In this fourth quarter the United States formally enters is electoral cycle. The year 2008 sports congressional and presidential elections that, when combined, sharply cut into the White House's bandwidth in even the calmest of years.This stalling of American power provides Russia with what might well be its last, best chance to expand its influence. The Putin government realizes that in any protracted conflict with the United States, Moscow is doomed to fail, and that Russia's demographic woes mean that in the long term it is doomed to get weaker. This is a reality that the Kremlin must prepare for, and that requires action.
When the Soviet Union collapsed, Russian influence shrank precipitously and did not begin to stabilize until it had fallen back well past the natural barriers that protected the Soviet Union. Those barriers -- the Carpathians, the Baltic Sea, the southern Caucasus and the deserts of Central Asia -- are now strategically beyond contemporary Russia's borders. If Russia is to have a chance of survival once its demographic crisis hits, it needs to re-establish those borders while its strength vis-à-vis the West is at a relative high. With the United States consumed with Iraq and internal issues, there will never be a better time than now.
Thus, the first and loudest Russian "intervention" will occur precisely where the United States wants it least: in Tehran. On Oct. 16, Russian President Vladimir Putin himself will be in Tehran for consultations with the Iranian leadership. Ostensibly these talks will occur under the auspices of the Summit of Caspian Littoral States -- perhaps the world's least-productive multilateral institution. The reality will be far different with Russia giving Tehran the diplomatic backstopping it so badly desires. Advances are highly likely in talks to supply the Iranians (and their Syrian allies) with nearly every Russian technology under the sun that could be handy in a fight with the United States.
The Kremlin has a vested interest in seeing the United States bogged down in a protracted conflict in single theater of operations far removed from Russia, but the Kremlin's goal is loftier than simple spite -- it needs room to maneuver, and U.S. preoccupation is a means to that end. But Moscow owes Tehran no loyalty. Russia ultimately views Iran as a long-term competitor for influence in the Caucasus. Putin will sell the Iranians out in a heartbeat, consigning them to face the Americans alone, should the United States provide the proper sweetener.
The cost of Russian quietude on the Iran issue will be steep. Russia seeks the freedom to force changes in the geopolitical relationships of its entire periphery, specifically seeking a change of alignment (or at least attitude) in Estonia, Latvia, Lithuania, Poland, Ukraine, Moldova, Georgia, Azerbaijan, Kazakhstan, Uzbekistan and Turkmenistan. In essence, the price of Russia's cooperation on Iran is a free hand for Moscow to re-create the basis of the Soviet empire. It matters little to the Kremlin whether that happens by conscious American choice or by a flood of Russian supplies to Iran that pins down American strategic options.
This hardly means that U.S. power is in massive retreat. Even as Russia attempts to roll back Western influence in its periphery, U.S. power is advancing in other regions, almost on autopilot. The fourth quarter will see the United States formally launch its new military command in Africa to surge U.S. influence deep into new territory, finalize plans to install anti-ballistic missile defenses in Central Europe to hedge in Iranian and Russian strategic options and put into motion a trilateral military grouping with Australia and Japan in the western Pacific to contain China.
But the bottom line is this: One way or another, Russia will take advantage of the United States' complete preoccupation to pursue a geopolitical offensive across the length and breadth of the former Soviet space in an attempt to secure more defensive frontiers.
Middle East: Ripples from Iran
As Iran's struggle with the United States over the future of Iraq rages, all will not be quiet on the home front. Two factions dominate policy in Tehran, and though they agree on the goal -- Iranian domination of Iraq -- they battle relentlessly over tactics. The pragmatic conservative faction of Ali Akbar Hashemi Rafsanjani, who heads the powerful Assembly of Experts and the Expediency Council, fear not just that Iran will suffer international isolation, but also that the United States has more tricks up its sleeve; this side favors diplomacy to get its way in Iraq. The hard-line allies of President Mahmoud Ahmadinejad feel a U.S. defeat is inevitable, and see every reason to take risks in achieving that goal -- risks that terrify Rafsanjani and his associates. Their battles will dominate not just domestic politics, but also Iran's ability to enter into negotiations in the first place.
There is one additional development in Iran that could complicate this process: the possible (natural) death of aged Supreme Leader Ayatollah Ali Khamenei. Should he die, Iran's factions would find their efforts to secure Iraq delayed by the need to effect a leadership transition in Iran's most powerful office. Rafsanjani would likely win that struggle, but victory would come neither quickly nor easily.
Though the U.S. decision to remain fully engaged in Iraq has Saudi Arabia sighing in relief, Iran's strengthening position in the Persian Gulf region continues to haunt the Saudis with flashes of their worst nightmare: nothing but sand between their oil fields and the Iranian military. For although on paper the Saudis have the best military equipment their massive oil wealth can buy, in reality Saudi military personnel are so poorly trained that they cannot defend the kingdom without outside assistance.
For Saudi Arabia, the fourth quarter will be about preparing for the worst, and Stratfor expects Tehran to begin pressuring Riyadh into a set of negotiations parallel to its coming talks with the Americans. Specifically, Iran wants the Saudis to accept limits on their influence across the Muslim world, specifically in Iraq and Lebanon, and make certain security concessions in the Persian Gulf itself.
Despite its oil wealth, proximity and history with Islamist elements across the world, Saudi Arabia is in a weak position to counter Iranian influence in the Iraqi theater. The Iraqi demographic group that the Saudis have the most influence with -- the Sunnis -- is the smallest of Iraq's three ethno-sectarian groups.
Additionally, most of the Sunnis are either Baathists -- a group that is not only ideologically hostile to Riyadh's religiosity but also closer to Syria (a regional rival of Saudi Arabia) than to Riyadh -- or jihadists. Even if Riyadh did successfully install a crop of jihadists with a Saudi vision in Iraq, the Saudis remember all too well how such fighters can come back to haunt them, as al Qaeda has. It is a bad option, but one of the few available.
Finally, the other Arab states of the Persian Gulf have their own ways of dealing with Tehran. Qatar, Oman and the United Arab Emirates lack Saudi Arabia's Shiite minority, so they can deal with Iran from a less frightened mindset. These three states also care about their economic positions far too much to entertain the idea of battling Iran. Therefore, they will want to balance between Iran on the one hand and the United States and Saudi Arabia on the other -- and thus Kuwait is the only Gulf state Saudi Arabia can count on as a reliable ally in the coming struggles against Iran.
Bereft of solid options, the Saudis are hoping against hope that the situation will change in their favor because of the actions of others -- they know that, aside from tinkering on the edges with media manipulation or playing with Sunni fire in Baghdad, there is little they can do independently. Their strategy, ineffective as it might be, is to negotiate -- slowly -- with the Iranians in order to buy time.
Just as Saudi Arabia is concerned about the immediate future, Israel fears what is just beyond the horizon. Israel cares little for what happens in Iraq, so long as whoever controls the territory is not able to strike further west and thereby curtail Israeli options. A potential Iranian expansion, therefore, demands Israel's attention and forces Israel to consider Iran as a threat independent of its nuclear ambitions.
