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quarterly forecasts

Jun 17, 2019 | 14:35 GMT

60 mins read

2019 Third-Quarter Forecast

Stratfor's 2019 Third-Quarter Forecast focuses on the most important factors affecting the international system this quarter.
(ATTA KENARE/GUILLERMO ARIAS/CARLOS ALVAREZ/RYAD KRAMDI/SEAN GALLUP/ALFREDO ESTRELLA/WANG ZHAO/GUILLERMO ARIAS/WIN MCNAMEE/AFP/G

Overview

 

The U.S.-China Trade War Will Drag On. While there is a small window for a truce between U.S. President Donald Trump and Chinese President Xi Jinping, there is a stronger likelihood that the White House will follow through on its threat to impose tariffs on remaining Chinese imports. Nearly every move China makes to push back and cope with tariff pressure, including ramping up state backing for strategic industries and retaliating against U.S. businesses, will drive the two economic giants further apart as the trade war continues to damage the global economy.

Iranian Retaliation Will Raise the Risk of a Military Confrontation. Iranian retaliatory moves against the United States, including the resumption of nuclear activities and threats to shipping in the Strait of Hormuz, will raise the threat of U.S. punitive strikes on Iran. Even though the White House intent will be to limit offensive action and avoid bogging itself down in another politically unpopular war in the Middle East, the potential exists for a more serious escalation. Short of the negotiation Trump envisioned for Iran, progress could be made toward establishing a deconfliction channel via third-party mediators.

A High Stakes Tech Battle Will Drive Fragmentation in the Global Tech Sector. Far-reaching U.S. export restrictions against Chinese telecom giant Huawei Technologies Co. will nearly paralyze the company in the near term, and it could strengthen the White House's ongoing campaign to deter other countries from working with Huawei on 5G rollouts. Even if the United States agrees to a partial relaxation of its ban against Huawei, China will move full steam ahead to accelerate indigenous semiconductor development and software alternatives to its Western competitors. At the same time, U.S. regulators will ramp up their investigations of U.S. tech giants over antitrust, privacy and data protection concerns. 

Mexico Faces an Uphill Battle to Appease Trump and Avert Tariffs. Though Mexico narrowly averted U.S. tariffs by pledging to do more on border security, it is not out of the danger zone yet. Mexico will fall short of meeting Trump's demand that it chokes off migrant flows, and Trump will likely rely on tariffs, or at least the threat of tariffs, as his preferred enforcement tool.

 

 

Geopolitical Risk Will Create Significant Headwinds for the Global Economy. Global economic growth estimates are headed for another downgrade in the third quarter. Intensifying U.S. trade conflicts with China, along with the lingering threat of a major disruption to North American trade, will continue to sap investor confidence and drive a U.S. Federal Reserve decision to ease interest rates. The Chinese yuan is likely to depreciate past 7 to the dollar, though China's Central Bank will intervene to avoid a much steeper devaluation that would accelerate capital flight and apply stress on a number of emerging markets. Between slowing consumer demand and a higher risk of supply disruptions from a potential Iran conflict, oil markets will remain in flux. 
 
Brexit Chaos and Italy Will Weigh on Europe. The United Kingdom will get a new hard-line prime minister, who will inevitably hit a wall with Brussels when negotiating the terms of the United Kingdom's future relationship with the European Union. The risk of a no-deal Brexit will rise through the quarter, but the likely result will be more delays and possibly a path to early elections. And even as Rome manages to dodge EU sanctions over its ballooning deficit, Italy's fiscal policies, weakening banking sector and fragile government coalition will continue to stress the European Union.

Great Power Competition Will Create Opportunity But Mostly Risk for Middle Powers. As U.S. competition with Russia persists, Poland will be able to take advantage of the White House's strategic focus on Eastern Europe, advancing plans to rotate more U.S. troops through Poland and pushing for targeted U.S. sanctions against Nord Stream 2. Turkey and India, meanwhile, will remain in the White House's crosshairs over their energy relationships with Iran and defense ties to Russia, with New Delhi facing the additional threat of tariffs this quarter. 

Military-Backed Transitions in North Africa Face Major Hurdles. The fall of legacy dictators in Sudan and Algeria have emboldened opposition groups hungry for political change. The militaries of each country trying to manage the tumultuous transition will struggle to satisfy opposition demands while navigating elite power spats behind the scenes. Sudan will rely more on brute force to quell unrest, while Algeria's more diverse set of power brokers will likely become mired in political negotiation as unrest persists.

section

Jun 11, 2019 | 20:12 GMT

14 mins read

Global Trends

section Highlights
  • There is a small window for a trade truce, but the White House is more likely to escalate its trade war and broader strategic competition with China.
  • Iranian retaliation against the White House's maximum pressure campaign will raise the risk of U.S. punitive strikes against Iran.
  • Mexico will continue to live in fear of tariffs as the country falls short of Trump's demands for choking off migrant flows.
  • Rising trade frictions, the potential for military conflict in the energy-vital Persian Gulf and growing political uncertainty will create major geopolitical headwinds for the already-slowing global economy.

The U.S. "Tariff Man" Strikes Again

U.S. President Donald Trump, the self-proclaimed "Tariff Man," is likely to be the single most important source of geopolitical risk to the global economy in the third quarter of 2019. A deepening standoff with China increases the probability that Trump will follow through with threats to impose 25 percent tariffs on all remaining Chinese imports. Tariff threats against Mexico over auto imports will continue to linger at a time during which global trade risk creates headwinds for global economic growth. Trump nonetheless appears to be operating under the assumption that the U.S. economy is on solid enough footing to justify tariffs, both as a wide-ranging negotiating tactic and as a means to drive down the U.S. trade deficit. 

A graphic showing the impact of Trump's trade wars.

Of all its trade battles, the United States will maintain a particularly hard line on China as Washington's strategic competition with Beijing deepens on nearly all fronts. A deliberate attempt by the White House to cripple Chinese tech giant Huawei Technologies Co. has narrowed what little middle ground there was last quarter for a trade compromise. And for every U.S. action designed to coerce Beijing into making greater concessions, there will be a Chinese reaction that pushes the economic giants further apart in the negotiation. For example, U.S. trade assaults on China will prompt Beijing to increase financial support for strategic sectors, such as the semiconductor industry, directly violating a U.S. demand to reduce state support and level the playing field for foreign businesses. Chinese tariff retaliation and possible boycotts of U.S. goods will counteract Washington's demand for China to buy more American products to reduce the U.S. trade deficit. Chinese attempts to push back against the United States by selectively blacklisting and fining American firms only feeds into a familiar White House complaint: that China actively discriminates against foreign businesses.

Washington will not ease up on Beijing over the quarter, but every U.S. action will have a Chinese reaction.

A potential Chinese restriction of rare earth exports will amplify threats to U.S. commerce that the White House is citing to legally justify Section 301 tariffs in the first place. And the unavoidable depreciation of the yuan from the stress of the trade war will be used by the White House to name and shame China as a currency "manipulator" bent on disadvantaging U.S. exporters. This burning economic dispute is meanwhile unfolding against a backdrop of rising security tensions in the South China Sea and growing pushback against Beijing in China's periphery, where the United States has the potential to apply sanctions against the Chinese government and its affiliates in the name of protecting human rights and democracy.

A chart showing the estimated global cost of a U.S.-China trade war

This geopolitical climate does not bode well for Trump and Chinese President Xi Jinping to reach a breakthrough in negotiations if and when they meet at the G-20 summit in Japan in late June. Beijing will keep the door open for future dialogue, and Trump still has the option of buying more time in the negotiation before resorting to all-encompassing tariffs. But the window for a truce is closing fast, and Xi and Trump will have enough political backing to prolong their economic war well beyond the quarter.

