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.

It's tempting to blame Syria for all the geopolitical intrigue that will characterize the second quarter of 2016. It is the scene of a protracted civil war, the source of Europe's migrant crisis and a major complication in Turkey's struggle with the Kurds. But in truth, Syria is merely a pawn in a larger game played by more powerful countries, each with their own designs in the Middle East.

Quarterly

Syria is merely a pawn in a larger game played by more powerful countries, each with their own designs in the Middle East.

Immigration presents leaders a difficult dilemma: How do you weigh the stewardship of your own people against the moral imperative — and in some cases the economic need — to allow foreign peoples to cross your borders? The answer to this question is growing increasingly complex as instability and economic duress drive migrants from the developing world to the developed world. When native populations oppose immigration, as they often do for economic reasons, their leaders often ride a wave of nationalism to political power. But this elides the fact that many of these same countries will need immigrants to offset some of the demographic problems aging, shrinking societies will soon face.

Immigrants can offset some of the demographic problems aging, shrinking societies will soon face.

Improving weather will make the Aegean Sea easier to cross, prompting migrants from the Middle East to continue to try to reach Greece despite the recent&nbsp;<a class="connectedContentTrigger" href="/article/eu-and-turkey-reach-tenuous-immigration-agreement" data-nid="269433" type="Assessments" title="The EU and Turkey Reach a Tenuous Immigration Agreement" data-timestamp="1458333264">EU-Turkey agreement aimed at reducing migrant flows</a>. In turn, EU members will drag their feet when it comes to accepting the relocation of refugees to their territories.Unilateral measures such as fences, border controls and asylum quotas will continue. With the main Balkan route almost completely closed, some migrants will seek an alternate passage to Northern Europe, such as through Albania and Bulgaria. Should those countries encounter increased numbers of refugees, however, they will strengthen controls at their borders with Greece.An&nbsp;<a class="connectedContentTrigger" href="/article/italy-next-greece" data-nid="269417" type="Assessments" title="Is Italy the Next Greece?" data-timestamp="1457947818">increasing number of incoming migrants will head to Italy</a>.&nbsp;Some of the asylum seekers entering Albania will try to reach Italy by crossing the Adriatic Sea. Better conditions on the Mediterranean Sea will reactivate the route connecting North Africa with southern Italy. Italy will react by backing efforts in Brussels for an EU-wide response to the crisis in order to defend the continuity of the Schengen Agreement and to back plans to strengthen the EU presence in the Mediterranean. Meanwhile, some of Italy&#39;s neighbors may decide to close their borders to prevent migrants from moving north.To stem the migrant surge, the European Union will present plans to create a European Border and Coast Guard to coordinate operations with national border authorities. Countries on the European Union&#39;s external borders, such as Italy, Greece, Poland and Hungary, will support the idea but will resist proposals by the European Commission to give Brussels the authority to deploy the agency to a member state without its consent. The proposed guard force will not be established during the quarter.The quarter will also be defined by debate over the future of the Schengen area. Countries along the Balkan migration route will lobby for the suspension of Greek membership in the Schengen Agreement and the continuation of existing border controls. But&nbsp;<a class="connectedContentTrigger" href="/article/germanys-tactical-about-face-greece" data-nid="269390" type="Assessments" title="Germany's Tactical About-Face on Greece" data-timestamp="1457020359">Germany and Italy will back Greece</a>, and Greece will remain a member of Schengen zone. Even so, the European Union, especially with the Brussels attacks fresh in everyone&#39;s memory, will tolerate a prolongation of border controls on sensitive parts of the migration routes.The migration crisis will have political repercussions in Germany. Chancellor Angela Merkel&#39;s position will not be at stake, but the&nbsp;<a class="connectedContentTrigger" href="/article/refugee-crisis-redefines-german-politics" data-nid="269418" type="Assessments" title="The Refugee Crisis Redefines German Politics" data-timestamp="1457966763">weak performance by her conservative party in March regional elections</a>&nbsp;and gains by the anti-immigration Alternative for Germany party will create dissent within the government. Merkel will continue to look for an EU-wide approach to the migration crisis, but she will not find one, relying instead on a reduced number of countries that still support a plan to relocate migrants to Turkey.

Crossing Borders

The United Kingdom may have voted to leave the European Union, but it can’t escape geography; it will have to define its political and economic relationships with the countries closest to it no matter what. And the process by which it does so will take years to complete. Immigration, membership in the EU internal market and the future of the British financial sector will all be points of negotiation — and of contention. Going forward, the United Kingdom will turn to a familiar strategy, one that it has employed since the end of World War II: balancing its relations with Continental Europe while strengthening ties with the United States.

The United Kingdom may have voted to leave the European Union, but it can’t escape geography; it will have to define its political and economic relationships with the countries closest to it no matter what.

The British referendum on EU membership will take place June 23. Prime Minister David Cameron and several members of his Cabinet, as well as a significant part of the Labor Party, will campaign to remain in the European Union. Rebel Conservative lawmakers and the anti-immigration party UKIP will campaign for leaving. Stratfor expects the United Kingdom to stay in the European Union. Should a Brexit occur, however, it would trigger a political crisis in London, where officials would want to keep negotiation channels open with Europe.Regardless of the outcome, Cameron&#39;s negotiation with the European Union has opened the door for other governments to make their own demands of the union, backed by&nbsp;<a class="connectedContentTrigger" href="/article/europe-solves-one-problem-and-creates-another" data-nid="275258" type="Reflections" title="Europe Solves One Problem and Creates Another" data-timestamp="1456185576">threats to hold similar referendums</a>. The British vote has also made it easier for governments to refrain from participating in the effort to deepen the process of Continental integration. The full effect of these changes will be felt well beyond the quarter.

Brexit

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.

The quarter will be marked by political and economic uncertainty in the eurozone. The Greek government will reach a deal with its lenders and will receive the next tranche of its bailout program. This means a default and a Greek exit from the eurozone will continue to be delayed. But the deal will come at a cost: weakening popular support for Athens and the progressive erosion of social safety nets for Greek households. Accordingly, Greece will face the constant threat of political and social revolt.In Spain, the main political parties will fail to reach an agreement on forming a government. Intense negotiations to strike a deal will occur, but Spain will nevertheless probably have to hold new elections in late June. This will not lead to a significant economic or financial crisis during the quarter, though the political turmoil and the prospect of a new government, which could backtrack on some of the reforms introduced during the previous administration, will weaken market confidence in Spain. Madrid is likely once again to miss its deficit reduction targets, which will create more problems for Spain. The situation is similar in Portugal, where a fragile government will struggle to convince financial markets of its ability to heal the Portuguese economy. Because the Portuguese government consists of a shaky multiparty coalition, early elections cannot be ruled out. The second quarter will also be eventful for Cyprus, which will hold legislative elections May 22. Should pro-unification forces win, the internationally recognized Greek government in Nicosia will seek to continue negotiations with the Turkish Cypriot government in the north. Although the&nbsp;<a class="connectedContentTrigger" href="/article/cyprus-makes-progress-reunification-talks" data-nid="269186" type="Assessments" title="Cyprus Makes Progress on Reunification Talks" data-timestamp="1449484517">north and the south are both interested in keeping the negotiations alive</a>, we do not expect any significant developments in the quarter.The Italian and Portuguese banking systems would likely bear the brunt of any global economic disturbances, such as bad news out of the Chinese or U.S. economies, that affect the European markets. Spain might be vulnerable, too, thanks to political uncertainty in Madrid. Any wobbles are unlikely to be dramatic at this stage, however, since the package of measures unveiled by the European Central Bank on March 10 should provide sufficient buoyancy to asset prices and stability for eurozone banks&#39; balance sheets.

The Fate of the Eurozone

The breakup of the European Union isn't random or scattered: It's happening along distinct lines. The more prosperous northern European countries are tired of picking up the tab for southern Europe and are fighting for more control over the south's fiscal policies. Southern European countries want the opposite. Some countries in the east, meanwhile, see the European Union solely as a trade bloc and are becoming increasingly irritated by many of its other policies. As the economic and political environment in Europe becomes more contentious, these fundamentally opposed interests will come into conflict more and more often, further destabilizing the union.

The breakup of the European Union isn't random or scattered: It's happening along distinct lines.

<a class="connectedContentTrigger" href="/article/poland-takes-new-direction" data-nid="236462" type="On Geopolitics" title="Poland Takes a New Direction" data-timestamp="1450771209">Warsaw will take new steps to increase its control</a>&nbsp;over Poland&#39;s political system and economy, which will lead to new frictions with the West. During the quarter, the Polish government will introduce a special tax on supermarkets, a sector with significant foreign investment. Warsaw&#39;s populist moves will also polarize Polish society, and anti-government protests during the quarter will be renewed. But the opposition is weak, and the current government will remain in control.As the NATO summit approaches in July, Warsaw will continue to demand a stronger military presence by the alliance in Eastern Europe. The Polish government will also look for more political cooperation from fellow members of the Visegrad Group, which also includes Hungary, the Czech Republic and Slovakia. Poland will seek to coordinate its position on EU issues with that group.Serbia will hold elections April 24, a vote that probably will not bring significant changes to the country&#39;s foreign policy. The next administration in Belgrade will not change Serbia&#39;s intent to join the European Union while simultaneously protecting ties with Moscow at a time of heightened EU-Russian tensions.During the final weeks of the quarter, debate over the status of EU sanctions on Russia will grow louder. Some EU members, such as Italy and Hungary, will send signals suggesting that sanctions may not be extended when they expire in late July. But the European Union is not likely to lift sanctions in the second quarter, and will in fact probably keep them in place at least until the end of the year.