There is a lack of good intelligence globally on the exact status of Tehran's nuclear program -- a reality that places additional pressure on the Israelis, particularly since international actions to date have not notably slowed Iran's march toward nuclear capability. Israel fears that it will have to act unilaterally to stop Iran's nuclear program; therefore, Israeli threats on the issue are far from simple rhetoric.
Israeli threats against Iran are very useful to the United States -- because they help box Iran in -- but actual strikes could upend Washington's Middle Eastern alliance network. For Israel, the fourth quarter will be about the United States trying to allay Israeli concerns even as the Jewish state pulls out the stops to figure out just how far along the Iranian nuclear program is.
The task of containing Iran carries its fair share of complications, but Israel has considerably more bandwidth to deal with Iran's proxies that are right on Israel's borders. Israel already has placed Syria in a compromising position through the mysterious Sept. 6 air raid against an alleged nuclear site. The leadership of Hezbollah, the main militant proxy of Syria and Iran, also is on Israel's radar. Despite the rhetoric of revenge, however, Syria is no mood for a direct military confrontation with Israel. Instead, Syria sees a window of opportunity of its own to use the region's preoccupation with Iraq to its advantage. Though Syria puts up a cooperative front, its focus this quarter will be on consolidating its position in Lebanon by ensuring that its candidate of choice gets in the presidential slot.
Closing out the Middle East is the return of a once-powerful player to active engagement in the region: Turkey.
Under the newly re-elected and re-energized Justice and Development (AK) Party government, Ankara has realized that, though closer economic links to Europe are likely, actual EU membership is simply not in the cards. This is leading the Turks back to the Middle East in a serious way for the first time in a generation. Under the AK Party, Ankara is moving toward a balance between the Arabs and the Israelis.
The Turks are masters at balancing power and see Iran as a powerful rising force, with legitimate claims to influence in the region. Unlike the Arabs to their south and Iran's west, the Turks see Iran as a challenge, but not one to be overly afraid of. After all, the Turks are economically and militarily far stronger than the Iranians. So for Ankara the issue is one of balancing relations among the Arabs, the Americans and the Iranians.
The issue that will drive Turkish involvement is not Iraq per se, but the issue of the Iraqi Kurds' relative independence leaking across the border into Turkey's own Kurdish minority. Neither Iran nor Turkey wishes to see the Iraqi Kurds independent (or even autonomous) -- a commonality that could allow Iran to play a Turkish card in its talks with the United States. Add in the oil fields of Iraq's Kirkuk region to Ankara's planning, and Turkey's long-term interest in northern Iraq will only grow in the months ahead.
The Turks do not want to invade the Kurdish sections of northern Iraq -- which would be a messy affair in any permutation -- but they will if they have to, in order to protect their interests. That goes doubly should the Iranians ever begin exercising direct control over southern Iraq. This is unlikely to occur, but the Turks are nervous and their military is ready. In an effort to prevent such a scenario, Ankara, despite its unprecedented tensions with the United States over the decision to engage in regime-change in Iraq, will work the diplomatic circuit in Washington and in the region to contain further deterioration in the conditions in Iraq.
The fourth quarter will see Ankara more involved in all things Iraqi than it has been in a generation. Diplomatic and small-scale military operations against the Iraqi Kurds could help seal the rift between the quasi-religious AK Party government and the secular-minded military, in addition to serving very real Turkish security interests.
Eurasia: The Bear Reclaims its Turf
Russia has two clear choices for its course in the last quarter of 2007: strike a deal with the United States that will land it the former Soviet space in exchange for Iran or buckle down for a series of lightning offensives in that space to root out Western influence. Russia's path depends entirely on whether the Bush administration is capable of not only consciously signing away allies throughout the former Soviet Union and its periphery but actually bringing diplomatic tools to bear to firmly explain to these allies that Russia is now in control.
For Russia not to proceed on a path of confrontation, the Bush administration will have to have some very uncomfortable conversations with the governments of the three Baltic states, Poland, Georgia, Azerbaijan, Moldova, Kosovo and pro-Western elements in Ukraine. Each of these states saw in the third quarter, as Stratfor expected, a much stronger and more forceful Russia. From a diplomatic crisis with Estonia to bombs falling into fields in Georgia and missile defense extensions in Azerbaijan, Russia has at least laid the groundwork with each of these countries for a geopolitical push forward. Inevitably, a host of these entities will face pressure from Russia. The question is whether they will have any U.S. support -- even if it is largely rhetorical -- when that pressure hits.
But this does not mean Russia has a clear path ahead of it. One massive obstacle could prevent Russia from seizing this historical opportunity: Russia's own government.
Russian President Vladimir Putin is -- at least formally and constitutionally -- in the process of leaving the Russian political scene. His second term expires in March 2008 and he is constitutionally barred from running for a third consecutive term. Elections from the rubberstamp Duma will be held in December, with two parties created by Kremlin strategists likely to win a clean sweep. The details of Putin's "transfer" of power are entirely up to him (he has been grooming First Deputy Prime Minister Sergei Ivanov as his successor). Putin's power is so absolute that Russia is only a democracy on paper. The transfer will go exactly as he orders it to, and if he chooses to stay at the helm in name or in fact, he will.
The transition is not the threat Putin fears. The power struggles accompanying it are.
None of the power players in Russia feel confident in their position or in what Putin will do next, and most are scrambling to secure a personal stake not just in the ministries and state firms they currently control but also in others' realms of power in order to secure their futures. All are anticipating Putin's eventual departure and are hoping that, by making their moves now, they can secure a larger slice for themselves in the post-Putin order.
Putin's solution will be to convince all players in Russia that the 800-pound bear is still very much in the room. In the final month of the third quarter, Putin dissolved his Cabinet, in large part because Prime Minister Mikhail Fradkov dared threaten to cause problems for Putin if Fradkov were not granted control of the banking sector. More shakeups are in the works, and the chaos created thus far foreshadows the painful falls of some of Russia's most powerful. If Putin cannot contain his "friends'" ambitions quickly and completely, his focus will be diverted, hindering his ability to pursue Russia's national self-interest while the United States is distracted.
One of the largest battles will be to rein in the fighting between Russia's energy champions -- Gazprom and Rosneft. Each company has been undermining the other at every opportunity for months. Both have a vested interest in having their Kremlin loyalists placed in key positions throughout the government, and neither has particular scruples about a course of action -- that, despite the fact that Putin has already dissolved the Cabinet once. Putin wants to keep unbiased parties in influential energy-related positions, but if past is prologue, even perfectly disinterested faceless bureaucrats develop ambition when placed at the helm of key assets (case in point: Fradkov used to be the quintessential faceless bureaucrat).
Other raging battles include, but are not limited to, keystone companies such as Norilsk Nickel, diamond giant Alrosa and industrial giant Power Machines. The consolidation of the defense industry into the behemoth state-run Rosoboronexport will further pull in private defense, engineering and production companies. Though battles for these firms lack the no-holds-barred feeling of the Rosneft/Gazprom war, all can safely be characterized as the triumph of fear and greed over loyalty and patriotism.
As these battles heat up, Putin could be forced to change not only the management of these state/corporate giants but also how control is kept over these national champions. Such massive shifts so late in the game would not just be jarring to Russian power centers and market operations but also hugely time-consuming for a president who so direly needs to focus his attention elsewhere.
