008 is a monumental obstacle to Russia achieving its goals: an internal clan war. After years of turning Russia&#39;s various factions against each other, Putin has finally secured control for his inner circle. But now that inner circle is tearing itself apart. For the most part, this is what good governance looks like for an authoritarian leader &mdash; Putin constantly has to arrange for internal feuds to keep the various power brokers from setting their sights on him. But this has led to fratricide across the Russian landscape, with the most pitched battles being fought in the justice, defense and energy spheres, bleeding away energy that could otherwise be used to further Russia&#39;s international agenda.&nbsp; &nbsp;&nbsp; There is one final problem that Russia faces, and at present the Kremlin is unwilling even to admit that problem exists. China is stealing Central Asia, building a network of infrastructures that will make it more attractive for the Central Asian states to integrate with China than to use Soviet-era links to Russia.&nbsp; &nbsp;&nbsp; The key is Kazakhstan, the only Central Asian state to share a border with Russia. Should Astana shift into China&#39;s sphere, all of the other Central Asian states not only will find it in their best economic interests to follow, but also will enjoy the buffer of the world&#39;s sixth-largest country (in terms of land area) between them and an angry Russia. It is nearly certain that Russian diplomats are going to have some very direct heart-to-hearts with their Kazakh counterparts, and we do not rule out some accidental polonium poisonings in Astana in 2008. Failing that, this could well go down in history as the year Moscow &quot;lost&quot; Central Asia.&nbsp; &nbsp;&nbsp; The Central Asian problem is about more than simply resources. While Russian diplomats have long waxed philosophic about a multipolar world in which Russia and China team up to reduce U.S. influence, the truth is that not only do Moscow and Beijing not trust each other &mdash; each would quickly sell the other one up the river in order to cozy up to the United States. Russia&#39;s need to pave a path to confrontation to the West almost dictates that China will attempt to be the best friend Washington could ever have. Russia will have to play hardball to keep Central Asia, and China will likely have U.S. economic and political assistance in countering.

Europe

After exactly 60 years of attempting to build a new European structure under the aegis of the European Union, Europe in 2008 will return to an earlier geopolitical arrangement: the Concert of Powers. For most of its history, Europe has existed as a dynamic constellation of states struggling for local, regional and continental power. The geography of the Continent &mdash; packed with mountains, peninsulas and islands &mdash; has made it impossible for any single power to emerge dominant, while the presence of the Northern European Plain and myriad rivers has ensured constant contact. The result is that the Continent is united by trade but divided by war in an ever-shifting array of alliances among rising and falling powers.During the Cold War the division and occupation of the Continent by the United States and the Soviet Union smothered the Concert of Powers, as all of Europe was forced into one camp or the other. During this period &mdash; which in essence was a fundamentally new political geography for the Europeans &mdash; the various states no longer needed to struggle against each other. In the early Cold War years, Germany, Austria and Italy were occupied; Spain languished under dictatorship; the United Kingdom licked its wounds; and all of Central Europe lay behind the Iron Curtain. Peace of a sort had been imposed and the Europeans could focus on economic matters. The result &mdash; merged with the ideology of France&#39;s Charles de Gaulle&gt;, who sought to unite Europe under a single political framework and become a third pole in geopolitics &mdash; was the European Union.But such a format was only possible so long as the geography of Europe was superseded by the Cold War. When the Berlin Wall fell and Central Europe re-entered the equation, the Gaullist dream began to unravel &mdash; first with the failure of the European constitution and then with Gaullist Jacques Chirac&#39;s departure from the French presidency.&nbsp;The year 2008 will see the European Union slowly evolve from a pan-continental government to a glorified free trade zone. We do not mean this as an insult: Europe&#39;s achievements in the past 60 years &mdash; indeed, in the past 10 &mdash; have been impressive, bringing Europe peace and prosperity it has never before possessed without somehow putting some of its own members at a severe disadvantage. But this affluence and stability was ultimately achieved in the context of a political geography that no longer exists.As Europe reverts to the Concert of Powers, there will be irregular and changing alliances that will advantage &mdash; and disadvantage &mdash; specific states. Outside powers, particularly the United States, will find it in their best interests to manipulate such divisions. Others, such as Russia, will discover their attempts to do so could actually generate what might seem like a renewed European federalist impulse. In reality, however, it will simply be a coalition of powers briefly acting out of their own self-interest.