Stratfor's Fourth Quarter Forecast 2014

Oct 6, 2014 | 09:15 GMT

As we enter the final months of 2014, several of the core themes highlighted in our Annual Forecast at the start of the year are coming into full view.

The first theme concerns Russia's efforts to neutralize Ukraine. It certainly has not been an easy year for Russian President Vladimir Putin, but we also knew that by the time winter approached, Moscow would hold a much stronger position. In a matter of weeks, Russia put Kiev back on the defensive on the battlefield. And with nowhere to turn but toward Moscow to keep warm as colder weather sets in, the same European countries that gave Kiev the courage to stand up to Russia are now pressuring the Ukrainian leadership to bend to Russian demands in order to ensure their own energy security. Russia now has another frozen conflict in its periphery that it can ratchet up or down depending on the mood and actions of its adversaries. Moving into the fourth quarter, Russia can return to the task of fragmenting an already divided Europe to deny the United States a coherent partner on the Continent that it can use to hem in Russia.


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Stratfor's Second Quarter Forecast 2014
Stratfor's Third Quarter Forecast 2014

That will not take much effort because, predictably, the eurozone's stagnation is deepening political friction across Europe. Among all the bickering parties, we remain focused on France and Germany, whose relationship forms the center of the European Union. As France's economic crisis intensifies and political divisions worsen, Paris' patience with German mandates will evaporate quickly. This situation will exacerbate a growing constitutional crisis within Germany over just how far Berlin is prepared to go in stimulating the less frugal economies of the eurozone periphery.

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What looks to be a lasting dip in the price of oil below $100 a barrel will bring some relief to major energy consumers such as China over the next few months. Beijing, however, still has a big problem, and it is not Hong Kong. As China's economy continues slowing, pumping credit into the economy is no longer as effective as it once was. The decreasing potency of credit raises the potential for localized property crises to spread into local government and debt crises. The key word for now is "local" — China is not yet at risk of a nationwide crisis, but Beijing's burden is growing. A smaller but far more severe economic case, Venezuela, will also avert a major crisis this quarter. The country still has measures it can resort to in order to maintain cash flow for a few months, but it is undoubtedly, albeit slowly, approaching the brink.

Iran will draw much attention this quarter in the lead-up to its Nov. 24 nuclear deadline with the United States. Iran's Islamic Revolutionary Guard Corps has made progress in the last quarter in constraining Iranian President Hassan Rouhani's room to maneuver in the negotiations. The future of U.S.-Iranian relations will not be decided by this deadline, however. As we said in the Annual Forecast, there will not be a comprehensive deal between the United States and Iran that eliminates sanctions by the end of the year. The nuclear issue may be the center of attention, but a number of common interests between Washington and Tehran will continue to underpin their developing relationship, even if the rhetoric often suggests otherwise.

One such common interest is the ongoing battle against the Islamic State. Without being able to fully or openly rely on Iran and Turkey to manage the threat, the U.S. decision to turn back to its Gulf Arab allies will come with consequences. Saudi Arabia and the rest of the Gulf Cooperation Council countries are all too eager to use a military campaign in Syria as an opportunity to cripple Iran's allies in the Levant. The United States, working to preserve its negotiations with Iran and stay focused on the mission against the Islamic State, inevitably will be pulled in multiple directions, adding to the uncomfortable reality that the destruction of the Islamic State is not an attainable goal. That said, the military campaign this quarter will be effective in putting the Islamic State on the defensive and stripping the jihadist group of its conventional military capabilities.

With our core trends continuing to track in the final months of 2014, the stage is set for what is likely to be an eventful year ahead.

Middle East

Locator - Middle East - 2014

Middle East and North Africa

U.S. Strategy Pulled in Multiple Directions

Since the beginning of the year, Stratfor has emphasized two key trends for the Middle East: a building rapprochement between the United States and Iran, and a pressing U.S. imperative to rely more on regional actors, most notably Iran and Turkey, to manage conflicts in the region. Though the United States certainly has attempted to follow through with these objectives, the Islamic State's rapid spread across Iraq and Syria, the difficulty of the Iranian negotiations and Turkey's reticence have altogether bedeviled U.S. strategy in the region. Various rebel factions and their state sponsors will take the opportunity to push Washington in their preferred policy direction while the United States tries to balance multiple, and often competing, objectives.

The U.S.-Iran Negotiation Deadline Approaches

The Nov. 24 deadline for nuclear negotiations between the United States and Iran will draw much attention this quarter. However, these talks will neither make nor break U.S.-Iran relations. Indeed, a number of issues — including the near-term goal of containing the Islamic State, the constant interest in maintaining a stable flow of oil out of the Strait of Hormuz, and the long-term objective of developing Iran as an energy alternative to Russia for Europe — have enabled a more open working relationship between Washington and Tehran. We expect that relationship to endure, even if the remaining technicalities of the nuclear agreement are not sorted out by the deadline. Stratfor has maintained since these negotiations began that it would be politically and technically impossible for the United States and Iran to reach a comprehensive agreement that would lift sanctions wholesale by the end of 2014.

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At the same time, the political constraints on Iranian President Hassan Rouhani are growing as the Islamic Revolutionary Guard Corps probes the weak spots of the U.S.-Iran dialogue, voices its dissent and raises the cost of concessions. Adding to these complications is the health of Supreme Leader Ayatollah Ali Khamenei. Though Khamenei appears to be fit enough to play a role in Iran's critical decision-making, the supreme leader's recent medical issues and his advanced age have spawned discussions — and competition — within the clerical establishment about his eventual successor. This dynamic could distract from the U.S.-Iran negotiations in the coming months. In short, even as Washington and Tehran can be expected to continue talking and even engage in quiet cooperation on issues of mutual interest, the Rouhani administration's political capital will decline visibly in the coming months, making overt arrangements more difficult.

The Battle Against the Islamic State

Ongoing complications in the U.S.-Iran talks will create an opportunity for Saudi Arabia and other Gulf Arab states — all fearful of a U.S.-Iran rapprochement — to reassert their alliances with the United States. This can be seen in the participation of Saudi Arabia, the United Arab Emirates, Bahrain, Qatar and Jordan in the air campaign against the Islamic State in Syria, even though these states (particularly Saudi Arabia and Jordan) run the risk of inviting retaliatory unconventional attacks by elements sympathetic to the jihadist organization. While the United States welcomes the added legitimacy these Sunni Arab states give its coalition, Washington will struggle with the competing objectives of its coalition partners this quarter.

In line with their goal of diminishing Iran's sphere of influence, Arab coalition partners will try to stretch the mission against the Islamic State in the direction of toppling Iran's ally, Syrian President Bashar al Assad, and weakening Iran's premier Shiite militant organization, Hezbollah, in Lebanon. These aims form a line that the United States does not want to cross. Not only can Washington not afford to enlarge the power vacuum that enabled the rise of Islamic State in the first place, but the United States also will not sabotage its own negotiations with Iran. U.S. control over the mission in Syria will weaken as the military campaign enters its next phase of arming and training Syrian rebels on the ground. The air campaign in Syria will work toward degrading the Islamic State's critical assets, but the campaign's inherent limits will keep it from driving the Islamic State out of eastern Syria entirely.

