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Jan 18, 2005 | 03:13 GMT

2005 Annual Forecast: When Other Things Start To Matter -- Part I

Introduction The war in Vietnam lasted for seven years. At a certain point, it became a fixed feature of the international landscape. The war was fought, and the world went on. Other wars came and went. Economic cycles rose and fell. The international system continued. The Soviets invaded Czechoslovakia. The 1967 Arab-Israeli War was fought. The United States aligned with China against the Soviet Union. The United States abandoned the gold standard. Wars move from crisis to routine. We expect 2005 to be the year in which Iraq becomes merely a notable feature of the international landscape rather than a global obsession, just as other battles in the U.S.-jihadist war — in Afghanistan, Southeast Asia, Europe — already have. Al Qaeda isn't broken and is fighting back in Iraq, in Saudi Arabia, in Pakistan and in other places. The United States is not about to give up either. The broad trend in this war still favors the United States, except in the Sunni Triangle of Iraq. We expect redeployments in that theater of operations that reduce the exposure of U.S. troops and reduce U.S. responsibility for security. We expect the United States to launch operations in Pakistan and possibly elsewhere. There could be further attacks by al Qaeda outside of the Muslim world. Nevertheless, the war will not end in 2005, and other important things will start to dominate the news. The most interesting things are happening in China and Russia, the two major Eurasian powers. In China, the 30-year economic explosion that began in 1975 has become tired. The expectations of Chinese growth are as unrealistic as were the expectations of dot-com billions. China's economic growth continues, but whether it is healthy, profitable growth or running-faster-to-stay-in-place growth is not nearly as clear. We predicted last year that 2005 might be the year of China's reckoning. We still hold with that view. The business cycle always has the last laugh — and after 30 years, and given the extreme optimism about China from all corners, we suspect it's about that time. The question that will be faced in 2005 is not so much economic — that seems to us settled — but how China will cope with the political consequences of even a diminution of its economic growth. This year, we expect the third major economic reversal in Asia in a generation: Japan, East and Southeast Asia and now China. While China is facing its test, Russia has clearly reversed a cycle that began in the mid-1980s with perestroika and glasnost. The great Russian romance with the market economy has ended, as has the commitment to openness. Between Beslan and Gazprom, the Russian state has reasserted its claim to primacy in Russian society. Russia will be dealing with the geopolitical consequences of its domestic reversal — focusing not only on Ukraine, but on the Caucasus and Central Asia. The year 2005 will not be a year of decisive crisis, but it will be the year in which the reversal of 2004 begins to take on definitive shape in Russia. The United States now will need to develop a skill it displayed during the Vietnam period: waging war on one hand while managing global relations with another. Events in Eurasia are unfolding alongside the war with the jihadists. The obsessive concern with the war will now have to make room for other global concerns. This is not something over which the United States has a choice. Indeed, only Europe has a choice, which it is exercising: It will remain essentially irrelevant to the global system, heavily focused on its own regional concerns. This is not to say the war will not continue to be a dominant theme in the world. It will simply cease to be the dominant theme, becoming part of the fabric of our time, rather than an assault against it. We fully expect the United States to move to the attack this year and for al Qaeda to counterattack. But some of the most interesting and disturbing news of the year might come out of Beijing and Moscow, rather than out of Baghdad and Riyadh. 2004 Report Card Each year, as we begin to develop our annual forecast, STRATFOR's first task is to evaluate the accuracy of our previous predictions and assess current trends. We found that our 2004 annual forecast contained two primary predictions, both of which are well on track. The first — and in comparison to 2003, the most critical — prediction was the devolution of al Qaeda as a strategic threat. We predicted that if al Qaeda could strike at the West, it would need to do so in the first quarter of the year or risk irrelevance. The strike did come in March, but in Madrid instead of the United States. That represented al Qaeda's high point in 2004. After that — again, as we predicted — the organization began to change. U.S. intelligence efforts prevented the network from sustaining any tempo of operations or even maintaining contact with its various affiliates. This forced al Qaeda to turn its publicized tapes into political statements directed at U.S. citizens and the Muslim ummah rather than calls to action. Simultaneously, al Qaeda was forced to abandon efforts aimed at stoking uprisings throughout the Muslim world and limit its focus on the one state where it had the greatest chance of making progress. As we stated in the 2003 