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 jihadist war that has defined and confounded U.S. foreign policy for the past decade erupted again in the second quarter. Washington cannot shut down this war through a direct military intervention, and it does not even want to try again. The upheaval will not be confined to Iraq; weak governments from Damascus to Sanaa will struggle to quell the jihadists' call to arms.


Quarterly

The jihadist war that has defined and confounded U.S. foreign policy for the past decade erupted again in the second quarter. The upheaval from it will not be confined to Iraq; weak governments from Damascus to Sanaa will struggle to quell the jihadists' call to arms.

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.

The Islamic State is in decline. Under pressure from all the enemies it has made in its rise to power, the group continues to lose territory in Iraq and Syria — and thus its claim as a legitimate caliphate. But for all its losses on the battlefield, it has lost none of its potency as a terrorist group, one that will continue to attack its foes in the Middle East and beyond. The Islamic State’s degradation, meanwhile, is fueling a competition for the lands it used to control, pitting the Iranians, Turks and Kurds against one another for influence in the absence of another authority.

The Islamic State is in decline.

Baghdad begins the quarter facing an emboldened Kurdish region, insurgent attacks and a growing dependence on Iran. Sustained by its strong base of operations in Syria, the Islamic State (formerly the Islamic State in Iraq and the Levant) has taken advantage of Iraq&#39;s porous border, sectarian tensions and an accommodating Sunni tribal network to further&nbsp;<a class="connectedContentTrigger" href="/article/worsening-violence-iraq-threatens-regional-security" data-nid="267911" type="Assessments" title="Worsening Violence in Iraq Threatens Regional Security" data-timestamp="1402521321">reduce Baghdad&#39;s tenuous hold on vast swaths of Iraq</a>. The Islamic State and allied militant forces will remain a critical threat in Iraq&#39;s Sunni belt running from Anbar up to Ninevah and across to Salahuddin and Diyala provinces. Jihadists are unlikely to threaten the Kurdish north, Shiite south or the Iraqi capital militarily, though Baghdad will be vulnerable to insurgent attacks. Iraq&#39;s central and northern regions are at risk of fuel shortages this quarter, but oil production and exports in the south will remain insulated from jihadist activity.Attempts to manage the threat will greatly hamper Iraqi government forces. Iraqi military forces securing the capital will shift their focus from limiting the Islamic State&#39;s moves in Anbar to pushing militants out of the region north of Baghdad, especially in and around Salahuddin province. This change in focus will only create more pockets for jihadists to spread across Iraq&#39;s Sunni territory. However, Baghdad will not be fighting this war solely with military means. The&nbsp;<a class="connectedContentTrigger" href="/article/iraqi-conflict-enters-its-next-phase" data-nid="267934" type="Assessments" title="The Iraqi Conflict Enters Its Next Phase" data-timestamp="1403295278">political negotiations with Iraq&#39;s Sunni tribal groups</a>&nbsp;will be paramount this quarter as Baghdad and Washington work to undermine the Islamic State&#39;s local support network.These talks are urgent, but Iraq&#39;s fractured political system will inevitably prolong the process of mobilizing a Sunni resistance strong enough to repel the Islamic State and its jihadist affiliates. Iraqi Sunni demands will cover such contentious issues as integrating Iraqi Sunnis into the military and security apparatus and securing a stake in oil production in disputed areas bordering the Kurdish region. Sunnis could also demand the removal of Iraqi Prime Minister Nouri al-Maliki, who will use the jihadist threat to fight for his political survival and delay the formation of a government. Regardless of who becomes Iraq&#39;s next prime minister, the resurgence of sectarian tensions caused by the Islamic State&#39;s offensive and Baghdad&#39;s deepening dispute with the Kurds will ensure that policymaking by any Shiite government in Baghdad will be highly polarizing.With Baghdad sufficiently weak and distracted, the&nbsp;<a class="connectedContentTrigger" href="/article/iraqs-kurds-could-find-leverage-baghdad-fighting-sunni-militants" data-nid="267931" type="Assessments" title="Iraq's Kurds Could Find Leverage With Baghdad in Fighting Sunni Militants" data-timestamp="1403169704">Kurds will offer security cooperation</a>&nbsp;in exchange for greater autonomy over energy exports and acquiescence to their wider control over disputed areas in the north, particularly the oil-rich province of Kirkuk. Anticipating a threat from both Sunni jihadists and Iraqi government forces in this contested territory, Kurdish paramilitary forces known as peshmerga will preserve their strength this quarter and maintain a largely defensive posture in the north against the Islamic State. With Turkish backing, the Kurdistan Regional Government will try to increase northern oil exports through a pipeline running through Kurdish territory to the Turkish port of Ceyhan. Technical and political impediments will continue to limit these exports in the near term.Besides an emboldened Kurdish north, Iraq&#39;s central authority is encountering a growing challenge in the Shiite south, where militias have mobilized with Iran&#39;s assistance to help repel the jihadist threat. Over time, the resurgence of Iraq&#39;s Shiite militias will exacerbate the fissures within&nbsp;<a class="connectedContentTrigger" href="/article/iraqs-electoral-reform-will-further-deadlock-parliament" data-nid="267797" type="Assessments" title="Iraq's Electoral Reform Will Further Deadlock Parliament" data-timestamp="1398517200">the country&#39;s Shiite community</a>. This dynamic will complicate&nbsp;<a class="connectedContentTrigger" href="/article/intrigue-lying-behind-iraqs-jihadist-uprising" data-nid="236225" type="On Geopolitics" title="The Intrigue Lying Behind Iraq's Jihadist Uprising" data-timestamp="1402992319">Iran&#39;s efforts to consolidate Shiite power in Iraq under a strong, central authority</a>&nbsp;and thus adds urgency to Iran&#39;s negotiations with the United States.&nbsp;

The Fight Against the Islamic State

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.