However, assuming for the moment that Putin is able to quickly rein in his rogue allies either via patriotic or personal appeals or by convincing them to commit suicide, his only problem will then be to choose which geopolitical assaults to make while the United States is preoccupied.
Moscow has an overabundance of opportunities to choose from. Many of these opportunities do not require Russia to act boldly, but even small interferences can trigger alarm and pushback. Putin knows from personal experience -- like the 2004 Ukrainian elections, when his campaigning for the pro-Russian candidate contributed to a nationalist backlash and the Orange Revolution -- that too bold an effort can make Russia its own worst enemy. The trick for Putin will be to rank these opportunities in terms of importance, and then scale them for time criticality and likelihood of pushback. Stratfor's assessment of Putin's thinking -- in order of likelihood of action -- is as follows:
1. Russia will surge troops into Chechnya, Ingushetia and Dagestan -- all of which are technically part of the Russian Federation -- in order to prevent even a hint of rebellion from spilling into the media. Before Russia can move against foreign targets, it must first clean its own house.
2. Ukraine is in flux again. General elections Sept. 30 will usher in a new parliament and prime minister. As this forecast goes to print, polling data indicates an even split between pro-Western and pro-Russian forces. Despite the risk of triggering another Orange Revolution, Russia must secure Ukraine. Without it all other efforts to expand Russian power are meaningless. It is Ukraine that has the buffer space, the industrial integration, the infrastructure, the warm water ports and the ethnic Russian population that Russia needs to make all other potential successes worthwhile. Russia needs to intervene to ensure a pro-Russian victory, somehow delay or scupper the elections or, should those elections result in a pro-Western government, find some way to trigger a crisis to prevent that government from taking root.
3. Right behind Ukraine is the Caucasus state of Azerbaijan. While Baku would like to exert independence from Moscow, its government fully realizes that it is too isolated to expect any meaningful help from the two other players in the Caucasus -- the West and Iran -- particularly considering the way the wind is blowing. Baku will bend to reasonable Russian demands in order to avoid punishment, and that could include changes that damage the billions in energy investments that Western firms have poured into Azerbaijan. In the unlikely situation that push comes to shove in Azerbaijan in the fourth quarter, Russia is the primary security guarantor for Azerbaijan's chief rival -- Armenia. A few arms shipments would be more than enough to plunge Azerbaijan into another destructive war should the need for an excellent distraction arise.
4. There are two locations that would not only assist the rectification of Russia's security profile but also drive home how powerless the United States would be to stop a Russian onslaught: Georgia and the Baltic states.
In Georgia, the government's need for U.S. power is palpable and local capabilities are negligible. Georgia sits on Russia's traditional border and therefore plays a key role in Russian security. Without Georgia in the Russian sphere of influence, Russia can never fully secure the Northern Caucasus, which includes Chechnya. At a minimum, Russia must convince Georgia that it cannot call upon U.S. assistance, and the best way to do this would be to take unilateral actions against the territories of Georgia's two secessionist (and pro-Russian) regions: Abkhazia and South Ossetia. Russia does not need to annex these territories outright in order to break Georgia, but as the clock ticks, such actions become ever more likely.
The Baltic states of Estonia, Latvia and Lithuania are former Soviet republics. All three have joined the European Union and NATO and use that status to frustrate Russian relations with the West, and all three are blocking Kremlin attempts to extend its energy influence deeper into Europe. A Russian-Baltic crisis would not only prove U.S. impotence as a Russian-Georgian crisis would, but it also would likely make a mockery of both European and NATO security pledges. However, because such actions could provoke responses from the core European states of Germany, France and the United Kingdom, Moscow is unlikely to move against the Baltics until such time as American impotence has been clearly demonstrated -- likely after a Georgian crisis. But whatever form it takes, the Russians will be unpredictable and will not give the West much time in order to minimize the chances of a unified Western response.
5. Two other paths are less likely to be pursued unless Russia first racks up significant successes elsewhere:
Moldova, where Russian troops are backing up the secessionist enclave of Transdniestria. However, though gains here would be easy, it is difficult to break a state more than Moldova is already broken. Additionally, since Moldova lacks strong relations with NATO and the European Union, damaging this poor state further does not prove much of a point to anyone -- although it would allow Russia to more firmly bracket Ukraine with both political and military power.
Central Asia, where the Russian calculus is far more complicated. Western influence in this isolated region is already at decade lows, but Russia's concerns here are not with the West -- they are with China. Beijing's efforts to ensure energy security have turned it away from maritime transport for oil and natural gas and toward the riches of Central Asia, where China is in the process of funding and building a number of pieces of infrastructure to fill its needs. However, Russia sees this region as its exclusive playground. Russia cannot have simultaneous struggles with the Chinese and the West. So though Russia feels it needs this region for its resources, its people and its buffer, this is a fight that Russia is likely to postpone -- unless, of course, Russia feels it is going to fall so far behind the Chinese that the region will be gone forever. The country that seems most likely to trigger a Russian reaction is the one that is shopping in all directions for new partners: Turkmenistan.
In the third quarter, we forecasted that the Russians and Germans were gunning for a fight over the Serbian province of Kosovo, and that the only way it would not erupt would be if the United States managed to shelve the conflict for another day. The United States proved successful, dodging that particular geopolitical bullet, and though this forestalled a conflict, now Russia also has an ace in the hole in case its expansion plans go drastically wrong. Russia can use this either to throw NATO into crisis or simply as a show of strength.
Russia is the primary backer of Serbia -- a state still reeling from its defeat by NATO in the 1990 Kosovo war. Though Russia cares little for Kosovo, it retains the ability to, among other things, trigger a crisis with NATO, or an outright war between Serbia and Kosovo. In either scenario, NATO and European credibility would be on the line, and U.S. assistance could well fail to appear.
Moscow's connections to its fellow Slavs allow it to light this powder keg any time it wishes to, but until the Western states either formally push for Kosovar independence, the Kosovars ignore Western caution and declare independence themselves (which could happen in December) or Russia feels pressed on issues of critical importance elsewhere, there is no reason to burn this asset.
Of the various European powers, only two have the flexibility and positioning to impact the Russian surge.
The first is Poland. Poland is not just watching Russia's resurgence, but has been preparing for it by solidifying its alliance with the United States. Decisions on ballistic missile defense are being finalized, and Poland continues to push for greater military integration. The current government is not only extraordinarily combative but is also facing an election Oct. 21 in which Poland's position in relation to Russia will be the central issue. In any Russian efforts in the Baltics or Ukraine, Polish interests would be directly affected, and Warsaw knows full well that one of the few ways to counter Russia would be to offer the United States a military base.
The second state is Germany, and in the past year Berlin has played a more powerful role in shaping European expectations and plans than in the previous 60. As Stratfor expected, France's changing of the guard in the third quarter resulted in Paris' alignment with Berlin and Washington. So a stronger Germany stepped in to fill what had been Paris' role. Breaking German morale will be a critical goal for the Kremlin, for if Germany fails to create a bulwark against Russian expansion, Poland will stand utterly alone. The fourth quarter will resonate with German attempts to foster a sense of European camaraderie, but in the face of Russian determination, Berlin will have to come up with something more substantial than simple diplomacy.
