Annual Forecast 2014

Jan 6, 2014 | 10:03 GMT

After spending more than a decade absorbed in intractable conflicts across the Islamic world, the United States will finally start to catch its breath in 2014. As U.S. troops draw down their presence in Afghanistan, Washington will go to great lengths to develop an understanding with Tehran. Negotiations will face major hurdles, and a final settlement that lifts the economic embargo on Iran will be a bridge too far for 2014. However, our longtime readers probably will not be surprised by the underlying depth and sincerity shared by Tehran and Washington that will sustain this detente over the course of the year.

The United States has long struggled to resurrect a balance of power in the region that would allow Washington to once again manage and manipulate relationships on both sides of the ethno-sectarian divide without directly entangling itself in every quagmire that arises. Iran, for its part, knows it has a limited time to negotiate the bounds of its sphere of influence with an interested party in Washington while Tehran still has a regional sphere of influence to claim. No party — including Israel, Saudi Arabia and Iran's own Islamic Revolutionary Guard Corps — will have enough leverage to block this dialogue. The foundation for the negotiation has already been laid, but the construction of a settlement that buries 34 years of hostile relations will necessarily be a loud and trying process.

Even as the United States takes care to avoid a confrontation with Moscow while negotiating with Iran, Russian President Vladimir Putin knows it will only be a matter of time before a much freer Washington returns its gaze to the Russian periphery. Russia will spend 2014 reinforcing the gains it has made over the past decade in neutralizing and reorienting peripheral states toward Moscow. Germany will quietly moderate Russia's steps in Central and Eastern Europe, preferring a bargain with Moscow when it comes to thorny issues like EU energy policy toward Russia.

Germany's far more consuming task this year will be the ongoing challenge of holding the European Union together. The eurozone will likely survive another year without a widespread banking or sovereign debt crisis, but a virulent combination of stubbornly high unemployment rates, low domestic consumption and growing consumer and corporate debt will have a sobering effect on the politics of the current crisis. This year will see nationalist and Euroskeptical parties gain popularity and thus build on their ability to obstruct structural reforms already laden with controversy at both the national and EU levels.

China will experience similar frustration in trying to balance deep reforms against growing social and political constraints. Whereas the European Union will continue to grapple in negotiations across 28 incredibly diverse member states, China will gradually shift away from the Party's slower, consensus-based decision-making to a more decisive model under President Xi Jinping. Even so, China's underlying structural weaknesses mean Beijing will have to pursue an incremental and cautious approach, both in applying reforms at home and in trying to define a sphere of influence in its near abroad.

By and large, 2014 will be a year of careful deliberation and preparation by the world's great powers, in which accommodation will likely prevail over confrontation in their interactions. By contrast, the countries between these great powers will grow restive as they try to adapt to their shifting geopolitical environment, lacking the influence to play a decisive role in the very issues redefining their neighborhoods.

Middle East

Locator - Middle East - 2014

Middle East

U.S.-Iranian Talks Take Center Stage

The U.S. attempt to resurrect a balance of power in the Middle East through a strategic detente with Iran will be the driving issue for the Middle East in 2014. Between U.S. President Barack Obama's growing struggle with Congress ahead of November midterm elections and Iranian President Hassan Rouhani's ongoing challenge of trying to garner support from hardliners at home, there are sure to be hurdles in the U.S.-Iranian negotiations that could at times make the talks appear to be on the verge of collapse. Despite the unavoidable obstacles, the U.S.-Iranian detente will endure this year.

However, a comprehensive settlement between Washington and Tehran — and thus an end to the Iranian sanctions — will take more than 12 months to develop. Obama will rely on his executive powers to skirt or override congressional resistance on sanctions relief when needed. Both the U.S. and Iranian governments will also be able to use domestic resistance to the deal as leverage in the negotiation. Iran's Islamic Revolutionary Guard Corps, which stands to lose the most economically and politically from a U.S.-Iranian deal, will be the most assertive challenger to the negotiation from Iran's side, but it will ultimately lack the institutional backing and public support to overturn the process.

The Scope of U.S.-Iranian Talks

The U.S.-Iranian negotiation will publicly focus on neutralizing the Iranian nuclear program in exchange for economic relief for much of the year. However, talks will extend quietly to other areas of mutual interest, including Syria, Iraq, Lebanon and Afghanistan, as the two sides negotiate a balance of power in the region. That said, progress will be uneven in each of these arenas as the United States and Iran struggle to work out their differences and influence a maze of competing ethnic and sectarian forces. As the United States prioritizes a difficult negotiation with Iran over the interests of its traditional allies in the region, the resulting strain in those relationships will hamstring U.S. efforts to work out the region's thornier issues. However, this is a price the United States is willing to pay while working toward a settlement with Iran.

Saudi Arabia's Lack of Options

Saudi Arabia, though deeply unnerved at the prospect of its primary patron developing a relationship with its main regional adversary, will lack the power and influence to derail the negotiation. The Saudi government will attempt to tighten and strengthen an Arab coalition against Iran (this time without U.S. backing), but this effort will be mostly hollow, especially since the Gulf Cooperation Council states will remain divided over how far they are willing to go in maintaining an antagonistic relationship with their Persian neighbor. Despite the obvious strain between Washington and Riyadh, the United States will maintain its relationship with the Saudi royals and other Gulf states through military and energy deals.

As the U.S.-Iranian deal progresses, the Saudi government might consider quietly opening up a back channel with Tehran to directly negotiate a truce with its adversary. Most of Saudi Arabia's focus this year, however, will be on trying to maintain influence in still-active sectarian battlegrounds.

Syrian Fighting and Spillover Continue

Syria will remain the main proxy battlefield between Iran and Saudi Arabia. Despite multilateral efforts to negotiate a political transition in Syria, no negotiation will quell the Syrian civil war this year. Limitations to external aid for the rebels and efforts to neutralize the Syrian chemical weapons program will keep the civil war relatively contained. Although they will receive continued financial and military aid from Saudi Arabia, Qatar and other Gulf donors, the rebels will not receive a substantial boost in their fighting capabilities from the West. Iran's strong support for the Syrian regime and Hezbollah reinforcements will make the imbalance of power on the Syrian battlefield even starker, but the regime will continue to face constraints in manpower and logistics in retaking rebel territory. The loyalist forces will have enough of a military advantage this year to enable Syrian President Bashar al Assad to manipulate elections, scheduled for the spring, in favor of the Alawite minority while playing rival rebel factions against one another.

