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Jan 10, 2010 | 00:13 GMT

Annual Forecast 2010

Click here to download a PDF of this report Editor's Note: This forecast was originally published Jan. 4. The dominant theme of 2009 was the global recession. A series of financial developments in the United States damaged the U.S. banking system and spread from there to the rest of the global economy. Everyone — whether purchasers of high-tech goods or sellers of raw commodities — was deeply affected. As the year turns anew, that recession has ended. The recovery in place is unsteady, but appears to have put down sufficient roots to hold. Two major evolutions will dominate 2010. The first is a continuation of a trend STRATFOR has been following for years: Russia's resurgence as a major power. In the 1990s the United States became very comfortable with the idea of Russian weakness, and in the 2000s the wars in Afghanistan and Iraq utterly consumed U.S. military capacity. With the recent decision to send even more forces into Afghanistan, the U.S. preoccupation with the Islamic world will become all-consuming, allowing Russia to do as it pleases in its near abroad. For Russia, 2010 will be a year of consolidation — the culmination of years of careful efforts. In the coming year, Russia will excise the bulk of what Western and Turkish influence remains from Ukraine, Kazakhstan, Belarus, Armenia and Azerbaijan, and try to lay the groundwork for the reformulation of a political union in much of the former Soviet space. That project will not be completed in 2010, but by year's end it will be obvious that the former Soviet Union is Russia's sphere of influence and that any effort to change that must be monumental if it is to succeed. Contributing to the Russian consolidation is a sharpening crisis in the Middle East. Israel believes that Iran's nuclear program has matured sufficiently to constitute a material threat to the survival of the Jewish state. International diplomatic efforts to contain that program are not simply intended to forestall a future nuclear threat from Iran, but also to prevent an Israeli strike on Iran — a strike that could quickly spiral into a general melee in the world's premier energy artery, the Persian Gulf. The mix of players and motives — Israel insisting on real controls and willing to act unilaterally, Iran evading real controls and retaining its ability to act decisively in Iraq and Afghanistan, Russia seeking to keep the conflict brewing in order to distract all from its efforts in the former Soviet Union, and the United States simply wanting everyone to calm down so it can focus on its wars — all but guarantees that a crisis will erupt in 2010. The only questions are whether that crisis will be limited to "simply" the Persian Gulf, and whether it will be military in nature. Elsewhere in the world, there will be many developments that will not rise to the omnipresence these issues will have in 2010, but are nonetheless critical on the regional level.
  • The global recession is over and a building, albeit tentative, recovery is putting down roots in many places. Its permanence or robustness is hardly a foregone conclusion, but the carnage of early 2009 is certainly a thing of the past. What has taken the place of the global economic crisis are a series of aftereffects that are regional in character: China's struggles with its export-led economy when export demand is tepid, and Europe's growing banking crisis.
  • The increase of U.S. forces into Afghanistan is an attempt to change the rules of the war. The real heat from the conflict in 2010 will not be in Afghanistan, but in Pakistan, where the conflict is expanding beyond the border region.
  • In Europe, the Lisbon Treaty — now fully entered into force — finally will allow Germany and France to assert meaningful leadership of the European Union.
  • The effects of Mexico's drug war are spreading rapidly, as the cartels focus their efforts along the drug supply chain into both Central America and the United States. For Central America, the violence and corruption that now permeates Mexico will become ever more familiar.
  • With internal transitions complete and civil wars resolved, Angola and South Africa have both matured as independent powers. Now begins their cold war.