&nbsp;The three states STRATFOR expects to be the most active in breaking out of the EU mold are Germany, Poland and France.&nbsp;During the Cold War, German national interests were completely submerged in the idea of &quot;Europe&quot; and, to be blunt, Germany was not allowed to have an independent military or foreign policy. Yet Germany is the natural leader of Europe because of its location, population and economic heft. Now that Germany is reunited, it is attempting to reprise this role, and to do so in a way that does not generate fear among its neighbors. The trick, ironically, is ensuring that Germany does not feel militarily threatened. So long as Germany is surrounded by NATO states and Russia is relatively quiescent, Germany does not require a robust military. A largely disarmed Germany is still an economic powerhouse, but while it triggers concern, it does not trigger fear. German insecurity &mdash; and the military consequences that will come from a rearming Germany &mdash; will be a crisis for another year.&nbsp;Poland is another question altogether. Warsaw is likely to see some of its worst fears realized in 2008 as a resurging Russia increases pressure on its western periphery. Part of this evolution is likely to involve some major advancement of the Russian-Belarus union, and 2008 could well be the year that the Red Army returns to the Polish border. Poland is already in the midst of a major military buildup to counter Russia, and its political strength as Europe&#39;s newest large member is leading it to flex its diplomatic and economic muscles as well. The combination of a Red Army that shifts west and a Poland frantic to counter it could well be the issue that forces Germany to rearm itself.&nbsp;Finally, there is France. During the past 60 years Gaullist France has considered itself Europe&#39;s leader. Now under new management, France simply considers itself France. Having abandoned its unrealistic global ambitions, Paris is ironically now more capable of exercising its always insightful and often incisive mix of economic, military and political skills. But instead of targeting the United States on a host of issues scattered hither and yon, most of its efforts will now be used against powers closer to home.&nbsp;Of these three states, France will make the biggest splash. In the latter half of the year France will hold the EU presidency, and while this could be viewed as Europe&#39;s last chance to federalize, it is far more likely that Paris will use it to steer its own nationalist agenda on everything from immigration to economic policy &mdash; particularly targeting China.One player missing from this mix is the state that used to hold the balance in most intra-Concert struggles: the United Kingdom. Under Prime Minister Gordon Brown the United Kingdom is struggling to hive itself off from Europe politically while still enjoying the economic benefits. Add in Brown&#39;s inexperience and unpopularity, and the result is a London obsessed with internal issues. This will not last; London will return and in a very big way to the Concert. But not in 2008, and probably not under Brown.&nbsp;The re-emergence of the Concert of Powers is not something that happens overnight. Indeed, one could accurately argue that it actually began in 2004 when the European Union expanded to include 10 new states, and intensified in 2005 with the French rejection of the EU constitution &mdash; the two events that killed the possibility of a European superstate. But 2008 will be the first year the European states &mdash; all of them &mdash; will act as if the dream really is dead. (This would have occurred in 2007, but the union was still adapting to the membership of its newest members, Bulgaria and Romania, and a Gaullist &mdash; Chirac &mdash; was still serving as French president for the first half of the year.)&nbsp;And then, of course, there is Kosovo.Kosovo is not about Kosovo. Kosovo itself is a nearly insignificant chunk of landlocked territory with minimal economic implications to anyone. Only one country &mdash; the politically and militarily emasculated Serbia &mdash; has any real interest there. And if it were left at that, NATO and the European Union long ago would have been able to force the Serbs to swallow Kosovar independence.&nbsp;Kosovo is about the Russian resurgence and the Europeans&#39; effort to resist it. Russian President Vladimir Putin has staked his international credibility on preventing Kosovar independence. Should it happen regardless of his objections, the perception of Russian power would be greatly diminished. At some point early in the year, STRATFOR expects the Russians to quietly remind the Europeans of the wide range of tools that Moscow holds that can make life in Europe very uncomfortable, with mention of Russia&#39;s energy leverage &mdash; it supplies the European Union with one-quarter of its natural gas demand &mdash; high up on the list.&nbsp;This will end up one of two ways. First, the Europeans will see the Russians&#39; point and graciously deny combat, pushing off the issue of Kosovo for (yet) another day. Alternately, the Europeans will not blink and it will be up to Russians to figure out exactly how to make them pay for such an indiscretion.