A large and capable jihadist presence in Syria will encourage the slow rise of an indigenous jihadist movement in Lebanon. Hezbollah will have to split its attention between an emerging Sunni militant threat in Lebanon and reinforcing its sectarian allies in Syria. The Lebanese political and militant landscape will become even more fragmented in 2014 as various factions seek accommodation with one another to adapt to Iran's strengthening role in the region. Hezbollah and Iran will try to take advantage of the atmosphere of negotiation in an attempt to push the United States toward accepting Hezbollah as a political actor and to formally integrate Hezbollah's militia into the Lebanese army for the Shiite organization's long-term preservation.

Strained U.S.-Israeli Relations Hamper Peace Talks

Like the U.S.-Saudi relationship, the U.S.-Israeli relationship will experience a great deal of strain as the United States absorbs the political cost of distancing itself from Israel while its policy for the region evolves. Israel will adapt reluctantly to the situation, focusing its efforts on shaping the terms of the U.S.-Iranian negotiation in the hopes of mitigating the Iranian nuclear threat.

Israel will use its sense of betrayal to drag its feet in any U.S. effort to reinvigorate the Israeli-Palestinian peace process. The deeply fragmented Palestinian political landscape, along with Egypt's disinterest and preoccupation, will further hamper the peace process.

Egypt's Military Consolidates Power Amid a Growing Jihadist Threat

The Egyptian military will use the spring election cycle to further entrench its authority and stack the government with political allies. Political unrest will persist — but not to a paralyzing degree — as the Muslim Brotherhood struggles to recuperate from its losses and as the military selectively co-opts Salafists into the government. An Egyptian economic collapse is unlikely, though Cairo will remain severely constrained as it tries to manage a burgeoning electricity crisis and unavoidable subsidy cuts amid a protest-prone populace. Egypt's continued dependence on aid from Gulf patrons keen on suppressing the Muslim Brotherhood and like-minded political forces will help Cairo manage its economic challenges.

On the security front, Egypt will face a persistent jihadist threat in the Sinai Peninsula that will spill increasingly into Egypt's core urban areas. Egypt's preoccupation in managing its political, economic and security challenges means Cairo will be unable to play a decisive role in Arab affairs beyond its borders in 2014. Hamas, blocked in by Egypt and Israel, will maintain a close relationship with Iran in the meantime.

A Distracted Turkey Seeks Balance in the Region

While Tehran stands to strengthen its regional position through accommodation with Washington, Turkey will look for ways to balance against Iran. These efforts will be most visible in Iraq, where Turkey will try to anchor its influence in the north through energy deals with the Kurdistan Regional Government while Iran maintains a dominant position in Baghdad through the Shiite-led government. Iraq's national elections, scheduled for April, will highlight this competition. Iraqi Prime Minister Nouri al-Maliki will attempt to retain his post while leaning on both Tehran and Washington to pressure Turkey and the Iraqi Kurdish leadership to respect Baghdad's authority in managing the country's energy resources. The result will be a stalemate: Baghdad will try to avoid pushing the Kurds too far in an election year while it also deals with a persistent jihadist threat, and Ankara will struggle to work out a compromise with Baghdad and Tehran while trying to maintain Kurdish support in a volatile election season at home. Periodic truces are possible, but a grand bargain satisfying the interests of Baghdad, Ankara and Arbil in northern Iraq's energy exports is unlikely this year.

Turkey's ruling Justice and Development Party will face great internal stress as a coalition of unlikely allies — including the Gulen movement, members of the business elite and the main opposition Republican People's Party — finds common cause to weaken Turkish Prime Minister Recep Tayyip Erdogan's position and undercut the ruling party in local and presidential elections. The government's ambitious peace process with the Kurdistan Workers' Party will reach an impasse, with the government too politically constrained to agree to concessions on political amnesty and the Kurds without an incentive to withdraw their forces. The Kurdistan Workers' Party's frustration over the negotiations, particularly ahead of elections and as the ruling party is already facing challenges on multiple fronts, could lead to large public demonstrations and sporadic attacks, but a full resurgence of Turkey's Kurdish insurgency this year is unlikely.

Turkey will use this year to reprioritize its foreign policy objectives. While trying to further its gains in northern Iraq, Turkey will have limited influence in Syria and Egypt. Outside the Arab world, Turkey will maintain a dialogue with Armenia and Cyprus in an attempt to extend its influence in the Caucasus and the eastern Mediterranean, but a diplomatic breakthrough in either arena will be difficult. Turkey's ties with Israel will improve gradually, but Ankara will prefer to keep the relationship muted while it tries to shape perceptions in the Arab world. 

Instability Persists in North Africa

The Maghreb will be less affected by the implications of the U.S.-Iranian negotiation but will face its fair share of challenges. Libyan instability will be at the heart of the region's security issues in 2014. Even as Western states push the transitional national authority in Tripoli to move ahead in the lengthy process of drafting a constitution and forming a new government, Tripoli will continue to struggle in asserting its authority over a fragmented tribal and militia landscape. Tripoli will coordinate with foreign capitals to train small groups of soldiers to help boost its fledgling national army's capabilities and organization. In trying to counter the decentralization of authority that defined much of Libyan instability in 2013, Tripoli will also work to co-opt smaller militia and tribal groups throughout the country. At the same time, Tripoli will attempt to partner with larger regional centers of authority to rein in renegade armed groups and militants that have benefited greatly from Libya's current security vacuum. This is sure to be a violent process in which control over energy infrastructure will be used as leverage. Expect oil production and exports to fluctuate greatly as a result.

Instability in Libya will continue benefiting regional jihadists in search of a haven and staging ground for attacks. Neighboring Algeria and Tunisia in particular will not be immune to such attacks, but Algiers will maintain its security cooperation with Tunis and, to a lesser degree, Tripoli as it tries to insulate itself in the coming year.

Algeria will try to expand its political, security and economic inroads into Tunisia as the latter continues through its difficult political transition. Algiers will also maintain security coordination with the Sahel states to the south and continue low-level political provocations with Morocco to ensure Rabat remains too distracted by domestic political and economic challenges to interfere with Algeria's regional policies. Algerian President Abdel Aziz Bouteflika and his faction will work toward securing a victory in the upcoming presidential election — whether Bouteflika or an ally runs for the office — and overseeing changes to the constitution while balancing competing military, political and economic interests. The success of Bouteflika's internal political management will determine how far Algiers goes in its attempts to revive foreign investment in the energy sector later in the year.


