... gift (oops, I meant chaos) continued ... Message 20288617
EAST ASIA
Despite growing concerns among international investors, China will remain a top destination for foreign investment in the third quarter. It figures too prominently in the growth plans of multinational corporations for investors to completely pull the plug, and some companies are acting on faith they can weather economic and political crisis in the country.
However, China's neighbors already have begun to feel the effects of investor bearishness. South Korea -- which is heavily exposed to China's economy -- experienced sudden and dramatic capital flight after the market jitters that began in the second quarter. The trend will continue throughout Asia this quarter.
However, the Chinese economy will be only one among several factors poised to drag down East Asia in 2005. High oil prices and the prospect of higher U.S. interest rates after the presidential election also will begin to cast a pall across the region.
Indonesia in particular will be in a tough spot. Presidential elections took place July 5, and former security chief Susilo Bambang Yudhoyono is headed for a runoff Sept. 20 with President Megawati Sukarnoputri or former military chief Gen. Wiranto, the candidate from the ruling Golkar Party. Following that vote, Jakarta likely will remain nearly paralyzed for several weeks, while Yudhoyono attempts to form political alliances among the many factions in the government. This will leave Indonesia among the least-prepared nations if East Asian fortunes decline in 2005.
On the Korean Peninsula, Seoul will adjust to the worsening signals from China. Meanwhile, the North Korean nuclear crisis will continue to simmer, before the six-party talks resume in September. Pyongyang will use this time to exploit anti-U.S. sentiment in South Korea, the changing security relationship between Washington and Seoul and the summer season of labor unrest in order to extract additional economic and security concessions from South Korea. The odds of at least moderate success will be high.
EUROPE
Having agreed on a constitution, European leaders will turn their attention back to their national and collective economies -- which are in the midst of a rickety recovery.
The most important event in this region during the third quarter will be the European Central Bank's (ECB) decision to raise interest rates. The move will be politically unpopular, but the independent ECB is likely to raise rates sometime this quarter, especially after the U.S. Federal Reserve did so in late June.
Pressure is growing for such a move. European inflation is rising, oil prices are likely to remain moderately high and the U.S. dollar is expected to rise -- drawing investment away from other markets, including Europe. Moreover, EU members' battle against the Union's economic stability pact -- which caps their acceptable deficits at 3 percent of GDP -- is likely to intensify, with more deficit spending in the cards. This will add an additional layer of inflationary concern that plays into the ECB's decision in favor of a pre-emptive rate hike.
August would be an excellent time for the move, since most Europeans take holidays during that fetid month. Any political uproar likely will be offset by the small size of the rate increase -- probably no more than half a percentage point in this quarter -- but the move nevertheless will feed into general concerns that European institutions are out of touch with the needs of EU members' economies.
Otherwise, most of the third quarter will remain politically quiet. The European Parliament is expected to confirm Portuguese Prime Minister Jose Manuel Durao Barroso as European Commission President on July 21 or 22, and he will spend the next few months deciding on commissioner appointments.
The Summer Olympics begin Aug. 13. Barring a major militant attack -- which in our view is a slim possibility because of heavy security and al Qaeda's preference for surprise -- the Games will be uneventful. Small-time anarchists and radical leftists will try to make their presence felt and gain publicity, but their effect on security will remain minimal. That said, with attention riveted on Athens, the Games could present opportunity for militant groups to launch attacks elsewhere, such as London or Cairo.
As in the second quarter, European nations will maintain an insular view of foreign policy -- focusing more on their own capabilities than on actually putting forward a strong foreign policy agenda. This will apply particularly to France, which is having to adjust to a new reality of declining power within the EU -- courtesy of expansion and the new draft constitution -- and the failure of its short-lived attempt to work with Germany and the United Kingdom in a "troika."
France has only begun to comprehend that its dream of a European foreign policy triumvirate -- France, Germany and Britain -- will not be realized, and that Paris will never be able to make the EU its own. After examining its failures, France will reassess its position in international politics and decide what to do next.