South Asia

Pakistan ended 2007 with the assassination of opposition leader Benazir Bhutto on Dec. 27. Though it is not clear who ultimately ordered the assassination or what they hoped to achieve, the result injected a huge amount of passion and uncertainty into a situation that already stretched the definition of &quot;chaotic.&quot;In 2008 STRATFOR expects the Pakistani army &mdash; which is to say, the Pakistani state &mdash; to hold together, but just. Political power within the army and governing institutions has become more diffuse as President Pervez Musharraf&#39;s grip has slackened, and Bhutto&#39;s assassination has upended many agreements to share power. With those deals up in the air, Pakistan&#39;s many factions &mdash; within and beyond the military &mdash; are now competing with each other with few established points of reference.Yet most of this is simply the sound and fury of internal maneuvering; ultimately, military commanders know that they are the true rulers of Pakistan no matter what elections produce and realize that, should they fall too deeply into infighting, they are only hurting themselves. It will likely take months for this realization to sink in &mdash; although general elections currently scheduled for Feb. 18 will serve as an excellent splash of cold water &mdash; and the political chaos of 2008 will make 2007 seem orderly in comparison. The United States, of course, stands ready to back nearly whatever actions the military deems necessary to ensure order &mdash; if for no other reason than to ensure that the Pakistani military continues to act against the jihadists.&nbsp;Pakistan&#39;s problems will really only manifest geopolitically where they intersect those anti-jihadist efforts. Though al Qaeda and its allies no longer constitute a strategic threat to the United States, they are a very real and present danger in Pakistan and Afghanistan. Confusion and distractions in Islamabad will greatly reduce the Pakistani government&#39;s ability (and willingness) to rein in those jihadists &mdash; especially in concert with American forces. We expect the situation to degrade particularly quickly and deeply in Pakistan&#39;s northwest. Increasing political unrest and instability in Islamabad could lead to the Pashtun regions becoming ungovernable in this coming year.&nbsp;Beyond Pakistan, the rest of South Asia is obsessed with domestic issues. An upsurge in Sri Lanka&#39;s Tamil insurgency will generate paralysis while Nepal&#39;s Maoist movement &mdash; still limping toward the murky world of coalition government &mdash; will provide enough ebb and flow to utterly consume any spare bandwidth in Kathmandu. Hotly contested elections in Bangladesh will simply mark the newest chapter in a generation-old power struggle between equally corrupt forces. There will be few changes on the ground in Afghanistan where a resurgent Taliban and a reinforced NATO &mdash; while fighting harder than ever &mdash; appear positioned to continue the stalemate of the last few years. While there will certainly be successes and failures on both sides, the Taliban is not in a position to drive NATO from the country this year &mdash; or likely in 2009. But neither is NATO in a position to impose a military solution of its own.India will face more international complications than the other South Asian states. New Delhi already faces major problems in its failure to stem insurgent traffic coming in from its border with Bangladesh. With Pakistan in spasms, militants operating along the Indian-Pakistani border will more firmly coalesce under the jihadist umbrella, making the Indian-Pakistani border in the Kashmir region more volatile and thus increasing the ability of Islamist militants to carry out attacks in major Indian cities. The bulk of these attacks are likely to remain focused on triggering and exacerbating communal riots between Hindus and Muslims.&nbsp;Yet India&#39;s foreign agenda will be held hostage by preparations for another round of elections. The Indian government (currently led by the Congress Party) wants to approve a nuclear agreement with the United States in order to strengthen long-term economic and strategic opportunities.&nbsp;This is being sabotaged not only by the opposition (currently the Bharatiya Janata Party, whose Hindu nationalist efforts are likely to foment many riots in 2008), but also by leftist elements within the governing coalition. Russia will attempt to capitalize on the government&#39;s failed realignment and reinsert itself into Indian politics, but while the government&#39;s unity is weak enough to not orient toward Washington, it also is strong enough to resist the Russian lure. India, strategically, will stall.And it may well stall economically as well. In 2007 India experienced myriad economic problems as everything from domestic politics to militants to power outages seemingly took aim at foreign investments. Investors have begun to realize that the miracle of Bangalore is not being repeated elsewhere in the country, even as rising corruption and insufficient infrastructure began to take the shine off of Bangalore.&nbsp;Despite much talk of &quot;Shining India,&quot; the national, regional and local governments have yet to even begin basic work on battling corruption, coordinating regulations, containing militancy and building infrastructure. In an election year, the ruling government will be even more gridlocked between populist and business interests as the issue of land appropriation for special economic zones continues to flare. The result is that the swarm of investors that has approached India in years past with the hope of using a toehold in one region to launch into others will see its optimism die. The realization is sinking in that doing business in India could be more trouble than it is worth, and 2008 will be the year that foreign direct investment &mdash; and with it, India&#39;s hopes of advancing economically &mdash; gets a rude reality check.

