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quarterly forecasts

Apr 10, 2017 | 11:42 GMT

87 mins read

2017 Second-Quarter Forecast

Trade will be at the forefront of many leaders' minds this quarter.
(Stratfor)

Overview

Trade will be at the forefront of many leaders' minds this quarter as a new U.S. administration settles into the White House. Though U.S. President Donald Trump continues to be bogged down by congressional battles and allegations of inappropriate ties to Russia, his team will try to draw the public's attention back to its trade agenda. To that end, Washington will work to clarify its strategy for cracking down on currency manipulation abroad, tightening the enforcement of existing trade laws and preparing to renegotiate NAFTA. But the uncertainty surrounding the White House's intentions will linger, prompting the United States' biggest trade partners to look for new economic relationships elsewhere.

At the same time, some will leverage security cooperation and promises of investment to get on Washington's good side — or, at the very least, to try to fend off its punitive trade measures. China will be one of them as it uses its economic heft with Pyongyang, and the growing sense of urgency surrounding North Korea's nuclear program, to its advantage in tense trade talks with the United States. The White House will do what it can to push for secondary sanctions against China's stubborn neighbor, perhaps even threatening to step up its military aid to Taiwan to compel Beijing's buy-in. But even if Washington has its way, a heavier sanctions regime will do little to slow the progress of Pyongyang's nuclear program. The United States will have no choice, then, but to build a credible military deterrent against North Korea — a move that will only widen the rift between Washington and Beijing.

The Trump administration’s attack on a Syrian air base was designed in large part to underscore to Beijing and Pyongyang that this White House is willing to take military action if so compelled. Though the attack sent a strong signal to U.S. adversaries, it also has created complications for the United States on the Syrian battlefield with Russia. Though Moscow will try to use the heightened risk of collisions on the Syrian battlefield and the fight against the Islamic State to bring Washington to the negotiating table, the United States will be limited in any concessions it would give to Russia in return.The Kremlin will be even less inclined to trust in dialogue with the West as its problems pile up at home, though arms control may be one policy area in which the two can begin to negotiate without encountering much political blowback.

As the United States and Russia box Turkey in on the Syrian battlefield, Ankara will devote more attention to northern Iraq, where a conflict is brewing between Arab and Kurdish forces. The highly prized, oil-rich region of Kirkuk remains a key flashpoint in Turkey's competition with Iran for influence — and Iraq's rival Kurdish factions are caught in the middle. Washington will lend support to Sunni states, led by Saudi Arabia, seeking to balance against Shiite Iran as proxy battles throughout the Middle East escalate, though its nuclear deal with Tehran will remain intact.

In the meantime, Saudi Arabia and its Gulf Cooperation Council allies will shoulder most of the burden of maintaining OPEC's oil production cuts for another six months. Steady oil prices will buy Venezuela's cash-strapped government some time to get its finances in order, but not much. Caracas' risk of default will spike in the second half of the year, and the ruling party will have to spend the second quarter consolidating power in preparation for the turmoil that no doubt lies ahead.

Venezuela isn't the only state heading toward single-party rule. On the other side of the globe, Indian politics are swinging to the right — a trend Prime Minister Narendra Modi and his center-right Bharatiya Janata Party have been able to use to their advantage. This quarter, they will focus on passing a state-level version of a massive tax overhaul that cleared Parliament earlier in the year, a feat that will be more feasible as the growing power of the country's Hindu nationalists gives the ruling party the political capital to push through much-needed structural reforms.

Nigeria will have less luck passing its most pressing reforms as an intensifying power struggle in Abuja brings the government to a near-standstill. Concerns over President Muhammadu Buhari's health have raised questions about who his successor will be — a transition South Africa's own leader, Jacob Zuma, is making preparations for as well. Zuma is working quickly to consolidate power and cater to his ethnic Zulu base with a populist platform of black empowerment before he steps down, alienating investors in the process.

Europe's entrenched rulers face a growing threat to their power as well, albeit of a very different kind. France is preparing to hold elections that will pit the country's traditional political elite against an up-and-coming Euroskeptic contender, and Italy may not be far behind. Though the French electoral system is designed to keep fringe parties out of power, the possibility of a Euroskeptic win cannot be discounted — an outcome that could bring the eurozone to its knees and send shocks through global markets.

Honeymoon Period

U.S. President Donald Trump’s honeymoon period didn't last long after he took office in January. Between allegations of Russian tampering in last year's election and a series of congressional and judicial roadblocks, the new administration has gotten off to a rocky start. And in the next three months, there will be many more political land mines to consume the United States’ attention. Washington's distraction will give its competitors and partners alike time to assess just how constrained the White House will be in translating its intentions into policy.

Chief among Washington's concerns this quarter is the expiration of the temporary spending bill that funds the government through April 28. The administration's request for $30 billion in supplemental national security funding, which includes provisions for the construction of a wall along the U.S.-Mexico border, would break the budget cap set for the 2017 fiscal year by $10 billion. But if Congress fails to approve at least some of the additional spending, large portions of the government could face a shutdown — offering a preview of even more contentious budget battles to come as lawmakers gear up for the 2018 fiscal year.

Linked to the budget is the next big item on Trump's agenda: a much-touted and highly anticipated overhaul of the U.S. tax code, including a cut to the country's corporate income tax. Yet it is difficult to see how the bill will pass Congress' standard of having a "revenue-neutral" impact as the administration's health care reform (and the purported savings it would bring) stalls, its deep budget cuts come under greater scrutiny, and its differences with Republican lawmakers grow over a suggested border adjustment tax.

Beyond its disputes with Congress, the Trump administration will be looking for opportunities to showcase its progress in pushing the president's agenda forward. Though there are no easy wins on the horizon, the White House will concentrate its efforts on achieving its objectives in global trade in the months ahead.

section

Apr 4, 2017 | 16:54 GMT

7 mins read

Global Trends

Chief among Washington's concerns this quarter is the expiration of the temporary spending bill that funds the government through April 28. The administration's request for $30 billion in supplemental national security funding, which includes provisions for the construction of a wall along the U.S.-Mexico border, would break the budget cap set for the 2017 fiscal year by $10 billion. But if Congress fails to approve at least some of the additional spending, large portions of the government could face a shutdown -- offering a preview of even more contentious budget battles to come as lawmakers gear up for the 2018 fiscal year.
The administration of Donald Trump has said it would
section Highlights
  • The constraints on U.S. President Donald Trump's administration will become more visible this quarter as it encounters new showdowns with Congress, and the government may shut down if political gridlock on a supplemental budget cannot be broken by April 28.
  • The White House will try to deflect attention away from its problems by focusing on trade, relying on the WTO to enforce international regulations even as it threatens to flout the organization to gain leverage in bilateral negotiations.
  • China -- the primary target of Washington's punitive trade measures -- will barter pledges of investment and cooperation against North Korea to try to manage its mounting tension with the White House.
  • OPEC will extend its agreement to collectively trim oil production for another six months, though Saudi Arabia and its GCC peers will shoulder most of the cuts.

Globalization

The administration of Donald Trump has said it would "level the playing field" of the global economy. To that end, the United States will pursue bilateral talks with its trade partners in hopes of more effectively asserting its interests. These efforts could include any number of measures, from creating the regulatory conditions needed to encourage U.S. companies to invest at home to pressuring other countries to buy more American goods, invest more money into the United States and end currency policies that, according to the White House, give others an unfair advantage. The United States has set it sights on countries with which it has large trade deficits, placing China, Japan, Germany and Mexico squarely in its crosshairs. The U.S. Treasury Department's biannual review of top U.S. trade partners' currency policies, which will be released in mid-April, will shed more light on how Washington intends to pursue its allegations of currency manipulation abroad. (The White House has criticized Germany, China, Taiwan, South Korea and Japan for their currency policies and has threatened to challenge currency manipulation as a type of export subsidy in the World Trade Organization.)

The Trump administration's tactics have left many U.S. trade partners wondering whether Washington would even be willing to honor the WTO's rulings if they undermined U.S. interests. Openly flouting the organization, after all, would cripple the global trade order that the United States has underpinned for more than seven decades — something Washington will not be willing to do, even if it uses the threat of challenging the WTO to shape its trade negotiations and target key industries. In fact, the White House's aspirations to more strictly enforce existing global trade rules are contingent on the WTO's ability to govern effectively.

Nevertheless, the concerns the White House's rhetoric has generated are enough to compel several major economic powers to band together against U.S. protectionism. A formidable group of free trade advocates is prepared to see cases through lengthy WTO deliberations and will try to present a unified front in defense of the WTO-led trade order. The G-7 summit in Italy on May 26-27 will offer the group a chance to stand their ground against Washington's protectionist policies this quarter.

In the meantime, other countries will seek out deeper trade relationships among themselves as Washington's interest in multilateral free trade agreements fades and its debate over border tax adjustments continues. Perhaps unsurprisingly, the biggest push for new ties will come from the United States' closest trade partners, such as Mexico, Canada and Japan. They will revive long-stalled trade talks, including the tabled free trade agreements between the European Union and Japan and Mexico. Despite the parties' renewed enthusiasm, however, many sticking points remain that are liable to drag out the negotiations.

As they search for new trade partners abroad, these countries will still have to prepare for greater friction with the world's superpower in the months ahead. For those with deeper pockets, promises of investment will may temper U.S. trade tantrums and coax Washington into broader strategic discussions. Of course, these carrots will also be paired with sticks that don’t involve trade that are designed to give Washington pause in picking its fights.

But for the United States and China, strife may be difficult to avoid as their most critical imperatives collide. Washington has targeted Chinese goods in hopes of rebooting the U.S. economy, but Beijing is already working (though struggling) to address the structural inefficiencies in its economy, all while consolidating political power under President Xi Jinping. Moreover, as the Chinese government prepares for the Communist Party Congress later in the year, caution will trump haste in any reform it may pursue. Even so, the United States will focus this quarter on enforcing the existing trade rules of the WTO through anti-dumping and countervailing duties, paying particular attention to Chinese industrial imports. China, in turn, will be quick to link the mounting trade pressure to security issues on which Washington needs Beijing's help, including North Korea's nuclear program. China also won't hesitate to leverage its military and economic heft in in its ongoing maritime disputes.

Germany, for its part, cannot withstand the shock of a trade war with the United States as it struggles to hold the European Union together. Like China and Japan, Germany will continue to tout investment deals that create American jobs, hoping to deflect U.S. pressure while forming a multilateral front in defense of free trade. But Berlin will also be preoccupied with fateful French elections this quarter, whose outcome could accelerate the eurozone's demise.

Lacking the financial leverage of its richer counterparts, Mexico will make for an easier target for the White House, especially since the country relies heavily on its trade with the United States. During the second quarter, the Trump administration plans to trigger the 90-day consultation process required to renegotiate NAFTA — talks that are meant to be a template for reshaping its other trade deals. The United States will center its negotiation points on increasing NAFTA's rules of origin requirements, expanding labor and environmental regulations, and integrating energy and the digital economy into the deal. Mexico, meanwhile, will concentrate on drumming up a strong U.S. lobby, made up of American states and businesses that depend on cross-border trade, to argue against substantial changes to the bloc.

A Crude Recovery

The world's top oil producers will also have some important decisions to make during the second quarter, when OPEC holds its biannual summit in Vienna on May 25. The biggest question facing the bloc is whether it will extend its agreement to collectively cut oil production, which is set to expire at the end of June. Unless low oil prices plunge even further by the Vienna meeting, OPEC will renew the deal. Global oil inventories have not dropped substantially over the six months the agreement has been in place, and if OPEC producers hope to make a bigger dent in the world's supply, they will have to maintain their quotas through the summer months, when demand for oil is highest.