annual forecast, "Al Qaeda needs to combine the force multiplier of anti-Americanism with U.S. interference by directly challenging a Middle Eastern state that is strategic to the United States. The state needs to be sufficiently powerful in the region to serve as a base for influencing other countries in the area, financially independent and with a population sympathetic to the militant network's ideology. Only one state in the region fits that description: the kingdom of Saudi Arabia." Al Qaeda's change of strategy led first to attacks against expatriates and then, at the close of the year, to direct assaults against government security institutions. Our second major forecast projected the beginning of Europe's fall. Although the European Union took in 10 new members in 2004, they are members who want Europe's economic strength (relative to their own) and market access — not a federalized superstate. Their inclusion, on the back of sharp inter-European divisions during the Iraq war, is the first nail in the coffin of the dream of a truly politically united Europe. As we said a year ago, "2004 may not be the year of big breaks in the European Union, or even of big decisions by EU members to strike out on their own, but it will be the year that history will view as the beginning of that process." Other smaller regional forecasts similarly came to fruition. China lost some of its shine, with foreign investors for the first time realizing that economic models based on optimism and cash flow as opposed to profitability and good books cannot succeed forever. China did not collapse — and we did not expect it to — but Beijing is spending more and more of its time attempting to keep foreign money flowing in, attempting to revamp the country's moribund state-owned enterprises (SOEs) and attempting to contain a brewing social explosion. As we said in the previous annual forecast, "As Chinese assets fail to hold up under closer scrutiny, the global fetish for the Chinese market will begin to wane." And it did. Russia's geopolitical retreat intensified as we expected, with Russia suffering setbacks in Central Asia, the Caucasus and — we must admit we are surprised — Ukraine. Putin used 2004 to consolidate control at home, to the degree that he was — as we expected — utterly unable to head off major Western efforts to strip Moscow of its former empire. In terms of the global economy, STRATFOR also was on target. The year 2004 witnessed strong U.S. economic growth. It might not have been obvious in presidential election coverage, but the U.S. economy grew at rates roughly analogous to those of the 1990s boom. Meanwhile, Europe and Japan suffered from inconsistent and faltering growth as the year went on. This is not to say we were dead-on about everything. The most significant strategic miss in our 2004 forecast cascaded out, negatively affecting a host of smaller, tactical forecasts. That miss was the underestimation of the Iraqi insurgency's strength. Contrary to our prediction, the insurgency is as strong — if not stronger — than ever. We mistakenly forecast for 2004, "While the United States became caught in an unexpected guerrilla war spread across about one-third of the population sections of Iraq, the insurrection is small and shows little sign of spreading to the country's Shiite south or Kurdish north. Anti-American sentiments in the Sunni areas have not translated into mass insurrection. STRATFOR sees the main trend line in the broader U.S.-jihadist war as moving in favor of the United States." While at first the United States began to use its occupation as a basis for reshaping relations with the entire region, in 2004 the United States suffered mission creep and is now seemingly obsessed with the strategically pointless goal of turning Iraq into a developed democracy. A mop-up operation turned into a full blown anti-guerrilla campaign in which the ebb and flow of Iraqi domestic political events have captured the full attention of top-rung U.S. policymakers. In this situation, Washington has been unable to sufficiently press Syria and Iran to move against al Qaeda. This, in turn, has delayed the expected emergence of a de facto U.S.-Iranian partnership. Only Saudi Arabia is moving against al Qaeda with a vigor Washington finds sufficient. By extension, U.S. attention remained so focused on Iraq that our prediction of major U.S. military efforts against al Qaeda forces in northwest Pakistan has not come to pass — yet. In short, the fighting U.S. Secretary of Defense Donald Rumsfeld famously — and erroneously — referred to as mopping up some "dead enders" has expanded enough to hobble U.S. efforts in the war beyond Iraq. Washington, while trying to convince the world that Iraq was (accurately) a part of the war on terrorism, somehow got muddled into actually acting like Iraq was the entire war against militant Islam — not simply a single battle in a much wider war. The trends on the above issues all balance on Iraq, which in turn balances on Washington's choice. Should the United States choose to declare victory and simply base out of Iraq instead of reforging it, everything else — an Iranian partnership, the death of al Qaeda in Pakistan, the co-opting of the Syrian regime — can still be achieved. In short, we have not yet been proven wrong on the subsequent developments — merely premature. (We were flat