Eurasia had an active past months, and we expect the third quarter to be just as busy if not more so. The main driver for the first half of the year has been Russia 's continuing political and economic internal consolidation. The second half of the year will see Russia push back against its encroaching adversaries and try to regain its lost empire.The one snag in Russia 's plans is that it expected to have until at least 2009, when U.S. President George W. Bush leaves office, to orchestrate its re-emergence. Russia was counting on the United States remaining tied up in negotiations with Iran over the future of Iraq, but the prospects -- whether real or imagined -- of positive negotiations have shortened Russia's time frame. Thus, Moscow will have to move quickly to push its regained might into its periphery and Europe before the United States -- the one power that can really stand up to Russia -- regains the bandwidth necessary to take on its former Cold War adversary.
Russia has been rather successful in its domestic consolidation and is now confident enough to move outside its borders. But before Russia can take on the United States and Europe , it needs to get its empire back, which means securing its periphery. Moscow has tremendous opportunities to do just that, since much of its periphery is destabilizing to the point where Russia could stroll in and retake control.
In Central Asia, as, Russia saw great prospects in its dealings with Kazakhstan . Kazakh President Nursultan Nazarbayev made it clear this past quarter that he would rather do business with Russia or China than with the West. Now Russia has to secure its ties with the increasingly authoritarian Nazarbayev in order to prevent Kazakhstan from making deals with China that will undercut Russia 's interests.
With Uzbekistan and Tajikistan already devoted to the Kremlin, Russia will increase pressure on the other two Central Asian states: Kyrgyzstan and Turkmenistan . Moscow wants U.S. forces evicted from their base in Kyrgyzstan , and with the country near a political breaking point, now is the time for Moscow to act. Turkmenistan also is politically fragile, since President Gurbanguly Berdimukhammedov came to power just six months ago. Berdimukhammedov is still figuring out his own government, but has already shown interest in ties with other countries and knows that he must use energy deals to secure those ties. Russia is ecstatic about Turkmenistan opening to new energy agreements, as long as they are only with Russia . Moscow knows that Turkmenistan could turn into a huge competitor in energy if it begins making firm deals with other large energy customers like Iran or China . In the third quarter, Russia will look to secure Berdimukhammedov's loyalty to the Kremlin before Turkmenistan becomes a competitor.
The Caucasus is a bit trickier for Russia , as the United States has been strengthening its relationships with Azerbaijan and Georgia . Russia will meet with strong resistance from both countries, especially while Georgia wants to join Western institutions such as NATO and Azerbaijan decides how to spend its new large oil wealth. The best opportunity Russia has to counter the pro-Western sentiment in the Caucasus is enflaming Georgia and Azerbaijan 's secessionist regions. The third quarter is the perfect time for this, as the Kosovo issue is already causing a crisis for the West (this is covered in detail in our Europe forecast).
On Russia 's western border, Ukraine -- which has been in chaos under its pro-U.S. president and pro-Russian prime minister -- is expected to hold parliamentary elections (and possibly a presidential election, if circumstances dictate it) in September. Russia's choice candidate -- Prime Minister Viktor Yanukovich -- is already leading in popularity, but Russia will focus more closely on Ukraine to make sure its interests do not get lost somewhere within the constantly topsy-turvy government. Meanwhile, Belarus is under pressure to allow Russia 's energy giants to simply take hold of its energy companies and infrastructure. Though the country is more or less already an annex of Russia, the Kremlin will solidify its claim on the state while taking full control of the energy supplies going to Europe.
Once Russia steps beyond Ukraine and Belarus , the real turf war between the West and the Kremlin begins. Russia already had a tense month with Estonia over the removal of a Soviet statue, and the groundwork is already laid for a much larger standoff not just with the Baltic states but also with Poland . Warsaw knows it is stuck in a tough spot between its adversaries: Russia and Germany . It is depending on U.S. backing against the two, and relations with both are deteriorating.
Though Moscow 's primary focus will be westward, Russia also will tinker around with its relations to the east. This usually entails Sino-Russian talks, but China is not only too involved with its own domestic political situation to get involved with Russia, it also is wary of damaging its relations with the United States. Russia will turn to other actors in the region to lay the foundation for future relations. Russia already is active in the six-party talks over North Korea and is pushing for new economic ties with the state. Japan could be a candidate for partnership with Russia . The nations' decades-old dispute over islands has been brought up again, and Russian President Vladimir Putin met with Japanese Prime Minister Shinzo Abe at the G-8 summit and was invited to make an official visit to Japan before the end of the year. However, it remains to be seen how serious Putin is about forming a Russo-Japanese association, and he knows that it will cost Russia quite a bit -- islands and energy, especially -- to solidify one.
For Russia to make all these moves into its periphery and a little further, Moscow will have to keep the United States distracted. However, Washington is not Moscow 's only powerful Western adversary. During the Cold War, Germany was too broken and weak -- not to mention occupied -- to take part in the U.S.-Russia showdown, but that is no longer the case. For the first time since World War II , Germany is not occupied and is economically and politically consolidated. Furthermore, Germany 's powerhouse leader, Chancellor Angela Merkel, is both the head of European politics and a force in global politics. This shift to the once-again powerful Germany is changing the Continent, and under Merkel, Europe could either experience an unprecedented unity or fracture.
A powerful Germany gives the rest of the European states an alignment option besides the United States and Russia , but it also gives Washington and Moscow a new adversary or ally. For now, Germany under Merkel is firmly in the Washington camp, but that alignment is neither preordained nor backed up by a particularly robust legacy. Russia knows this and has tried to split Germany from the United States and key European states. Russia is attempting to divide the West over topics like disarmament treaties, pending U.S. anti-missile defense bases and Kosovo. The missile defense issue and disarmament treaties have already caused some friction among Germany, the United States , Poland and the Baltics; look for Russia to continue to drive these differences.