EU: Regional Blocs

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. 

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.

This quarter will be defined by Russia&#39;s efforts to reshape the Syria crisis and, relatedly, to negotiate away EU sanctions. As&nbsp;<a class="connectedContentTrigger" href="/article/even-russians-withdraw-their-legacy-syria-remains" data-nid="269434" type="Assessments" title="Even As Russians Withdraw, Their Legacy in Syria Remains" data-timestamp="1458336140">Russia draws down its forces in Syria</a>&nbsp;and as the Geneva talks on the conflict continue, Moscow will attempt to look more like a partner for a&nbsp;<a class="connectedContentTrigger" href="/analysis/iraq-syria-battlespace-0" data-nid="222423" type="ZZZ_DEPRECATED_Analysis" title="A Creaky Cease-Fire Threatens to Unravel" data-timestamp="1483469421">Syrian solution</a>&nbsp;than like an aggressive interventionist. Russia still has significant influence in Syria politically and militarily, however, and it can ramp operations back up if it deems necessary. All of this will frame Russia&#39;s talks with the United States and the European Union. Above all, Russia is trying to change the atmosphere in the lead-up to two important events in the third quarter: the NATO summit in Warsaw and the EU sanctions decision.Any decision to lift or ease&nbsp;<a class="connectedContentTrigger" href="/article/ukraine-eu-sanctions-russia-hang-balance" data-nid="269438" type="Assessments" title="For Ukraine, EU Sanctions on Russia Hang in the Balance" data-timestamp="1458551730">EU sanctions</a>&nbsp;against Russia prior to their expiration at the end of July would require a unanimous vote from all 28 member states, which will not happen this quarter. But an extension of the sanctions once they expire would also require unanimity. Russia will use the next few months to lobby the countries that are most amenable to easing sanctions, such as&nbsp;<a class="connectedContentTrigger" href="/article/why-italy-seeks-cooperation-russia" data-nid="268507" type="Assessments" title="Why Italy Seeks Cooperation from Russia" data-timestamp="1425516078">Italy</a>, Hungary and Greece, to vote in Moscow&#39;s favor come July. Moscow is also inviting important EU leaders and European business elites to the St. Petersburg International Economic Forum in June&nbsp;for the same purpose.<a class="connectedContentTrigger" href="/article/germany-and-russia-west-standoff" data-nid="268637" type="Assessments" title="Germany and the Russia-West Standoff" data-timestamp="1430126113">Germany</a>&nbsp;is the country to watch. Voices within Germany, the European Union and the United States are calling on Berlin not to let Moscow off the hook for its actions in Ukraine.&nbsp;But Germany is also looking for a way to slow the flow of refugees from Syria, an issue Russia is tying to its withdrawal from Syria and to the Geneva talks. From bilateral visits to multilateral engagements in Minsk and Normandy,&nbsp;<a class="connectedContentTrigger" href="/article/ukraines-conflict-rumors-compromise-grow" data-nid="269334" type="Assessments" title="In Ukraine's Conflict, Rumors of Compromise Grow" data-timestamp="1455095722">diplomacy</a>&nbsp;between Russia and the European Union will dominate the second quarter. Russia will also maintain its presence in Ukraine, though no major military escalations &mdash; or political concessions, for that matter &mdash; are expected.In the meantime,&nbsp;<a class="connectedContentTrigger" href="/article/russia-targets-nato-military-exercises" data-nid="268542" type="Assessments" title="Russia Targets NATO With Military Exercises" data-timestamp="1426756613">Russia&#39;s saber-rattling toward the West</a>&nbsp;is likely to rise leading up the NATO summit, despite the drawdown of forces in Syria. Russia&#39;s threats will be motivated by countries such as&nbsp;<a href="/article/poland-vanguard-central-and-eastern-europe">Poland</a>, Romania and the Baltic states, which are pushing for permanent forces and an increased NATO presence in their regions.<a class="connectedContentTrigger" href="/article/russia-japan-ideal-time-warm-relations" data-nid="269004" type="Assessments" title="Russia, Japan: An Ideal Time to Warm Relations" data-timestamp="1443037568">Russia and Japan</a>&nbsp;will hold high-level meetings and summits this quarter in what will appear to be a warming relationship. But Russia will not budge on the issue of the disputed Kuril Islands, and Japan will probably not lift sanctions until others (such as the European Union) do. Moscow will invite Tokyo to participate and invest in some large investment projects, particularly in energy, along the Arctic and in the Far East. The United States is pressuring Japan to keep its money and technology out of Russia, but Japan seems open to finding compromise on economic matters this year.

Echoes of the Cold War

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 Kremlin&#39;s plan to stave off economic crisis is slated to go into effect during this quarter. The plan includes increased state investment into the Russian regions, the automotive sector and the banks. At the same time, the Kremlin will likely enact&nbsp;<a class="connectedContentTrigger" href="/article/russia-defense-cuts-were-inevitable" data-nid="269408" type="Assessments" title="In Russia, Defense Cuts Were Inevitable" data-timestamp="1457686811">more budget cuts</a>, and some large firms can be expected to sell assets at home and abroad. Though the Kremlin will move forward with&nbsp;<a class="connectedContentTrigger" href="/article/russia-state-firms-will-stay-public-now" data-nid="269309" type="Assessments" title="In Russia, State Firms Will Stay Public for Now" data-timestamp="1454058014">plans to privatize</a>&nbsp;some firms, such as Russian Helicopters and Alrosa, it will still struggle to do the same with larger firms, such as energy giant Rosneft. The most important privatization to watch this year concerns energy firm Bashneft; Lukoil may be looking to challenge Rosneft for the firm&#39;s acquisition, sparking a&nbsp;<a class="connectedContentTrigger" href="/article/rough-road-ahead-russias-energy-giants" data-nid="269059" type="Assessments" title="A Rough Road Ahead for Russia's Energy Giants" data-timestamp="1444986997">battle between the energy giants</a>&nbsp;that would require the intervention of the Kremlin. Moscow will also debate whether to curb Gazprom&#39;s domestic and export pipeline monopolies, though it is unclear if a decision will be made on the issue this quarter.Meanwhile, the Kremlin will prepare for parliamentary and regional elections that will be held in the third quarter. The Kremlin is designing deals with opposition groups to try to bolster ruling United Russia&#39;s position&nbsp;come September, pressuring (and possibly reshuffling) the governors, and circumventing plans for protests. The Kremlin&#39;s biggest conundrum this quarter will be what to do with Chechen President Ramzan Kadyrov, who announced in the first quarter that he&nbsp;<a class="connectedContentTrigger" href="/article/weighing-chechnyas-presidential-contenders" data-nid="269384" type="Assessments" title="Weighing Chechnya's Presidential Contenders" data-timestamp="1456909247">will not seek re-election</a>. Thus far, it looks as though Kadyrov&#39;s announcement was intended to force Russian President Vladimir Putin to give him support and a mandate to continue ruling Chechnya.

Russia's Internal Struggle

For proof that the Cold War never fully died, look no further than Ukraine, the site of a much broader standoff between the West and Russia. After the Euromaidan uprising of 2014, protesters replaced a government allied with Moscow with one allied with the West — an act to which Russia responded by annexing Crimea and by supporting separatist rebels in eastern Ukraine. The West has since levied sanctions against Russia. The government in Kiev is still viable for now, but security, economic and political support from the West will ultimately determine whether Ukraine can stay intact.

For proof that the Cold War never fully died, look no further than Ukraine, the site of a much broader standoff between the West and Russia.

For Ukraine, a major political shake-up is probable this quarter (and sooner rather than later), including overhauls of the Cabinet and ruling coalition, though early elections are unlikely to be called or held. Despite surviving a no-confidence vote in the first quarter,&nbsp;<a class="connectedContentTrigger" href="/article/ukraines-prime-minister-fights-his-position" data-nid="269358" type="Assessments" title="Ukraine's Prime Minister Fights for His Position" data-timestamp="1455872420">Prime Minister Arseniy Yatsenyuk</a>&nbsp;is likely to step down in favor of a new government led by parliamentary speaker Volodymyr Groysman. As long as early elections are avoided, much-needed financial assistance from the International Monetary Fund is likely to resume this quarter, and Ukraine should stay financially afloat.Given&nbsp;<a class="connectedContentTrigger" href="/article/ukraines-political-volatility-extends-beyond-kiev" data-nid="269372" type="Assessments" title="Ukraine's Political Volatility Extends Beyond Kiev" data-timestamp="1456395310">Ukraine&#39;s political volatility</a>, Kiev is unlikely to follow through on key political aspects of the Minsk agreement, such as granting autonomy to the separatist regions and recognizing elections in the Donbas region. The conflict in eastern Ukraine is not going away, though major offensives by the separatists are unlikely. Kiev will continue to confront&nbsp;<a class="connectedContentTrigger" href="/article/ukraine-separatists-are-running-out-reasons-not-fight" data-nid="269127" type="Assessments" title="In Ukraine, Separatists Are Running Out of Reasons Not to Fight" data-timestamp="1447416823">pro-Russia separatists</a>&nbsp;on one hand and far-right ultranationalist groups on the other, but the Ukrainian government will not fall.

The Ukraine Conflict

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.