Instead, the Islamic State's operations will be limited most visibly in Iraq. The conventional threat posed by the Islamic State and its affiliates will diminish during the quarter, but the jihadist group will compensate for the setback by launching more unconventional attacks. Even as the Islamic State is put on the defensive in Iraq, it will not be dislodged from urban areas like Mosul, where its fighters have been digging in. Kurdish peshmerga forces on their own will not pay the high cost in resources and manpower needed to oust the Islamic State from Mosul, and we do not expect Iraqi security forces to make enough progress in the north to supplement peshmerga forces and thus make the liberation of Mosul an attainable goal this quarter.

Widening Iraqi Rifts

Differences among the key ground players battling the Islamic State — Sunni tribesmen, Kurdish peshmerga, Shiite militiamen and a mixture of Iraqi army forces — will hamper the ground effort against the Islamic State. Baghdad's efforts to integrate more Sunnis into the political and security apparatuses will be slow going, as will progress toward building a viable and inclusive national guard.

Ethnic and sectarian rifts will be especially visible in disputed territories in the Kurdish-Arab borderland, including the oil-rich region of Kirkuk, where Sunni Arabs are demanding oil rights. With Kurdish peshmerga forces positioned in the disputed territories, Baghdad will rely on growing Sunni Arab and Turkmen resistance to Kurdish rule in these areas to destabilize the Kurds' attempts to solidify their control. Baghdad will also promise enhanced autonomy for disputed territories as a way of undermining the Kurdistan Regional Government's authority while only offering piecemeal cooperation in granting budget allocations to the Kurds. The financial pressure on the Kurdish region will only widen the split between the two main Kurdish factions in Iraq — Massoud Barzani's Kurdistan Democratic Party and Jalal Talabani's Patriotic Union of Kurdistan — as the latter opts to work with Baghdad rather than follow the Barzani faction's strategy of aligning with Turkey to unilaterally export crude. Iran's negotiations with Talabani's party will widen this split as Tehran works to undermine Turkey's strategy in Iraqi Kurdistan and bolster Baghdad's authority on energy matters.

Turkey's Dilemma

Turkey's faltering strategy in the Iraqi Kurdish region compounds the challenge Ankara faces this quarter: demonstrating cooperation against the Islamic State on its borders with Syria and Iraq while trying to contain a rise in Kurdish separatism. Given that many of the Kurdish fighters Turkey is trying to contain are also on the front line battling the Islamic State, Ankara will not be able to reconcile these two objectives and will thus remain constrained in any action it takes against the Islamic State. Turkey can be expected to bolster its defenses along the Syrian border while emphasizing its contributions in humanitarian aid.

Turkey could offer the use of its air bases to shorten the anti-Islamic State mission's logistical chain. However, Ankara's push for a no-fly zone in Syria — aimed principally at challenging Syrian air power — will not receive foreign support. Plans to establish a buffer zone on the ground will develop slowly as Turkey struggles to secure the participation of a number of countries that will be reluctant to deepen their military involvement in Syria. Any moves Turkey attempts in the border area will be designed in large part to keep a check on Kurdish separatists in Syria when the need arises. Turkey will use the lack of foreign participation in its plans, as well as a lack of U.S. commitment to focus the Syria strategy on uprooting the al Assad government, to defer significant and overt action against the Islamic State.

Turkey's conflicting strategies of supporting Kurdish factions in Iraq and trying to suppress Kurdish militants in Syria and Iraq will leave little room for progress in its ongoing peace talks with the Kurdistan Workers' Party this quarter. Growing disillusionment with the peace process, along with deteriorating economic conditions, will add to the slow-building pressures on President Recep Tayyip Erdogan's Justice and Development Party as it moves into election mode ahead of parliamentary balloting early next year.

A New Phase of Instability for Yemen

The effects of the transformation of Yemen's al-Houthi movement from a sectarian rebel group to a mainstream political force in the third quarter will reverberate in the fourth quarter. With Sanaa on the defensive, other key stakeholders in the country, such as former President Ali Abdullah Saleh's camp, the al-Ahmar tribe and the southern secessionist movement, will become more vocal in making demands of the government. Amid the uptick in political jockeying and violence, al Qaeda in the Arabian Peninsula will try to exploit the resulting sectarian fissures to enhance its power in Yemen. Though Saudi Arabia is naturally disturbed by the growing instability in Yemen and its declining influence among Yemeni tribes, it will benefit from these actors' fighting each other rather than focusing their efforts on the Saudi monarchy to the north.

Egypt Prepares for Elections

Egypt's economic turmoil will persist through the end of the year as the country prepares for parliamentary elections. Dates have not been announced, but the campaigning is expected to begin shortly after the Eid al-Adha holiday in early October. Polling likely will take place in three phases that will continue into early 2015. With the Muslim Brotherhood boycotting the election, two main camps will probably be the primary forces participating in the vote. The first camp is the country's largest Salafist party, the al-Nour Party, which came in second place behind the brotherhood in the 2011-12 parliamentary elections. The second camp is the country's highly fragmented anti-Islamist camp. There is also an effort to form a centrist coalition led by former Muslim Brotherhood leader and presidential candidate Abdel Moneim Aboul Fotouh, who is trying to gather moderate Islamists and secularists. The military's efforts to find a replacement for the defunct former ruling National Democratic Party will not come to fruition before the new parliament takes shape next year.

Meanwhile, Egypt will oversee a tenuous power-sharing arrangement between Hamas and Fatah in the Palestinian Territories. Hamas will participate in a unity government primarily out of financial necessity, but competition between the two factions over Palestinian security policy will remain the biggest threat to the deal. The arrangement provides a cover for Hamas to negotiate with both Egypt and Israel over the cease-fire, which is likely to hold through the quarter, as well as measures to rehabilitate Gaza. Though the Israelis are uncomfortable with a united Palestinian government, Israel can be expected to use its economic influence in the territories to undermine the coalition's authority.

A Proliferation of Players Adds to Libya's Chaos

The infighting and violence that has plagued post-Gadhafi Libya will enter a new phase in the fourth quarter as foreign actors expand their involvement in the conflict. Egypt and its regional backers in the Gulf, especially the United Arab Emirates and Saudi Arabia, will continue to provide materiel and political support for rogue retired Gen. Khalifa Hifter's purportedly anti-Islamist Operation Dignity based in Benghazi. Arab states have also been coordinating their efforts with France, which spearheaded the 2011 foreign intervention against former leader Moammar Gadhafi, in an attempt to drum up similar Western support for a potential intervention targeting Islamist militants who are taking advantage of Libya's instability. We do not expect a Western-backed foreign intervention in the quarter, though deeper involvement by members of the Arab League remains likely, especially in terms of continued backing and support for Hifter, airstrikes or covert activity on the ground.