Locator - Europe - 2014


Eurozone Sluggishness Continues

Europe will be able to muddle through another year of stagnant economic growth and high unemployment, but the political and social pressures developing on the Continent will hobble the very structural reforms needed to manage the crisis in the long run.

Although some eurozone countries will see marginal reductions in unemployment and the periphery will see decent export levels, negligible economic growth and high unemployment rates (in the periphery, as well as core countries like France and the Netherlands) will persist. Under these circumstances, credit conditions for households and companies will remain tight, undermining domestic consumption as well as hopes for a strong economic recovery. Efforts made by the European Central Bank to provide easier access to credit for small and medium-sized businesses will have limited success, as the bank still lacks an effective mechanism to impose monetary policy on member states and banks that will remain hesitant to lend. The combination of high unemployment and tight credit conditions will carry a number of consequences for the year.

The Social and Political Effects of the Ongoing Crisis

The most palpable consequence will be the rise of social unrest on the Continent. Street demonstrations will be the most obvious expression of popular anger at ruling elites. Just as important to watch will be the gradual strengthening of nationalist and anti-establishment parties as well as the more subtle emergence of grassroots movements capable of gaining support from various, but equally frustrated, segments of society.

From local to EU levels, the rise of nationalist and Euroskeptical parties will be felt in the 2014 election cycle. Belgium, Hungary and Sweden are scheduled to hold general elections, while France, the United Kingdom and Greece will hold municipal elections. In May, the populations of all EU member states will vote in elections for the European Parliament. Though nationalist and Euroskeptical parties will not assume full control of the European Union and its member states, they will perform strongly and achieve record results in most of these elections.

More national governments will thus be forced to seriously consider the demands of anti-establishment parties in shaping policy. At the same time, Brussels will continue pushing for further government austerity measures and more centralized control at the EU level. These contradicting interests will create more friction between national governments and EU institutions as member states fail to meet their deficit targets under growing pressure from unions, protest groups and nationalist parties to maintain spending levels — and thus safety nets — for their populaces.

EU-Level Developments and Complications

EU institutions largely will be paralyzed for the second half of the year due to European Parliament elections in May and the election of a new European Commission at the end of 2014. Further complicating matters at the EU level in this transition period will be the entry of nationalist parties into the European Parliament, where they will try to block or at least delay EU integration policies put forth by the member states and the European Commission, such as the creation of a eurozone budget. The United Kingdom, widening the split between eurozone and non-eurozone countries, will reinforce the trend of Euroskepticism by resisting reforms aimed at centralizing Brussels' control over the union, particularly when it comes to immigration.

Greater political discord at the EU level will complicate efforts underway to insulate and repair European banks, but the European Central Bank will retain the tools it needs to prevent a Europe-wide banking and sovereign debt crisis this year. The task of forming a banking union will enter the technical phase as the European Central Bank and national regulators try to implement a relatively diluted political agreement to centralize the oversight of, and decision-making for, eurozone banks. Decision-making shared among the European Central Bank, European Union and national governments will greatly complicate the second pillar of the plan to decide when and how banks should be closed.

Ahead of the European Central Bank's assumption of a supervisory role over the eurozone's largest banks at the end of the year, these banks will undergo rigorous stress tests to reveal which are overexposed and which will require new injections of capital. High unemployment rates will continue preventing many households and businesses from honoring their debts, forcing banks — including those spared from the stress tests — to defer action on a growing pile of non-performing loans. The European Central Bank will work to keep potentially unnerving information from leaking out in this process and will moderate demands on banks to avoid triggering panic in the financial markets. The consolidation process, in which stronger banks absorb the weaker, will continue, and the European Central Bank will be able to provide aid (in the form of providing financial assistance, restructuring bailout agreements and relaxing austerity demands) to struggling eurozone countries if the need arises. Greece, Cyprus, Portugal and Slovenia will be the most vulnerable countries that could require such aid in 2014.

Challenges Arise in the European Core

The Franco-German relationship, which forms the foundation of the European Union, will undergo strain this year as France's domestic tensions escalate. Paris and Berlin will make the necessary effort to manage their relationship, even as their economic performance continues to diverge. French President Francois Hollande will try to appease a diverse and growing group of demonstrators and balance between business groups, local protest groups and unions though reforms, such as revamping the country's taxation system, though progress will be slow and uneven. Criticism from Germany and the European Union over France's resistance to cutting back government spending will have little influence on French policy.

Germany will also have a busy domestic agenda, including efforts to pass energy reforms in response to the rising costs that have come with the increased use of renewable energy. Germany's energy reforms will trigger disputes at home and with the European Union, because Berlin will be expected to prioritize domestic demands to avoid raising energy costs for German companies over EU complaints that German state financial support for companies undermines competitiveness on the EU level. Germany's decision to implement a minimum wage in 2015 could dampen criticism of the country's trade surplus.

Though Germany will be preoccupied with managing stresses within the eurozone, it will attempt to play a bigger role in Central and Eastern Europe, where Russia has been trying to strengthen its foothold through commercial deals. The German government will debate internally over how to deal with the Russians on a tactical level, but neither Berlin nor Moscow will risk a rupture in their bilateral relationship.

Germany will engage in a complex balancing act with Russia, particularly when it comes to the thorny issue of energy policy. On the one hand, the completion of liquefied natural gas import terminals in Poland and Lithuania in 2014 will demonstrate a continued commitment from the European Commission to weaken Russia's energy leverage over Europe. Germany can be expected to demonstrate its close relationship with Poland in other aspects as it balances against Moscow. On the other hand, Germany likely will play a critical role in facilitating a compromise between the European Commission and Russian state-owned energy firm Gazprom on the European Union's ongoing antitrust probe.

Hungary and Bulgaria will also push for a compromise between the European Union and Russia on energy policy, since they are among the European countries that hope to profit from Russia's South Stream natural gas pipeline project. Hungary will maintain an antagonistic relationship with Brussels, and Hungarian Prime Minister Viktor Orban's government will run a heavily anti-EU and populist campaign ahead of elections in the first half of the year. Budapest's attempts to expand its control over the Hungarian economy will continue, with utility companies and banks some of its main targets.