East Asia

The year 2008 is critical for Beijing; it is the year in which China will finally be showcased as a modern and &quot;big&quot; nation, and one in which the taints of the Maoist era and the 1989 Tiananmen Square incident are distant memories.The Olympics is one of the largest foreign public relations exposures Beijing has invited upon itself in almost 20 years. The central government is using the event externally to serve as a focus for investment and internally as a tool for engendering social pride and unity. This latter point is critical as Beijing struggles with economic and social disparity, corruption and rising domestic frustrations. China is proving somewhat successful in using a mix of self-interested foreign investment, large dollops of cash and selective political repression to steadily whittle away at its financial problems and head off social explosions &mdash; both of Olympic size themselves. Having everyone rollicking in an eight-month Olympic party is sure to make that job easier.&nbsp;But there is still work to be done to ensure that nothing goes awry during that party. The Chinese government has spent much of the last two years laying down pre-emptive measures against interest groups &mdash; from the Falun Gong to Amnesty International to Taiwanese intelligence &mdash; who see the games as a perfect opportunity to gain publicity and leverage in pressing their causes to (or against) the Chinese government. High-profile protests and demonstrations that threaten to provoke the Chinese government&#39;s hand could tarnish China&#39;s international stakeholder image or offer a potential avenue of release for China&#39;s simmering pot of social rural-urban tensions. China cannot risk a crackdown during the games, so it must engage in many before them.&nbsp;While all attention is on the regalia of the Olympic Games, another normally dominating event &mdash; the March National People&#39;s Congress session &mdash; will occur with little public fanfare. But what will happen there is every bit as important as China&#39;s management of its social and economic ills. Besides identifying China&#39;s next probable set of leaders, the session will usher in a new energy law that seeks to create a proper energy ministry. Currently power over China&#39;s energy sector is scattered among various ministries, bureaus and a handful of large state energy firms. This format complicates efforts to regulate prices, limit pollution and ensure product supplies while fostering a sense among energy big wigs that the central government&#39;s wishes can be massaged at best or ignored at worst.&nbsp;The new law seeks to unify the disparate parts into a single office directly under the authority of the State Council (the equivalent of an inner circle). Part of the goal is to improve pollution laws to make them consistent with international best practices. Part is to ensure an end to dangerously unpopular gasoline rationing and price spikes. Part is to shift some of the burden for infrastructure and quality upgrades onto foreign firms, even while encouraging those same firms to compete in subsectors currently dominated by the Chinese energy oligarchs. Part is to use central fiat to starve out financially questionable projects that take advantage of the country&#39;s cheap credit system and end up wasting resources &mdash; especially energy &mdash; and so compound both the financial and pollution problems.&nbsp;But ultimately it is an effort to simply get the energy sector to do what Beijing wants and impose a single decision-making body that keeps China&#39;s overarching goals firmly at the center of planning. It is a tall order. The energy sector is huge and dispersed, and the State Council has been trying this in small bites for three years. However, there are a lot fewer players in energy than in the financial sector, and five years into Beijing&#39;s financial reform/containment effort definite progress can be seen even if the scope of the problems remains nearly unfathomable.&nbsp;Beyond China, there is a broader realignment taking place within the American alliance structure within the Pacific. The five key American allies in the region have or will soon undergo government changes. In no case will this lead to any ruptures in relations, but in all cases the shakeup will require a United States with already stressed bandwidth to allocate fresh resources to alliance management.&nbsp;The greatest need likely will be in Taiwan, where first the outgoing president might be tempted to rattle China ahead of the Olympics and the incoming government might be a little too close to Beijing for comfort. Washington, occupied with all things Middle Eastern, wants exactly zero Asian crises in 2008 &mdash; especially if those crises are fomented by formally unrecognized allies.The second shifting ally is Thailand, where the generals who launched a coup in 2006 have now seen elections bring the politicians they ousted back to power. The American interest is in keeping things quiet, but domestic political arrangements in Thailand appear to be moving in any direction but settlement.&nbsp;Finally, government shifts in Japan, South Korea and Australia will complicate matters for the United States. While none of these new governments are anti-American and the states will remain firmly in the U.S. alliance structure, all of them are working to operationalize newfound pan-Asian sentiments. The net effect of these states&#39; pan-Asian policies will not weaken their connections with Washington, but it will limit their involvement in U.S.-led multilateral efforts within Asia. Put another way Japan, South Korea and Australia will still be U.S. allies, but Washington will need to deal with them individually as opposed to collectively.