However, there is a key unresolved issue that could become the flashpoint for the United States , Germany and Russia in the third quarter. At the beginning of the year, Merkel vowed that Serbia 's secessionist region of Kosovo would be independent by mid-2007. She repeated this vow -- which has U.S. President George W. Bush's backing -- at the G-8 summit in Berlin while she was standing near Putin, who is the biggest roadblock to the small region's independence. Putin has sworn to keep his fellow Slavic state, Serbia , from losing Kosovo.
Kosovo is turning into a crisis that both Germany and Russia are escalating. If Kosovo gains its independence from Serbia , Putin will look the fool and Merkel will revel in the fact that she forced Russia to back down. Putin, of course, can move against the decision, but that would require Russia to take the extreme position of standing up -- perhaps militarily -- to the West, in league with Serbia. Neither Germany nor Russia cares very much about Kosovo, but Putin dearly needs to crack Merkel's resolve in order to fracture Europe internally, and drive a wedge between the Americans and the Europeans. Kosovo is the perfect crisis for this, as Merkel has already risen to the challenge and U.S. bandwidth is simply insufficient to fill the leadership gap in Europe if Germany 's nerve breaks.
Europe's other power player, France , has lost much of its gravitas. The second-quarter election of President Nicolas Sarkozy signaled the end of France 's Gaullist era. No longer does Europe exist -- in the Parisian mind -- to serve as a platform from which France can project power. This end to French exceptionalism leaves France a major power, but not one with global ambitions.
Only Germany is capable of not just taking the helm of European leadership, but also countering Russia until Washington gets back into this region's game. If Putin breaks Germany 's authority in Europe -- whether over Kosovo or some other crisis -- the rest of Europe will fall along with Germany . The United States will be in a peculiar position in the third quarter as it tries to prevent any of these crises from erupting until its involvement in Iraq is wrapped up and it can fully focus on Eurasia.
South Asia.
Given the political turmoil in Pakistan, the biggest question is what will become of President Gen. Pervez Musharraf as the crisis heats up before the election season, scheduled to begin during the third quarter. The situation continues to deteriorate, but Musharraf still has a few cards left to play. This does not mean he can salvage his position; rather, he can alter the magnitude and direction of his decline so that he could still be in the picture even after the end of the third quarter.
The political storm that erupted more than four months ago with Musharraf's ill-fated decision to sack the country's chief justice, Iftikhar Mohammad Chaudhry, has intensified to the point where the embattled general's only chance for political survival is to step down as military chief and work out a power-sharing agreement with a civilian government, as Stratfor forecast in the previous quarterly.
The presidential election is scheduled for sometime between Sept. 15 and Oct. 15, but in an attempt to hold onto his power, Musharraf is considering delaying it until after parliamentary elections. To do so, Musharraf would have to dissolve parliament and the provincial legislatures sometime in July and hold parliamentary elections within 90 days. Musharraf will also allow the Supreme Court to rule in Chaudhry's favor and reinstate the top jurist as a means of defusing the growing anti-Musharraf movement. This is unlikely to work, however, because Musharraf's dual role as president and military chief will continue fueling the already irreversible crisis.
Therefore, Musharraf will spend the better part of the third quarter trying to create conditions that will help his regime survive the coming elections. He will be unable to make any concrete deals with his opponents unless he decides to retire from the military and assume the role of a civilian president, which could help him remain at the helm for a while, but with reduced powers.
For continuity purposes, the United States is pushing Musharraf to work out a deal with the civilian parties to safeguard his position as president, but if Musharraf is forced out, there will be few tears shed for him in Washington . The United States does not care much who is in charge in Islamabad as long as the military establishment can ensure that U.S. military supply lines in Pakistan are not disrupted. For the United States, stability in Pakistan is what matters, and as long as the military has a hand in running the show, Pakistan's political crises will be self-contained enough to allow the United States to continue its counterterrorism operations in the region.
The other country with a vested interest in seeing that Pakistan 's military stays in control of the situation is India . As long as the generals are safeguarding Pakistan 's nuclear arsenal, India will be amenable to working with a new civilian government in Islamabad .
India 's main foreign policy issue in the third quarter will be trying to finalize a pending civilian nuclear agreement with the United States , though that still appears to be a long shot. Washington is already setting India up for disappointment over the failure of the nuclear deal, but it will work to assure New Delhi that the United States is still firmly committed to pursuing a strategic partnership with India when Indian Prime Minister Manmohan Singh makes a highly symbolic visit to U.S. President George W. Bush's ranch in Crawford, Texas, as early as September.
India is largely absorbed in domestic political and social issues as the ruling Congress Party is trying to stave off a comeback by the main opposition Bharatiya Janata Party (BJP) and balance between populist and business interests. This will continue to be the case in the next quarter, particularly as the parties wrangle over the presidency ahead of the July 19 presidential election. Right now, the Congress Party seems to have a fighting chance of winning the presidency (and installing the country's first female president), as long as its left-wing allies get their preferred candidate to fill the position of vice president.
Militant activity in India is increasing as Kashmiri Islamist groups operating in the country are trying desperately to stage attacks to trigger communal tensions between Hindus and Muslims. As we anticipated, these groups are being drawn more into the jihadist orbit (illustrated by a recent video released in Kashmir that featured a Kashmiri Islamist militant declaring war on India in the name of al Qaeda). The adoption of jihadist methods spells grave complications for New Delhi , since these militant groups are exploring more spectacular tactics in order to magnify their status in the Kashmir insurgency. In addition to targeting Muslim worshippers (a strategy that has thus far failed to produce the militants' desired results), these groups could focus more on attacking transportation targets, or even India's prized information technology sector, to provoke an Indian response.