These efforts will face considerable resistance from Libya's powerful Islamist militias, tribal groups wary of foreign intervention and local power centers such as the Western city of Misrata. (The Misratans are affiliated with a counter-Hifter campaign known as Operation Libyan Dawn, which is backed by Qatar and, to a lesser extent, Turkey.) Other North African states such as Algeria and Tunisia will also oppose greater foreign involvement in Libya, fearful that militants could cross over their own borders. Surrounding countries will expand defensive postures across their borders as the risk for spillover instability grows.

Militias will continue their violent struggle for infrastructure and resources, with sporadic strikes and sit-ins causing Libyan oil production to fluctuate. Competition between rival governments in Tripoli and Tobruk is likely to delay national elections and a constitutional referendum, scheduled for the fourth quarter, until 2015.

Algeria Buffers Against Libya Amid Political Restructuring

Algeria will lobby against a foreign military intervention in Libya, seeking to minimize instability within its borderlands. As U.N.-brokered cease-fire talks in Libya falter, Algiers will work with European and Western partners, using its own cash resources and ties to actors across the Libyan political spectrum to begin a behind-the-scenes dialogue among Libya's warring factions.

Domestically, Algeria will focus on finalizing a package of constitutional reforms that has been in the works since the presidential election in April. At its heart, the reform process is set to redefine the country's political leadership (held by President Abdel Aziz Bouteflika for more than 15 years), make changes to civilian oversight of the military, and further open Algeria's economy — and energy resources — to outside investment. The draft of the proposed changes may emerge by the end of the year, but we do not expect the changes to be ratified and put into place before 2015. The process will face the greatest pushback from individuals within Bouteflika's generation of revolutionary-era politicians and from within Algeria's corrupt bureaucracy. However, changes made to military and intelligence structures, along with the support of the judiciary and legislature, should give Bouteflika the institutional heft to see the reforms through.

Algeria will continue its security cooperation with Tunisia as Tunis prepares for parliamentary and presidential elections in October and November. Tunisia has faced ongoing militant activity and attacks along its borders with Algeria and Libya, and the upcoming elections mark important steps in Tunisia's progress from the transitional authority that took over after the 2011 Arab Spring to a permanent, post-revolutionary government. Militant attacks and social unrest are more likely in the quarter because of the transition, but cooperation between Algiers and Tunis has helped to minimize these threats significantly in the past year. Algeria will continue to coordinate closely with Tunisia's Islamist Ennahda party and its secular rivals and military institutions, keeping Tunisia — an important buffer state between Algeria's restive Kabylie region and Libya — within Algiers' sphere of influence.

Former Soviet Union

Locator - FSU - 2014

Former Soviet Union

Russia Holds the Upper Hand in Ukraine

When Western-backed demonstrations erupted in Kiev and brought about a pro-European government, Stratfor warned against assuming Russia was cornered. We noted that Russian President Vladimir Putin would play the long game in Ukraine and that options would avail themselves to Russia as winter approached. Indeed, Russia enters the fourth quarter in a stronger position to neutralize Ukraine. Russia has regained the upper hand on the battlefield in Ukraine and has weathered the sanctions imposed by the European Union and United States. Now, in the lead up to winter, energy exports are a more powerful tool for Moscow to influence Kiev and the downstream governments that have cautiously tried to aid Kiev through reverse energy flows. In short, Ukrainian leaders have little choice but to de-escalate military conflict and pursue negotiations with Russia, with Moscow largely dictating the terms.

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Through its efforts in eastern Ukraine, Russia effectively has established another frozen conflict on its doorstep. Kiev does not have a viable military option for reversing the separatists' gains, nor will it be able to restore its military capabilities in the fourth quarter of 2014. What Ukraine lacks most is manpower, and that is not an area in which NATO is willing or able to contribute because it does want to engage Russia directly.

With the cease-fire in place, limited skirmishes and localized escalations will continue, and some territory may be traded in the process of establishing a more stable cease-fire line. Even in the absence of renewed offensives, the reorganization and redeployment of forces will continue on both sides of the conflict as Kiev and Moscow do what they can to improve their military positions while the lingering threat of renewed military operations influences negotiations. As long as Ukraine is tied into talks with Russia, the odds are low that either side will take drastic military action for the rest of the year.

October parliamentary elections will produce a pro-Western government in Kiev, but that will do little to advance Ukraine's goals of integrating with the West. Pro-Western factions will come to dominate Ukraine's parliament; pro-Russia factions from Donetsk and Luhansk provinces will be underrepresented. Still, the staunchest Western advocates will not be able to ease Ukraine's dependence on Russia for energy.

Though Ukraine has 16 billion cubic meters of natural gas in storage and imports a relatively small amount of natural gas in reverse flows from Slovakia and Poland, it does not have sufficient supplies to last through winter. Ukraine will run out of natural gas by early January if Gazprom does not resume natural gas flows. Moreover, growing EU reluctance to impose effective sanctions against Russia leaves Ukraine with few tools to pressure Moscow in energy negotiations. Thus, Ukraine will have to come to Russia for a short-term energy deal to last through the winter. Naturally, Russia will attach political conditions, including amendments to Kiev's standing association agreement with the European Union, to any such deal.

With Ukraine beholden to Gazprom for energy supplies this quarter and with the battlefield tilted in Russia's favor, Moscow will be less likely to take bolder action against Ukraine, especially if those actions invite more significant sanctions from the West. The threat of renewed military combat in the east of the country and a crippling energy cutoff to Ukraine that affects Russia's downstream customers is powerful enough. As long as Kiev remains engaged in negotiations and continues offering concessions to Russia, as appears to be the case so far, the Kremlin will cease military operations and allow Gazprom to pursue a compromise on at least a temporary natural gas deal.

Ukraine's concessions will include autonomy for parts of Donbas for the foreseeable future and a pledge, whether formal or informal, that Kiev will not pursue NATO membership or meaningful cooperation with the alliance. Meanwhile, Russia will maintain a small force in eastern Ukraine, in addition to its military presence in Crimea, to maintain a credible military option — an option that will be exercised only if Western governments provide Kiev with significant military assistance.

The Former Soviet Periphery Beyond Ukraine

Ukraine is not the only country in play between Russia and the West. With Western options more constrained in Ukraine, the broader competition over the former Soviet periphery will become more relevant in the coming months.