A chart showing possible scenarios for the U.S.-China trade war

While Mexico has been among the main beneficiaries of the U.S.-China trade war, it has now found itself squarely in Trump's trade crosshairs. Having narrowly averted tariffs this time around, Mexico's government is facing a tight timeline and an uphill battle to appease the U.S. president. Given the Mexican national guard's questionable ability to crack down on migrant traffic coming across its southern border — coupled with escalating unrest in parts of Central America and the reluctance of countries in the region to overhaul their asylum laws — the best Mexico City may be able to hope for is a temporary lull in migrant flows as smugglers adapt to expanded border controls. Moreover, Mexico's already robust trade relationship with the United States and lack of market-based purchasing does not leave much room for the current administration to make a showy concession to Trump by increasing agricultural imports. 

Fearing a descent into recession, Mexico will carefully avoid a confrontation with the United States this quarter as it tries to steer clear of costly tariffs.

Trump's tariff threats against Mexico could resurface around July 22 and again on Sept. 5, when the Mexican government is supposed to deliver to the White House its progress report on curbing illegal border crossings. Already on the edge of recession, Mexico will be careful to avoid a confrontation with the White House in an effort to steer clear of costly tariffs. After more than a quarter of a century of tariff-free trade on the U.S.-Mexico border, the economic impact of just 5 percent tariffs on Mexican imports, as Trump earlier threatened, would be tantamount to ripping up the North American Free Trade Agreement and returning to average World Trade Organization-level tariffs for most sectors. Supply chain disruptions would reverberate across the auto, electronic, industrial and food sectors. Furthermore, U.S. agricultural producers would be singled out for retaliatory tariffs, and Congress could even regain momentum to challenge the president's trade authority — though a veto-proof majority on such a measure would be far from assured. Even if Trump avoids the heavy economic and political toll that comes with disrupting North American trade through tariffs, the uncertainty that comes with merely keeping the threat alive will continue to erode investor confidence.

The threat of auto tariffs will meanwhile continue to loom large as Trump waits for U.S. trading partners to come to him with a "solution" by November, in the form of voluntary export restraints and/or acceptance of U.S. quotas. While Japan has a better chance of negotiating a trade compromise with the White House that includes agriculture and autos, EU leaders, too divided and consumed with horse-trading over political positions in the European Union for most of the quarter, will resist the White House's ultimatum on restricting auto exports to the United States. As a result, there won't be much movement in Continental trade negotiations with the Trump administration. 

The psychological impact of Trump's tariff weaponization strategy will linger well beyond the quarter.

The White House has already raised the WTO's hackles by stretching the definition of national security to justify a variety of tariffs, all while discrediting the global trade body's authority to arbitrate trade disputes. With a Dec. 10 deadline pending for the United States to lift its siege on the WTO Appellate Body or else drive it into paralysis, European leaders will prepare for the worst and work on convincing other WTO members to sign onto an ad hoc solution that would have former WTO appeals judges settle trade disputes under WTO arbitration rules until a compromise — likely with the next White House — can be found. 

The European Union's creative workaround at the WTO points to a growing assumption among U.S. allies and adversaries alike that negotiation with the current White House may be futile. Erratic U.S. negotiating tactics and the elusiveness of a final, negotiated settlement will bruise business confidence and investor sentiment globally. Hamfisted diplomacy will also convince a number of powers, including China, Europe and Iran, that seeing out the result of the 2020 U.S. election makes more strategic sense than entertaining heavy concessions in a negotiation with the Trump White House over a deal that may or may not last. 

Geopolitical Risk Bludgeons the Global Economy

In the face of yet another major tariff escalation, China will erect stronger capital controls and draw on its reserves to defend its currency, the yuan. China's Central Bank will intervene to avoid a steep and sudden devaluation because a depreciation beyond 7 yuan to the dollar will exacerbate China's economic slowdown and place greater stress on emerging market currencies. Heavy downside risk from the White House's trade wars will drive the U.S. Federal Reserve to ease interest rates this quarter.

A variety of competing factors will slow but not quite stall the global economy in the third quarter.

The European Central Bank has already abandoned plans to tighten monetary policy this year as crises of the European Union's own making roil the bloc. We do not think this quarter will end in a no-deal Brexit, but an escalation of political chaos in the United Kingdom, along with a drawn-out confrontation between Rome and Brussels over Italy's expansive fiscal policies, will continue to sap at European growth amid rising global trade frictions.

For energy markets, between the opposing forces of slowing consumer demand and the threat of military conflict in the Persian Gulf creating a sharp supply disruption, oil prices will remain in flux. When the Organization of Petroleum Exporting Countries meets early in the quarter (with its expanded retinue of crude-producing partners, a collective known as OPEC+), Saudi Arabia and Russia will drive an agreement to extend production cuts into the second half of the year as the world's biggest oil producers try to contend with rising U.S. inventories and weaker global demand.

A chart showing geopolitical risk against oil markets

Great Power Competition Drives Global Tech Fragmentation

An aggressive U.S. move in the second quarter to ban Huawei from selling and operating in the United States and, more importantly, to proscribe U.S. tech suppliers from working with the company goes well beyond trade leverage and fits into a broader White House strategy to cripple China's tech giants as a U.S.-China battle for technological dominance intensifies. If Xi and Trump agree to de-escalate the trade war this quarter, the White House could offer a selective and partial relaxation of export controls on goods and/or licenses that fall outside of highly strategic applications — specifically, dual-use technologies that could be used for security, surveillance or defense purposes. Pressure from affected U.S. businesses and ongoing court challenges could also have the effect of weakening U.S. restrictions against Huawei.

Regardless of their country of origin, global tech companies will find themselves on the firing line as the U.S.-China trade dispute heats up.

Uncertainty surrounding the U.S.-China trade negotiation and the viral nature of U.S. export law, in which even a minimal amount of U.S. components, software and technology could subject a company to sanctions, will accelerate Chinese efforts to shore up indigenous semiconductor development. Huawei will further seek to roll out an independent operating system for smartphones to maintain the company's global market share. China will struggle to reduce its reliance on major international chip providers — such as Intel Corp., Samsung Electronics and the Taiwan Semiconductor Manufacturing Company (TSMC) — that are now liable for U.S. sanctions. But over time, the rise of Chinese competitors in the chip manufacturing sector and the rollout of Chinese software alternatives — such as Huawei's mobile operating system challenger to iOS and Android — are likely to contribute further to the fragmentation of the global tech sector. 

A graphic showing global telecom operators and manufacturers

Ongoing U.S. diplomatic efforts to pressure countries in Europe, Latin America and Southeast Asia into imposing similar bans against Huawei equipment on national security grounds are already stalling. This is because most countries are unwilling to tolerate the much higher costs and implementation delays for 5G networks that would come with blacklisting Huawei. But the broad reach of U.S. export controls against Huawei will now give many of these governments and relevant telecommunications partners pause as they weigh a much bigger compliance risk in dealing with the Chinese firm. 

Even as its efforts to defang Chinese tech leaders gain momentum, the U.S. government has also made a point of targeting the exact Silicon Valley tech giants that Washington relies on to outperform China in a global race for technological supremacy. In line with Stratfor's 2019 Annual Forecast, bipartisan momentum is quickening behind U.S. efforts to scrutinize Big Tech over antitrust, privacy and free speech concerns. Google and Facebook are likely at the top of the list for the Federal Trade Commission and the Justice Department, which share oversight duties over the United States' largest tech firms. U.S. tech companies will also remain a prominent target in the European Union, where Ireland has launched a probe into Google for violating the European Union's General Data Protection Regulation on privacy protections. 

The White House Struggles to Find Order in Its Cluttered Foreign Policy

As well as juggling trade wars, the White House will also have to balance competing foreign policy priorities. Iran remains at the top of that list. The Trump White House is operating under an assumption that its ability to choke off Iranian exports and inflict heavy economic pain on the Islamic Republic will drive Tehran to the negotiating table or, better yet, instigate a grassroots overthrow of the clerical regime. Neither is likely to happen, though — and certainly not this quarter. At most, Tehran could rely on third-party mediators to establish a deconfliction channel with the United States as military frictions rise. Trump appears well aware of the political flack he would receive by committing the United States to yet another massive military conflict in the Middle East and so is likely to exercise some restraint in trying to avoid a costly military scenario with Iran. But there are a number of triggers that will arise this quarter, such as Iran telegraphing threats to shipping in the Persian Gulf and restarting parts of its nuclear program, that will embolden White House hawks to argue for punitive strikes against Iran.

