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Oct 14, 2011 | 15:14 GMT

Fourth Quarter Forecast 2011

The political aspects of Europe's economic crisis have come to overshadow the financial aspects. Although institutional inertia and a fear of the unknown might drive temporary solutions should the European Union begin to fracture, the European experiment is being questioned. National interests rise in times of crisis and are being pitted against the reasons for forming the union in the first place as well as the difficulties that would be presented by rolling it back. In this quarter, the overt focus may be on resolving the financial aspects of the European crisis, but underlying everything will be questions about the logic of retaining the European Union's current structure and the simmering tension between the populations and the economic and political elite. Europe's crisis ripples beyond the Continent. In Russia, concern over the potential for a European contagion in part shaped Prime Minister Vladimir Putin's decision to run for president again. Russia will be looking for ways to exploit the European uncertainties through economic levers and shaping political perceptions. In East Asia, China too is watching the European crisis and measuring the implications for Beijing's own economic recovery plans. A weakened Europe and a sustained global economic slump could push China's internal economic balance to the limits. As the excitement of the Arab Spring continues to fade in the Middle East, the shape of regional power continues to evolve. Iran is looking at the looming deadline for the U.S. withdrawal from Iraq and will play a careful hand. Tehran wants to reshape regional politics as the neighboring countries nervously watch the U.S. withdrawal, while not acting so assertively that its actions provide justification for the United States to remain. At the same time, Turkey will be focused increasingly on the gap left by the United States in Iraq and the future expansion of Iran's influence. The rising competition between Turkey and Iran, while in its nascent stage, will prove complicated for Turkey, as Ankara's early actions in the eastern Mediterranean test its relations with the United States.

Global Trends

Global Trend: Europe's Crisis

European Union member states are not as committed to the bloc as they once were. The states that joined the union before 2000 did so with the understanding that the union was created to contain German ambitions. The states that joined after 2000 did so with the understanding that the union would protect them from Russian domination. All members joined with the additional understanding that the union would grant them wealth. However, all those understandings are now in breach. In the past year, Germany has steadily rewired European structures to its advantage. The German-dominated bailout fund (modifications to which are expected to take effect in October) now operates largely independent of EU authority or scrutiny. A reawakening Germany has discovered that it has many reasons to collaborate with a strengthening Russia: energy, security and limiting U.S. influence throughout Eurasia. And overall, the European economy is stagnant at best. German-imposed austerity measures are slowing economies further and might have already created a recession for Europe as a whole. One of the few European states still showing signs of economic activity is Germany. STRATFOR anticipates that ongoing efforts to strengthen the eurozone's bailout fund — a precondition for any solution that would save Europe — will continue apace in the coming quarter. We do not expect a Greek default, euro dissolution or general European catastrophe in the fourth quarter of 2011. But whatever fondness EU member countries have felt for the bloc is ending. In the fourth quarter, the leaders and populations of the 27 EU states will feel nostalgic for the past but will be unwilling to bear the collective financial burden required to preserve it, disillusioned with what Europe is becoming but only willing to blame others while evaluating the options they might have if the European experiment comes to an inglorious end. Several weak points in the European system could trigger a series of events that would accelerate that end. The following are the most likely scenarios:
  • The Italian government and Belgian caretaker government are both in precarious positions. An Italian government collapse likely would overwhelm the fail-safes the Europeans have thus far established. Belgium does not even have a government in any practical sense, making it impossible for Brussels to negotiate — much less implement — austerity measures. A financial crash in Belgium would bring the financial crisis into the Northern European core.
  • Political miscalculations or opposition to more bailouts in Germany could limit financial support to Greece at a key moment. Greece is living on bailout funds and will default on its debt should the payout schedule be more than moderately interrupted. Such interruption would trigger a financial cascade, starting in Greece and ending in the Western European banks before EU bailout programs are expanded sufficiently to handle the fallout.
  • European banks suffer from a number of deep maladies that include exposure to U.S. subprime real estate, Europe's homegrown real estate troubles, overcrediting both within and beyond the eurozone and decades of being used as slush funds by various governments. Just as a sovereign debt meltdown could trigger a banking catastrophe, a banking meltdown would trigger a sovereign debt catastrophe. Addressing this issue will be a primary topic of the Oct. 17-18 EU heads of government summit.