The United States will maintain pressure on Russia through continued sanctions and ongoing, albeit limited, military assistance to frontline states. Meanwhile, most European states will try to distance themselves from the Ukraine conflict as they prioritize their own economic stability. Poland, Romania and the Baltic states will maintain their support for Kiev, and they have veto power on EU decisions on sanctions. However, they will have to compensate for the relative decline in overall EU interest in Ukraine with a stronger push for security alliances with the United States and other NATO allies. NATO members will focus on strengthening ties through training, standardization and logistical preparation for potential interventions in Eastern Europe, but an actual deployment of a considerable standing forces along the alliance's eastern borders is not in the cards this quarter. Budgetary constraints will limit the alliance to small rotations of soldiers in Eastern Europe through military exercises, as will the disinterest among NATO members that are only marginally affected by Russia's military.

Moldova will be important this quarter in the competition between Russia and the West. Moldova, a country that, like Ukraine, is trying to integrate further with the West, will hold parliamentary elections at the end of November. These elections will allow Russia to use its influence in the country, including the Communist Party and the pro-Russian regions of Gagauzia and Transdniestria, to weaken and potentially stall Moldova's Western integration via demonstrations and greater calls for autonomy.

The Baltic countries — Estonia, Latvia and Lithuania — will attempt to capitalize on the Ukraine conflict and on Russia's attempts to destabilize them. The Baltics will demand stronger security commitments from NATO and the United States, especially in terms of troop rotations, joint exercises and training, as well as participating in or facilitating the potential deployment of rapid response forces. Permanent basing for NATO forces, however, will not be discussed in this quarter. In the meantime, Russia will maintain pressure on the Baltics through military buildups in the surrounding region and support for pro-Russia elements in the Baltic countries.

Georgia also will try to take advantage of the Ukraine conflict by demanding stronger security commitments — specifically, defensive weapons shipments — from NATO and the United States. The West will stop short of agreeing to let Georgia begin the formal NATO accession process.

Armenia will become a full-fledged member of the Russia-led Customs Union once the bloc becomes the Eurasian Union on Jan. 1, 2015. Sporadic skirmishes on the line of contact with Azerbaijan will continue but will not erupt into a larger military conflict this quarter. As Armenia solidifies its place in Russia's camp, Azerbaijan will continue to reach out to other players, including Turkey and the Europeans, to diversify its options from Moscow.

With tensions beginning to calm, Russia will resume its commercial activities in Central Europe as a means of gaining influence. The countries associated with the South Stream pipeline — Bulgaria, Hungary and Serbia — will be a major focus for Russia in the fourth quarter. Bulgarian elections will bring back a government that claims to favor Western investment but understands how to deal with Moscow. The return of this familiar government, along with the cease-fire in Ukraine, will give Russia an opportunity to push to get South Stream back on track, with Bulgaria as Moscow's primary focus. Russia could offer incentives for Bulgaria and the other Central European countries to make progress on the project.

Russia's Asian Pursuits

In the fourth quarter, Moscow will turn its attention to Asia. Over the past few years, Russia has increased its energy, political and economic ties to its eastern and southern neighbors. As tensions between Russia and the West have grown, Moscow has fast-tracked this strategy. In this quarter, Russia and China will strengthen their relationship with several large energy deals, including new pipelines and export terminals. Moscow is looking to balance its relations with Beijing by also increasing ties to Tokyo, though any broad deal with Japan involving a peace deal and concessions over disputed islands likely will wait until 2015. Once such an agreement is struck, the two countries will have opportunities for large-scale investment and energy deals.

Russia Weathers the Economic Slowdown

The Russian economy will continue to decline, with annual gross domestic product growth for 2014 expected to hit around 0.5 percent. However, with the conflict in Ukraine being played out predominantly in political negotiations, the economic decline will slow this quarter.

Another factor that will affect the economy is oil prices. The Russian government's budget assumes a price of $114 per barrel. However, with a surplus in revenues already this year, the Kremlin will not have to address budget shortfalls so long as oil remains above $90 per barrel. Russia will be able to handle these rocky economic conditions without significant social unrest. The Kremlin will be forced to use more of its own cash reserves to bolster its preferred state firms and projects, such as major energy companies and large banks, while courting foreign investment, particularly from China.

In recent months, Putin has assumed direct control of decision-making in all matters: economic, military, foreign relations and governmental. Putin's inner circle — those he trusts personally and can count on to make decisions — has been shrinking. As the crisis in Ukraine moves into a more manageable stage for Russia this quarter, Putin could restructure his inner circle to avoid stretching himself too thin. However, this could occur in 2015, when the Russian leader can better gauge Russia's challenges in the months to come.

Central Asia

Central Asian economies, excluding Turkmenistan's, will continue to decline as a result of Russian and Kazakh economic stagnation. Rising inflation and commodity shortages will persist in Central Asian states, particularly Kyrgyzstan, Tajikistan, Uzbekistan and parts of Kazakhstan, raising the potential for scattered social unrest.

This will be the last quarter of preparation before the Eurasian Union, the bloc comprising Kazakhstan, Belarus and Russia, debuts in 2015. Kyrgyzstan, which has been delaying accession efforts, eventually will be pressured into joining next year after Moscow offers incentives and threats in the fourth quarter.


Locator - Europe - 2014


Europe Seeks Distance from Ukraine

Using the current cease-fire as political cover, the European Union will try to extricate itself from the Ukrainian crisis this quarter and use its economic influence over Kiev to facilitate a short-term energy compromise. Europe's attempts to ease tensions with Russia will be measured in an attempt to allow the collective to save face, and likely will accompany some form of financial aid to Ukraine.

The European Union will remain reactive to the events in Ukraine. Stratfor does not expect European sanctions against Russia to escalate; in fact, some of the existing sanctions could be eased in upcoming reviews. The only thing that could force the European Union to toughen its stance on Russia would be an unexpected event involving the deaths of large numbers of civilians — an event like the downing of Malaysia Airlines Flight 17. Even if such an event occurs, the divergent interests of EU members will prevent Brussels from applying sanctions in key sectors such as natural gas. In any case, Brussels will avoid direct military involvement in Ukraine.

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Europe's reluctance to escalate tensions with Russia will only contribute to European fragmentation. And since Europe will gradually lose interest in applying sanctions, Poland will take the lead in trying to deepen defense, political and energy cooperation among the countries most directly affected by Russia, with a focus on Lithuania, Latvia, Estonia and Romania. Little progress in these relationships will occur this quarter. NATO will demonstrate its commitment to Eastern Europe by participating in military exercises with Poland and the Baltic countries even as its options remain limited in Ukraine.

A legal dispute between Russia and the European Union over the controversial South Stream pipeline will persist through the quarter. Russia and some of its main partners in Europe, including Bulgaria, Hungary and non-European Union member Serbia, will present options to exempt the pipeline from the EU Third Energy Package. For example, they may allow additional companies to participate in the project. But Brussels will approach the issue cautiously, keeping it in limbo throughout the quarter.

Franco-German Friction on Display

Stratfor will remain focused on the relationship between France and Germany this quarter; the two continental powers are predictably diverging on how to manage the eurozone crisis. Franco-German friction worsened in the third quarter as the government in Paris fell, a collapse resulting from internal dissent over how to deal with Germany, coupled with attempts to manage the consequences of a slowing economy.