The ripple effects of the standoff in Ukraine between Russia and the West will continue to manifest across the periphery of the former Soviet Union. In&nbsp;<a class="connectedContentTrigger" href="/article/east-and-west-belarus-plays-both-sides" data-nid="269350" type="Assessments" title="With the East and West, Belarus Plays Both Sides" data-timestamp="1455699652">Belarus</a>, the government will deepen economic ties with the West to offset lingering financial issues, but it will&nbsp;<a class="connectedContentTrigger" href="/article/russia-can-no-longer-afford-buy-allies" data-nid="269368" type="Assessments" title="Russia Can No Longer Afford to Buy Allies" data-timestamp="1456222510">maintain strategic military and security ties</a>&nbsp;with Russia.&nbsp;<a class="connectedContentTrigger" href="/article/moldova-outsize-significance-small-country" data-nid="269304" type="Assessments" title="Moldova: The Outsize Significance of a Small Country" data-timestamp="1453899246">Moldova</a>, which has been in the midst of a political standoff between pro-Russia opposition parties and the pro-EU government, will stabilize somewhat in the quarter. The frequency of anti-government protests will drop off, but Moldova&#39;s foreign policy will remain deadlocked. The&nbsp;<a class="connectedContentTrigger" href="/article/poland-and-baltics-find-new-energy-options" data-nid="269056" type="Assessments" title="Poland and the Baltics Find New Energy Options" data-timestamp="1444900539">Baltic states will keep pursuing alternative energy sources</a>&nbsp;and will diversify away from Russia while seeking a stronger commitment from NATO, but no permanent NATO presence will be established in the area this quarter.In the&nbsp;<a class="connectedContentTrigger" href="/article/caucasus-formidable-barrier-russian-expansion" data-nid="269269" type="Assessments" title="The Caucasus: A Formidable Barrier to Russian Expansion" data-timestamp="1452675606">Caucasus</a>,&nbsp;<a class="connectedContentTrigger" href="/article/what-new-georgian-government-can-and-cannot-change" data-nid="269264" type="Assessments" title="What a New Georgian Government Can and Cannot Change" data-timestamp="1452504649">Georgia</a>&nbsp;will build economic ties with Russia while looking for greater commitments from NATO in the lead-up to the Warsaw Summit; full NATO membership will elude Georgia this quarter and beyond, however. Azerbaijan will escalate the&nbsp;<a class="connectedContentTrigger" href="/article/azerbaijan-armenia-conflict-small-mountain-outpost-can-make-big-difference" data-nid="269323" type="Assessments" title="In the Azerbaijan-Armenia Conflict, a Small Mountain Outpost Can Make a Big Difference" data-timestamp="1454662826">Nagorno-Karabakh dispute</a>&nbsp;between itself and Armenia as it tries to divert attention from domestic economic difficulties. Still, major military hostilities are unlikely to break out.&nbsp;<a class="connectedContentTrigger" href="/article/russias-evolving-role-caucasus" data-nid="269402" type="Assessments" title="Russia's Evolving Role in the Caucasus" data-timestamp="1457514011">Russia</a>&nbsp;and Turkey will try to influence talks between the two countries through their respective allies.In&nbsp;<a class="connectedContentTrigger" href="/article/russia-re-evaluates-security-ties-central-asia" data-nid="269388" type="Assessments" title="Russia Re-Evaluates Security Ties in Central Asia" data-timestamp="1456996511">Central Asia</a>, economic issues stemming from falling remittances and growing unemployment will provoke protests and political&nbsp;<a class="connectedContentTrigger" href="/article/central-asia-different-kind-threat" data-nid="269243" type="Assessments" title="Central Asia: A Different Kind of Threat" data-timestamp="1451643310">instability in the region</a>. Kazakhstan and Uzbekistan have plans to alleviate the pressure by privatizing firms, but they will have trouble finding international buyers. The threat of militant spillover along the Afghanistan-Central Asia border will be a concern, so Russia and the United States will continue to compete for security partnerships in the region. Tajikistan will increase security cooperation in areas such as counterterrorism with other countries,&nbsp;<a class="connectedContentTrigger" href="/article/chinas-security-ambitions-south-and-central-asia" data-nid="269430" type="Assessments" title="China's Security Ambitions in South and Central Asia" data-timestamp="1458291605">especially China</a>,&nbsp;but will remain strategically aligned with Russia.

The Fight for Russia’s Borderlands

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.

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&#39;s priority in the second quarter will be to address the existential threat it perceives from the territorial expansion of the Kurdish People&#39;s Protection Units (YPG) in northern Syria. Despite&nbsp;<a class="connectedContentTrigger" href="/article/russia-leaves-syria-loyalists-offensive" data-nid="269422" type="Assessments" title="Russia Leaves Syria With Loyalists on the Offensive" data-timestamp="1458073883">its drawdown</a>, Russia can still block military advances &mdash; primarily through&nbsp;<a class="connectedContentTrigger" href="/article/even-russians-withdraw-their-legacy-syria-remains" data-nid="269434" type="Assessments" title="Even As Russians Withdraw, Their Legacy in Syria Remains" data-timestamp="1458336140">airstrikes</a>&nbsp;&mdash; which could still deter Turkey from sending forces into northern Syria to establish a safe zone. In lieu of a full intervention, Turkey will use the opening as an opportunity to, with Gulf Cooperation Council support, provide northern rebel forces with weapons, funds and artillery support to try to weaken the YPG. The Turks will also use&nbsp;<a class="connectedContentTrigger" href="/article/eu-and-turkey-reach-tenuous-immigration-agreement" data-nid="269433" type="Assessments" title="The EU and Turkey Reach a Tenuous Immigration Agreement" data-timestamp="1458333264">European anxiety over migrants</a>&nbsp;to exact concessions on funding, visa liberalization and EU accession.&nbsp;NATO will be willing to negotiate with Turkey about increasing the alliance&#39;s surveillance and air defenses on the Syria-Turkey border, but it will stop short of participating in a ground offensive. Meanwhile, the United States will keep working with the YPG to fight the Islamic State, particularly east of the Euphrates River. To mitigate Turkish concerns, Washington will step up its support for rebels under Ankara&#39;s influence as well.&nbsp;Russia will&nbsp;<a class="connectedContentTrigger" href="/analysis/iraq-syria-battlespace-0" data-nid="222423" type="ZZZ_DEPRECATED_Analysis" title="A Creaky Cease-Fire Threatens to Unravel" data-timestamp="1483469421">promote negotiations in Geneva</a>&nbsp;to show its utility in the Syrian crisis, but the talks will not bring about an end to the fighting this quarter. In recognition of the country&#39;s divisions, federalism will gain momentum as a potential model for a solution. Turkey will resist this solution and any plan that would give the Kurds more autonomy for fear that it would strengthen the YPG and its connections to the Kurdistan Workers&#39; Party. Russia and Iran can&nbsp;use Syrian parliamentary elections in April to reinforce their argument that a solution must come from the elected government in Damascus, even though the civil war and&nbsp;<a class="connectedContentTrigger" href="/article/why-syrias-government-has-survived-war" data-nid="269412" type="Assessments" title="Why Syria's Government Has Survived the War" data-timestamp="1457874099">President Bashar al Assad&#39;s government</a>&nbsp;will greatly restrict voter turnout.Loyalist forces, having consistently focused their efforts on the rebels, will now shift their operations toward retaking territory from the weakened Islamic State. The Syrian Democratic Forces will concentrate their efforts against the Islamic State in this quarter as well, with an emphasis on Raqqa and Deir el-Zour. Continued support from Turkey, the United States and the Gulf states to the rebels will not match Iranian and Russian involvement with and assistance to the loyalists, but it will be enough to help the rebels avoid defeat.&nbsp;Refugees fleeing from southern Syria will threaten&nbsp;<a class="connectedContentTrigger" href="/article/strangely-stable-kingdom-jordan" data-nid="269327" type="On the Road" title="The Strangely Stable Kingdom of Jordan" data-timestamp="1454853629">Jordan&#39;s security</a>. Though Jordan has tightened its border security with the help of the United States and other allies, the potential for militant attacks will continue to be a danger for the country.

Turkey's Resurgence

An unspoken social contract keeps the peace throughout much of the Middle East. The terms of the contract are simple: Governments give their constituents a high quality of life, and their constituents give their governments their absolute loyalty. But the economic model that contract depends on — a model that features heavy subsidies, bloated public sectors and high commodities exports — has run its course. Thanks in part to low oil prices, governments have been forced to cut expenditures, raise taxes and diversify their economies, creating conditions for political unrest in some of the world’s most autocratic countries.

Thanks in part to low oil prices, governments have been forced to cut expenditures, raise taxes and diversify their economies, creating conditions for political unrest in some of the world’s most autocratic countries.

