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Apr 9, 2012 | 13:34 GMT

Second Quarter Forecast 2012

As we enter the second quarter of 2012, the most important question is whether Israel or the United States will carry out a strike on Iranian nuclear facilities. It has been our view that such an attack is unlikely in the extreme but, at the extreme, conceivable. Because of the Israeli campaign designed to both intimidate Tehran and create a sense of urgency over the Iran question, public awareness of the danger has risen. Except for this campaign, we do not believe such a strike is likely, and we lay out our arguments in this forecast.

This does not mean we are not in the midst of an Iranian crisis. As we discussed in our annual forecast, Iran is emerging as the dominant power in the Persian Gulf, absent the United States, and following its withdrawal from Iraq, the United States does not seem to have an appetite for re-engagement in the region. The focus for this quarter is Syria, where the survival of the current regime — with or without President Bashar al Assad — would set the stage for a major extension of Iranian power. The United States has opposed the survival of the regime in order to block Iranian influence. It has thus far failed to block Iran either in Syria or with the use of sanctions. It is the future of the Syrian crisis that we think will define Iranian power, but we doubt the Syrian issue will find closure this quarter.

Of perhaps greater importance in the long-term are elections in France. If President Nicolas Sarkozy is re-elected, French relations with Germany will remain intact, as will the foundations of the European Union. If Sarkozy is defeated, then another element of the European Union will become uncertain. We do not forecast elections, but we have forecast that the current European elite will come under substantial pressure from both austerity measures and imbalances of trade with Germany. The French election is certainly the most important, but there will be many others in Europe in the coming years to test this hypothesis.

The other processes that we laid out in the annual forecast, from Chinese internal challenges to a moderate U.S. recovery, remain unchanged, and we do not see this quarter as being decisive in any of these. Apart from the French elections, the most important signal of geopolitical change would be the fall of the Syrian regime. The longer it survives, the more likely it is to survive, and its survival would strengthen Iran — in some ways more than the acquisition of nuclear weapons.


The second quarter in Europe will be marked by elections in two countries at the core of the European financial crisis: France and Greece. In our annual forecast, Stratfor wrote that the French election would be important in 2012 because the Franco-German partnership is the core of the European system, and any serious breach between the two would herald the end of the European Union. France's elections will thus be the pivot around which Europe will move in the second quarter.

French presidential elections will occur in two rounds — the first on April 22 and a run-off election scheduled for May 6. A month later, France will hold parliamentary elections in two rounds. Paris will look inward during most of the second quarter as politicians focus on domestic issues and will have neither the time nor the will to lead Europe jointly with Berlin, as it has since the beginning of the crisis. Furthermore, as France examines domestic issues it will differentiate itself from Germany, a process that, among other things, will highlight the divergent interests of the French and German economies. During this quarter the differentiation will only be rhetorical; no substantial decisions that could strain the Franco-German relationship will be made.

Germany will also be focused on domestic issues, with German Chancellor Angela Merkel forced to address problems within her coalition. Regional elections are also coming up, including a vote in Germany's most populous state, North Rhine-Westphalia.

With Germany and France, the largest and second-largest economies in the European Union, consumed by domestic matters, Stratfor expects the EU decision-making process to be slowed considerably this quarter.

Meanwhile, northern European countries will face the question of how to deal with their own budget deficits. As core countries — most notably the Netherlands and Germany — have domestic debates about their own austerity measures, the legitimacy of their push for more austerity in Europe's periphery will shrink. This, combined with the paralysis of the Franco-German alliance, will encourage Europe's peripheral countries to relax the restructuring of their economies, casting doubts on the effectiveness of the European Union's latest fiscal agreements.

In our annual forecast, Stratfor wrote that during the crisis Germany "is using its superior financial and economic position to attempt to alter the eurozone's structure to its advantage." While Germany will continue using its economic power in this sense this quarter — especially by claiming that the crisis is not over yet and more fiscal responsibility is needed — Berlin will find it difficult to achieve this goal as countries try to loosen their austerity measures.

