South Asia

Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders. The Himalayan Mountains form the northern border of South Asia, whose two main rivers, the Indus and the Ganges, support the region&rsquo;s great population centers. India is the region&rsquo;s dominant country, home to the world&rsquo;s fastest growing economy. But its rivalry with neighboring Pakistan, a fellow nuclear power and growing consumer market, has made South Asia one of the world&rsquo;s most dangerous nuclear flashpoints. The region is also a testament to how militancy and militarism can undermine the regional integration needed to unleash higher economic growth.

Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders. 

Our forecast for 2012 is framed by the idea that we are in the midst of what we might call a generational shift in the way the world works. The processes are still under way, and we will therefore have to consider the future of Europe, China and the Middle East in some detail before drawing a conclusion. 

Annual

The European Union and eurozone will survive 2012, and Europe's financial crisis will stabilize, at least temporarily.

Europe

To the west of Eurasia lays Europe, a region predisposed to division. It is surrounded on nearly all sides by islands and peninsulas that make it difficult for Europe to cohere. The northern half of the continent, moreover, sits on a plain whose short, meandering rivers tend to empower countries without forcing them to work with others. The southern half is situated on more mountainous terrain that has historically impeded the creation of strong, unified economies. As a result, Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.

Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.

The European Union and eurozone will survive 2012, and Europe&#39;s financial crisis will stabilize, at least temporarily. However, Stratfor expects Europe to continue its long, painful slide into deepening recession. We expect accelerating capital flight out of peripheral European countries as investors in Europe and farther afield lose confidence in the European system. We expect financial support measures to be withdrawn on occasion to maintain pressure on governments to implement fiscal reforms, which will lead to financial scares.However, the driving force behind developments in Europe in 2012 will be political, not economic. Germany, seeing an opportunity in the ongoing financial crisis, is using its superior financial and economic position to attempt to alter the eurozone&#39;s structure to its advantage. The core of this &quot;reform&quot; effort is to hardwire tight financial controls into as many European states as possible, both in a new intergovernmental treaty and in each state&#39;s national constitution. Normally, we would predict failure for such an effort: Sacrificing budgetary authority to an outside power would be the most dramatic sacrifice of state sovereignty yet in the European experiment &mdash; a sacrifice that most European governments would strongly resist. However, the Germans have six key advantages in 2012.First, there are very few scheduled electoral contests, so the general populace of most European states will not be consulted on the exercise. Of the eurozone states, only France, Slovakia and Slovenia face scheduled national elections. Out of these three, France is by far the most critical: The Franco-German partnership is the core of the European system, and any serious breach between the two would herald the end of the European Union. If Germany is to compromise on its efforts for anyone, it will be for France, and if France needs another country in order to secure its own position in Europe, it needs Germany. Consequently, the two have chosen to collaborate rather than compete thus far, and we expect their partnership to survive the year. Luckily for the German effort, French elections will be at the very beginning of the ratification process, so any possible modifications to the German plan will come early.Second, Germany only needs the approval of the 17 eurozone states &mdash; rather than the 27 members of the full European Union &mdash; to forward its plan with credibility. That the United Kingdom has already opted out is inconvenient for those seeking a pan-European process, but it does not derail the German effort.Third, the process of approving a treaty such as this will take significant time, and some aspects of the reform process can be pushed back. European leaders are expected to sign the new treaty in March, and the rest of the year and some of 2013 will be used to seek ratification by individual countries. Amending national constitutions to satisfy Germany will be the bitterest part of the process, but much of that can be put off until 2013, and judgment by European institutions over how the revision process was handled comes still later. Such delays allow political leaders the option of pushing back the most politically risky portions of the process for months or years.Fourth, the Germans are willing to apply significant pressure. Nearly all EU states count Germany as the largest destination for their exports, and such exports are critical for local employment. In 2011, Germany used its superior economic and financial position as leverage to help ease the elected leaderships of Greece and Italy out of office, replacing them with unelected former EU bureaucrats who are now working to implement aspects of the German program. Similar pressures could be brought to bear against additional states in 2012.Those most likely to clash with Germany are Ireland, Finland, the Netherlands and Spain. Ireland wants the terms of its bailout program to be softened and is threatening a national referendum that could derail the ratification process. Finland&#39;s laws require parliamentary approval by a two-thirds majority for some aspects of ratification. The normally pro-European government of the Netherlands is a weak coalition that can only rule with the support of other parties, one of which is strongly Euroskeptic. Spain must attempt the most painful austerity efforts of any non-bailout state if the reform process is to have credibility &mdash; and it must do so amid record-high unemployment and a shrinking economy. Also, if Greece decides to hold new elections in 2012, European stakeholders will attempt to ensure that the new government in Athens does not end its collaboration with the European Central Bank (ECB), European Commission and International Monetary Fund. None of these issues will force an automatic confrontation, but all will have to be managed to ensure successful ratification, and the Germans have demonstrated that they have many tools with which to compel other governments.Fifth, the Europeans are scared, which makes them willing to do things they would not normally do &mdash; such as implementing austerity and ratifying treaties they dislike. Agreeing to sacrifice sovereignty in principle to maintain the European economic system in practice will seem a reasonable trade. The real political crisis will not come until the sacrifice of sovereignty moves from the realm of theory to application, but that will not occur in 2012. In many ways, the political pliability of European governments now is all about staving off unbearable economic catastrophe for another day.The economic deferment of that pain is the sixth German advantage. Here, the primary player is the ECB. The financial crisis has two aspects: Over-indebted European governments are lurching toward defaults that would collapse the European system, and European banks (the largest purchasers of European government debt) are broadly insolvent &mdash; their collapse would similarly break apart the European system. In December, the ECB indicated that it was willing to put up 20 billion euros ($28 billion) a week for sovereign bond purchases on secondary markets to support struggling eurozone governments, while extending low-interest, long-term liquidity loans to European banks in unlimited volumes. The bond program is large enough to potentially purchase three-fourths of all expected eurozone government debt issuances for 2012, while the first day of the loan program extended 490 billion euros in fresh credit to ailing banks.