Middle East

Iran's nuclear program has progressed without being slowed by international efforts. This is unacceptable to Israel, and so the Jewish state is both becoming more concerned about its national survival and playing up the threat to force more decisive action. The Israelis have said that unless the Americans can halt Iran's nuclear activities (whether through the use of "crippling sanctions" or military action), they will have no choice but to launch a military strike of their own to neutralize the program. Despite its desire to avoid war, the United States understands that should such an attack occur, it would have to participate for two reasons. First, while Israel could undoubtedly throw the Iranian program back a few years, Israel lacks the reach to destroy it. Iran, cognizant of the threat it faces, has not only done extensive work to conceal the physical elements that make up its nuclear program, it has also distributed its various parts across the country. Israel will need U.S. military assistance in terms of bunker-buster ordnance to successfully penetrate facilities that are deep underground and spread across great distances. Second, Iran would undoubtedly retaliate in a number of theaters, and one of those theaters would be the Strait of Hormuz, the world's most densely trafficked energy transport route — thus threatening to throw off the global economic recovery through rising oil prices. U.S. participation would increase the likelihood of success in a strike against Iran's nuclear facilities, and only the United States has the resources to both strike at the facilities and engage Iran's retaliatory capabilities in the Strait of Hormuz. But none of this means that the Americans want a war in 2010. Washington wants nothing more than to focus its efforts on the expanding war in Afghanistan and withdrawing from Iraq. It desperately wants to put Iran off for another day. But the Israelis are forcing the issue, and the Russians are amplifying the Iranian threat — as part of a plan to keep the Americans occupied in the Middle East — by encouraging Tehran to remain defiant. STRATFOR does not have sufficient evidence to forecast that war lingers at the end of this road, but that is a distinct possibility which may slide toward probability as the year wears on, and certainly as Iran comes closer to being able to build a nuclear bomb. The year 2010 will be about Israel attempting to force a conflict, the Americans attempting to avoid it, the Iranians preparing for it and the Russians manipulating all sides to make sure that a resolution to the standoff does not come too soon. Elsewhere, Turkey continues to gain prominence, working toward a status more representative of a country of its geographic, demographic and economic heft. But Turkey's emergence is still a very new phenomenon, and Ankara wishes to avoid any decisive conflicts until it is more confident of its position. It also remains constrained by domestic political wrangling. Turkey currently lacks the tools to prevent a military conflagration between the Americans and Iranians — and it certainly does not wish to become involved itself. It also lacks the stomach to face off against the Russians in the Caucasus, and could well lose what footholds it has there in 2010. Ergo its influence will expand like a gas into any region which other major powers have neglected. In 2010, Turkey's efforts will be concentrated upon two areas: the Balkans, where the geopolitical contest is a bit of a free-for-all (especially Bosnia, where the other players have mixed feelings), and Iraq, where the Americans are trying to leave. That American withdrawal will severely test the ability of Iraq's factions to work together through the series of political arrangements that have held to date largely due to American browbeating. Iraq's increased factionalization in 2010 is a guarantee at this point, whether due to the U.S. departure, Iranian meddling, as a consequence of deteriorating Iranian-U.S. relations or some combination of these. The first taste of what is to come will be ushered in by parliamentary elections scheduled tentatively for early March. The first recourse by any group that feels slighted will be to reactivate the militias that turned the country into a bloodbath in the recent past. No matter which way the balance of power shifts — and it is likely to shift away from the Kurds toward the Sunnis — Iraq is in for a very tough year, one that will be an important test of its ability to function more sustainably.