<a class="connectedContentTrigger" href="/article/who-wins-and-who-loses-world-cheap-oil" data-nid="269259" type="Assessments" title="Who Wins and Who Loses in a World of Cheap Oil" data-timestamp="1452294595">Speculation will abound</a>&nbsp;ahead of the June OPEC meeting. Although OPEC members&nbsp;<a class="connectedContentTrigger" href="/article/tempered-expectations-after-oil-output-agreement" data-nid="269349" type="Assessments" title="Tempered Expectations After an Oil Output Agreement" data-timestamp="1455647149">may agree to freeze production</a>&nbsp;at already high levels, some of the largest producers &mdash;&nbsp;Saudi Arabia, the United Arab Emirates, Kuwait and Qatar&nbsp;&mdash;&nbsp;will not cut production to stabilize prices. Moreover, another of the major producers,&nbsp;Iran, will not freeze or cut production now that sanctions have been eased. In fact, Iranian production will gradually rise throughout the quarter, and by year&#39;s end it will exceed pre-sanction production levels by 250,000-500,000 barrels per day. Saudi Arabia and its Gulf allies will prefer to see a market correction play out in the next few months.<a class="connectedContentTrigger" href="/article/saudi-arabia-palace-intrigue-time-transition" data-nid="236469" type="On Geopolitics" title="Saudi Arabia: Palace Intrigue at a Time of Transition" data-timestamp="1452585613">Saudi Arabia</a>&nbsp;and the&nbsp;Gulf countries&nbsp;will slowly and carefully unveil economic structural reforms throughout the quarter.&nbsp;The effects of subsidy pullbacks will be most visible in Bahrain and Oman. Though balancing controls, such as cash payments, will shield locals from the harshest effects, some social unrest is expected. In Bahrain, security forces &mdash; with Saudi and Gulf Cooperation Council (GCC) support &mdash; are well prepared to keep widespread unrest at bay should it start up in poorer or minority neighborhoods.Financially, most GCC states will pursue international financing this quarter. Saudi Arabia, Kuwait and Qatar are all seeking billions of dollars to cushion the outflows from their reserves. Bahrain just canceled a bond issuance after S&amp;P downgraded the country&#39;s debt level, so it is unlikely to try to issue another bond in the next few months, instead relying on Saudi Arabia for any immediate financial and security needs. A June GCC meeting will conclude discussions on the potential implementation of a value-added tax in 2018, setting a new precedent for the Gulf states, which are all reluctantly beginning the process of revising social contracts with their citizens.In Iran, President Hassan Rouhani will use the momentum he gained from recent <a class="connectedContentTrigger" href="/article/iran-fragile-coalition-defeats-hard-liners" data-nid="269383" type="Assessments" title="In Iran, a Fragile Coalition Defeats the Hard-Liners" data-timestamp="1456875281">parliamentary and Assembly of Experts elections</a>&nbsp;to formalize parts of the economic stimulus package proposed in October. Negotiations with foreign oil companies over the next few months could lead to the signing of&nbsp;large investment deals into Iran&#39;s oil sector. The Oil Ministry has set a target of a full year to sign all the contracts it seeks &mdash; contracts that could be worth $10 billion to $15 billion.

Broken Contracts in the Middle East

Oil made Saudi Arabia rich, but it also stunted its ability to diversify its economy — much more so than its fellow members of the Gulf Cooperation Council. The government in Riyadh has therefore embarked on an ambitious reform plan to lure investment to the private sector — investment it will sorely need to ensure the comfort levels to which its citizens have grown accustomed. But the plan, as envisioned, is untenable, mostly because the government has set an unrealistic timetable for its completion. But all the time in the world wouldn’t make it any less difficult to recruit and train native workers and attract foreign businesses.

Oil made Saudi Arabia rich, but it also stunted its ability to diversify its economy.

With its financial pressures&nbsp;mounting, Riyadh will want to ensure that&nbsp;<a class="connectedContentTrigger" href="/article/saudi-friendship-comes-cost" data-nid="275259" type="Reflections" title="Saudi Friendship Comes at a Cost" data-timestamp="1456281288">its investments are buying it the intended influence</a>&nbsp;in the region. As demonstrated in Lebanon in the first quarter, Saudi Arabia is signaling to current and potential allies that it will financially reward only those countries that align their policy with its own. For countries as fragmented as Lebanon, this sort of fundamental shift in policy is impossible. Saudi Arabia will not abandon proxy&nbsp;<a class="connectedContentTrigger" href="/article/iran-helping-lebanon-may-not-be-worth-cost" data-nid="275263" type="Reflections" title="For Iran, Helping Lebanon May Not Be Worth the Cost" data-timestamp="1456887848">battlegrounds such as Lebanon</a>, but it will work to develop new and more reliable allies; in Lebanon, it will try to raise a Sunni militia to counterbalance Hezbollah. Meanwhile, to prevent Iran from exploiting Riyadh&#39;s absence,&nbsp;the United States and France will fill any void left by the Saudis in Lebanon when it comes to military assistance and financial aid. Other Gulf states, such as Kuwait, will opt for nuance over the Saudis&#39; aggressive approach to relations with Lebanese factions. The intensifying Iranian-Saudi competition there ensures that the political stalemate over Lebanon&#39;s presidency will persist through the quarter.

The Saudi Survival Strategy

Though Yemen has always suffered from instability, its recent history has been especially violent. What started as protests during the Arab Spring eventually developed into open warfare. One president was replaced by another. Cease-fires were declared but later ignored. The economy is in shambles. Water is scarce. The extremist groups that thrive in such an environment are now the object of U.S. counterterrorism policy, not to mention a problem for Saudi Arabia, which is more exposed to spillover violence and displaced refugees than any other country. Saudi Arabia has no choice but to shoulder the burden of the conflict, even if its policies for doing so clash with those of its erstwhile allies.

Yemen has always suffered from instability, but its recent history has been especially violent.

In Yemen, there is a possibility for a truce between the Saudis and the Houthi militants along the northern border&nbsp;to turn into something more. The Saudi-led coalition&#39;s successful advance into the outskirts of Sanaa has tilted the balance toward a negotiated resolution, with new talks set to start in Kuwait in mid-April. But whatever peace deal could emerge this quarter, complete peace in Yemen will not be the result. Recent military movements and diplomatic actions have laid bare the rifts in the alliance between the Houthis and the&nbsp;forces loyal to Ali Abdullah Saleh; the former president will probably be left out of any political solution that should emerge. Were that to happen, Saleh&#39;s fighters would remain as opponents of the Saudi coalition&#39;s forces, but they would be too weak to put up much resistance &mdash; on the battlefield or at the negotiating table.&nbsp;An end to the Saudi coalition&#39;s campaign would do nothing to ease fighting between southern separatists, pro-government forces and extremist elements all vying for control in Yemen, particularly in the south. The Yemeni government will find it difficult to consolidate its control. Stronger than before, the southern separatists will stand firm against the central government. Meanwhile,&nbsp;<a class="connectedContentTrigger" href="/article/jihadism-yemen-long-history-long-future" data-nid="269409" type="Assessments" title="Jihadism in Yemen: A Long History, a Long Future" data-timestamp="1457687708">the threat from jihadist factions</a>&nbsp;affiliated with the Islamic State or al Qaeda will persist regardless of any peace agreement. Considerable time will be needed to repair the Yemeni security apparatus and rebuild its cooperation with foreign governments, which had been and will be instrumental in containing the militant threat.

The Yemen Civil War

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.

Preparations for a long-awaited&nbsp;<a class="connectedContentTrigger" href="/article/retaking-mosul" data-nid="268489" type="Assessments" title="Retaking Mosul" data-timestamp="1424771931">offensive in Mosul</a>&nbsp;will continue to take shape; Iraqi and international coalition forces have been increasing their numbers in the city&#39;s surrounding areas. Iraqi security forces will make gains in Anbar province as they proceed toward Fallujah, parts of which they could even capture&nbsp;this&nbsp;quarter. The participation of Shiite militias in these efforts will grate on local Sunni forces, particularly in Diyala province, where there will be violent clashes.&nbsp;<a class="connectedContentTrigger" href="/article/iraq-braces-protests-capital" data-nid="269429" type="Assessments" title="Iraq Braces for Protests in the Capital" data-timestamp="1458259916">Demonstrations against the government of Prime Minister Haider al-Abadi</a>&nbsp;will probably escalate and could lead to calls for the president&#39;s resignation, while the prime minister struggles to implement anti-corruption reforms and to install a technocratic Cabinet. Should protests overwhelm the government, Iran will not hesitate to ditch al-Abadi and support popular replacements. Tehran will be actively shoring up alternative Shiite leaders to preserve its influence in Iraq and will work closely with political allies such as the Badr Organization to find a replacement premier who is both popular in Iraq and is pro-Iran. At the same time, Baghdad and Tehran will both be hesitant to back a candidate who would lead Western partners to withdraw their security support for Iraq. In addition, Tehran will insist on the involvement of the Shiite Popular Mobilization Forces in preparing for the offensive in Mosul.Social unrest will get worse for the Kurdistan Regional Government, which is&nbsp;<a class="connectedContentTrigger" href="/article/why-iraqi-kurdistan-struggling-pay-its-bills" data-nid="269307" type="Assessments" title="Why Iraqi Kurdistan Is Struggling to Pay Its Bills" data-timestamp="1453973407">struggling to pay</a>&nbsp;public sector employees. President Massoud Barzani will try to deflect attention from the protests and the challenges of his political rivals by calling for an independence referendum, but his calls will do little to reduce tensions.&nbsp;<a class="connectedContentTrigger" href="/article/capitalizing-kurds" data-nid="269351" type="Assessments" title="Capitalizing on the Kurds" data-timestamp="1455700566">Turkey</a>, though unnerved by the referendum talk, will continue its relationship with Barzani and will work to advance a natural gas pipeline project linking the Kurdistan Regional Government and Turkey. As Turkey&#39;s own military campaign against the Kurdistan Workers&#39; Party militant group persists, tension between the Kurdish militants and Barzani&#39;s Kurdistan Democratic Party in northern Iraq will also grow and will raise the threat of attacks on the Kurdistan Regional Government-Turkey oil pipeline.

Rebalancing Power in the Middle East

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.