Germany's Advantages

As the European Union’s political order breaks down, so too will its monetary union, the eurozone. At the core of the crisis is the struggle over the good of nations versus the good of the whole. Put simply, richer nations are tired of shouldering the financial responsibility of the entire union. And as some eurozone members become increasingly weighed down by high debt and deficit levels, fragile economies and weak banking sectors, other eurozone members are turning to Euroskeptic and nationalist parties that want to leave the currency union altogether.

As the European Union’s political order breaks down, so too will its monetary union, the eurozone.

Together these two measures make a eurozone financial meltdown highly unlikely in 2012, but they will greatly degrade European competitiveness and efficiency. That will be a problem for another time, though. For now, ECB actions are buying economic and political breathing room: economic in that austerity efforts can be somewhat softer than they would otherwise need to be, and political in that there is a feeling that Germany is willing to compromise somewhat on the issues of budgetary discipline today in order to achieve its broader goals of budgetary control tomorrow. Therefore, while the financial support is not exactly buying good will from other European states, it is certainly buying time.As the ratification process proceeds, European hostility toward Germany and Brussels will increase. Internationally, the key theme will be states attempting to protect themselves from what they see as a growing &mdash; and unwelcome &mdash; German intrusion into their internal affairs. At the national level, the deepening recession will translate into general anger toward the government&#39;s announced austerity measures. The relative dearth of elections will deny that anger its normal release valve of centrist opposition parties, emboldening nationalist and extremist movements and leading to social unrest.Political and financial turbulence will persist within this framework as Germany negotiates the new treaty with other eurozone countries. Though the core of these negotiations is a highly contentious abdication of national fiscal sovereignty, Europe is highly likely to adopt the new treaty since a perceived failure would dramatically accelerate the collapse of EU political structures and implementation will not happen in 2012.

The Fate of the Eurozone

Eurasia

Eurasia is the world&rsquo;s most expansive region. It connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia. Forming the borders of this massive tract of land are the Northern European Plain, the Carpathian Mountains, the Southern Caucasus Mountains, the Tien Shan Mountains and Siberia. At the heart of Eurasia is Russia, a country that throughout history has tried, to varying degrees of success, to extend its influence to Eurasia&rsquo;s farthest reaches &mdash; a strategy meant to insulate it from outside powers. But this strategy necessarily creates conflict throughout Russia&rsquo;s borderlands, putting Eurasia a near constant state of instability.

Eurasia connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia. 

History shows that all too often the biggest threats to Russia come from within. Such is the case in the current era, a time when Moscow must manage a standoff with the West, a weak economy, limited financial resources, social unrest, demographic shifts and political infighting in the highest echelons of power. As its leaders try to prevent Russia from collapsing altogether, the country will cease to be the nominal democracy it is now and become an outright autocracy. But Moscow can use its alienation from the West to its advantage: Demonizing an external enemy is an effective way to shore up national support.

History shows that all too often the biggest threats to Russia come from within.

In 2012, the Kremlin will face numerous challenges: social unrest, restructuring Russia&#39;s political makeup (both inside and outside of the Kremlin) and major economic shifts due to the crisis in Europe. The social unrest seen at the end of 2011 will continue festering throughout the presidential elections in 2012. Kremlin chief Vladimir Putin will have to reshape the political landscape from one dominated by his party to one that accounts for the increasing support for the nationalists and a new class of young, liberal activists. Simultaneously, Putin will restructure his inner circle of Kremlin loyalists, who have allowed infighting to divert their attention from their roles in tackling Russia&#39;s social unrest and financial problems. None of this will significantly diminish Putin&#39;s authority. The Kremlin will also have to adjust its economy in 2012 to accommodate changes in previous plans involving billions of dollars in investments from Europe in some of Russia&#39;s most strategic sectors. The crisis in Europe means any such investments will be significantly reduced, so the Kremlin will have to restructure the economic plans for its modernization and privatization programs and fund many of the projects itself. Putin will be able to navigate through these obstacles, though they will take up much of the Kremlin&#39;s attention. None of these factors will fundamentally change Russia&#39;s direction either domestically or in its foreign policy.

Russia's Internal Struggle

The Iron Curtain is gone, but the competition for the lands that once shielded the Soviet Union from the West lives on. The Caucasus, Eastern Europe, the Baltics and Central Asia are just as important now as they were during the Cold War — and for nearly the same reasons. Russia is compelled to use them to protect its borders, and the West is compelled to use them to halt the rise of Russian power. The survival of the countries that occupy these lands will depend on agile diplomacy, economic diversification and flexible security relationships.

The Caucasus, Eastern Europe, the Baltics and Central Asia are just as important now as they were during the Cold War — and for nearly the same reasons.