Sub-Saharan Africa

The coming year will see the major stakeholders in Africa &mdash; France, the United States, China, Nigeria and South Africa &mdash; shift their priorities to other affairs.&nbsp;While it still will intervene to protect its citizens and economic interests, France under a non-Gaullist government will have less time for flag-waving in its former African colonies. When interference is necessary in Francophone Africa in circumstances of little obvious payout, Paris will be more likely to seek international intervention than to keep such actions strictly French affairs.The United States will remain engaged in anti-jihadist Special Forces operations in Somalia, but its actions in Africa will be slight; most U.S. activity instead will be limited to Saudi Arabia and Iran. What does happen in Africa from the American point of view will be largely limited to paperwork. In 2008, the Pentagon will launch the U.S. Africa Command (AFRICOM), but little more than the forging of initial partnerships and the groundbreaking of its Africa-based administrative headquarters or logistics hub in the region is likely this year. That base probably will be established in one of the island states of the Gulf of Guinea: Equatorial Guinea or São Tomé and Príncipe.&nbsp;China will use its sovereign wealth fund to secure mineral and energy assets in the region, but these investments will be only a tiny fraction of the money available to Beijing &mdash; most of which will go either to Chinese domestic investments or to solicit the involvement of Western financial institutions in Chinese economic reform. In order to avoid abandoning its Olympic moment to charges of hosting the &quot;Genocide Olympics,&quot; China likely will keep a low profile on the continent in 2008. Beijing also will use its responsible stakeholder arrangement with Washington to encourage dialogue between Darfuri rebel groups and the Sudanese government (though the Darfur conflict itself is not expected to end any time soon).Nigeria, often the mover and shaker in West Africa, will appear mostly introspective in 2008. In the wake of the 2007 elections, the country is in the process of re-establishing the river of bribes that holds its political system together, giving it little bandwidth for dealing with extra-Nigerian affairs. Normally, such a period of transition would be a time of much strife, but the 2007 elections resulted in the political elite of the Niger Delta&#39;s dominant Ijaw tribe gaining the vice presidency. Add in strong, if slightly lower, oil prices and the country&#39;s Ijaw nationalists have both representation and extra cash. The Niger Delta still will be a dangerous place where the military cannot effectively project power and attacks against energy infrastructure are endemic, but with the region&#39;s elite occupied in Abuja, these political patrons and their militant proxies back home have no desire to bring the energy infrastructure to a crashing halt. They have (most of) what they want. Export interruptions will be infrequent in timing and intermediate in severity &mdash; a far cry from the major sustained disruptions that occurred in the lead-up to last year&#39;s presidential election.South Africa, the final power player, is locked in a succession struggle that Jacob Zuma seems sure to win, but that process will drag on for most of the year. (The presidential election is not scheduled to be held until 2009.) The distraction largely will freeze the expansion of South African influence in southern Africa until Zuma formally takes the place of lame-duck President Thabo Mbeki.&nbsp;However, while the normal players are busy with other issues, there is one new player that will cut its teeth on the African scene: Angola. The country&#39;s civil war with the National Union for the Total Independence of Angola (UNITA) is over, rebels in the Cabinda province have been bought off or otherwise pacified (in part by some 10,000 government troops) and its sophomore oil industry soon will push through 2 million barrels per day of output. Add in sizable and rising diamond production and the country will be able to have its cake and eat it too.&nbsp;Angola will be able to push out on all of its frontiers economically and politically, and it is almost certain to toe across its borders to pursue the niggling remains of its rebel movements and pre-empt any efforts to disrupt Luanda&#39;s plans for its oil and minerals sectors. &nbsp;But such interventions would not necessarily be viewed as hostile. Angola would be intervening to reinforce the governments of friendly regimes in neighboring countries such as Zimbabwe &mdash; and especially in the two Congos &mdash; in order to deny those UNITA or Cabinda rebels from using the states as staging grounds. Furthermore, such interventions would not be limited simply to mitigating the effect of Angola&#39;s own rebels. Should those neighboring regimes face serious threats to their own grips on power &mdash; for example, should the conflict simmering in the North Kivu region of the Democratic Republic of the Congo spread westward and threaten President Joseph Kabila&#39;s government in Kinshasa &mdash; expect Angola to intervene to defend what it sees as its first line of defense: its neighbors.Normally, such aggressive Angolan activities, which would be tantamount to establishing a sphere of influence, would be countered by a constellation of other powers, particularly South Africa &mdash; but not in 2008.