That compliance with the deal has been spotty is hardly surprising, and the Gulf Cooperation Council, led by Saudi Arabia, will continue to shoulder the bulk of the cuts. But the kingdom will boost its oil consumption as the summer heat hits in order to meet its people's demand for electricity. Rather than hiking up its output accordingly, adding to the global oil glut and jeopardizing its plans for economic reform, Riyadh will push hard to extend the OPEC deal and dip into its own stockpiles to preserve its share of the market. Thanks to its efforts, the bloc's members will likely agree to an extension, even if Russian producers do so begrudgingly. But prolonged production cuts still won't cause oil prices to significantly rebound, at least not as much as the world's more fragile producers would like. Upticks in U.S. output, along with the Libyan oil sector's uneven recovery, will temper any short-lived increase in price. The cuts will, however, buy particularly vulnerable producers like Venezuela more time to get their finances in order.

Central banks around the world will closely monitor inflation as they make policy decisions this quarter. Since mid-2016, headline inflation has risen as commodity prices have stabilized, in part because of OPEC's moves to steady the market. Core inflation, which does not take food and energy prices into account, has not followed suit. Because an extension of production cuts are unlikely to have a substantial or enduring impact on oil prices, headline inflation should start to drop off this quarter, lifting some of the pressure on central banks (including those in Europe and Japan) to tighten their monetary policy.

The United Kingdom may prove to be an exception to this rule. The delayed effects of a weaker pound are likely to start taking hold this quarter, nudging up inflation across the country. The Bank of England, however, might be reluctant to tighten its policies for fear of triggering a slowdown in the British economy. Meanwhile, across the pond, the United States' tax reforms and massive infrastructure spending plans will be put on hold amid bottlenecks and delays. But this may not undermine the health of the U.S. economy during the second quarter. And as more jobs are created and inflation remains steady, the possibility of a second interest rate hike by the Federal Reserve in June cannot be ruled out.

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Apr 4, 2017 | 16:47 GMT

13 mins read

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.
section Highlights
  • Presidential and legislative elections in France will play a deciding role in the future of the eurozone as voters choose between pro- and anti-EU parties.
  • Italy will inch closer to holding new general elections, and the prospect of victory for Euroskeptic forces will do little to assuage doubts about the health of the country’s banks and Rome’s sizable public debt.
  • Brexit negotiations will formally begin, but progress will be slow. 

    The first topics on the negotiation agenda will include the United Kingdom’s financial commitments and the rights of EU and British citizens

    .
  • As the weather improves in the Mediterranean Sea, more migrants will seek entry into Southern Europe, testing the resilience of the Continent’s immigration deal with Turkey and generating new friction among EU members.
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The Fate of the Eurozone

French presidential and legislative elections will be the most important events to take place in Europe during the second quarter. A significant portion of France’s political apparatus will be elected and appointed over the next three months. The presidential election will be held in two rounds on April 23 and May 7, while legislative elections (also split into two rounds) will follow on June 11 and 18. French voters will have to decide whether they want to further liberalize and deregulate their economy or increase protectionism. They will also have to choose whether they want France to stay a member of a reformed European Union or leave the Continental bloc entirely.

The biggest contenders in the elections are the nationalist National Front, the centrist En Marche!, the center-right Republicans, the left-wing Unsubmissive France, and the center-left Socialists. Should any of the moderate parties win the presidency, they will focus primarily on economic and security issues. A moderate government (especially under En Marche! or the Republicans) would seek to make the economy more competitive through various combinations of spending cuts, public investment, labor reform and initiatives to reduce bureaucracy, cut down on regulation and attract foreign investment. A moderate government would probably also direct more resources toward security forces and defense spending, while at the international level it would work to reform the European Union and defend France’s leading role in it. The possibility of different parties controlling the presidency and the National Assembly cannot be excluded. This would complicate policy-making. 

France’s two-round electoral system has historically made it difficult for extremist parties to win presidential and legislative races. Candidates have to receive more than 50 percent of the vote to gain the presidency or a seat in the National Assembly, a threshold that the National Front, for instance, has found tough to reach. If the National Front overcomes this hurdle and wins the presidency, it will set in motion a chain of events that could lead to severe crisis in the European Union.

For one, the National Front wants to introduce tariffs on French imports and tax companies that hire foreign workers, including EU nationals. Both ideas go against the basic principles of the EU single market, which emphasizes the free movement of people, goods, services and capital. Even more important, however, the party also intends to hold a referendum on France’s membership in the eurozone. Many of the National Front’s campaign promises would require a majority in Parliament, and in some cases the legal procedures to implement them would be arduous. National Front leader Marine Le Pen has also said that the referendum on eurozone membership would be called only after six months of negotiations on reforming the European Union. But even the mere victory of the National Front in the presidential election could trigger a crisis in the eurozone. Savers in the eurozone’s periphery states (such as Spain, Portugal and Greece) could, for example, withdraw their money from local banks or transfer it to safer havens abroad, forcing authorities to introduce capital controls at the national or Continental level to stop a run on eurozone banks.

Even the mere victory of the National Front in the French presidential election could trigger a crisis in the eurozone.

Even the mere victory of the National Front in the French presidential election could trigger a crisis in the eurozone.

If France’s moderates win, Germany will immediately invite the new president to shore up bilateral ties between Paris and Berlin and co-lead Europe. In global markets the euro, along with riskier assets such as bonds from Europe’s periphery, will strengthen rapidly. Should the National Front win, on the other hand, the German government will seek accommodation with the nationalist government in Paris, trying to dissuade it from fulfilling its most radical campaign promises. But many of the National Front’s policies are simply incompatible with EU structures, limiting its room for compromise. And if serious trouble arises in the eurozone, Berlin will start making preparations for the most orderly dissolution of the currency area possible while planning its next steps with its closest partners in Central and Northern Europe. The market fallout of a potential eurozone collapse would be immediately felt in global markets as European investors flee riskier bonds and move their money to safer assets, such as German bonds.

Italy, meanwhile, is moving toward its own general elections, though it is unclear just how quickly they will arrive. The country does not have to hold elections until early 2018, but disputes within the ruling center-left Democratic Party could precipitate an early vote. The government in Rome, led by Prime Minister Paolo Gentiloni, will remain weak as Italy’s main political parties prepare for the elections. Ahead of the vote, the Democratic Party will hold its primary to appoint a new leader in late April — a necessary step before the government resigns and parliamentary elections can be held.

Still, the elections will not take place during the second quarter. This means that Italy’s vote will not coincide with France’s, giving markets and EU governments time to digest the latter’s results. But the lingering risk of elections in Italy, where Euroskeptic parties would probably make a strong showing, will add to the uncertainty clouding Italy’s political and financial future. This will do little to ease market fears about the health of Italian banks and the country’s high levels of public debt. But Italy will introduce some modest spending cuts to allay the European Commission’s concerns about its deficit, and whatever frictions may arise, Rome and Brussels will find a compromise, allowing Italy to avoid EU sanctions.

Greece, another troubled eurozone country, will also be politically and financially fragile this quarter. Because Greece does not have any significant debt repayments to make until mid-July, negotiations between Athens and its creditors on the disbursement of the next tranche of bailout money could drag on for weeks, perhaps even extending beyond the end of the quarter. Nevertheless, the Greek bailout program will stay on track since Athens and its creditors are eager to avoid a default at all costs, though Athens could try to tone down some of the policies it has promised to implement, or announce spending increases in some areas, in hopes of avoiding a rebellion within the government.

Because Greece does not have any significant debt repayments to make until mid-July, negotiations between Athens and its creditors could drag on for weeks.

Because Greece does not have any significant debt repayments to make until mid-July, negotiations between Athens and its creditors could drag on for weeks.

In the meantime, Germany will continue to delay granting debt relief to Greece during its own election cycle. It could, however, make vague promises to discuss the issue in the future. Even if the International Monetary Fund does not announce a decision on its participation in the bailout program during the quarter, Greece and its creditors will work to keep it in place.

For an export-dependent economy like Germany’s, the prospect of a trade war brewing with the United States and Washington’s threats to undermine the World Trade Organization are also major sources of concern. Consequently, Berlin will keep communication channels open with the new administration in the White House to defend Germany’s stance on these issues, as well as on many other points of controversy between the two governments. Germany will also use its rotating presidency at the G-20 to defend free trade and the role of multilateral trade organizations.

Germany’s strategy will include preserving the European Union’s single market and expanding the bloc’s trade relationships with other markets, primarily by supporting EU plans to resume stalled free trade talks. During the second quarter, for example, the European Union will revive negotiations with Mexico to update their free trade agreement. Brussels’ efforts to sign free trade agreements with countries such as Japan and India will likewise intensify. Germany will advocate the development of closer trade ties between the European Union and China as well, though the bloc will struggle to get European companies the same level of access to China that Chinese companies have to Europe, creating room for friction during any negotiations that are held. Berlin’s aggressive stance against Chinese takeovers of German companies will lead to similar complications during the talks.

To curry favor with the United States, the German government is willing to make gestures of good faith in areas such as defense spending. But this will not go over well in Germany. After all, it is an election year and the German government will be forced to keep lines of communication open with Washington while also being critical of the new administration, especially since a large portion of the German public disapproves of U.S. President Donald Trump. The relationship between the ruling center-right Christian Democratic Union (CDU) and its coalition partners in the center-left Social Democratic Party (SPD) will encounter additional tension as the two try to differentiate themselves before the general elections.

Regional elections in the northwestern German states of Schleswig-Holstein (May 7) and North Rhine-Westphalia (May 14) will test the appeal of the SPD and CDU ahead of the September vote. They will also act as a gauge of the popularity of smaller parties, such as the environmentalist Green Party, the left-wing Die Linke and the center-right Free Democratic Party — all of which could become coalition partners to the SPD and CDU after the elections end. Moreover, the regional races will show whether the nationalist Alternative for Germany (AfD), whose popularity has declined in recent months, can make gains beyond its strongholds in the east and enter the legislatures of western regions. Regardless of the AfD’s performance, other parties will refuse to cooperate with it. Yet the AfD’s role in German politics is not necessarily to enter government, but to force moderate parties to incorporate elements of its nationalist agenda into their own.

Brexit and Beyond

Brexit negotiations among the British government, EU institutions and EU members will begin in earnest in the second quarter. But the process will last at least two years. All sides will spend most of the next three months in exploratory discussions that aim to define the framework and terms of the negotiations, and no dramatic decisions are expected this early on. Before the talks can even begin, the European Union’s remaining 27 members will have to agree to give the European Commission directives for its talks with London.

Some of the topics at the top of the Brexit agenda will include the legal status of British citizens living in the European Union, and of EU citizens living in the United Kingdom. The parties are also likely to debate the Brexit’s financial aspects, including the United Kingdom’s contributions and payments to the European Union in the years ahead. This will create frictions, as the British government would try to keep its exit bill as small as possible. At the same time, the British government will be interested in starting conversations on the free trade agreement it hopes to sign with the European Union. But EU negotiators will insist on a sequential approach, starting with the country’s exit and leaving the debate over the terms of its future relations for a later date.

British Prime Minister Theresa May’s administration, meanwhile, will face the difficult task of reassuring the devolved governments in Scotland, Northern Ireland and Wales that their voices will be heard and their interests will be protected during the Brexit talks. London will also have to make sure that the central government remains in control of the Brexit process. London may promise subsidies, investment, tax breaks and even the transfer of powers currently in the hands of the European Union to regional governments to try to appease secessionist claims. It is unlikely, however, to give Scotland and Northern Ireland a decisive role in the negotiations. And as Northern Irish nationalist and unionist parties struggle to find common ground, the Good Friday Agreement that defines how the region’s government operates will continue to show signs of fatigue.

Divided EU Foreign Policies

The next three months will bring a flurry of debates about Russia to the Continent. As the July 31 expiration date for EU sanctions against Russia approaches, the bloc’s internal discussions about its relations with Moscow will become more frequent. Since there have not been any notable changes on the ground in eastern Ukraine or in U.S.-Russia ties since the Trump administration took office, most EU members will support the continuation of existing sanctions. Though the bloc does not have to make its decision until late July, the possibility of it coming before the end of the quarter cannot be ruled out. Should the issue be put to a vote within the next three months, some countries will voice their criticism of the sanctions but are unlikely to veto the decision of the majority. (That said, an electoral victory by France’s National Front, which has argued against new punitive measures toward Russia, would significantly threaten the Continent’s sanctions regime.)