Global Trend: Iran and Iraq

The next three months will be critical for Iran. By the end of the quarter, the United States will face a deadline to complete its troop withdrawal from Iraq. The increasingly nervous Arab states in the Persian Gulf region will not view whatever ambiguous troop presence the United States maintains in Iraq beyond that deadline as a sufficient deterrent against Iran. Tehran will want to exploit its Arab neighbors' sense of vulnerability to reshape the region's politics while it still has the upper hand. To this end, Iran will use a blend of conciliatory and threatening moves in an attempt to drive the United States and its Arab neighbors toward an accommodation on Iran's terms. Iran will have to work within constraints, however. Though Tehran's strongest covert capabilities are in Iraq, Iran likely will exercise restraint in this arena to avoid giving the United States justification for a prolonged military presence. Meanwhile, Iran will continue efforts to build up assets in Bahrain, but its best chance of success is in the Levant, where Tehran likely can exploit its existing militant proxy relationships to accelerate an already developing Egypt-Israel crisis that would keep Israel busy and distract from Syria's internal troubles. Despite Iran's best efforts, we do not anticipate that Tehran will be able to force a fundamental political realignment in the region as early as this quarter, though it will emerge stronger.

Global Trend: Russia's Resurgence

In its dealings with the United States, Iran and Europe, Russia will continue its dual foreign policy in which it appears more conciliatory while retaining its ability to be aggressive. This dual track is meant to continue rolling back U.S. influence in Eurasia while solidifying Moscow's position. Russia had anticipated that its recent maneuvers with Western powers — particularly its stance against U.S. ballistic missile defense (BMD) plans and its counterproposal to those plans — would divide the Europeans and allow Moscow to begin pressuring Central Europe. Russia's plans on this front were to reach a finale at a series of planned meetings with NATO in the fourth quarter. However, these meetings have become less critical, as larger issues have emerged — mainly the European financial crisis. It is not that the Europeans are not concerned about Russia; rather, there is so much tension within Europe over finances, alliances and the balance of power on the Continent that security issues will have to wait. This does not mean Russia will stay quiet on these issues, particularly ahead of a series of meetings with the Europeans, NATO and the United States. Russia will continue trying to pressure all parties involved in the BMD issue and will reconnect with Iran to shore up its position. But Moscow knows its attempt to split the Europeans and United States over security issues will not be realized just yet. With security issues sidelined, Russia will try to take advantage of the Europeans' crises in the fourth quarter. Russia is already purchasing some choice assets in Europe, and it is watching to see if it can further its advantage — possibly by dumping large amounts of cash into Europe to help curb the crisis (or so Moscow would want the Europeans to believe). This will not occur before the end of the year, but Russia will spend the fourth quarter formulating its options.

South Asia

U.S.-Taliban negotiations mediated by Pakistan will advance in the fourth quarter. On the surface, these talks will appear to be fruitless as all involved parties attempt to strengthen their negotiating positions and fringe groups try to derail the process. Militants affiliated with Pakistan and the Afghan Taliban will launch attacks with the aim of prompting a quicker U.S. exit from Afghanistan, while the United States will try to force Pakistan into action in facilitating and enforcing an agreement with the Taliban that would place strong constraints on transnational jihadist activity in the region, or risk a future in which the United States shifts its support away from Pakistan. Though the United States faces many disadvantages in these negotiations, Washington will enhance its position by decreasing its dependence on Pakistani supply lines. The seemingly chaotic talks will intensify over the next three months, but STRATFOR believes the fundamentals of these negotiations — the United States' strategic need to extricate its forces from Afghanistan, Pakistan's need to remain cohesive and rebuild its influence in Afghanistan with U.S. support to counter India and the Taliban's need to dominate a post-war political settlement — will carry the negotiations forward, though not necessarily at a steady pace.