Berlin has remained steadfast in its demands for more reform in France. In the final months of 2014, stubbornly high unemployment will push France to become more vocal in its demands for intervention by the European Central Bank, more spending by the European Union and more action by Berlin to boost domestic investment and German public consumption.

There is little reason to expect a dramatic improvement in France's economic condition this quarter, so President Francois Hollande's government will continue weakening. We expect the final quarter of the year to be marked by protests and strikes, while the anti-establishment National Front party will remain highly popular. Hollande will not resign, but his government will become increasingly ineffective and will remain pressured to reach difficult compromises with the dissenting groups within the Socialist party.

In its advocacy for greater intervention to boost growth, France will find a strong backer in Italy, since Rome is also dealing with a stagnating economy. Paris and Rome will, however, only have modest success in their demands because Germany will be trapped between conflicting interests. On the one hand, Berlin needs to protect its economy, the strength of which rests on low inflation and a high volume of exports. The German government also faces external pressures from the anti-euro Alternative for Germany party and institutional pressures from the Bundesbank and the Constitutional Court, all of which have criticized the European Central Bank's recent unorthodox policies, including the purchase of asset-backed securities. On the other hand, Berlin sees a political need to preserve its strategic alliance with France and Italy and ensure that its main export partners are still able to consume German goods.

As a result, Germany will accept its partners' demands selectively. For example, Berlin will criticize but eventually accept France's decision not to meet EU fiscal targets for the next three years. Germany will also support EU investment plans for the eurozone in order to create jobs and boost growth. These plans will include measures such as using the European Investment Bank to finance projects in the eurozone. Berlin, however, will not relent in its demands for countries in Mediterranean Europe to apply structural reforms and will continue to argue against what it considers to be political manipulation of the euro. Germany also will continue resisting quantitative easing this quarter for legal and political reasons.

The European Court of Justice will hold hearings throughout the quarter on the European Central Bank's bond-buying program, commonly known as Outright Monetary Transactions. While this issue could eventually create legal friction with the German Constitutional Court, which deems the program illegal, the European Court of Justice will not make a ruling on this highly controversial issue this quarter.

In our annual forecast, we said that credit conditions would be tight in 2014, and that "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." This will remain the case in the final quarter of the year. The second round of cheap European Central Bank financing to banks will happen during the quarter, following a somewhat disappointing first round in September. We do not expect these measures to have a significant impact during the quarter, and credit conditions for companies and households will remain tight, weakening the prospects of a substantial economic recovery, especially in the EU periphery.

Also during the quarter, the European Central Bank and the European Banking Association will release the results of the stress tests and asset quality reviews of European banks. There has been a long run up to this test, and various banks have already taken measures to raise money in preparation for the review. That said, the results could unveil a few a surprises. The European Central Bank will probably say that some banks in countries such as Italy, Greece and Germany need additional capital. Overall, there will be enough failures to affirm the strength of the stress tests but not enough to trigger a major financial disruption in Europe.

Separatism and Euroskepticism Linger

Separatist tensions in Europe will be especially visible this quarter in Spain and in the United Kingdom. In Spain, the battle between Catalonia and Madrid will intensify as the Nov. 9 referendum draws closer. In late September, Madrid blocked Catalonia's independence referendum at the Constitutional Court. This will generate strong frictions within the Catalan establishment, because some parties will push for a cancellation or postponement of the referendum, while others will push the Catalan government to ignore Madrid and hold the vote anyway. The Catalan government will either cancel or postpone the referendum. As a result, early elections probably will be announced before the end of the year, and protests by pro-independence groups cannot be ruled out. In any case, Catalonia's push for independence will continue in 2015 and beyond.

In the United Kingdom, the British government will have to deal with the aftermath of the Scottish independence referendum and Prime Minister David Cameron's promise of more devolution to Scotland, England, Wales and Northern Ireland. There will be considerable political turbulence in Westminster, with all three main political parties developing policies on increased devolution across the British Isles. The government will present new proposals, which will probably not refer to the creation of a new English Parliament, but to the removal of voting rights for Scottish parliament members on England-only policies. During the quarter, there will be several proposals and debates, but little to no action in the way of reforms.

After the lengthy process of appointing new EU Commission members, Cameron will resume his push for the reforms he wants in the United Kingdom's relationship with the European Union. Brussels will show some willingness to negotiate, but the process will go well beyond this quarter. The rise of anti-establishment parties will continue in Britain. The anti-EU United Kingdom Independence Party, commonly known as UKIP, will probably win its first seat in Westminster in a by-election in October. This will put Cameron under more pressure to adopt stronger anti-EU rhetoric at home and to combine demands of a reduction of bureaucracy in the European Union with requests of repatriation of powers regarding immigration during his negotiations with Brussels.

EU Immigration Policy Stirs Tensions

As asylum seekers continue to arrive in the European Union en masse, the issue of Europe's asylum policy and the status of the Schengen agreement will remain highly contentious. This will generate tension among member countries and between EU member states and Brussels. Though we do not expect a fundamental reconfiguration of the European Union's immigration policy in the next three months, the long-term direction is toward stricter immigration policies and enhanced border controls.

Elections in Central Europe

Romania will hold a presidential election in two rounds, first on Nov. 2 and then on Nov. 16. With the governing Center-Left Alliance set to win, we expect continuity in Romania's foreign and domestic policies. Moreover, with President Traian Basescu ending his second and final term in office, the elections likely will lead to closer cooperation between the prime minister and the president. In the long-term, this will allow Romania to advance some key policies, including greater liberalization of its energy sector to attract foreign investment.

Bulgaria held parliamentary elections Oct. 5. Sofia will have to deal with a fragile banking sector and a fragmented political environment while continuing to balance its relationship with Moscow. The new government in Sofia will try to accommodate  the European Union to allow the construction of South Stream to proceed under European rules.

Greece's Bailout Ends

Greece will end its bailout in December and will not require a third bailout. In the fourth quarter, Athens will focus on negotiating with its lenders — the European Union and the International Monetary Fund — for longer maturities and lower interest rates for its debt. We expect the European Union and the International Monetary Fund to accept these requests eventually, but the negotiations will probably last longer than the quarter.

East Asia

Locator - East Asia - 2014

East Asia

China's Limits to Reform

Two themes will dominate the fourth quarter of 2014 in China. First and foremost will be the Chinese government's struggle to manage a deteriorating economic situation at home. The second rests on discussions around the Chinese Communist Party's Fourth Plenary Session in October, focusing on the underlying shape of the Party, corruption and the rule of law.