A graphic outlining how Iran might respond to U.S. aggression.

A lingering threat of military confrontation between the United States and Iran will detract from Washington's focus on its burgeoning great power competition with both China and Russia. Beyond high-stakes economic battles, the potential for skirmishes between the United States and China in the South China Sea and in the Taiwan Strait will rise as the U.S. Navy and Coast Guard steadily expand their footprint in China's near abroad. Russia, meanwhile, will oscillate between instigator and mediator in multiple theaters that have the potential to dominate the White House's attention. While Russia already provides significant political and economic backing to Iran and Venezuela, it can always dial up military support should it see an opportunity to generate leverage against a highly distracted White House. U.S. attempts to coax Russia and China into a trilateral strategic arms control treaty are unlikely to gain much momentum this quarter as arms buildups continue on all sides. 

The White House will have its hands full this quarter when it comes to foreign policy — Iran, Russia, China, Venezuela, North Korea and Afghanistan all require Washington's attention in differing measures.

Unlike most countries dealing with the current White House, North Korea is trying to accelerate negotiations while Trump is still in office. Now that the United States has little choice but to plan for a military contingency around Iran, Pyongyang will have more room to push the line on missile testing while trying to break through a stalemate in negotiations. North Korean leader Kim Jong Un remains confident that Trump would rather keep North Korea in diplomatic limbo and call it a foreign policy win than return to a military confrontation with Pyongyang. 

When compared to a prospective nuclear-equipped nation, Venezuela inevitably falls much lower on the list of U.S. foreign policy priorities. Even as the persistent threat of another coup attempt and the specter of greater Russian involvement in Venezuela will vie for Washington's attention, the White House is unlikely to risk a messy military intervention at this stage to force regime change. A steady intensification of U.S. sanctions and ongoing backchannel dialogue with military leaders to try and crack the rule of President Nicolas Maduro will be the White House's preferred method of managing Venezuela as the country descends further into chaos.

Additional Forecasts

These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

  • June 25-26: OPEC+ members meet in Vienna, Austria.
  • June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
  • Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods. 
  • July: If the U.S. economy continues to grow, this month will mark the longest U.S. economic expansion in its history. 
  • July 7: The 60-day deadline Iran gave to the European Union expires, after which time Tehran vowed a partial nuclear restart.
  • July 22: 45-day review of the U.S.-Mexico deal on border security. 
  • Sept. 5: 90-day review of the U.S.-Mexico deal on border security. 

section

Jun 11, 2019 | 20:40 GMT

9 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.

Key Trends for the Quarter

The U.S. Takes Its Iran Spat to the Brink

While doubling down on its strategy of economically crippling Iran through sanctions this quarter, the United States will incrementally strengthen its naval and personnel deployments in the Middle East to deter Tehran and its regional proxies — including Lebanese militant group Hezbollah — from attacking U.S. and allied interests. Iran can retaliate in a number of ways: by ramping up naval harassment in the Persian Gulf, conducting state-level cyber warfare, using its proxies to stage attacks and, potentially, resuming its nuclear program.

A map showing U.S. and Iranian military bases in the Middle East

In May, Tehran announced a 60-day deadline to the remaining signatories of the Joint Comprehensive Plan of Action (JCPOA), demanding that European nations review the existing sanctions package if they wanted to keep Iran within the framework of the nuclear deal. When the deadline expires July 7, Iran will likely violate aspects of the JCPOA, particularly articles regulating the size of Iran's stockpiles of low enrichment uranium and heavy water. Iran will continue to expand the infrastructure needed to quickly return its nuclear program to pre-2015 levels, but in a bid to leave the door open to the European Union, it will move cautiously. For example, Tehran could choose to remain below the nuclear deal's enrichment threshold of 3.67 percent. In the event that Tehran takes more extreme action, such as returning to pre-JCPOA enrichment levels of 20 percent purity, more hawkish elements in the U.S. administration would push for punitive strikes, even though the White House still wants to bring Iran to the negotiating table.

Although a limited strike against Iranian forces or assets is probable this quarter, potential mediators — including Oman, Switzerland, Kuwait and Japan — will work feverishly to establish a channel between Washington and Tehran to avoid military escalation. Contrary to U.S. intent, Iran will not buckle under economic pressure, nor will it engage in broader political negotiations with the Trump White House

A chart showing Iran crude oil exports

In response, U.S. sanctions are likely to increase, potentially encompassing all remaining non-oil exports apart from foodstuffs. The subsequent decline in export revenue will harm Iran's ability to purchase food and humanitarian goods, thereby increasing the possibility of economic turmoil and countrywide unrest, though the Iranian government will crack down on price gouging and media dissent while simultaneously enacting certain private sector reforms. In the end, Iran-EU relations will inevitably deteriorate this quarter because Brussels will fail to provide a sufficient economic safety net for Tehran. As a result, the Islamic republic's diplomatic isolation will increase. 

For more on Iran and the possibility of a military conflict this quarter, read Stratfor's latest assessment. To better understand Iran's economic management priorities through another tough period of sanctions, click here.

Great Power Competition Heats Up in Syria

Given the fractured nature of the Syrian battlefield, the sheer number of foreign military forces operating in and around the country and the general lack of alignment among outside powers, clashes between states — including Syria and outside powers — are probable this quarter. Nevertheless, existing lines of communication and de-escalation will prevent such clashes, intentional or otherwise, from growing into a major state-on-state confrontation. Most likely to be involved in a shooting incident is Turkey, a key security guarantor in rebel-held Idlib in northwest Syria. Turkish troops are likely to clash with Syrian loyalist troops, Russian combat personnel or advisers and/or the Islamic Revolutionary Guard Corps' Quds Force — all of whom want to see Damascus regain total control of Idlib province. Beyond Turkey, which has significant combat power arrayed along the Syrian border, clashes are possible between Israel and Iran, the United States and Iran, and America and Syria.

Firmly established de-escalation channels will help prevent a major military crisis from unfolding around Syria this quarter. 

Because of the inherent risk of escalation in such a conflict, the Syrian government will be forced to suppress its desire to retake Idlib this quarter, especially as Damascus' Russian and Iranian allies advise caution as they wish to avoid military activity that puts Turkish forces in the line of fire. Even then, the potential for U.S. strikes against Syrian forces in retaliation for the use of chemical weapons or Israeli strikes on Iranian positions to prevent further entrenchment and consolidation will remain pervasive. Potential Israeli and U.S. airstrikes that inadvertently harm Russian, Iranian and/or Syrian personnel raise the possibility of state-level escalation, but firmly established diplomatic means of de-escalation will help mitigate any blowback from collateral damage, preventing major military crises from unfolding this quarter. 

A graphic showing the levels of strategic alignment in the Syrian civil war.

Turkey Struggles to Balance Its Political and Economic Needs

Turkey's ruling Justice and Development Party (AKP) will employ nationalist policies to try to shore up its domestic political legitimacy this quarter as it faces a tough Istanbul mayoral election rerun, even at the cost of straining Ankara's foreign relationships and jeopardizing the country's long-term economic well-being. Residents of Turkey's largest city will be voting with an eye to the country's shaky economy — which is currently marked by a volatile currency, a hefty debt burden and slumping consumption — which will detract from the AKP's appeal. Nonetheless, the AKP will do whatever it takes to eke out a win and intimidate the opposition in the election aftermath. The government's expanded push through the quarter into oil and gas exploration in the Eastern Mediterranean and deepening anti-Kurdish militant operations in Iraq and Syria will help fan the flames of nationalism at home, even if such jingoism alarms Turkey's EU allies.