Crossing Borders

As the weather starts to improve in the Mediterranean Sea, migration to the European Union’s southern members will pick up. Along the migrant route traversing the eastern Mediterranean, the EU-Turkey immigration agreement still holds, but Ankara has the power to refuse to honor the deal and to stop policing migrant traffic. If it does, it would be in an effort to put pressure on the European Union, whose half-hearted compliance with the terms of the deal has rankled Ankara. The bloc, for example, has not lifted visa restrictions for Turkish citizens — one of the main promises it made to Ankara in exchange for its cooperation in preventing asylum seekers from entering the European Union. Several EU states will also continue to criticize the Turkish government’s attempts to consolidate power following last year’s failed coup attempt, giving Turkey added reason to threaten to renege on the deal.

As the weather starts to improve in the Mediterranean Sea, migration to the European Union’s southern members will pick up.

As the weather starts to improve in the Mediterranean Sea, migration to the European Union’s southern members will pick up.

Many migrants may, in fact, become emboldened by the Turkish government’s threats and attempt the journey from Turkey to Greece. But Ankara will not give up on the migrant deal completely, since it still hopes to use the agreement — and Europe’s fear of the political side effects that renewed waves of immigration could have in an election year — to negotiate and expand its customs union with the bloc in the near future. Maintaining these deep economic ties with Europe is especially important to Turkey as its economy continues to founder.

Regardless, EU members will try to protect themselves from a possible uptick in asylum seekers, keeping their borders closed along the biggest migration routes. This will pose a serious threat to Greece, as the country risks once again becoming a bottleneck for migrants who reach its shores but cannot keep moving northward.

There is also only so much the European Union can do to tamp down on the Central Mediterranean migrant route. In recent months the bloc has stepped up its political, economic and security cooperation with countries in sub-Saharan Africa, from which many migrants originate, as well as with Libya, the main transit state for migrants trying to reach Southern Europe. These policies will continue during the second quarter, but their impact will be modest. Italy and other southern EU members will see more migrants arrive on their doorsteps as weather conditions improve, creating tensions between them and their peers in Northern Europe. Rome will demand greater assistance to handle the influx of people, and if it allows some migrants to pass through its borders and into the rest of the Continent, frictions between it and its neighbors could worsen.

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Apr 4, 2017 | 16:47 GMT

8 mins read

Eurasia

Eurasia is the world’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’s farthest reaches — a strategy meant to insulate it from outside powers. But this strategy necessarily creates conflict throughout Russia’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.
section Highlights
  • The standoff between Russia and the West will persist this quarter as Western resentment of Russian aggression festers, risk heightens on the Syrian battlefield and each side continues its military buildup.
  • Russia will target Europe -- particularly France, Germany, Italy and the Balkans -- with information and disinformation campaigns in an attempt to further divide the Continent.
  • At home, Russia’s political atmosphere will remain tense as economic stagnation spurs protests and Kremlin elites make power grabs.
  • The conflict in eastern Ukraine will endure over the next three months, since the Minsk protocols’ security and political components are unlikely to be implemented.
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Echoes of the Cold War

The United States and Russia will see heightened frictions this quarter despite widespread speculation that the election of U.S. President Donald Trump would pave the way for a detente with Moscow. As scrutiny over Russia’s meddling in U.S. politics builds, any engagement with Moscow will become politically problematic for Washington. And despite Trump’s campaign rhetoric, it is in his best interest to keep pressure on Russia through sanctions and continued support for NATO. As a result, both countries will continue their military buildups along Russia’s periphery this quarter, and each will test the other's sphere of influence.

Following a limited U.S. strike on a Syrian air base, Russia will position itself as a potential spoiler on the Syrian battlefield to try and draw the United States back to the negotiating table. The risk for collision between the powers is higher this quarter as Russia tries to leverage deconfliction in Syrian airspace to complicate ongoing U.S. military operations in Syria against Islamic State. Russia’s reliance on negative influence to try and bargain with Washington, however, will risk further souring the negotiating climate and limit potential collaboration. There may, however, still be room for restarting a dialogue in other areas, like arms control. Both sides need to resolve several arms control issues, including their differences over violations of the Intermediate-Range Nuclear Forces Treaty, the question of whether to renew the New Strategic Arms Reduction Treaty (START), and a strategy for responding to the buildup of weapons arsenals by other powers, such as China.

Moscow, meanwhile, will be busy trying to expand its influence abroad, including in North Africa and the Balkans. In the coming quarter, it will gradually increase its involvement in the Libyan conflict by backing multiple factions while coordinating closely with Egypt. In the Balkans, Russia will also continue bolstering its support for Serbian nationalists, both in Serbia ahead of elections and in Northern Kosovo. Moscow will likewise back the separatist claims of Bosnia's Republika Srpska and will work to deepen the divides between Macedonia and the West over the political status of the country’s Albanians. Russia does not expect these countries to become staunch allies; rather, it hopes to use the mounting tension to distract the West and gain political leverage.

Moscow will also work to widen rifts in Europe, particularly as the Continent prepares for French elections. Russian cyber, information and propaganda campaigns will continue to sow discord and increase uncertainty in France, especially if the Kremlin’s preferred candidate, Marine Le Pen, does not win the presidency. Moscow will use the same tools to bolster Euroskepticism, particularly in Italy and Germany. Its efforts are likely to intensify in the lead-up to Europe’s July deadline to extend sanctions on Russia. Even with sanctions in place, however, Moscow will work to bring European investment back to Russia when it hosts a major investment forum in June.

The Fight for Russia’s Borderlands

In the meantime, the standoff between Russia and the West will continue to shape the strategic landscape of the European borderlands. The conflict in eastern Ukraine will maintain its intensity, since the security and political components of the Minsk protocols are unlikely to be implemented this quarter. Economic ties between Ukraine and its separatist territories will deteriorate because of a blockade instituted in the first quarter, forcing the rebel regions to rely on Russia and spurring long-term energy diversification efforts in Ukraine proper forward. As the European Union and United States continue to be distracted by issues elsewhere, Ukraine will build up its economic and security cooperation with Poland and the Baltic states to supplement its Western integration strategy. Meanwhile, the course of European politics (and, in particular, the outcome of France’s presidential race) will be key to determining the future of EU sanctions against Russia, though they are unlikely to be lifted altogether this quarter. 

Moldova and Georgia will look to strengthen their economic ties with Russia while seeking to soften tactical elements of their policies toward breakaway territories out of pragmatism.

Moldova and Georgia will look to strengthen their economic ties with Russia while seeking to soften tactical elements of their policies toward breakaway territories out of pragmatism.

Moldova and Georgia, for their part, will look to strengthen their economic ties with Russia while seeking to soften tactical elements of their policies toward breakaway territories out of pragmatism. Nevertheless, they will also continue cooperating with the European Union and NATO. (Moldova, for instance, is slated to open a NATO liaison office in April.) To the north, Belarus will come under greater domestic pressure as protests over a controversial tax policy persist, testing longtime President Aleksandr Lukashenko’s undisputed grip on power. Though the unrest has so far remained a domestic issue, external powers — including the West and Russia, which have long competed for influence in Belarus — could become involved, potentially exacerbating the protests.

Armenia and Azerbaijan’s ongoing dispute over the separatist region of Nagorno-Karabakh won’t die down this quarter either. In fact, hostilities may intensify after Armenia’s parliamentary elections are held in early April. Russia will continue to serve as the primary arbiter and power broker in the dispute as Turkey remains distracted (and, to an extent, dependent on Russia’s cooperation) in the Middle East. However, Moscow’s attempts to build on its gains and increase its clout in the region through the Eurasian Economic Union and Collective Security Treaty Organization will be compromised by infighting within the blocs.

Russia's Internal Struggle

Apart from its foreign interests, Russia will have to contend with a somewhat chaotic domestic environment this quarter. Though the Russian economy will continue to recover from recession, stagnation will linger through the rest of the year. Despite the sanctions against it, Moscow will court foreign investment from the West, the Asia-Pacific and South Asia at its annual St. Petersburg International Economic Forum in June, putting on hold many of its isolationist practices of the past three years.

Regardless of this relatively bright outlook, many Russian regions and citizens are in dire financial straits. Enduring hardship will fuel protests over political, economic and social issues across the country. The Kremlin has tried to ensure that these demonstrations do not coalesce into a single movement against it, but if they do, security forces have been fortified and deployed nationwide to respond. Russia’s heavy-handed crackdowns on opposition figures and dissent will continue, and it could start to squeeze social media channels as well.

Enduring hardship will fuel protests over political, economic and social issues across the country.

Enduring hardship will fuel protests over political, economic and social issues across the country.

Russian President Vladimir Putin will also work to contain the country’s political elite as they continue to make grabs for power. At the same time, the Kremlin will struggle to answer tough questions about the ownership of assets, such as Chechnya’s oil sector and defense companies, and whether to force energy giants like Rosneft to cut production. All the while, Russia’s security services and their cyber centers — prized portfolios for the country’s elite — seem to be undergoing a reorganization behind closed doors in the wake of accusations and arrests tied to the alleged hacking campaign targeting the U.S. presidential election. Such contests for power will further isolate Putin as he grows more authoritarian in order to preserve the stability of the political system beneath him.

Moscow Looks to the East

Russia, meanwhile, will keep diversifying its ties away from West in the second quarter. Putin will hold another much-touted summit, this time with Japanese Prime Minister Shinzo Abe, as Russia and Japan attempt to mend their relationship. The two countries have been hung up on a territorial dispute over islands they both claim for some time. Though they have made minor progress in settling the spat, including by establishing joint investment projects and agreeing to visa-free travel on the islands, neither is ready to make a grand bargain for them or reach a peace deal. Russia still sees the islands as an issue of national sovereignty and as a front line in its nuclear deterrence, while Japan has maintained sanctions on Russia and has been slow to release funds promised to projects in Russia’s Far East. So, though both sides will promote better ties, actual steps toward achieving them will be few and far between.

Russia will work to expand its relationships elsewhere in Asia as well. Moscow will hold its annual economic forum in May, which key delegations from China, Japan and India will attend. Beijing is looking to extend its Belt and Road Initiative through Russia, while Japan is still holding out hope of investing in the Far East. The summit will be co-hosted by India, since New Delhi has been pumping more money into Russia, and Moscow wants to rekindle its ties with the South Asian country to balance its other relationships in Asia. Russia and Vietnam will also hold a summit this quarter; Moscow is aiming to improve its foothold in the country with energy, military and metals investment deals to gain leverage in the wider region.

Instability in Central Asia

Central Asia’s troubles will not end in the second quarter as protests, militancy and political infighting persist. Kazakhstan and Kyrgyzstan will probably be the Central Asian states most vulnerable to unrest, the former because of its foundering economy and the latter because of an impending presidential election in November. (Kazakhstan will also begin the rocky process of transferring some powers from long-serving President Nursultan Nazarbayev to Parliament and the Cabinet.) But tension will build in Uzbekistan as well as the country’s new president, Shavkat Mirziyoyev, and security chief Rustam Inoyatov spar over reforms. All the while, Russia will seek to steadily increase its sway over the region, particularly on matters of security.