wrong, however, in missing the strength of the insurgency.) However, should Washington choose to continue trying to make Iraq into a Western-style democracy, the entire U.S. effort against al Qaeda and Islamist militants might fail. However, we might have been incorrect — as opposed to premature — on another topic. We projected that 2004 would be the year in which Georgia would disintegrate under Russian pressure. Unique among all former Soviet republics, Georgia is under partial occupation of Russian peacekeepers and unwillingly hosts two Russian military bases. Should Moscow choose, it easily could snap Georgia apart. But instead of ripping the former Soviet republic up in 2004, Russia lost much influence in the country. Pro-Russian forces in a potentially secessionist region were sent packing, a new vehemently anti-Russian president came to power, and the Baku-Tbilisi-Ceyhan oil pipeline project — which will allow Georgia to achieve economic independence — neared completion. It is not so bad we predicted something that did not happen, but our basic understanding of Russia itself might be flawed. STRATFOR, after all, expected Georgia to break apart not just in 2004, but also in 2003, 2002, 2001 and 2000. It is even in our 1995 and 2000 decade forecasts. Georgia is a miniscule issue in the grand scheme of things, but for cultural, geographical and security reasons, it is critically important to Moscow. Its continued existence as a pro-Western state is a grand testament to Russia's military, economic, cultural and political weakness. It gets worse. Though Georgia is important to Russian ambitions, Ukraine is critical to its survival. Yet Russia — rhetoric aside — has done nothing since the slew of fraud charges in the aftermath of the Nov. 21 Ukrainian presidential election led to the eventual purging of pro-Russian politicians from the Ukrainian government. If Russia feels — for whatever reason -it has no choice but to let Georgia and Ukraine go, then basic questions about the fundamental viability of the Russian state must be raised. The War in Iraq: A More Sophisticated Insurgency Turning our attention to 2005, we begin in Iraq, where insurgents are poised to launch more deadly attacks against U.S. forces and their allies in the coming year. Though the U.S. military has developed some good intelligence on the guerrillas, the guerrillas have developed far superior intelligence on U.S. forces and have been able to penetrate U.S. military facilities — as evidenced by the December 2004 bombing of a military mess tent in Mosul. Even though the U.S. military is improving security following the Mosul attack, the problem of insurgent intelligence cells and operatives penetrating coalition forces will not go away in 2005. Attacks will continue, and the insurgency will swell. Of the three components of Iraq's insurgency — nationalist-Islamist guerrillas, transnational jihadists and Shiite militants — the nationalist group is the largest. Sunni tribal and Iraqi government sources estimate there are between 15,000 and 20,000 nationalist guerrillas in Iraq. Jihadists from various groups account for approximately 2,000 to 2,500 members of the insurgency. Approximately 800 to 1,000 of them are foreign Islamist militants — mostly from Saudi Arabia, Jordan, Egypt and Syria, though some Algerians and Moroccans are among them. The Shiite insurgents, mostly led by Muqtada al-Sadr, are laying low until the next uprising. Shiite tribal sources say the core members of al-Sadr's Mehdi Army number about 3,000 and are scattered from Basra to the areas north of Baghdad. At this point, only about 300 of al-Sadr's fighters have joined arms with the nationalist guerrillas to get more combat experience and knowledge from the skilled nationalists. What all these numbers mean is that even without a Shiite uprising led by al-Sadr, the U.S. military and its allies in Iraq face an insurgency that could total more than 20,000 fighters. Melees with U.S.-led coalition troops are not expected to diminish their numbers, either — sources in Iraq say the number of guerrilla losses remain lower than the number of recruits and volunteers joining the insurgency each month. The guerrillas are much more numerous than they were a year ago, and their ranks will grow further throughout 2005. With their growing numbers comes a need for weapons and other supplies — to which the insurgents have access. Sources in Iraq say guerrillas obtain weapons not only from the black market but also from former Iraqi army caches, which are readily available. The guerrillas also have access to artillery, howitzer shells, anti-tank and other surface-to-surface missiles, rocket-propelled grenades and other grenade launchers, land mines and mortars and shells. All these supplies are available domestically; the insurgents will not have to look to other countries for materiel until their own stockpiles are used up. That could take years; it certainly will not happen in 2005. The Iraqi insurgents enter the New Year with tested elements of an operational command and control system. Organization and coordination among guerrilla groups was evident during the Ramadan offensive in 2003, and the first command and control system operating tactically was seen in Al Fallujah in April 2004. During the second battle in Al Fallujah and uprisings in Mosul and Ar Ramadi in November and December 2004, there