Key Elections for Separatists

2014 will also be a significant year for European separatist movements. London will campaign against Scotland's independence referendum in September, but the issue is unlikely to generate substantial frictions within the United Kingdom.

In Spain, Catalonia's push for a referendum will be considerably more contentious. The Catalan government will try to use its plans to hold a referendum as leverage in its negotiations with Madrid, while the government of Prime Minister Mariano Rajoy will threaten to take the matter to the Constitutional Court, where it would be annulled. Even if the referendum is actually held, the deep divisions within Catalonia's political establishment will prevent a unilateral declaration of independence in 2014.

Former Soviet Union

Locator - FSU - 2014

Former Soviet Union

A Crucial Year Ahead for Moscow

Russia has a limited amount of time before the United States uses a detente with Iran to lighten its burden in the Middle East and turn its attention to other areas of the world, including Russia's neighborhood. Though Russia will continue trying to build leverage in the Middle East to quietly complicate U.S. plans for the region, it will not be able to stand in the way of a deal. Therefore, this year will be a crucial period during which Russia will resolve as many priority issues as it can while Washington remains preoccupied with negotiations with Tehran. However, given the array of challenges Russia faces at home and abroad, this will not be an easy task.

The tools that Russian President Vladimir Putin used to resurrect the Russian state when he came to power are growing blunt. Economic malaise will drive social unrest in Russia at a time when the state mechanisms traditionally used to manage that unrest are losing influence. Putin will be able to manage the growing instability within the Kremlin and on the streets, but in the process he will make the state more dependent on him in particular and thus more vulnerable in the long run.

Stagnant economic conditions will force Russia to confront vulnerabilities in its energy-based economy. The Russian energy sector will continue evolving from a monolithic state-run sector focused almost entirely on Europe to a more competitive, but still heavily state-influenced, sector in which more players, such as Novatek, will be able to compete with Gazprom and sell to a more diversified client base. 

The Kremlin will also engage in policy changes in 2014 to bolster non-energy sectors of the economy, including the mining, metals, construction, food and auto industries. This initiative will make limited progress in the short term, but the Kremlin will loosen up restrictive investment policies in an attempt to make these sectors more attractive to potential investors. A restructuring of the economy will necessarily create more competition among the Kremlin clans and could lead to a large government reshuffle as Putin attempts to manage various factions while trying to tame a frustrated populace. With a full domestic agenda, Russia will carefully weigh where it can afford to be more assertive and where it will have to be more conciliatory in managing its foreign affairs.

Russia's Maneuvers Abroad

Russia is nervous about the prospect of a U.S.-Iranian rapprochement but likely will not be able to stop it. Moscow will try to make the most of the situation by arguing that the U.S.-Iranian negotiation has removed the Iranian military threat and thus has rendered U.S. ballistic missile defense plans for Europe obsolete. Russia will rely on its relationship with Germany to try and build a coalition of NATO members willing to delay U.S. ballistic missile defense plans or renegotiate the contracts to integrate Russia into an expanded defense system. The United States will try to avoid a confrontation with Russia as it focuses on securing a deal with Iran, but Washington is unlikely to compromise substantially on its ballistic missile defense plans, designed in large part to balance against Russia and reinforce a U.S. military commitment to allies in Europe.

Russia will continue its commercial acquisition strategy in Central Europe, but Berlin will be more assertive on occasion in an effort to set some boundaries with Russia in Central Europe while focusing on the much bigger issue of holding the eurozone together. Berlin and Moscow will take care to maintain their bilateral relationship, but the two countries will engage in substantial bargaining over Central Europe, Ukraine and the EU energy strategy.

Moscow's relationship with Berlin will be critical in managing the two major European energy issues of 2014: the European Commission's antitrust probe into Russian energy monopoly Gazprom and the legality of Gazprom's South Stream pipeline project connecting Russia and South-Central Europe. With the upcoming turnover of European Commission members in 2014 and the array of compromises Gazprom can offer the European Union — including giving further price cuts to European customers and allowing third-party suppliers to access South Stream — the standoff between the European Union and Russia will move toward an eventual accommodation.

Moscow Consolidates Influence in Its Periphery

Russia's moves in the former Soviet periphery this year will mostly involve defending and consolidating the gains it has made thus far. With Western influence in Ukraine neutralized for now, Russia will move forward with plans to strengthen its ties to Ukraine's energy and economic sectors. This will be a politically volatile year for Ukraine in the run-up to the presidential election slated for early 2015, and protests against the president will occur periodically throughout the year. Germany and the European Union will try to maintain some influence in Ukraine through their support of opposition leaders like Vitali Klitschko, but Russia will maintain the upper hand in Ukraine overall.

Moldova and Georgia, which moved forward with EU agreements in 2013, will become a focal point of the competition for influence between the West and Russia. Russia can be expected to apply economic, security and political pressure on Moldova and Georgia to try to prevent them from following through with the agreements. Russia will probably succeed, particularly since the same fundamental obstacles that prevented Ukraine from proceeding with its EU agreements are likely to obstruct Moldova's and Georgia's plans as well.

The Baltic states will continue to make progress in their energy diversification from Russia, with Lithuania's liquefied natural gas import terminal coming online in late 2014. However, the Baltics will continue to struggle to get the security commitment they seek from NATO and the United States in the face of Russia's more aggressive military posturing in the region

Russia will maintain a strong position in all three Caucasus states this year, though the U.S.-Iranian talks will open the door for both Iran and Turkey to gradually become more active in the region. Iran will seek to increase its social and political influence in Azerbaijan, while Turkey will try to mediate talks between Armenia and Azerbaijan over Nagorno-Karabakh in an attempt to reopen relations with Armenia. However, both Turkey and Iran face too many constraints this year to make much headway in these efforts, allowing Russia to retain its predominant role in the region.

Armenia, Kyrgyzstan and Tajikistan will strengthen economic and security ties with Russia as they progress with plans to join the Customs Union, which is set to become the Eurasian Union by 2015.

Russia Turns its Attentions to Asia

As Moscow looks beyond Europe to diversify its energy clientele, Russia will expand and deepen its relationships in the Asia-Pacific region. Russian oil deals with Asian clients have already begun to alleviate pressure in the Russian oil sector, but this year Russia will begin construction on energy infrastructure designed to supply natural gas to Asia.