Middle East

Egypt-Israel-Palestinian Territories

Egyptians are scheduled to go to the polls for the country's first post-Mubarak parliamentary elections in November, and Egypt will be consumed with this issue for the entire fourth quarter. The Supreme Council of the Armed Forces (SCAF) has been steadily laying the groundwork for an election that will not allow any one political grouping to dominate the others, and it will seek to ensure that the divisions within the opposition will translate into a government that remains weak. While it is busy managing the electoral process, the SCAF will also place its focus on the militant environment in the Palestinian territories and the Sinai Peninsula. A crisis involving militants from these areas and Israel would increase popular opposition to military rule in Egypt, and would place pressure on the Egyptian military regime to fundamentally alter its relationship with Israel. Several parties, ranging from Iran and Syria to jihadist factions operating in the Sinai, want to create a military confrontation between Egypt and Israel. Hamas, however, will be under heavy constraints this quarter and will be careful to avoid jeopardizing the Muslim Brotherhood's political opening in Egypt by providing the SCAF with further reason to crack down during the election period.

Syria

Syria will continue struggling to stamp out protests, but neither the fractured protest movement nor the regime has the resources to overwhelm the other, and any dramatic shifts in the situation are unlikely this quarter. The Syrian regime will devote increasing attention to rooting out dissent among the upper ranks of the Alawite-dominated military; this dynamic will need to be watched closely for signs of serious fracturing within the regime. The regime will find relief in the likelihood that Syria's opposition will remain without meaningful foreign sponsorship through the end of the year.

Turkey

Turkey will continue encountering obstacles as it tries to push its regional re-emergence beyond rhetoric, especially in the eastern Mediterranean. More important, Turkey will have to pay more attention to Iraq, where a power vacuum is waiting to be filled by Iran as the United States draws down its military presence in the fourth quarter. The next three months will see tensions between Iran and Turkey grow quietly as Ankara increases its efforts to counterbalance Iran in the region, though these efforts will only be in the nascent stages this quarter. Iran, meanwhile, will rely primarily on the shared threat of Kurdish militancy as it tries to maintain a basis for cooperation with Turkey in light of Ankara and Tehran's growing strategic differences. Turkish-Israeli relations are unlikely to improve in the coming months as Turkey tries to use the deterioration of its ties with Israel to enhance its regional credibility. Turkey will not be able to count on the United States' full support as it becomes more assertive in the eastern Mediterranean, yet given Washington's needs in the region (especially regarding Iran and, in the longer term, Russia), the United States will eventually make its relationship with Ankara a higher priority.

Yemen

Yemen will remain in political crisis this quarter as Yemeni President Ali Abdullah Saleh and his clan continue efforts to regain their clout in the capital and undercut the opposition. Street battles in and around the capital between pro- and anti-regime forces can be expected, with Saleh's faction retaining the upper hand yet still unable to quash the opposition.

Libya

Friction among the various factions competing for control over Libya will increase in the fourth quarter, as the loose alliance of anti-Gadhafi militias seeks to eliminate the regime loyalists' final strongholds. STRATFOR does not foresee a drawn out insurgency by pro-Gadhafi forces, but even if the National Transitional Council (NTC) declares the country's liberation in the fourth quarter — an act the NTC has said is a precondition to any formation of a transitional government — the resulting political wrangling will leave the country without a unified leadership that can move Libya forward toward elections.