Finally, if Greece holds elections in late April or early May — as the Greek government has recently indicated will occur — a weak coalition is likely to emerge because no party will have enough votes to secure a majority government. Parties that traditionally have not been part of the political establishment are expected to be key actors in the second quarter, either by participating in the discussions to form a coalition after the elections or by voicing their discontent with the Greek government if the elections are postponed. If the latter happens, fringe parties could organize protests that may lead to street violence.

Middle East

The Iran Dilemma

Stratfor's annual forecast for the Middle East included three broad trends: Iran will accelerate its efforts to consolidate and extend its regional influence while it has the opportunity; Iran will be operating under heavy constraints and will be unable to fundamentally shift the politics of the region in its favor; and Saudi Arabia will be wary of the potential for a U.S.-Iranian strategic accommodation in this threat climate, but given Iranian constraints, will gamble on a closer alignment with the United States.

This forecast remains on track. In the first quarter, Iran emphasized its most potent deterrence strategy — its threat to the Strait of Hormuz. Tehran made its point, not only to the United States and Gulf Cooperation Council (GCC) states, but also to Iran's main energy clients in Europe and Asia. This strategy has so far helped Iran ward off an attack, but it has also spurred the United States to intensify its sanctions drive and gradually reduced Iran's share in the energy market. The deadline for foreign compliance with the U.S.-led sanctions on Iranian oil will come this quarter, and the credibility of the sanctions campaign will again come into question when Washington is unable to gather the political will to force Iran's largest energy customers to comply.

Iran will make a concerted effort to reduce the momentum of the U.S. sanctions campaign. By taking a more conciliatory approach to nuclear negotiations with help from Turkey, Russia and China, Tehran will try to give its energy clients political cover to resist the pressure to comply fully with the sanctions. Tehran's conciliatory moves will be mostly superficial, however. Iran will continue relying on carefully measured rhetorical threats to sustain the price of oil and avoid military conflict.

Saudi Arabia sees the impediments to a U.S.-Iranian negotiation at this stage and so will use this time to continue strengthening a GCC-led regional coalition against Iran while reinforcing the strategic foundation of its alliance with Washington. Though Saudi Arabia cannot completely make up for a shortfall of Iranian crude in the market in the next quarter, it will continue increasing its market share and supply the United States with more oil as a means of strengthening its political favor with Washington and giving the United States more flexibility in pressuring Iran.

The Iran-U.S. conflict is thus unlikely to see significant change this quarter. Military posturing and sanctions rhetoric will intensify, but the cost of a strike remains too high for the United States and Israel, and Iran will be able to withstand the rising pressure from the West.

The Syrian Crisis

Stratfor's forecast about the al Assad regime's ability to hold together and the unlikelihood of a foreign military intervention is on track. The minority Alawite government in Damascus will continue military crackdowns on restive cities to rid the areas of rebel strongholds and quell civilian protests. Despite this, the rebels will continue attacking security targets and infrastructure but will remain unable to defeat the Syrian army or hold significant territory. While the civilian opposition will struggle for relevancy, the rebel opposition will become more radicalized and show further signs of blending into a jihadist insurgency.

Though it will be difficult to trace the origins of the various jihadist groups that arise in Syria this quarter, Saudi Arabia is likely supporting the growing jihadist trend as a means of fortifying the rebellion and undermining the Syrian regime. Riyadh will be unable to fully control the increasing jihadist activity in Syria in the long term, and local nodes could use the opportunity to try to reinvigorate their campaigns in the Saudi kingdom over the next several months. Jihadist nodes in the Arabian Peninsula will continue finding haven amid Yemen's political paralysis, but their tactical capabilities will remain severely limited.