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Apr 4, 2017 | 16:47 GMT

16 mins read

Middle East and North Africa

The Middle East and North Africa is the world'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 — Saudi Arabia and Egypt are the current Arab powers — and their competition for influence over the region'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.
section Highlights
  • In Syria, the United States will face growing complications on the battlefield as it tries to avoid collisions with Russia while trying to remain focused on an offensive against the Islamic State in Raqqa
  • Turkey will try to use flare-ups in the Syrian civil war to draw deeper U.S. involvement while focusing more attention on an escalating proxy battle with Iran in northern Iraq.
  • In Iraq, the operation to reclaim Mosul from the Islamic State will come to a close this quarter, and coalition forces will turn their attention to retaking the extremist group's remaining strongholds, Tal Afar and Hawija.
  • Even as U.S.-Iran frictions will escalate in the runup to Iran's presidential election, both sides will take care to keep the JCPOA nuclear deal intact.
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The Syrian Civil War

The United States faces heightened risk on the Syrian battlefield this quarter at the same time it prepares to kick off a major offensive against Islamic State in Raqqa. A U.S. limited strike on a Syrian air base in response to a Syrian chemical weapons attack was designed to demonstrate the United States’ decisiveness in military matters (a message not lost on North Korea,) but it also came with risks. Russia has long attempted to leverage the Syrian battlefield in its broader negotiations with the United States, but the United States is not leaving much room for a bargain with Moscow. Russia thus has to rely on negative influence to try and draw the United States into a dialogue and will try to play the role of spoiler on the Syrian battlefield to raise operational risks for the United States. There will be potential for the two sides to negotiate on deconfliction, but that will likely be the extent of their cooperation this quarter as Washington focuses on the fight against the Islamic State.

Russian forces will be active elsewhere in Syria, however, supporting the Syrian army's offensives against rebel forces as well as the Islamic State in theaters such as Deir el-Zour. After a few shaky months in place, the cease-fire that Russia, Turkey and Iran brokered between the rebels and loyalists in December 2016 has broken down completely. Its failure underscores the futility of the attempted peace talks that took place throughout the first quarter. In the second quarter, Syria's deepening economic woes, evident in the country's food shortages and collapsing currency, will threaten the government's hold on loyalist territory

Washington will focus on the fight against the Islamic State.

Washington will focus on the fight against the Islamic State.

Syrian fighters backed by the United States will lead the charge in RaqqaThe United States' battle plan, which also includes deployments of U.S. troops, will rely on the most effective fighting force available in the short term: the multiethnic Syrian Democratic Forces (SDF). The SDF has made swift work of the fight so far, having nearly encircled the city. With help from the freshly deployed U.S. forces, artillery support has also been put in place.

But by emphasizing the SDF in the battle for Raqqa, the United States will further strain its already tense relations with Turkey. The forces include members of the Kurdish People's Protection Units (YPG), a militia Turkey considers a terrorist organization and an active threat to its national security. Still, Ankara's dismay will not discourage Washington from working with the force. And though Turkey will try to finagle a more prominent role for the forces it supports, including Turkish-trained Arab tribal forces, the United States will prioritize winning the fight against the Islamic State by the most expedient means available over appeasing Turkey. Turkey will nonetheless try to draw the United States deeper in a fight against the Syrian regime and push its proposals for establishing a no fly one and safe zones in in Syria. 

Washington's battle plan for Raqqa is just one of many complications Ankara will have to contend with in Syria in the second quarter. By the time Turkey took al-Bab from the Islamic State during the last quarter, it had already accomplished many of its objectives in northern Syria under Operation Euphrates Shield. But its efforts to keep Kurdish forces from establishing control over a contiguous swath of territory in the northern part of the country are still in progress. To achieve that objective, it will have to tread lightly so as not to step on Russia's toes. Ankara and Moscow's alliance of convenience has mostly run its course in Syria, especially since Russia foiled Turkey's plans to take the city of Manbij. Nevertheless, the two countries need to keep the lines of communication open to ensure that their troops don't end up in conflict. If their priorities in Syria continue diverging, Turkey may start looking for other ways to gain leverage over Russia — by joining in on negotiations over the Nagorno-Karabakh dispute, for instance, or increasing its coordination with fellow NATO members in the Black Sea. And even though Turkey will have less room to maneuver in Syria this quarter, it will still have some leeway to deepen its involvement in northern Iraq.

The Fight Against the Islamic State

In the Middle East and North Africa, the primary focus of the second quarter will be the fight against the Islamic State. The battle to oust the extremist group from its strongholds in the region will reach milestones in multiple theaters in the months ahead. in Iraq, for instance, the battle for Mosul will come to a close, at least in the city itself. And in Syria, the operation to reclaim the city of Raqqa is about to get underway. These events, though notable, will hardly herald the demise of the Islamic State. In fact, the organization will redouble its terrorist activities, not only in its core area of operations in the Middle East but also internationally, in an attempt to maintain its relevance as it loses territory.

The Battle for Mosul

Five months into the fighting, the end of the Mosul offensive is now in sight. Before the operation ends, though, Iraqi forces will deploy to other Islamic State strongholds such as Tal Afar and Hawija to sweep the extremist group out of those pockets. As the main battle comes to a close, the divisions among the Iraqi coalition's constituent groups will become clearer than ever. The risk of infighting among the alliance's Shiite, Kurdish and Sunni militias will be high throughout the quarter, particularly in the northern border regions of Nineveh province.

That Iraqi army forces are engaged in fighting in the city itself has improved the central government's reputation among Mosul residents; the boost will help Baghdad gain legitimacy and establish its authority over the city. But stabilizing the reclaimed territories around the city will be a tall order for Baghdad. Rifts within Shiite, Sunni and Kurdish groups will prevent them from reaching a coherent political settlement over Nineveh province's future this quarter. Iran and Turkey, meanwhile, will continue to vie for influence in Iraq, primarily through proxy battles in the disputed territories that will soon be reclaimed from the Islamic State. The Iraqi government and the Kurdistan Regional Government (KRG) each claim control of Tal Afar, Kirkuk and Sinjar, making these areas most susceptible to fighting and disputes over territory and resources.

As Iraq's political parties gear up for provincial elections in September, regional powers such as Turkey and Iran will have yet another opportunity to try to gain influence in the country. Tehran will use its sway among Iraq's Shiite political parties and militias to goad Baghdad to prioritize its ties with Iran and to block Ankara's attempts to get involved in the political settlement process through Sunni parties. Prime Minister Haider al-Abadi will face mounting political pressure from all sides, including Iraq's nationalist parties, as he tries to appease Turkey, Iran and the West simultaneously. Adding to the mix, Saudi Arabia will make economic and diplomatic gestures in an effort to strengthen its ties with Baghdad. (U.S. President Donald Trump's administration has been pressuring the kingdom to help loosen Iran's grip on Baghdad's political and security spheres.)  

The Kurdish Struggle

In Iraqi Kurdistan, disagreements will prevent the region's various political factions from forming a united front. In fact, the divisions are widening. The Patriotic Union of Kurdistan (PUK) has started pushing back more forcefully against its main political rival, the Kurdistan Democratic Party (KDP), to increase its share of oil revenues from Kirkuk and weaken the KDP's alliance with Baghdad. The dispute is good news for Baghdad, at least. Should the PUK make another attempt at disrupting the flow of oil from Kirkuk to win concessions from Baghdad or Arbil, the Iraqi government will feel less threatened than it would if the KDP were also in on the plan. But Kirkuk could become a flashpoint this quarter regardless, as the governments in Baghdad and the KRG, not to mention the rival Kurdish parties, fight over control of the province and its oil production.

Iraqi Kurdistan, similarly, will be a primary playing field in the competition between Turkey and Iran. Ankara will use the presence of the Kurdistan Workers' Party (PKK), which it considers a terrorist organization, in northern Iraq as a pretext to deploy proxy forces in the region to defend its interests there. Turkey might consider, for instance, dispatching the Rojava Peshmerga, a Kurdish militia aligned with the KDP, to fight on its behalf in the event that ethnic conflict flares up after the Mosul offensive winds down. To keep Ankara in check and support its own interests in northern Iraq, Tehran will rely on the mostly Shiite Popular Mobilization Forces positioned near Turkish-backed forces, as well as its ties with Baghdad.

Turkey's Resurgence

To try to improve its chances of success, the AKP has been using the country's security concerns to stoke nationalism and stir popular support for the referendum. The wave of nationalism sweeping Turkey will buoy the ruling party, win or lose. Nevertheless, the results of the referendum will reveal strong support for and opposition to the AKP, laying bare the country's sharp political divisions.

President Recep Tayyip Erdogan has a lot riding on the success of the reforms.

President Recep Tayyip Erdogan has a lot riding on the success of the reforms.

In Turkey, voters will head to the polls in mid-April to decide whether to go ahead with proposed constitutional amendments that could change Turkey's political future. President Recep Tayyip Erdogan has a lot riding on the success of the reforms, which would increase the powers of the presidency and curtail those of other branches of government. But when voters cast their ballots on April 16, they will have other concerns on their minds, such as the country's flagging economy. Turkey's high dollar-denominated debt and weakening currency — set to further deteriorate as the dollar strengthens — have exacerbated its financial troubles recently. If the referendum falls short of the simple majority it needs to pass, the ruling Justice and Development Party (AKP) will still retain power, though the loss would be a blow for Erdogan's campaign to consolidate institutional control.

Iran's Arc of Influence

As the Islamic republic gears up for its election, one of its prized proxy forces, Hezbollah, could derail a vote in Lebanon. The militia's allies and enemies are still at odds over electoral reforms and a new budget, and their disagreements could postpone elections set for May. Notwithstanding the current dispute, the Lebanese government has come a long way over the past several months. A new prime minister and president have managed to reshuffle the country's military leadership and, more important, revive its stagnant energy sector. Their progress highlights the pragmatic approach Lebanon's main political parties have taken to try to find a viable compromise to solve the country's persistent problems. But as the lingering differences over electoral reform demonstrate, no solution is perfect.

Hezbollah will also be a source of growing concern for Israel during the second quarter. The group's military buildup in Syria over the course of the civil war there, combined with its growing presence in the Golan Heights, has put Israel on high alert and fueled fears of an impending war at the country's northern border. To prevent Hezbollah from getting any stronger, the Israeli government will continue attacking its arms shipments in southern Syria. Nevertheless, the conflict could escalate during the second quarter.

The threat of new sanctions from the United States will compound Iranian President Hassan Rouhani's economic worries

The threat of new sanctions from the United States will compound Iranian President Hassan Rouhani's economic worries

Iran will also hold an important vote this quarter. Voters in the country will elect their next president May 19. As the election approaches, even the Islamic republic's hard-line politicians are trying to avoid instigating conflict with the United States. Washington, likewise, will be careful not to provoke hostilities with Tehran by changing the Joint Comprehensive Plan of Action nuclear deal — especially since the GCC countries support keeping the agreement in place rather than risking uncertainty by scrapping it. But that won't stop the Islamic Revolutionary Guard Corps from keeping up its usual defensive posturing and staging missile tests or military exercises in a bid to stay relevant. And as U.S. lawmakers have made clear, Congress will not hesitate to impose additional sanctions against Tehran in response to any perceived aggression.

The threat of new sanctions from the United States will compound Iranian President Hassan Rouhani's economic worries in the runup to the elections. When campaign season kicks off in April, the incumbent leader will face challenges from opponents in Iran's hard-line and conservative camps alike. And though Rouhani has experience, momentum and his role in Iran's economic recovery to date on his side, the country's lingering financial troubles will weigh heavy on voters' minds as they head for the ballot box. Inflation has fallen under Rouhani's administration, but unemployment is still high — a vulnerability his opponents may seize on during the campaign.

Israel's Survival Strategy

If the Israeli government keeps pursuing its settlement policy in the West Bank without objection from the White House, moreover, the proliferating communities could provoke a violent response from Palestinians there. The risk of renewed conflict, sparked by competing Salafist groups or merely by chance events, will loom large in the Palestinian Authority, though its two main political parties, Fatah and Hamas, will each try to avoid confrontation with Israel this quarter. In addition, the political divides between the parties could further postpone legislative elections in the Palestinian territories, scheduled in the West Bank for May.