In Afghanistan , the Taliban's spring offensive did not materialize as expected, though fighting did pick up. The Taliban's inability to launch a major spring offensive against NATO forces can be largely attributed to the killing of Taliban commander Mullah Dadullah, a number of major NATO pre-emptive operations at the beginning of the season and mounting pressure on Pakistan to assist Afghan and NATO forces against the Taliban.
Though 2007 does not appear to be the year for a conventional Taliban assault, NATO is no more able to impose stability militarily than the Taliban is able to eject NATO from the country. As a result, a stalemate this year in Afghanistan seems to be on track. Dadullah's death will facilitate efforts by the Afghan government and its NATO allies to co-opt pragmatic Taliban and undercut the jihadist insurgency in the country, though no major progress on the negotiating front should be expected this quarter.
Bangladesh 's military-backed interim government will continue its anti-corruption campaign in an attempt to weaken the country's two main political forces, led by Sheikh Hasina's Awami League (AL) and Begum Khaleda Zia's Bangladesh Nationalist Party (BNP). While the army has steadily worked to reassert itself as a stealth kingmaker in Bangladesh 's political scene, the country's civil society will grow wary of the army's intentions. The first hints of a public backlash against the military could surface toward the end of this quarter.
In Nepal , advances will be made in undermining the king's authority and expanding political representation for the country's minority groups in preparation for Constituent Assembly elections in November. However, unrest within the Maoist camp and ethnic strife with the Madhesis in Nepal 's Terai region will continue to threaten the political process.
As expected, India stopped short of offering any serious military assistance to Sri Lanka to fight the Liberation Tigers of Tamil Eelam, even as the civil war intensified during the past few months. Things are only likely to get worse since neither side is even remotely serious about peace talks. The Tigers will focus more on carrying out bombings, including suicide attacks, in Colombo this summer as the Sri Lankan air force continues to pound Tiger strongholds in the north and east of the country.
East Asia.
For now, the U.S.-Chinese relationship will remain the core driver in East Asia.
While China remains a distant second to Japan in economic prowess, its sheer size and the continued perception of China as a rising power keep everyone in the region focused squarely on Beijing . Chinese leaders have grown more adept at managing relations with their regional counterparts, though the twin trends of pan-Asian regionalism and intra-Asian nationalism continue to encourage contradictory policies and rapid fluctuations in regional relations.
At the same time, Beijing sees the United States as the only remaining global superpower and the biggest challenge to Chinese interests abroad (and at home). Beijing is increasingly capable of dealing with Washington , though it is less capable of handling the split between the U.S. Congress (which has to answer to anti-China factions and constituents) and the U.S. administration (which, like China , wants to preserve the mutually beneficial status quo in trading relations).
Beijing 's main internal driver is its increasingly shaky hold over domestic social stability and expectations. This comes before a critical Communist Party Congress at the beginning of the fourth quarter that likely will identify President Hu Jintao's successor and bring to a head internal Party differences over handling domestic economic and social instability and China 's emerging role on the global political stage.
For Beijing , Washington 's preoccupation with the Middle East has been a blessing, since it has reduced external pressure on China while internal factions battle over policies and successors. Signs of a potential breakthrough in U.S.-Iranian relations -- and thus in negotiations for a working resolution on Iraq -- are drawing China 's interest. Beijing thought the United States would be distracted by the Middle East until the end of the Bush administration, so an earlier shift in the U.S. foreign policy focus could quickly change China 's calculus; Beijing keenly remembers the Bush administration's early days and the E-P3 incident.
If Washington and Iran do settle over Iraq soon, Beijing 's one hope is that the rising tensions between Russia and the United States could draw most of the United States ' attention. This would not only keep the spotlight off China , but it would also put Beijing in familiar territory where it could play Washington and Moscow off each other.
Internally, Beijing will focus on choosing the so-called fifth-generation leadership, the vanguard of which will begin taking key Party positions later this year and higher government positions after the National People's Congress session in early 2008. At the same time, Beijing is struggling with the related battle over internal social and economic issues. Numerous policies covering everything from the stock market to local elections will be discussed in the Chinese media and promulgated by the administration.
The 2008 Olympics present another pressing issue as Beijing struggles to counter the rising tide of anti-China measures inspired by its status as an Olympic host. International nongovernmental organizations and activists are linking Darfur, human rights, labor rights, religious freedoms and historical legacies (such as Tiananmen Square) all to China 's hosting the Olympics. This is one of Beijing 's biggest public relations challenges, so the government will work to expose and crack down on many of these issues as a way to hamper criticism. A boycott of the Olympics is unlikely, but increasing pressure on major Olympic sponsors will bring additional pressures to bear on Beijing .
China 's growing need for imported oil and natural gas has led it to move into Africa (including Sudan ) in search of natural resources. The April 27 militant attack against the Chinese government's energy exploration facilities in eastern Ethiopia revealed that China 's overseas energy-acquisition strategy is not ironclad and showed Beijing that it is no longer immune to accusations of imperialism in sub-Saharan Africa .
Acutely aware of its vulnerability, China has started changing the way in which it interacts with African governments. Beijing appointed a new African affairs envoy in May and intensified efforts to develop political-risk insurance packages specifically for investment projects and workers overseas. That shift will continue this quarter, while the amount of Chinese investment in Africa (especially in energy asset acquisition) will continue rising, since Beijing lacks alternative ways to increase its energy security. At the same time, China will continue rolling out new domestic initiatives to increase energy consumption efficiency and technological innovations, but these will see no significant results for quite some time.
China 's neighbors will watch how Beijing deals with Olympic pressures, domestic economic inconsistencies and jabs from the U.S. Congress before its recess. Some of Beijing 's actions will directly affect China 's neighbors; in East Asia, many countries' foreign trade depends heavily on continued Chinese economic growth and on China as a market. A major jump in China 's yuan valuation, while not a high probability, could force rapid reactions from other Asian nations. Beijing is more likely to continue the steady pace of yuan appreciation, but even this trend could accelerate investment in Vietnam , whose labor costs are becoming increasingly competitive with China 's.