Iran and Western powers face a looming deadline to either reach a negotiated settlement on Iran&#39;s nuclear program or agree to continue negotiations. We do not expect Iran and the P-5+1 group (the five permanent members of the U.N. Security Council plus Germany)&nbsp;to reach a final agreement by the initial deadline of July 20, but both sides will demonstrate enough progress in the negotiations to&nbsp;<a class="connectedContentTrigger" href="/article/chronology-geopolitics-nuclear-deal-iran" data-nid="267449" type="Assessments" title="A Chronology of the Geopolitics of a Nuclear Deal with Iran" data-timestamp="1385328822">continue to work toward a comprehensive settlement</a>. U.S. President Barack Obama will rely on his executive authority to reduce sanctions pressure on Iran, including relaxing enforcement of current trade and financial sanctions, in order to help Tehran&#39;s negotiating team maintain enough leeway within Iran to continue talks. Iranian energy exports could grow slowly toward the end of the quarter as Iran and its large Asian customers take advantage of the minor sanctions relief, but we still do not expect a wholesale lifting of oil sanctions on Iran or significant Western investment into Iran&#39;s energy sector this year.Saudi Arabia has had few occasions to scuttle the talks but has found opportunities to pressure Iran in Lebanon and Syria &mdash; and most recently in Iraq. We do not expect a shift on the battlefield in Syria that would either significantly strengthen or weaken the regime of Syrian President Bashar al Assad, though al Assad can be expected to use the threat of the Islamic State to try to maneuver into a negotiation with Washington via Tehran. While the Islamic State is focused on Iraq this quarter, the United States will be cautiously trying to prop up&nbsp;<a class="connectedContentTrigger" href="/article/us-provides-measured-support-syrian-rebels" data-nid="267964" type="Assessments" title="U.S. Provides Measured Support for Syrian Rebels" data-timestamp="1404160129">more moderate Syrian rebels</a>&nbsp;in a strained effort to sever the group&#39;s supply line from its strongholds in eastern Syria. Hezbollah will maintain a large presence in Syria while preparing for another possible uptick in jihadist activity in Lebanon. The struggle between Riyadh and Tehran will continue to play out in Syria, Lebanon and Iraq even though the Saudis and Iranians have gingerly entered a&nbsp;<a class="connectedContentTrigger" href="/article/saudi-arabia-extends-invitation-iran" data-nid="267840" type="Assessments" title="Saudi Arabia Extends an Invitation to Iran" data-timestamp="1400012546">diplomatic dialogue</a>. The smaller Persian Gulf states, led by Oman, Qatar and Kuwait, will hold their own negotiations with Iran, independent of Saudi Arabia, as the region continues to evolve in anticipation of a U.S.-Iran deal.Yemen could see an uptick in tensions along its northern border with Saudi Arabia. Amid growing sectarian and regional competition, clashes with jihadists in the area and Iran&#39;s support for al-Houthi rebels give Tehran another way to pressure Riyadh. Al-Houthi militancy, secessionist unrest in the south and al Qaeda in the Arabian Peninsula activity in the southeast will compound the already significant pressure on the government of President Abd Rabboh Mansour Hadi. Accompanying these security challenges are intensifying economic challenges: a growing deficit; regular shortages of diesel, food and water; countrywide electricity cuts; and attacks on oil and natural gas infrastructure carried out by disaffected tribesmen. Yemen is no stranger to high levels of instability, but the precarious security environment could clear the way for power grabs by former President Ali Abdullah Saleh and his loyalists, or by a combination of anti-government militants and tribes inspired by the Islamic State offensive in Iraq.

Rebalancing Power in the Middle East

At the height of its power, the Ottoman Empire stretched from Central Europe to the Arabian Peninsula. Turkey, the country that sprang from the Ottomans’ demise, is not an empire, but it is a country on the rise. Strategically located between East and West, the country is using its economic clout, its military might and its cultural weight to expand its influence throughout the Middle East. Larger powers such as the United States, Europe and Russia will therefore have to alternately work with and against Turkey as they pursue their interests in the region.

Turkey, the country that sprang from the Ottomans’ demise, is not an empire, but it is a country on the rise.

Turkey will tacitly back the Kurdistan Regional Government&#39;s territorial expansion in Iraq and&nbsp;<a class="connectedContentTrigger" href="/article/kurds-use-oil-tankers-challenge-baghdads-control" data-nid="267913" type="Assessments" title="Kurds Use Oil Tankers to Challenge Baghdad's Control" data-timestamp="1402564500">northern oil exports</a>, but it will also use the leverage it now has over Arbil to contain Kurdish ambitions for independence. Turkey already has a small military presence in northern Iraq&nbsp;<a class="connectedContentTrigger" href="/article/turkey-mulls-response-jihadist-crisis-iraq" data-nid="274915" type="Reflections" title="Turkey Mulls a Response to the Jihadist Crisis in Iraq" data-timestamp="1402532102">that we expect will grow</a>&nbsp;as&nbsp;<a href="/article/letter-kurdistan">Ankara draws a line</a>&nbsp;between its strategic alliance with Arbil and its need to prevent the emergence of an independent Kurdistan. For now, Turkey&#39;s public endorsement of the Kurdistan Regional Government will work to the political advantage of the ruling Justice and Development Party, also known as the AKP, in the Aug. 10 presidential election. In his bid for the presidency, Prime Minister Recep Tayyip Erdogan will need Kurdish votes and a working relationship with Turkey&#39;s main Kurdish militant and separatist group, the Kurdistan Workers&#39; Party, or PKK.Iraq will naturally be the focus of&nbsp;Turkey&#39;s foreign policy&nbsp;this quarter, but other discussions on the Turkish periphery bear scrutiny. The United States wants to recruit Turkey as the southern anchor for a&nbsp;<a class="connectedContentTrigger" href="/article/geopolitical-journey-part-2-borderlands" data-nid="236219" type="On Geopolitics" title="Geopolitical Journey, Part 2: Borderlands" data-timestamp="1401782249">regional alliance to hem in Russia</a>&nbsp;and thus will continue to help move along a slow-going negotiation in Cyprus that would reinvigorate Turkey&#39;s position in the eastern Mediterranean. Turkey will also continue to strengthen its relationship with Azerbaijan while reaching out to Turkmenistan, though discussions over energy links across the Caspian will not move beyond the preliminary stages.