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Recently, property markets and housing-related construction activity have declined across virtually every region in China and all but a handful of major cities. Beijing will seek to mitigate the impact of this trend through a variety of stimulus measures intended to keep the housing and construction sectors vibrant without allowing another bubble to develop. Beijing's actions in the quarter will include allowing local governments to relax restrictions on home purchases and further easing access to credit for first-time homebuyers. On a broader front, Beijing will increase government-led investment into large-scale infrastructure projects in areas such as transport and power generation. It will also expand credit availability and decrease borrowing costs for small and medium-sized enterprises in manufacturing and services sectors.

However, these measures are only management tools, and their results will be decidedly mixed. The deeper problem for Chinese policymakers is the diminishing effectiveness of credit and investment as tools for managing and stimulating Chinese industry. Over the long run, Beijing hopes to obviate this trend by rebalancing toward a domestic consumption and services-driven economic model. In the fourth quarter, however, China's leaders will have little option but to continue pumping credit into the economy and containing local financial crises as they emerge, while patiently striving to improve bank discipline and curbing shadow loans to overextended property developers, speculators and building materials companies.

Localized property crises cannot be ruled out within the quarter, and these would likely spark local government and corporate debt crises. But relatively weak interregional economic flows will buffer against more systemic financial collapse this quarter, and as Beijing has shown in the past, it will not hesitate to use stronger pro-growth measures to head off a nationwide crisis, if required. Barring such a crisis, Beijing will continue to focus its support not on the moribund housing sector, but on services and manufacturing in the hopes that its efforts to boost credit to these sectors improve through the winter export season.

Political and institutional reform also will come to the fore this quarter as the Communist Party leadership convenes its Fourth Plenary Session in October. This assembly will focus on personnel issues — particularly the anti-corruption campaign — and strengthening the rule of law. The plenum itself is unlikely to produce concrete reform measures — those will not come until at least March 2015, when the National People's Congress meets — but it could help clarify Beijing's approach to issues like regulatory transparency and the role of foreign enterprises in China's economy. More fundamentally, it will provide a window into the central government's strategy for reforming the incentive structure for officials, as well as building more durable, flexible legal and political institutions. 

In addition to domestic economic concerns, Beijing faces an even more immediate challenge from ongoing demonstrations in Hong Kong. So far, pro-democratic protests in the city show every indication of persisting well into October, if not beyond, threatening to paralyze business throughout key city districts and leaving Beijing with few good options to respond. The Chinese and Hong Kong governments appear determined to wait out demonstrators and hope that fatigue and fragmentation undo the movement from within. But if the movement persists into and beyond October, Beijing could attempt to open channels for negotiations with protest leaders while holding steady on its core position regarding electoral reforms and support for Hong Kong's chief executive.

Japan's Economic Balancing Act

In the fourth quarter, Japan will struggle to negotiate between competing short- and longer-term economic needs. On the one hand, after a third quarter marred by sharp declines in consumer spending and weak exports, pressure is mounting on Tokyo to strengthen monetary easing efforts in the coming months and to delay a decision on whether to raise the national sales tax from 8 percent to 10 percent in 2015. On the other hand, the urgency for fiscal consolidation, as well as political and corporate pressure to continue with the consumption tax hike, remain factors that will gain strength this quarter unless both external and internal economic conditions show signs of improvement. Prime Minister Shinzo Abe earlier promised to make a decision on the sales tax hike by December. Whatever his decision, it will not have a tangible impact on Japan's economy in the fourth quarter — if a tax hike occurs, it will not take effect until October 2015. In the meantime, the Bank of Japan has made clear that if economic conditions deteriorate much further, it will not hesitate to boost its purchases of Japanese government bonds.

Slow Realignment in Northeast Asia

Japan is pursuing a diplomatic breakthrough with Russia regarding the status of the four Russian-occupied islands that Tokyo claims as its own. The ongoing crisis in Ukraine, along with Japan's need to position itself among Western countries by way of international policy, has complicated Tokyo's discussions with Moscow. Both Japan and Russia, however, see a mutually beneficial situation on the horizon in which Japan begins to reclaim sovereignty over its northern territories, while Russia gains access to Japanese investment and markets for its Far Eastern natural resource development and infrastructure projects. Although currently unlikely, it is possible that Abe and Russian President Vladimir Putin will have a breakthrough meeting this quarter. The potential for such a meeting will increase should Europe and the United States begin to ease sanctions on Russia.

China and South Korea will finalize their free trade agreement, highlighting the expanding relations between the two countries as South Korea seeks access to China's markets and its assistance in containing North Korea while Beijing seeks to complicate U.S. strategic relations in Northeast Asia by exacerbating South Korea's mistrust of Japan. North Korea, which continues to experiment with new economic measures at home, could break out of its political isolation in the quarter, as Kim Jong Un may finally travel to China — his first foreign trip since becoming North Korea's leader. Pyongyang will continue playing the competing interests of regional powers off one another, maintaining its courtship with Japan while expanding engagement with Russia, particularly for infrastructure and economic investment.

Economic Diversification and Security Challenges in Southeast Asia

The need to adapt to a changing regional economic environment in light of China's slowdown will be particularly strong in countries like Vietnam, Australia and Indonesia. This quarter, Vietnam will pursue efforts to diversify away from a heavy dependence on China by strengthening economic, diplomatic and security ties with countries like India, Japan and — most prominently — the United States. Vietnam will not be alone in looking to balance its economic exposure; a series of regional meetings will allow several Southeast Asian countries to seek greater economic attention from Japan and the United States, while avoiding a serious economic or political break with China.

Meanwhile, Australia and Indonesia will work to soften the blow to export revenues caused by declining growth in Chinese demand for raw materials such as coal, iron ore and other metals. Australian iron ore producers will maintain their strategy of flooding the market with supply in order to drive prices down and drown out competition in China and elsewhere. In Indonesia, the pressure from declining Chinese coal import demand will be exacerbated by a volatile currency and high and rising fuel import costs. To offset these costs, President-elect Joko "Jokowi" Widodo likely will try to use his first months in office to push through further cuts to fuel subsidies. Doing so, however, will require Jokowi to muster political support for redirecting fuel subsidy funds to other areas of the national budget, such as social security spending, and face the prospect of public backlash.

As the Islamic State faces U.S. and coalition airstrikes in the Middle East, the flow of foreign fighters back to their home countries could increase. This is raising alarms throughout Southeast Asia, where periodic outbreaks of Islamist terrorism have been a longstanding problem. New and revived terrorist and militant cells are likely to emerge this quarter, with the highest risk in Indonesia, Malaysia and the Philippines. However, Southeast Asia's religious and social structure has thus far prevented large-scale pan-Islamist uprisings on par with those in the Middle East. Even long-established Islamist militant movements, such as those in the southern Philippines and southern Thailand, have been more ethnically based than pan-Islamist in nature.

The governments and security forces in Southeast Asia will be on higher alert and more active in arresting and disrupting the activities of suspected militants, though at times this vigilance could have repercussions. Uighur militants returning to western China could be of particular concern this quarter. Beijing is already intensifying its security operations (and, at times, social repression) in western China in anticipation of a new wave of militant attacks.