East Asia: Watching and Waiting
The fourth quarter will be an unstable one for East Asia. This instability can be interpreted through two lenses.
First, though Russian opportunism is intended to focus largely on the United States, Moscow has been uncharacteristically active in Asia as well. As the Kremlin racks up successes, it will naturally seek to capitalize on its momentum, and this will bring it into growing contact with an increasing number of East Asian states. For Asia, the Russian expansion brings a great deal of uncertainty. Russia -- even in Soviet times -- has never really been an Asian power.
For East Asia, therefore, the fourth quarter will be a time of evaluation as the local powers attempt to understand Russia's motivations, strengths and arrestors. Alignment with or opposition to Russian goals cannot happen until the Asians know what Russia is up to, but everyone has an initial opinion. Japan perceives the Russian intrusion as unwelcome, seeing Russia as a competitor for political, economic and military influence. Indonesia sees Russia as a potential investor, and few understand how investment and political influence meld better than Jakarta. Taiwan views a Russian expansion as a potential lure to draw the United States deeper into the region. It is unlikely that any Asian states will take any but the most tentative steps to deal with the Russians in a meaningful way, but all will be watching closely.
However, there might be one exception: China. Beijing will be paying the most attention to Russian activities because, after 16 years of pretending that all is friendly in bilateral relations, the two giants' national interests are beginning to overlap in uncomfortable ways.
Beijing's regional and global actions will continue to be driven and shaped by its hunger for energy assets, and that hunger is taking it to the one place in the world where U.S. naval-based aircraft cannot interrupt China's supply chain: Central Asia. China's need for energy is leading it to fund the development of several pipeline projects aimed at tapping Central Asia's oil and natural gas resources. This infrastructure -- and not by design -- threatens to reorient the entire region away from Russia's previous dominance.
But the last thing Russia wants is a tussle with China in Central Asia while Moscow is attempting to expunge Western influence from its western and southwestern peripheries. For now, Stratfor expects Russia to work via the Central Asian states themselves to hold China at bay -- a strategy that has very little chance of success unless it is married to deeply personal threats against the Central Asian leadership that the Russians are willing to make good on.
Last but not least, East Asia is set for a season of political transitions this quarter.
The Chinese Communist Party's 17th Congress on Oct. 15 will give the world an idea of where and how Chinese domestic and international policies will be heading for some time to come. President Hu Jintao's choices for new ministerial positions also will give the world its first good look at who is likely to replace Hu in 2012. Where politics and economics collide, Beijing plans to firmly establish a sort of leadership over foreign businesses via the use of increasingly institutionalized anti-corruption campaigns.
Thailand's Dec. 23 general elections will mark the beginning of the end of the coup government and a return to what passes as stability in Thailand, no matter how chaotically the electoral campaign progresses. Elections in Australia (in late November or early December) and South Korea (on Dec. 19) also will generate much noise and drama, limiting these states' international impact but ushering in few changes of geopolitical significance.
Taiwan may yet attract some attention, however. As Stratfor forecast last quarter, Taiwan has moved noisily of late to keep the prospect of its U.N. membership on the front burner, forcing China to repeatedly work against it in the U.N. General Assembly, Security Council and Secretariat. With the Beijing Olympics drawing nearer, the rising rhetoric on this politically sensitive issue could be seized by a Democrat-dominated U.S. Congress to embarrass the Bush administration. Such a move would force the U.S. administration to pull the Taiwan issue back into its top-level negotiations with Beijing, something both sides are loath to do. As noted in Stratfor's last quarterly forecast, China has proven very successful at managing its relationship with the United States when it remains focused on bilateral trade and currency issues.
Ultimately, any Taiwanese concerns will lead the Chinese to signal Washington that, while they do not want a fight and do not have a horse in the Iraqi race, they do have options since the United States is tied down.
Yet, the combination of U.S. preoccupation with Iraq and Russian aggression throughout the former Soviet space is perhaps the best of all worlds for the Chinese. Not only can the United States not afford to dicker with Beijing, but China could trade the United States a favor and offer to serve as a check on Russian ambitions on at least one front: Central Asia.
South Asia: Focus on Pakistan
The coming quarter will be a noisy one for Pakistan, but that noise will not reverberate too far beyond its own borders.
After nearly eight months of intense political jockeying, Pakistan has finally reached its breakpoint. Pakistani presidential elections are to be held Oct. 6, but so far the only serious candidate is President Gen. Pervez Musharraf -- and the Supreme Court may well strike his candidacy down. With institutional coherence fraying, what remains is a contest of credibility between a presidency characterized by authoritarianism, a split opposition suffering from an exiled leadership, a military unable to keep order and an aggressive court system that can smash -- but not crown -- pretenders to the throne. In short, the old Pakistani political order is collapsing under its own weight, giving way to something new.
The most likely scenario will be sharply intensifying unrest and uncertainty as a weak and divided coalition government takes the reins -- even as a military demoralized by an ongoing insurgency attempts to maintain control of the country's economic life.
A new coalition government in Pakistan also spells trouble for U.S. counterterrorism operations. One of the few points the new government will agree on is a display of its ability to stand up to U.S. demands. With political sensitivities stark and the military in crisis mode, cooperation from Islamabad will be hard to come by.
Though India will be paying more attention to Pakistan this quarter, things have not reached a point where instability in the region warrants an Indian response. Pakistani instability does, however, give India an incentive to move closer to the United States.
India will be almost completely consumed this quarter with domestic issues. The one with international implications is the pending U.S.-Indian nuclear deal. India's leftist parties, fearful the deal will turn New Delhi into a U.S. lackey, are putting up a strong front and trying to kill the agreement. And with the U.S. election season gearing up, India cannot count on the U.S. Congress having the bandwidth to approve the deal before year's end.
Despite domestic opposition, India will inevitably reorient itself -- albeit clumsily -- toward the United States for its own geostrategic imperatives, but only over the long run. Such irresistible interests pushing India in this direction include: India's dire energy situation and a need to diversify its nuclear energy supply, the substantial military advantage it will have over Pakistan from the reorientation of the United States' alliance posture away from Islamabad and toward New Delhi, shedding the nuclear pariah status and gaining recognition among the world's major powers as a legitimate member of the nuclear club, and growing business ties with the United States.
For its part, the United States is interested in developing India as a strategic ally in the Indian Ocean basin because it would serve as a hedge against China's military expansion, safeguard U.S. interests in the Persian Gulf, diminish Russia's ties with New Delhi and sustain pressure on Pakistan for its counterterrorism operations.
Russia will exhibit its concern over the growing Indo-U.S. relationship, but ultimately there is little it can do shy of restarting Cold War-style subsidization -- something well beyond Moscow's means. Russia will turn to its traditional national champions -- energy and industrial defense -- to remind India of the benefits of staying "neutral." As Russia refocuses its defense priorities for its own growing needs, India finds itself far more interested in working closely with the West on defense matters.
India also faces a growing problem as Islamization in its restive northeast and instability in Bangladesh have created the conditions for Islamist militants to reach into India's southern financial hubs. This is a major security concern for India, and a good reason for New Delhi to pay closer attention to its northeastern regions and borders. As Stratfor forecast last quarter, the first hints of public backlash against the Bangladeshi military have surfaced, as the country's two traditional power brokers are working to undermine the military-backed interim government. This will intensify in the fourth quarter, with riots becoming a common manifestation of the rips in the national fabric.