Continued instability in Libya will be detrimental to the country&#39;s neighbors in North Africa. Even if the House of Representatives in Tobruk approves the&nbsp;<a class="connectedContentTrigger" href="/analysis/powerful-show-support-house-representatives" data-nid="222906" type="ZZZ_DEPRECATED_Analysis" title="A Powerful Show of Support for the House of Representatives" data-timestamp="1484169510">Government of National Accord</a>, a U.N.-backed unity government plan, intense competition among political factions will continue to wrack the country.&nbsp;<a class="connectedContentTrigger" href="/article/west-moves-discreetly-libya" data-nid="269404" type="Assessments" title="The West Moves Discreetly in Libya" data-timestamp="1457563427">The foreign military presence in Libya</a>&nbsp;will expand to combat concentrations of the Islamic State through airstrikes and on-the-ground training and advising, particularly from U.S., French, Italian and British special operations forces. Continued political jockeying between the House of Representatives, the General National Congress in Tripoli, the unity government and the &quot;Libya-Libya&quot; dialogue means there could eventually be three or four governments in Libya claiming legitimacy in this quarter.Tunisia will request further assistance from the United Kingdom and the United States in&nbsp;<a class="connectedContentTrigger" href="/article/tunisia-struggles-militants" data-nid="268802" type="Assessments" title="Tunisia Struggles With Militants" data-timestamp="1435569340">securing its borders</a>&nbsp;from the Islamic State threat emanating from Libya. It will continue to court European, U.S. and Gulf financial support to stem domestic unrest, and it will be successful in containing protests this quarter. The surge of resignations from President Beji Caid Essebsi&#39;s ruling party, Nidaa Tounes, has subsided, and Nidaa Tounes is emerging from the ashes as a new party, Nidaa Al Horra, led by parting Secretary-General Mohsen Marzouk. The party and other emerging coalitions will gain a lot of attention and followers, while police and civilian protests against unemployment and low salaries will continue.While Tunisia is fracturing, Algeria is consolidating. Security and constitutional reforms aimed at strengthening the role of civilian government and reducing the power of the presidency will proceed. Political opposition to these changes will be contained. Algeria will try to secure partners for its energy exports and reassure allies and trade partners of the stability of&nbsp;<a class="connectedContentTrigger" href="/article/algerias-president-crafts-succession-plan" data-nid="269235" type="Assessments" title="Algeria's President Crafts a Succession Plan" data-timestamp="1451431220">the president&#39;s political succession</a>. Finally, the unveiling of a revised economic plan and a bond sale is expected in April in an effort to shore up the country&#39;s stagnant economy.

The Difficulties of North African Reform

There is a higher threat of social unrest in Egypt in the second quarter than there was in the first quarter&nbsp;because of the country&#39;s&nbsp;<a class="connectedContentTrigger" href="/article/dollar-crisis-threatens-egypts-economy" data-nid="269407" type="Assessments" title="A Dollar Crisis Threatens Egypt's Economy" data-timestamp="1457602205">severe dollar shortage</a>&nbsp;and import interruptions. On the heels of currency devaluation, Egypt will also experience a rise in inflation. We expect to see greater counterinsurgency training and a surge of security forces in the Rafah-El Arish-Sheikh Zuweid triangle to counter&nbsp;<a class="connectedContentTrigger" href="/article/egypt-islamic-state-one-threat-among-many" data-nid="268821" type="Assessments" title="For Egypt, Islamic State One Threat Among Many" data-timestamp="1436259719">increasing militancy in the Sinai Peninsula</a>.With Saudi prodding, incremental progress will likely be made in the&nbsp;<a class="connectedContentTrigger" href="/article/sunni-alliance-creates-strange-bedfellows" data-nid="269293" type="Assessments" title="A Sunni Alliance Creates Strange Bedfellows" data-timestamp="1453453362">Egyptian-Turkish rapprochement</a>&nbsp;this quarter. Egypt&#39;s presence at the Organization of Islamic Cooperation summit in Istanbul in April will be a step in this direction. The gradual Egyptian-Turkish warming will take place at the same time&nbsp;<a class="connectedContentTrigger" href="/article/middle-east-long-dormant-alliance-re-emerges" data-nid="269392" type="Assessments" title="In the Middle East, a Long Dormant Alliance Re-Emerges" data-timestamp="1457083806">Turkey is slowly improving its relations with Israel</a>. Diplomatic relations between the two countries could be restored in the second quarter. As part of the negotiation, Turkish aid will be delivered to Gaza in the easing of the Gaza blockade and Fatah will likely regain control over the Rafah border crossing.

The Eastern Mediterranean

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. 

In China, where efforts were already underway to rebalance the economy, an economic slowdown will pressure authorities to implement structural reforms. But authorities will meet resistance on both local and central levels, and how to pass reforms while mitigating short-term negative effects will be an important question for Beijing. The result will be inconsistent policy-making&nbsp;in&nbsp;planned economic policies such as industrial overcapacity cuts and yuan internationalization. President Xi Jinping and his loyalists will seek to&nbsp;<a class="connectedContentTrigger" href="/article/raising-stakes-xis-consolidation-power" data-nid="269365" type="Assessments" title="Raising the Stakes in Xi's Consolidation of Power" data-timestamp="1456132505">tighten their grip on power and on the government&#39;s propaganda system</a>, emphasizing the need for officials to toe the Party line and for local governments to address socio-economic issues.Efforts to reach the targets set at December&#39;s Central Economic Work Conference will begin in earnest following the passage of the new government budget at the recent National People&#39;s Congress. To begin with, authorities will proceed with cuts to production and overcapacity in heavy industries, particularly steel and coal. Layoffs, furloughs and labor demonstrations will follow, especially in provinces that host major concentrations of coal and steel production, mainly in northern China. Meanwhile, heavily indebted local governments will bargain with the central government to foot a larger share of the fiscal burden of managing the resulting unemployment. Local administrations will also compete against one another for a larger share of central government resettlement funds, worth 100 billion yuan (around $15.5 billion), that will be allocated over the next two years. All the jockeying at the local level will make implementation of capacity trimming and worker relocation highly uneven. Jobs are likely to be slashed whether or not the policies to address unemployment are fully implemented.Moves to reduce overcapacity will also encourage the expansion of local government bond programs inaugurated a year ago. The economic fundamentals of most local governments do not appear to have changed much since the rollout of the debt swap initiatives in 2015, so commercial banks likely will again be compelled to buy these bonds.China will also begin to implement a program to allow banks to swap nonperforming loans for equity. This will reduce bankruptcies and clean up the balance sheets of underperforming companies. The program will also enable some &quot;zombie companies&quot; to take out more loans to stay afloat in the near term, partially mitigating rising unemployment in China but also increasing the long-run stresses on the country&#39;s financial institutions.Meanwhile, local authorities in third- and fourth-tier cities, home to 70 percent of China&#39;s unsold housing stocks, will lower barriers for home purchases in order to reduce excess inventories. Demand will be low, however, as China&#39;s smaller cities face an uphill battle in convincing citizens to buy surplus housing. Moreover, lower purchasing barriers will encourage property developers to continue housing construction in these cities, albeit at a slower pace than in previous years. Meanwhile, looser restrictions on home-buying will also fuel property speculation in first-tier cities (long seen as safe investments), necessitating efforts to manage overheated local property markets through new regulatory measures, such as restrictions on the use of loans for housing down payments.The economic slowdown will also prompt China to prop up its credit market through monetary easing to stimulate economic growth. However, the move will undermine Beijing&#39;s longer-term effort to reduce growing corporate debt levels. Defaults on bond repayments, especially in the&nbsp;metals, mining, property, transport and construction sectors, will climb during the quarter. Overall, the government will pump credit to allow some companies to refinance and stay afloat, while also tolerating a bigger share of defaults to help address the debt issue.Beijing&#39;s focus on keeping the yuan stable, internationalizing the currency and opening its markets to foreign capital will run up against its interest in stemming capital outflows. Inconsistent policy will be unavoidable. In the second quarter, authorities are unlikely to allow a significant devaluation of the yuan, considering how two previous major devaluations negatively affected domestic and global markets &mdash; not to mention concerns that another steep drop in the yuan would accelerate capital outflows just when Beijing is trying to signal stability in policy. The country&#39;s substantial exchange reserves will provide the government a cushion with which to maintain the currency at acceptable levels.China will work to consolidate its regulatory structure in the financial system, either under the Chinese central bank or via a new regulator merging the China Securities Regulatory Commission, the China Banking Regulatory Commission and the China Insurance Regulatory Commission. The effort will attempt to make Beijing&#39;s policies more coherent and prevent repeats of its recent struggles to stabilize the stock markets. The targeting of the financial sector in the ongoing anti-corruption campaign may have quieted overt resistance to regulatory consolidation, and there may be a nominal merger of its regulators during the quarter. Nonetheless, the logistical difficulties of untangling overlapping fiefdoms will hinder China&#39;s ability to coordinate its economic policies.

The pursuit of economic stability will be accompanied by continued efforts by the Communist Party to centralize power, both to manage social tensions and to intimidate upstart factions vying for power ahead of the 2017 Party Congress. For example, the Party will use its latest wave of corruption investigations (government propaganda organs are prime targets) and the implementation of tough new restrictions on foreign nongovernmental organizations to tighten its control over the news media, state-owned or otherwise, as well as social media.Neither China nor Taiwan will be interested in destabilizing their relationship while Taiwanese President-elect Tsai Ing-wen&#39;s administration is still trying to find its footing. Tsai will take office in May.

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.