In the Philippines and Myanmar, the quarter could bring further progress toward the resolution of longstanding militancy. Myanmar likely will secure a nationwide cease-fire with most of the country's various ethnic groups, theoretically alleviating clashes in the borderlands. With many key issues — from federalism to political autonomy — unlikely to be settled by the cease-fire alone, political competition will continue, particularly from the military, ahead of national elections in 2015. Similarly, the Philippine government is in the final stages to secure the Bangsamoro Basic Law in a bid to stabilize the restive southern region of Mindanao. The administration of President Benigno Aquino III wishes to complete the peace process sooner rather than later, so the next quarter will see some back-and-forth over legislative impediments. Meanwhile, the risk of violence will remain.

South Asia

Locator - South Asia - 2014

South Asia

Domestic Stresses in India Take Precedence

As Prime Minister Narendra Modi works to maintain momentum on several ambitious foreign policy objectives, a spate of domestic headaches will demand New Delhi's attention. As monsoon rains and waters recede, the central government will begin the quarter by addressing flood damage across northern India and assessing its impact on grain and sugar crops. Modi has promised a 40 percent increase in grain distribution under the Food Security Bill. This increase will create a short-term strain on India's grain stocks and distribution systems. As New Delhi works to secure food access for its densely populated northern regions, India will remain opposed to lifting agricultural subsidies and tariffs in negotiations with the World Trade Organization despite ongoing lobbying by the United States, the European Union and the World Trade Organization.

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Modi's recent high-profile meetings with the heads of state of the United States, Australia, China and Japan have generated excitement in the media, but any implementation of trade or development deals signed during these visits will occur far beyond the fourth quarter. In the last three months of the year, the Modi government will have to focus on a number of more pressing domestic issues, especially those related to energy: Coal and natural gas production and imports are beginning to undermine India's already fragile power generation capacity, limiting the benefits India will reap from lower global oil prices. Coal and steel industries in particular will face the possibility of large-scale strikes if the central government pursues its current plans to divest state-owned steel, iron ore and coal enterprises. India's powerful labor unions and local bureaucracies oppose these plans.

A Developing Political Detente in Dhaka

After months of political gridlock in Bangladesh, signs of a potential rapprochement between the ruling Awami League and opposition forces led by the Bangladesh Nationalist Party can be seen. The commuting of death sentences of convicted leaders of Jamaat-e-Islami — a long-standing partner for the Bangladesh Nationalist Party — and the restructuring of leadership in the Awami League's youth wing (Bangladesh Chhatra League) suggest that Prime Minister Sheikh Hasina is prepared to begin a national dialogue after securing her political position in previous months.

The main impetus for the dialogue is growing investment interest from Japan, China and India, which want to expand Bangladesh's manufacturing base from its traditional focus on textiles to electronics, automobiles and other goods. Domestic and political stability is necessary for this costly long-term shift in manufacturing, and Hasina is keen for outside investment to reinvigorate the country's manufacturing base. Protests and violence are expected in the fourth quarter from both the traditional opposition and elements within the Awami League's support base opposed to any potential deals with the Bangladesh Nationalist Party and Jamaat-e-Islami. Dhaka's foreign policy — marked by a shift in U.S. rhetoric over the Awami League's disputed electoral victory in January, Bangladeshi support for Japan's bid for a permanent U.N. Security Council seat, and increased outreach to New Delhi and Beijing — will reflect the long-term goals of domestic decisions undertaken by the Awami League in the upcoming quarter.

Afghanistan's Political Disorder

Afghanistan will enter the fourth quarter with the results of its contentious presidential election decided but with no clear roadmap to political stability in sight. The results of the April 5 poll remain inconclusive, and the power-sharing agreement between the two leading candidates — Afghan President Ashraf Ghani Ahmadzai and Prime Minister Abdullah Abdullah — has created the potential for more political instability and competition at the executive level, including significant delays in Cabinet formation.

Constitutional changes, including a definition for a formal prime ministerial position for Abdullah, are unlikely until another Loya Jirga (or grand assembly) convenes, which could take up to two years. Until then, competition between the two executives is expected to limit the government's already tenuous control over much of its territory. The Taliban will work diligently to take advantage of this situation to increase its authority, both through militant attacks and attempts to instill some political order in its own regions as an alternative to the political uncertainties in Kabul. The recent signing of status of forces and bilateral security agreements between Afghanistan and the United States will give the Afghan government a bulwark against militancy. However, the political chaos associated with the transition away from a Hamid Karzai-led government will continue to undermine the development of government institutions, including military and police forces.

Pakistan's Domestic Difficulties

The Pakistani military will mediate contentious negotiations between the civilian government and opposition forces led by Imran Khan and Tahir-ul-Qadri. While the opposition was unable to topple the government with its sit-ins, the agitation has forced the government into a judicial inquiry into fraud allegations concerning the 2013 parliamentary elections. The inquiry and negotiations likely will not reach a resolution in the fourth quarter.

Like India, Pakistan will be occupied with recovery efforts following heavy flooding from this year's monsoon season. The military's ongoing offensive against Taliban rebels in North Waziristan will continue through the quarter and into the next year as the military makes incremental gains against local militants. The Ministry of Petroleum and Natural Resources has announced that it is expecting the delivery of a liquefied natural gas import terminal by year's end, but continued wrangling within the government regarding oversight of the project and challenges related to the Khan-Qadri opposition movement make this timeline unlikely.

Latin America

Locator - Latin America - 2014

Latin America

Cash Flow Problems Worsen in Venezuela

Venezuela's economy continues to spiral downward, but Caracas could stave off a crisis in the final months of the year. The government of President Nicolas Maduro will rely on already strained public finances to keep the economy afloat and to continue funding crucial imports and social programs. At the same time, the ruling United Socialist Party of Venezuela will continue to lose popularity as inflation increases and as the price of food and consumer goods rises.

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Though the opposition is still capable of organizing disruptive protests, it probably will not become a formidable enough threat to threaten the government in the fourth quarter. The opposition appears to be moving toward mass mobilizations, which inevitably bring some disruptions and violence but are not yet large enough to destabilize the government. Until the opposition becomes more coordinated, the current government will be secure.

The country's high level of public spending means that state energy firm Petroleos de Venezuela will continue to face cash flow problems, which will limit the amount of money available for discretionary government spending. Consequently, the government likely will continue adjusting the economy modestly to improve cash flow. It may implement higher foreign exchange rates or slightly raise the price of fuel, but it will avoid major economic reform for fear of losing popularity. 

Another Step in Colombia's Peace Process

Demobilization, a crucial topic in the peace talks between the Revolutionary Armed Forces of Colombia, or the FARC, and the Colombian government will probably be addressed in the fourth quarter. But even if they make progress on the subject, the issue of criminal penalties for rebel leaders will remain unresolved. With the negotiations still underway, the threat of militant attacks against energy infrastructure and security forces in the rebels' traditional strongholds of northeastern and southwestern Colombia will remain. Further steps toward a formal peace negotiation with the National Liberation Army, which is Colombia's second-largest guerrilla organization, are also possible in the coming months.