Turkey's Resurgence

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.

For the rest of the year, Saudi Arabia and the United Arab Emirates will financially support newly elected Egyptian President Abdel Fattah al-Sisi. Their aid will help alleviate pressure on Egypt as it tries to move beyond the political uncertainties of the Arab Spring and into a stable working relationship between the military and its designated political leadership. This quarter, al-Sisi will try to form a civilian political establishment around his leadership while preparing for parliamentary elections. A few seats will likely be available for Islamist parties as the military, now more confident in its position, gradually begins to soften its stance on the Muslim Brotherhood.Concentrating on getting its domestic stresses under control, the Egyptian government will have few means to influence another flare-up in the Palestinian territories. Israeli operations in the West Bank and Gaza,&nbsp;<a class="connectedContentTrigger" href="/article/palestinian-agreement-alter-regional-dynamics" data-nid="267801" type="Assessments" title="Palestinian Agreement to Alter Regional Dynamics" data-timestamp="1398677325">designed in part to keep the Palestinians divided</a>, will undermine Cairo&#39;s effort to forge a Hamas-Fatah unity government.&nbsp;The military will stay focused on combating insurgents in Sinai and the Nile River Valley, but instability in Libya will also draw Cairo&#39;s attention. The chances of the Egyptian military moving large numbers of troops across its western border are remote. Instead, Cairo is likely to increase monitoring and counterterrorism operations along the border, especially if Tripoli begins to target militants more frequently to match rising regional pressure.

Egypt's Uphill Battle

Between the Sahara Desert and the Mediterranean Sea lies North Africa, the birthplace of the Arab Spring, a region of high youth unemployment, militancy, porous borders and resource scarcity. The Arab Spring may have empowered the region’s political opposition movements, which have since pushed for a variety of reforms, but governments are pushing back, some more successfully than others. Restructuring social contracts under such conditions will be difficult task, one that will test the stability of governments that naturally want to stay in power.

The Arab Spring may have empowered North Africa’s political opposition movements, which have since pushed for a variety of reforms, but governments are pushing back, some more successfully than others.

Libya&#39;s recently elected House of Representatives faces the daunting task of overseeing the drafting of the Libyan Constitution and organizing elections by the end of the year. With retired Gen. Khalifa Hifter&#39;s anti-Islamist movement shifting into a broader campaign against militants and with regional and tribal competition re-emerging across the&nbsp;<a class="connectedContentTrigger" href="/article/libyas-new-government-will-face-old-challenges" data-nid="267944" type="Assessments" title="Libya's New Government Will Face Old Challenges" data-timestamp="1403638523">Libyan political landscape</a>, the body is more likely to focus on managing growing&nbsp;regional opposition and protests. The incoming government will trigger a new round of talks &mdash; and potentially a negotiated resolution &mdash; with rebel commander Ibrahim Jadhran, who has led&nbsp;longtime strikes at eastern oil terminals. Libya&#39;s propensity for strikes, protests and rejection of centralized authority will keep overall oil production and exports below capacity, and Tripoli will be incapable of guaranteeing stable oil production until the national government can secure oil fields and infrastructure on its own.Algeria&#39;s outward focus for the quarter will be on managing the risks that the unraveling security situation in neighboring Libya poses. Algeria&#39;s security services have said Algiers&#39; suspected involvement in backing Hifter&#39;s anti-Islamist campaign has increased the risk of a militant attack. While Algeria increases security operations along the Libyan border and in coordination with Tunisia, it will&nbsp;<a class="connectedContentTrigger" href="/article/uncertainty-looms-over-algerian-elections" data-nid="267705" type="Assessments" title="Uncertainty Looms Over Algerian Elections" data-timestamp="1395133230">continue the negotiations with opposition political figures</a>&nbsp;ahead of political and economic reforms that are expected to be announced by the end of the year. The government will especially focus on developing unconventional energy resources such as shale, but changes to hydrocarbon investment laws will likely be pushed beyond the time frame of the quarter. Any meaningful investment and exploratory work is likely to happen in 2015 at the earliest.

The Difficulties of North African Reform

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. 

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.

While still negotiating with Kiev and the West over the fate of Ukraine, Russia will continue to support low-level separatist activity in the country&#39;s east. Russia will pressure the Ukrainian leadership to grant more authority to the regions at the expense of the central government. Ultimately, Moscow will push for a neutral Ukraine, where Kiev makes no significant and lasting efforts to integrate with the West, including the European Union but especially NATO. How much the Ukrainian government concedes on these issues will determine the extent to which Russia will continue supporting separatists and using energy and other economic advantages against Ukraine.Meanwhile, the European Union, Russia and Ukraine will continue to discuss the&nbsp;energy pricing&nbsp;standoff between Moscow and Kiev. The Kremlin can afford to drag out this negotiation ahead of the fall and winter months, when colder weather will boost consumption and Ukrainian and European customers downstream will need to refill their storage tanks. Russia will not, however, disrupt the supply of natural gas to the Europeans as the negotiation plays out over the quarter.&nbsp;Newly elected&nbsp;<a class="connectedContentTrigger" href="/article/ukraine-ends-cease-fire-amid-domestic-pressure" data-nid="267968" type="Assessments" title="Ukraine Ends Cease-Fire Amid Domestic Pressure" data-timestamp="1404241386">Ukrainian President Petro Poroshenko</a>&nbsp;will attempt to shore up his own political support, primarily by moving forward with plans to call early parliamentary elections sometime in the coming months. Elections could shore up his position, but they also risk raising tensions among pro-Western factions and empowering eastern representatives who lost their influence in parliament with the ouster of President Viktor Yanukovich. Even without elections, Poroshenko will struggle to balance his pro-Western base, the more moderate pro-Russian elements in the east and the powerful oligarch class that supports said moderates. Overall, the&nbsp;<a class="connectedContentTrigger" href="/article/ukraines-new-president-faces-myriad-challenges" data-nid="267876" type="Assessments" title="Ukraine's New President Faces Myriad Challenges" data-timestamp="1401205012">Ukrainian government will remain hamstrung</a>&nbsp;in its ability to cope with the country&#39;s economic pressures and anti-government forces on the ground, challenges that work to Russia&#39;s advantage.