South Asia

The year 2010 will see Washington implement its new Afghanistan strategy: Increase the U.S. military presence from 70,000 to 100,000 in order to roll back the Taliban's momentum, break up the Taliban factions and train the Afghan army. On the surface, the American decision seems like it will dominate 2010. It will not. The Taliban is a guerrilla force, and it will not allow itself to be engaged directly. It will instead focus on hit-and-run attacks and internal consolidation in order to hold out against both the U.S. effort to crack the movement and any al Qaeda effort to hijack the Taliban for its own purposes. These internal Taliban concerns could well make the various negotiations involving the Taliban just as important as the military developments. In contrast, across the border in Pakistan, Islamabad is near a breakpoint both with Washington and the jihadists operating on Pakistani soil. Thus it is here, not Afghanistan, where the nature of the war is shifting. The bulk of the al Qaeda leadership is believed to be not in Afghanistan, but in Pakistan. Increased cross-border U.S. military activity — mostly drone strikes, but also special forces operations — will therefore be a defining characteristic of the conflict in 2010. Even a moderate increase will be very notable to the Pakistanis, among whom the U.S. efforts in Afghanistan (to say nothing of Pakistan) are already deeply unpopular. The United States' increased military presence and increased proclivity to operate in Pakistan raise four concerns. First, Pakistan must find a means of containing the military fallout. U.S. actions will force Pakistan's military to expand the scope of its counterinsurgency offensive, which will turn heretofore neutral militants against the Pakistani state. The consequence will be a sharp escalation in militant attacks across Pakistan, including deep into the Punjabi core. Second, Pakistan needs to find a way to manage U.S. expectations that does not rupture bilateral relations. Allowing or encouraging limited attacks on NATO supply lines running through Pakistan to Afghanistan is one option, as it sends Washington a message that too much pressure on Islamabad will lead to problems for the effort in Afghanistan. But this approach has its limits. Pakistan depends upon U.S. sponsorship and aid to maintain the balance of power with India. Therefore a better tool is to share intelligence on groups the Americans want to target. The trick is how to share that information in a way that will not set Pakistan on fire and that will not lead the Americans to demand such intelligence in ever-greater amounts. Third, an enlarged U.S. force in Afghanistan will require more shipments and hence more traffic on the supply lines running through the country. The Pakistani route can handle more, but the Americans need a means of pressuring Islamabad, and generating an even greater dependency on Pakistan runs counter to that effort. The only solution is greatly expanding the only supplemental route: the one that transverses the former Soviet Union, a region where nothing can happen without Russia's approval. This means that in order to get leverage over Pakistan the United States must grant leverage to Moscow. Finally, there is a strong jihadist strategic intent to launch a major attack against India in order to trigger a conflict between India and Pakistan. Such an attack would redirect Pakistani troops from battling these jihadists in Pakistan's west toward the Indian border in the east. Since the November 2008 Mumbai attack, India and the United States have garnered better intelligence on groups with such goals, making success less likely, but that hardly makes such attacks impossible.

Former Soviet Union

STRATFOR has charted the strengthening of the Russian state for several years. In 2009, with Washington's attention focused on Iraq, Afghanistan and domestic politics, Moscow was able to make a series of profound gains in many former Soviet territories, most notably in Azerbaijan, Georgia and Ukraine. In 2010, Russia will consolidate those gains to insulate itself against any future increased U.S. interest in the region. Most of these efforts will be focused in three specific locations.
  • Ukraine: Each of the three leading candidates in the country's January presidential election — the first such election since the 2004 Orange Revolution — are in the Kremlin's pocket. Early in the year Russia will have successfully ejected pro-Western decision-makers from the Ukrainian senior leadership, allowing Russia to re-consolidate its hold on the Ukrainian military, security services and economy.
  • Belarus and Kazakhstan: On Jan. 1, a customs union between Russia, Belarus and Kazakhstan entered into force. Unlike most customs unions, this one was expressly designed to grant Russia an economic stranglehold on the other two members. Belarus reluctantly agreed, as Russians already own a majority of that country's economy, while Kazakhstan had to be coerced into the deal. If there is a weak point in Russia's armor in 2010, it will be in Kazakhstan, where many players realize that the customs union will eventually kill any hope of holding an economic or political position independent of Moscow. Russia aims to extend the customs union to Ukraine, Armenia, Kyrgyzstan and Tajikistan eventually, and in time hopes to use the union as a platform from which to launch political unification efforts.
With Russia's consolidation effort unlikely to meet serious resistance, other former Soviet territories will be forced to either sue for acceptable terms or seek foreign sponsorship to maintain their independence. Azerbaijan and Turkmenistan are almost certain to fall into the former camp, while Georgia (unlikely to succeed) and the Baltics (unlikely to fail) will fall into the latter. Therefore it will be in the Baltic states that Russia will slide toward confrontation with both Europe and the United States. Though Russia likely will have some success in its periphery in 2010, the Kremlin will face a tough fight at home. At the end of 2009, the Russian government started multi-year economic housecleaning to rid the government of wasteful state companies and purge the managers who were not seen as doing their job. But this move to make Russia more financially and economically sound in the long run has ripped through the two main power clans in the Kremlin, sparking a series of fierce purges. This next year, the war between the Kremlin clans will intensify. Though it will be incredibly noisy and dangerous for the majority of Russia's most powerful men, it will be up to Russian Prime Minister Vladimir Putin to maintain stability in the government and keep the clans from ripping the government apart. Putin is the only one in Russia that can contain this war, though he may have to make some tough choices on reining in or neutralizing some of the most important figures in the Kremlin. This will ripple through every part of Russia — including the Federal Security Service, the military, strategic economic sectors and more.