Russia will continue building its influence in its former Soviet periphery in 2012, particularly by institutionalizing its relationships with many former Soviet states. Russia will build upon its Customs Union with Belarus and Kazakhstan as it evolves into the Common Economic Space (CES). This larger institution will allow the scope of Russia&#39;s influence over Minsk and Astana, as well as new member countries such as Kyrgyzstan and possibly Tajikistan, to expand from the economic sphere into politics and security as Moscow lays the groundwork for the eventual formation of the Eurasian Union, which it is hoping to start around 2015.As Ukraine&#39;s chances to grow closer to the European Union decrease, Kiev will realize that Moscow is the only outside power it can turn to. Russia will be able to take advantage of Ukraine&#39;s inability to maneuver and will gain access to strategic Ukrainian assets, possibly including minority control in its natural gas transit system. However, Ukraine will continue to resist the institutionalization of Russia&#39;s influence via the CES by maintaining a degree of cooperation with the West.In the Baltic countries &mdash; which, unlike other former Soviet states, are committed members of NATO and the European Union &mdash; Russia&#39;s ultimate goal is to neutralize the countries&#39; pro-Western and anti-Russian policies, a goal it will make progress toward in Latvia in 2012. It will face setbacks in Lithuania, but Lithuania will not be able to seriously challenge Russia&#39;s maneuvers in the region because of ongoing difficulties for its primary supporters: NATO and the European Union.

The Fight for Russia’s Borderlands

From the battlefields of the Middle East to the borders of Eastern Europe, Russia and the United States are clashing once again. As a global power, Russia is a shadow of its former self, but that won’t stop Moscow from using every means at its disposal — its military, security services, financial tools, cultural ties, propaganda, political connections and cyber-capabilities — to defend itself from what it sees as Western encroachment on its border, on its borderlands, on its interests around the world.

From the battlefields of the Middle East to the borders of Eastern Europe, Russia and the United States are clashing once again.

Russia will continue managing various crises with the West &mdash; mainly the United States and NATO &mdash; while shaping its relationships in Europe. Moscow and Washington will continue their standoff over ballistic missile defense and U.S. support for Central Europe, and Moscow will react to the ongoing row by increasing security pressure on Central Europe and bolstering its economic presence in the region. Russia will use these crises as an opportunity to deepen divisions among the Europeans, between the Europeans and the United States, and within NATO while promoting the perception that Russia is being forced to act aggressively. The security situation will become tenser, and Russia will attempt to push these crises with the United States to the brink without actually rupturing relations &mdash; a difficult balance.Russia will also use the financial and political crises in Europe to bolster its influence in strategic countries and sectors. Moscow and Berlin will continue their close relationship, especially in economic matters and security, but Russia will focus more on Central Europe in areas of security and energy and in picking up assets. There is no real counter to Russia in Europe, as the Europeans will be absorbed with domestic and EU issues. But this does not mean Russia has a free pass, as it must still manage the domestic effects of its neighbors&#39; crisis.

Echoes of the Cold War

The countries of Central Asia are predisposed to instability. Their economies are in disrepair, itinerant workers are returning from Russia and militants from neighboring countries spill across their borders. More important, however, is their geographic location, which throughout history has been an arena in which greater powers have vied for influence and, in more recent years, competed for natural resources. That competition will continue to play out so long as there is economic opportunity in this troubled region.

Central Asia has throughout history been an arena in which greater powers have vied for influence and, in more recent years, competed for natural resources.

Numerous factors will undermine Central Asia&#39;s stability in 2012, but they will not lead to a major breaking point in the region this year. Protests over deteriorating economic conditions will occur throughout the region, particularly in Kazakhstan, though these will be contained to the region and will not result in overly disruptive violence. Serious issues in Kazakhstan&#39;s banking sector could lead to a financial crisis, though the government will be able to manage the difficulties and contain it during 2012 by using the oil revenues it has saved up.The more pressing problem is the rising Islamist militancy in the region. Sporadic attacks will continue in Kazakhstan, and Kyrgyzstan, Tajikistan and Uzbekistan could see an increase in attacks. However, these attacks will not achieve their strategic goal of overthrowing regimes or coalesce into a transnational movement capable of destabilizing the region. In addition to these security tensions, looming successions for the longtime leaders in Kazakhstan and Uzbekistan will create political tensions, but barring the death of either leader, no major political upheavals are expected.

Instability in Central Asia

Middle East and North Africa

The Middle East and North Africa is the world&#39;s crossroads. It encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between. The story of the region, as is so often the case of places stuck between foreign players, is the story of trade, exchange and conflict. The traditional powers of the region are Turkey and Iran &mdash; Saudi Arabia and Egypt are the current Arab powers &mdash; and their competition for influence over the region&#39;s weaker states makes the Middle East and North Africa an arena of violence and instability.

The Middle East and North Africa encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between.

Iran’s domain in the Middle East stretches from the Persian Gulf to the Mediterranean Sea. It maintains this arc of influence through its use of militant proxies, political agents and economic relationships, fending off challenges to its power from Sunni rivals in Saudi Arabia and Turkey. Iran’s nuclear program, meanwhile, will continue to test relations with the West. But for all the program’s controversy, it is unlikely to spark a serious confrontation with the United States — Iran will instead leverage its control of the Strait of Hormuz, through which roughly 20 percent of all globally traded crude oil passes. In fact, some of the biggest challenges to Iranian power will come not from without but from within as new generations of Iranians drift further from the religious principles — principles guarded by the still-strong clerical elite — on which the revolution was founded.

Iran’s domain in the Middle East stretches from the Persian Gulf to the Mediterranean Sea.