Elsewhere in the former Soviet space, Russia will respond to the&nbsp;<a class="connectedContentTrigger" href="/article/eu-borderland-deals-will-not-end-russias-challenge" data-nid="267953" type="Assessments" title="EU Borderland Deals Will Not End Russia's Challenge" data-timestamp="1403861372">official signing of the EU association and free trade agreement</a>&nbsp;by Georgia and Moldova at the end of the previous quarter. Moscow&#39;s reaction will include supporting opposition and protest movements in the countries, but demonstrations are unlikely to rise to the level seen in Ukraine. Moscow will also increase economic and security support in the countries&#39; secessionist and autonomous regions, namely, Transdniestria and Gagauzia in Moldova and Abkhazia and South Ossetia in Georgia. Russia could go as far as offering the secessionist regions membership or associated membership in the Customs Union, but it will not annex the regions outright.Tensions will escalate this quarter in Central Asia. All of the Central Asian states are facing increasing economic problems, which will translate into security and political problems. As the Kazakh and Russian economies stagnate, the rest of the region, particularly Tajikistan and Kyrgyzstan,&nbsp;will feel the effects of higher inflation. The&nbsp;<a class="connectedContentTrigger" href="/article/kazakhstan-seeks-investment-amid-economic-woes" data-nid="267962" type="Assessments" title="Kazakhstan Seeks Investment Amid Economic Woes" data-timestamp="1404121181">Kazakh government will introduce financial and investment measures</a>&nbsp;in the third quarter to try to mitigate the country&#39;s economic slowdown, but there will be little impact this quarter. Meanwhile, with seasonal construction projects in Russia &mdash; typically a key source of employment for Central Asian workers &mdash; having slowed, Moscow has begun restricting Central Asian migrants from working in the country. Restrictions will translate into higher unemployment and fewer remittances for those Central Asian states. Border tensions and energy disputes are common among the Central Asian states, especially during the summer. As economic pressures grow, these flare-ups could be more serious than usual. Russia is busy in other parts of the former Soviet sphere, so any major instability in Central Asia will stretch Moscow&#39;s attention thin.

The Fight for Russia’s Borderlands

Russia&#39;s political and economic relationships with France and Germany will help it prevent Europe from forming a united position on trade, security and energy ties with Russia. In informal negotiations with Germany over the future of Ukraine and NATO&#39;s role in Central and Eastern Europe, Russia has eased up on its opposition to countries such as Ukraine and Georgia signing the European Union&#39;s association and free trade agreement. At the same time, the emerging understanding between Russia and Germany is that Moscow will not tolerate a unified NATO response to Russian moves in the borderlands or any expansion of NATO in the region. The West will respect Russia&#39;s position this quarter, leading to more ambiguity than clarity about NATO&#39;s mission ahead of a NATO summit in Wales in September.At the same, the United States will proceed with plans to increase troop rotations in Central Europe while the Baltic states, Poland and Romania actively push for a larger and permanent U.S. presence in the region. The&nbsp;<a class="connectedContentTrigger" href="/article/us-defense-policy-wake-ukrainian-affair" data-nid="236195" type="On Geopolitics" title="U.S. Defense Policy in the Wake of the Ukrainian Affair" data-timestamp="1396943996">U.S. presence throughout Central and Eastern Europe</a>, while remaining narrow in scope, will spark more Russian military exercises and deployments in Moscow&#39;s sphere of influence.The Europeans will continue to support limited political and economic integration with the likes of Ukraine, Moldova and Georgia. The European Union will also pay more attention to other former Soviet countries regarding energy diversification, particularly via the Southern Corridor. Azerbaijan and Turkmenistan, which the European Union has been lobbying to follow through with the long-discussed but politically controversial Trans-Caspian pipeline, will be key in this regard. Turkmenistan is reconsidering its position on sending energy supplies westward. Azerbaijan will continue balancing its energy relationship with Russia against its efforts to expand its Southern Corridor options. With both the West and Russia courting Baku, the Azerbaijani government will try to use the heightened attention to advance negotiations with Russian ally Armenia over the longstanding Nagorno-Karabakh dispute.

Russia and Europe

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.

The other focus for Russia in the third quarter is its weakening economy. Russia is already feeling the financial effects of increased tensions with the West. Investment into Russia fell by 50 percent and capital flight exceeded $55 billion in the first half of the year. The Russian government has had to draw on its large currency reserves to stabilize the currency and markets. In the third quarter, the Kremlin will avoid significantly escalating tensions with the West, particularly with the Europeans, in an attempt to reinvigorate investment interest in Russia. In line with this effort, Russia will look toward nontraditional partners from Asia and the Middle East to invest in strategic sectors of the Russian economy.Increased economic pressure will complicate Russia&#39;s ability to finance its large energy projects, particularly the&nbsp;<a class="connectedContentTrigger" href="/analysis/no-link-russia-china-agree-natural-gas-deal" data-nid="207470" type="ZZZ_DEPRECATED_Analysis" title="NO LINK Russia, China Agree to Natural Gas Deal" data-timestamp="1400684128">Power of Siberia pipeline</a>, the construction of which is set to begin this quarter. Russia will look to alternative plans for Power of Siberia, such as using a prepayment from China for natural gas deliveries to help finance the pipeline. The economic situation could also force the government to postpone plans to relaunch its privatization scheme in the second half of the year. Moscow is set in the third quarter to create a plan to tackle the country&#39;s regional debts, which have been skyrocketing. Such plans could involve either debt restructuring or bailouts. Finally, the bleak economic situation is exacerbating divisions among the Cabinet members and the security services. This will further distract President Vladimir Putin as he tries to take decisive actions at home and abroad.