A map showing maritime disputes in the Eastern Mediterranean

Ahead of a likely summer meeting between U.S. President Donald Trump and Turkish President Recep Tayyip Erdogan, Washington and Ankara are trying to find areas of compromise when it comes to Syria, Turkey's procurement of the Russian S-400 air defense system and Turkish economic ties with Iran. There are a number of potential triggers that will stress the U.S.-Turkey relationship this quarter, including potential U.S. sanctions on natural gas — a critical energy source for Ankara — Turkey's commitment to seeing through the S-400 deal with Russia, the threat of U.S. CAATSA sanctions over the weapons purchase, as well as the Erdogan government's long-term commitment to maintaining a presence in Syria. For more on Turkey's balancing act as a middle power defending its own national interests, read Stratfor's in-depth assessment.

Algeria's Power Brokers Cling to the Status Quo

Algiers will seek new channels for political dialogue with the strident opposition this quarter to appease an emboldened protest movement that is demanding a wholesale political overhaul. Although the military-backed civilian government won't allow political reforms that compromise their power-sharing agreement, there will be legitimate discussions about constitutional amendments and political inclusivity that will start to increase the input civil society organizations can have on government policy over the long term. Following Algerian President Abdel Aziz Bouteflika's sudden resignation in April, the military adopted aspects of the presidency's former powers for itself, including control over the police and intelligence forces. However, persistent civil unrest threatens the security force's ability to keep the peace, thereby limiting the army's willingness to dramatically assume more political powers.

An animated graphic showing the shifting power structures in Algeria.

Meanwhile, Algeria's economy is in desperate need of more prudent economic management, which means that any announcement of populist economic reforms that could satisfy the immediate demands of protesters will only undermine future efforts at real fiscal balancing and growth. And then there is the matter of the interim president's term ending on July 9. With elections postponed indefinitely, Algeria's government will fail to properly address the economic crises simmering throughout the quarter — something that will lead to further protests and unrest without a political resolution in sight.

Israel Experiences Election Deja Vu 

In a bid to survive yet another election with reduced political capital, Israeli Prime Minister Benjamin Netanyahu will take risks and push Israel's political system to its limits to ensure he remains in power. This, in turn, could propagate a conflict between Israel and the militant group Hamas, Israel and Iran, and Israel and Hezbollah. Netanyahu will be forced to find unlikely allies on the radical margins of Israel's political spectrum to ensure electoral victory and maneuver through legal loopholes to minimize the political fallout from his impending corruption hearings. In doing so, he will test the strength of the country's rule of law.

This quarter, Prime Minister Benjamin Netanyahu will test the strength of Israel's rule of law.

Meanwhile, an increasingly hard-line Israeli political establishment will respond to any provocation from Hamas, Hezbollah, Iran and Syria with swift retaliation. Combined with intensifying U.S.-Iran tensions, this perfect political storm increases the risk of a major conflict on Israel's frontiers throughout the quarter. For more on Israel's electoral do-over, read Stratfor's latest assessment.

Additional Forecasts

These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

  • June 23: Turkey will rehold mayoral elections in Istanbul.
  • June 25-26: The Bahrain-U.S. economic platform conference for Arab-Israeli peace negotiations will occur.
  • July: The next round of Astana talks among Iran, Turkey and Russia will happen in July. 
  • July: Turkey is expected to receive the S-400 advanced air defense system from Russia.
  • July: U.S. President Donald Trump could visit Turkey. 
  • July 7: Tehran's 60-day deadline to Brussels will expire, heralding the possible restart of Iran's nuclear enrichment activity.
  • July 31: The Pentagon deadline for Turkey to abandon the S-400 deal with Russia will end.
  • Aug. 22: The next regular International Atomic Energy Agency (IAEA) report on Iran is due. 
  • Sept. 17: Israel will hold national elections.

section

Jun 16, 2019 | 20:54 GMT

6 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.

Key Trends for the Quarter

China Hunkers Down for an Economic Storm

Time is running out for the United States and China to call another trade cease-fire ahead of the G-20 summit in Japan in late June, and both sides appear to be digging their heels in for the long fight. In an extreme and very plausible scenario in which the United States follows through with threats to impose additional 25 percent duties on nearly all remaining Chinese imports, China could suffer a 1 percent hit to its gross domestic product (GDP) and millions of job losses over the next two years. If the White House and Beijing fail to reach a truce, China will stoke nationalist fervor to withstand the economic hardship — at the risk of inciting anti-U.S. boycotts and protests that could escalate beyond Beijing's intent.

A chart showing the U.S.-China trade imbalance

China will also boost domestic infrastructure spending and even employ risky property stimulus measures in rural areas and lower-tier cities to avoid social disruptions from unemployment ahead of the 70th anniversary of the People's Republic's founding. Enacting such measures also means Beijing will struggle to contain debt risks in the coming months as fiscal burdens rise for local governments and bureaucracies. The extreme tariff scenario will most likely see China's currency depreciate past 7 yuan to the dollar, creating more currency stress for emerging markets but also forcing the Chinese central bank to intervene to prevent sharp depreciation. Read more about why China will expand stimulus measures to ensure employment stability. 

A chart showing Chinese national debt.

U.S.-China Confrontation Spreads

In the next quarter, the United States will maintain its strategic offensive against China in the Asia-Pacific through a more assertive security posture. It will also lobby support from allies and partners to counter Beijing's claims over the South China Sea and Taiwan as well as commit to regional infrastructure development. The risk of U.S.-China collisions — both literal and figurative — will increase as Beijing feels pressured to respond to Washington's intensifying maneuvers in the Taiwan Strait. Contentious activity in the South China Sea will also grow as the U.S. Navy increasingly challenges China's coast guard and maritime militias and vice versa. Separately, unrest in Hong Kong over an extradition law could provide an opportunity for the United States to exert targeted trade or sanctions pressure.

A graphic explaining the political terrain in Taiwan.

Hoping to muster waning public support ahead of the Taiwanese 2020 presidential election, Taiwan's ruling Democratic Progressive Party will lobby Washington for elevated security and diplomatic support while ramping up pro-independence narratives. Possible visits by senior U.S. Cabinet officials to Taiwan, completion of pending arms sales or a resumption of trade talks will draw Chinese military intimidation — including increased patrols and flyovers — risking escalation around the Taiwan Strait. Read more about Taiwan's position in the U.S-China competition

Regional Powers Find Footing in the Middle

A number of countries in the Asia-Pacific region will be caught in the middle of the great power competition between the United States and China. Australia and Japan broadly align with the United States when it comes to restricting Chinese investments in each country's tech sector, but they draw the line at engaging in maritime Freedom of Navigation operations and overt support for Taiwan (though enhanced security cooperation with regional states is a given). Tokyo may aid Washington's efforts to counter Beijing's Belt and Road Initiative by financing and providing technical expertise to participants to help scrutinize projects underway. But Tokyo will not limit its own infrastructure and technological cooperation with China, seeking instead to set up a security mechanism with Beijing to manage East China Sea tensions.

Many countries caught between the United States and China in the Asia-Pacific region are choosing to play both sides, with varying degrees of success.

With the United States embroiled in a trade confrontation with China, and having struck a tenuous deal with Mexico, U.S.-Japan trade talks will proceed slowly, allowing Tokyo to focus first on elections before having to deal with Washington. Meanwhile, U.S. lobbying to block Chinese tech giant Huawei's 5G rollout and other infrastructure projects will face further constraints among smaller states in the Indo-Pacific region. Southeast Asian states — besides Vietnam — will avoid provoking Beijing out of necessity, despite cooperation with the United States. Read the latest Stratfor assessment on Japan's rising role as a regional third power. 