India also must spare some attention for its northern border, where a peace deal it helped broker between the Maoists and the Nepalese government is unwinding. Though the Maoists are posturing for greater concessions ahead of November elections, New Delhi cannot afford to ignore the possibility that the Maoists could remilitarize. A return of the Maoist insurgency in Nepal would fuel India's own Maoist insurgency, seriously damaging the ruling Congress party's credibility.
In Afghanistan, there will not be much change in the military situation. The winter months typically lead to a drawdown in attacks and Taliban factions will entertain the idea of negotiations with Kabul while regrouping for the next fighting season.
Latin America: Function from Dysfunction
Latin American countries, as forecast, have remained significantly more concerned with domestic issues than with international ones. This internal focus appears to be aiding the region's development. Latin America's most deeply entrenched fault is its collective belief that the solution to its problems lies beyond its reach, and that all efforts should be dedicated to attracting or convincing an outside power to help the region overcome its difficulties, whether they be inadequate infrastructure, political stability or poverty. That mentality -- well over a century old -- is shifting, in part because the United States is so distracted that it seems the White House is only tangentially aware of Latin America's existence. The fourth quarter will see a number of Latin American states take great strides to better their lots on their own schedules, in their own ways, with their own abilities and for their own reasons.
By far the most dramatic example of this shift in mind-set and circumstance is Mexico, where President Felipe Calderon now has several victories under his belt. Calderon has pressed ahead with his agenda to repair the country after an inauspicious election and inauguration, winning plaudits for hurling the army at some of the country's drug cartels, as well as for his efforts -- successful so far -- to reform the country's tax laws.
These might seem like simple concepts to outsiders, and it is clear that the country's drug wars are far from over, but even attempting such actions is revolutionary in Mexico. The drug lords and the nonfunctional tax system have always been regarded as dark hallmarks of Mexican society that were completely immutable. Calderon's recognition of and actions against these problems have successfully debunked that belief, firing the public imagination with the idea that Mexico can be something other than a dysfunctional narco-state.
The fourth quarter will see Calderon challenge the next "obvious" fact about Mexico: that its energy sector is beyond reform. In the next 12 weeks, he will begin the process of constitutional revision necessary to allow foreign investment into the country's antiquated and failing energy sector -- a third-rail political issue if there ever was one in Mexico.
Other Latin American states also are taking matters into their own hands. Chile, fresh from signing free trade agreements (FTAs) with India and Japan, is starting to look at economically integrating with countries close to home as well. Ecuador has shied away from actions that would startle investors and is instead almost handily walking the tightrope between populism and economic orthodoxy, as Stratfor forecast. Peru plans to launch trade deals with both China and the European Union. Not only is economic growth perky in Panama, but the country's canal expansion plans also are moving along swimmingly, with foreign investors bidding enthusiastically on major projects. Both Peru and Panama should see their FTAs with the United States approved this quarter as well. Meanwhile, Colombia -- whose FTA likely will be stalled in the U.S. Congress -- is moving forward with plans to put its paramilitary problem to sleep once and for all.
Brazil is engaging in the largest domestic energy investment program Latin America has ever seen. One phase involves launching its ethanol plans, not just for the domestic market but also for the Caribbean and Central America. Another involves partnering with overseas states to facilitate the import of liquefied natural gas. Yet another involves cooperating with the United States and Norway to monetize its biofuels industry -- separately from the above plans -- for export to those markets. Perhaps the most interesting partnership is a new accord for cooperation between the energy sectors of Brazil and Mexico.
But not everyone is capable of making this break. Three states remain saddled with their domestic issues. The presidential election in Argentina will put the president's spouse in office, with the utter lack of policy changes that implies, despite rising inflationary pressures. Bolivia is so mired in constitutional revisionism that absolutely no progress will be made on any issue all quarter. And Venezuelan President Hugo Chavez has maintained his iron grip on the country; as forecast, he is flexing his muscle to intimidate Venezuela's nascent student movement. Signs of instability and inflation in Venezuela's domestic economy are becoming ever more worrying, even while the maverick politician keeps to his aggressive schedule of world travel.
This travel, however, is not all about ideological vanity. In one specific issue quite close to home, Chavez has made a bit of an unexpected breakthrough. The Colombian foreign minister has publicly said that the primary point of interaction between Bogota and the Revolutionary Armed Forces of Colombia (FARC) guerrilla movement should be through none other than Chavez. At first, this appears to be a massively confused move. For years, Chavez has allowed FARC limited access to Venezuela, and he even stands charged with arming its members. Why would Colombia possibly want Venezuela involved in the peace process?
A deeper look provides the answer.
First and foremost, making Chavez responsible for FARC puts the international spotlight on the Chavez-FARC link. Colombia benefits from that link being out in the open; after all, Chavez is indirectly sponsoring a civil war. Second, if Chavez fails, Colombian President Alvaro Uribe Velez's government feels there is little to lose, and if he succeeds in actually ending the war, no one will win more than Colombia. Third, Colombia is making substantial progress in disarming and reintegrating the country's paramilitary forces and engaging in peace talks with another rebel group; it cannot currently handle another major initiative. And finally, it is not like Bogota sees FARC as a problem it can solve any time soon. In Colombia's view, if -- on an outside chance -- a preening Chavez thinks he can resolve the problem, let him try.
Chavez's involvement, however, is about far more than simple public relations or ego. Since he has granted FARC sanctuary and weapons, he is in the unique position of being able to talk to the group. He actually does have a chance, however slim, of mediating a peace agreement that might stick, and the kudos for that would resonate far and wide, generating much of the international legitimacy that Chavez so craves. But imagine for a moment the implications of a success, considering that the United States has been supporting Colombia in its war against FARC for the better part of two generations and has, to date, failed to generate a sustainable peace.
This drama will not complete this quarter, but both Uribe and Chavez are convinced that the other carries the higher level of risk. Each believes that if anything actually comes of it, he will be the big winner. This balance -- or imbalance -- of perceptions is a win-win situation for both players. If a deal fails to materialize, it has cost Colombia nothing and Chavez little more than an admittance of what everyone already knows: that he supplies FARC. But if a deal emerges, Colombia's agonizing war ends and Venezuela will have rather conclusively proven that Chavez's methods can produce far more concrete results than anything the United States can provide.
Sub-Saharan Africa: The Dawn of AFRICOM
The United States' African Command (AFRICOM) will become operational as a sub-command of the United States' Germany-based European Command in October, and is expected to become a fully independent command headquartered somewhere in Africa -- odds are in Sao Tome and Principe -- a year later. The U.S. goal for AFRICOM is to consolidate and improve coordination of Pentagon activities in Africa under a single command. Currently, the United States carries out counterterrorism operations primarily in the Horn of Africa region and the Sahel region of West Africa, and limited support for U.N. peacekeeping operations in countries including Liberia and Sudan. The United States also plans to add improved maritime security for the Gulf of Guinea to AFRICOM's list of competencies.