Egypt's Political Transition

The Egyptian military has set an ambitious timeline for laying the political foundation of the post-Mubarak state. By the end of the quarter, Egypt is scheduled to complete presidential elections, draft and ratify a constitution via public referendum, and complete a transition from military to civilian rule. Through these processes, particularly the drafting of the constitution, Egypt will determine just how much authority the military and an Islamist-dominated parliament will wield. Judging by the progress in the political transition thus far, there is no guarantee that all these deadlines will be met, but the Muslim Brotherhood's demands will have to be addressed before a power balance between the civilians and the military is enshrined in a new constitution. As outlined in Stratfor's annual forecast, the military still has the advantage in this standoff and will maintain a great deal of influence over Egypt's future civilian government. Both the Muslim Brotherhood and the military will make concessions, but Egypt's political Islamists will end up making greater sacrifices to avoid thwarting the political transition altogether.

Former Soviet Union

Returning Russian President Vladimir Putin, who will be inaugurated May 7, will focus on addressing the numerous domestic challenges facing the Kremlin. First is a reorganization of the Kremlin elites. This process, which will entail government reshuffles, new appointments of strategic business chiefs and increased pressure on many Russian oligarchs, will begin before Putin's inauguration and last many months. Protests and rallies both against and in support of the Kremlin will continue, though they will not be as large or prevalent as in the first quarter of the year.

A critical issue for Putin as he resumes the presidency is the future of Russia's economic programs. The Kremlin has realized that its modernization and privatization programs might be stalled, since Moscow's main partners in the projects, the Europeans, face financial difficulties. Moscow has already decided to pay for certain projects, such as railway projects with German firms, to keep the Europeans involved and encourage them to contribute technology. In the second quarter, Russia plans to privatize a major strategic asset — Russia's second-largest bank, Sberbank — to gauge the Europeans' appetite for investing in such a program. If the initial privatization occurs, then Russia will move forward with its ambitious programs this year and in years to come. If not, it will rework the programs, downsizing some components and contributing more financially in order to maintain its economic ties to Europe.

Meanwhile, prolonged tensions between Russia and NATO will intensify ahead of a tentatively planned Russia-NATO summit in May, the first since 2007. Russia will increase its focus on the United States' plans for ballistic missile defense in Central Europe. Moscow will use leverage such as activating the S-400 air-defense system and possibly deploying Iskander short-range ballistic missiles in Kaliningrad, along with continuing diplomatic and military maneuvering in Syria. However, Russia's provocations will not move the United States to back down from its current security plans for the region. Moscow will not force this escalation to the point where it will cause a break with NATO or the United States, though relations will continue to sour. At the same time, Russia will maintain warm security relations with Western European countries, especially Germany.

Russia's increased pressure on the United States will cause the Central Europeans, particularly Poland and Lithuania, to react. Warsaw and Vilnius are already working on presenting more concrete challenges to Russia's increasing influence. Fueled by progress in their efforts to move away from Russian energy supplies, these countries, as well as other Baltic and Nordic states, have increased regional security cooperation as well, and this will help them respond to Russia's strengthening military posture in the region.

South Asia

A limited U.S.-led offensive will begin in eastern Afghanistan this quarter. The scope and objectives of this operation will be more modest than offensives in recent years in southern Afghanistan. As the spring fighting season intensifies, an uptick in insurgent attacks against International Security Assistance Force troops and Afghan security targets will also occur. While the Taliban have considerable motivation to launch more spectacular attacks for political purposes, we expect such actions to be tactically consistent with past attacks and not to demonstrate a fundamentally new capability.

Stratfor forecast that the United States and the Taliban would continue negotiations this year but has remained skeptical on a final deal emerging by the end of the year. Significant disruptions to these talks, such as those seen in the first part of the year, will continue, but the negotiations will endure in spite of spoiler attacks.

Small force reductions ahead of the drawdown of U.S. troops to 68,000 by the end of September have begun, and so far the United States is on track for an accelerated drawdown by the end of the second quarter. The first quarter saw an intensification of "green-on-blue" incidents — attacks by Afghan forces on foreign forces they are cooperating with — that have prompted serious changes to force protection measures. This will place an additional burden on the smaller number of foreign forces in the country and affect coordination between foreign and Afghan forces at a particularly delicate time.