China's growing interest in Central Asia will unnerve Moscow, but Russia will avoid confrontation and prioritize securing its own large energy deals with China this year. Russia will gradually develop a counterweight to China at the same time through its warming relationships with Japan and South Korea.

The Russian-Japanese relationship will be particularly important in 2014 as both states make concrete moves to negotiate a peace treaty and ease territorial tensions. This will pave the way for large deals involving security cooperation, Russian energy exports to Japan and Japanese investment in Russia.

The U.S. drawdown in Afghanistan and the resulting gradual outflow of militants will exacerbate an already tense security environment in Central Asia. Security deterioration in Central Asia will be incremental rather than a sudden and significant destabilization. Border tensions and violence among Uzbekistan, Kyrgyzstan and Tajikistan will continue to pose a threat in the region. Kazakhstan and Uzbekistan both face uncertainties regarding presidential successions, but political friction will build in Uzbekistan in particular as the competing clans struggle this year in preparation for the eventual transition. 

East Asia

Locator - East Asia - 2014

East Asia

China's Changes Reverberate in the Region

Three trends will shape East Asia and the Pacific region in 2014. First, China will struggle to implement reforms amid an economic slowdown, consolidate the new administration's power and assert its influence in the region. Second, major powers will respond to China's growing influence, including the United States updating its engagements in the region and Japan reviving its international status. Third, a range of Asian states will experience greater volatility as a result of China's slowdown, U.S. monetary policy and internal political dynamics.

China's central government enters 2014 buoyed by optimism abroad and at home over a host of ambitious social, economic and political reforms outlined during November's Third Plenary Session. Now the real work begins for President Xi Jinping and his administration as they attempt to implement these reforms while managing all the inherited pressures of China's economic slowdown. 

The cautious, incremental implementation of reforms in China over the next 12 months is defined by the need to streamline government bureaucracy, address widening regional and rural-urban economic imbalances and allow market forces to play a more significant role in the allocation of resources.

Two structural reform areas will be key in 2014. First, Beijing will accelerate market-oriented pricing for resources like natural gas and water to improve efficiency. Second, it will adjust the fiscal relationship between central and local governments, widening taxes on property and coal, changing existing taxes on resources and consumption, and expanding local bond issuance programs, largely to stabilize local government financing. The central government also will further relax controls on interest rates, the exchange market and the capital account to promote financial liberalization, which is already underway in the Shanghai special economic zone. However, while the central government plans to restructure ineffective state-owned enterprises and monopolized sectors, this process will likely fall short within the year because of resistance from the enterprises and leaders' concerns about unemployment

In line with its broader goal to shift toward an economic model less reliant on coastal export manufacturing, the central government will extend reforms of residential registration and rural land sales. Likewise, it will support further inland and western development through new special economic zones and infrastructure investment. However, restructuring the economy is a multiyear process — one that China's leaders will seek to balance against the need to maintain socio-economic stability, resulting in gradual and partial execution.

Severe risks to social and economic stability will persist, mainly from recent credit accumulation, threats to employment from slower growth and rising public anxiety over corruption and environmental degradation. While the new leadership has signaled it will tolerate a moderate economic slowdown and some increase in unemployment for the sake of reform, it will struggle to balance these goals against rising public expectations and growing concerns over local government debt. Localized instability in property markets is likely this year, potentially exacerbating local government debt woes. However, despite the risk of systemic financial crisis, the central government has the resources to manage these concerns throughout 2014.

Xi's Administration Consolidates Political Power

The Communist Party is showing signs of moving beyond its two-decades-old model of collective leadership to build a more consolidated Party centering on Xi. A "strongman" model, like Deng Xiaoping's leadership, has become attractive based on the belief that it would help the country make critical decisions at a time of enormous domestic and international challenges.

Reforms always come with more intense ideological debate and rising political expectations that go beyond the Party's interests. Hence, the Party will resort to tight control over social media, dissent and the ideological realm in order to ensure that further economic opening will not jeopardize its political authority, as the events leading up to the Tiananmen incident did.

Xi and his allies will burnish their public credentials and build confidence in the Party's trustworthiness by continuing to wage an aggressive campaign against corrupt officials. This will also serve to consolidate power throughout the Party and state bureaucracy. Xi will also try to improve the judicial system gradually. Still, social unrest and alternative political demands will intensify as different groups oppose what they view as either excessive gradualism or radicalism in the central government's reform agenda. 

China Repositions Itself Internationally

Supply line security and inland development have required Beijing to expand its security and military focus in its periphery over the past decade. In 2014, Beijing will accelerate economic cooperation with its neighbors to speed up development in its border regions and improve its strategic standing among its immediate neighbors. In particular, China will refocus on development in the south and west, looking to open up land corridors to reach Central Asia, Eastern Europe and the Middle East. Beijing will move beyond energy to promote other trade and infrastructure deals in these regions. At the same time, China will bolster its traditional foothold in Southeast Asia, seeking greater connectivity and market share in the face of growing competition.

In the maritime sphere, Beijing's growing capabilities and assertiveness will continue pressuring surrounding states, but China will not treat its neighbors uniformly. In Northeast Asia, China's military modernization and assertions of influence will increase tensions with Japan, while in Southeast Asia, China hopes that its accelerated economic outreach to countries like Thailand, Malaysia and Indonesia will further divide the Association of Southeast Asian Nations regarding territorial disputes and security concerns. China will court Vietnam and the Philippines for joint exploration as the smaller countries look for third powers to strengthen their position.

With the establishment of its National Security Committee, Beijing is looking to increase its general level of involvement in external affairs. Beijing will attempt to use regional multilateral frameworks and its allies to divert U.S. pressure while seeking to prevent competition with the United States from disrupting its delicate domestic transformation.

Washington and Tokyo Increase Activity

The U.S. challenge of resurrecting a balance of power in the Middle East will limit Washington's focus on the Asia-Pacific region in 2014, but the United States will gradually gain more flexibility to pursue engagements there. It will work with allies and partners to increase military drills, visits and dialogues while pressing forward with economic cooperation, including but not limited to the Trans-Pacific Partnership. 