The focus in Japan in the second quarter will center on preparations for the upper house elections in July. Security and economic issues will dominate the agenda; Prime Minister Shinzo Abe&#39;s administration is seeking a constitutional change to facilitate an expanded security role for Japan and is struggling to stimulate economic growth.The ruling coalition, led by Abe&#39;s Liberal Democratic Party, will attempt to build support to secure the two-thirds majority necessary to pass the constitutional amendment. Japan&#39;s Diet will also spend the quarter debating the&nbsp;<a class="connectedContentTrigger" href="/article/tpp-devil-details" data-nid="275182" type="Reflections" title="With TPP, the Devil Is in the Details" data-timestamp="1444092161">Trans-Pacific Partnership bills</a>&nbsp;submitted by the government in early March, potentially leading to ratification in the coming months. Meanwhile, the opposition, including a new party formed by the merger of the Democratic Party of Japan and the Japan Innovation Party, will coordinate efforts to try to deny the ruling coalition a supermajority in the upper house. Zeroed in on July elections, the Liberal Democratic Party will not want to do too much to fuel accusations that it is&nbsp;<a class="connectedContentTrigger" href="/article/japan-reconsiders-military-engagement-overseas" data-nid="268478" type="Assessments" title="Japan Reconsiders Military Engagement Overseas" data-timestamp="1424339862">flouting Japanese constitutional restraints on military action abroad</a>. It will also compel the central government to press local administrations to ramp up fiscal spending in an effort to spark short-term improvement in the economy, which will continue to sputter anyway because of the limited effectiveness of Abe&#39;s &quot;Abenomics&quot; agenda.Tokyo will feel pressure to undertake another&nbsp;<a class="connectedContentTrigger" href="/article/politics-japans-new-monetary-stimulus" data-nid="266845" type="Assessments" title="The Politics of Japan's New Monetary Stimulus" data-timestamp="1365417041">stimulus package</a>, given the failing monetary policy and the perceived need to rely on more government spending due to weak consumer spending. Pressures will mount for a second attempt to introduce negative interest rates in the second quarter, though such a cut would be unlikely to improve the economic situation.In May, Japan will host the G-7 summit, which will focus on the conflicts in Ukraine and Syria, security issues and tensions in Asia, and coordinating efforts to address the global economic slowdown. Ahead of the summit, Japan may try to bring together the G-7 members and Russia, potentially facilitating a visit by Russian President Vladimir Putin. Russia, a key party to efforts to resolve the conflicts in Syria and Ukraine, is also interested in attracting Japanese investment in Siberia. Tokyo appears open to these deals, but talks on a bilateral peace treaty are likely to remain gridlocked during the quarter.

A Japanese Awakening

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.

Tension will persist between North Korea on one side and South Korea, the United States and Japan on the other, with additional provocations by Pyongyang likely. In May, Kim Jong Un will preside over the Workers&#39; Party of Korea&#39;s first congress since the 1980s. Kim will probably outline new policies and initiatives that&nbsp;<a class="connectedContentTrigger" href="/article/policy-impact-north-koreas-latest-purge-and-execution" data-nid="267492" type="Assessments" title="The Policy Impact of North Korea's Latest Purge and Execution" data-timestamp="1386869333">mark the solidification of his and his party&#39;s rule</a>&nbsp;and resolve in the face of external pressure, such as the new U.N. sanctions. Kim will also appoint trusted aides to positions once held by caretaker officials chosen by his father&#39;s administration. The North Korean leader will probably take the opportunity to demonstrate the pre-eminence of the Workers&#39; Party over the military, whose power surpassed the party&#39;s during Kim Jong Il&#39;s rule. In the lead-up to the congress, China may begin to implement the newly passed U.N. sanctions more vigorously, reminding Kim of China&#39;s indispensability to North Korea. Nonetheless, Pyongyang has pledged new nuclear weapon and ballistic missile tests in spite of the new sanctions; it appears to have taken concrete steps to advance its nuclear weapons program, including by carrying out&nbsp;<a class="connectedContentTrigger" href="/article/north-korean-nuclear-ambitions-ride-missile-development" data-nid="269445" type="Assessments" title="North Korean Nuclear Ambitions Ride on Missile Development" data-timestamp="1458723617">re-entry simulations</a>. This increases the likelihood of additional nuclear and ballistic missile tests within the quarter, which may lead to more hostile relations with South Korea and the United States.In South Korea, meanwhile, the fragmented political opposition will struggle to defeat the ruling conservative Saenuri Party in parliamentary elections in April. Saenuri remains unpopular, however, and may be the target of labor unrest in the wake of the closure of the Kaesong industrial complex and restructuring attempts in sectors such as shipbuilding. The decline in exports over the past 14 months will sustain pressure on South Korean exporters, though low oil prices will offset some of the related losses. Compared with China or Japan, South Korea enjoys relative economic stability and has room to initiate rate cuts without going into negative territory, which should make it easier to push for structural reforms in the next few months. But progress will be slow given the controversial nature of the proposed reforms, including reduced state support for the shipbuilding and construction industries and efforts to develop the services sector and small and medium-sized businesses. Labor reforms will especially be at risk of generating stiff opposition; though related protests have subsided in recent weeks, they are likely to grow in frequency and size closer to the April polls.

Coping With a Nuclear North Korea

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.

Across Southeast Asia, economies will continue to feel the pain of China&#39;s economic slowdown, which shows no signs of abating during this quarter. China&#39;s dumping of exports will pressure regional exporters and may emerge as a stronger point of friction. That said, the downward pressure on the yuan will be paired with similar pressure on Southeast Asian currencies, helping the others stave off competition from Chinese exports. Meanwhile, Japanese and Chinese firms will maintain their brisk pace of investment in the region. Recipients of that investment will play Beijing and Tokyo off one another and explore what opportunities the newly launched,&nbsp;<a class="connectedContentTrigger" href="/article/chinas-new-investment-bank-premature-prophecy" data-nid="236355" type="Contributor Perspectives" title="China's New Investment Bank: A Premature Prophecy" data-timestamp="1429689611">China-led Asian Infrastructure Investment Bank</a>&nbsp;might bring. However, the bank probably will not begin operations in earnest &mdash; certainly not at full scale &mdash; in the next three months. Some large infrastructure projects in Southeast Asia will be delayed until the bank is fully functional in order to secure more favorable terms. Indonesia and others are already submitting proposals for loans from the new bank, with Jakarta in particular looking for additional sources of funding to better shield itself from weak global demand and China&#39;s economic slowdown.As the region copes with economic uncertainties, members of the Association of Southeast Asian Nations (ASEAN) will work to realize the opportunities of the&nbsp;<a class="connectedContentTrigger" href="/article/limits-soft-power-south-china-sea" data-nid="269139" type="Assessments" title="The Limits of Soft Power in the South China Sea" data-timestamp="1447838106">newly launched ASEAN Economic Community</a>&nbsp;and of a recently created trade mechanism with the United States. For example, Washington and ASEAN will start the process of establishing three regional centers (in Bangkok, Jakarta and Singapore) to enhance trade with and within the regional bloc and to launch technical discussions with members considering joining the Trans-Pacific Partnership. These efforts will focus on organizational issues, however, and no immediate, significant impact on trade facilitation is likely in this quarter.

Southeast Asia: Burdened by Consensus

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

In the South China Sea, two U.S. freedom of navigation operations are scheduled to take place in the quarter. U.S. naval ships will sail near disputed,&nbsp;<a class="connectedContentTrigger" href="/article/glimpse-chinas-military-presence-south-china-sea" data-nid="269357" type="Assessments" title="A Glimpse Into China's Military Presence in the South China Sea" data-timestamp="1455830963">Chinese-held islands</a>&nbsp;in a demonstration of Washington&#39;s commitment to protecting the sea&#39;s vital trade routes. Meanwhile, a&nbsp;<a class="connectedContentTrigger" href="/article/japan-wades-further-south-china-sea-dispute" data-nid="275234" type="Reflections" title="Japan Wades Further Into the South China Sea Dispute" data-timestamp="1452565972">Japanese P-3 Orion maritime patrol jet returning from anti-piracy missions</a>&nbsp;off the Horn of Africa is expected to take the opportunity to conduct joint exercises in the South China Sea with an unspecified Southeast Asian claimant to the waters. Beijing will also probably continue construction work on these islands to facilitate civilian flights to and from the islands later in the year. Each of these events will heighten tension in the region. With Japan&#39;s ruling party distracted by upper house elections, however, Tokyo will likely refrain from actions that would support the opposition&#39;s narrative that the prime minister is violating Japan&#39;s self-imposed constraints on military activities abroad. China, for its part,&nbsp;<a class="connectedContentTrigger" href="/article/new-high-us-china-military-ties" data-nid="269179" type="Assessments" title="A New High for U.S.-China Military Ties" data-timestamp="1449220524">will not want to jeopardize its invitation</a>&nbsp;to join the U.S.-led RIMPAC multilateral naval drills in June and July.The U.N.&#39;s Permanent Court of Arbitration in The Hague, which has been reviewing whether partially submerged features in the South China Sea controlled by China give the country exclusive maritime rights, is expected to rule against Beijing and in favor of the Philippines in May. China will not accept the ruling and may choose to assert its claims by deploying additional military assets or sending fishing vessels to the disputed areas. China may also begin testing military flights over the Spratlys. The United States will probably undertake at least one freedom of navigation operation after the tribunal ruling to demonstrate its support for the decision. Washington will also continue encouraging individual and joint patrols involving Australia, Japan and India in the waters, but progress will remain slow because of domestic political constraints in all three countries. The United States and Japan will also seek to conduct joint naval or coast guard drills with Southeast Asian claimant states and make progress on new defense equipment deals. For example, the United States and the Philippines will work toward holding joint patrols in the South China Sea, while a convoy of Japanese warships (including a submarine) will pay a &quot;good will&quot; visit to the Subic Bay naval base in the Philippines in April and will make the first-ever visit by Japanese warships to Vietnam&#39;s strategic port at Cam Ranh Bay.

Asia-Pacific: Among Great Powers

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

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.