Latin America

Latin American history is dominated by a singular thought: that the solution to the region&#39;s problems lies somewhere beyond the continent. During the past few years the region began breaking away from that mindset, with many Latin American states tinkering with policies to take matters in their own hands. This occurred on both the left and right. Venezuela sought to use its energy resources to drive Western oil firms from the region. Colombia buckled down for war rather than wholly rely upon foreign aid. Argentina walked away from its foreign debt, and Brazil began building its own infrastructure with its own money.These steps toward regional self-sufficiency have proven successful enough that 2008 will witness Latin American states making a messy break with their past and getting down to the nitty-gritty of taking control of their own destinies.&nbsp; &nbsp; The state that will make the most progress will be Mexico, where President Felipe Calderon will become Mexico&#39;s strongest president in decades. The president will make tangible progress in his efforts to salvage state energy monopoly Petroleos Mexicanos (Pemex) as his party works toward hiving off responsibility for refineries, pipelines and storage to private companies, allowing the firm to focus where it must if Mexico is to continue to be an energy producer: exportation and production. Constitutional reforms that will solve Pemex&#39;s inefficiency problems will not occur in 2008, but the groundwork for that battle &mdash; to be held in 2009 &mdash; will be laid.&nbsp; &nbsp; Energy reform will not be the only issue on the table. Tax reform, public service reform, police reform, defense reform and a dozen others will scroll through the Mexican Congress as Calderon forces Mexico to own up to its past shortcomings. Calderon has achieved what as recently as 2005 no one thought possible: He has made the country believe that improvements are possible. Even a modicum of success will give Calderon the political gravitas he needs to strengthen ahead of midterm elections in 2009.&nbsp; &nbsp; Even on the issue of the drug war, while true progress is negligible &mdash; and if anything violence levels will increase, particularly in border towns &mdash; Calderon is not relenting in his offensive against the drug cartels. Though the government&#39;s countercartel operations have succeeded in at least marginally disrupting cartel functions, the syndicates regroup as soon as the security forces scale back. Despite the cartels regrouping, Calderon will get an &quot;A&quot; for effort in the report card of public opinion, further boosting his power &mdash; and effectiveness elsewhere.That, of course, assumes that the rising violence does not spill across the U.S. border and raise the slim but implication-laden possibility of an American intervention. Such an intervention would only occur if the drug cartels drastically misread the situation and are overbold &mdash; which is unlikely. The Americans do not take well to Mexico&#39;s security problems leaking across the border and tend to overreact to such developments.&nbsp; &nbsp; Similar &mdash; albeit less dramatic and successful &mdash; steps toward progress will be taken in:<ul><li>Brazil, as it seeks to become an energy superpower;</li><li>Central America, as the states there lay the physical groundwork that will allow them to compete with Chinese exports globally;</li><li>Colombia, as its eschews outside mediators and gets down to brass tacks in its negotiations with the National Liberation Army and its paramilitaries;</li><li>Ecuador, as it reinterprets mining concessions and changes tax laws to assume direct control over the country&#39;s minerals sector;</li><li>Panama, as construction on the canal expansion begins, and</li><li>Argentina, as the government finds itself forced to roll back some of its populist policies to avoid a damning inflationary spiral.</li></ul>Yet one country is not following this trend:&nbsp;Bolivia. There, President Evo Morales is locked in attempting to entrench the power of his allies in the poor indigenous highlands, an effort that is prompting the richer European lowlands to rebel. Bolivia&#39;s chaos will raise a question that has not been addressed on the continent in a century: Are South America&#39;s borders inviolable? On one side is Morales and his efforts to seize economic control of the country; Morales boasts the support of a cohesive military and Venezuelan President Hugo Chavez. Opposing him is the wealth of the lowlands, which might be able to bring in outside support, particularly from the power with the strongest economic interest in the lowlands: Brazil. Such Brazilian involvement is likely to be informal and political, unless Chavez sends paramilitary forces in to assist the highlanders. &nbsp; Morales&#39; military superiority means he is likely to hold the center, but it will not be easy and it will not be quiet. But even in the best-case scenario the country will be completely wracked with instability and unable to fathom how dark its picture is about to get. Two of the three states that use Bolivian natural gas &mdash; Brazil and Chile &mdash; will in 2008 see the first payback for their efforts to divorce themselves from what they now view as an unreliable supplier. Which means that by the end of 2008 Bolivia will be well on its way to having only having one customer: debt-defaulting Argentina.&nbsp; &nbsp; Since Argentina&#39;s 2001 debt default the country has faced only limited access to global markets. President Nestor Kirchner&#39;s populist policies have resulted in underinvestment in energy production, which in turn has led to regular brown-outs and steadily rising inflation. Kirchner&#39;s successor, his wife Cristina Kirchner, must now find a way to square the populist circle. It will cost her, at a minimum, her political honeymoon.&nbsp;And even should both Argentina and Bolivia hold, as STRATFOR expects, Brazil will still take advantage of both states&#39; increasingly dire straits. Its method will be investment; Brazil will invest &mdash; and heavily &mdash; in the Bolivian energy sector. This is not an economic decision but a geopolitical one.