Former Soviet Union

The announcement that Russian Prime Minister Vladimir Putin will run for president in March 2012 will lead to many shifts in the next three months. STRATFOR said recently that Putin would only return to the presidency if there was a need for the Kremlin to be seen as stronger and more assertive on the global stage. Clearly Russia believes that current and upcoming events — the eurozone crisis, which is destabilizing most of Europe, and stagnant negotiations with the United States and NATO over security issues — will require a more assertive Kremlin (or at least the perception of one). The former Soviet states, Europe, and the United States will begin considering the consequences of Putin's return to Russia's top post, though this will not lead to a dramatic shift in relations with Moscow until 2012. The most immediate effects of Putin's decision to return to the presidency will be felt inside Russia and the Kremlin in the fourth quarter. Putin's candidacy was announced at the United Russia Conference in a bid to settle any dispute and shift focus away from Putin's tandem with current Russian President Dmitri Medvedev ahead of legislative elections scheduled for December. The announcement was meant to strengthen support for and confidence in the Kremlin, Putin and United Russia ahead of the elections. Now the Kremlin will focus on consolidating wins for United Russia and Putin's umbrella political movement, the All-Russia Popular Front. However, the announcement has exposed a deep rift within the Kremlin. Few within the Russian government are upset about Putin's return to the presidency, but they are concerned about Medvedev's future role. Many Cabinet ministers want Medvedev to become speaker of the Russian parliament instead of prime minister, because if he takes the premiership he will become their direct superior. Such disagreements will occur throughout the fourth quarter and could involve some of the most important figures and policies in Russia, such as the Kremlin's implementation of its modernization and privatization programs. Decisions about who will move where will come at the end of the year and into the March election.

East Asia

China's Economy

China will see a temporary easing of inflationary pressure, though such easing will remain slow in translating to households. Beijing will be cautious about signs of a resurgence due to ample external liquidity and continued government-led domestic investment. Beijing likely will be more willing to accept moderate inflation given the issues it is facing:
  • A slowdown will continue with no sign of radical policy changes from Beijing, at least ahead of a major economic conference in December and particularly in light of the worsening economic situation in Europe, which is expected to affect China's export sector.
  • Beijing will use policy tools to continue fighting inflation without affecting growth further. Depending upon the state of growth, a chance for a policy change could occur in December to pave the way for a smooth transition in 2012.
  • Though tightened economic controls are likely to dominate the fourth quarter, the deteriorating financial health of small- to medium-sized enterprises will require greater policy assistance, including fiscal spending or flexibility in adjusting monetary policy.
  • Beijing will also clamp down on media and ideological expression in order to suppress unrest or the airing of local grievances, but this means there is a greater chance that protests could be mishandled, which would also create concerns for stability.

U.S.-Chinese Relations

China and the United States could have a direct confrontation over trade disputes and currency during the fourth quarter, as the United States might be ready to gradually build up political pressure regarding these issues. Depending on China's domestic situation — particularly regarding the economy and social stability — Beijing could consider it beneficial to increase tensions with the United States to distract the public from domestic issues. Relations between China and the United States will affect U.S. President Barack Obama's attempts to strengthen relations with Washington's regional allies during his Asia tour in November. U.S.-Chinese relations will also color Washington's attempt to demonstrate a renewed commitment in the Asia-Pacific region via several multilateral mechanisms including U.S.-Japan-India trilateral talks, the East Asia Summit and the Asia-Pacific Economic Cooperation forum.

South China Sea Tensions

Tensions in the South China Sea will be the main regional security issue in the next quarter. Claimant countries and outside players likely will accelerate moves to draw greater international attention to the ongoing maritime disputes. China will increase its diplomatic efforts to contain the issue; these efforts could include economic benefits and political pressure. China's steps will depend on the United States' moves in the next quarter, though as the disputes in the South China Sea grow more complicated, miscalculations could lead to unexpected consequences (possibly even involving military action).

Latin America

Venezuela's Economy and Chavez's Health

While the status of Venezuelan President Hugo Chavez's health remains a serious concern and the most critical of state secrets in Venezuela, the regime does not appear to be in a rush to prepare for Chavez's imminent departure. Elections have been set for October 2012, giving the regime time to prepare for a transition of power, if one is forthcoming. This next quarter will be dominated by the implementation of major economic reforms that include the Law of Fair Costs and Prices and the nationalization of the gold industry. Chavez will also be occupied with mediating competition within the inner circle elite. Protests by groups spanning the political spectrum have become more common throughout the country and are expected to continue growing. Barring an outside shock like a collapse in oil prices, no major changes to overall stability are expected in the next quarter.

Brazil's Economy

Brazil will remain focused on economic management this quarter. Its dual goal of managing inflation while stimulating the local economy will require incremental policy changes as the country reacts to shifting projections of global growth. Increased trade protections are likely. The relationships most likely to grow tense over increased trade protections will be those with China and Argentina.