Pakistan's ongoing political evolution will continue in favor of the civilian forces as the army-intelligence complex's ability to shape events gradually weakens. The strengthening of civilian governance will complicate U.S.-Pakistani ties, but the second quarter will see an overall improvement in relations as negotiations progress slowly. The potential reopening of the Pakistani supply line will be one indication this quarter that the United States and Pakistan are moving forward in their negotiations on a post-U.S. Afghanistan settlement.

East Asia

China's Economic and Political Challenges

The weakening global economy and Beijing's staggered restructuring will contribute to the slowing of China's economic growth in the second quarter — a trend complicated by the rising costs of utilities and labor. Although Beijing had indicated a willingness to accept lower growth in favor of economic rebalancing, continued weakness in the export sector and problems in domestic investment will make Beijing likely to adopt some expansionary measures to prevent a significant economic slowdown that could threaten the employment situation. Additional monetary easing, including rate cuts, are likely in the second quarter.

The implementation of fiscal policies like tax reforms, direct subsidies and wage increases to promote consumption will not be sufficient to shift away from traditional investment-driven growth in the next quarter. In particular, fixed investment could continue to be a primary driver enhancing the country's growth in the second quarter, whereas the export sector — which is subject to increasing global trade disputes — will likely receive support from Beijing. While there is little reason to think Beijing will carry out broad-based changes to its real estate policy, it is likely to make localized adjustments in the quarter. Beijing is betting that this, coupled with declining prices, will help sustain or even drive up real estate demand in the second quarter.

The ousting of Chongqing Party leader Bo Xilai has made China's political infighting publicly visible and has led to immense speculation, anxiety and ideological divisions as Beijing's leadership transition enters its critical stages. Intensifying internal political tensions could contribute to conflicting policy directions on handling social issues or the contentious reform agenda. Nonetheless, the opacity of the political system will continue to fuel speculation and rumors and, combined with latent social discontent, could lead to sporadic political backlash.

North Korea's Next Launch

North Korea will launch a satellite in April to mark the 100th anniversary of the birth of founder Kim Il Sung. The launch will fall between a special conference of the Workers' Party of Korea and a session of the Supreme People's Assembly to formalize the leadership transition to Kim Jong Un.

Although the launch is being portrayed abroad as a provocation, North Korea announced the move to the United States even before the death of Kim Jong Il. The February missile and nuclear moratorium was meant to reduce international criticism of the launch. Pyongyang will make a case for returning to negotiations in the latter half of the quarter, but further action will be delayed by the election seasons in South Korea and the United States, respectively.

Japan's Political Tensions and Economic Decisions

Political conflict over Prime Minister Yoshihiko Noda's consumption tax hike bill will raise both internal and external pressure on the Democratic Party of Japan-led governing coalition, threatening to topple Noda's Cabinet within the second quarter. Moreover, to prevent investor perceptions of Japanese long-term financial insolvency, Noda could accede to calls for early elections in exchange for support for the tax hike bill from the Liberal Democratic Party. This would probably pave the way for third parties to make inroads into the parliament.

Regional Economic Integration

Having learned from the 1997 Asia financial crisis, Asian countries have realized the importance of regional economic integration during the current economic turmoil. As economically weakened Asian countries look for ways to strengthen the safety net against liquidity shortages and wean themselves from the Western financial system, they are turning to regional-based economic mechanisms such as the Chiang Mai Initiative.

Furthermore, accelerated cross-regional trade liberalization — particularly measures led by the United States — has promoted the regional dynamic by making free trade agreements a priority. These pacts, whether bilateral or multilateral, are meant to maximize the benefits for all countries involved. China will likely try to take the role of facilitator in many of these agreements. China, Japan and South Korea are working to finalize their investment pact in May as part of negotiations on a trilateral free trade agreement, and other bilateral agreements are in the works.