&nbsp; &nbsp; Brazil is heavily investing in nuclear and hydroelectric power as well as liquefied natural gas. Soon it will not need Bolivia. But by de facto controlling Bolivian natural gas output, Brazil will gain great leverage over not only the Bolivian upstream but also the Argentine downstream. Since the early days after Spanish and Portuguese rule, Brazil&#39;s dream has been to dominate South America. In 2008 courtesy of Bolivia&#39;s internal political chaos and Argentina&#39;s deepening economic weakness, Brazil will make the most progress toward this goal in decades &mdash; and end the year as the most powerful country it has been in a century. &nbsp; The greatest loser in this, tactically and strategically, will be Argentina &mdash; tactically because soon its energy supply will be in Brazilian hands and strategically because it is the only South American state that could challenge Brazil, but the national weakness that its populist polices have engendered make it unable to resist.&nbsp;One other state will face significant tests in 2008: Venezuela. Something happened at the end of 2007 that no one expected: Chavez lost a referendum vote. That occurred because something else happened that no one expected: The Venezuelan opposition unified. In 2008 the opposition will attempt to forge itself into something more functional, and the center of gravity of this situation is the only institution in the country that retains the power to challenge Chavez: the military.&nbsp;The year 2008 will be the year that Chavez must attempt to purge the military of dissident thought. The first step of this is the formal folding into the military of the Chavista militias in order to dilute the power of the military brass. Next will come selective purges of those officers who do not see the world through the lens of Chavez&#39;s Bolivarianism. In Venezuela, the question for 2008 is simple: Will the military stand firm and assert a leadership role with the country&#39;s gathering opposition to form a functional check on Chavez&#39;s power?The onus is certainly on the opposition and military. Chavez has the money, the popular support and the Chavistas to call upon. And he has a track record of success; previously he has shown little compunction about grinding down an important organization&#39;s capabilities in order to make it politically docile. Just think back to what he did to national oil producer Petroleos de Venezuela after the 2002 failed coup: He destroyed the firm&#39;s long-term economic prospects in order to prevent it from functioning as a focal point for the opposition.Luckily for Chavez, there are no scheduled votes for the opposition to rally around in 2008. That will allow him to splash oil money where it will do him the most good, purge the state bureaucracy and military of dissidents and prepare for the battles ahead. One potential means of garnering more public support could include an anti-crime campaign that will double as an informal means of cracking down on opposition personalities. The opposition&#39;s challenge will be simply to survive. But do not forget that Venezuela now has something it has lacked previously &mdash; an opposition worth talking about.

The prominent features of the global economy in 2008 will be oil and energy issues, a U.S. dollar that is weakening yet becoming more important and a strong performance by the U.S. economy.Oil prices finally will fall in 2008. Much of the price buildup in recent years has been the result of geopolitical risk introduced by Iran war scares, the occupation of Iraq, Nigerian domestic politics, Venezuelan seizures, piracy in the Strait of Malacca, the war against al Qaeda and Russia&#39;s energy policy.The world has changed. Iran is moving toward an agreement with the United States on Iraq, Nigerian politics have calmed, the market has priced in Venezuelan nationalism, states in the Malacca region have managed to get piracy under control and al Qaeda&#39;s operations have been sequestered in the Afghan-Pakistani border region. The only wild card remaining in 2008 is the Russians, who could limit their exports of oil and natural gas as part of Moscow&#39;s struggle with the West. However, since such restrictions would impact Russia&#39;s own exports, any geopolitical impact on energy prices in 2008 is unlikely. &nbsp;The expected downward trend in oil prices will not carry over to other commodities, such as food and minerals. The price increases of these products in recent years are the result of rising and more varied demand &mdash; such as the new biofuels industry&#39;s increasing need for crops. There is no reason to expect such demand to falter, and there are no new supplies of any minerals expected to come on line that might be large enough to cause prices to substantially drop. The one exception could be foodstuffs, whose supply in large part is determined by the weather (something we do not attempt to forecast).&nbsp;While energy prices will moderate in 2008, there will not be a collapse. Since the declines will be relatively mild and since most oil exporters have managed to save up vast sums, very few producers will suffer any substantial financial stress. In fact, nearly all oil producers will continue to accrue near-record amounts of income, stabilizing them politically and economically despite the moderate downturn in prices. The two countries to watch are Argentina and Venezuela, which both have been spending their petroleum income as fast as it has come in, and whose lack of long-term investment in production has resulted in steady output drops in output for years.&nbsp;Yet there is another aspect to this equation. Prices have been strong since 2003 and have given rise to a major trend that will surge forward in 2008: the steady deliberalization of the energy sector.&nbsp;Producing states &mdash; from Venezuela to Kazakhstan &mdash; are seeking to rake in as much income from energy production as they can, regardless of how dependent they might be upon foreigners to produce that energy. On the coin&#39;s other side, consuming states &mdash; from Malaysia to Argentina &mdash; need to assert control over their energy industries in order to head off the social and economic problems caused by sustained high prices. Some countries on both sides &mdash; such as China &mdash; are afraid of how powerful their energy firms have gotten, and they see deliberalization as a means of combating that challenge. Countries such as Russia see state control of the energy sector as a good thing &mdash; and a good thing that allows other policy options. Still, more &mdash; most notably Hungary &mdash; see such intervention as a means of preventing undue foreign influence.