Hamas and Fatah will each be focused on their own internal objectives this quarter rather than on bridging the divide between them. Hamas is working to modify its political charter for the first time in decades, breaking with tradition to recognize the 1967 Palestinian borders. The party's turn toward moderation, however slight, is meant to curry favor with Arab partners such as Egypt, whose support Hamas needs more than ever now that the Islamic State's Sinai faction is threatening its supply routes and legitimacy. (Israel will put little stock in the group's efforts at change, though, and will continue its operations against Hamas.) Fatah's leaders, meanwhile, will be focused on establishing a succession plan for aging party leader and Palestinian President Mahmoud Abbas. The enduring rifts between the rival Palestinian parties will prompt Arab states in the region to get more involved to try to resolve the struggle.

The Saudi Survival Strategy

For Saudi Arabia, the second quarter will hinge on OPEC's May 25 meeting. The summit, during which Riyadh will cajole its fellow members in the oil cartel to extend the production cut instated in November 2016, will be a turning point for the Saudi government's economic reform initiatives. Even though the production cap hasn't boosted oil prices as much as Riyadh hoped it would, the kingdom is in no position to risk oversaturating the market by scrapping the deal. Doing so, after all, would further destabilize the price of oil, jeopardizing Saudi Arabia's oil revenues in the process. Whether the country can persuade the rest of OPEC to stay the course with the production cut will determine every other economic action that the Saudi government takes for the rest of the year.

The Yemen Civil War

With all sides of the conflict locked in a stalemate, Yemen's civil war will enter the second quarter more or less stagnant. The rifts in the Gulf Cooperation Council (GCC) military coalition against Yemen's Houthi rebels are more pronounced than ever. The United Arab Emirates is focused on training and supporting its own forces in the south. Saudi Arabia, on the other hand, is looking to the United States for help negotiating a political resolution to end the fight. But until Riyadh compromises in its adamant support for Yemeni President Abd Rabboh Mansour Hadi, and the Houthi rebels agree to relinquish territory to the government, the prospects for peace will be slim. So though the United Nations will make another attempt at forging a peace plan for the country, it will make little headway in this endeavor.

Evidence of Iran's efforts to train and equip the Houthi rebels, meanwhile, has prompted the Pentagon to request more support for the Saudi- and Emirati-led coalition. If the White House approves, the United States will share more intelligence and boost its logistical coordination with the Gulf coalition to try to limit Iran's influence in war-torn Yemen and stabilize the strategic Bab al-Mandab Strait. At the same time, Washington will pursue a more aggressive strategy against al Qaeda in the second quarter since the group's slow and steady approach has enabled it to grow in Yemen as well as Syria.

The Libyan Civil War

Oil production will also play an important role in Libya this quarter, as multiple conflicts rage on in the country. Libyan National Army chief Field Marshal Khalifa Hifter has reclaimed the critical As Sidra and Ras Lanuf oil export terminals in eastern Libya, after the Petroleum Facilities Guards and Benghazi Defense Brigades militias overran them in early March. Though the fighting stalled oil production in Libya, it will likely maintain export levels over 400,000 barrels per day throughout the quarter.

In western Libya, meanwhile, rivalries between the U.N.-backed Government of National Accord and the General National Congress, two of the country's three rival governments, will breed divisions in Misrata and Tripoli. Outbreaks of violence between the governments' corresponding militias will continue to be a constant this quarter, particularly in the capital. International support for Libya's governments will be less divided, by contrast. Egypt and the United Arab Emirates will continue to back Hifter, while Russia increases its support for his Libyan National Army. (Unless he can bring more ground forces under his control, however, Hifter will have trouble increasing his influence in eastern Libya, and his efforts to draw new recruits will run up against tribal divisions.) And although the European Union will push for political resolutions to the various battles in Libya, negotiations will stay at a standstill this quarter.

The Difficulties of North African Reform

Elsewhere in North Africa, Algeria's government will fight a political battle of its own this quarter, albeit more quietly. The country's citizens are frustrated since the government passed a new budget that slashed public spending and raised taxes. The austerity measures, which sparked public protests, will be at the forefront of voters' minds as they head to the polls in May for legislative elections, and more demonstrations are expected in the meantime. Whatever the vote's outcome, however, the Parliament lacks the political clout to bring change to Algeria's tightly controlled political system, even if opposition parties perform better than they have in years past. Many of President Abdel Aziz Bouteflika's close allies have ensconced themselves in important ministries and positions over the past few years, including, during the first quarter, the head of state oil and gas company Sonatrach. Infighting among the country's elite will be a strong undercurrent in Algerian politics for the rest of the quarter, though it will take place largely behind closed doors.

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Apr 4, 2017 | 16:49 GMT

12 mins read

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.
section Highlights
  • Chinese President Xi Jinping's administration’s overriding focus on preparations for the pivotal Party Congress (likely to be held in October) will translate into policies that prioritize economic and social stability over risky reforms.
  • China will use economic pressure against North Korea to try to rein in Pyongyang's nuclear program and gain leverage against Washington on other issues, particularly U.S pressure on trade. Beijing will avoid, however, taking actions that threaten North Korea’s economic lifelines in China and destabilize Kim Jong Un's government.
  • The upcoming fishing season will test the fragile reconciliation between China and ASEAN states, particularly the Philippines, while Washington and Tokyo will step up maritime activities in the disputed waters.
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China in Transition

Chinese President Xi Jinping’s push to consolidate his grip on power will enter a critical phase in the coming months amid preparations for October's 19th Party Congress, the quinquennial meeting where senior party officials select the next Politburo Standing Committee, the country's top governing body. With as many as five of the current seven committee members expected to step down this year, the plenum will offer Xi a momentous opportunity to stack the country’s leadership with his supporters, fortifying his position as China’s most powerful leader in decades. In the lead-up to the congress, Xi’s core task will be to eliminate remaining checks on his influence, while reshuffling personnel to move allies into key posts. Broadly speaking, these efforts will be successful.

The stakes riding on the Party Congress will compel Chinese leaders this quarter to focus overwhelmingly on stabilizing the economy, sustaining low unemployment and avoiding social disruptions, meaning much-needed but risky reforms will take a back seat. Beijing will continue to push industrial restructuring and consolidation programs, environmental initiatives and limited financial reforms. Major new initiatives, however, that would threaten to erode business confidence or destabilize the economy are unlikely in the near future. And on existing issues that the government chooses to expand, such as corporate debt-equity swaps and bankruptcy tribunals and the introduction of a nationwide property tax, authorities will delay full implementation until after the congress. In the meantime, Beijing will maintain robust support for key industrial sectors such as home construction and manufacturing while introducing piecemeal measures to strengthen the economy's defenses against potential external shocks, especially those threatened by impending shifts in U.S. trade and currency policies.

Outside the mainland, Beijing will face a bigger challenge in managing persistent discontent in Hong Kong over China’s interference in the city’s political affairs, a situation that the recent election of its preferred candidate, Carrie Lam, as Hong Kong’s next chief executive will do little to alleviate. As the special administrative region prepares to mark the 20th anniversary of its reunification with China on July 1 (Lam’s inauguration date), conditions will be ripe for an escalation of protests.

 

Globalization

The ongoing evolution in U.S. trade policy will continue to be felt across the Asia-Pacific and will pose the greatest potential threat to Chinese economic stability — and therefore to Xi’s drive to consolidate power — in the second quarter. In the next three months, Washington may not impose new barriers to trade with China beyond anti-dumping and countervailing duties, but Beijing will gird itself for the possibility that the Trump administration follows through on the new president's promises to name China a currency manipulator or levy new controls on U.S. imports of Chinese goods such as steel or automobiles. Chinese authorities will work to build up buffers against U.S. threats or punitive measures while seeking to deter Washington by outlining the retaliatory measures Beijing can take. China may also introduce its own anti-dumping measures. Beijing's most likely course of action, however, will be to try to use its influence on regional security matters as leverage in economic discussions with Washington. Toward this end, China may offer to cooperate with Washington on issues such as cybersecurity, military affairs and even North Korea — a rare area where U.S. and Chinese interests overlap. At the same time, it will become more openly confrontational in the South China Sea or on other regional matters.

Though China has been the primary target in Asia of Washington’s attacks on trade and currency manipulation, Japan and South Korea — the United States’ two most important security allies in Asia — have by no means been exempt from prospective U.S. policy changes. This will compel both countries to explore other options, including expanded investment into and potentially imports from the United States, to hedge against pressure from Washington and prevent economic frictions from undermining their security partnerships. Nonetheless, even rhetorical pressure from Washington on trade will be painful for South Korea as Seoul attempts to move on from the fall of President Park Geun Hye while also facing Chinese economic retaliation over the deployment of the Terminal High-Altitude Area Defense (THAAD) missile defense system. China may ease pressure on Seoul in an effort to open diplomacy with the next South Korean administration after the upcoming election. But the new president's attention will be divided between a range of priorities: not only the perennial North Korean threat but also reform of South Korea's scandal-prone chaebols (giant, family-run conglomerates) and broader economic restructuring.

Elsewhere in the Asia-Pacific, moderate recoveries in the global economy — particularly in commodity prices — will continue to provide much-needed relief for regional exporters. Nonetheless, countries such as South Korea and Thailand will struggle to regain their growth momentum because of internal political constraints, increased regional competition and regional geopolitical pressures. Moreover, few countries in the region will be immune to the long-term impact of the surge of protectionism across the globe or the potential fallout from a prolonged Sino-U.S. trade or currency spat. As major powers reconfigure their trade strategies, smaller economies will seek to insulate themselves from potential shocks by more proactively pursuing regional cooperation and economic diversification. In addition to Asia-centric multilateral frameworks such as the 16-member Regional Comprehensive Economic Partnership (RCEP), trade-dependent economies such as those of Malaysia, Australia, Vietnam and South Korea will explore free trade options farther afield.

The New Silk Road

Beijing will be well-positioned to exploit regionwide uncertainty over Washington’s potential retrenchment to press Chinese interests elsewhere in its periphery this quarter. In response to the Trump administration’s withdrawal from the Trans-Pacific Partnership trade pact, China will redouble its efforts to draw regional economies further into its orbit by touting regional trade initiatives such as RCEP.

In addition to trade, expanded investment, particularly in infrastructure, will be core to China's diplomatic outreach throughout its periphery, with Beijing using its One Belt, One Road summit in May to portray itself as an economic anchor and promote its vision for the region as a favorable alternative to the Western-led order. But its efforts to build out vast road and rail networks will be constrained by localized unrest and suspicions in target countries, particularly Pakistan and Sri Lanka, as well as at home in Xinjiang. Domestic economic pressures will also complicate implementation of Beijing's grand plans.

Coping With a Nuclear North Korea

The fraught efforts by China and the United States, as well as South Korea and Japan, to contain North Korea’s nuclear weapons program will remain a singular driver of regional dynamics in the quarter. As North Korea nears the successful development of an effective nuclear deterrent against the United States, Pyongyang will continue to use every opportunity to demonstrate its expanding defense capabilities. Another North Korean nuclear test would undoubtedly elicit heated rhetoric and defense posturing by Seoul and Tokyo, including moves that Beijing views as antagonistic. This will reduce room for diplomacy between Washington and Northeast Asia’s leading powers and intensify pressure on Washington to consider alternative measures to deter Pyongyang.

Pyongyang will continue to use every opportunity to demonstrate its expanding defense capabilities.

Pyongyang will continue to use every opportunity to demonstrate its expanding defense capabilities.

Direct, pre-emptive military action against Pyongyang — particularly its nuclear weapons infrastructure and arsenal — is possible but unlikely this quarter absent a complete breakdown of diplomatic efforts by the United States and China. Instead, Washington will most likely focus on pressuring Beijing to rein in Pyongyang. Beijing may use its economic pressure over North Korea to hedge against Washington’s agenda on other fronts, particularly U.S. pressure on trade. But Beijing will avoid fully severing North Korea’s economic lifelines in China or substantially undermining Kim Jong Un's rule in Pyongyang.