Meanwhile, Japan will continue to act with a renewed sense of international purpose, aiming to revive its international image as a great power. Tokyo will revise the legal, administrative and policymaking frameworks for its new national security strategy. It will continue normalizing its military, paying particular attention to expanding capabilities in the southwestern islands, facilitating arms exports and changing policies to allow collective self-defense. It will also tighten its alliance with the United States and its security cooperation with regional partners.

Tokyo will maintain the recently increased tempo of economic diplomacy, focusing especially on infrastructure exports and emerging markets. It will court states that offer both economic and strategic benefits especially — including Russia, India and members of the Association of Southeast Asian Nations. As Japan tries to solidify its energy supply chain security through arrangements in Russia, the Middle East and elsewhere, the U.S.-Iranian negotiations will give it the opportunity to pursue relations with Iran with fewer constraints but amid greater competition among energy clients in Asia.  

Domestically, economic stimulus will mitigate the impact of a higher consumption tax, but the attempt to contain large deficits and debt while speeding up growth and inflation will reveal constraints on the government's economic policies. The ruling party will pursue structural reforms in a number of sectors — most notably the electricity industry. However, these reforms will not have an immediate, game-changing effect. The very slow restart of nuclear power will be politically controversial, and energy import costs will remain high, contributing to trade deficits. In addition, the need to raise wages will remain a major obstacle to broader economic revival. For these reasons, political opposition will grow even as the ruling party remains broadly popular and firmly in control of policy.

Internal Challenges Grow Across the Region

Across Southeast Asia, a range of economic and socio-political challenges will become more prominent in 2014. The region's emerging economies will capitalize on the gradual shift of manufacturing investment away from China and the rising competition among developed countries for market share in this economically ascendant region. However, they will face immediate challenges as China's slowdown, Europe's weakness and expectations of tighter U.S. monetary policy force them into a riskier environment

In addition to economic volatility, several Southeast Asian countries face the prospect of political instability and social discontent stemming from a variety of causes. Indonesia's new government will face the test of whether it can maintain the past decade's relative stability despite budgetary, trade and inflation troubles. Thailand will enter into the next episode of its ongoing political and constitutional crisis, since the royalist establishment and regional populist movement probably will not be able to forge a broad compromise to accommodate each other's interests in 2014. Myanmar will continue its economic opening and political reform, but the election in 2015 will lend momentum to political maneuvering and further ethnic and religious instability. Vietnam will strive to contain rising public grievances as it restructures its economy. In countries as diverse as Malaysia, Cambodia and Singapore, opposition pressure will spur the dominant ruling parties to try new ways of restoring support. These trends will require governments to use a range of tools — from public spending to security forces — to preserve their grip on power. Thus, while Southeast Asian states differ in their specific problems and capabilities, growing internal challenges will be a general trend in the region.

In North Korea, 2014 brings even greater uncertainties than usual. The ousting and unexpected execution of North Korean leader Kim Jong Un's uncle, Jang Song Thaek, raises questions about Kim's consolidation of power — namely, whether the purge of Kim's rivals is unfinished. Moreover, the struggle for consolidation will continue since Kim remains a new leader surrounded by older generals and party leaders. With further consolidation and reshuffling expected, Pyongyang will need to appear threatening to remind outside powers to give it space to deal with internal matters, and it may engage in some provocations. However, when Pyongyang feels it stands on firmer ground, it has the option of initiating various talks as well as continuing to experiment with economic opening policies, not only with China and South Korea but also with other parties, such as Russia. However much Pyongyang may reach out, it will not go so far as to make major concessions on its nuclear or missile programs in the next year.

South Asia

Locator - South Asia - 2014

South Asia

India Gears Up for a Dynamic Year

Domestically, the looming national elections in May 2014 will consume India's attention. The incumbent Congress/United Progressive Alliance government will be in a lame-duck position for the first half of the year as the domestic economy struggles with an overall slowdown. Some sectors may see better-than-expected growth, but overall the opposition Bharatiya Janata Party will position itself as the force capable of lifting the Indian economy out of the doldrums facing many emerging economies. As the Congress and the Bharatiya Janata Party square off in their decadeslong rivalry, the national elections are likely to illustrate the rising clout and popularity of local parties on the national level, reflecting growing frustration with the traditional duopoly of India's national politics. The large numbers of people mobilized as part of the political process will create several avenues for conflict: local communities pushing back against state and national authority, competing ethnic and sectarian interests, and the ever-present jihadist and militant threat as those groups seek to take advantage of a distracted central authority and large gatherings of people to stage attacks. 

India's domestic political battle will take place at a time of near-unprecedented upheaval in the Indian periphery. New Delhi will attempt to pursue its strategic interests in the broader Indo-Pacific basin, including Nepal, Sri Lanka and Myanmar, as well as other Association of Southeast Asian Nations, while trying to limit the risks of instability in Pakistan and Bangladesh and of an Afghan state preparing for the 2014 NATO withdrawal. As New Delhi continues moving toward a more stable working accord with Beijing, it will also try to leverage its traditional relationships with the United States, Australia and Japan into increasing foreign investment and infrastructure development. Any major foreign policy shifts are unlikely ahead of the national vote, but India's inherent risks and interests in its periphery will remain largely unchanged no matter who wins the election. The U.S.-Iranian negotiations will create opportunities for India to expand its ties with Iran and potentially cooperate in areas like Afghanistan. However, a slow removal of sanctions will threaten India's favorable payment arrangements for Iranian oil, and Tehran's demand for euro-denominated payments will continue exacerbating the economic challenges that India's rising energy import bill poses.

Elections and Strikes in Bangladesh

Dhaka will face the daunting task of trying to hold a national election that is free and fair enough to satisfy both international observers and internal constituents, including the military. Bangladesh will attempt to hold elections without a military-backed neutral caretaker government in place for the first time since the country's return to civilian rule in 1990. While the outgoing Awami League-led coalition will attempt to bring the opposition Bangladesh Nationalist Party, its Islamist allies and the military into negotiations on its own terms ahead of any election, the party's attempts to retain power will face significant resistance.  

Violence, public unrest and protests will take their toll on overall security and stability. The country's critical textiles and clothing manufacturing sector will suffer from continued, disruptive strikes for higher wages. The government will grant concessions to labor, but strikers' awareness of the government's weak position will spur further demands. New Delhi will seek to limit the outflow of Bangladeshi immigrants seeking refuge within its borders, especially during its own elections-related upheaval, but it will encounter limitations in trying to shape the outcome of Bangladesh's political process to suit its own strategic imperatives.