Iran&#39;s efforts to expand its influence will be the primary issue for the Middle East in 2012. The U.S. military withdrawal from Iraq has rendered Iran the pre-eminent military power in the Persian Gulf, but Tehran cannot count on the United States being as constrained beyond this year, and Turkey, Iran&#39;s natural regional counterweight, is rising steadily, albeit slowly. Iran&#39;s efforts to consolidate and extend its regional influence must therefore accelerate this year before its window of opportunity closes. Iran will still be operating under heavy constraints, however, and will therefore be unable to fundamentally alter the politics of the region in its favor.Iran&#39;s regional expansion will be felt most deeply by Saudi Arabia. The Saudi royals now doubt that the United States has the ability or the willingness to fully guarantee Riyadh&#39;s interests. Adding to Saudi Arabia&#39;s vulnerabilities, the Gulf Cooperation Council states fear that if Iran is not contained within Iraq, it will exploit continued Shiite unrest in Bahrain and in Saudi Arabia&#39;s Shia-concentrated, oil-rich Eastern Province. In 2012, Saudi Arabia will lead efforts to shore up and consolidate the defenses of Gulf Cooperation Council members to try to ward off the threat posed by Iran, but such efforts will not be a sufficient replacement for the United States and the role it plays as a security guarantor. A critical part of Iran&#39;s regional agenda for the year will be to force Riyadh into an accommodation that benefits Iran and allows Saudi Arabia some reprieve. This could lead to temporary truces between the two adversaries, but given Iran&#39;s constraints and limited timetable, Saudi Arabia is more likely to stay committed to the U.S. security framework in the region &mdash; for lack of better options.

Iran's Arc of Influence

Though the Middle East has never been a picture of stability, the region has had at least a semblance of order for the past hundred or so years, held together as it was by authoritarian regimes that for all their failings managed to keep the region from devolving into outright chaos. That is no longer the case. The fall of Saddam Hussein gave Iran, the Middle East’s premier Shiite power, an opportunity to extend its influence from the Persian Gulf to the Mediterranean Sea. Its rise has galvanized the region’s Sunnis, led by Turkey and Saudi Arabia, against Iran in a series of proxy wars throughout the region. The disarray has given extremist groups the space to operate and has all but invited outside powers like Russia and the United States to intervene and exploit as they see fit. And though these powers may intend to avoid the quagmire that is the Middle East, competing agendas and transnational threats will challenge those intentions.

Though the Middle East has never been a picture of stability, the region has had at least a semblance of order for the past hundred or so years. That is no longer the case.

The effects of Iran&#39;s expansion efforts will be most visible in Iraq and Syria. In Iraq, Iran&#39;s main challenge is to consolidate Shiite power among several competing groups. As Iraq&#39;s fractured Shiite leadership tries to solidify its influence with Iranian support, Iraq&#39;s Sunni and Kurdish factions increasingly will be put on the defensive. This ethno-sectarian struggle and the security vacuum created by the U.S. withdrawal will degrade Iraq&#39;s overall security conditions. Meanwhile, Turkey will attempt to contain the spread of Iranian influence in northern Iraq by building up political, economic, military and intelligence assets.In Syria, the ultimate goal of Saudi Arabia, Turkey and the United States will be to disrupt Iran&#39;s Shiite arc of influence by trying to crack Syrian President Bashar al Assad&#39;s regime. However, without direct foreign military intervention, the Syrian regime is unlikely to collapse. Al Assad will continue to struggle in trying to stamp out domestic unrest. The regime&#39;s limited options to deal with the crisis will force Syria to further rely on Iran for support, which will allow Tehran to reinforce its presence in the Mediterranean.Stratfor cannot rule out the remote possibility that the al Assad clan will be coerced into a political exit. Such an outcome would risk inciting a sectarian struggle within the regime. Iran&#39;s goal is for Syria to maintain a regime &mdash; regardless of who leads it &mdash; that will remain favorable to Iranian interests, but Iran&#39;s ability to influence the situation is limited, and finding a replacement to hold the regime together will be difficult. It should be noted that the battle for Syria cannot take place without spilling over into Lebanon. In that regard, Lebanon faces a difficult year as proxy battles intensify between Iran and Saudi Arabia in the Levant.

Rebalancing Power in the Middle East

Overwhelmed by instability in its periphery, Turkey will continue to face significant challenges to its regional ascendency. Despite its rhetoric, Turkey will not undertake significant overt military action in Syria unless the United States leads the intervention &mdash; a scenario Stratfor regards as improbable &mdash; though it will continue efforts to mold an opposition in Syria and counterbalance Iranian influence in Iraq. Ankara will thus work to maintain a decent bilateral relationship with Tehran despite growing tensions between the two. Economic conditions in Europe will slow Turkey&#39;s economic growth, Kurdish militancy in Turkey will remain a significant threat, and concerns over Turkish Prime Minister Recep Tayyip Erdogan&#39;s health could turn the government&#39;s focus inward as it tries to work through a contentious set of proposed constitutional changes. On the foreign policy front, Turkey will try to influence the rise of political Islamists, particularly in Egypt and Syria, but Ankara&#39;s own constraints will prevent it from taking meaningful steps in that regard.

Turkey's Struggles

Egypt’s modern history dictates that the military, battle-tested for decades by conflict at home and abroad, reigns supreme. And its geography dictates that it is uniquely influential in the region: Removed somewhat from the tumult of the Middle East, the country is a key ally in the United States' bid to maintain the Arab-Israeli balance of power. Now that Egypt has dealt with the political upheaval of the Arab Spring, it is looking to reclaim its regional influence. But doing so is no small task. Its persecution of the Muslim Brotherhood has driven political Islamists to militancy, and the public has grown restive of the structural reforms Cairo has implemented to try to reduce its dependency on foreign aid — and all the obligations that come with it.

Egypt’s modern history dictates that the military reigns supreme, and its geography dictates that it is uniquely influential in the region.

Egypt&#39;s turbulent political transition likely will give rise to a parliament with a significant Islamist presence, thereby complicating the ruling military elite&#39;s hold on power. However, the democratic transition will be a partial one at best; the country&#39;s fractious opposition and impotent parliament will continue to suffer from internal divisions and will be unable to overrule the military on issues of national strategic importance. Thus, the military will remain the de facto authority of the state.Concerns over the country&#39;s struggling economy will outweigh the military&#39;s concerns over its political opposition. Egypt&#39;s preoccupation with its economic and political issues will undermine its ability to patrol its Sinai buffer, leading to increased tensions with Israel. However, both sides will continue to maintain the peace treaty that has been the foundation of Israeli-Egyptian relations for the past generation.