Asia-Pacific: Among Great Powers

Where possible, Beijing will work to separate its tension with Washington over trade and the Korean Peninsula from other pivotal issues in China’s periphery. Beijing will be particularly on guard against any moves by Washington to use Taiwan as a bargaining chip in other negotiations. Though the Trump administration reversed course and pledged in February to continue the “One China” policy, a long-standing diplomatic formula underpinning Washington's relations with Beijing and Taipei, the White House may still seek to boost arms sales or diplomatic contact with Taipei this quarter. Meanwhile, Taiwan will also expand its economic outreach to other countries, particular Japan, India and Southeast Asian states, to lessen the impact of diplomatic isolation by Beijing. China would heartily protest any new U.S. arms sales to Taiwan and possibly reduce military cooperation with Washington, but it will avoid inflaming cross-strait tensions in any way that would threaten Xi’s goals at the upcoming Party Congress.

Meanwhile, Beijing will further its evolving strategy for managing the backlash in Southeast Asia to expanding Chinese maritime activities in regional waters. Following last year’s international tribunal ruling invalidating China’s territorial claims in the South China Sea, Beijing has continued a carrot-and-stick strategy, pairing maritime and economic concessions with coercive measures — all while continuing to build out its regional military presence. In recent months, this strategy has helped China and some South China Sea claimant states, particularly the Philippines, achieve a tentative conciliation, even as China’s broader confrontation with the United States has threatened its capacity to manage South China Sea affairs.

But numerous potential flashpoints in the second quarter will put this reconciliation to the test. For example, the upcoming fishing season will create ample opportunities for flare-ups between Chinese fishing fleets and coast guard forces and their counterparts from littoral states such as Indonesia and Vietnam. Perhaps the biggest test will be the joint fishing arrangement between China and the Philippines in waters around the Scarborough Shoal, a long-standing flashpoint some 200 kilometers west of Luzon. Though large-scale, sustained conflict in the disputed waters is unlikely, the growing number of civilian and naval ships on the seas raises the risk of accidents and miscalculations capable of spawning an international crisis.

Landmark bilateral Sino-Philippine maritime consultations in May will not fundamentally alter the dynamic in the region. With Philippine President Rodrigo Duterte’s erratic rhetoric and efforts to reorient the country's foreign policy toward China beginning to draw some pushback at home — and given China’s unwavering goal of cementing its regional maritime dominance — Sino-Philippine relations will remain fraught, creating opportunities for a warming of ties between Manila and Washington. This, in turn, could affect how other states in the region deal with Chinese assertiveness. Ultimately, claimant states will continue to pursue omnidirectional foreign policies marked by greater ties with a range of outside powers, including Russia and Japan. And Beijing will work to maintain its current strategy of balancing coercion with concessions and cooperation (including on energy development in disputed waters) to temper the sharpest tensions and limit opposition to its maritime actions.

Southeast Asia: Burdened by Consensus

China and the Association of Southeast Asian Nations (ASEAN) will likely make some progress in negotiations on a Code of Conduct for the South China Sea. But divisions within ASEAN over how to deal with Beijing, combined with deepening concerns over China’s growing military power and perceived assertiveness, will limit the negotiations.

Moreover, across Southeast Asia, domestic political factors will continue to hinder pan-ASEAN cohesion and complicate broader regional issues. Even as the Philippines’ temporary detente with China enters rough waters this quarter, for example, so will Duterte face new challenges to his initially unquestioned authority at home. As long as Duterte’s domestic popularity is high, he will face no serious threats to his power. But the threat of power struggles within the government and political establishment will grow as he pushes forward with contentious initiatives such as his violent war on drugs, peace talks with Muslim Moro and Communist rebels, and a plan to shift the government to a federal system — all while seeking to limit domestic backlash to his reorientation away from the United States, which retains deep ties throughout the Philippine defense establishment. A Duterte administration bogged down by domestic pressures would have less room to sustain a politically risky outreach to China or, as this year's ASEAN chair, steer the body toward a semblance of consensus on the South China Sea.

Meanwhile, in Cambodia — under the current government, China's most stalwart supporter in ASEAN — upcoming commune elections will test the public's support for Prime Minister Hun Sen and the grip of his Cambodian People's Party on power ahead of 2018 general elections. Similarly, an April runoff election for Jakarta governor will serve as a barometer of the ruling party's ability to solidify support to the degree necessary to expand substantial fiscal, regulatory and economic reforms and play a more decisive role in regional trade and security affairs.

A Japanese Awakening

Barring a significant change in U.S. policy toward the South China Sea, claimant states and U.S. allies alike will remain cautious about undertaking bilateral naval patrols with Washington or taking other actions that might antagonize Beijing. Such concerns will be unlikely, however, to deter Japan from deepening its diplomatic outreach to and defense cooperation with South China Sea claimant states. Tokyo will use arms sales and military aid to ASEAN states, along with joint exercises with regional navies and a generally increased regional maritime presence, to bolster its position as an increasingly robust check on Chinese influence in Southeast Asia.

Japan’s diplomatic, economic and security offensives in Southeast Asia are just one piece in its broader push to revive the country's standing and influence abroad. In the second quarter, Japanese Prime Minister Shinzo Abe will meet with Russian President Vladimir Putin as the two countries seek to improve ties and resolve a long-standing dispute over control of the South Kuril Islands. Even incremental progress here would help Tokyo hedge against Chinese influence in Northeast Asia. Meanwhile, Japan will continue with efforts to counter China's expanding presence in the East China Sea by increasing naval and coast guard patrols and research activities. But Tokyo's attention will be dominated by relations with Washington this quarter, with several meetings between senior Japanese and U.S. lawmakers on the docket, as the government seeks to build on the momentum generated by Abe's recent visit to Washington and Japan’s promise to invest in the United States.

The Abe administration will use political capital gained from its diplomatic successes here to push for structural reform legislation at home, along with a constitutional revision allowing the emperor to abdicate. The quarter will likely see concrete progress on reform legislation in areas such as agriculture and labor. Meanwhile, the Abe administration will rely on aggressive monetary and fiscal policy to sustain overall economic stability at home.

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Apr 4, 2017 | 16:49 GMT

12 mins read

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 — 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 characters 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
section Highlights
  • U.S. President Donald Trump will trigger the process of renegotiating NAFTA this quarter, though talks on the bloc's future won't formally start until at least the third quarter.
  • Mexico will explore the possibility of increasing trade with would-be members of the ill-fated Trans-Pacific Partnership, the European Union and South America to reduce its dependence on U.S. imports.
  • Faced with the persistent threat of financial default and social unrest, Venezuela will keep a close eye on its military to reduce the risk of a coup.
  • As his brief tenure threatens to be cut even shorter by an electoral court investigation, Brazilian President Michel Temer will try to present pension reform -- a key part of his austerity agenda -- to the lower house.
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North America Unrivaled

Now that the key members of U.S. President Donald Trump's trade team have been appointed and are likely to be confirmed this quarter, trade issues will move up on the White House's agenda. Washington will use the next three months to conduct an internal review on the United States' existing trade agreements and decide which aspects of the deals to amend in negotiations. At the top of the new administration's priorities will be the revision of the North American Free Trade Agreement (NAFTA).

NAFTA's members — Canada, Mexico and the United States — will open the discussion within a trilateral framework. Though the United States has said it would prefer to pursue trade talks on a bilateral basis, Canada and Mexico have made clear that they prefer to stick to three-way talks. But even if the United States is willing to kick off the negotiations in this format, differences between Washington and its North American trade partners could eventually force the parties to move to one-on-one discussions instead. This cannot happen, however, until the negotiations formally begin in the second half of the year. (The White House has said it plans to use the Trade Promotion Authority law to renegotiate NAFTA, but doing so would require the administration to give 90 days' notice before entering into official talks — notice it will almost certainly issue in the second quarter.)

In the meantime, all parties will see a flurry of preparations and lobbying take place in the coming months, ahead of the talks. The United States will use its 90-day consultation period to draft specific negotiating points for congressional review. Chief among them will be NAFTA's rules of origin: Washington will argue that products imported from Mexico and Canada should be made up of more inputs sourced from NAFTA members in order to qualify for tariff exemptions. The White House will also probably seek to reshape the bloc's Chapter 19 dispute settlement mechanism, introduce more labor and environmental requirements, and expand the deal's purview to cover modern sectors such as the digital economy that were not included in the initial agreement.

Mexico's strategy going into the negotiations also began to take shape over the first quarter. Mexico City has already triggered its own 90-day consultation period and has begun reaching out to business leaders and groups at the state and municipal levels in Mexico and the United States to lobby against any substantial alterations of NAFTA. Mexico has also outlined the sectors most likely to be affected by a breakdown in negotiations or new U.S. tariffs on Mexican goods so that it may respond in kind if it must. But with few practical means of immediate leverage against the United States, Mexico is at a distinct disadvantage. As a result, it will have no opportunity to pressure Washington without jeopardizing the NAFTA talks as a whole. Threats of scaling back intelligence sharing, for example, will probably emerge from Mexico only if Washington attempts to impose unfavorable constraints on Mexican goods during the talks.

Though Trump's harshest criticism of NAFTA has so far centered on Mexico, Canada is taking no chances. Following Mexico City's lead, Ottawa has reached out to U.S. states that frequently trade with Canada, including in the Midwest, in an attempt to minimize disruptions to NAFTA. Several of those states voted for Trump in November, but Ottawa is hoping to make the case that preserving close trade ties with Canada is in their best interest. Its lobbying and outreach efforts will continue through the second quarter. Canada has also pointed out that its own free trade agreement with the United States, which predates NAFTA, has only been suspended and could easily be resurrected should Washington choose to replace the trilateral deal with two bilateral arrangements.

Beyond its immediate neighbors, the United States will seek to more tightly enforce its existing trade deals with other partners, particularly China. Washington, however, is unlikely to make much progress on larger trade issues during the coming quarter. Though the White House has threatened to ignore the rulings of the World Trade Organization (WTO) as it sees fit, the issue probably will not come to a head in the next three months. With its health care plan on ice, the Trump administration will instead shift gears toward trying to implement its proposed tax cuts and reforms. Congress will pass a budget resolution in the second quarter that will allow it to try to approve tax adjustments through budget reconciliation before the end of the 2018 fiscal year.

Meanwhile, the Trump administration will unveil its own proposed changes to the tax code this quarter, though its plan will face an uphill battle in Congress. Among the most controversial amendments that Republicans in the House of Representatives have proposed is a border tax adjustment. Many are concerned that the measure may violate the United States' obligations under the WTO by rebating "direct taxes" on exporters (potentially constituting an export subsidy) and by taxing imported goods differently than domestically produced products. EU members and other countries have expressed concern about these issues and have promised to challenge the changes if they are approved by Congress. That said, it is unclear whether these aspects of the tax reform will be eliminated, adjusted or kept before the bill is presented to lawmakers. Moreover, though Washington will kick off the process of overhauling the U.S. tax code this quarter, Congress will not face as tight a deadline to complete it as it did with health care reform earlier this year. The tax proposals' actual passage, then, will not occur until at least the second half of 2017.

The Importance of Mexico

Mexico's relationship with the United States — its most important in terms of trade, security and diplomacy — will take center stage in Mexico City this quarter. Though the Mexican government will take small steps to try to limit any alterations to its ties with Washington, it will also hedge its bets by searching for ways to diversify its economy away from its northern neighbor. Mexico will explore its options for expanding trade with the European Union and Asian partners, including Japan, China, New Zealand and Thailand, while seeking to partially substitute U.S. food imports with goods from South America. To that end, it will try to lay the groundwork for deals to purchase more soybean, beef, pork and corn imports from Brazil and Argentina.