Russia's Internal Struggle

That countries act in their own interests and not the interests of others is a fact that has always haunted EU foreign policy. It is for this reason that its foreign policy is reactive, not proactive as it was meant to be. And this dynamic is not lost on other foreign powers such as Russia, Turkey and the United States, which exploit EU divisions for their own benefit.

That countries act in their own interests and not the interest of others is a fact that has always haunted EU foreign policy.

Under pressure to balance between Russia and EU members in Central and Eastern Europe, Germany will continue its cautious approach in dealing with Russia. Berlin&#39;s reticence naturally will irritate some countries in Central and Eastern Europe, most notably Poland and Romania,&nbsp;that want more Western assistance. Poland and Romania are critical components of the slow-building&nbsp;<a class="connectedContentTrigger" href="/article/central-and-eastern-europe-weigh-more-cooperation" data-nid="267893" type="Assessments" title="Central and Eastern Europe Weigh More Cooperation" data-timestamp="1401785472">Intermarium alliance in Central and Eastern Europe</a>. During the quarter, Warsaw and Bucharest will continue to pursue a rapprochement with each other, but their engagement will be preliminary and rhetorical while Europe&#39;s conflict with Russia continues, albeit at a lower intensity.To help strengthen Western, particularly American, interest in the country, Romania will begin the legislative process to reform the&nbsp;<a class="connectedContentTrigger" href="/article/romania-sees-opportunity-energy-investments" data-nid="267905" type="Assessments" title="Romania Sees the Opportunity for Energy Investments" data-timestamp="1402308000">legal framework on the energy sector</a>&nbsp;and attract foreign investment. The process will not conclude this quarter. Bucharest will be particularly concerned about events in Moldova, where Moscow will escalate political and economic pressure following Moldova&#39;s signing of the EU agreement. The Romanian government will increase its official and unofficial contacts with the Moldovan government to strengthen its influence in the country, but there is little Bucharest can do to prevent social unrest and protests in the country.European concerns about Russia will continue to fuel the debate over defense spending in most countries from the Baltic Sea to the Black Sea. Proposals to increase spending will be mostly preliminary due to the summer recess, but a few countries such as Lithuania will actually approve increases in their military spending during the quarter.NATO membership will be much debated during the electoral campaign in Sweden, but Stockholm is unlikely to join the military alliance.&nbsp;<a class="connectedContentTrigger" href="/article/finland-aims-continue-finlandization" data-nid="267926" type="Assessments" title="Finland Aims to Continue 'Finlandization'" data-timestamp="1402996423">A similar scenario will play out in Finland</a>, where the NATO debate will be high on the political agenda but will probably not be resolved in the next three months.Europe&#39;s efforts at energy diversification away from Russia will not make much headway this quarter. The leadership transition in the European Commission, along with strong political support from several Central and Eastern European members for Russia&#39;s South Stream pipeline, will prevent Brussels from formally blocking the project. Negotiations between Russia, the European Union and the members of the South Stream project will continue despite Brussels&#39; occasional threats. Russia will also be able to use political and legal means to effectively obstruct any preliminary plans for a Trans-Caspian route.

Divided EU Foreign Policies

European geography lends itself to political and economic fragmentation. Fundamental differences among Northern, Southern, Eastern and Western Europe have always prevented wholesale cooperation on the Continent, and the creation of the European Union never really reconciled those differences. If anything, it aggravated them when, beginning in 2008, it proved incapable of guaranteeing prosperity during times of economic and political duress. Many voters in Europe have since found sanctuary in the notion of the nation-state and, in doing so, have fueled feelings of nationalism, Euroskepticism, protectionism and isolationism. Those forces will tear the very fabric of the European project, leading to smaller alliances of like-minded countries.

European geography lends itself to political and economic fragmentation.