France will play a bit part in the U.S. presidential campaigns, while Bush takes two tracks: He will make overtures to the EU amid attempts to shift some of the military load in Iraq and Afghanistan, but he will score political points if and when Paris speaks out as Europe's loudest dissenter on U.S. policy. Bush is prepared to turn the other cheek, rhetorically, to any jabs from European leaders. He will avoid open confrontation that would cause him to appear unreasonable in an election year -- but he will indulge in subtle digs at the French, which makes for good politics in the land of freedom fries and freedom toast.
SOUTH ASIA
Although all three major states of South Asia -- Afghanistan, Pakistan and India -- are geopolitically significant, the third quarter will see activity in only the first two. India will remain relatively quiet, except for moves by the new Congress-led United Progressive Alliance coalition government to consolidate its hold on power and to pursue the process of normalization with Pakistan -- an initiative begun by the BJP-led National Democratic Alliance government.
Afghanistan
Seeking to strengthen its hold on power, the government of Afghan President Hamid Karzai will spend the first two months of the third quarter preparing for the elections scheduled for September. First, Karzai will be courting and forging deals with ethnic, tribal, local and regional power brokers -- including "willing" members of the ousted Taliban movement -- to enhance his chances for re-election and to ensure that the vote will be held with minimal disruption. Second, the government will seek greater involvement by foreign troops in containing Taliban and other jihadist militants who oppose Kabul and the presence of U.S.-led coalition troops in the country, and who seek to derail the ongoing political process. Finally, the government will be working with the United Nations to register voters and set up polling infrastructure and processes.
Pakistan
During the next quarter, Pakistani President Gen. Pervez Musharraf will focus on three issues. First, he will continue efforts to consolidate his hold on power in the run-up to a fourth-quarter decision -- one way or the other -- on whether to retire his uniform and assume the role of a civilian president. He will try to do this by installing Finance Minister Shaukat Aziz, in the place of interim Prime Minister Chaudhry Shujaat Hussain, although more Cabinet reshuffles likely will result. Stratfor also expects at least one more reshuffling of the top military brass as two of Musharraf's immediate subordinates, Vice Chief of the Army Staff Gen. Yusuf Khan and Chairman of the Joint Chiefs of Staff Committee Gen. Mohammed Aziz Khan, retire.
Second, he will continue to pursue al Qaeda and allied militant organizations within Pakistan and throughout the four provinces and tribal areas; and third, he will move ahead with the well-calibrated peace process with India.
These three issues will lead to tense moments in the third quarter with opposition parties -- particularly the moderate Islamist Mutahiddah Majlis-i-Amal (MMA) alliance. However, no dramatic showdowns are likely until the fourth quarter or early 2005 -- and these are most likely if Musharraf decides to remain as military chief beyond the Dec. 31 deadline.
FORMER SOVIET UNION
President Vladimir Putin will remain firmly in charge of a stable Russia this quarter. There will be no loud purge of Putin's opponents within the intelligence community -- only a quiet purge, with continued appointments for the president's pro-U.S. loyalists to key positions. Rank-and-file members will continue to oppose what they see as Putin's surrender to Washington on political, security and economic issues -- forming the basis for plots and other types of active opposition to Putin that will emerge next year.
Oil major Yukos likely will gain new owners this quarter. The company probably will be saved from bankruptcy, but the new owners and management -- unlike owner Mikhail Khodorkovsky, the jailed oligarch -- no longer will represent a political challenge to the Russian president. This turn of events will affect other major companies headed by oligarchs, who soon could be seen obediently doing Putin's bidding.
More market reforms are in store for Russia during the third quarter -- leading to further impoverishment but no major protests. Oil will help keep Russian macroeconomic indicators in the black.
Meanwhile, Putin will drift closer to the United States, though still occasionally critical of some U.S. policies for internal and non-U.S. consumption. That will worsen Russia's relations with Europe and China. However, betting on Bush's re-election in November, Putin will aid his U.S. counterpart domestically -- perhaps through diplomatic measures or by issuing more statements about Russian intelligence that support Bush's stance on Iraq, Afghanistan and other issues.