Global Economy

At some point in the middle of 2009 the recession in the United States ended. However, pockets of economic weakness remain within the United States and larger problems continue elsewhere in the world. (click here to enlarge image) STRATFOR uses a handful of measures to evaluate the U.S. economy, and nearly all appear positive. The Standard and Poor's 500 Index, a good leading indicator of investor sentiment, is now up 50 percent from its recessionary lows. First-time unemployment claims, an excellent lagging indicator of economic growth, are down roughly a third from their recessionary highs. Retail sales have not only been higher than inventory builds for months, but inventories have been shrinking for most of that time; businesses are running their shelves bare, indicating that they now have no choice but to place orders for more goods, which in turn kick-starts employment growth. STRATFOR's largest remaining concern is that banks remain skittish about lending and consumers about borrowing. So while the United States is well into an economic recovery, it is not a powerful one. Until normal credit relationships are fully restored and embraced by both lender and borrower, the U.S. recovery cannot be characterized as robust. Yet other areas of the world have much larger, more persistent problems. Much of Europe returned to growth in 2009, but several countries — most notably Greece, Ireland, Italy, Spain, Romania, Hungary and Latvia — remain in serious economic trouble. Every state on this list faces increasing debt levels that can only be resolved by painful austerity programs, a massive bailout from the European Union, or both — any of which would generate massive social unrest. The only way to avoid that result would be for the European Central Bank to keep pumping out emergency liquidity, allowing the weaker economies to continue with massive deficit spending. This "solution" would simply put off the crashes for another day in the hopes that a strengthening American recovery would provide a lifeline eventually. Additionally, as most European governments blamed the Americans for the recession, few took a serious look into their own banking systems (U.S. banking problems are what spread the crisis in the financial sector to the broader economy). The European Union has only now begun to diagnose the health of its own banks — which are far worse off than their U.S. counterparts — much less address the banks' failings. At the time of this writing, only half of the probably 1 trillion euros ($1.4 trillion) in damaged assets has even been acknowledged, and less than half of that has been realized as losses. Consequently, Europe will face two economic crises in 2010: a generational banking crisis, and a series of debt mitigation efforts that could well damage the health of the euro itself. Japan too has returned to growth, but only by reverting to the massive deficit spending of the 1990s. Critics point out that the United States has also engaged at such spending, but a sense of perspective is needed: The U.S. national debt is now 87 percent of gross domestic product, while Japan's stands at 217 percent — the largest in absolute and relative terms in human history. China registered the strongest growth in the world in 2009, but this growth occurred despite a collapse in exports — traditionally the source of China's economic dynamism. Fully 95 percent of China's growth for 2009 originated from investment spending, most of which was rooted in a massive lending expansion characterized by almost no concern for loan quality. In essence China maintained growth — and with it mass employment and social stability — by generating a large chunk of questionable loans, or by transferring the new debt to local governments. Both solutions will haunt China in the future. And with the U.S. recovery less than entrenched and the European recovery questionable at best, China will need to find another way to avoid in 2010 the downturn it evaded in 2009. The key global economic issue of 2010 is simple: export demand. There are no states experiencing growth strong enough to serve as unabashed consumers — while recovering, the once-insatiable U.S. consumer's demand levels remain below those in 2008, a circumstance unlikely to improve much in 2010 — and there are too many states whose economies are export-oriented. That mismatch will limit growth throughout Asia and to a lesser degree Europe, but the overproduction of goods that this mismatch generates will ensure that overall inflation remains extremely tame.