Vietnam has engaged in a series of overseas dialogues -- including Vietnamese President Nguyen Minh Triet's mid-June visit to the United States -- that will set it up for a new surge in foreign business interest this quarter. Hanoi has spent years adjusting its internal systems to prepare for a second chance at economic opening, and the results are drawing increasing attention from elsewhere in Asia . Hanoi hopes the United States and Europe follow suit. Nearby, Cambodia is also preparing for a much smaller but still significant jump in international economic attention, primarily in the tourist and transportation infrastructure sectors, as Phnom Penh finally finishes preparation for the long-delayed tribunal of former Khmer Rouge leaders.
In neighboring Thailand , the military-backed regime has struggled to consolidate its power and demonstrate effective leadership ever since coming to power in the September 2006 coup. Only as the second quarter drew to a close did it begin to show signs of a more sophisticated pre-emptive style of governance, managing public expectations and opposition efforts at undermining its rule. Ironically, now that the regime has won broad-based support for its new constitutional draft and electoral time frame, serious fractures are emerging in the partnership between military chief Gen. Sonthi Boonyaratglin and interim Prime Minister Surayud Chulanont due to their differing views on how Thailand should be run -- and who should retain power after the transition to civilian rule.
Sonthi might attempt to oust Surayud in the next quarter, but this would be risky, given Surayud's significantly wider support base (which draws strength from the military, civilian and business sectors, as well as the monarchy). However, Surayud does not want to give Sonthi a reason to topple him, especially since the prime minister is set for an influential position in future Thai politics if and when elections (currently slated for November or December) proceed. In the third quarter, opposition groups loyal to ousted Prime Minister Thaksin Shinawatra will continue trying to rally anti-regime support but, as in the second quarter, will fail to generate sufficient mass.
Elections are driving politics elsewhere in the region as well. In Taiwan , parties on either side of the spectrum will continue drifting toward the center regarding China . The incumbent Democratic Progressive Party is being forced by the opposition's successful reconciliatory gestures toward China to adopt a less-confrontational stance against the mainland. President Chen Shui-bian's "Taiwan Identity" drive has lost some steam, but the president is likely to ramp up his push for constitutional reform and a national referendum in the third quarter. Chen will also seek to gain lost ground in the never-ending struggle with the mainland for diplomatic recognition by Latin American, African and Pacific Island nations.
In South Korea , electioneering is centering on the Korea-U.S. free trade agreement (which is facing increasing pressure in both countries and could collapse amid renegotiation efforts), domestic media reform and policies toward North Korea . The resolution of the Banco Delta Asia issue at the end of the second quarter has paved the way for increased progress on the six-party nuclear talks -- and the potential for an August inter-Korean summit, which could have a significant effect on South Korea 's December elections and the future of U.S.-South Korean military cooperation.
In Japan , Prime Minister Shinzo Abe faces a test of his leadership and national support in parliamentary elections in July. His Liberal Democratic Party (LDP) is still expected to come out on top, but polls are showing a drop in support even as the opposition Democratic Party of Japan is rising. While Abe has gained support for his actions abroad, his domestic policies are engendering little confidence. A significant loss for the LDP could lead to Abe's resignation, though that remains a slim possibility. In the meantime, Abe and the LDP will proceed with defense reforms, increasing military and technological cooperation with the United States and stretching the interpretation of Japan 's Constitution to the breaking point before presenting their own constitutional reform proposal.
Latin America.
Countries in Latin America are significantly more concerned with domestic rather than regional (much less global) issues, and the rift between populist leaders and moderate leaders is growing.
We expected constitutional reform to be the region's driver in the second quarter. While Venezuela and Mexico postponed such reforms, Ecuador 's April 15 referendum on a constitutional assembly received overwhelming support, and in Bolivia , tensions over constitutional reform came to a head in June. Stratfor also correctly identified links between politicians and right-wing paramilitaries as a wild card for Colombia . Democrats in the U.S. Congress used the Colombian paramilitary issue to bolster opposition to a free trade agreement with the country, even as they reached a compromise with the Office of the U.S. Trade Representative allowing agreements with Panama and Peru to move forward.
The driver for now will be consolidation (or, perhaps more accurately, re-consolidation) of domestic power, even as the region's factional lines become more clearly defined. For moderate leaders in Chile , Brazil , Peru and Colombia , this will involve shrugging off scandals and energy crises and moving toward increased state spending on infrastructure projects. For Venezuela and Ecuador 's populist leaders, it will involve increased intimidation of vocal but relatively helpless opposition groups.
Venezuelan President Hugo Chavez will use his consolidated power to intimidate and harass the nascent student opposition movement and Globovision, the last remaining private television station broadcasting nationally. Brazilian President Luiz Inacio "Lula" da Silva will ignore corruption scandals and criticism from a slowly resurging hard-left, focusing instead on trying to accelerate spending by the state's Growth Acceleration Program. Peruvian President Alan Garcia will ignore indigenous and environmental groups' protestations about his plans to expand the country's oil, natural gas and mining projects. Mexican President Felipe Calderon will press on with his tax reform agenda, despite a deteriorating security situation -- evidenced by increasing police resignations and strikes -- as the war against drug cartels becomes increasingly bloody. None of these moves will seriously jeopardize the ruling powers, since all of them continue to enjoy relatively strong popular support bolstered by positive economic trends.
Similarly, Ecuadorian President Rafael Correa is firmly in charge, and the constitutional assembly due to be elected Sept. 30 is likely to be composed mostly of delegates loyal to his agenda. A new Ecuadorian business coalition opposed to new banking restrictions (which Stratfor accurately anticipated in the second quarter) will either have to reach an accommodation with Correa or face accusations that it represents the sort of interest group that must be separated from Ecuador 's politics in order to maintain the integrity of the democratic process.