The effects of the European Parliament elections, the most important EU-level political event this year, will continue to reverberate across the Continent in the third quarter. As Stratfor wrote in its annual forecast, the decision-making process at the EU level will be virtually frozen because national governments and EU lawmakers will spend most of the quarter negotiating and ratifying the new composition of the European Commission. At the national level, member states will be absorbing the political repercussions of growing Euroskepticism, while the summer recess will slow the legislative process.During the third quarter, the&nbsp;<a class="connectedContentTrigger" href="/article/battle-political-control-europe-continues" data-nid="274919" type="Reflections" title="The Battle for Political Control of Europe Continues" data-timestamp="1403137892">tussle over Europe&#39;s political direction</a>&nbsp;will continue. In late June, EU members reached an agreement on their candidate for the next president of the European Commission. Each country will now have to appoint representatives to the commission. After holding hearings to vet them, the European Parliament must ratify the president and the commissioners. This process will lead to frictions between member states, and between member states and the continental legislature, over whether Europe should follow a more integrated path.The ratification process will have lasting political effects in Europe. With the bloc struggling to strike a&nbsp;<a class="connectedContentTrigger" href="/article/integration-debate-gains-momentum-europe" data-nid="267910" type="Assessments" title="The Integration Debate Gains Momentum in Europe" data-timestamp="1402478100">balance between national sovereignty and supranational integration</a>, member states continue to drift apart. Countries in Northern Europe, led by the United Kingdom, will argue that the process of continental integration needs to be frozen, or even reverted in some areas, and that national governments need to recover some of the prerogatives that they gave up to Brussels. Other countries, most notably France and Italy, will push for deeper European integration to ensure more subsidies and softer fiscal targets on the Continent.Germany will be trapped in the middle. Berlin needs to protect the eurozone and make sure that integration is not disrupted, but it is also interested in preserving the current process of economic reforms and fiscal consolidation measures in the European periphery. In the third quarter, these contradictory views on the future of Europe will continue to fragment the European Union.The rise in Euroskepticism will also be felt at the national level. In countries such as the United Kingdom and Germany, the debate over the future of EU integration will be high on the agenda, especially as conservative parties become increasingly fearful of losing votes to their nationalist rivals. With elections in three German regions during the summer, the Euroskeptical members of the ruling Christian Democratic Union and Christian Social Union parties will push for an internal debate on whether to seek an alliance with the Euroskeptical opposition. Euroskeptical politicians in Germany &mdash; in the government and the opposition &mdash; will also criticize different aspects of the process of EU integration. Chancellor Angela Merkel will probably resist these forces but will come under increasing political pressure inside and outside of her government.This will, in turn, affect EU policies. Italy is in charge of the European Union&#39;s rotating presidency during the second half of the year and will push for a renegotiation of Europe&#39;s policy regarding refugees from North Africa and the Middle East. The European Union is likely to provide more funds for countries in Mediterranean Europe, but&nbsp;<a class="connectedContentTrigger" href="/article/europes-immigration-debate-heats" data-nid="267982" type="Assessments" title="Europe's Immigration Debate Heats Up" data-timestamp="1404724951">substantial reforms of the Continent&#39;s policies on the issue</a>&nbsp;are not expected.&nbsp;The third quarter will be relatively quiet for banks and financial markets. The debate over the value of the euro and unorthodox measures such as quantitative easing will still rank high on the EU agenda, but the European Central Bank is unlikely to apply additional measures during the quarter. The institution will wait to see the effects of the measures enacted in June, when it lowered its benchmark interest rate and applied negative deposit rates for banks, before deciding on further action. Despite the apparent calm in the financial markets, many Europeans will continue to face hardship. Credit conditions for small and medium-sized companies, particularly those in the European periphery,&nbsp;will remain weak, which will undermine the prospects for sustainable economic growth.

European Disintegration

At the national level, countries will have to deal with the consequences of high unemployment and rising anti-establishment sentiments while trying to clean up their economies. Italy and France will present structural reforms to try to reduce state bureaucracy and improve efficiency in public spending, with mixed results. Rome will make some progress in its plans to cut state bureaucracy, and a reform of the country&#39;s Senate will probably be approved during the quarter.Reforms will be particularly difficult in France, where&nbsp;<a class="connectedContentTrigger" href="/article/internal-instability-will-challenge-franco-german-alliance" data-nid="267963" type="Assessments" title="Internal Instability Will Challenge Franco-German Alliance" data-timestamp="1404122218">political and social tensions continue to mount</a>. Paris&#39; plan to reduce public spending and apply tax breaks for companies will lead to additional frictions within the ruling Socialist Party, while its plan to reduce the number of French regions will generate resistance in some of the regions affected. With unemployment still high in France, anti-establishment sentiments will result in anti-government protests and strikes in the quarter. The survival of the French government is not yet in question, but the government will be increasingly ineffective.In Spain, the parliament will approve a fiscal reform program centered on reducing income taxes. The program is part of the government&#39;s effort to regain popularity after the European Parliament elections. The reforms will take effect in early 2015, an electoral year in Spain.The summer season will bring some temporary relief to Southern Europe. Countries such as Greece, Spain and Portugal will benefit from political instability in competing tourist destinations, including Turkey, Egypt and Thailand. The increase in tourism will create some jobs in Southern Europe&#39;s formal and informal sectors. Most of the jobs will be temporary, however, and the summer season will not be enough to significantly improve unemployment in the European periphery.Scotland will hold its independence referendum Sept. 18. We can expect London to promise additional devolution of powers, most notably on tax issues, if Scotland remains in the United Kingdom. Scotland is likely to vote against independence.Sweden will hold general elections Sept. 14. We expect traditional, moderate political parties to dominate the elections. However, we also expect the far-right Sweden Democrats to perform well, improving on their 2010 performance, when they received 5.7 percent of the vote and made it into Parliament for the first time. This will not substantially modify Sweden&#39;s political landscape in the short term, but it will highlight the potential for&nbsp;<a class="connectedContentTrigger" href="/article/nationalist-parties-nordic-europe" data-nid="266588" type="Assessments" title="Nationalist Parties in Nordic Europe" data-timestamp="1356002260">anti-establishment parties&#39; growth in Nordic Europe</a>.&nbsp;

The Trouble With Reform

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. 

Mostly cut off from the West by economic sanctions and by soured relations, Russia has begun to build bridges with the East. To that end, Moscow has expanded its trade ties throughout the Asia-Pacific region, particularly with China, South Korea and Japan. But those ties come at a price: Moscow has begun to involve itself in the affairs of others, jumping into contentious regional issues to gain influence and to challenge the United States. Meanwhile, Eastern powers are also encroaching on Moscow’s sphere of influence in Far East Russia and in Central Asia — a presence Russia will struggle to curb as it spends more time and resources managing its long-term internal problems.

Cut off from the West by economic sanctions and by soured relations, Russia has begun to build bridges with the East.

The momentum&nbsp;<a class="connectedContentTrigger" href="/analysis/no-link-russia-china-agree-natural-gas-deal" data-nid="207470" type="ZZZ_DEPRECATED_Analysis" title="NO LINK Russia, China Agree to Natural Gas Deal" data-timestamp="1400684128">Russia and China have accrued in their energy alliance</a>&nbsp;could expand to the strategic sphere as Russia looks to engage less with the West and more with the East. Russia will also seek to re-engage with Japan, perhaps offering a more beneficial path to a resolution on the four disputed northern islands, paving the way for increased Japanese investment into Russia. Should Moscow make additional concessions, Tokyo would be hard-pressed to delay just to remain in line with U.S. and European punitive actions against Russia over Ukraine. Moscow is also recruiting Seoul through its work to keep North Korea in check and through offers of energy, natural resources and&nbsp;<a class="connectedContentTrigger" href="/article/north-korea-emerging-regional-crossroads" data-nid="274886" type="Reflections" title="North Korea Emerging as Regional Crossroads" data-timestamp="1398117859">investment opportunities</a>. These pursuits will continue through the quarter as Moscow works to complicate the U.S. alliance structure in the Asia-Pacific region.