The U.S. Muddles Through on North Korea

The U.S.-North Korea dialogue will remain open throughout the quarter. Although no major breakthrough toward a deal is expected, neither side is willing to fully derail the talks, thereby avoiding the risky escalatory cycle of previous years. Washington will deprioritize its outreach to Pyongyang to free resources to deal with Iran and Venezuela. To ensure that it remains on the U.S. radar, North Korea will continue missile testing only in a manner calculated to exert pressure but not run afoul of the Trump administration. However, a miscalculated weapons test could empower White House hard-liners. China and Russia will continue to support Pyongyang's outreach to the United States in the interest of stability. Amid trade tensions, China will be more willing to slacken enforcement of sanctions on North Korea, prioritizing economic lifelines. However, U.S. President Donald Trump's personal commitment to a North Korea deal leaves open the small possibility of the United States offering a compromise deal of incremental sanctions relief. To learn more about why the U.S.-North Korea outreach still has momentum, read Stratfor's assessment on the matter

Additional Forecasts

These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

  • June 28-29: Chinese President Xi Jinping and U.S. President Donald Trump are expected to meet at the G-20 summit in Japan.
  • Early July: The United States could follow through on threats to impose tariffs on $300 billion worth of Chinese goods. 
  • July: The United States will make a decision on whether to sell 66 F-16V fighter jets to Taiwan.
  • July or August 2019: Japan will hold upper house elections with the potential for lower house snap elections.
  • July 27: North Korea's Day of Victory in the Fatherland Liberation War holiday marks the signing of the Korean War armistice.
  • September: Taiwan will conduct "Indo-Pacific Democratic Governance Consultations" with the United States.  

section

Jun 16, 2019 | 22:13 GMT

6 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.

Key Trends for the Quarter

Don't Expect Brexit in the Third Quarter

The ongoing political crisis in the United Kingdom will escalate, but it will not lead to a disorderly Brexit in the third quarter. Several time-consuming developments will prevent the country from leaving the European Union without a deal in the next three months. First, the governing Conservative Party will have to appoint a new leader and prime minister. Even a hard-line prime minister will first try to negotiate an orderly Brexit with Brussels before making any unilateral moves. Second, the British Parliament's summer recess will delay any crucial decisions about Brexit. 

A graphic showing Brexit options for the UK.

While a hard-line leader would increase the chances of a no-deal Brexit in October, the House of Commons will retain the option of a no-confidence vote if a no-deal Brexit looks imminent. Holding an early general election won't be a priority for the new prime minister, but it could become a last resort later in the year to end the parliamentary stalemate. For its part, the European Union will remain united in its support for a deal that keeps the border between Ireland and Northern Ireland open, which reduces the chances of an agreement with London. But debates among member states over whether to grant the United Kingdom another extension will reemerge as the October deadline approaches. Find out what a no-deal Brexit would look like in this Stratfor analysis

Italy Remains a Hotbed of Political and Economic Risk

Italy will be the main source of political and financial risk in the eurozone this quarter. Rome will face external pressure — from financial markets, credit rating agencies and Brussels — to reduce its deficit. While the Italian government will be willing to introduce some cosmetic measures to reduce public spending and increase state revenue, it will not completely sacrifice its fiscal expansion plans. This will raise questions about the sustainability of Italy's fiscal policies and the resilience of the Italian banking sector. Relations with the EU Commission will remain tense, but Brussels is unlikely to implement sanctions during the quarter. 

A graphic showing who owns Italy's debt

The League, one of Italy's ruling coalition partners, will push to increase its control of the government, moving ahead with its policy agenda — which includes tax cuts, large infrastructure projects and tougher law and order policies. This will lead to disputes with its partner, the Five Star Movement. The coalition will remain together but exist on the constant verge of collapse. Doubts about Italy's financial and political future will rattle markets at a time when Brexit risk and uncertainty about global trade weigh heavily on eurozone growth, even if a full-on financial crisis is unlikely during the quarter. Northern European countries will use the situation in Italy as a pretext to resist, or at least soften, proposals to increase financial risk-sharing and increase public spending in the currency area. Learn more about the implications of Italy's policies for the broader eurozone here.

A chart showing Italian bond yields

The Battle for Political Dominance in the European Union 

The appointment of new leaders to key Continental institutions — including the European Commission and the European Central Bank (ECB) — will exacerbate geographic and ideological competition within the bloc. Northern Europe will push for the next commission to focus on issues such as trade, competition and immigration, while Southern Europe will want it to focus on greater public spending and improved eurozone integration. The battle for the ECB will be contentious, pitting countries that defend a continuation of the expansionary policies that were introduced by the current presidency against those advocating for a more conservative approach to monetary policy. 

A graphic showing the various EU institutions

The so-called "Spitzenkandidat" mechanism will be abandoned this quarter. Germany and France will reach a compromise to distribute power within the union through a political negotiation in which a southern-backed candidate will probably head the commission and a northern-backed candidate will govern the ECB — though negotiations over the latter could extend beyond the third quarter. This will open the door for individuals from smaller EU member states to obtain key positions, serving as proxies for Germany and France. To learn more about all the EU institutional battles this year, click here.

U.S.-Europe Trade Talks Heat Up 

Trade negotiations between the United States and the European Union will continue, but they won't result in a comprehensive deal during the quarter. Negotiators will spend significant time simply discussing the scope of the agreement. The obstacles to a deal will include Washington's push to include agricultural products, which the European Union will oppose, as well as the bloc's demand that the United States withdraw its threat to impose higher tariffs on European automobiles. On auto tariffs, Washington will probably avoid doing anything before the expiration of a November deadline the White House gave Brussels to reduce its auto exports. Complicating things further, EU-U.S. negotiations will be led by an EU Commission that is in the final weeks of its mandate, meaning that the most crucial decisions will probably be left to the new commission, which should take over around October. 

A chart showing EU trade with the United States.

In addition, a new round of higher American tariffs on EU products, which the bloc expects to enter force in July or August as a result of a World Trade Organization (WTO) dispute over European subsidies to Airbus, will worsen the negotiating environment, reducing the likelihood of an agreement. The sides will not reach a comprehensive trade deal during the quarter, but there will be room for progress on the harmonization of EU-U.S. regulations for specific industrial sectors. To learn more about the obstacles to a U.S.-EU trade deal, read Stratfor's assessment on the state of negotiations

Additional Forecasts

These Stratfor assessments provide additional insights for the Quarter

  • The next Greek government will face a timid economic recovery, high unemployment and a demographic time bomb.
  • EU member states are taking different approaches when it comes to Huawei and the development of 5G technology. 

Key Dates to Watch

  • June: The Eurogroup will make decisions on the European Deposit Insurance Scheme and the new eurozone budget.
  • June 20-21: The European Council will meet. The bloc is expected to adopt its new five-year strategic agenda and could decide on the next EU Commission president. 
  • June 29: Outgoing European Commission President Jean-Claude Juncker will meet U.S. President Donald Trump at the G-20 summit in Osaka, Japan. 
  • July 2: The new European Parliament will be officially inaugurated.
  • July 7: Greece will hold a general election. 
  • July 8-9: The Eurogroup will meet, while the European Council could make a decision about whether to implement an excessive deficit procedure against Italy.
  • Week of July 22: The British Conservative Party will announce the winner of its leadership contest.
  • July 31: EU economic sanctions on Russia will expire.
  • July or August: The EU expects the U.S. to introduce retaliatory measures on EU products because of a WTO dispute over Airbus subsidies.
  • Aug. 9: Ratings agency Fitch is expected to publish its updated assessment on Italy.
  • Aug. 25: The G-7 will hold a leaders' summit in Biarritz, France.
  • September: Austria will hold a general election. 
  • Sept. 6: Ratings agency Moody's will publish its assessment on Italy. 
  • Sept. 21: The British Labour Party will convene a conference.
  • Sept. 29: The British Conservative Party will hold a conference.

section

Jun 16, 2019 | 22:27 GMT

6 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 characterize North America will prove elusive.