The fourth quarter will be a time of AFRICOM diplomacy. Pentagon and U.S. State Department personnel in Africa will explain to African states precisely what AFRICOM is intended to do, with the hope that it will allay concerns that the United States is making a power grab. It is U.S. intent to only work with states that welcome AFRICOM. Those soothing words might be true, but many African states rightly fear AFRICOM's activation. By its very nature, AFRICOM will assist states friendly to an insertion of U.S. influence, which in and of itself -- without any specific planning by Washington -- will alter the balance of power of the continent. And that is before increased competition with an increasingly present China -- whose economic initiatives are now backed up by a few hundred billion in excess foreign currency reserves -- is taken into account.
Every state eager to coordinate activities with the United States and work with AFRICOM is about to get a leg up in inter-African competition. Pro-American Liberia -- until recently a failed state -- just got a fresh lease on life. Mali, Djibouti, Tanzania and Kenya now too have less to worry about in terms of their neighbors, although all -- especially Kenya -- will do what they can to publicly downplay the extent of cooperation with the United States in order to avoid domestic backlash from Islamists. Perhaps the biggest boost will be for Ethiopia, which stands to benefit mightily from the intelligence and even weapons that will flow from the United States toward the common cause of fighting against Islamist militants, particularly in Somalia. That support will be greatly needed, particularly as Ethiopia's Somalian occupation encounters greater instability and violence -- a trend Stratfor identified in its previous quarterly forecast.
Conversely, states aligned against the United States and its AFRICOM allies face a new obstacle: The United States is squarely in their path. The country most outraged by AFRICOM'S existence is Eritrea, which now faces the United States formally backing archenemy Ethiopia on all major fronts in the Horn of Africa.
Right behind Eritrea are Africa's two regional hegemons -- South Africa and Nigeria -- that fear AFRICOM will provide a defensive bulwark to states in their subregions. South Africa's neighborhood is more or less happy with Pretoria's leadership, providing fewer openings for the Americans. This provides South Africa with more time to carry out its own leadership transition. Though the race has opened up to include a few competitors, no one has gained sufficient traction to surpass Jacob Zuma as the leading candidate to take over the country. But Nigeria has a great deal to lose. Equatorial Guinea, Sao Tome and Principe and Cameroon in particular resist Nigeria's sometimes overbearing influence and look forward to leveraging AFRICOM in order to emerge from Nigeria's long shadow.
Luckily for Nigeria, however, the political instability brought about by its long election process is finally over. And as Sratfor forecast last quarter, newly elected Nigerian President Umaru Yaradua has strengthened his hold over the Nigerian political system by using the very Niger Delta issues that have long threatened the federal government. For Yaradua and Nigeria, the fourth quarter will be a time of consolidation. The full power and grace of the Nigerian state will be brought to bear against the militants of the Niger Delta. The power lies in the militants' newfound lack of political patrons; candidates' efforts to stir up trouble as part of efforts to alter the power structure are over, so the militants -- for now -- are not needed to serve political purposes. The grace is that these candidates have actually come to power, and Abuja has finally prioritized addressing the grievances of the Niger Delta region. Some of this is manifesting as protection money being paid to the region, but there are signs real change could be coming. The fourth quarter will see Nigeria prepare for a national conference on how to more equitably distribute oil monies -- a core concern in the Delta region. Of course an outright cessation of militant violence is not likely, as Abuja will never allow the region the 50 percent of oil revenues being demanded (up from 13 percent). And the politicians inevitably left out of the ensuing payoffs will not have forgotten the successful use of militant groups such as the Movement for the Emancipation of the Niger Delta as a means to force the government to meet their financial concessions.
In short, Nigeria will be about as quiet as it is capable of being. The militants are being betrayed by their former masters, even as Abuja is taking tentative steps to address those same militants' concerns.
Global Economy: Moving Toward Slowdown
The strong economic growth that began after 9/11 has tapered off and the question now is whether recession -- perhaps a global one -- will ensue.
Despite the fear that predominated in the aftermath of the 9/11 attacks against New York City and Washington, D.C., the tragedy actually ushered in a period of broad prosperity on a global level. This period of exceptional growth proved to be among the fastest globally in the post-World War II era, with the United States clocking in at a very respectable average quarterly growth rate of 2.8 percent.
There were four causes behind this growth.
First, the Organization of the Petroleum Exporting Companies -- for fear of breaking with the early international consensus after the attacks -- raised oil output levels instead of restraining them as originally planned. Second, all of the major governments passed hefty stimulus packages in order to bolster growth. Third, central banks the world over pared interest rates to the bone to encourage demand. Fourth, the Asian financial system infused massive amounts of capital -- both in terms of government currency reserves that were boxed up primarily in U.S. T-bills and simple capital flight -- into the international system, compounding the impact of the low interest rates. This fourth factor predated the 9/11 attacks, and its single largest contributor, of course, was China.
Ultimately the last two factors -- which resulted in a flood of cash available for any project or loan under the sun -- proved the most critical features, drastically reducing the cost of capital the world over. Money became very cheap indeed, and growth spread everywhere.
In the six years since, however, the first three of these factors have evaporated completely; oil prices have rocketed skyward, the stimulus packages have long since run their course, and interest rates have been steadily pushed back up in to "normal" territory.
In the third quarter, the fourth factor began to fall away as well. The Chinese changed the way they managed their currency reserves, launching a sovereign fund to invest their monies in a way more in line with Beijing's political goals rather than blindly pouring it into U.S. T-bills. Stratfor failed to predict this significant financial shift. Many other Asian states tend to ape China's actions, suggesting that this secular shift will only gather steam in the months ahead.
Moving forward, of critical importance to the various portions of the global economy will be where the Chinese (and other Asian states) ultimately choose to invest their spare few hundred billion dollars, as the excess liquidity they have provided the globe these past five years will be concentrated in specific regions. Currently, signs point to two primary points of concentration: acquiring raw materials and reforming portions of the Chinese economy. If one can get access to this politicized capital, the future will be very bright indeed, regardless of what happens to the international system. For everyone else, however, the heady days of cheap capital that resulted from China's uncertainty about what to do with its massive currency reserves are over.
This change in environment -- the evaporation of the four factors -- has put the brakes on growth. Growth in Japan has turned negative, the major European economies have slowed by more than two-thirds in the past year, and the U.S. Federal Reserve is slashing interest rates to prepare for a U.S. slowdown. It is an open question whether Europe or the United States will suffer a recession, but a slowdown is certainly in the cards.
In the past few months a number of negative developments -- the subprime crisis, the Iraq war, the rising possibility of a conflict with Iran, slips in the housing market, high oil prices -- have battered the U.S. economy and markets from a number of angles, and yet that economy and her markets are still marching forward. Yes, liquidity is drying up for a number of reasons, but the shifts are orderly, rational and in terms of scale not particularly abrupt. This suggests a powerful economy that will not suffer a recession, but a slowdown.
Local factors will undoubtedly compound the change of environment and push the economies of the developed world further down. The resignation of Japan's most recent prime minister, Shinzo Abe, is a massive blow to a Japan that was hoping against hope that it had finally turned the corner and escaped deflation, recession and political instability. High consumer debt levels in the United Kingdom -- even higher than they are in the United States -- could well turn one of Europe's star economies into a millstone. And the subprime mortgage crisis in the United States is sapping strength from the housing sector at a time when its previous strength is sorely needed. But is the evaporation of broad international forces that are driving this economic shakeout.