Venezuela will become less politically stable in the coming months. During the second quarter, the Venezuelan opposition coalition will advance several legal and informal processes aimed at removing the president, including a recall referendum, a constitutional amendment and demonstrations. Institutions controlled by the ruling party&nbsp;could greatly delay the referendum and amendment. But even if the opposition fails to oust&nbsp;<a class="connectedContentTrigger" href="/article/how-venezuela-would-remove-its-president" data-nid="269369" type="Assessments" title="How Venezuela Would Remove Its President" data-timestamp="1456307869">Venezuelan President Nicolas Maduro</a>, he may not be safe from a growing movement within his own party.After successfully making debt payments due in the first quarter, Caracas will have two more quarters in which to raise and save as much cash as possible ahead of large debt payments due in October and November. Venezuela will probably continue attempting one-off measures (selling more gold or negotiating an individual debt refinancing deal, for example) to raise the cash and will try to restructure its debt that is due over the next few years. Even if Caracas manages to raise additional funds, avoiding default will be difficult given the current economic stresses. The country&#39;s already high inflation will worsen in the second quarter, and food shortages will occur throughout the country. Small demonstrations will persist nationwide in protest of inflation, shortages, rising public transit costs, and deficient public electric and water service.<div>If the demonstrations against Maduro become widespread, they could trigger the deployment of the armed forces to restore order, increasing the likelihood of violence between the military and civilians.</div>

Venezuela's Unraveling

After five decades of conflict, the Colombian government is making peace with insurgents of the Revolutionary Armed Forces of Colombia and the National Liberation Army. And although the peace agreements they have forged will effectively reduce the threat of militancy and organized crime in the country, other illicit activities such as drug trafficking and illegal mining will continue largely unabated.

After five decades of conflict, Colombia is making peace with its rebel groups.

The Colombian government and the rebel Revolutionary Armed Forces of Colombia (FARC) will continue peace discussions aimed at reaching a final agreement this year, but numerous factors could delay a deal. Key aspects of the agreement have yet to be agreed upon. Even if a deal were signed in the second quarter, it would not be implemented for months, and voters would need to approve it. The process of disarming and demobilizing the FARC will therefore drag out beyond the quarter.Meanwhile,&nbsp;<a class="connectedContentTrigger" href="/article/colombia-national-liberation-army-plans-peace" data-nid="269252" type="Assessments" title="In Colombia, the National Liberation Army Plans for Peace" data-timestamp="1451984405">the rebel National Liberation Army could begin its own peace talks</a>&nbsp;with the government in the second quarter if there are enough incentives for the group&#39;s breakaway units to join a negotiation. If it decides not to negotiate with the government, the group will miss its window, and Bogota will target it along with other criminal groups.

Colombian Peace Process

Mexico’s geography is a blessing and a curse. Its proximity to the United States has given it a rich, powerful and stalwart trading partner right across its northern border. But this has made Mexico dependent on the United States — vulnerable, in other words, to changes in U.S. policy. And changes over immigration and trade policies may well be in the offing. The more protectionist the United States becomes, the more it will aggravate tensions with Mexico. But ties between the two countries are simply too tight to unravel. North America will continue to thrive from its integration, of which Mexico is an important part.

Mexico's proximity to the United States has given it a rich, powerful and stalwart trading partner right across its northern border. But this has made Mexico dependent on the United States — vulnerable, in other words, to changes in U.S. policy.

Mexico&#39;s public finances will continue to feel the pressure of low oil prices. Major cost-cutting initiatives at state-owned energy firm Petroleos Mexicanos, such as firings and a slowdown in activities, will continue. But the diversified Mexican national economy will keep growing, albeit at a slower pace than in previous years.

The Importance of Mexico

During the second quarter, President Dilma Rousseff and former President Luiz Inacio Lula da Silva will try to fend off challenges to Workers&#39; Party rule from the opposition and from the ongoing&nbsp;<a class="connectedContentTrigger" href="/article/brazil-politics-policing-corruption" data-nid="269393" type="Assessments" title="Brazil: The Politics of Policing Corruption" data-timestamp="1457123100">Lava Jato criminal investigation</a>.Segments of the country&#39;s political opposition will keep pushing for Rousseff&#39;s impeachment. For Rousseff to face a real threat of impeachment, parts of the government&#39;s main coalition partner, the Democratic Movement Party of Brazil, and smaller parties in the ruling coalition would have to defect to the opposition, and her opponents would have to begin a concerted effort to remove her. The continued loyalty of Rousseff&#39;s coalition partners would make it difficult for any pro-impeachment camp to begin substantive discussions on her removal.Argentine debt negotiators and lawmakers will move to resolve the&nbsp;<a class="connectedContentTrigger" href="/article/argentina-emerges-financial-exile" data-nid="275260" type="Reflections" title="Argentina Emerges From Financial Exile" data-timestamp="1456366322">15-year impasse between Buenos Aires and its foreign creditors</a>. The Argentine legislature will vote on lifting a series of regulations and legislation collectively referred to as the &quot;lock law&quot; during the second quarter. Removing the lock law would enable Buenos Aires to offer its creditors a deal to restructure its debt payments. A deal on the debt payments, which Buenos Aires has been in default on for more than a decade, would grant Argentina increased access to foreign capital markets over the next few years. Whether the government can make payments to its creditors by April 14, the deadline given by the holdouts (creditors who opposed previous debt repayment negotiations and have only now reached a settlement with the Argentine government), will depend on the court ruling.After the Argentine congress clears the way for a debt agreement, a U.S. court must rule in Argentina&#39;s favor in a lawsuit brought by dissatisfied creditors. The court&#39;s decision is essentially the last hurdle Argentina must clear for its debt problems to be over. Meanwhile, a U.S. federal appeals court will rule in early April on lifting the ban on Argentine debt payments to creditors. If it lifts the ban, Argentina can once again access capital markets.At the same time, Argentine President Mauricio Macri&#39;s measures to reduce the central government&#39;s deficit, such as raising the price of electricity and natural gas, are likely to spur inflation as they are implemented. Though Argentina is implementing inflationary reforms slowly to reduce their effect on the population, the public will feel the effects of rising inflation in the second quarter.

Brazil and Argentina

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. 

India is its own worst enemy. The world’s largest democracy is not only a nuclear power but also one of its fastest growing economies, one that is supported by a massive labor pool flush with tech-savvy and English-speaking workers. And though this has created pockets of prosperity throughout the country, it ignores India’s high rates of poverty and corruption and inadequate infrastructure — problems that are difficult to solve with a political system as diffused, disruptive and bureaucratic as India’s. Leaders in New Delhi understand that economic growth is the key to absorbing the 12 million Indians who enter the job market every year, but growth is difficult when India’s services and manufacturing sectors are so vulnerable to workplace automation. As India tackles these domestic challenges, it will have the equally daunting foreign policy challenge of pursuing energy security and courting foreign investment while maintaining its nonaligned status.

Some problems are difficult to solve with a political system as diffused, disruptive and bureaucratic as India’s.

During the second quarter, social unrest will continue over the January suicide of University of Hyderabad student Rohith Vemula and the pending sedition case against student activist Kanhaiya Kumar. This will give the opposition Indian National Congress party ammunition to thwart Prime Minister Narendra Modi&#39;s land, labor and tax reform plans. Modi will be unable to overcome the challenge and get his goods and services tax passed&nbsp;before the end of the budget session on May 13.Instead, this quarter the prime minister will focus on what he can do: implementing popular measures in the $289 billion annual budget aimed at helping the country&#39;s rural agricultural sector. The measures would extend $130 billion in credit to farmers and set aside $16 billion to spend on job creation, farmers&#39; welfare and rural road construction. These are measures intended to win votes in this quarter&#39;s state assembly elections in Assam, West Bengal, Kerala, Tamil Nadu and Puducherry.India will become a full member of the Shanghai Cooperation Organization at the Tashkent summit in June, marking a step forward in the country&#39;s efforts to expand its economic footprint in Central Asia. Yet, progress toward growing this footprint will be slow given India&#39;s differences with Pakistan and difficulties in constructing trade routes through Afghanistan.&nbsp;Meanwhile, now that the Nepal-India border blockade has ended after five months, the two nations will begin to renew ties. The process will be complicated by Nepalese Prime Minister Khadga Prasad Sharma Oli&#39;s effort to strengthen relations with China during his state-level visit to Beijing in March.

India's Own Worst Enemy

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 precarious security situation in Afghanistan will deteriorate further as the Taliban launch their spring offensive. Helmand province will continue to see some of the fiercest clashes. Afghanistan, Pakistan, the United States and China will hold more talks as part of the Quadrilateral Coordination Group, but the intensified fighting will likely thwart the countries&#39; efforts to open negotiations with the Taliban. Even if the Taliban do agree to peace talks, the Quadrilateral Coordination Group&#39;s divisions, the mystery surrounding the fate of Taliban leader&nbsp;Mullah Akhtar Mansoor and the Taliban&#39;s insistence on pursuing negotiations solely through their political office in Qatar will limit the talks&#39; promise.

South Asian Militancy

In 1947, British India was partitioned into two independent states: India and Pakistan. Nearly seven decades later, the two countries — now both nuclear powers — are still fierce rivals. As Pakistan works to develop its tactical nuclear weapons, and as India seeks new means of deterring their development, South Asia will be uniquely vulnerable to the threat of military miscalculation. Pakistan’s ongoing struggle to rein in militants, some of whom have turned against the government in Islamabad, will only make matters worse. The ongoing spat over the disputed territory of Kashmir, meanwhile, will prevent New Delhi and Islamabad from normalizing ties. But though the prospect of conflict can never truly be ruled out, the states' mutual need for economic growth will temper their hostilities toward each another, much as it has for the past few years.