was evidence of a command and control system working on an operational level. This system will develop further in 2005, making the guerrillas more capable of conducting major battles and operations. It is likely that some nationwide strategic command and control system embracing some — but not all — of the guerrilla groups will be created by the end of the year. This will create both opportunities and risks for the United States. Washington will have opportunities to negotiate with a somewhat united force representing many guerrillas. Similarly, it can try to defang the system by hunting down its senior leaders; we believe the United States will try both tactics. The risk will be that the guerrillas, with a more strict and serious command system in place, will be able to mount more serious offensives. The insurgents' intelligence capabilities have taken them inside virtually all levels of the Interim Iraqi Government (IIG) except the very top, sources in Iraq say. It seems that skilled intelligence operatives from the Hussein regime supervise the guerrillas' intelligence networks and are able to penetrate their agents into IIG and coalition forces. The insurgents also enjoy broad support from the Iraqi population. Even pro-U.S. sources in Iraq and some U.S. military contacts admit the guerrillas are popular and becoming more so with each passing week. We believe that in 2005, these factors will significantly enhance the guerrillas' abilities. The war is entering a new phase — one in which the United States faces an enemy much more organized than before, able to mount operations and coordinate its combat actions in several regions at the same time. Guerrilla operations will have more decisive goals than in 2004, such as trying to drive U.S. forces away from their bases and from some key cities. We expect the U.S. command to respond with overwhelming firepower and major counteroffensives. Al Fallujah, Ar Ramadi, Mosul, As Samarra, Baqubah, Tall Afar and several other cities likely will fall under insurgent control at some points in 2005, and U.S. forces will launch offensives to flush the insurgents out. This is not likely to pacify the resistance in those cities. Each side will take a military initiative several times in 2005, with guerrilla offensives and U.S. offensives alternating and sometimes overlapping. After each insurgent offensive, U.S. forces likely will launch a counteroffensive, while the insurgents likely will counter U.S. campaigns with major attacks in other regions of Iraq. With their enhanced capabilities, the guerrillas willextend the duration of their offensives; they might also launch three sustained major offensives in 2005 instead of two such operations per year as has been the case so far. Because of the insurgents' new capabilities, STRATFOR expects higher casualties for all sides and a faster tempo of operations in 2005 than in 2004, even though the guerrillas probably will not be able to sustain that faster tempo consistently. Operations using Iraqi troops are not likely to be major or sustained. Ideally, U.S. forces would be able to successfully train Iraqis and create a combat-ready Iraqi army to replace many of the U.S. troops on the ground. The coalition would also like to see the new Iraqi government take over security responsibilities after the Jan. 30 election — if for no other reason than to lend legitimacy to the new regime. However, this is not the best of all possible worlds, and U.S. efforts to create a viable Iraqi security force likely will fail. The bottom line for the war in Iraq in 2005 is that even in the absence of another Shiite uprising — which could happen if the election results displease Shiite elements — Iraq's fate will be decided in bloody battles between U.S. forces and Iraqi guerrillas. Neither side will achieve military victory by year's end. We will not predict who will be winning by the end of 2005; both sides will face serious problems and will then have to make major decisions on which direction to take the war in 2006. Though divorcing itself from nation-building and focusing on force projection could help the United States achieve its military goals in Iraq, it is not clear that Washington will do any such thing. Asia: Economic Woes Ahead China — and particularly its precarious economy — will be Asia's geopolitical epicenter in 2005. Changing global trends will cause the Chinese economy to begin faltering. When the Chinese economy suffers, economic pains throughout Asia are sure to follow. Moreover, a faltering Chinese economy could cause the Communist Party to struggle to maintain control. Ultimately, although China claims it is running a "market economy with Chinese characteristics," it has been doing little differently from its Asian neighbors during their boom times — pressing growth at the expense of profitability and moving ever deeper into a debt-driven economy, where new loans are used to repay old loans, market share and throughput supersede profitability, and politics and connections guide lending. Banks currently account for approximately 90 percent of all financing in China, and the country's mountain of debt far outstrips the authorities' ability to manage it in a crisis, despite improvements in the banking system made in recent years. New bank loans in China doubled between 2001 and 2003 alone, and credit growth remained strong — at 26 