Correa's constitutional agenda is still unclear in many important respects, making it difficult for business leaders to know how to position themselves. Thus far, Correa seems to want to take medium-sized steps toward reform. For example, he intends to revise some of the rules for the mining sector, but not to nationalize the sector or take steps so drastic that they drive out investors entirely. Correa's vision for constitutional reform will become clearer during the third quarter, as will his determination of which portions of Ecuador's foreign debt should be honored, renegotiated or rejected as illegitimate.
Bolivia will be an exception to the consolidation trend, since the government does not have full control and will likely be forced to negotiate with the opposition in the Constitutional Assembly or face significant unrest. The departments (states) in Bolivia 's lowland Media Luna region, home of landowning descendants of Europeans, declared a state of emergency in defense of their autonomy when faced with the threat of a new political map that would empower indigenous groups. Other interest groups -- including university student organizations, small mining cooperatives and the military -- also began rallying against draft constitutional articles they consider threatening. In the third quarter, Bolivian President Evo Morales will have to press for some serious compromises, or candidates from main opposition group Podemos will withdraw from the assembly, rendering the constitutional drafting process illegitimate and potentially leading to violent clashes among rival protesting groups in Bolivia 's major cities.
Though we expected Chavez to continue clamping down on the Venezuelan media, the previous quarterly forecast did not anticipate the regional repercussions of his refusal to renew the public broadcasting license for Radio Caracas Television (RCTV) on May 27. The RCTV affair sparked an exchange of insults between Brazil 's center-right senators and Chavez. In the third quarter, this could lead Brazil 's Senate to vote against -- and thereby effectively deny -- Venezuela 's full membership in Mercosur. This could represent the end of Venezuela 's bid to join Brazil as a co-leader -- and eventually be the sole leader -- of South American integration efforts, forcing it instead to fall back into its more limited patronage-based sphere of influence.
This rift comes at a crucial time as the global trading powers make a final -- and almost certainly failed -- attempt to push the Doha round of World Trade Organization talks forward. Doha 's foundering will spur renewed attention to bilateral and regional trade agreements -- and therefore to Mercosur. Venezuela 's objectives in Mercosur have more to do with regional political maneuvering than an interest in trade negotiations, so if its membership is rejected, the trade organization will be more likely to operate effectively.
Developments in Argentina in the third quarter could also affect the future of Mercosur. President Nestor Kirchner will announce whether he intends to run for re-election in October or whether his wife, Cristina, will be the better candidate to fulfill their shared aspiration of a dynasty. Whichever Kirchner runs is likely to win, but it appears increasingly likely that Cristina will be the candidate. This is not only because she could distance herself from her husband's record of energy shortages and high inflation, but also because the Kirchners likely realize that tough changes are necessary in Argentina , including the relaxation of the price controls that created the energy problems. If Cristina runs and wins, Argentina 's relations with Venezuela are likely to change; Cristina is known to be less fond of Chavez than her husband is.
Sub-Saharan Africa.
Internal political struggles in key states will dominate sub-Saharan Africa. South Africa and Kenya will prepare for December elections, and Nigeria 's fledgling government will take on complex security problems in the Niger Delta.
Political infighting in South Africa 's ruling African National Congress (ANC) dominated the political landscape during the second quarter. President Thabo Mbeki's faction within the ANC moved to sideline rival former Deputy President Jacob Zuma by positioning other candidates for the party's presidential election in December. The ANC dominates South African politics to such a degree that unless Mbeki pushes for a constitutional amendment allowing himself to be nominated for a third term as party president (which he has not ruled out), the ANC party president can be assured of the national presidency. An election that once seemed certain to go to Zuma has opened up to other competitors -- notably Tokyo Sexwale and Cyril Ramaphosa, two business tycoons who have benefited from the country's black economic empowerment initiatives.
The race ahead of the ANC party elections will figure prominently in the third quarter, especially the ANC's June 27-30 policy planning conference, where candidates are expected to begin campaigning in earnest for the ANC leadership. Zuma will continue to fight corruption charges, but the negative press surrounding him will erode some of his considerable mass appeal. Sexwale and Ramaphosa, both multimillionaires with early ties to the ANC, will compete for the role of compromise candidate in the intra-party struggle between Mbeki's faction and Zuma's faction. Zuma, being pro-union and in favor of South Africa 's poorest residents, likely would enact policies that could harm business interests. Look for the business community to back Sexwale or Ramaphosa in the third quarter.
The run-up to Kenya 's presidential and parliamentary elections in December will be decidedly less peaceful. Kenyan elections, even referendums, historically have been preceded by violence. The resurgence of the quasi-religious organized crime gang known as Mungiki (meaning "the mob," or "the multitude" in the local language) in the second quarter will only add to fears of worsening violence. As the government continues to battle Mungiki, the combination of Mungiki brutality and police overreaction will make the third quarter a very bloody one, with the possibility of more attacks like the June 10 bombing in Nairobi .
Nigeria 's second-quarter elections went as Stratfor expected. Former Vice President Atiku Abubakar was barred from running until the week before the elections, despite his determined legal effort. This cleared the way for former President Olusegun Obasanjo's chosen successor, Umaru Yaradua, with Goodluck Jonathan as vice president. Jonathan, an ethnic Ijaw native of the Niger Delta and former governor of the oil-rich Bayelsa state, will take the lead in dealing with the Delta state governors and militant groups in order to prove himself indispensable to Abuja and build his reputation as an advocate for the Niger Delta's disenfranchised population -- thus gaining the support he will need for any future presidential aspirations.