The White House's plans to renegotiate NAFTA and insistence that Mexico do more to restrict immigration could translate into political gains for populist politicians south of the border. The campaign season for Mexico state's gubernatorial election on June 4 will heat up during the second quarter, and given the state's size and political diversity, it is widely regarded as a bellwether for the country's presidential race, which will be held in 2018. At the moment, populist figure Andres Manuel Lopez Obrador's National Regeneration Movement (Morena) appears ready to give the country's traditional political heavyweights — the Institutional Revolutionary Party (PRI) and National Action Party (PAN) — a run for their money in this year's election. As Morena squares off against the PRI and PAN for control of Mexico state's governorship, its performance will give some indication as to whether the PRI's numerous corruption scandals and Mexico City's deteriorating relationship with Washington will result in populist backlash during next year's presidential race. Lopez Obrador will no doubt capitalize on Mexican voters' dissatisfaction with the ruling PRI and U.S. antagonism to further his own campaign for the presidency over the next few months.

Venezuela's Unraveling

This year will be the toughest the ruling United Socialist Party of Venezuela (PSUV) has ever encountered. Chief among the government's concerns will be its high risk of defaulting on debt owed by state oil and natural gas firm Petroleos de Venezuela (PDVSA). PDVSA is counting on sealing a deal to sell Russian oil giant Rosneft a stake in a joint venture to make its $3.1 billion in debt payments due in April and May. If the loan falls through, Venezuela will be in dire financial straits. Should the company default on its upcoming bills, the threat of unrest spreading throughout the country will rise. But even if PDVSA successfully makes its payments in the second quarter, it will owe another $3 billion in October and November — bills it will probably fail to pay without additional foreign assistance.

If Venezuela proves unable to avoid default, whether in April or November, its full impact will not be felt for several months. But eventually imports, including food supplies, will plunge and the country's already high inflation will soar. Each of these effects would pose a significant threat to the PSUV's continued rule. Political elites would likely close ranks and crack down on signs of dissent from within their own party and from the opposition in hopes of fending off potential challenges to the state.

Venezuela’s armed forces divide the country into eight Strategic Defense Regions and 24 Strategic Defense Zones.

Venezuela’s armed forces divide the country into eight Strategic Defense Regions and 24 Strategic Defense Zones.

Faced with mounting discontent, the Venezuelan government will also maintain — and perhaps increase — its surveillance of the country's armed forces. The ruling party fears that military officers in Venezuela's regional commands may someday rise up against the central government. Though no coup seems to be in the making at present, Caracas will use human intelligence sources and electronic surveillance to keep a close eye on its troops to ensure that does not change.

In addition to its predicament at home, the Venezuelan government will have to grapple with the uncertainty surrounding the new U.S. administration's foreign policy. The White House began to adopt a tougher stance toward Venezuela in the first quarter, and it may choose to build on that pressure by slapping new sanctions on Caracas, through the U.S. Treasury Department, in the second quarter. If the sanctions target Venezuelan officials, their impact on the country as a whole will be minimal. But if they are leveled against PDVSA — the government's primary source of revenue — the punitive measures will do considerable damage to Caracas' finances and the ruling party's position in power. Such sanctions (or the mere threat of them) will therefore give the United States substantial leverage over Venezuela in any future negotiations.

Colombian Peace Process

Colombia, meanwhile, will continue the process of winding down its longest-running insurgency. Rebels belonging to the Revolutionary Armed Forces of Colombia (FARC) will stay in their demobilization zones awaiting commanders' orders to surrender their weapons. At the same time, the Colombian Congress will pass legislation that will permit the FARC to continue laying down arms. Though the group originally agreed to give up all of its weapons by June 1, this deadline may be delayed since FARC members have been slow to gather at the country's predetermined demobilization zones.

Rebels belonging to the Revolutionary Armed Forces of Colombia will stay in their demobilization zones awaiting commanders' orders to surrender their weapons.

Rebels belonging to the Revolutionary Armed Forces of Colombia will stay in their demobilization zones awaiting commanders' orders to surrender their weapons.

The disbandment of Colombia's largest guerrilla group, coupled with rising demand for cocaine in the United States, Europe and Asia, will fuel violent competitions among smaller rebel and criminal organizations for the FARC's former coca-producing territories in the months ahead. Now that most FARC rebels are preparing to reintegrate into society, the National Liberation Army (Colombia's second-largest insurgency) and the Clan del Golfo crime syndicate will vie with each other for control over key drug trafficking routes and resources, bringing greater violence to the Colombian hinterlands in the Choco, Cauca and Meta departments.

Brazil and Argentina

The second quarter will bring new promise for the Brazilian economy. Buoyed by higher oil and iron ore export revenue as well as rising domestic consumption, the country will continue to pull itself out of recession in the months ahead. But Brazil's politicians will not fare as well. President Michel Temer's tenure may be cut short in the second half of the year by an ongoing Supreme Electoral Court investigation into charges that he knowingly accepted campaign funds in 2014 that were obtained through acts of corruption. Though the court is unlikely to issue its ruling during the second quarter, the accusations will continue to hang over the president in the coming months.

Several other leading figures from Brazil's major political parties have been swept up in the scandal as well. Politicians who would have otherwise been obvious candidates for the country's presidential election in 2018, such as Aecio Neves, Jose Serra and former President Luiz Inacio Lula da Silva, have been plagued by allegations of corruption. As the popularity of Brazil's established elite has fallen, political outsiders have seized the chance to make their own gains. Chief among them is a highly conservative former military officer, Jair Bolsonaro, who came in third place in recent polls. Bolsonaro's rise is troubling to Brazil's traditional parties, such as the Workers' Party and the Social Democracy Party of Brazil, which may have a hard time defeating him if they cannot carve out a clear majority in the first round of the presidential race. (Even da Silva, who is popular among voters, would run the risk of losing to Bolsonaro in the event of a runoff.) Still, the campaign season has only just begun, and Bolsonaro's chances of proceeding to a runoff are remote — especially if new candidates enter the race on behalf of Brazil's entrenched leaders.

For now, Temer will focus on bringing his pension reform — a key part of his austerity agenda — to a vote in the lower house of the National Congress. But protests against the proposal and government corruption could stall the vote, particularly as Eliseu Padilha (Temer's chief of staff and lead negotiator with the National Congress on the reforms) comes under scrutiny for graft. The threat of an investigation into and indictment of Padilha, or of Brazilian lawmakers, may sideline Temer's effort to rally the fractured National Congress' support for his policies.

Argentina's leaders will be in a no less precarious situation this quarter. President Mauricio Macri will have to balance between satisfying the demands of organized labor and attracting foreign investors as he continues to steadily make fiscal adjustments over the next few months. These measures will include hikes in the price of natural gas and likely water for consumers across the country.

There are limits, however, to how heavy a burden the government in Buenos Aires can place on taxpayers. The country will hold legislative elections in October that are considered a prelude to the presidential race in 2019. Determined to remain in power, the ruling party will shy away from implementing heavier austerity measures or spending cuts ahead of this year's vote that would directly harm labor unions or provincial governments.

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Apr 4, 2017 | 16:50 GMT

7 mins read

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’s great population centers. India is the region’s dominant country, home to the world’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’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.
section Highlights
  • Now that India's Parliament has passed the federal component of the Goods and Services Tax bill, state legislatures across the country will begin the lengthy process of passing their own versions of the measure.
  • Ties between New Delhi and Islamabad will stabilize this quarter since, with state election season behind it, India has less political incentive to censure Pakistan.
  • Pakistan, meanwhile, will shift its strategic focus toward securing the Afghan border in anticipation of the Taliban's spring offensive.
  • In Nepal, the Madhesi ethnic group's demands for greater political autonomy, and the opposition Communist Party of Nepal (Unified Marxist-Leninist)’s resistance, will make local elections in May a point of contention.
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India's Own Worst Enemy

The second quarter will be a benchmark for India's ambitious tax reforms. The Goods and Services Tax (GST) bill has weathered a halting journey in the 17 years since it was first proposed, spurring debate and disagreement as it wound its way through India's democratic system. Thanks to Finance Minister Arun Jaitley's "cooperative federalism" strategy, however, the dual value-added tax legislation clinched a major victory during the Parliament's recent budgetary session when the lower house passed all four of its component bills. The bills' passage marked a big step toward simplifying India's convoluted tax system and unifying its fragmented market — two key components of Prime Minister Narendra Modi's plan to boost economic growth.

Having passed the measures at the federal level, the ruling Bharatiya Janata Party (BJP) will now shift its attention to India's 29 state legislatures, each of which must pass a local version of the GST. This will be a lengthy undertaking, of course, especially considering that the BJP is in the minority in 14 state assemblies. Consequently, Modi's government probably won't meet its July 1 implementation deadline. But that doesn't mean the measures will fail. Through concession and compromise, Jaitley and his state counterparts in the GST Council have addressed local governments' major grievances, including the issue of compensation for lost tax revenues in manufacturing-heavy states. Ever since Parliament passed the GST constitutional amendment in August 2016, moreover, India's state and federal governments have become more aligned on the issue of tax reform. And so, notwithstanding the usual politicking, each state will pass its version of the GST eventually — though not necessarily in the second quarter.

In fact, India's economic reform project as a whole is entering the new quarter with renewed momentum after the recent state elections in the country. The BJP achieved a resounding victory in the all-important state of Uttar Pradesh, and it also formed governments in the states of Goa, Manipur and Uttarakhand. This string of successes is good news for the BJP for a couple of reasons. The ruling party, for instance, will get to send more representatives to the upper house of Parliament, easing the way for economic reforms — though this is a benefit that will take some time to pay off. More immediately, the party's strong electoral performance is a vote of confidence for Modi's demonetization campaign, despite the many inconveniences it caused.

Now that the Reserve Bank of India has removed ATM cash withdrawal limits, the demonetization process has ended, and "remonetization" is in full swing. As Indians regain access to cash, their country's economic growth should pick up a bit. At the same time, however, digital transactions — something demonetization tried to encourage — will keep falling, albeit not necessarily to pre-demonetization levels. New Delhi has yet to address the underlying reasons that have kept cash king in the Indian economy. The country's financial infrastructure remains inadequate, the cost of credit card transactions still exceeds that of cash payments, and the legal protections against credit card fraud are lacking. Until New Delhi fixes these issues, cash will continue to reign supreme.

The quarter also promises several important foreign policy visits for India covering defense, energy and investment. In April alone, Modi will host the prime ministers of Bangladesh and Australia, as well as the president of Nepal and Singapore's foreign minister. The Indian prime minister will chalk up a success in his country's quest to join multilateral institutions in June at the Shanghai Cooperation Organization summit in Astana, Kazakhstan, where India will receive full membership in the bloc. Pakistani Prime Minister Nawaz Sharif will also be in attendance to represent his country, which is also being admitted to the alliance. Their meeting will mark the first exchange between the two leaders since 2015 and offer a chance to gauge the state of South Asia's most consequential bilateral relationship.

The India-Pakistan Rivalry

With state election season behind it, the BJP has less political incentive to lambaste Pakistan, and relations between the two will stabilize during the second quarter. The two nuclear rivals will continue to bicker over a host of issues, of course, including the disputed territory of Kashmir. But since the fourth quarter of 2016, the number of cease-fire violations along the Line of Control in the region has fallen. The drop coincided with Gen. Qamar Javed Bajwa's ascension to the powerful post of Pakistan's army chief. Bajwa is redirecting his country's strategic attention away from India and toward Afghanistan (though securing the eastern border will still be a priority for Pakistan). Consequently, Islamabad will take pains to avoid antagonizing New Delhi. And as Pakistan's next general elections approach in 2018, a Supreme Court decision on Sharif and his family's involvement in the Panama Papers scandal could give the opposition useful campaign fodder.

India, likewise, will shift some of its attention from Pakistan — which will remain its biggest regional foreign policy challenge nonetheless — to another country in its periphery, Nepal. The Madhesi, an ethnic group of Indian origin living along the Terai plains near the Nepalese border with India, have renewed their demands for greater autonomy, including the creation of two Madhesi-majority provinces in the area. What's more, they have promised to boycott Nepal's May 14 local elections, the first such vote in 20 years and a milestone for the country's democracy. The opposition Communist Party of Nepal (Unified Marxist-Leninist), meanwhile, has vowed to counter the Madhesi's demands for fear that the two new provinces would give the ethnic group control over the Nepal-India border. The party's stance alone will cause greater discord as the election approaches.