In the rest of the FSU, gains are likely for pro-American parties in government and opposition stances, while pro-Russian parties will lose traction. Although some violence is possible, the internal struggles of FSU countries will be conducted mainly in the political rather than the military realm. One potential hot spot, however, is South Ossetia, a breakaway region of Georgia that is populated by an ethnic minority. The conflict could be prompted by the Georgian government's attempts to recover the territory -- following its success in Ajara and encouraged by U.S. support. If conflict does flare up, it would be prolonged, with no clear winner this quarter.
New attacks by Islamist militants are possible in Uzbekistan and some other parts of Central Asia this quarter.
LATIN AMERICA
Popular referendums in Venezuela and Bolivia will be the most salient developments in Latin America in the third quarter.
Venezuelan President Hugo Chavez will confront a presidential recall referendum Aug. 15. All recent voter surveys indicate that more than two-thirds of Venezuelans would vote for Chavez to resign, paving the way for new general elections. However, a similar percentage of voters also reject the return of traditional leaders and political parties that ruled Venezuela before Chavez was elected in December 1998.
Chavez has a chance of winning the referendum if he can persuade enough voters to stay at home Aug. 15 or else vote to support him. But even if he loses, a return to power cannot be ruled out; he could seek re-election in the subsequent general polls and win under Venezuela's simple-majority, winner-take-all system.
As the referendum process unfolds, Venezuela will be politically unsettled. But the military is likely to remain in barracks, and there is little chance that oil exports will be disrupted due to political tensions -- unless Chavez decides to cut off shipments to the United States. Though he repeatedly has threatened such a move in recent months, Stratfor views follow-through as unlikely, since the financial and political fallout could hurt his government.
In Bolivia, voters will decide in mid-July what to do with their natural gas reserves, and whether to establish an assembly to draft a new constitution. The referendum could determine the fate of President Carlos Mesa's government. Since taking power in October 2003 after a popular revolt toppled then-President Carlos Gonzalez de Lozada, former Vice President Mesa has been steering a careful course between efforts to continue free-market policies and populist demands to renationalize the oil industry and boot the United States out of the country.
Whatever the outcome of the Bolivian referendum, it likely will intensify nationalist passions among indigenous groups, and it could affect the stability of Mesa's government. It also is likely to aggravate a long-simmering conflict between highland and lowland Bolivians. The mainly indigenous highlanders advocate interventionist and nationalist government policies, while lowland Bolivians are broadly supportive of free-market policies. The conflict is eating away at Bolivia's territorial cohesiveness as a nation-state. This does not mean Bolivia is on the verge of balkanizing, but its continued difficulties will act as a brake on broader regional efforts to develop more integrated economies.
Elsewhere in the region, Argentina will continue to slog forward with debt-restructuring talks. Minor adjustments are possible in terms of the write-downs proposed by the Argentine government, but in the end creditors likely will lose about 80 cents on the dollar of their original investment in Argentine government debt bonds.
AFRICA
The most important trend in Africa over the third quarter will be the emerging diplomatic partnership between the United States and Libya. Washington has approached Tripoli in efforts to funnel humanitarian supplies to the Darfur province of western Sudan.
Though the crisis in Darfur has attracted the international spotlight only recently, it has been under way since at least early 2003. Washington's decision to get involved at this point has little to do with concern about the humanitarian situation in Darfur. Rather, with its focus on the volatile Gulf region at the moment, the United States needs North Africa's Arab states to remain stable.
Despite Moammar Gadhafi's political reintegration and the resumption of U.S.-Libyan relations, Washington must tread carefully where Tripoli is concerned. Taking a position on the Darfur crisis -- an issue the United Nations has begged Washington to pay attention to for months -- gives the Bush administration a chance to develop a working relationship with Gadhafi. The goal -- if not to secure his long-term cooperation -- is at least to prevent any chance that he will aid Islamist militants. At the same time, Washington will be able to increase the pressure on Khartoum to halt the fighting in Darfur and lock down a peace deal with southern rebels.
Over the next three months, the United States will likely find other diplomatic tasks for Gadhafi in Africa. Problems in countries with limited U.S. interest -- such as the civil wars in the Democratic Republic of the Congo and Cote d'Ivoire, or troubles in Liberia and other West African states -- could become a proving ground for U.S.-Libyan political cooperation.
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