East Asia

Unlike the rest of the world, for China the 2009 global recession did not translate into a credit crunch. China has a very high level of household and corporate savings and a deep pool of foreign exchange reserves to draw upon, and it used these to encourage a massive surge in cheap loans. This, coupled with government stimulus measures aimed at infrastructure development, generated the high levels of economic growth the world has come to expect from China. But this growth is not without its cost, and even the Chinese government has realized that economic reforms necessary to stabilize the economy and shift it away from the Asian "growth for the sake of growth" model have been seriously set back as the government focused on weathering the financial storm. Like Japan and the East Asian Tigers, China's economic model is fraught with risks, and the inefficient use of capital built into the system is sure to come back to haunt Beijing at a later date. China's problem in 2009 was a plunge in global demand for Chinese exports. Much of China's industry was already operating on thin profit margins, and the drop in exports left parts of the economy twisting in the wind. Rather than firing workers to balance the books — something that could quickly translate into mass unrest — China rapidly increased loans to those companies on one hand, and launched major (debt-financed) infrastructure projects on the other. Combined, the two efforts (conservatively) cost more than $1 trillion, but they had the desired effect. China's current problem is that, with the exception of having more infrastructure than it did a year ago, Beijing enters 2010 in almost the same situation as it entered 2009. Exports have rebounded by about one-third but have not returned to pre-crisis levels. Chinese corporations remain burdened with the same export-dependency and capital-inefficiency problems that made 2009 so nerve-wracking, and structural shifts in the Chinese economy to reduce this dependency cannot be made in a decade, much less a year. The Chinese, then, have little choice but to continue the debt-driven loan and infrastructure programs that allowed them to evade a crash in 2009 until such time that external demand revives sufficiently. Consequently, trade spats with the United States — a country also nervous about its employment situation — are sure to increase, even as China attempts to step up new trade deals in Asia and the developing world to reduce its dependence on the United States and tap into new areas of growth. Furthermore, China is facing increasing resistance to its 2009 push to buy overseas resource assets and will be shifting its approach in 2010 to more joint ventures and smaller shares as it seeks to deflect criticism and opposition. As China continues to deal with its internal economic and social difficulties, it is also looking at Southeast Asia with concern. Recent U.S. initiatives to revive relations with the Association of Southeast Asian Nations, including a diplomatic visit to the oft-shunned Myanmar, have left Beijing feeling that Washington is meddling in China's expanding sphere of influence and seeking to encircle China. For their own economic and strategic reasons, Japan and India are also stepping up economic and political activity in Southeast Asia, contributing to China's feelings of insecurity. In 2010, Southeast Asian countries could find themselves at the center of attention — something they will seek to carefully navigate and exploit.

Europe

With the United States preoccupied in the Middle East, Europe will have to deal with a resurgent Russia on its own. However, as the European Union deals with the realities of the Lisbon Treaty, new — and opposing — coalitions are solidifying within the union. The most important of these coalitions by far is the Franco-German relationship. Paris and Berlin have come to an understanding — perhaps transitory — that together they are much better able to project power within the European Union than when they oppose each other. Under Lisbon, there are very few laws and regulations that these two states cannot — with a little bureaucratic and diplomatic arm twisting — force upon the other members. Gone are the days that a single state could paralyze most EU policies. But many EU states have problems with a union led by France and Germany, and Lisbon leaves the details on many forthcoming institutional changes to be sorted out. This will create plenty of opportunity for further disagreements on how the European Union is to be run. Furthermore, France and Germany have already resigned themselves to Russian preeminence in Ukraine and Russia's preeminent role in Europe's energy supply. These two policies are not palatable to Central Europe, particularly the Baltic States, Poland and Romania. In 2010, the Central Europeans will finally be convinced that they are facing the Russians alone. They will try to draw a distracted United States into the region in some way. The United Kingdom is almost certain to elect a euroskeptic government by mid-year which will hope to precipitate a crisis with the European Union in second half of 2010. London will find ample allies for its cause in Central Europe. Finally, increasingly divergent economic interests among EU members (see the Global Economy section) will further swell the ranks of states disenchanted with Franco-German leadership.