Sri Lanka's Ambitions for 2014

Colombo will focus on consolidating its position in the Tamil-dominated northern and eastern parts of the country following the provincial council votes in September 2013. Taking advantage of the internal divisions already becoming apparent within Sri Lankan Tamil politics, President Mahinda Rajapaksa's administration will try to revitalize provincial economies through outside investment and infrastructure development. Colombo will also seek greater foreign capital inflows into the country's ambitious infrastructure, energy and mineral extraction sectors. Agriculture and manufacturing, specifically textiles production, will continue to be a focus of growth, especially as Colombo attempts to take advantage of lower cost labor among the island's historically disadvantaged and underdeveloped Tamil regions.  

Sri Lanka will be caught in a competition between New Delhi and Beijing as both try to bring the island nation into their spheres of influence. While Colombo wants to avoid being simply a satellite of India, it cannot avoid developing a more stable working relationship with New Delhi — something India will pursue even in the face of domestic Tamil opposition. The Rajapaksa administration will also work on consolidating its political relationships on the island, including courting Tamil votes through promises of investment and development, ahead of the 2015 presidential election.

Afghanistan Prepares for the NATO Drawdown

Afghanistan faces two primary challenges in 2014: the drawdown of NATO forces and the decision on the status of forces agreement with the United States. Stratfor believes that Kabul will eventually agree to a continued U.S. military presence, despite elaborate outward waffling on behalf of President Hamid Karzai's outgoing government aimed at limiting negative blowback from announcing a decision publicly. This military presence will be too small to meaningfully affect Washington's fitful negotiations with the Taliban, but the drawdown will also effectively remove Afghanistan as a strategic priority for the United States.

Afghanistan will undergo a critical transition after a presidential election slated for April produces a successor to Karzai, the country's only president since the fall of the Taliban government. It is bound to be a rocky transition as the new president seeks to consolidate his position — a matter complicated by both Karzai's efforts to retain influence after leaving office and an anticipated increase in Taliban attacks against Afghan and Western forces beginning in March or April.

Insurgencies and Military Issues Preoccupy Pakistan

The growing uncertainty in Afghanistan will have the most direct impact on its eastern neighbor, which already faces a strategic dilemma on how to manage its own domestic jihadist insurgency. Pakistani Taliban rebels under a new leader based in eastern Afghanistan will try to take advantage of the vacuum created by departing Western forces and the Afghan Taliban insurgency to launch a new offensive east of the Durand Line. Islamabad thus will have its hands full dealing with the new Afghan leadership as well as the insurgencies next door and at home.

Meanwhile, Pakistani Prime Minister Nawaz Sharif's government will focus on enhancing civilian control over the military after appointing the first military chief since the Musharraf era as part of a reshuffle of the top brass that will be complete before the end of the year. Pakistan's efforts to improve its economy will not see much success beyond some reduction in the duration of power outages as electricity production slowly increases.

Latin America

Locator - Latin America - 2014

Latin America

Political Tumult Returns in Mexico

If 2013 was the year of unprecedented political dynamism and cooperation in Mexico, 2014 will be the year of a return to political infighting. Having passed a raft of deep political, economic and social reforms in 2013, Mexico will now be faced with perhaps an even harder task: implementation. With no constitutional reforms on the agenda, alliances among the country's three major parties will be less imperative, and interparty cooperation will likely stagnate.

Implementation of the aforementioned reforms will be replete with bureaucratic and political hurdles. Secondary legislation for several of the country's major reforms — including those on telecommunications and energy — will be negotiated throughout 2014, and the effects will not begin to be felt until late 2014 if not 2015. Both reforms will address the key issue of introducing competition into two sectors that have long been monopolized. For energy reform specifically, secondary legislation likely will clarify the types of contracting models that will be applied to certain energy activities.

On the security front, Mexican President Enrique Pena Nieto will struggle throughout 2014 to implement his long-term strategy — namely, creating a new national gendarmerie and consolidating public security under a single, centralized command structure in each state. With few alternatives, he will continue his predecessor's approach of using the military to target the leadership of organized crime groups and to maintain order where needed.

Even though nationwide homicide rates may decline throughout the year due to security improvements in the cities that most heavily contribute to these figures, high levels of violence and insecurity will continue in most of the country — particularly the northeast and southwest. The expansion of citizen-organized militias — commonly referred to as community police or self-defense groups — in Michoacan and Guerrero states has added another challenge for Mexico's military to manage in 2014.

Colombia Attempts to Quell Unrest

Colombia likely will reach a deal with the Revolutionary Armed Forces of Colombia, or FARC, in 2014, thereby ending the Western Hemisphere's longest insurgency. President Juan Manuel Santos will push hard to have these negotiations wrapped up by election day in May and will hold a national popular referendum coinciding with the elections in order to seal the deal. But even if negotiators do not reach a deal by this deadline, Santos likely will be able to keep negotiations alive if he is re-elected. That said, the longer they go on, the more vulnerable to failure the talks become.  

Even if the FARC reaches a peace agreement with the government in 2014, the deal's implementation will be complicated, and any agreement likely will take months or years to fully enact. With the FARC talks approaching a conclusion, the Colombian government will continue exploring the possibility of starting formal peace talks with the National Liberation Army, the country's second-largest guerrilla group. 

With legislative elections in March and a presidential election in May, the Santos administration will work assiduously to appease disgruntled farmers and struggling manufacturers by crafting new economic policy that is more supportive of local production. The government will also auction off overdue transportation infrastructure projects in 2014. 

Venezuela Focuses on Economic Pressures

With no major elections in 2014, the Venezuelan government will focus on stabilizing its deteriorating economy. Caracas will try to rein in high inflation and address scarcities of food and consumer goods, with limited success. The widening gap between Venezuela's official exchange rate and the black market rate makes devaluation in 2014 likely, which in turn makes a substantial decrease in inflation unlikely.

Venezuela will continue relying on already overburdened state-owned oil company Petroleos de Venezuela to fund national social spending and provide foreign currency to the central bank. Significant investment from abroad into Venezuela's energy sector is unlikely, and the government will have to consider raising fuel prices and/or reducing some Petroleos de Venezuela-funded programs domestically and abroad to reduce the strain on the company.