Mexico's Cartels

Mexican drug cartels continue fragmenting violently, spreading volatility throughout the country. There are strong indications that factional violence within the Gulf cartel could erupt, which would lead security conditions in Tamaulipas, Veracruz and Nuevo Leon states to deteriorate in the near future. Fighting between the Gulf cartel and Los Zetas will intensify in Mexico's northeastern states. Relative calm in the northwest, particularly in Sonora and Baja California del Norte states, will continue in the fourth quarter as the Sinaloa Federation exerts near-complete control over the region. As many as seven different factions and organizations are battling for control over transportation corridors in the central, south-central and Pacific coast regions. Jalisco, Nayarit, Guerrero, Colima, Michoacan, Oaxaca and Sinaloa states will be particularly vulnerable in the next quarter.

Sub-Saharan Africa

The Conflict in Somalia

The African Union Mission in Somalia (AMISOM) will expand by 3,000 soldiers, bringing its total force level to 12,000. The incoming peacekeepers, who will come from Djibouti and Sierra Leone, will be deployed to Mogadishu early this quarter to reinforce the current forces drawn from Uganda and Burundi. These additional peacekeepers will enable AMISOM to consolidate control of Mogadishu this quarter, giving Somalia's Transitional Federal Government (TFG) a secure space to work on governance and delivering public services. Al Shabaab will remain divided and unlikely to reunify even loosely or surrender to the TFG. While AMISOM and the TFG will not conduct offensive operations against the Somali jihadists outside Mogadishu this quarter, al Shabaab's constituent groups will see their range of operations limited to narrow sections in southern Somalia.

Nigeria's Militants

Nigerian President Goodluck Jonathan's government will continue grappling with Boko Haram in the fourth quarter. The government will engage dissenting politicians from the country's north who are sympathetic to the Nigerian Islamists in negotiations, offering to trade patronage for limits on support for Boko Haram. The government will build out and decentralize its intelligence capability — albeit slowly — to isolate hard-line elements of the fundamentalist sect not interested in negotiations and maintain Joint Task Force deployments of army personnel to interdict radical Boko Haram members. Separately, the Nigerian government will keep funneling money to its Niger Delta amnesty program, supporting what is effectively a welfare scheme for militants in the oil-producing region in order to keep oil production running smoothly. The militants, from groups such as the Movement for the Emancipation of the Niger Delta, will comply with the government but resist any attempt to undermine their capabilities. The Jonathan administration, too, will safeguard militant capabilities for political leverage (though this will not be used in the fourth quarter).

Angola and the Democratic Republic of the Congo

The neighboring countries of Angola and the Democratic Republic of the Congo (DRC) will hold elections of sorts this quarter: The DRC will hold a presidential election in late November and Angola will hold a ruling party leadership convention in December. Both instances will be opportunities for the opposition to organize street protests aimed at destabilizing the incumbent regimes, though such demonstrations will not meaningfully affect either government. Both governments could use the elections as an opportunity to harbor militia or military forces to destabilize each other. Angola is not likely to have its armed forces intervene during the DRC elections, but its relations with DRC President Joseph Kabila's government are cooler than they were in 2006, when Angola prepared its Cabinda-based units to occupy Kinshasa to guarantee Kabila's election. For its part, Kinshasa will not actively harbor anti-Luanda militias, though it will continue ignoring migrations across its shared border by Angolans and Congolese involved in smuggling and illegal mining activities.

Security in the Sahel

As some militants (and their weapons) return to the Sahel subregion of West Africa from the conflict in Libya, they will find they have little room to maneuver. Regional African and foreign governments, including the United States, will strengthen intelligence-acquisition and intelligence-sharing efforts, focusing on the threat of terrorism from al Qaeda in the Islamic Maghreb (AQIM) and Tuareg rebels largely from Algeria, Mauritania, Niger and Mali. AQIM fighters and hostile Tuareg elements will not have political space, nor freedom from intelligence agencies and military forces, to consolidate their forces from the dispersed camps they maintain throughout the Sahel. This means constraints will be in place to limit an increase in militant activities in the region.
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Fourth Quarter Forecast 2011
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