Latin America

Latin America has seen many changes in the past decade as a generational shift in leadership reset regional trends: Venezuela and Bolivia's shift to staunch anti-Americanism, Argentina's financial deterioration, Colombia and Mexico's critical decisions to use force against their drug cartels, and Brazil's long-delayed rise to prominence. For Latin America, 2010 will be noted not for any great shifts, but rather for continuity, despite substantial internal evolutions in key countries. It is an election year in the region's two most dynamic states, Brazil and Colombia, where the ultimate outcome — as far as who will succeed the enormously popular incumbents — is not at all clear. But the policies pursued by both countries — relatively liberal, consensus-based and market-friendly investment and tax laws (and in Colombia's case, a focus on security) — have proven so successful and popular that whoever is the leader at year's end will have very little room to negotiate changes. Brazil and Colombia are finally on the road to meaningful economic development, and for the first time in a century, no mere election has a serious chance of disrupting that path. Continuity will also hold for those states whose economic future is not so bright, the most visible cases being Argentina and Venezuela. Argentina will concentrate on gaining access to global capital markets despite the lingering effects of its 2001 debt default. This is not part of any economic restitution or rehabilitation program; Argentina is seeking capital so it can spend itself into a deeper hole. When it comes, Argentina's reckoning will be a painful one. However, regardless of what happens — or does not happen — with international capital markets, that reckoning is not likely to come in 2010. In Venezuela, the question remains one of political control. There will be legislative elections in 2010 that could give the opposition a new rallying point, but that opposition remains disunited and disorganized, allowing the government to maintain the upper hand fairly easily. Barring an external shock — and one that triggers a massive and sudden economic decline — the central government's control will likely hold. The only country in which STRATFOR expects a change of circumstance will be Mexico, where cartel activity will expand. Mexico has experienced significant successes in its fight against drug cartels during 2009. With pressure picking up on their home territories as the military presses every advantage, the Mexican cartels will increasingly seek to diversify their involvement in the drug trade by strengthening their control of various parts of drug supply chains — and the corresponding profit pools. Cartel activity will spread increasingly across the Mexican borders to the United States and Central and South America. While there will likely be a concurrent rise in violence in the countries to the south of Mexico, the cartels will attempt to maintain a low profile in the United States in hopes of avoiding the attention of U.S. law enforcement. Nevertheless, the potential for violence remains, as the cartels will have to compete with established gangs, and potentially even with each other.

Sub-Saharan Africa

The leadership transition in South Africa has taken years to occur and crystallize, while Angola has required years to stabilize and consolidate after nearly three decades of civil war. Both processes are now complete, and the competition between the two southern African countries to become the dominant regional power has finally begun. The players have different strengths and vulnerabilities, though each has its own power base and means of leverage. South Africa is wealthier and boasts a stronger military and industrial base. Angola boasts a brutally effective security service and abundant revenue from its now-robust oil industry. In 2010, the competition will start off rather sedately, with Angola offering bits of its diamond industry and sales of crude oil as a means of keeping relations with South Africa friendly. But it will not be long before something like a cold war — that is, a conflict using proxy dissident factions — erupts between the two. The factions' operations in 2010 will be limited to the political realm, however, rather than an all-out war like the one between Angola and South Africa in the 1970s and 1980s. Both states plan to shape Zimbabwe to their liking, and competition there will heat up as Zimbabwean President Robert Mugabe's health (or general disagreeability) takes him out of the picture. Already both are maneuvering their allies into position. There will also be no shortage of action within the two countries as each attempts to sow chaos within the other. South Africa has plenty of contacts among Angola's various ethnicities that date back to the civil war — the governing Mbundu are actually a minority (albeit a sizeable one) of Angola's population — that it will reactivate. The group likely to attract the most South African patronage will be the Ovimbundu, the group that fought the Mbundu most fiercely during much of the civil war. Angola will return the favor by establishing links with the upper echelons of South Africa's much more powerful — but also much more fractious — military, and with factions within South Africa's governing alliance. In particular, Angola will attempt to ingratiate itself with the South African Communist Party and the Congress of South African Trade Unions, two groups that are already chafing at the leadership of South African President Jacob Zuma.

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