Militant leader Mujahid Dokubo-Asari's recent release -- one of the primary demands the Movement for the Emancipation of the Niger Delta (MEND) militant group made to the federal government -- is a good-faith sign that Abuja is willing to negotiate. Since his release, Dokubo-Asari has denounced kidnappings but still advocates sabotaging oil infrastructure. This will lead his followers to discontinue kidnappings and focus on infrastructure attacks. While Dokubo-Asari attempts to rein in a large part of MEND, some factions will split off and conduct business as usual, carrying out kidnappings for ransom. Since it is virtually impossible to reach a deal with all discontented militant groups, the third quarter will see an increase in attacks overall, particularly in small-scale attacks and less sophisticated "invasions" of oil installations as groups left out of the political calculus fight to maintain their credibility (and access to revenue).
The potential for a peaceful resolution to the current crisis will rest heavily on Dokubo-Asari's shoulders, as it was an unspoken condition of his release that he will work to bring as many portions of the heavily factionalized MEND as possible under his control. Delta region governors, fresh from their victorious lobby for Dokubo-Asari's release, will continue to portray themselves as the key mediators between militant groups and Abuja and reap the rewards of relative stability, including increased oil profits and political favor from the ruling People's Democratic Party. Thus, the third quarter also will see increased backroom deals as the newly installed regional and federal players make alliances and draw battle lines.
The situation in Somalia will continue deteriorating as insurgents and fighters loyal to the ousted Supreme Islamic Courts Council (SICC) and their al Qaeda affiliates conduct deadlier and more sophisticated attacks. The attacks in Mogadishu are expected to reach unprecedented magnitude and frequency in the third quarter as the insurgents hone their bombmaking skills and delivery systems, learn the tactics and habits of African Union (AU) and Ethiopian forces and become more skilled in waging an insurgent-style war. Ethiopia will be forced to keep its troops in Somalia , despite its desire to withdraw, since no AU force is capable of securing Somalia against Islamist insurgents without Ethiopia 's military presence. The United States will continue hunting suspected al Qaeda and former SICC militants in Somalia , mostly in the northern autonomous region of Puntland, where security forces are poorly equipped to deal with the situation.
The Somalia Reconciliation Congress' efforts will be genuine, as shown by the amnesty offer the government extended to the insurgents, but the reconciliation conference will keep being pushed back as the security situation deteriorates and President Abdullahi Yusuf becomes less and less willing to accommodate the former Islamists at the negotiating table. The government will barely maintain its grip on power as insurgents continue targeting specific individuals for assassination in hopes of disrupting the government's ability to operate. There will be repeated calls for international peacekeeping assistance from non-African countries, but these will fall on deaf ears since none is willing to send its troops into the maelstrom.
During the second quarter in the Democratic Republic of the Congo (DRC), President Joseph Kabila dislodged his strongest rival, Jean-Pierre Bemba, who is now in semi-exile in Portugal . Having disarmed and scattered Bemba's militia, Kabila will now turn his attention to selling mining assets in the DRC after suspending many contracts for re-examination. Bemba's planned July return will create tension in the country, since he and his supporters are convinced that the ruling party will move to further marginalize him. Kinshasa could see some scattered violence upon his arrival. Although portions of eastern DRC near the borders with Sudan , Uganda and Rwanda are still not secure, Kabila will try to sell DRC mineral resources as sound investments. Much of this marketing will be behind closed doors.
Sudan 's government will face continued pressure to resolve the Darfur crisis. Part of this pressure will be directed at China , which many perceive as having the most influence over Khartoum because of the large amount of oil China buys from Sudan . In the third quarter, there will be more dialogue, but little action. Sudan 's goal has been to limit the effectiveness of whatever force might eventually enter the country, and although Khartoum recently agreed in theory to a U.N.-backed peacekeeping force, it will continue to delay and frustrate the international community's efforts to get boots on the ground in Darfur . Sudan will seek to limit the size of the foreign forces, keep the number of rapid-reaction troops to a minimum and limit transport equipment and attack helicopters. Sudan also will seek to restrict the force composition to African countries, which are seen as less combat-capable and more pliant.
Global Economy.
The period from 2002 through 2006 saw some of the fastest economic growth in recent U.S. history -- an average of 3.4 percent per quarter. As the U.S. economy overheated, inflation edged higher and the triple hit of high energy prices, a faltering housing market and repeated geopolitical shocks steadily eroded economic growth until -- as forecast in Stratfor's 2007 annual -- growth bottomed out in the first half of the year.
That time of weakness has now passed. U.S. inflation is at 2.8 percent, slightly over the Federal Reserve's comfort level, but has not spun out of control. Increased efficiencies have mitigated the price of energy. And the stumbles in the American sub-prime mortgage industry have not spread to the wider market.
But all of these figures have contributed to a falling U.S. dollar, which almost by itself is guaranteed to lead to a surge in U.S. exports and foreign investment that will ensure that the threat of near-recession from the first half of 2007 remains firmly in the past.
Part of this investment surge is a typical reaction to an Asian scare. One of the defining characteristics of the Asian economies is that they funnel subsidized money to state-linked (or even state-owned) firms that fail to use it efficiently. A side effect of this system is that flight of this subsidized capital becomes very common as enterprising individuals regularly ship the money abroad in order to generate higher returns. As a rule no major economy is better geared to generate such returns than the United States . Push the U.S. dollar down for almost any reason, and that torrent of Asian money becomes a flood. The end result is that the cost of credit in the United States plunges and growth surges.
China is flirting with just such a scare. In a system in which information is controlled and money is everywhere, such endless demand can cause assets prices to quickly balloon without any reference to reality. This is a leading cause of the Chinese stock market boom, as inexperienced investors with negligible understanding about risk sink their money into politicized companies actively trying to manipulate public understanding about their firms. The result is a ridiculous surge in stock prices; China 's Shanghai Composite Index is up fourfold from two years ago.
Though the Chinese government is certainly pleased that there are now more places for people to put their money, it is decidedly displeased with corrupt local officials luring citizens to take out second mortgages to play the markets. Since the market boom is not related to market fundamentals, neither are the Chinese government's solutions. The government is using fees on trades, deliberately floated rumors about impending capital gains taxes and crackdowns to rein the markets back in.