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

Key Trends for the Quarter

Mexico Contends With U.S. Trade Threats

In early June, Mexico reached a tentative agreement with the United States to avoid immediate tariffs, but the threat that Washington will penalize its North American neighbor for illicit immigration through its territory could resurface during the quarter. The current deal rests on Mexico's reducing the number of immigrants reaching the United States, with Washington defining progress as a decline in apprehensions of migrants at their shared border over the next three months. 

The deal is on shaky ground, however, mainly because the United States wants to see apprehensions fall back to around 20,000 per month — a record low measured in early 2017. The severity of political unrest in Honduras coming around the 10-year anniversary of its 2009 coup risks depressing that country's economy and driving more migrants north beginning in late 2019, possibly turning Mexico's agreement to curb migration into a promise it cannot fulfill. The United States would also like Mexico and several other Central and South American nations to commit to larger-scale measures to curb migration, though pushing such a proposal will prompt legal challenges within Mexico from migrant relief groups and legislators concerned about the financial burden. 

A chart showing apprehensions at the U.S. border with Mexico

Washington's complex additional demands in U.S.-Mexico negotiations also risk upending the tenuous agreement. U.S. President Donald Trump is stipulating that Mexico import more U.S. agricultural products — a demand it has not acknowledged and could not easily meet. The White House's intermingling of ambitious immigration enforcement and trade demands will risk driving renewed tariff threats during the quarter. Such threats would have a chilling effect on foreign direct investment in Mexico as companies try to wait out the spat. Read Stratfor's latest assessment of U.S.-Mexico trade relations in the face of the White House's demands.

In Venezuela, Maduro Teeters Between Survival and Collapse

A U.S. military intervention against Venezuela is not expected in the third quarter as Washington contends with other priorities. However, Venezuelan President Nicolas Maduro will face the persistent threat of a military coup. Washington will escalate sanctions pressure on Venezuela with the intent of turning the country's armed forces against Maduro. Anticipated tighter sanctions from Washington targeting companies that do business with Venezuela's energy sector threaten to depress Venezuela's crude oil production — its main source of revenue to guarantee military compliance — to less than 500,000 barrels per day, a precipitous decline from the slightly more than 1 million bpd it was producing at the beginning of the year. This risks turning the support of Venezuela's influential generals away from Maduro and toward an opposition government, which would be more likely to successfully attract foreign investment as a viable way to preserve revenue from Venezuela's declining energy sector.

Venezuelan President Nicolas Maduro has historically relied on his generals to keep him in power, but if he can't afford to pay them, his rule will not be sustained on goodwill alone.

Any government — whether from Venezuela's political opposition or from the ruling United Socialist Party — will have to contend with dwindling oil production, as well as the threat of creditors going after assets. The longer that Maduro's government remains in power, the more capital Venezuela's energy sector will require to reverse its production slump. Should a coup against Maduro succeed, the government that follows Maduro will look to engage U.S. and European private creditors and Chinese lenders in talks to restructure debt that the previous government defaulted on. Read more about the issues facing Venezuela in the months ahead in our latest assessment.

A chart showing Venezuela's illicit economies and strategic defense regions

South American Nations Downgrade Reform Expectations

The threat of widespread unrest — particularly in austerity-hit Argentina — will push governments in the Common Market of the South (Mercosur) to focus primarily on lowering tariffs as opposed to threatening free trade restrictions that protect domestic industry. Argentina's weakening peso will continue to hurt Argentines' purchasing power but will be a boon to agricultural exporters looking to supply the Chinese market at the expense of tariff-hit U.S. sellers. Still, anti-establishment sentiment will gain momentum in Argentina throughout the quarter. Former President Cristina Fernandez de Kirchner will formalize her bid for the vice presidency alongside presidential candidate Alberto Fernandez. The duo will pick up votes at incumbent President Mauricio Macri's expense, as years of uneven economic growth, budget austerity and utility hikes will turn some undecided voters against the government. 

A chart showing the declining value of the Argentine peso.

In Brazil, the politically weak President Jair Bolsonaro will press for a congressional vote on pension reform but will struggle to do much else. Congressional leaders appear ready to move pension reform to a lower house vote in the third quarter, no doubt motivated by the need to prevent social security spending — which already accounts for 40 percent of the budget — from ballooning out of control. But the president's lack of influence in Congress and his politically threatening anti-corruption drive will keep lawmakers from approving other pending reforms

A chart showing Mercosur's top trading partners.

Colombia's President Goes After a Rebel Deal

Colombia's government will keep undermining the previous administration's deal with the Revolutionary Armed Forces of Colombia (FARC), though the agreement is unlikely to collapse this quarter. Colombian President Ivan Duque's strategy will be to create uncertainty about whether the government will follow through with amnesty and other commitments in the agreement. The government has enough institutional tools at its disposal — such as opening new criminal investigations against former militant leaders — to keep the deal in limbo during the third quarter. Should the deal fail as a result of government pressure, the risk of FARC retaliation through acts of terrorism will rise significantly. FARC dissidents would also return to criminality in greater numbers, making parts of the country's south-central region and the border with Venezuela far more dangerous to locals, travelers and businesses. However, this is unlikely in the next quarter. To learn more about the current state of militancy in Colombia, read this Stratfor assessment

Additional Forecasts

These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

  • June 19-21: Mexico's Senate will hold special sessions to approve a planned constitutional reform on referendums. 
  • July 14-17: The Mercosur presidents' meeting will take place in Argentina. The Mercosur reform plan will probably come up for further discussion and shaping ahead of potential approval by the Common Market Council later in the year. 
  • July 21: The United States and Mexico are tentatively slated to begin reviewing Mexico's efforts to curb illegal migration.
  • Aug. 2: U.S. Congress will go into recess until Sept. 9. 
  • Aug. 7: The United States and Mexico are tentatively slated to return to the negotiating table if migrant flows through Mexico have not declined. 
  • Aug. 11: Argentina will hold primary elections to select presidential candidates. 

section

Jun 16, 2019 | 21:03 GMT

6 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.

Key Trends for the Quarter

India Grapples With Its Economy and Foreign Policy

Armed with a renewed electoral mandate, Indian Prime Minister Narendra Modi faces daunting domestic and foreign policy challenges this quarter, including a cooling economy and rising trade frictions with the United States. With quarterly GDP growth falling to a four-year low, India's government will focus on reviving consumption by stimulating demand in the country's vast rural hinterland and jump-starting private investment. To reassure concerned investors, Modi will take baby steps toward reforming India's restrictive land and labor laws, though implementing these politically sensitive measures — which are aimed at creating tens of millions of jobs — is a task that will stretch far beyond the quarter. 

A graphic showing India's cooling economy.

India's relationship with the United States presents a major foreign policy challenge for New Delhi. When it comes to dealing with Washington's trade demands — specifically, lower tariffs to grant better access to U.S. firms exporting to India — New Delhi has limited retaliatory options. It will, therefore, avoid escalating the ongoing trade dispute beyond tit-for-tat measures — such as imposing $235 million in retaliatory tariffs — against the United States, which is India's largest export market. The fate of the dispute will ultimately depend on the White House and whether it chooses to launch a Section 301 investigation into Indian tariffs that it complains are too high. For India, trade tensions with the United States heighten the importance of entering regional trade blocs such as the Regional Comprehensive Economic Partnership (RCEP), a grouping of 16 countries, including China (though disagreements over market access between New Delhi and Beijing persist).

The United States wants to ensure its allies align with its objectives, especially when it comes to managing China, Russia and Iran. India imports Iranian oil — albeit in small quantities — and Russian arms, which puts New Delhi in the crosshairs of Washington's Countering America's Adversaries Through Sanctions Act (CAATSA). While India will reduce its oil purchases from Iran (potentially to nothing) and pay in rupees as opposed to dollars, New Delhi is highly dependent on Russian military equipment. Though it will not curtail its arms purchases from Russia, India is actively seeking to procure U.S.-made equipment, which will likely be enough to avoid CAATSA sanctions in the third quarter. And though India still counts China as its main strategic rival, the two will maintain calm on their disputed frontier as each country wrestles with other issues abroad. Even so, New Delhi's strategic and economic competition with Beijing will advance across South Asia as India cultivates deeper ties with Sri Lanka, the Maldives, Bangladesh and Nepal through a mix of foreign aid, diplomacy and security cooperation — in keeping with Modi's "Neighborhood First" policy. Pakistan, of course, will remain the outlier: talks, at least publicly, are unlikely this quarter since Modi rode to power on an anti-Pakistan platform.