Latin America

Argentina's Finances

Though not included in our annual forecast, Argentina's implementation of stringent trade and capital flow restrictions was a prominent development in the country in the first quarter. These measures are designed to keep capital in the domestic financial system and will cause economic volatility during the second quarter as new policies are implemented. As a result of trade barriers implemented Feb. 1, there are already reports of consumer goods shortages in Argentina ranging from furniture to pharmaceutical drugs. These shortages will worsen before the quarter is over. International tensions will continue to build over the next quarter between Argentina and the European Union, the United States and Mercosur member countries. However, Argentina will not change its behavior because of international threats and will instead focus on domestic needs.

A spike in export revenue will occur during the second quarter, injecting foreign capital that will provide some short-term relief for Argentina's financial situation. This, combined with political fallout from goods shortages, will push Argentina to begin to allow more goods in on a limited basis by the end of the quarter.

Alongside these macroeconomic shifts, Argentina's energy industry will remain at the center of political contention as the government pressures the sector's largest company, Repsol YPF, to increase investment and output in order to relieve financial pressure on the government. The government will begin to place similar though less severe pressure on the mining sector to increase investment and output in the second quarter.

Brazil's Economy and Politics

Growing concerns about Brazil's falling industrial production will lead the government to extend more support to Brazilian businesses and raise trade barriers to external competitors. Under this rubric, tensions with China and Mercosur member countries will grow during the second quarter, but Brazil will not reach a breaking point with any one trade partner. Brazilian President Dilma Rousseff will continue to pressure the international community to take action on currency and trade issues. Rousseff will use her visit to the United States in April to push for increased exports to the United States, but aside from symbolic measures the two will find little common ground.

Domestically, Brazil's focus on municipal elections will dominate the political climate. These elections will occupy political parties at every level of government and weaken cohesion within the governing coalition.

Militancy in Colombia

Colombia is experiencing what the government is calling a resurgence of the Revolutionary Armed Forces of Colombia (FARC). The government's new counter-militant strategy, called Sword of Honor, can be expected to increase the tempo and scope of operations against the FARC and other violent criminal organizations in the second quarter. This will increase violent clashes and the chances for retaliatory strikes by the FARC on vulnerable targets, including urban settings and energy infrastructure. Colombia's continued security cooperation with Venezuela will be a boon in the second quarter as Bogota's operations chase militants and criminals across Colombia's eastern border.

Mexico Prepares for Elections

Mexico will spend the quarter preparing for the July 1 presidential and legislative elections. Few legislative or political changes will occur, although the ruling National Action Party will attempt to make symbolic gains in the fight against transnational criminal organizations.

Overall levels of violence will continue for the next quarter, with a high concentration of violence in Tamaulipas and Veracruz. Attacks will increase in both Nuevo Laredo and Culiacan as the competition for that territory between the Sinaloa and Los Zetas cartels intensifies. The most important struggle this quarter will be between the Knights Templar and Cartel de Jalisco Nueva Generacion, which are competing over central and Pacific states including Jalisco, Michoacan, Guerrero and Guanajuato. Guanajuato can expect higher levels of violence in the second quarter than it has seen since 2010.

Economically, Mexico can expect continued stable growth. This will occur as the economy picks up in the United States and Mexico's exports to the United States increase.

Chavez's Health and Reforms in Venezuela

Two issues will dominate the second quarter in Venezuela: Venezuelan President Hugo Chavez's deteriorating health, and the implementation of key economic reforms. Chavez is currently in treatment after his second round of surgery for abdominal cancer. Though confirmed information remains scarce, it appears that he may have less than a year to live. The political dynamic in Venezuela can be expected to focus on this uncertainty, with key political players making backroom deals in anticipation of a change of leadership.