So far Beijing has pricked but not popped the market, and so far the indices keep bouncing back. It is a dangerous game of chicken, but unless the Chinese are willing to challenge the core problem -- that the capital propping up the Chinese economy is artificially cheap while investment choices are few -- these are the only tools Beijing has.
Near the end of the third quarter Beijing will begin to implement longer-term solutions, such as launching (or increasing awareness of) smaller regional stock markets. Venture capital funds could begin in small form, and state efforts to push investor dollars away from the headline Chinese firms into small and medium enterprises will begin taking shape. The end goal of all this is to begin convincing the Chinese that efficiency matters and to live, plan and invest accordingly -- but that idea is up against two generations of cheap capital and nonexistent capital markets. Investor attitudes cannot and will not change overnight. Until they do change, more market dips will happen, and they will happen by design.
The biggest economic surprise of the first half of the year -- and for most of 2006 -- was Europe 's strong economic performance. (Of course, strong growth in the European Union generally means anything over 2 percent; in 2006 growth was 2.9 percent.) Ultimately, this outlier boils down to Stratfor's underestimating the morale effect of good governance.
Under Chancellor Angela Merkel, Germany 's economic reforms have certainly accelerated, but small tweaks to labor and tax laws are not the sort of thing that generates dramatic shifts in consumer spending patterns in a few months. In the longer run Germany 's growth is utterly dependent on both the health of the global economy -- no other major economy is more dependent on exports than Germany -- and ongoing reforms. But for now, the feel-good impact that the confident chancellor has imprinted upon her citizens is as undeniable and lasting as it is impossible to measure. So long as Merkel soars and keeps tinkering at the German economy's edges, that economy will continue to perform at its strongest rate in nearly a generation.
A similar morale boost appears to be on the horizon in France as well, where new President Nicolas Sarkozy is rolling up his sleeves for a full review and tune-up of the French economy. Sarkozy's agenda is much more revolutionary than anything Merkel's coalition government has so far attempted, and likewise the room for improvement is far greater.
But success is hardly guaranteed.
In reality, the French left succeeded in narrowing Sarkozy's parliamentary majority weeks after Sarkozy's own election. Though this will only tangentially affect Sarkozy's ability to push radical reform through the legislature -- none of Sarkozy's reforms require constitutional changes -- it has restored political legitimacy to anyone who chooses to combat Sarkozy's programs by striking.
More than one French government has been laid low by nationwide strikes. Should Sarkozy not choose his battles very carefully he will quickly discover why most French presidents govern through their prime ministers and not directly -- they can be blamed and disposed of when the public rebels.
And Finally, an Achilles Heel for the World.
As in the past several quarters, the U.S.-Iranian negotiations will once again be the main issue driving events in the Middle East for the third quarter of 2007. The dealings between Washington and Tehran have reached a critical phase; both sides realize it is now or never, which explains their decision to make the previously back-channel negotiations public. Over the next three months, these talks will intensify, as will the violence in Iraq .The fighting will escalate as both the Sunnis and Shia try to bring some method to the madness of their internal affairs against the backdrop of the ongoing Sunni nationalist insurgency, jihadist suicide bombings and Shiite militia activity. This will involve paring the number of political and militant actors down to a manageable level so that both communal groups can effectively negotiate and arrive at a power-sharing agreement. Some Iraqis will not want to take part in a power-sharing mechanism, and those trying to negotiate a settlement will have to deal with the uncooperative actors with an iron fist.
While the Sunnis and Shia deal with intra-communal issues, they also will be dealing with one another and the Kurds in terms of making progress on a number of thorny issues. These same issues will be the subject of talks between the United States and Iran . They include:The move to return the Baathists to the fold of both the state and mainstream society; Specifying the details of a hydrocarbon law, which will provide guidelines for sharing energy-related revenues among the three principal ethno-sectarian communities; and Amending the constitution in order to allow Sunnis more influence in Baghdad and a resolution of the disputes having to do with regional autonomy, especially the one related to the Kurdistan Regional Government (KRG).
Some incremental progress toward resolving these issues can be expected, but no major breakthrough is likely this quarter. The existing violence, the need for both Sunnis and Shia to rein in the militants within their sects and a pantheon of deal-spoilers will all prevent any significant headway. Furthermore, Iraq 's internal problems and the U.S.-Iranian talks will continue affecting each other; a meeting of the minds between Washington and Tehran could play a key role in significantly clearing up Iraq 's internal issues, but those issues feed back into the U.S.-Iranian dealings and further complicate matters.Additional rounds of public meetings between the Bush administration and Iran 's clerical regime could take place during the coming quarter, but the real wheeling and dealing will remain behind the scenes, with topics such as the U.S. detention of Iranian officials and the status of the Iranian nuclear program as central issues.
Iran 's domestic situation also significantly shapes how the clerical regime will proceed with the talks on Iraq . The pragmatic conservative faction, led by Expediency Council Chairman Ali Akbar Hashemi Rafsanjani, and President Mahmoud Ahmadinejad's ultra-conservative camp continue to struggle to influence the country's foreign policy. Rafsanjani's camp has the upper hand, and its efforts to clip its rivals' wings will continue regardless of the Iraq talks. Internal criticism of the Ahmadinejad administration's domestic policies dealing with economic management, social issues and religious matters already is being allowed to gain momentum.
Saudi Arabia will watch the U.S.-Iranian negotiations like a hawk this quarter in order to ensure that any power-sharing agreement leaves Iraq 's Sunnis in a position to contain the Shia and their Iranian allies. In this regard, Riyadh will continue to press Washington , remain in direct communication with Tehran and extend support to the Iraqi Sunnis -- though not so much support that jihadists might come home to roost and threaten the kingdom's security.