In addition, Germanys leader Merkel said Sept. 20 over the direction of the European Central Bank (ECB), that Germany will fight any attempts to "challenge the central bank's independence." Ans since this might not just be of influence during the next but indeed, the next three, quarters we will look at it in some more detail because it highlights geopolitical realities that make a single eurozone in Europe, monetary policy intrinsically unstable.
Continental Europe's major economies agreed in 1992 to establish the ECB as part of the Maastricht Treaty, which led to the creation of the European Union as we know it. The ECB came into being in 1998 to further integrate the economic policies of 11 nations that would then participate in the eurozone. (Thirteen nations now use the euro as currency.) Its primary mandate is to maintain price stability, which generally includes keeping inflation low. It does this by shrinking or expanding the money supply, much like the U.S. Federal Reserve, by altering interest rates. Lower rates expand the money supply and increase loan availability to businesses. This typically results in greater economic growth, but risks inflation, whereas higher rates contract the money supply and the availability of loans for businesses and consumers but increase price stability and a currency's purchasing power.
In order to fully bring Germany into France's vision of a politically and economically united Europe, France agreed to Germany's demand that the ECB be modeled on Germany's own central bank, the Bundesbank, which has a long history of independence from government interference and places a high priority on keeping inflation low. This is at odds with the French banking system, which traditionally features government involvement and inflation-prone economic policies. France agreed to base the ECB on the German model because, at the time, Paris felt that German integration into the European Union was worth giving up some economic sovereignty.
As a result of this agreement, President Sarkozy's recent attempts at liberalizing economic reforms in France are running headfirst into an EU monetary policy that mostly reflects German interests. In response, Sarkozy is calling for the ECB to focus more on the economic growth goals of eurozone nations, as opposed to inflation targets. Primarily, he wants the ECB to lower interest rates, which would weaken the euro and increase inflation but increase French exports by making them cheaper on the world market. Although Sarkozy's recent criticism that ECB policies are harming France's economy might be political -- his intent could be to use the central bank as a scapegoat for France's ills as he pushes through controversial reforms -- the current mandate of the Frankfurt-based ECB does favor Germany's economy over France's.
France has frequently proposed reforming the ECB and has recently advocated enshrining changes in the EU constitution that would decrease the central bank's independence. Constitutionally changing the ECB would require a unanimous vote among eurozone nations; Germany could veto any changes, ultimately forcing France to negotiate directly with Germany if it is serious about reforms. Still, France might seek an alliance with other eurozone nations that have qualms with the ECB in order to pressure Germany on the issue, and could even threaten to withhold support for a new EU treaty on the issue.
ECB policy will always reflect the needs of the largest member economy -- Germany, which represents one-third of the eurozone economy. This is not necessarily because of direct political influence on Germany's part, but rather because the bank must address the largest factor affecting inflation first in order to meet its inflation-fighting mandate; pumping money into or out of the eurozone based on the Netherlands' economic situation would be quite futile. Thus, Germany is in the driver's seat of EU monetary policy, with support from many Eastern European countries that are happy with foreign investment-inducing and currency-stabilizing high interest rates.
Geopolitically, Germany -- a nation with few natural resources and a large population -- perpetually will have to be an innovative and financially disciplined economy. France, while not a high-tech or industrial laggard, will always be a less efficient and more agriculture-oriented economy and will depend less on a strong currency to import resources. Germany will want less government interference in the economy, lower inflation, a stronger currency and higher interest rates, since it is more dependent on import provisions because it has a larger population and a less productive agriculture sector than France.
High ECB interest rates also help attract capital inflows to the European Union from other lower-interest rate investment destinations such as the United States. This works well for Germany's innovation-based industrial technocracy economy, which is ever-hungry for more capital.
The ECB's current focus is on keeping inflation in line and maintaining a strong euro, which has favored -- and continues to favor -- the German economy, as Germany produces goods that are high-quality, less-price sensitive and in higher demand than other EU member nations' exports. Even with a stronger currency, an importing nation outside the eurozone would not be able to find substitutes for specialized industrial and high-tech German goods easily, but it would be simpler to find replacements for relatively low-quality and agricultural exports from France (and from other eurozone economies, such as Italy and Spain).
France's generally weaker economy -- the European Commission announced in early September that it expects Germany's economy to grow 2.4 percent in 2007, while France's growth is expected to be 1.9 percent -- would benefit from lower interest rates and a weaker currency. However, Germany has little interest in changing a monetary policy that helped it grow and maintain a very large share of total eurozone exports -- the value of extra-eurozone exports (trade outside of the eurozone) totaled roughly $1.96 trillion in 2006, with Germany representing $724 billion (36.9 percent) of that total.
Setting a single monetary policy for France and Germany, not to mention the 11 other eurozone nations, will always be difficult since their economies are quite different in composition. Within the eurozone, there are large and small technocracies; large and small industrial economies; and large and small agrarian economies. Each will experience business cycles of demand and supply that do not overlap, meaning an expansionary monetary policy designed to spur demand in one country will threaten business competitiveness and heighten inflation in another. Contrast this with the United States, a large, complex economy with 50 state governments and a single monetary policy. The U.S. Federal Reserve has endless problems fashioning a single monetary policy for a country with regions that are very diverse in wealth and economic structure; Europe's more rigid labor laws and cultural and linguistic differences make the ECB's job even harder than the Fed's.
France signed onto the Maastricht Treaty as a political project under Gaullist leadership in order to control German national ambitions and further French political interests on the Continent. France has brought Germany into the fold of the European community and thus increased its own security, but it has spurred German economic growth and political dominance on the Continent. Germany is usurping French political dominance in Europe, so the newly assertive French government is seeking to redefine its role in Europe and the world. Meanwhile, the French public is increasingly wary of losing control over not only its economy but also its culture and national sovereignty to further EU integration.
Sarkozy wants strong economic growth in France to reduce unemployment and allow him to propose economic reforms while his popularity is still high. A lower eurozone interest rate would weaken the euro and make euro exports more competitive while increasing domestic business activity by making it easier for consumers and businesses to take out loans. Sarkozy has repeatedly called on the ECB to pursue a more pro-growth strategy beyond the bank's treaty mandate of maintaining low inflation; during his election campaign Sarkozy advocated amending the ECB mandate to redirect the bank's policies toward job creation and economic growth.
In the short term, when the ECB Board of Governors meets in early October, it will likely dig in its heels and fight any further pressure from Sarkozy. And unless the ECB is altered -- which is not likely any time soon and will probably only happen if the issue becomes a deal-breaker for agreement on a new EU treaty -- it will continue to pursue policies that are generally to Germany's benefit. As long as the French economy does not slow significantly, Sarkozy could be able to continue his rhetoric and pass economic reforms.
