January 4, 1999
stratfor.com
SUMMARY
Russia will begin the process of recreating old Soviet empire in
1999. The most important question of 1999: will Ukraine follow
Belarus into federation with Russia?
Russia and China will be moving into a closer, primarily anti-
American alliance in 1999.
Asian economies will not recover in 1999. Japan will see further
deterioration. So will China. Singapore and South Korea will
show the strongest tendency toward recovery.
China will try to contain discontent over economic policies by
increasing repression not only on dissidents, but the urban
unemployed and unhappy small business people. Tensions will
rise.
Asia will attempt to protect itself from U.S. economic and
political pressures. Asian economic institutions, like an Asian
Monetary Fund, will emerge in 1999.
The Serbs, supported by the Russians, will test the United States
in Kosovo. There is increasing danger of a simultaneous challenge
from Serbia and Iraq, straining U.S. military capabilities
dramatically.
The main question in Europe will be Germany's reaction to the
new Russia. The Germans will try to avoid answering that
question for most of the year.
Latin America appears ready to resume its economic expansion,
beginning late in 1999.
FORECAST
The Post-Cold War world quietly ended in 1998. A new era will
emerge in 1999. It will appear, for a time, to be not too dissimilar to
what came before it, but looks can be deceiving. In fact, we have
entered an era with a fundamentally different global dynamic than the
previous era. We should not think of the period 1989-1998 as an era. It
was an interregnum, a pause between two eras. 1999 will see a more
conventional, natural world, in which other great powers in the world
will unite to try to block American power. In 1998 the United States
worried about Serbia, Iraq and North Korea. In 1999, the United
States will be much more concerned with Russia, China, France and
Japan. The world will not yet be a truly dangerous place, but it will begin
the long descent toward the inevitable struggle between great powers.
Two forces are converging to create this world. The first is the recoil of
Russia from its experiment in liberalism. The other is the descent of Asia
into an ongoing and insoluble malaise that will last for a generation and
reshape the internal and external politics of the region. In a broader
sense, this means that the Eurasian heartland is undergoing terrific stress.
This will increase tensions within the region. It will also draw Eurasian
powers together into a coalition designed to resist the overwhelming
power of the world's only superpower, the Untied States. Put
differently, if the United States is currently the center of gravity of the
international system, then other nations, seeking increased control over
their own destinies, will join together to resist the United States. Russia
will pose the first challenge. Asia will pose the most powerful one.
Russia Begins its Quest to Recover Great Power Status
The die has been cast in Russia. We wrote in our 1998 Forecast:
"Whether or not Yeltsin survives politically or personally is immaterial.
The promise of 1991 has become an untenable nightmare for the mass
of Russians. The fall of Communism ushered in a massive depression in
the Russian economy while simultaneously robbing it of its global
influence." In 1998 we saw the consequences of this. The reformers in
Russia were systematically forced out of power. Power seeped out of
Yeltsin's hands. Finally, a new Prime Minister was selected -- the
former head of the KGB's international espionage apparatus. A
restoration of sorts is well under way in Russia.
Personalities are unimportant. What is important is that in 1998, the
massive failure of the reformers resulted in their being forced from
power. The West, which had invested in Russia, realized that it would
never recover those investments nor many of the loans they made. As a
result, investment and credit ceased flowing into Russia and, therefore,
Western influence plummeted. There was no reason to appease the
West if no further money was forthcoming. The Russian love affair with
the West came to an abrupt halt. As so many times before in Russian
history, the pendulum is moving from adoration of the West to suspicion
and contempt. As before, the Westernizers who dominated Russia for
the past decade are being replaced by Slavophiles, who will seek to
root out Western influence while they liquidate the Westernizers.
Russian politics has searched for a center of gravity ever since the
reformists began to lose credibility. In December 1998, that center of
gravity emerged in the form of Russian chauvinism and
anti-Americanism. When the United States bombed Iraq without even
consulting the Russians, the lid suddenly came off of the pent up anger
Russians felt at their loss of great power standing. The one thing that
every significant faction in Russian politics agree on today (save for the
dwindling band of liberals) is that the loss of great power status is
intolerable. Primakov, Zhirinovsky, the Communists and even Yeltsin
agree on little save this -- Russia must recover its great power status. It
is the only unifying principle left in Russian life.
The corollary to this is a growing Russian consensus that Russia has
been victimized both by Western investors and by the United States.