Unless Nepalese Prime Minister Pushpa Kamal Dahal's Maoist Centre party concedes to negotiations over the Madhesi's requests, the local elections will hit a snag. Either the vote will be delayed, or its legitimacy will come into question, sparking protests along the Terai. Each scenario will increase the probability that India and China stage a diplomatic intervention, as they did in 2016 to try to keep former Prime Minister Khadga Prasad Oli's administration from toppling. (New Delhi will be careful not to intervene too directly, though, lest it push Kathmandu closer to Beijing.) Even so, given that Dahal's alliance holds a majority in Nepal's legislature — even without the Madhesi parties' support — his administration will survive through the quarter.

South Asian Militancy

Back in Pakistan, the army will continue its efforts to vanquish anti-state militancy, particularly in the restive Federally Administered Tribal Areas along the border with Afghanistan. Bajwa, the new army chief, is currently overseeing Operation Radd-ul-Fasaad as part of that initiative, which has already contributed to a decline in the number of militant-related civilian deaths in Pakistan. Though the campaign will help further reduce the casualty rate, progress will come at the cost of high-profile retaliatory attacks by the Islamic State's Khorasan chapter and the Jamaat-ul-Ahrar, a breakaway faction of the Tehrik-i-Taliban Pakistan. The threat of militant attacks in South Asia, in fact, will rise during the second quarter because warmer weather heralds the start of the annual spring offensive. The Taliban will ramp up their attacks across Afghanistan — not just in their strongholds of Helmand and Kandahar provinces in the country's south. The Islamic State's Khorasan chapter may also increase its activities. The uptick in attacks, in turn, will encourage more militants to seek refuge across the border in Pakistan, complicating Operation Radd-ul-Fasaad and perpetuating a cycle of militant violence and military crackdowns in the region.

In addition, the second quarter will test Afghanistan's peacemaking skills. Notorious warlord Gulbuddin Hekmatyar is expected to end his 20-year exile from public life in the next few months as part of a deal that Kabul struck with his party, Hizb-e-Islami Gulbuddin, in fall 2016. Should he return to Kabul as anticipated, Hekmatyar will reintegrate himself into the political wing of his party to begin laying the foundation for a return to politics. This quarter, moreover, Russia will continue to increase its efforts to jump-start the peace process in Afghanistan as it joins with Pakistan and China to mediate in prospective negotiations between the Afghan government and the Taliban. Despite its bloody history with Russia, Kabul is cautiously optimistic about Moscow's involvement.

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Apr 4, 2017 | 16:50 GMT

9 mins read

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’s no surprise that it captured the imagination of Europe’s earliest explorers — and that it continues to capture the imagination of current world powers eager to exploit it. And yet despite the region’s diversity, Sub-Saharan African countries have common challenges — transnational terrorism, rapid population growth, endemic poverty and corruption — 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.
section Highlights
  • Rising concerns over Nigerian President Muhammadu Buhari’s health will complicate the government’s attempts to push through an ambitious reform meant to improve Nigeria’s business climate.
  • South Africa’s presidential succession battle will intensify as opposing camps within the ruling ANC push their visions of reform and President Jacob Zuma tries to strengthen his hand.
  • The stalled deal between the Democratic Republic of the Congo’s ruling party and opposition will be at greater risk of collapse this quarter, making elections less likely to be held by the end of the year.
  • Mozambique will be forced to restructure its debts with bondholders to pave the way for the IMF bailout it needs to continue developing its burgeoning oil and natural gas sector.
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Nigeria: Obstacles to Prosperity

Nigerian President Muhammadu Buhari has had a tough year so far, made all the more complicated by lingering concerns over his health. The public’s fears were significantly heightened after what was supposed to be a 10-day medical trip to London turned into a nearly two-month convalescence abroad. Should the president be unable to finish his term, which ends in 2019, the center of Nigeria’s political power and patronage would shift southwestward toward the base of Vice President Yemi Osinbajo, who would assume the presidency. Aggrieved northern politicians may respond by boosting their support for the country’s militancies, while the oil-rich and restive Niger Delta’s expectations of concessions from the federal government may rise. (In its negotiations with Abuja, the southern region has demanded money and other perks.) Even if Buhari's rule continues, opposition from within and outside of his ruling All Progressives Congress party will mount in the face of the country's persistent financial difficulties. This will be especially true if the president fails to allay fears over his health before potential successors begin jockeying for a place in Nigeria’s 2019 election — now less than two years away — in earnest.

Regardless of who rules the country, Nigeria’s numerous economic challenges will not lessen in intensity in the second quarter. Weak oil prices, high inflation and the possibility of a stronger U.S. dollar will be a difficult combination for the Nigerian state and its citizens to weather. After all, a stronger dollar relative to the naira, Nigeria's currency, would hike up the costs of food and other imports, sparking protests and other forms of unrest. Meanwhile, international financial institutions such as the International Monetary Fund will continue to pressure Nigeria to lift its foreign exchange restrictions, which have proved costly for the country’s currency reserves. But the government will likely limit its actions to small steps, avoiding a completely free-floating naira in the name of price stability. Nevertheless, Abuja will make minor progress in reforming the country’s business environment as it pursues its 2017-2020 Economic Growth and Recovery Plan. This progress will likely include increasing transparency in service-level agreements (such as permits) and improving efficiency in the entry and exit of people and goods, which Nigeria’s plan is slated to target first. More ambitious reforms, however, will suffer if Buhari — who has reportedly reduced his working day to only a few hours — remains in ill health.

As government coffers come under increasing strain, the president will have to forgo expensive projects that could win over new allies and prevent the fissures within his party from widening. Deals intended to placate militants and stakeholders in the Niger Delta will likewise be modest, thus lacking the broad appeal needed to please the region’s fractious groups and keep them from resorting to politically motivated violence. The possibility that Niger Delta militants will try to increase pressure on the federal government in the second quarter by holding protests and conducting attacks as Abuja builds a peace package for the region cannot be ruled out.

The Post-Apartheid Era Ends

The contest over who will succeed South African President Jacob Zuma as the head of the African National Congress (ANC) will continue to heat up this quarter. Finance Minister Pravin Gordhan and other Zuma detractors were dismissed in a March 30 Cabinet reshuffle that removed several ministerial roadblocks constraining the president’s actions. Zuma has since appointed his close allies as replacements. Over the next three months, opposing factions within the country’s ruling party will press for their favored styles of reform as Zuma further emphasizes the need for radical economic change, including greater black economic empowerment, to energize his base and improve the odds that his successor will emerge from his ethnic Zulu and pro-labor circle. One possible candidate is his political ally and former wife, Nkosazana Dlamini-Zuma, who returned to the country in March after serving at the African Union for four years. She has since begun campaigning for the ANC’s top position.

Meanwhile, the president’s dismissal of Gordhan, whom the international community views as a steady hand over the economy, prompted S&P Global to downgrade South Africa’s credit rating on April 3. The move will only further weaken the country’s fragile financial position. Judicial proceedings related to corruption allegations and other cases that involve Zuma and his inner circle may prove an additional distraction as revelations of politically damaging information threaten to complicate matters for the president.

Zuma’s options will be further constrained by the countermoves of the ANC’s more market-oriented faction as it seeks to strengthen its own candidate ahead of the party’s December leadership congress. This wing will continue to push for restrained spending measures and budget cuts that are anathema to Zuma’s need to shore up support among his followers. Its ability to hamstring the president, however, was weakened by the March 30 Cabinet reshuffle. As the country’s ongoing leadership struggle intensifies, the government will have a harder time pushing through difficult reforms in the months ahead, and rifts within the ANC will widen.

For the most part, labor relations will remain calm in the second quarter — at least compared with previous years — as numerous agreements remain active until the end of the year and as the government seeks to avoid a credit downgrade. Nevertheless, tensions within the coal industry will continue to mount as the opposing sides debating the structure of wage negotiations struggle to find common ground. (In January, the previous policy of holding negotiations at a centralized level will be replaced by negotiations at the company level.) Tense labor relations in the coal sector could worsen if Zuma and his camp politicize the talks in order to energize their base for the brewing leadership battle.     

Old Leaders in a New Africa

In the Democratic Republic of the Congo, President Joseph Kabila’s political alliance will continue seek a successor who can protect the well-entrenched system of patronage it depends on to maintain power. As it stands, a 2017 election is still a possibility, even as the ruling party and portions of the opposition struggle to implement a Dec. 31 deal to transition power away from Kabila. With the president still in office despite finishing his constitutionally mandated final term in 2016, the deal’s collapse looks increasingly likely. Progress on voter registration in some provinces has been made, yet millions of Congolese citizens have yet to be registered, and it is unclear how a presidential contest would be paid for, given its hefty price tag.

The political obstacles that arose after the Dec. 31 deal was signed will endure in the second quarter, causing little progress to be made between the ruling party and the opposition. This means that the time available for Kabila, who oversees a weak and fractious political order, to find a successor before 2017 ends is running out. And in the absence of an acceptable successor, the president will be more likely to resort to additional delaying tactics — such as citing election costs — to push the election (and by extension, his rule) until 2018, risking sustained unrest in the process.

Mozambique's Financial Mess

Within the next three months, the government in Maputo will be forced to strike a deal with bondholders to restructure its debts. Negotiations became necessary when it was revealed in 2016 that bond proceedings were misused to buy military equipment and large amounts of debt were hidden. The ultimate success and timing of the negotiations will be crucial since the country, hoping to secure a bailout before the year ends, seeks to open talks with the International Monetary Fund in a bid to restore its support. A bailout would help ease the burden on the cash-strapped state, where patronage networks are strained (which could open splits within the ruling Mozambique Liberation Front) and investment in its oil and natural gas sector has stalled. Should Mozambique fail to reach a bailout deal, suspended energy industry investments could hamper development over the next few years and increase the risk that its burgeoning natural gas sector won’t get off the ground amid the pending glut in the liquefied natural gas market.

There's a chance that Mozambique's burgeoning natural gas sector won’t get off the ground.

There's a chance that Mozambique's burgeoning natural gas sector won’t get off the ground.

Ethiopian Instability

Last year, social unrest directed against the Tigray minority-led government in Addis Ababa spread, challenging its control of the country. But Addis Ababa’s use of heavy-handed security measures in the latter half of 2016 and into 2017 has blunted the opposition movement’s ability to unite, grow and intensify its pressure on the government. In the second quarter, the crackdown will continue to constrain the opposition, keeping the conflict to a low boil even as flare-ups posing significant risks to foreign businesses operating in Ethiopia persist. Ethiopia’s waning internal security concerns will give it additional maneuverability in neighboring Somalia, where Addis Ababa is currently reshaping its presence.

East African Integration

East Africa will continue to see crucial infrastructure projects come online this quarter. Following the inauguration of the Addis Ababa-Djibouti Railway in early 2017, another Chinese-funded project — the standard-gauge railway connecting Mombasa and Nairobi — is on track to be completed around June or July. The railway, which is Kenya’s largest infrastructure project since independence, will provide the country with greater transport efficiency and supply-chain redundancy from its biggest port to the capital city.

East Africa will continue to see crucial infrastructure projects come online this quarter.

East Africa will continue to see crucial infrastructure projects come online this quarter. 

Meanwhile, the European Union’s proposed economic partnership agreement with the East African Community remains troubled. The deal, which has been in the works since 2007, would give member states duty-free and quota-free access to the European Union's market. In exchange, the community would remove tariffs on 80 percent of its imports from the bloc by 2033. But Tanzania and Uganda have serious reservations about the deal, and Burundi continues to be isolated diplomatically, leaving only Kenya and Rwanda to have signed onto the agreement. During the second quarter, the European Union and Kenya will keep lobbying the community's dissenting members for their support, but Tanzania will continue employing delaying tactics in hopes of killing the deal.

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