Egypt's Uphill Battle

The political order of the modern Middle East, one that has stood in place through the strength of autocratic regimes for more than a century, is under threat. The threat comes not from Western democracy or from Islam but from a potent combination of the two: political Islam, whose mere existence undermines the monarchies and military dictatorships that have so often suppressed its adherents. Some governments will continue to suppress them, of course, but the ones that work with them will eventually gain influence at the expense of those who do not.

The monarchies and military dictatorships of the modern Middle East are under threat from a potent combination of Islam and democracy.

Hamas will take advantage of the slowly growing political clout of Islamists throughout the region in hopes of presenting itself to neighboring Arab governments and the West as a pragmatic and reconcilable political alternative to Fatah. These moves will help protect Hamas from the potential regime crisis in Syria (where its politburo is based) and bolster its relationships with Egypt, Jordan and Saudi Arabia. At the same time, Hamas will be on alert for tactical opportunities to undermine security in the Sinai Peninsula with the hope of creating a crisis between Egypt and Israel.Egypt&#39;s preoccupations and Hamas&#39; expanded room to maneuver will incentivize the Jordanian leadership to strengthen its ties with Hamas. It will also allow Jordan to manage its own unrest by building more credibility among Islamists, leverage its relations with Fatah and keep a tab on Hamas&#39; actions as the Jordanian monarchs adjust to changing regional dynamics.

The Pulse of Political Islam

Asia-Pacific

The Asia-Pacific is home to more people than any other region. Centered on the western rim of the Pacific Ocean, this region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. Several of these countries, most notably China, experienced rapid economic growth in the second half of the 20th century, giving the region a new sense of global economic relevance that continues today. That relevance, however, depends largely on China, a power in transition whose rise is testing the network of U.S. alliances that have long dominated the region. How effectively Beijing manages its transition will shape the regional balance of power in the decades to come.

Centered on the western rim of the Pacific Ocean, the Asia-Pacific region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. 

For the past three decades, cheap exports and government-led investment have sustained economic growth in China. And in doing so, they have ensured political stability in one of the world’s largest and most populous countries. But leaders in Beijing understand that that model is unsustainable, and they have therefore begun to develop a new economic model, one built on consumption, an expanded services sector and technological innovation. The move from the old to the new will test the Communist Party’s will to reform and shake the very foundations on which its legitimacy stands.

China cannot evolve economically without also evolving politically. 

Three things will shape events in East Asia: China&#39;s response to the economic crisis and possible social turmoil amid a leadership transition; the European Union&#39;s debt crisis and economic slowdown sapping demand for East Asia&#39;s exports; and regional interaction with the U.S. re-engagement in the Asia-Pacific region.The 2008 financial crisis exposed the inherent weaknesses of the Chinese economy, which, like its East Asian powerhouse predecessors, largely was based on a growth model driven by exports and government-led investment. While Beijing had been aware for some time of the need to shift toward a more balanced economic model, the continued slump in Europe and fears of another global slowdown have forced the government to face the challenges of economic restructuring now, rather than constantly staving them off. Even in the best of times, the redirection of an economy the size of China&#39;s would be difficult, but the pressure for change comes amid a leadership transition, when Beijing is particularly sensitive to any disruptions. With the politburo lineup changing in October and the new state leaders taking office in early 2013, the Communist Party of China (CPC) is focused on maintaining social stability to preserve the legacy of the outgoing leadership and solidify the legitimacy of the incoming leadership.A rapid drop in economic growth poses a serious threat to China in 2012; a modest slowdown is widely expected this year due to the weakening export sector, a slump in the real estate market, and investment and risks to the banking system. Beijing is betting the decline will remain at a manageable level &mdash; at least for a year of transition. The sharp drop in demand from Europe will harm the export sector in particular, with growth likely reduced to single digits. This declining external demand will threaten the already weakened export-oriented manufacturing industry, which has experienced rising costs in labor, raw materials and utilities as well as appreciating currency on top of its already thin-to-nonexistent profit margins. China will seek to compensate in part by refocusing on exports to the United States and expanding in emerging markets in Southeast Asia, Latin America or Africa, though this will not fully make up for the drop-off from Europe. Moreover, growing trade protectionism because of the economic downturn and political considerations &mdash; especially the upcoming U.S. election season &mdash; will likely put Chinese manufacturers at the center of trade frictions, making their position even more vulnerable. Beijing will employ traditional tools including targeted credit, tax reductions and direct subsidies to mitigate the risks of rising unemployment and bankruptcy in the financially strained manufacturing sector.While Beijing knows that rolling out another massive fiscal stimulus and bank loans as it did in 2008-2009 is unsustainable and would put the economy at risk, it sees few other short-term options and thus will use government-led investment to sustain growth in 2012. Beijing will resume and launch a number of large infrastructure projects even at the expense of overcapacity and lack of productivity. However, accounting for around 10 percent of gross domestic product and a quarter of fixed investment, the decline in the real estate sector due to Beijing&#39;s tightening measures since 2010 represents one of the largest threats to Beijing&#39;s effort to stabilize growth. With affordable housing projects &mdash; Beijing&#39;s plan to offset the negative consequences from falling real estate prices and weakening investment &mdash; unlikely to reach their designated goal, Beijing may have to selectively relax its real estate tightening policy in 2012 while trying to avoid overcompensating by causing a sharp market rebound or property price inflation. The ruling Communist Party had promised it would bring these issues under control; its failure to do so could undermine the Party&#39;s credibility.The continued high-level credit boom combined with the need to work out nonperforming loans (NPL) from the 2008-2009 stimulus will bring China into heightened NPL risk. The actual NPL ratio may rise as high as 8-12 percent in the next few years. At least 4.6 trillion yuan ($729 billion) out of a government-estimated local debt of 10.7 trillion yuan is set to mature within two years, and Beijing expects 2.5 trillion to 3 trillion yuan of the total risk to turn sour. The NPL risk, the 2.1 trillion-yuan debt from investment in the railway system and the massive informal lending from the shadow banking system that grew significantly during Beijing&#39;s credit tightening pose a systemic risk to the banking sector. Beijing may have to take some pre-emptive actions, such as refinancing measures or capital injections, in 2012 to ensure Chinese banks are able to maintain confidence in China&#39;s financial system.