Despite the increasingly unstable economic situation, Venezuelan President Nicolas Maduro will not face a direct threat to his rule this year. No political faction within the ruling United Socialist Party of Venezuela seems willing or able to challenge Maduro's position as Hugo Chavez's successor, and the opposition remains weak. For now, Maduro appears to have gained the cooperation of powerful government figures such as National Assembly leader Diosdado Cabello and Oil Minister and Petroleos de Venezuela President Rafael Ramirez, as well as the armed forces, in ruling the country. Despite the likelihood of further economic deterioration, the government will continue to implement piecemeal measures to sustain the system without radically altering its national economic policy.

Brazil Braces for the World Cup Amid Domestic Issues

Three major dynamics will define Brazil in 2014: global macroeconomic instability, the World Cup and the presidential election.

Of paramount importance for Brazil is maintaining domestic economic stability as the global economy experiences a structural shift. Facing the gradual end of the U.S. Federal Reserve's monetary expansion program and the end of a credit-driven growth spurt, Brasilia will need to adapt to new economic realities and carefully balance inflation and growth in 2014, much as it did in 2013. Although major economic crises are not likely to develop, 2014 will be a year of higher-than-desired inflation and slower-than-desired growth.

In June and July, the world's attention will be on Brazil as it hosts the 2014 World Cup. The government will be wholly focused during the first half of the year on preparing for the games by both finishing up major infrastructure projects and readying its law enforcement bodies to manage associated social unrest and prevent violence. The political opposition will try to leverage any popular protests as a means of gaining popularity ahead of elections. 

In October, Brazilians will elect a new president. Incumbent President Dilma Rousseff and the leftist Workers' Party comfortably lead in the polls and stand a good chance of winning four more years in the executive branch. Most of the year will be spent campaigning, courting social movements and building electoral coalitions. The Rousseff administration will continue to auction off long-delayed infrastructure projects, with mixed success, and will continue to push for new trade deals but will meet resistance from Buenos Aires. 

Economic Troubles and Social Unrest in Argentina

With the economy struggling, less congressional support after midterm elections and the inability to run for another term, Argentine President Cristina Fernandez de Kirchner will be in crisis-prevention mode in 2014 while continuing to prepare a succession scheme.  

A debt, inflation or current accounts crisis does not appear to be on the one-year horizon, but the economic situation will nevertheless continue deteriorating throughout 2014. The government will try to normalize its external position — softening up trade restrictions and/or reaching deals with lenders such as the Paris Club and multilaterals such as the International Monetary Fund and World Bank — in order to gain access to international capital markets. Buenos Aires will continue to make piecemeal concessions to attract investment, particularly into its energy sector. However, on the whole, the government will be constrained from deviating from the protectionist, interventionist economic policies it has systematically implemented over the past decade.

Social unrest is a fact of life in Argentina, and opposition groups undoubtedly will focus on distinguishing their policies from those of the government. Farmers, the middle class, labor and other disaffected sectors of society will take to the streets in 2014, but broad-based mobilizations against Fernandez's government may prove elusive as each group tries to position itself behind potential competitors in the 2015 election. 

Sub-Saharan Africa

Locator - Africa - 2014

Sub-Saharan Africa

Militancy Escalates Ahead of Nigeria's Elections

This will be an especially violent year in Nigeria ahead of political party leadership elections in December and national elections in April 2015. The biggest issue at stake this year is whether the southern Niger Delta region upholds a political arrangement to rotate the presidency back to the north. Nigerian President Goodluck Jonathan will face significant pressure to decline nomination for re-election, but he will likely hold on to his eligibility through most of the year so his support base can reap the financial benefits of his position before finally declining the nomination. Jonathan can then be expected to angle for a party elder position to retain influence beyond his presidency.

The uncertainty over Jonathan's ultimate decision will facilitate militant activity against civilians and government officials in the north by Boko Haram. Niger Delta militants will also be active, but their attacks will not result in substantial disruptions to energy production. Oil production is more likely to be sporadically affected by damage to equipment during criminal thefts. The political constraints facing Jonathan's administration will prevent the government from passing a comprehensive Petroleum Industry Bill designed to reform and diversify Nigeria's energy sector.

Integration Continues in the South and East

The economic and transportation supply chain infrastructure in southern and eastern Africa will become more deeply integrated. Angola and South Africa as well as Kenya and Uganda will take major steps in 2014 to deepen their supply chain connectivity, including pipelines, roads, rail and energy infrastructure. Tanzania for the most part will be sidelined from major infrastructure projects in the Great Lakes region, both due to its physical underdevelopment and Kenya's interest in preventing Tanzania from undermining its role as the primary transit hub for the region. East Africa will see incremental progress toward a customs union, but political constraints will hobble efforts to form a monetary union.

South Africa Holds Elections

South Africa will hold national elections in April. Opposition parties will not attract meaningful numbers of voters beyond narrow factional supporters, resulting in a comfortable win for the ruling African National Congress and its president, Jacob Zuma. Collective bargaining over wage agreements in the mining sector will reopen midyear. The bargaining process is already underway in the platinum sector, as wage agreements reached in 2012 come up for renewal in 2014. The resolution of wage disputes will largely be informed by market conditions for the commodity. If demand and pricing for the commodity remain weak, the predominant unions — the National Union of Mineworkers and the Association of Mineworkers and Construction Union — will be pragmatic in making wage agreements. Once the national election is over, political alliances angling to win the 2017 African National Congress leadership primaries will begin loosely forming.  

Militants Remain Active in the Horn of Africa and the Sahel

While the capabilities of al Shabaab and al Qaeda in the Islamic Maghreb have been degraded in the groups' main areas of operation, they will remain capable of conducting guerrilla attacks, thereby justifying a sustained presence of international and regional counterterrorism forces in the Sahel and the Horn of Africa.  

Mali and its Sahel neighbors — notably Mauritania, Niger, Chad and Burkina Faso — will receive continued extensive counterterrorism cooperation from countries including France and the United States. France will draw down its forces to approximately 1,000 troops in Mali and shift more security responsibility to the several thousand U.N. troops in the country, but Paris will retain the capability to disrupt any lingering al Qaeda in the Islamic Maghreb cells trying to remobilize. Mali will experience guerrilla attacks, but the attackers will not form a coherent insurgency. Tuareg representatives will engage in what will end up being largely inconclusive political negotiations.

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