&nbsp;In 2008, energy deliberalization will be the game of the day, and STRATFOR expects the following countries to be particularly active in asserting the role of the state: Venezuela, Ecuador, Bolivia, Thailand, Kazakhstan, Russia, Ukraine, Hungary, China, South Korea, Nigeria, Indonesia, Japan and Canada.&nbsp;Meanwhile, the U.S. dollar &mdash; which has slipped by 50 percent in the past six years &mdash; will give more ground in 2008, since the trends that have shaped the past few years have not yet run their course. Unconvinced that the euro would succeed, central banks dumped European currencies when it was launched in 1998. They now are dialing back from that position, as well as purchasing more gold. Both of these trends have a negative impact on the U.S. dollar, and both have more room to run.&nbsp;None of this is a vote of no confidence in the dollar; contrary to the crowing out of Venezuela, Iran and, on occasion, Russia, the dollar is in no danger of losing its status as the world&#39;s de facto currency. In fact, contrary to conventional wisdom, the role of the U.S. dollar in the international economy is increasing.&nbsp;All of the energy-producing economies sell their products in U.S. dollars. The Chinese yuan is de facto pegged to the dollar, and nearly every other economy in the western Pacific Rim is loosely pegged to it as well. Combine the dramatic increase in the size of the Chinese economy and the pileup of dollars in the Arabian Peninsula from high oil prices (Organization of the Petroleum Exporting Countries members earned more than half a trillion dollars in 2007 from oil alone) and the result is a de facto dollar bloc.&nbsp;Yet none of these economies boasts sufficient size or sophistication to handle all of this inflow, and how they manage such vast sums will prove a major development of 2008.Many of the Arab oil states have chosen to invest in economic diversification so that they will not suffer as they have in times past the next time oil prices plunge. To this end, they are investing heavily in refining and heavy chemical industry facilities, both at home and in consumer countries. In most cases, the Arabs are providing only the capital for such ventures, with either imported expatriates or foreign hosts providing both the labor and the management for the projects. The Russians, of course, are investing in their own geopolitical push and are attempting to purchase as much energy infrastructure in Europe as possible (something the Europeans are resisting fiercely), while the Chinese are hoping to use at least some of the cash to bail out those of their state-owned enterprises that are worth saving. But even this leaves the vast majority of the accrued monies untouched &mdash; in dollars or U.S.-based investments.&nbsp;Beyond the tactical details, the bottom line is that most of Asia, the Arabian Peninsula and the United States have de facto merged into a single system of exchange that has become more important in purely economic terms than the U.S. relationship with Europe. Not since the heady days of the British Empire has a single currency held sway over so much of the world. Yes, these entities are diversifying their investments, which is reducing the value of the U.S. dollar vis-à-vis the euro, but the more important trend is the strengthening of the dollar&#39;s role as the reserve currency of the world &mdash; forming the base of the reserve economy of the world.&nbsp;Combine weaker energy prices (which free up resources) with a lower dollar (which boosts exports) and the U.S. economy is primed for a strong performance in 2008. A brief slowdown in early 2007 shook out some inconsistencies that built up during the post-9/11 boom, and the stage is set for another extended expansion.Many will mourn that the subprime lending crisis is about to cause major problems &mdash; and perhaps even a recession. STRATFOR sees these fears as overblown for two reasons. First, mortgages that enter default are different from other defaulted loans in that mortgages have their own built-in collateral in the form of houses. Rather than getting back pennies on the dollar, creditors likely will recoup most of their money. This, combined with the fact that not all subprime loans will go bust, drastically reduces subprime&#39;s impact.&nbsp;Second, every so often, the Western financial sector needs a shock to remind itself that it is not Asia and that loans need to be evaluated on strict economic criteria before being granted. During the 2005-06 subprime surge, this lesson had been forgotten. Now it has been remembered, and banking institutions have forced the mortgage broker industry to rate loans more appropriately. As a result, most of those brokers have gone under, and many construction projects have lost funding. Those who have been hurt worst are those who leveraged subprime mortgage assets (and should have known better).&nbsp;This rationalization of risk is bad for the housing sector in the short run but excellent for the banking sector and the wider economy in the longer run. Yes, one sector has taken hits and will take more in 2008. But the primacy of economic rationality already has reasserted itself. This is a core strength of the U.S. and Western systems; without it, these economies would look like Japan&#39;s. The knocks resulting from the subprime crisis could indeed take some shine off of growth in 2008, but that would simply change it from a banner year to &quot;merely&quot; a strong year.&nbsp;The global trade agenda will be somewhat muted in 2008. Talks on the next World Trade Organization round, Doha, have been all but suspended, and no major economy will join the organization in the next year. Neither will there be any progress on other major deals among or within trade blocks &mdash; largely a result of European efforts to push through their newest treaty (an echo of the constitution that failed in 2004) and the U.S. presidential election. Trade talks will be limited to ironing out a few minor bilateral deals between the United States and small powers &mdash; deals that are now before Congress &mdash; and between the European Union and its former colonies.

2008 ANNUAL FORECAST

Global Economy

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