Given the economic uncertainty and political sensitivity surrounding the leadership transition, political elites in Beijing will attempt consensus at the highest levels. As it learned from the Tiananmen Square incident, CPC factional infighting exploited at a sensitive time is a serious risk, and we expect to see measures to ensure ideological and cultural control throughout the Party and down through the rest of society. Meanwhile, the priority to ensure a smooth transition means Beijing will be much less tolerant of actions that could spread instability, though Beijing is also cultivating pre-emptive methods for social control, such as community-level management or providing carefully controlled outlets for expressing grievances to better manage the country&#39;s social frustration, which will likely be exacerbated by the deteriorating economic situation.Internationally, China will continue to accelerate its resource acquisition and outward investment strategy. As domestic problems mount, China may use external disputes to ease public dissatisfaction. Anticipating U.S. economic and trade pressure due to the electoral season and strategic encroachment in China&#39;s periphery, Beijing will focus its attention on reducing miscalculation and stressing interdependence in its relations with Washington while clarifying its response to the U.S engagement. Meanwhile, China will balance nationalistic initiatives with maintaining neighborly relations &mdash; particularly with the South China Sea claimant countries, India and Japan &mdash; and countering perceived moves by the United States to constrain China&#39;s economic influence in the region and lines of supply. The South China Sea claimant countries, including Malaysia, the Philippines and Vietnam, will respond by accelerating their military purchases, taking advantage of the U.S. re-engagement efforts to hedge against China.Most Asian countries &mdash; which showed a strong economic recovery throughout 2010 and early 2011 &mdash; will experience reduced growth amid the global economic slowdown. As the most important economic partner to many countries, China will increase its economic assistance and trade to Association of Southeast Asian Nations countries to leverage its influence. Beijing hopes to again project economic power in the region through aid, the import of consumer goods, currency swaps and regional trade agreements, but Beijing&#39;s role may also face challenges by renewed interest from other nations &mdash; for example, the United States and Japan.

China in Transition

The death of North Korean leader Kim Jong Il has increased uncertainty on the Korean Peninsula. The first six months of the year will be critical as the unity of the regime is tested amid the leadership transfer. The leadership structure between civilian and military elements was established in recent years to strengthen the role of the Workers&#39; Party of Korea as one of the pillars of power and to rebalance the military&#39;s role, but the process was not yet complete at the time of Kim&#39;s death. North Korean leaders are unlikely to fundamentally change the direction of Pyongyang&#39;s foreign policy in the near term. Their attention initially will be focused internally, and they will seek to avoid any sudden shift in policy that could destabilize the regime or significantly increase foreign pressure. China will look to make a push to ensure even greater influence on the Korean Peninsula during the transition period. In addition, bilateral discussions with the United States on resuming the six-party nuclear talks were showing progress before Kim&#39;s death, and Pyongyang is likely to restart these discussions sometime during the year.

A Trying Year for North Korea

Americas

The Americas stretch from the Arctic Circle in Canada to the southern tip of Chile. This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world &mdash; an ascendance aided in part by bringing Mexico and Canada into its sphere of influence. Farther south, the nations of South America are like islands, separated by vast spaces of impenetrable mountains, rivers and jungles. Try though these countries may to integrate more closely, deeper ties such as those that characterize North America will prove elusive.

This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world

Illicit drugs and mass migration — these are two of the most pressing security challenges for the United States when it comes to Latin America. Washington has struggled to stem the flow of both across U.S. borders for years, and it will continue to do so for years to come. Its efforts in that regard will, for better or worse, define its relationships with countries as close as Mexico and as far as Colombia — not to mention several in between, from which most U.S.-bound immigrants originate.

Illicit drugs and mass migration are two of the most pressing security challenges in Latin America.

Through the first half of 2012, Mexico will be enmeshed in campaigning for its July 1 presidential election. The country faces the possible end of what will be 12 years of rule by the National Action Party (PAN). Faced with public condemnation of rising violence, the PAN has lost a great deal of credibility over the past five years, something likely to benefit the Institutional Revolutionary Party and the newly unified Revolutionary Democratic Party. We expect no major legislative action under the administration of outgoing President Felipe Calderon as the three main parties compete for public approval. The new president takes office Dec. 1, meaning most of the new administration&#39;s major policy moves will not occur until 2013.Regardless of any change in party, Mexico&#39;s underlying challenges will remain. The country&#39;s drug war rages on, with Los Zetas having consolidated control over most of Mexico&#39;s eastern coastal transportation corridor and the Sinaloa cartel having done the same in the west. Both cartels have a significant, growing presence in Central America and relations with South American organized crime. We expect the cartels to intensify their efforts to extend control over regional supply chains in 2012, although the Mexican cartels will remain dependent on relationships with local organized crime in other transit and producing countries. Despite significant territorial control in Mexico by Sinaloa and Los Zetas, numerous smaller criminal entities are still struggling for access to key transport hubs such as Acapulco. Meanwhile, the two main cartels will continue to attack each other in critical transit cities such as Veracruz and Guadalajara.Continued inter-cartel competition among Mexico&#39;s diverse criminal groups will prevent any kind of alliance between Los Zetas and Sinaloa that allows them to abandon violence in favor of more profitable smuggling conditions. Similarly, the government faces severe constraints on its counter-cartel activities. It cannot afford to be seen publicly backing away from attempts to rein in violence. At the same time, any significant uptick in military offensives against the cartels carries the risk of intensifying the violence. The government will therefore attempt to emphasize social and economic policies while maintaining its current, high-tempo counter-cartel strategy.