Investors are seen has having taken advantage of Russia's eagerness to
please the West, exploiting it shamelessly. The United States has treated
Russia as if it were a third world country, subjecting it to continual
humiliation. All of this has tapped into a deep vein of Russian chauvinism
and xenophobia. In a country that has become virtually ungovernable,
this powerful nationalism is now the only means of uniting the country.
No one can govern Russia any longer except on a powerful, nationalist
platform.
The situation in Russia reminds us of the last days of Weimar Germany.
Unable to provide either prosperity or national security, Weimar
Germany was replaced by a regime that used national security issues as
a means to unite Germany and revive the economy through military
spending. Yeltsin's Russia has lost all credibility, failing to provide either
prosperity or national security. Where Germany focused on the
Rhineland, Sudetenland and the Danzig Corridor, Russia will focus on
the Baltics, Ukraine and Central Asia. We expect to see massive
increases in defense spending, intended both to increase Russian power
and stimulate the Russian economy.
As with Germany, not all of the former fragments of the old Soviet
empire are opposed to reintegration. On December 25, 1998, exactly
six years after the dismantling of the Soviet Union, Russia signed a treaty
with Belarus, essentially establishing the foundations of reunification.
That set, the focus for 1999 will be Ukraine. If Ukraine follows Belarus
back into federation with Russia, the geopolitical essence of the former
Soviet Union will have been recreated. Then the focus will be on the
Caucuses, Central Asia and the Baltics. But first and foremost, the
burning question of 1999 will be Ukraine. We predict that Ukraine will
join Belarus in returning to federation, in spite of belated efforts by the
West to keep them out.
After that, Russia will face a generation of reabsorbing its former
constituents. Each step of reabsorption will bring it into greater conflict
with other nations. Its move back into Central Asia will bring it into
direct conflict with the United States, which has made huge investments
in oil development in the region. Its move south into the Caucuses will
collide with Iran and Turkey. But it is the move west that will be the
most dangerous. In 1999, Russian troops will once again find
themselves on the Polish border, a Poland now part of NATO. As
Russian pressure grows on the Baltic States, this border area will
become explosive.
But the first confrontation will come, we think, over Serbia, where we
expect Russia to increase direct aid to Serbia openly, thereby
challenging U.S. policy in Bosnia and Kosovo. Serbia, watching U.S.
fumbling over Iraq, and emboldened by Russian support, is clearly
preparing a new challenge to the United States over Kosovo. Serbia is
calculating that the United States will not risk a major confrontation with
Russia, and France may choose to oppose a full-scale anti-Serbian
intervention. The dangers of a new confrontation with Serbia rise as
Russian nationalism intensifies. There is particular danger if Serbia and
Iraq challenge the United States simultaneously.
Asia Seeks Political Solutions to Continuing Economic
Malaise
Russia will not represent a global threat, but it will challenge U.S. power
along its periphery, in a contest that will begin in 1999, but will take a
generation to play out. Nevertheless, the United States will face threats
globally, owing to the evolution of the Asian financial process. Note that
we say process and not crisis. Asia is no longer in crisis. It is now in an
endemic malaise, from which it cannot, generally speaking, recover.
Asia's economic dysfunction is no longer a crisis, but a long- term Asian
condition.
Since some are predicting recovery in 1999, let us explain why we are
so negative. The essence of the Asian crisis, as we have said many
times, is to be found in the appallingly low rate of return on capital that
Asian economies have experienced. This low rate of return is rooted in
the ability of Asian governments to abort the business cycle through
export-generated growth and high savings rates. Because interest rates
were kept artificially low, businesses that had no business surviving
actually expanded. They grew in spite of the fact that they were only
minimally profitable, if at all. These businesses soaked up available
credit, while continuing to erode financially. In the end, they could not
even repay their loans.
Recessions are normally triggered by rising interest rates. The rising cost
of money forces marginally profitable business to restructure or fail. This
is an essential aspect of the discipline of capitalism. Capitalism without
business cycles is a contradiction in terms. Nevertheless, Asian
governments managed to avoid this discipline for almost half a century.
They avoided business failures, lay-offs, restructuring and all the
nastiness of capitalism. The net result is a group of economies that are
breathtaking in their inefficiency.