Syria , too, will be keeping a close eye on the U.S.-Iranian talks, looking for assurances from Tehran that it will not be compromised in any deal, particularly over the implementation of an international tribunal to try Syrian suspects in the 2005 assassination of former Lebanese Prime Minister Rafik al-Hariri. Syria wants to show that it is integral to any deal on Iraq and will cooperate with the United States by redirecting Iraq-bound Islamist militants to Palestinian refugee camps in Lebanon .
This strategy meshes well with Syria 's plans for Lebanon . The main focus in Lebanon this quarter will be on the September election of a new president to replace Syria 's lackey and lame-duck President Emile Lahoud. The current front-runner is anti-Syrian former intelligence chief Johnny Abdo, a friend of the al-Hariri clan. Abdo can count on U.S. , Saudi and French efforts to weaken the Hezbollah-led opposition, in part by co-opting the support of Maronite Christian leader Gen. Michel Aoun.
Syria might not be able to impose its favored presidential candidate, but it can certainly stall the political process and even push for the creation of a rival government by the end of the summer if things are not going its way. For political intimidation purposes Syria also has plans to accelerate the wave of bombings in Beirut -- an easy mission for the militants Syria is diverting from Iraq.
The struggle for supremacy within Turkey will be a major theme in the third quarter. Even before the presidential upset, the AK Party was facing an onslaught from the ultra-secularist Turkish establishment, which has been trying several tactics to weaken the AK Party's hold on power. Turkey 's main cities saw massive demonstrations opposing alleged moves by Prime Minister Recep Tayyip Erdogan's government to undo the secular fabric of the Turkish republic; similar demonstrations will become more common in the run-up to the parliamentary elections.
The military also has been using the recent uptick in Kurdish rebel attacks to discredit Erdogan's government. Since some of these attacks have been by the Kurdistan Workers' Party (PKK) and its smaller Kurdish separatist allies who use northern Iraq as a launch pad, the military is actively pushing for a major cross-border operation. On its own, the military has been shelling the border region and launching occasional small cross-border raids. This has increased tensions between the government and the military; among Ankara , Arbil and Baghdad ; and between Turkey and the United States . Such tension puts the AK Party in a very bad light, which is precisely the military's goal. Though the AK Party is likely to lose some seats after the elections, it probably will remain the single largest force in the legislature.
The Iraqi Kurds, meanwhile, have been trying to rein in the PKK to prove their usefulness and thus prevent themselves from being sacrificed in a U.S.-Iranian deal on Iraq . While the United States , the Iranians, Iraq 's Kurds and the AK Party currently have a vested interest in keeping the conflict quiet, Kurds in Iraq will get much more antagonistic this quarter. Iraq 's Kurds have more or less kept to themselves while the Sunnis and Shia duke it out further south, but this is do-or-die time for the Kurds to secure a commitment from Washington to hold a referendum on the oil-rich city of Kirkuk by the year's end -- a decision that will pretty much seal the fate of Iraqi Kurdistan. The sensitivity over the Kirkuk referendum issue ensures a lack of real progress in formulating an Iraqi oil law this quarter. The referendum issue will meet volatile resistance from Iraq 's Sunni and Shiite factions as the deadline nears, and the Kurds will eventually accept the likelihood that the referendum will not take place as planned.
Before that realization hits the KRG, however, KRG President Massoud Barzani will take the lead in provoking Turkey -- using issues such as Turkish interference in the referendum issue and in plans to put U.S. military bases in northern Iraq -- in an attempt to get Washington to recognize Kurdish demands in exchange for security cooperation.
The Israeli-Palestinian theater, usually known for the conflict between the two sides, is now seeing both sides preoccupied with their domestic situations. During the past two quarters, the Hamas-Fatah struggle for power has devolved into a military battle for control over the Palestinian territories. On the other side, Israeli Prime Minister Ehud Olmert's government continues to struggle with instability.
The partial release of the Winograd Commission report inquiring into the reasons behind the outcome of the 2006 Israeli-Hezbollah conflict exacerbated problems for Olmert's drastically unpopular coalition government. Meanwhile, the Labor Party's leadership changed, with former Prime Minister Ehud Barak winning the party's primary and replacing outgoing leader Amir Peretz as the country's defense minister. Barak is positioning himself as the most suitable replacement for Olmert, who could be forced to quit after the full Winograd report is made public. But unless Barak is assured that he can establish a replacement government, his party is unlikely to force fresh elections for fear of allowing the Likud Party's Benjamin Netanyahu -- the country's most popular politician -- a chance to become prime minister.
In the Palestinian territories, the struggle between Hamas and Fatah for control over the security forces has escalated from periodic clashes to something like a civil war, with Hamas seizing control of the Gaza Strip. This has led President Mahmoud Abbas to dismiss the Hamas-led Cabinet and dissolve the National Security Council. Meanwhile, the Arab states are scrambling to keep the situation from deteriorating further.
Egypt will be at the forefront of such efforts. U.S. expectations, the need to maintain the status quo with Israel , concerns that the situation in Gaza could get out of hand and fears of Iranian and/or Syrian infiltration will force the Egyptians to take an aggressive role in sorting out issues between Hamas and Fatah. For Egypt , this is a return to its old policies and the end of its deference to Saudi Arabia on the Palestinian issue. However, it is likely that very little intra-Palestinian cooperation can be restored, and the third quarter could see no progress at all.
In neighboring Jordan, King Abdullah II -- sitting on the fault line of all the major regional crises -- will be more concerned about the intra-Palestinian struggle than anything else in the third quarter, for two reasons. First, the vast majority of the Jordanian population is of Palestinian origin. Second, if Hamas is allowed to enhance its position in the West Bank, it could pose a threat to the Hashemite kingdom as Hamas has close ties to Jordan 's main opposition party, the Jordanian Muslim Brotherhood.