percent — in the first half of 2004. The government's moves to cool the economy and restrict credit to overheated sectors — such as steel, cement, automotive and real estate — reduced credit growth to 7 percent by the third quarter. It is still growth, however — largely in loans that will be repaid late, if at all. With the U.S. Federal Reserve set to increase interest rates significantly in 2005 — up to 6 percent, in our opinion — it is only a matter of time before capital takes wing from China. Foreign investment in China has been seen largely as a long-term payoff: Get a foot into the world's largest potential market, and returns will start to trickle back in a decade or so. But this lack of profitability, the increasingly apparent weaknesses in the banking system and the rising U.S. interest rates are likely to trigger a movement of capital out of China and back into the United States. A few cases of this already have been seen, as major Chinese businesses look abroad for new investments. On one hand, this could be interpreted as the natural evolution of a growing economy — but it reflects an impression by Chinese investors and businesses themselves that money is worth more, and is much safer, abroad. By the end of 2005, the United States will most likely recapture its title from China as the world's top destination for foreign direct investment (FDI). As U.S. rates increase, capital will begin to flow away from China and toward the United States. If China were to raise its own rates in line with the Fed, it would remain competitive with the United States and capital would stay in the country. However, China will not raise its own rates significantly, because doing so would instantly create financial distress by reducing bank lending, which would in turn cripple SOEs and the economy as a whole. It also would attract speculative currency flows that would increase the already significant pressure on the renminbi's peg to the U.S. dollar. Of course, China could always simply hack away at the dead wood of the SOEs more quickly, but it lacks the fiscal and bureaucratic resources to handle the social implications of larger rounds of lay-offs. China faces increasing unrest — including demonstrations, protests and ethnic and socioeconomic tensions — that not only has spread throughout rural regions but has come right to the central government's doorstep in Beijing. Though the government can manage discrete demonstrations, if groups of protesters begin to coordinate their efforts across city or provincial borders, the unrest could quickly get out of hand. Any seemingly harsh response by Beijing would only accelerate the flight or at least suspension of foreign investment — and, unlike in 1989, it is not clear that China's economy could survive the outflow of investment that would accompany a Tiananmen-style crackdown. Though China's economic and social systems are unlikely to reach a breaking point this year, 2005 is likely to be seen in retrospect as the beginning of the end of the Chinese "miracle." The change will be slow early in the year, and the initial effects will be minimal. As U.S. rates approach 5 percent, however — which could happen by mid-year — the capital trickling out of China quickly could turn into a flood. As capital is drawn away from the Chinese economy, banks will find themselves unable to continue extending credit to SOEs that survive on credit alone. With neither sector able to offer any funds to the other, the game will be up and both banks and SOEs will collapse like a house of cards — barring significant government intervention. The Chinese government will dip into its reserves — which likely will hold the considerable sum of $550 billion to $575 billion — to inject some liquidity into the banking system. This move will only postpone the inevitable, however, and convince foreign investors that China's day of economic reckoning has begun. The Chinese credit bubble burst will send shock waves through the country's economy and into the rest of Asia. Beijing's biggest challenge at that point will be to maintain the Party's central control, as large businesses and the economic elite begin to see their futures dim and rural workers begin to see their livelihoods fade. China already is turning to its tried-and-true fallback: the call of nationalism. These calls are likely to become increasingly strident throughout 2005, as Beijing seeks to shift attention away from economic pressures at home and toward the threat of Taiwanese independence and the fear of growing Japanese militarism. This tactic — and funneling reserves into the banks and economy — might work for a while, but Beijing does not have the resources or demographics to maintain an artificial sense of order for long. As it becomes clearer that the Party has failed not only in its moral obligations (corruption still runs rampant in the government) but also in its commitment to the people, and as the economic pinch begins to sting, the Party core will have to fight for survival. A significant downturn in China, coupled with a regional downturn triggered by high resource prices, will further spur the rising nationalistic rhetoric emerging throughout Asia. Japan is trying to re-establish itself as Asia's core and will exploit the slow demise of China's economy to the fullest while maintaining pressure from a military standpoint, raising the