The key is Japan. Japan led Asia into its current situation. Japan must
lead Asia out. But Japan is institutionally committed to preventing the
needed massive, shattering, agonizing restructuring of its economy. It
cannot proceed. The huge dinosaurs of the Japanese economy must be
compelled to restructure. The only force that can compel them to do this
is rising interest rates. As Japanese credit worthiness continues to
decline, foreign investment and loans are either drying up or available
only at much higher interest rates. Internally, the Japanese government
continues to protect the dinosaurs by keeping interest rates absurdly
low. Japan understandably wants to prevent a massive collapse of the
economy. But unless the economy is permitted to collapse, it cannot be
reconstructed. In other words, Japan can neither endure the disease it
has caught or the medicine that can cure it. It is not Japan's politicians
that have created gridlock. It is the Japanese reality.
This is the agonizing dilemma throughout Asia. Having played with the
business cycle for generations, inefficiencies have built up to such a
degree that the culling that must take place will be cataclysmic. Socially,
Asian societies are completely unprepared to pay the price they must
pay in terms of unemployment, declining standards of living, and loss of
control to foreign investors and creditors. Politically, leaders are trapped
between the economic and social realities. They are therefore paralyzed.
The inefficiencies continue to rise, hopes of recovery are constantly
aborted by economic realities, and social tensions rise.
In weaker Asian societies, such as Indonesia, society has already
essentially exploded and the government is trying to contain the
consequences. In some countries, like Singapore and South Korea,
owing to fortunate circumstances and skillful political action,
restructuring is actually taking place within the existing political
framework. In Japan, however, the government's inability to bear the
social consequences of depression has paralyzed it. This is not because
Japanese politicians are stupid or weak as some have charged. The
paralysis of the Japanese state is built into the collision of the Japanese
economy with Japanese society. There can be no solution without a
radical restructuring of the Japanese political order, replacing it with a
structure that is able to impose pain on a society unprepared to endure
it.
This is precisely what China is trying to do. On the one hand, China is
permitting economic reality to ravage its economy. It is shutting down
inefficient businesses, allowing unemployment to rise, allowing standards
of living to begin falling. It is also taking political steps to control the
situation. Apart from its very public crushing of dissent, Beijing is shifting
its political base away from the coastal regions to the interior agricultural
regions, by shifting state investment patterns. It is not clear that China
will succeed in this partial, politically controlled house cleaning. It may
well be, as we strongly suspect, too little and too late. But the
combination of powerful political repression with some degree of
restructuring may well become an Asian model.
It is a model that can mitigate the economic problems, but cannot solve
them. Asia cannot endure the long-term reconstruction needed to make
it competitive with a rampant America. As Asia becomes less
competitive, it will find that it must protect itself against American
economic encroachment. Obviously, the U.S. is sensitive to Asian
exports surging into the United States. But the real friction is caused by
the Asian need for U.S. investment and Asia's inability to pay the price it
must to get it.
Japan badly needs U.S. investment and credit. It cannot solve its
problems without them. But U.S. investors and lenders require a level of
transparency and a degree of control that is incompatible with Japanese
social requirements. Someone lending billions to bail out a Japanese
bank will want a large degree of control over that bank. American
owners will want to make investments based on economic rationality
rather than on the bank's keiretsu relationships. The intrusion of
American capital would cause the very social chaos that Japanese
politicians badly want to avoid. This holds true throughout most of Asia.
Asia is unable to generate sufficient capital to solve its problems, unable
to restructure its economies to generate that capital, and unwilling to
allow an uncontrolled influx of American capital on American terms.
Asia cannot solve its problems. It is therefore caught in a process of
mitigation, keeping things from becoming unacceptably bad. In order to
do this, Asia must seek to insulate itself from the United States in
particular and the global economy in general. It appears to us that the
Asian solution will be to create Asian institutions to supplant the global
institutions within which Asian economies are increasingly uncompetitive.
We expect to see increased resistance to American demands for trade
liberalization along with increased utilization of Asian solutions to
problems, from using the yen as a reserve currency to an Asian
Monetary Fund to Asian based security systems. We expect 1999 to be
a year in which Asia begins creating Asian institutions.
The Sino-Russian Alliance Redefines the World
Asia's efforts to work around its fundamentally insoluble economic
malaise will lead to increased friction with the United States on all levels.