Security Challenges in Latin America

Brazil will spend 2012 focused on mitigating shocks to trade and capital flows from the crisis in Europe. However, with only 10 percent of Brazil&#39;s gross domestic product dependent on exports, Brazil is much less vulnerable than many other developing countries. In politics, Brazil will remain focused on trying to strike a balance between growth and inflation during the expected slowdown with judicious fiscal outlays and monetary expansion. Brazil will thus remain primarily focused on domestic issues through 2012. Trade protectionism will play a strong role in efforts to shield vulnerable industries. With global trade slowing, China will look for alternative export markets; these two trends will drive increased bilateral tensions between China and Brazil over the next year. Key Brazilian domestic issues will include ongoing city and border security initiatives; social welfare programs; infrastructure construction; and the development of, and politics surrounding, Brazil&#39;s petroleum reserves.

Brazil Looks Inward

Venezuela is one of Latin America's most dynamic and troubled countries. It had been relatively stable during the administration of President Hugo Chavez, but when he died, stability died with him, aided in no small part but the fall of the price of oil. His successor, Nicolas Maduro, is now being challenged not only by Venezuelan citizens, who are angry as they struggle to obtain the most basic living staples and foodstuffs, but also by politicians inside and outside his own political party. His ruling party may not survive the coming collapse, but if it does, it will have the daunting challenge of trying to rebuild the economy.

Venezuela had been relatively stable during the administration of President Hugo Chavez, but when he died, stability died with him, aided in no small part but the fall of the price of oil.

Uncertainty surrounding the health of Venezuelan President Hugo Chavez makes it difficult to forecast the precise direction of Venezuelan politics in 2012. There will certainly be continued speculation about a potential successor from the Chavista elite, and growing dissatisfaction with the status quo among Chavez&#39;s base will be a prominent political force. Meanwhile, the political opposition parties &mdash; which at this point appear prepared to unite behind a single candidate to be selected in February &mdash; will make their most credible play for power in a decade. Under these conditions, the 2012 election will serve as a disruptor of Venezuelan politics. While the exact details of the outcome are unpredictable, 2012 will likely see some sort of power transition away from Chavez.Regardless of who holds power at the end of the year, 2012 will continue to be characterized by growing domestic economic uncertainty, periodic infrastructure failure and poor distribution of basic goods. Dissatisfaction with these and other socio-economic issues will drive further protests, but the majority of political action will be centered on the election.

Venezuela's Unraveling

Cuba&#39;s slow and cautious transitional measures can be expected to continue in 2012. Key reforms such as making credit and private property available to individuals are under way, and similar reforms, including attempts to loosen travel restrictions, can be expected in the next year. Cuba&#39;s ultimate international challenge is to balance the liberalization demands of the United States with its need for subsidized Venezuelan oil. A sudden disruption of these shipments is unlikely, but a political shift in Venezuela could force Cuba to reach out to the United States as a much more powerful &mdash; but also more politically invasive &mdash; economic partner.

Cuba's Slow Transition Continues

Militancy is a fact of life in South Asia. Taliban insurgents, Islamic State jihadists, Baloch rebels and Kashmiri separatists all operate there, and they are able to do so because South Asian governments simply cannot control the farthest reaches of their territories — or the porous borders that define them. In some cases these governments even sponsor militant groups to work against their regional rivals. Whatever the cause, South Asian militancy will endure as long as governments refuse to grant the kind of autonomy for which these groups are fighting.

South Asian militancy will endure as long as governments refuse to grant the kind of autonomy for which these groups are fighting.

The U.S.-led campaign in Afghanistan will not maintain sufficient force levels long enough to militarily defeat the Taliban &mdash; and their various factions &mdash; or pacify the country. But the Taliban will not be in a position to drive the United States and its allies from the country by force. Force structure choices must be made in 2012 to define the war effort through 2014, but the United States and its allies will continue to combat the Taliban in 2012 even as Afghan forces increasingly bear the brunt of the war effort. The United States will continue to consider a political accommodation with the Taliban, but such accommodation is unlikely to be reached this year. The most important development in South Asia is Pakistan&#39;s ongoing political evolution. While other states, including Iran, are interested in shaping the future political landscape of Afghanistan, Pakistan continues to be at the heart of the Afghan war. As such, U.S.-Pakistani tensions will intensify in 2012 as the United States reaches an understanding with Pakistan, which will have to deal with the situation in the region after the United States leaves. Political, religious, ethnic and ideological tensions will intensify inside the country, and these will affect Pakistan, Afghanistan and U.S.-Pakistani relations moving forward.

South Asian Militancy

Sub-Saharan Africa

Sub-Saharan Africa is a study in diversity. Covering an area that spans the entire width of the continent beginning at the Sahara Desert and ending at the southernmost tip of South Africa, the region is home to countless cultures, languages, religions, plants, animals and natural resources. It&rsquo;s no surprise that it captured the imagination of Europe&rsquo;s earliest explorers &mdash; and that it continues to capture the imagination of current world powers eager to exploit it. And yet despite the region&rsquo;s diversity, Sub-Saharan African countries have common challenges &mdash; transnational terrorism, rapid population growth, endemic poverty and corruption &mdash; that prevent them from capitalizing on their economic potential. The coming years will be critical for the region, especially as its political institutions mature in a rapidly globalizing world.