specter of Chinese expansionism as justification for Japan's return to a central role in regional security. Resource competition will accelerate moves toward the formation of temporary alliances as countries seek bilateral deals to exploit resources believed to lie beneath the South China Sea. Regional pariahs Indonesia and Myanmar might emerge from their isolation in 2005, with Jakarta's new leadership seeking favors from Washington and Canberra, and Yangon tightening central control but repositioning itself for a favorable standing with the Association of Southeast Asian Nations (ASEAN). It also could be the year Indonesian President Susilo Bambang Yudhoyono begins to assert regional leadership as the world focuses on Asia's recovery from tsunami devastation. Thailand remains an important wild card; Prime Minister Thaksin Shinawatra stands on shaky ground because of the continued insurgency in his country, but he could preserve his popularity and strength if he effectively deals with the aftermath of the tsunami. Thaksin's position at home will, to a great degree, help determine whether he will emerge as a major guiding force for ASEAN and Southeast Asia as a whole in 2005 or if he will be relegated to the background on regional initiatives. Former Soviet Union: Can Russia Regenerate? This year, Russia and the former Soviet Union (FSU) will play a crucial role in global geopolitics. Post-Soviet atrophy has led outside powers to intrude into the region, while Russian governments — first under Boris Yeltsin and now under Vladimir Putin — have abandoned superpower ambitions and tried to incorporate Russia into the West. But Moscow and the West see Russia's place in a Western-dominated world very differently. While it accepts Washington's senior role, Putin's Russia would prefer to revive itself as a great power on par with the United Kingdom, France and Germany and be a junior yet valued ally to Washington, which would hopefully take Russia's interests into account. The West, however, does not think it should reserve such a high place for a weakening Russia. As history has shown, when an entity is weakened, others take that entity's place and drive it into obscurity. The United States has been leading a decisive Western geopolitical offensive inside the FSU. The Baltic states have been incorporated into the North Atlantic Treaty Organization and European Union, U.S. forces are stationed in Central Asia, and the bulk of the Transcaucasus has become pro-American. Revolutions in FSU countries have replaced some pro-Russian regimes with pro-Western governments. In 2005, we expect the West to repeat that strategy in Armenia, Belarus, Moldova and several Central Asian republics — though success is not guaranteed in all cases. The Western efforts in Armenia and Moldova are more likely to succeed. The former Soviet republic of Georgia also is feeling less Russian influence. The withdrawal of Russian troops from Georgian bases in Batumi and Akhalkalaki (which STRATFOR projects in 2005) is extremely likely to encourage Tbilisi to finally take on its separatist regions — first and foremost, South Ossetia — in a full-scale attack rather than the low-intensity conflict witnessed in 2004. Tbilisi will still prefer to rein in its separatist regions by using the threat of force instead of actual force. After all, the Georgian army, despite U.S. support, remains weak. So far, Putin has tolerated the West's growing influence over the FSU. But Ukraine — a country vital to Russia's defense — came into the U.S. fold in December, when pro-U.S. candidate Victor Yushchenko won a presidential election. More than all the others, this development is pushing Russia to a breaking point — it must strike back soon and attempt to reverse the West's eastward advances, or it not only will lose the remainder of its influence in the FSU, but see Russia reshaped to suit Western tastes. Even Putin will not be immune. Sources among Russian government elites say Washington has encouraged a radical pro-U.S. faction in Russia's upper echelon — including pro-Western liberals inside and outside the Kremlin, some Russian oligarchs who want to remove Putin's government in order to acquire more wealth and even some national security establishment figures — to take political shots at Putin and to attempt to emulate the same kind of pro-U.S. revolution that succeeded in Ukraine, Georgia and other countries. However, such moves are unlikely to succeed in 2005. Facing nearly suffocating pressure, Putin has to react. If he does not check the West's geopolitical offensive in 2005 and allows Ukraine to fall under Western influence, Russia will be finished as a viable geopolitical force. The decentralization of Moscow's influence in the FSU could lead to the eventual disintegration of Russia itself. Centrifugal force is already fully at work in the Russian Federation — Chechen separatism has served as an icebreaker, other Muslim areas are increasingly defiant, and many of the federation's regions are trying to loosen their ties to Moscow. This leaves STRATFOR in a bit of a quandary. Our geopolitical forecasting model indicates that Putin must move against the West, and this move must be made in 2005 or it will be too late to save Russia from geopolitical oblivion. However, intelligence from all corners of Russia, including the country's elites and national security