Larger problems loom if Sarkozy is serious about tying ECB reform to support for a new EU treaty. France is pushing to list the ECB in the EU treaty as an EU institution and delete any emphasis on the bank's independence. Other countries, such as Italy and Spain, have made similar though less strident criticisms of ECB policy in the past. They will generally align with France on this issue, though recent remarks from Italy and Spain diverge on the issue: Spanish Prime Minister Jose Luis Rodriguez Zapatero said in September that interest rates have reached their peak, while Italian Finance Minister Tommaso Padoa-Schioppa said that a strong currency would force Italy to make much-needed economic reforms. Both comments reflect the different temporal economic realities of each nation and underscore the perpetual conflict that will persist if the status quo continues.
However, holding the EU treaty hostage over ECB reform could ultimately be a moot point if the desired changes are lost among myriad other unresolved issues, such as the larger questions of sovereignty and voting rights.
Current European political and economic integration has proceeded as far as it can without fundamental changes in the character of Europe's nation-states; the differences between Germany and France over interest rate moves represent the fundamental difficulty of coordinating economic policy for many quite different economies -- a dilemma that will hamper further EU negotiations and expansion. If France can establish alliances with other eurozone nations interested in reforming the ECB, deliberations over a new EU treaty will be further complicated, and a fundamental reassessment of the economic sovereignty of member-nations will be in order.
Much as European political integration was seriously derailed in 2005 when France and the Netherlands rejected the EU constitution, further economic integration will not proceed unless France gets its way in reforming the ECB or the French economy does indeed liberalize, as Sarkozy is proposing, and align more closely with Germany's economy. France's strategy will become clearer in the summer of 2008, when it assumes the European Union's rotating presidency.
And finally as per today, Sept.26, 2007; U.S./PERU: The U.S. House Ways and Means Committee approved a free trade agreement (FTA) with Peru on Sept. 25. The accord was passed in a "mock" hearing that gave legislators a chance to offer amendments to the deal before its submission to Congress for a formal vote. No amendments were suggested. Congress now has 90 days to approve or reject the agreement without filibuster or changes to the deal. The Senate Finance Committee gave its initial approval to a draft of the agreement Sept. 21. FTA talks between the United States and Peru were concluded nearly two years ago; Peru ratified the agreement in 2006, but the deal has languished in the U.S. legislature amid concerns related to labor and environmental conditions in the South American country. Peru made changes to the deal in June and has since lobbied heavily for U.S. approval. The passage of Peru's FTA is particularly significant because Washington is facing political obstacles to the approval of two other proposed FTAs with Latin American countries Colombia and Panama.
RUSSIA: Gazprom and the Siberian Coal Energy Co. (SUEK) said Sept. 24 that they will sign a deal for their long-awaited joint venture before the end of the year. The continually postponed agreement will put Gazprom in charge of 30 percent of SUEK's capacity -- something SUEK has fought, though a political falling out between SUEK owners Andrei Melnichenko and Sergei Popov has allowed Gazprom to move in. Gazprom intends to use SUEK, Russia's largest coal producer, to increase its use of electricity from coal from 13 percent to 35 percent by 2015, freeing up more natural gas for export. There is speculation, though, that Gazprom intends to move in on SUEK beyond the joint venture.
NIGERIA: The Nigerian militant group Movement for the Emancipation of the Niger Delta (MEND) said Sept. 23 it has ended its cease-fire with the Nigerian government. In an e-mail statement, the group said it will carry out attacks against the Niger Delta region's oil infrastructure and kidnap expatriate oil workers. MEND, which began its campaign of attacking and kidnapping in late 2005 and succeeded in disrupting one-third of Nigeria's oil output, had been relatively quiet since Nigeria's new government, headed by President Umaru Yaradua and Vice President Goodluck Jonathan, was inaugurated May 29. The MEND threat is seen as credible, though its capabilities have been degraded as a result of Nigerian military operations against it and the loss of its leader's political patronage.
SAUDI ARABIA: The World Bank on Sept. 25 recognized Saudi Arabia as one of the top global reformers in its annual "Ease of Doing Business" report. Recent reforms in Saudi Arabia improved the kingdom's position from 38th to 23rd in the 178-country ranking. The report calls Saudi Arabia the best place to do business in the entire Middle East and Arab world, ahead of Kuwait (ranked 40th in the world) and the United Arab Emirates (ranked 68th). The Saudi kingdom has made huge strides since 2003 to attract investment, motivated largely by Riyadh's need to engage in damage control after the 9/11 attacks. But the law of unintended consequences is creating another dynamic in the country; reforms to the financial and economic sectors have spilled over into civil society, where Saudis are demanding more freedoms. The challenge for the Saudi government is to maintain power while pushing ahead with reforms, which will not be limited to the money markets.
IRAQ: Iraqi Deputy Oil Minister Ahmed al-Shammaa said today that Baghdad will sign a $40 million contract with an international firm to design a $2 billion refinery with a capacity of 300,000 barrels per day (bpd) in the southern city of An Nasiriyah. Meanwhile, another refinery is planned in Karbala, with a capacity of 140,000 bpd, for which the ministry has invited companies to submit design bids. Both of these planned refineries will be located in the southern Shiite heartland. Not only will the refineries help the Iraqi Shia consolidate their hold on power, they also could become a source of cheap gasoline for Iran, which has very few refineries of its own and must import fuel to meet its domestic consumption needs.
TURKEY: Huseyin Saltuk Duzyol, general manager and chairman of the board of Turkish state-controlled pipeline company Botas, said today that Ankara cannot disregard Iran on political grounds and needs the Islamic republic "from a commercial point of view." Duzyol added that Iranian natural gas is necessary to fill the Nabucco pipeline. He explained that though Turkmenistan, Azerbaijan and Kazakhstan will be able to produce a combined 90 billion cubic meters of natural gas in 2020, Iran will be producing that amount by itself. Duzyol's comments, which followed U.S. calls for Ankara to cut business ties to Iran, indicate a growing change in Turkey's foreign policy regarding Washington in the context of Iraq. It seems the Turks are no longer merely using Tehran as a card to extract concessions from Washington on the Kurdish issue; instead, Turkey is now seeking a balance between its relations with the United States and Iran.
CHINA: A number of Chinese government-funded projects have been suspended in the wake of the latest corruption scandal to hit Philippine President Gloria Macapagal Arroyo's administration. The rival bidder for a $30 million telecommunications deal between Manila and ZTE Corp. -- China's largest telecommunications equipment manufacturer -- has accused Arroyo's husband of interfering to secure ZTE's victory. Arroyo subsequently suspended this and other Chinese-backed projects and established a special government panel today to monitor all ventures backed by Chinese funds. Although this incident will hamper Beijing's "go outward" strategy for securing overseas energy assets and maximizing foreign business exposure for its state companies, it is unlikely to stop China from continuing to invest in the Philippines. As in Africa, Beijing is expected to use its diplomatic leverage to unfreeze the deals.
The U.S. Senate approved a nonbinding resolution today to divide Iraq into semiautonomous Shiite, Sunni and Kurdish regions. The plan, proposed by Senate Foreign Relations Committee Chairman Joseph Biden, passed by a vote of 75-23.While Kazakhstan cannot compete with Russian natural gas reserves -- the largest in the world -- it does boast a significant 2 trillion cubic meters in proven reserves, and intends to produce a great deal of natural gas as a consequence of deposits overlaying its oil extraction plans.