After a relatively calm first quarter, public dissension can be expected to pick up in the second quarter as important reforms become law and take effect. The Law of Fair Costs and Prices officially went into effect April 1, and while its effects will be varied, it can be expected to increase the instances of scarcity in basic household goods and raise prices on the gray market. Additionally, some version of a new labor law is expected to take effect May 1. The law is not yet finalized and may not be ready by May 1, but with the presidential campaign season under way it will be an important symbolic move for Chavez to implement on International Labor Day. The law most likely will force companies and government agencies to renegotiate labor contracts in a process that is sure to generate civic unrest across several sectors.

Sub-Saharan Africa

Nigeria's Struggle With Militants

New political efforts aimed at disrupting Boko Haram will be launched in the second quarter, and Nigerian security forces will maintain pressure on the militant group in the country's North-East region. After the March 24 election of North-Easterner Bamanga Tukur as the national chairman of the ruling People's Democratic Party (PDP), the Nigerian government will expect Tukur to deliver insights into Boko Haram so that the central government can weaken the group.

Boko Haram will face significant challenges beyond its northeastern core but will be able to sustain itself given the North-East region's need to use the militant group for political leverage ahead of the PDP's 2014 leadership convention. During the second quarter, Boko Haram will conduct attacks largely concentrated in the North-East region. Sustained low-level violence will keep the pressure on the Nigerian government to accommodate the North-East, and keeping violence at that level will avoid attracting unwanted international focus on the Nigerian government.

Militants in the Niger Delta region will carry out occasional attacks, mostly on Nigerian soft targets, with occasional strikes against energy infrastructure. These operations will serve to remind international oil companies and the Nigerian government that militancy in the region can be reactivated should political conditions require it.

Increasing Pressure on Jihadists in Somalia

The second quarter will see the further development of a broader containment strategy against Somali jihadists. The African Union Mission in Somalia (AMISOM) peacekeeping force will receive additional forces, including new Ugandan troops in April and new Sierra Leonean troops in June. This will allow AMISOM to strengthen its position in Mogadishu and begin expanding beyond the immediate neighborhoods of the capital, including patrols in adjoining regions and towns such as Afgoye and Baidoa.

More than 4,000 Kenyan peacekeepers will be integrated into AMISOM, a move that will help command and coordination during the second quarter, though the Kenyans will remain deployed to maintain the southern containment flank against al Shabaab. The Ethiopians will retain their blocking position in central Somalia, working with the Somali militia Ahlu Sunnah Waljamaah to disrupt al Shabaab fighters in that region.

Collectively, these efforts are meant to consolidate current gains, though the strategy to cut off al Shabaab from popular support remains a long-term objective. An enhanced security environment will support political efforts to make the transitional Somali government a permanent organization, a process that will be supported by elections planned for August.

South Africa's Political Scene

The leadership race within South Africa's ruling African National Congress (ANC) will accelerate during the second quarter. A policy planning conference scheduled for June 26-29 will give party factions an opportunity to position themselves in front of delegates who will vote at the leadership convention scheduled for December. Neither policy discussions nor election campaigns will be finalized this quarter, however.

The second quarter will see a start to South Africa's strike season, with unions under the banner of the Congress of South African Trade Unions starting their annual round of wage and working condition negotiations. This strike season will continue into the third quarter.

A Shifting Relationship for Sudan, South Sudan

With insufficient forces to defeat each other and long supply lines exposed to rival regular and irregular forces, Sudan and South Sudan will resort to internationally mediated border and oil sector negotiations.

The countries will maintain significant deployments of regular and irregular forces along their shared border, especially in South Kordofan-Unity state and Blue Nile-Upper Nile areas. Because of the presence of these forces, tensions along the border will remain, and occasional violent flare-ups will occur.

Lower-level negotiations will take place under African Union mediation in neighboring Ethiopia in early April, and the closure of less contentious issues such as citizenship rights could then lead to a rescheduled inaugural bilateral summit involving more fundamental issues. Negotiating full border and oil revenue and tariff agreements will likely take the rest of the year, however. Though both governments will encourage diversified foreign investment, the limited prospects will compel Sudan and South Sudan to continue working toward cooperation, even if that cooperation is rife with tensions.

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