establishment, indicates that Putin will not move against the West anytime soon, and certainly not in 2005. Such inertia would most likely lead to geopolitical death for both Russia and Putin. However, sources in the Kremlin indicate that Putin — torn between his self-appointed mission to bring Russia into the Western fold and the need to stop the West's geopolitical invasion — is reluctant to break with the West. Though he sees the West grabbing one position after another in dangerous proximity to Moscow, his outlook so far (as Russian government sources say he has told his associates) is that Russia must choose between two evils — confrontation, which would require a complete reversal of all post-Soviet efforts to Westernize Russia, or submission, becoming one of the energy resource bases of the West and losing real sovereignty. Putin reportedly sees the latter as the lesser evil and hopes Russia will be able to buy the time needed to rebuild itself economically and eventually free itself from dependency on the West. If our sources are correct, Putin seems to be postponing the inevitable confrontation with Washington because he knows Russia will lose if the confrontation comes too soon — but Washington will not give Russia the necessary time and opportunity to recover from its current state of degradation. It would not serve U.S. interests for Russia to recover and potentially be able to challenge U.S. hegemony in the future. That said, two potential events could move Putin in the opposite direction. One is that the pro-Washington Russian elite could try to stage a Ukrainian-style revolution. This could force Putin to move, but with no elections scheduled in 2005, revolution is unlikely in the coming year. Besides, there is no need for Washington to push to dismiss Putin as long as he follows a policy of accommodation, and the Russian opposition — such as it is — is simply not yet ready for such an effort. The other possibility is that new militant attacks against Russia could force Putin to act. The attacks would need to have considerably more impact than the series of attacks in August and September 2004; the only move those attacks inspired Putin to make was toward further centralization of his power. Russian intelligence sources say Chechen and international Islamist militants have planned large-scale, high-impact attacks to be launched as early as January 2005. Militants reportedly are planning two groups of strikes. The first will be against soft targets, in order to inflict horrifically high casualty rates, shake Russia's psyche and distract Russian security forces from the second group of attacks. Those would involve seizing control of a nuclear power plant in southern Russia or a strategic missile base and then demanding that Russia withdraw from Chechnya and admit defeat, thereby ending the war. If Putin drags his feet in this situation, the militants could then cause a disaster on par with Chernobyl. Though such a catastrophe would inspire strong reactions from Russian citizens, we are not sure Putin would change Russia's course even then. To be precise, he might launch major strikes against Chechens, but he would stay the course of "Westernization." In short, new large-scale attacks are more likely to move Putin toward alignment with the West than away from it — which would mean the U.S.-led geopolitical offensive into Russia and the FSU would continue unchecked, and Putin would still have to find an answer to it. The longer he waits, the less likely it is that Russia will pull through in one piece. Russian sources say the elite are increasingly frustrated with Putin's inability to stop militant attacks and are pushing Putin to agree to joint Russian-Western (read: U.S.) protection of Russian nuclear facilities — strategic and otherwise — across the country. Their applied pressure will increase as new attacks are launched. If Putin submits, he would fulfill one of Washington's most cherished dreams: gaining control of the nuclear arsenal of the only country capable of destroying the United States. This goal might not be reached in 2005, but steps will probably be made toward the joint protection arrangement. Putin's responses to the West's growing influence and to the increasing militant attacks probably will be limited. Even under tremendous pressure, Putin will neither turn away from the West nor call for all-out war against Islamist militants. His response to the West likely will be to deploy a few new strategic weapon systems, conduct major military exercises and continue forging strategic ties with countries that want to challenge U.S. global influence — such as China, France and especially Germany. Against the militants, Putin will probably call for limited offensives in Chechnya, special forces operations in other regions of the North Caucasus and — less likely, though still possible — surgical strikes against militant facilities outside Russia. Though these limited responses will benefit Russia more than pure rhetoric, they will in no way lead to a reversal of the shifting balance of power in the FSU or of Russia's continued decline. Putin will leave the responsibility of saving Russia from a slow death to the future — and possibly to a future Russian government. Continued on: Annual Forecast: When Other Things Start To Matter — Part II

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