Nearly seven decades after gaining independence, India and Pakistan — now both nuclear powers — are still fierce rivals.

The slow pace of the India-Pakistan Comprehensive Bilateral Dialogue as seen in the first quarter will continue into the second quarter. Both countries will continue to argue over how to assign blame in the pending investigation into the Pathankot air force base attacks that took place in January. Militants will carry out sporadic attacks in Pakistan during the second quarter as the security situation in neighboring Afghanistan deteriorates. Some of the attacks will also be in response to the government&#39;s prosecution of the final phase of its anti-militant Operation Zarb-e-Azb in North Waziristan along the porous Afghan border. Like India, Pakistan will join the Shanghai Cooperation Organization at the Tashkent summit in June.Relations between Pakistan and Bangladesh will remain tense as Bangladeshi Prime Minister Sheikh Hasina continues to put dissidents on trial for war crimes that occurred during the 1971 war that transformed East Pakistan into Bangladesh. The ongoing spat will further undermine the economic integration at the heart of the South Asian Association for Regional Cooperation, which will host its annual meeting in Islamabad during the third quarter. Moreover, Jamaat-ul-Mujahideen Bangladesh will continue to wage sporadic attacks in Bangladesh.

The India-Pakistan Rivalry

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.

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 is planning to hold municipal elections between May and August, which will help shape the future direction of the African National Congress (ANC) as it approaches its next general party congress in 2017. President Jacob Zuma and the ANC are coming under fire from middle-class South Africans, and the Democratic Alliance, South Africa&#39;s primary pro-business opposition party, could win in key urban centers, such as Pretoria and Port Elizabeth. The ANC also faces attacks from the Economic Freedom Fighters, an upstart far-left party that appeals to the poor black majority in rural and semi-urbanized areas.The ANC fears that should it lose any of these municipalities, it will struggle to recover them. The next two quarters will make it possible to gauge the extent to which ANC control over South Africa has diminished. Though unlikely, the ANC could delay the election if it feels that the risk of losing too many municipal areas beyond Port Elizabeth, Pretoria and a few others is too high. Delay would spark widespread protests, some of which could turn violent.&nbsp;Meanwhile, low commodities prices are exacerbating structural problems that contribute to South Africa&#39;s economic decline and the ANC&#39;s apparently waning popularity. The end of the second quarter also marks the beginning of South Africa&#39;s strike season, typically the source of disruptions to its supply chain and mining sector. Unlike in 2012 and 2014, this year&#39;s strike season will be subdued since most wage agreements in the more contentious sectors do not expire until next year. Disruptions on the scale of the 2014 platinum strike would be a surprise.Finally, South Africa&#39;s drought will necessitate continued imports of agricultural goods. The arrival of winter, however, will free the government from other financial commitments, such as supplying energy for cooling. Despite the fall in commodities prices, South Africa still has a reasonably healthy level of reserves given that it has chosen to let the rand float. This gives South Africa room to spend to offset some of the cost of increased imports. Rising food costs, however, will exacerbate inflation,&nbsp;which has been climbing because of&nbsp;the weakening rand and rising domestic energy prices.

The Post-Apartheid Era Ends

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.

In the Niger Delta, amnesty programs remain firmly in place after President Muhammadu Buhari extended them in February. Low-level violence in Warri district will continue but will not coalesce into a broader Niger Delta militant movement. We expect Buhari to continue to go after former militant leader Government &quot;Tompolo&quot; Ekpemupolo,&nbsp;who is the most influential of the holdouts to the amnesty deal.&nbsp;Tribal and ethnic leaders in the delta support the government&#39;s pursuit of Tompolo.Economically, Nigeria has a difficult quarter ahead. The naira will continue to face deflationary pressures; its black market rate is now 320 to the dollar, compared with an official rate of 199 to the dollar. Though the Central Bank of Nigeria&#39;s current fiscal strategy is untenable in the long run, Nigeria has several options for sustaining its budget in the short term, and it will begin finalizing several agreements for international financing (through a combination of loans and issuing debt). Buhari and Deputy Oil Minister Emmanuel Ibe Kachikwu will continue overhauling the vital petroleum sector. Throughout the quarter, Abuja will continue implementing its structural changes and unbundling of the vast Nigerian National Petroleum Corp., which was split into seven independent operational units in March.In the northeast, violence emanating from Boko Haram will persist but generally not spread in the second quarter. The ability of the Islamist group, formally known as Wilayat al Sudan al Gharbi,&nbsp;to attack farther-flung targets such as Abuja or even Kano or Kaduna has been and remains degraded. The Nigerian armed forces are similarly limited, however, in their ability to counter Boko Haram in remote hideouts in northeastern Nigeria.

Nigeria: Obstacles to Prosperity

Economies that rely too heavily on commodities are hostages to the marketplace. When prices are high, the governments that manage these economies can afford the costs of political stability. When prices are low, however, their people get restless. Opposition mounts. Policy choices dwindle. Prolonged periods of low revenue sow the seeds of political crisis — something countries like Nigeria, Angola, Ecuador and Venezuela know all too well.

Economies that rely too heavily on commodities are hostages to the marketplace.

In general, West African petroleum producers &mdash; including Ghana, Gabon, the Republic of Congo, Cameroon, Equatorial Guinea and, of course, Africa&#39;s second-largest oil producer, Angola &mdash; will continue to experience financial stresses due to low oil prices. Angola will maintain its austerity budget, which it has already cut by 20 percent for 2016. We do not expect austerity to spark large protests &mdash; the ruling Popular Movement for the Liberation of Angola will see to that.&nbsp;The Popular Movement for the Liberation of Angola will spend the next few months preparing for its party congress in the third quarter. President Jose Eduardo dos Santos has announced that in 2018 he will leave politics. Whether he will try to retain the party&#39;s top position during the congress is unclear, but either way, jockeying among the party&#39;s most powerful members to become his successor will continue. This will inevitably lead some factions and individuals to be marginalized, such as Vice President Manuel Vicente, the former CEO of state-owned oil company Sonangol, who has become entangled in a Portuguese corruption scandal.Terrorist attacks stemming from al Qaeda in the Islamic Maghreb and affiliated groups will continue to be a risk in West Africa. Although countries such as Senegal, Ivory Coast and Niger are at risk, the most likely targets for attacks remain Algeria, Mali and Burkina Faso. Al Qaeda in the Islamic Maghreb affiliates in the Sahara and Sahel still lack the capability to attack hardened targets, which means their most successful attacks will continue to be against soft targets, similar to the attack in March at Grand-Bassam, the popular Ivory Coast beach resort. Unlike the terrorist attacks in southern Mali and other parts of West Africa, attacks in northern Mali will more resemble insurgency, such as hit-and-run attacks against the military.&nbsp;

Commodities: A Cautionary Tale

East Africa is a potential success story on a continent that tells too few of them. Improved economic and transportation supply chains have brought the region closer together, and the countries that constitute it have experienced rapid economic growth. Among the few obstacles to continued growth are the rivalries that plague the region, most notably the one between Kenya and Tanzania. But cultural commonalities, historic ties, shared demographic trends and, most important, an imperative to band together will ultimately prevail, making them more attractive investment destinations.

East Africa is a potential success story on a continent that tells too few of them.

In East Africa, Tanzania, Uganda and Mozambique will continue making progress in numerous energy projects. Financial interest disclosures on projects are not expected this quarter, though they may emerge on projects in Mozambique in the second half of the year.In Mozambique, the rift between the opposition Renamo and the ruling Frelimo will persist, contributing to low-level violence in the middle belt of the country. Renamo is incapable of seriously threatening Frelimo, so President&nbsp;Filipe Nyusi and Frelimo have no need to accede to Renamo&#39;s demand that the opposition group be allowed to control provinces its presidential candidate won in 2014 elections.

East African Integration

When the Cold War ended, many African nations lost their foreign benefactors in the United States and the Soviet Union. Multiparty democracies, particularly the democracies that exist in name only, forced some leaders to search for more creative ways to extend their terms in office. But though tactics such as extended term limits will, in fact, prolong a leader’s time at the top, they will also increase the chances of their violent removal — and that their removal will destabilize their countries.

When the Cold War ended, many African nations lost their foreign benefactors in the United States and the Soviet Union.

Two trends related to elections have emerged in the Republic of Congo and the Democratic Republic of the Congo. In the Republic of Congo, President Denis Sassou Nguesso won re-election in March despite protests over his overturning of term limits in 2015. We expect low-level protests in the aftermath of the elections, but the lack of a significant opposition in the Republic of Congo means they will not become more than a minor nuisance to Brazzaville.&nbsp;The Democratic Republic of the Congo, meanwhile, will spend the quarter preparing for elections that will be held in the second half of the year. President Joseph Kabila still has not announced whether he intends to stand for re-election; even if he decided not to run, he would not announce it this quarter.&nbsp;Opposition groups will keep trying to build a coalition against him; Kabila will try to prevent them from doing so. As fragmented as the political opposition in the Congo is, a coalition would be difficult to form this far from the elections.

Old Leaders in a New Africa

Negotiations to close the rift between South Sudanese President Salva Kiir and rebel movement leader Riek Machar will continue. Although Kiir named Machar his vice president, the two are deeply divided over aspects of the August 2015 peace deal, such as the number of states South Sudan should have. A lasting solution will not happen this quarter, and steps toward any resolution will be small.

2016 SECOND-QUARTER FORECAST

Europe

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