Moscow Looks to the East

As its military power grows, China will struggle to balance its desire for friendly relations with its neighbors against the more fundamental need to secure its maritime interests — a need Beijing believes is best served through unilateral action. China’s rivals are doing all they can to contain this expansion, in part by leveraging economic cooperation with Beijing and in part by forging alliances with outside powers such as the United States, Japan and Australia. But as more powers enter these contested waters, the risk of confrontation will only rise.

China’s rivals are doing all they can to contain its expansion

China and Vietnam will continue their standoff over China&#39;s deployment of a deep-sea oil exploration rig in disputed waters&nbsp;<a class="connectedContentTrigger" href="/article/china-uses-deep-sea-oil-exploration-push-its-maritime-claims" data-nid="267830" type="Assessments" title="China Uses Deep-Sea Oil Exploration to Push Its Maritime Claims" data-timestamp="1399543731">near the Paracel Islands</a>. The rig is not slated to leave until some time in August, and although both Beijing and Hanoi will try to avoid a major military confrontation, both will patrol the area with&nbsp;<a class="connectedContentTrigger" href="/article/hanois-internal-divisions-hinder-its-china-policy" data-nid="267909" type="Assessments" title="Hanoi's Internal Divisions Hinder Its China Policy" data-timestamp="1402477200">maritime security and civilian vessels</a>, and the chances of an accidental confrontation remain high. Beijing is also accelerating land reclamation projects at several small islets and islands in the South China Sea and may begin&nbsp;<a class="connectedContentTrigger" href="/article/maritime-claims-and-tensions-southeast-asia" data-nid="276915" type="Graphics" title="Maritime Claims and Tensions in Southeast Asia" data-timestamp="1401384896">bolstering its small outposts</a>&nbsp;with additional buildings, supplies and airfields. This will further unnerve the Philippines, which will call for additional U.S. or Japanese assistance during the quarter and will increase the number of forces it keeps stationed on the&nbsp;<a class="connectedContentTrigger" href="/analysis/china-moves-again-south-china-sea" data-nid="207293" type="ZZZ_DEPRECATED_Analysis" title="China Moves Again in the South China Sea" data-timestamp="1400095869">Spratly Islands</a>&nbsp;to match China&#39;s moves. Although the actual change is minor and all sides will keep their actions just below the threshold that would engender a stronger and more concrete response, the increased activity also raises the likelihood of accidental clashes. Moreover, China&#39;s increased air patrols along the edge of its&nbsp;<a class="connectedContentTrigger" href="/article/chinas-new-air-zone-poses-test-rivals" data-nid="267461" type="Assessments" title="China's New Air Zone Poses a Test for Rivals" data-timestamp="1385755136">newly expanded air defense identification zone</a>&nbsp;will bring Chinese and Japanese aircraft into increasing proximity, raising the potential for a midair collision.

Asia-Pacific: Among Great Powers

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. 

Two emerging developments will dominate China&#39;s third quarter. First, after months of weak industrial activity and facing&nbsp;<a class="connectedContentTrigger" href="/article/difficult-year-looms-chinas-real-estate-market" data-nid="267702" type="Assessments" title="A Difficult Year Looms for China's Real Estate Market" data-timestamp="1395052452">mounting troubles in the real estate sector</a>, Beijing will more proactively&nbsp;<a href="http://www.stratfor.com/topics/economics-and-finance/chinas-economy">bolster the economy</a>. It will do so by loosening certain controls on lending and increasing government spending on large infrastructure projects. Among the likely steps, Beijing will expand first-time homebuyers&#39; access to credit, allow local governments to loosen controls on housing purchases for non-first-time homebuyers and, if these prove insufficient to revive market confidence, ease credit controls more broadly. In the meantime, the central government will boost spending on transport, water and energy infrastructure development to&nbsp;offset the impact of slumping property markets on pillar industries such as coal, steel and cement. While Beijing is temporarily easing credit controls in the property sector, it will continue to implement fiscal reforms designed to eventually reduce the likelihood and impact of a property crisis by reducing local governments&#39; reliance on land sales. The recently announced municipal bond pilot program is too small to have a tangible effect on the property sector within the quarter.Second, after a spate of deadly attacks on Chinese civilians in the first half of the year, Beijing will intensify efforts to crack down on terrorism and religious extremism in Xinjiang and Han core regions while expanding its security footprint in politically sensitive cities. Uighur Muslim-affiliated groups operating in or around Xinjiang will remain the government&#39;s primary target throughout the quarter, but Beijing&#39;s crackdown will not be limited to ethnic and religious unrest among the Uighur population. A brutal killing in Shandong in May highlighted the growing security risks posed by the spread of underground cults, many of them Christian in nature, throughout rural Han China. These organizations do not seriously challenge central government control, but signs that they are developing cross-provincial networks and gaining ground among poor, undereducated&nbsp;<a class="connectedContentTrigger" href="/article/china-rural-unrest-presents-dilemma-beijing" data-nid="265691" type="Assessments" title="China: Rural Unrest Presents Dilemma for Beijing" data-timestamp="1327579653">rural populations</a>&nbsp;will prompt Beijing to take pre-emptive measures to contain their proliferation within the quarter.<a class="connectedContentTrigger" href="/article/chinas-anti-corruption-drive-pushes-ahead" data-nid="267208" type="Assessments" title="China's Anti-Corruption Drive Pushes Ahead" data-timestamp="1376647265">President Xi Jinping&#39;s anti-corruption campaign</a>&nbsp;and attendant push to consolidate his influence within the Party leadership will continue, as will the central government&#39;s gradual rollout of fiscal reforms. However, the need to support economic growth, particularly to bolster the housing sector, may mean slower progress on both fronts this quarter.