An Election in Brazil Amid an Economic Slowdown

The most important event of the quarter will be the final election in Brazil. Incumbent Dilma Rousseff, who garnered the most votes in the first round of voting on Oct. 5, will face challenger Aecio Neves of the Brazilian Social Democracy Party in a runoff vote scheduled for Oct. 26. The slowing Brazilian economy will remain the core challenge for the next president. This quarter, inflation, which is a longstanding concern for Brazilian leaders, is likely to approach the desired yearly limit of 6.5 percent set by the Central Bank. Although the development of the national economy during the fourth quarter will influence Brazilian economic policy well into the coming year, the Brazilian government probably will hold off on major economic adjustments until the next presidential term begins in January 2015.

Argentina Stuck in Default

Argentina will remain in technical default this quarter. Longer-term economic trends, such as steadily rising inflation and the growing gap between the official and illicit peso exchange rates, will restrict the Argentine government's ability to manage the economy. Argentina also has no easy way to alleviate the pressure from the ongoing default. Because a clause in Argentina's agreements with restructured bondholders leaves the government vulnerable to lawsuits from these creditors, Argentina likely will avoid seeking a negotiated solution with holdout bondholders until 2015.

With the end-of-year grain harvests beginning in coming months, the Argentine government will have a greater impetus to devalue the currency to motivate grain sales that bring in badly needed dollars for the foreign currency reserves. The government could rely on the recently passed Supply Act to try to force farmers to sell grains they are hoarding, but this could trigger resistance and mobilizations from the agricultural producers.

Mexico Prepares for Energy Investment

After intense legislative activity to approve secondary energy bills in the second and third quarters, the Mexican government will turn to implementing regulatory details to hold bidding on oil blocks in the first half of 2015. The fiscal terms and contract schemes, which are necessary for energy investment to begin flowing into Mexico next year, likely will be finalized in the fourth quarter. Mexican state-owned energy firm Petroleos Mexicanos also will continue seeking foreign partners for 12 oil projects that it owns but lacks the technology or funds to successfully exploit. 

Sub-Saharan Africa

Locator - Africa - 2014

Sub-Saharan Africa

Ebola Outbreaks Remain Mostly Confined to West Africa

In the next three months, Guinea, Liberia and Sierra Leone will be the only countries largely afflicted by the Ebola outbreak. Intense transmission can be expected initially, as can more cases, particularly in Sierra Leone and Liberia. These countries, as well as Guinea, are under the greatest stress and lack the domestic resources to contain this unprecedented outbreak efficiently.

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These countries will see increased and coordinated international presence and aid, including a $750 million U.S. military-led operation and a U.N. Mission for Ebola Emergency Response team that recently arrived in the region. With an international focus on the keys to halting infection, including increasing the availability of necessary supplies, medical facilities and public education, we expect the first steps toward control and containment of the outbreak to take effect within the quarter. Because of the increased international aid, the worst-case scenario recently released by the Centers for Disease Control — as many as 1.4 million infections by Jan. 20, 2015, a number which includes a correction factor to compensate for underreporting — will be unlikely. However, we do not expect the disease to be fully contained within the quarter.

Though we cannot predict exact virus mutations, the risk of mutations that result in a change in the mode of infection remains very low. As long as the mode of transmission stays the same, we do not expect large outbreaks of the disease beyond West Africa. We may see additional isolated cases, such as the one reported in Dallas, Texas, on Sept. 30. However, such cases are likely not likely to result in a wider spread of the disease, although there may be a limited number of secondary cases. The three countries bearing the brunt of the outbreak will feel the economic, social and political effects acutely, but we do not expect to see a wider or global threat, especially within the fourth quarter.

Indeed, the Ebola outbreak will have a significant impact on economic growth in Guinea, Liberia and Sierra Leone, with the agricultural and mining sectors likely to be hit hardest. A World Bank study indicates that yearly growth in Guinea and Liberia could be reduced by half and in Sierra Leone by 30 percent. The U.S. humanitarian mission will establish an "air bridge" to deliver medical supplies and personnel to affected areas, and Ivory Coast has decided to reopen corridors with neighboring infected countries as well. However, some of the border closures and travel restrictions are likely to remain in place, especially during the first part of the quarter, as countries wait to see the success of the latest wave of relief efforts. As long as ports remain open, the macroeconomic impacts will be negligible, but localized economic effects will linger because of limited cross-border trade.

Security will continue to be dynamic throughout the quarter. While we do not expect any of the country's governments to collapse under the stress of the ongoing outbreak — international support will keep Freetown, Monrovia and Conakry afloat — we do expect to see localized violence like the recent riots in Monrovia's West Point district and an attack in Guinea that resulted in the death of eight health care workers. Isolated incidents such as these are expected to continue, especially if larger quarantine measures are implemented and, additionally, as the Western presence in the region increases while more aid arrives.

Countdown to Elections in Nigeria

The presidential primaries for the ruling People's Democratic Party and the All Progressives Congress opposition party in November and December will dominate the political process ahead of Nigeria's national elections. Currently, President Goodluck Jonathan is positioning himself for re-election and has been supported by several elements of the party leadership. The All Progressives Party has several candidates, requiring a compromise on a valid candidate. If the party fails to reach a consensus, it will struggle to organize a consistent platform for members and voters, limiting its ability to pose an electoral challenge to the People's Democratic Party.

The consequences of these primaries will not be felt until after the fourth quarter — namely, in the national election scheduled for February 2015. Issues such as Niger Delta militancy and the Nigerian military's challenges in combating Boko Haram in the northeast will be essential to the political posturing of either party's candidate. However, neither issue is expected to pose a critical threat to the stability of the government.

Mozambique Negotiates with the Opposition

Mozambique will hold national elections in mid-October. The ruling Mozambique Liberation Front party will dominate the elections, but the opposition Mozambique National Resistance will influence the election aftermath through its own patronage demands. In a bid to sustain economic development in the central and northern parts of the country, the Mozambican government will attempt what will ultimately be a tenuous accommodation with the opposition. Failure in this negotiation could lead the group to resume low-level violence.

The al Shabaab Threat Persists

Following the death of al Shabaab leader Ahmed Godane, the Somali jihadist group will be on the defensive this quarter as it tries to restructure its leadership. Al Shabaab will remain under pressure from African Union peacekeeping forces as well as foreign forces, most notably from the United States, who will continue to degrade and disrupt the militant group. Nonetheless, the possibility of significant terrorist attacks in East Africa by al Shabaab remains. Just as Godane demonstrated his capabilities by conducting the Westgate attack in Nairobi in 2013, new al Shabaab leaders could attempt an attack with a similar intent.

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