Washington Wants an Afghan Deal by September

Though the war in Afghanistan rages on, the Taliban will remain in negotiations with the United States because dialogue offers the surest path to clinching the insurgency's paramount objective: the withdrawal of foreign forces. For its part, Washington will remain committed to talks in the hopes it can seal a peace deal ahead of Afghanistan's presidential elections in September. 

The sticking point for negotiations has always been the sequencing of demands: The Taliban insist that U.S. forces leave Afghanistan first, whereas Washington wants a Taliban cease-fire, counterterrorism pledge and dialogue with the Afghan government first.

A graphic showing the timeline of Afghan peace talks.

If, however, a deal eludes both parties this quarter, it will be because of the fundamental disagreement over the sequencing of their respective demands: The Taliban will insist that the United States first announce a withdrawal of forces, whereas Washington will demand a Taliban cease-fire, counterterrorism pledge and commitment to hold talks with the Afghan government. Iran could choose to spoil any peace deal, too, if it anticipates a U.S. military strike against it. The country could ramp up its support for the Taliban, emboldening the insurgency on the western fringes of Afghanistan. Iran would, however, seek to balance such a move with its need to maintain good relations with Kabul. Beyond Iran, regional actors including Russia, China and Pakistan — the Taliban's key external sponsor — will support efforts to enable a durable resolution to the long-running conflict.

Pakistan Endures Rising Opposition to Austerity Measures

Though Pakistan's government will face a social and political backlash arising from the government's austerity measures — which are tied to the International Monetary Fund's $6 billion loan — its survival won't be at stake. Prime Minister Imran Khan recognizes the importance of maintaining military support for his political survival, so he will accommodate the army's demands, principally delegating control over foreign and defense policy with respect to India and Afghanistan. A key constraint against protests over high inflation will be the sidelining of leaders from Pakistan's two main opposition parties — the Pakistan People's Party (PPP) and the Pakistan Muslim League-Nawaz (PML-N).

Unpopular austerity measures will create social and political fallout, but thanks to the support of the armed forces, the government will hold strong through the quarter.

But even if protests grow, the army not only has the ability to control public disorder but can silence dissent in the media as well. Khan and the army want to avoid anything that could hurt business confidence in Pakistan, especially as the country's $300 billion economy prepares for an abrupt slowdown. For Pakistan, projecting an image of stability abroad is paramount.

A chart showing Pakistan's foreign exchange reserves, minus gold.

Additional Forecasts

These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

  • June 16-21: The Financial Action Task Force (FATF) will meet in the United States.
  • July 1: The fiscal year will begin in India, Pakistan and Bangladesh.
  • July 5: India's government will present its federal budget.
  • Sept. 28: Afghanistan will hold presidential elections.
  • Unknown: Kashmir will stage state elections (unscheduled but due this year).
  • Unknown: The next round(s) of U.S.-Taliban talks will be announced.

section

Jun 16, 2019 | 22:17 GMT

6 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.

Key Trends for the Quarter

Ethiopia Sets the Horn of Africa's Reform Agenda

Ethiopia will move forward with ambitious economic reforms this quarter, including the partial privatization of huge enterprises such as Ethio Telecom and Ethiopian Airlines. Despite significant interest from foreign investors, key economic and infrastructural problems — such as Ethiopia's acute foreign exchange deficit and drought-induced electricity shortages stemming from the country's heavy reliance on hydroelectricity — will hurt private sector growth. Businesses will struggle to import much-needed foreign items, such as heavy machinery, while experiencing electricity rationing through July. The power cuts will also hurt neighboring Sudan and Djibouti, which import Ethiopian electricity. 

A map of the Eritrea-Ethiopia frontier.

Moreover, elements of Prime Minister Abiy Ahmed's political agenda remain unfulfilled, such as cementing a formalized peace between Eritrea and Ethiopia. In spite of a historic peace agreement, parts of the countries' relationship remain unsettled, including border controls, territory swaps and currency imbalances. After unilaterally closing its three border crossings with Ethiopia in April, Eritrea will likely unveil a newly revised border crossing process this quarter to effectively monitor who enters and exits its territory — a key requirement for Eritrea's authoritarian government as it rebuffs efforts to reform. For more on Ethiopia's economic transition, read Stratfor's assessment on challenges facing the country.

Sudan's Stalling Transition Harms Growth Prospects

Elsewhere in the Horn of Africa, Sudan finds itself in a difficult position after the removal of longtime strongman Omar al Bashir. Initial progress between the military and protest leaders toward a transition of power has collapsed, pushing the country closer to a protracted no-deal reality. As the volatile situation continues, further bloodshed cannot be ruled out, and as the divide between the various opposition movements and military factions widens, the likelihood of an agreement decreases. Political discord directly harms Khartoum's ability to develop better ties with Western nations, and the United States will suspend efforts to support Sudan, including removing the country from Washington's list of state sponsors of terrorism.

A graphic showing a snapshot of Sudan's economy.

Instead of looking West, the Sudanese military leadership will lean on its relationships with Gulf Cooperation Council states, including Saudi Arabia and the United Arab Emirates, and Russia to sustain Sudan's position amid an acute civilian backlash. Indeed, protesters will continue to rally — and, thus, face harsher crackdowns — meaning political and economic instability will persist in Sudan through the quarter, though that is unlikely to faze the country's potential Gulf benefactors. For more on Sudan's messy transition, see Stratfor's latest assessment

South Africa's Economic Malaise Continues 

As the dust settles from South Africa's May 8 elections, President Cyril Ramaphosa will, in theory, have a stronger mandate to enact crucial economic reforms. In the third quarter, the national priority will be to overhaul the ineffective state electricity giant Eskom, which has undermined South Africa's economy in recent months. However, Ramaphosa's supposedly more robust position will be constrained by practical realities, such as top-level resignations from the embattled energy company slowing turnaround efforts. Also, pressure from labor unions will limit the president's options as he seeks to avoid privatizing Eskom or incurring job losses, things that would anger the energy industry's powerful worker factions. 

A graphic showing South Africa's economy.

More broadly, South Africa's deep economic distress will prove too stubborn to fix quickly. Efforts to ameliorate the situation — including improvements to an unreliable national electrical grid, attempts to stall mounting government debt, efforts to expunge rampant corruption and measures to drive down crushing unemployment — are widely lauded but unlikely to gain traction to stimulate the lackluster economy. Given this harsh reality, currency volatility and policy uncertainty will remain throughout the quarter as investors sit on the sidelines, awaiting signs of improvement in the investment climate. Moreover, the country's economic weakness will hurt its ability to project political power regionally and beyond. For more on South Africa's trajectory, read Stratfor's assessment on the country's attempts to generate pro-business policies.

The Perilous Sahel Courts Militancy

As Western-led counterterrorism efforts in the Middle East force jihadist groups to look elsewhere for sanctuary, international militants will shift resources and manpower to Africa, particularly dissolute regions such as the Sahel. As a result, the local security situation in such places will further deteriorate in the third quarter. Systemic shortcomings in local governance in the Sahel provide militants with fertile ground to recruit, train and commit attacks regionally and further afield. Large swaths of Mali will remain extremely dangerous. Instability will also continue to percolate in Burkina Faso and drive further south, spreading militancy into coastal West Africa, which could, in turn, hurt fast-growing economies in the region such as Ghana and Ivory Coast. However, even as states such as Benin, Ivory Coast, Togo and Ghana shore up northern defenses amid rising militancy, foreign security benefactors — primarily France — will resist pressure to increase their physical commitment to the regional security burden.