Most important immediately, we see the reemergence of a
Moscow-Beijing axis designed to block unilateral American actions in
Eurasia. Furthermore, this relationship will both insulate Russia and
China from U.S. political and military pressure, and create
politico-military counter-pressure on the United States designed to elicit
greater economic cooperation. 1999 will be the year in which this
alliance will take full shape.
There will be outriders to this alignment. Japan is increasingly at odds
with the United States over economic policy. It also seems to be
developing an independent assessment of the North Korean threat. As
U.S. pressure on Japan to liberalize its markets increases, Japan's
search for alternatives will increase as well. Its search for economic
alternatives is already well under way. But in order to create economic
alternatives to the U.S. sponsored global systems, Japan will need
political traction. Japan will not join in the Russo-Chinese alliance, but it
will use it to attempt to extract concessions from the United States.
There will be other outriders. France is already clearly cooperating with
China and Russia. This was visible in the Iraq affair. The question is
what pressure it will put on the new Europe. We were clearly wrong
when we expected the Euro to fail. The Euro is here and seems likely to
work in the short run. However, with French foreign policy increasingly
anti-American, the question is whether the rest of Europe will follow. To
be more precise, the question is whether the Germans will follow the
French lead.
Germany is now deeply torn. The political instincts of the new
government, forged in the 1960s, reflect a profound uneasiness with the
United States and its leadership. French policy is attractive. However,
fear of Russia is also a visceral feeling in Germany, and mismanagement
there could quickly destabilize the government. With Russian troops on
the Polish frontier, the old German nightmare, the Polish question, is
about to arise. Happy to have the buffer, but reluctant to forward
deploy in Poland (and unlikely to be welcomed by the Poles), the
Germans need the United States to counterbalance the Russians. At the
same time, a solid arrangement with the Russians is also attractive.
Germany is now in the process of defining an identity and a policy for
the 21st century. It is simply unclear to anyone, including the Germans,
what this identity will be. 1999 will not be the year this is settled.
The United States Rolls Blithely On
Then there is the United States. We continue to expect the U.S.
economy to expand. There will undoubtedly be a cyclical downturn at
some point, but it will not be historically significant and it may not come
for a while. We have heard a great deal from those who expect the U.S.
economy to implode because of Asia. Asia will undoubtedly have some
effect. But the Asian crisis has been in full swing from over a year and
the U.S. economy has been only marginally affected. We just don't see
indications that the expansion is about to end. We have been bullish on
the U.S. economy since 1995 and we continue to see this as a massive,
long-term movement driven by the restructuring of the 1980s.
We expect others, particularly Latin America, to benefit from this
historical American expansion. In spite of the problems in Brazil and
Venezuela, we feel that the worst has already been seen and the
probability of an upturn later this year is extremely strong. We continue
to feel that Latin America will see the strongest growth of any region in
the first decade of the 21st Century. The 1998 downturn, while
unexpected, represented the rapid cycling of capital markets in an
immature economy, not the wheezing senility of Asia. Just as Latin
America deteriorated with surprising vigor, it will, we think, recover. By
late 1999, we expect to see a major Latin American rebound underway.
As rosy as the economic picture is in the Western Hemisphere, the
foreign policies of the United States are increasingly unsettling. U.S.
policy in Iraq has essentially collapsed. U.S. policy in Serbia, where we
expect another crisis shortly, is now going to be challenged by the
Russians, making the U.S. mission much more dangerous and much less
soluble. North Korea will similarly become unmanageable. The Wye
Accords between Israel and the Palestinians are coming apart at the
seams. Whether Bill Clinton survives his crisis is at this point, 1999,
fairly irrelevant. What is relevant is that the United States has not
created a foreign policy identity for itself, and has not planned for a
world increasingly resistant to its policies.
That is the key to 1999. We are in a world increasingly resistant to the
one superpower. There is no second superpower, but there are several
great powers. These great powers are in the process of cobbling
together an alliance that, taken together, may not fully counterbalance
the United States, but will serve to limit American freedom of action.
Behind the shield of this alliance, built around China and Russia, we
expect to see increasing Asian economic integration, designed to limit
the effects of the global economy on their insulated societies. We also
expect to see increasing regional Russian imperialism, increasing Chinese
repression, increasing attempts by others to use the Russo-Chinese
alliance for their own ends and therefore, a new and dangerous world.
1999 is the first of many years of increasing tension and conflict
involving not only minor players, but also the world's great powers. It is
the beginning of what will prove to be a tense first decade in the 21st
century. |