China in Transition

Kept dormant for two decades by the weight of economic malaise, Japan has awoken again, ready to reclaim its place in the international order. Standing in the way, however, are unprecedented economic and demographic problems, the solutions to which will require radical changes to the country’s technological, political, social and economic structures — changes that will difficult to accept, let alone implement. But if it does, Japan will be a case study for governments that find themselves in similar predicaments.

Japan has awoken again, ready to reclaim its place in the international order.

<a class="connectedContentTrigger" href="/article/japan-new-economic-reforms-are-announced" data-nid="274922" type="Reflections" title="In Japan, New Economic Reforms Are Announced" data-timestamp="1403668707">Japan&#39;s &quot;Abenomics&quot;</a>&nbsp;has had modest success lifting Japan out of its decadeslong economic slump. The consumption tax hike is contributing to a temporary rise in inflation, but the country may enjoy only a short pause before wage pressure and the deepening demographic crisis take their toll. For this reason, Tokyo will likely continue a policy of monetary injection while slowly increasing wages in the next quarter. Nuclear restarts may begin in the coming months amid concerns of energy shortages. Prime Minister Shinzo Abe&nbsp;<a class="connectedContentTrigger" href="/article/japanese-revival-imminent" data-nid="274926" type="Reflections" title="Is the Japanese Revival Imminent?" data-timestamp="1404260465">will use his momentum</a>&nbsp;to carry out shifts in Japan&#39;s collective defense, and Tokyo will seek to reinforce its position with Russia and North Korea as it secures its northern flank and shifts attention to the East China Sea.

A Japanese Awakening

Few countries are better positioned to capitalize on the opportunities created by China’s economic transition than the 10 states that constitute the Association of Southeast Asian Nations. Its members understand that what is good for one is, in theory, good for the whole — so much so that unanimity was made a central tenet of their founding charter. But domestic political considerations often prevent them from acting as one. And it is this discrepancy between collective interests and individual interests that will determine how quickly their economies grow — and how deeply they integrate.

Few countries are better positioned to capitalize on the opportunities created by China’s economic transition than the 10 states that constitute the Association of Southeast Asian Nations.

Indonesia will hold its presidential election July 9. Both candidates have sought a balance in their campaigns between resource nationalism and openness to foreign investment, so dramatic swings in market sentiment are unlikely regardless of who wins. Within the quarter, tangible changes to policy, particularly energy and mining policy, are unlikely &mdash; both candidates have expressed support for the&nbsp;<a class="connectedContentTrigger" href="/article/indonesia-struggles-export-ban" data-nid="267544" type="Assessments" title="Indonesia Struggles with an Export Ban" data-timestamp="1389290696">mineral export ban</a>,&nbsp;and the winner will not take office until October. Within the quarter, the president-elect will begin the process of bringing together a Cabinet and governing coalition.The Thai military will take more steps toward the establishment of an interim government during the quarter. First, however, alongside ongoing efforts to eliminate former Prime Minister Thaksin Shinawatra&#39;s influence, the military will broaden economic programs designed to appease Thailand&#39;s rural communities, the traditional support base for the ousted &quot;Red Shirt&quot; government. For the most part, the crisis in Thailand will remain internal, and neighboring countries will be reticent to openly support the opposition&#39;s attempts to create a resistance organization abroad. Small protests and sporadic violence are likely, but the military will prevent large-scale acts of resistance from taking root. The wild card is the status of the king and the complications&nbsp;<a class="connectedContentTrigger" href="/article/why-royal-succession-matters-thai-stability" data-nid="274908" type="Reflections" title="Why Royal Succession Matters to Thai Stability" data-timestamp="1401411478">a succession would bring to the military&#39;s transitory rule</a>.

Southeast Asia: Burdened by Consensus

North Korea is convinced that the only way to avoid foreign military action against it is to develop a viable nuclear deterrent — and it is now in the final stages of developing one. Sanctions and negotiations have failed to persuade Pyongyang to abandon this strategy, so world powers have only two options for coping with North Korea: militarily intervene before it acquires a deterrent or begin to shape defense strategies based on the assumption that it will inevitably acquire one. The dilemma is forcing China, Pyongyang’s only ally, to redefine its North Korea policy and is compelling countries such as South Korea, Japan and the United States to increase military cooperation.

North Korea is convinced that the only way to avoid foreign military action against it is to develop a viable nuclear deterrent — and it is now in the final stages of developing one.

North Korea is working to diversify its international relations, particularly focusing on Russia and Japan, to ease external pressure. Although its work with these countries will not replace the significant role China plays in North Korea&#39;s economic survival, Russian activity inside the country will increase, as could Russian energy supplies to North Korea. Pyongyang and Tokyo are having a quiet detente similar to that seen during the administration of Junichiro Koizumi (2001-06). North Korea is willing to further discuss&nbsp;<a class="connectedContentTrigger" href="/article/north-korea-and-japans-growing-interest-better-relationship" data-nid="267941" type="Assessments" title="North Korea and Japan's Growing Interest in a Better Relationship" data-timestamp="1403516211">the status of kidnapped Japanese citizens</a>&nbsp;with the expectation that doing so will ease restrictions on Japanese exports and repatriation of currency from overseas Koreans to North Korea. As usual, Pyongyang keeps things like nuclear and missile tests on reserve as a way to shape international perceptions and encourage talks but also as a way to strengthen its own national defense. We may also see more experiments with North Korean economic zones and minor adjustments to economic policies as Pyongyang continues to try to revitalize or at least awaken its slumbering economy.

2014 THIRD-QUARTER FORECAST

Europe

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