Covering an area that spans the entire width of the continent beginning at the Sahara Desert and ending at the southernmost tip of South Africa, Sub-Saharan Africa is home to countless cultures, languages, religions, plants, animals and natural resources.

In 2012, a containment strategy will solidify against Somali jihadists &mdash; both the transnationalist group al Shabaab and its nationalist rival, the Somali Islamic Emirate. This strategy will have three elements. The first will feature African Mission in Somalia (AMISOM) forces consolidating their presence in Mogadishu. These forces include peacekeepers from Uganda, Burundi and Djibouti, and additional forces from Sierra Leone will be deployed soon.In the second part of the strategy, Kenyan troops will strengthen the cordon along the Kenyan border with southern Somalia. The 4,000 Kenyan troops there, nominally part of AMISOM, will hold territory and interdict Somali jihadists moving about the area. Lastly, Ethiopian forces will fortify a cordon along Ethiopia&#39;s border with central Somalia, also attempting to hold the territory and interdict jihadists.To deny the Somali militias propaganda material, AMISOM, the Kenyans and the Ethiopians will not push deep into Somali territory to engage the jihadists. Instead, local militias employing guerrilla tactics will fight the jihadists within the containment zone. The combined efforts will successfully disrupt the jihadists&#39; lines of supply, but they will not bring about their defeat. The United States will continue covert action in the Somali theater. U.S. special operations forces and unmanned aerial vehicles will collect and share intelligence with the Somali government and its allies. Additionally, U.S. forces in East Africa and the Horn of Africa will remain poised to strike high-value Somali jihadists or senior al Qaeda targets, should the opportunity arise.

Containing Somalia's Jihadist Movements

Though Nigeria boasts Africa’s largest economy, its march toward prosperity has always been a struggle, shackled as it is by political division, ethnic rivalry, militancy, theft and corruption. Its single biggest source of revenue is oil, most of which is found in the Niger Delta, a hotbed of militants and disaffected residents. Solving this region’s problems would help to keep oil flowing, but it won’t give Nigeria what it needs to be truly prosperous: a more diverse economy.

Nigeria's single biggest source of revenue is oil, most of which is found in the Niger Delta, a hotbed of militants and disaffected residents.

Nigeria will see sustained militant violence in its northern region. Aggrieved political elites in the north, believing the government of President Goodluck Jonathan stole political power from them, will seek to use the Boko Haram militant group to their advantage. As part of their campaign to regain political power in 2015 national elections, these northern politicians will provide Boko Haram with arms and funding while protecting it politically.This will enable the group to carry out frequent attacks on Nigerian government and civilian targets in its core area of operations in the country&#39;s northeast and northwest. Boko Haram will also conduct operations in the Nigerian capital of Abuja, but these will be rare. Boko Haram&#39;s statements will be jihadist and fierce, but the nature of its support will prevent it from carrying out attacks that would trigger an international response and result in a loss of leverage for northern Nigeria&#39;s political elite, such as transnational operations or attacks against foreign political or commercial facilities in Nigeria.The Niger Delta in the south will also see a slow but steady return to militant violence. Though the Jonathan administration has stated that it will serve only from 2011 to 2015, divisions will start to emerge within the Jonathan camp over whether a single term is sufficient. Like their peers in northern Nigeria, political elites in the Niger Delta region, including Jonathan, will start reactivating alliances with regional militant groups such as the Movement for the Emancipation of the Niger Delta (MEND).Attacks by MEND or other Niger Delta militants in 2012 will be infrequent and ultimately will not threaten oil production. However, they will form the basis for a counter-campaign by the Niger Delta political elite to demand political patronage while the region&#39;s elite decides whether to run for the ruling party&#39;s nomination for the presidency in the next elections.

Nigeria: Obstacles to Prosperity

Domestic opposition in Sudan and South Sudan will prevent both governments from signing a legally binding oil revenue-sharing accord. Instead, they will accept the continuation of ad hoc agreements regarding the distribution of oil revenues. Additionally, U.N. peacekeepers will maintain their deployments in South Sudan and Darfur to respond to border clashes between militias on both sides of the Sudan-South Sudan border. It will take much of the year, but Khartoum and Juba will settle into an informal understanding over border demarcation.

Settling the Sudanese Border

The African National Congress has ruled South Africa since Nelson Mandela became the country’s first president of the post-apartheid era. But its support is dwindling, thanks in part to generational changes, structural economic issues, and the rise of a black middle class that demands improved service delivery and governance. And while it will continue to be the first among equals in South African politics, the cracks that have emerged in its base may force the ANC to revert to the more socialist policies of its founding. Were that to happen, it would be less inclined to accommodate the businesses that keep its economy afloat.

The African National Congress has ruled South Africa since Nelson Mandela became the country’s first president of the post-Apartheid era, but its support is dwindling.

South Africa will remain focused on internal rivalries that will inhibit its ability to consolidate its influence in the southern African region. The ruling African National Congress (ANC) will contend with internal rivalries as it moves toward a leadership convention and election in December 2012. South African President Jacob Zuma will be working to secure a second term as ANC president, a post that would effectively make him the party&#39;s candidate for South African president in 2014 elections. Simultaneously, the Zuma camp will work to ensure that no rival faction in the ANC gains enough momentum to challenge Zuma.

2012 ANNUAL FORECAST

South Asia

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