A map show security incidents in Africa's Sahel region from 2015 to now

Halting militant spillovers in the Sahel is a difficult sell given the domestic issues that the French government must deal with over the quarter, but that does not mean Paris' commitment to the Sahel is done. The question is whether a deeper commitment could embroil France in a situation from which it cannot easily extract itself. For more on worsening security in the Sahel, take a look at Stratfor's latest assessment on the matter. 

Additional Forecasts

These Stratfor assessments provide additional insights for the Quarter

Key Dates to Watch

  • June 20: South African President Cyril Ramaphosa will give his state of the nation address. The speech will include details about his economic recovery and reform package, giving businesses and investors a better understanding of the administration's new policy direction.
  • June: An Emirati military base under construction in Berbera, Somaliland, is scheduled to become operational.
  • June 22: Mauritania will hold the first round of its presidential elections.
  • July 6: Mauritania will hold a second round of presidential elections if no candidate receives more than 50 percent of the vote on June 22.
  • July: Ethiopia will unveil a new mining and petroleum policy to stimulate growth and foreign investment in the sector.

section

Jun 16, 2019 | 21:07 GMT

7 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.

Key Trends for the Quarter

Russia Uses Global Power Projection to Needle the U.S.

As the standoff between Russia and the United States endures, Moscow will be increasingly active in several key theaters this quarter as a means to enhance its global position and gain leverage in negotiations with Washington. Iran will be a key area of focus, with Moscow offering economic and diplomatic support to help Tehran withstand U.S. pressure. Such support could include the establishment of oil smuggling networks, renewed impetus to construct additional nuclear power facilities and advice on circumventing U.S. sanctions — a topic Russia is well familiar with. Moscow will consider extending direct military assistance to Iran, although it remains wary of becoming entangled in a physical dispute between Washington and Tehran.

Russia has a global reach and will be increasingly active in several key theaters this quarter to shore up its position on the world stage and gain leverage when it comes to dealing with the United States.

Another focal point for Russia in the third quarter will be Venezuela, as Moscow is likely to send more military specialists to the country to prop up the Nicolas Maduro administration. However, Russia will not engage in direct military operations in the country, even if more serious clashes occur between the Venezuelan government and the opposition.

A global map showing Russia's overall strategy at play.

Elsewhere, Russia will continue to actively build economic and energy ties with China, with the Power of Siberia pipeline set to begin natural gas deliveries in August. Meanwhile, the country will take advantage of its growing position in Africa and Latin America to further develop relationships in the economic, diplomatic and military/technical fields with countries including Sudan, the Republic of Congo and Cuba. Read more about Russia's global diversification strategy here

The U.S. Won't Back Down on Russia Sanctions

Russia's perceived interference in foreign affairs and its penchant for hybrid warfare — including political meddling, disinformation techniques, cyberattacks and covert operations in the United States and Europe — will impel Washington to impose more sanctions on it during the quarter. The White House will consider restricting key Russian energy projects, most notably the Nord Stream 2 pipeline, as part of an increasingly strategic focus to undermine Russia's energy position in Europe and enhance its own. The U.S. Senate, for instance, will consider a bill to enact automatic sanctions on any pipe-laying vessel that participates in the construction of the pipeline. Such legislation,  if implemented, would delay — and possibly upend — the project's completion.

Washington knows to hit Moscow where it hurts — in the wallet.

The United States will also weigh broader financial restrictions on Russian banks and sovereign debt. However, due to the possibility of contagion associated with the latter options, as well as the Trump administration's more moderate position on punitive measures compared to Congress, the actual implementation of financial sanctions this quarter will likely be confined to specific individuals and entities, limiting the overall impact on Russia. Read more about the outlook for U.S. sanctions against Russia in this Stratfor assessment.

The U.S.-Russia Military Competition Intensifies, Globally and Locally 

In the wake of Washington's suspension of the Intermediate-Range Nuclear Forces (INF) Treaty at the beginning of 2019, the United States and Russia will allow the pact to lapse this quarter. This will accelerate weapons development on both sides and further erode the veracity of the New Strategic Arms Reduction Treaty, which is set to expire in 2021. However, both Washington and Moscow will maintain New START throughout the quarter while they consult about the formation of a more comprehensive arms control arrangement that also includes China. Beijing will initially be open to participating in such discussions, but won't constrain its own weapons development, making it unlikely that China will formally sign onto such a deal.

A central area of U.S.-Russia military competition in the third quarter will be Poland, primarily because Washington is ready to strike a formal agreement with Warsaw to establish a permanent military presence in the country by September. This agreement will fall short of the singular, division-sized "Fort Trump" base that Poland initially proposed. Instead, the United States will expand its footprint in Poland by 1,000-1,500 additional personnel, who will be dispersed among a number of existing bases in the country. The agreement will increase the likelihood that Russia will increase its own military presence in neighboring Belarus.

Once again, we will see a buildup of forces along Russia's periphery, harking back to the Cold War.

While Minsk has so far refused to permit Russia to install an airbase on its territory, Belarus could alter its calculations in the face of an enhanced U.S. military presence across its border in Poland — something that would make it more amenable to Russian military basing demands. (Even without a new foreign airbase, Belarus can expect an uptick in Russian military interest through the rest of the year.) Moscow could also seek to deploy more military assets to Crimea, its Western Military District — which abuts the European Union — and the Kaliningrad exclave in response. Read more about the arms control breakdown between the United States and Russia in this Stratfor assessment

A map showing potentials sites of U.S. and Russian military expansion in Europe.

Moscow Stabilizes Its Wobbly Home Front  

The Kremlin will face internal political ripples this quarter in the form of regional elections in September. The elections are likely to result in the ruling United Russia party losing several governorships and regional parliamentary seats. Sizeable demonstrations are also expected to coincide with the polls. Despite losing seats, United Russia is expected to lose only to systemic opposition parties such as the Communists and Liberal Democratic Party of Russia, meaning that the Kremlin is unlikely to lose much power. In the meantime, Moscow will succeed in containing protests with a mixture of security crackdowns and selective concessions to demonstrators. Russia will manage its internal discord for another quarter, but demographic shifts and rising youth activism present a long-term problem that the Kremlin must eventually address. To learn more about the shifting domestic political landscape in Russia, this Stratfor assessment.

Additional Forecasts

These Stratfor assessments provide additional insights for the quarter

  •  
  • Ukraine's new president, Volodymyr Zelenskiy, will significantly improve his party's position in parliament in snap elections on July 21. This will enable him to make progress domestically on key anti-corruption measures, but Zelenskiy will struggle to make any significant changes on the foreign policy front, including Ukraine's frozen conflict in the east.
  • Kazakhstan's succession process from former President Nursultan Nazarbayev to freshly elected Kassym-Jomart Tokayev will be smooth at first, though the new premier will encounter problems beyond the quarter, particularly when it comes to managing socio-economic tensions and maintaining a balancing act between Russia and China.
  •  

Key Dates to Watch

  • July 1: Azerbaijan plans to resume crude oil exports via Russia's Novorossiysk Sea Port.
  • July 8: A Ukraine-EU summit will be held in Kiev.
  • July 21: Early parliamentary elections begin in Ukraine. 
  • July 31: The European Union's deadline to review sanctions against Russia will expire. 
  • Aug. 2: The U.S. plans to leave the INF Treaty following a six-month deadline for Russia to prove compliance with the agreement.
  • Aug. 12: The Caspian Economic Forum will be held in Turkmenbashi, Turkmenistan.
  • August: Russia will host a summit with Azerbaijani President Ilham Aliyev and Iranian President Hassan Rouhani.
  • August: Abkhazia will hold presidential elections.
  • August: Russia plans to begin delivery of natural gas to China via the Power of Siberia pipeline.
  • September: Poland expects to secure a basing agreement with the United States early in the month.
  • Sept. 6: Snap parliamentary elections may be held in Moldova. 
  • Sept. 8: Russia's regional elections will take place.

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