Forecast for the Third Quarter of 2000
The Major Players Focus on the Great Game
Summary
In the coming months, world events will be shaped by an unfolding
game of alliances. After consolidating power at home, the new
government in Moscow will look abroad, seeking investment from the
West and competing to a certain degree with China. After a long
dormant period, American interest in the world will be renewed with
the pressures of a presidential campaign; one of those pressures
will be found in the price oil. And Washington is likely to bring
its own pressure to bear on friendly governments in Latin America
and the Persian Gulf to control those prices before the November
elections.
The U.S. Economy: Why We Weren't Quite Right
Our forecast for the second quarter of 2000 declared that American
and international attention would be caught up in a looming
correction in the U.S. economy and its repercussions economies
across the globe. In fact, the second quarter did see a correction,
primarily focused on the tech sector, but the overall U.S. economy
proved to be surprisingly resilient.
Indeed, our long term forecast, predicting that a massive expansion
will continue into the last half of this decade would appear more
accurate than our short term forecast. There are continued signs of
weakening in the economy. And the United States has gone so long
without any contraction that there is a strong argument for a more
than mild cooling. We stand by our long-term forecast; but our
short-term forecast could now be out by a couple more quarters.
So what's in store for the third quarter of 2000? Our annual
forecast for this year declared that this "will be the year in
which the world gets down to the business of creating the new epoch
in world affairs: the serious business of great powers and their
conflicts and alliances. The world will be in the process of
defining the constellation of relationships that will characterize
the coming generation."
That process has clearly been proceeding at a rapid pace, with
high-level international visits peppering the last three months.
With a full diplomatic calendar and increased attention from both
Russia and the United States, the third quarter will be dominated
by the great game. The basic motifs of our decade and annual
forecasts remain.
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Beijing & Moscow: Competition Instead of Cooperation
Neither the Russian nor Chinese governments want an alliance right
now, though.
Both Moscow and Beijing wish to use the threat of an alliance,
instead, to extract concessions from the United States. After
flirting with one another, both regimes are signaling to Washington
that they are available for business. Thus, in the coming quarters,
it will appear that China and Russia will be at odds with one
another and that the way is open for the United States to exploit
that rift.
In the long run, however, the United States, with its
disproportionate power, continues to represent a fundamental threat
to each regime; this will limit a Sino-Russian rivalry. However, in
the near term and certainly through the third quarter, it will
appear that China and Russia are serious rivals.
Indeed, there are serious matters to be contested. The new player
in the game, Russian President Vladimir Putin, spent much of the
first half of 2000 attempting to check Russia's decade-long
decline, to gain control of the reins of power and to establish a
new baseline and strategy for Russian foreign policy. Now ready to
focus his attention abroad, he will have two targets.
First, Putin must revitalize Russia's economic relationship with
the West; the relationship has been decimated by the chaos and
corruption that defined Russian economics and politics under former
President Boris Yeltsin. As we noted in our decade forecast,
Putin's greatest challenge on this front lies in convincing the
West that his heavy-handed crackdown on corruption and his
consolidation of federal power is not nascent totalitarianism, but
a reform program that will create a better climate for investment.
Judging by early international reaction to the new Russian
president, and by the relative national interests involved, Putin
will likely focus his attention more on Western Europe than on the
United States.
Second, Putin will continue to pursue a distinctly chilly foreign
policy toward China. This is a significant difference between the
current president and the previous one. As Yeltsin's short-lived
program of economic reform effort was devoured by oligarchs - and
Western loans and investment dried up - Yeltsin began touting the
prospects of a strategic partnership with China. In part, this
threatened challenge was intended to scare the United States into
remaining economically and politically engaged with Russia. In
part, this was an attempt by Russia to profit by association with
China's economic and political successes.
But the gambit backfired. Russia was placed in an inherently weak
position, constantly reliant on its Chinese partner. Moscow could
neither challenge the United States nor woo U.S. investment. Russia
had difficulty even attracting U.S. attention, except perhaps as
the object of scorn.
In contrast, Russia is now offering only three things to China:
oil, arms and a wealth of chaos. For Beijing, a close Russian ally
is a political liability, while Russia kept on a leash and at a
distance can be very profitable. Faced with its internal economic
problems, China has almost no incentive to allow Russia access to
its economy, and both countries are in competition for the same
pool of foreign investment. And while geography stands in the way,
in the long term, China's growing population of 1.2 billion poses a
threat to Russia's dwindling population of 148 million. Border
regions of eastern Siberia are reportedly already being flooded
with Chinese, for example.
The only short-term thread really holding together the Russian-
Chinese relationship is China's need for arms and oil, and now
China is not even sure it needs Russian oil. This is the ultimate
source of the rift between the two countries. Russia has little to
offer the world market but arms and raw materials. Oil and gas
accounts for some 44 percent of Russian exports and 40 percent of
Russia's budget revenues. Hydrocarbon exports will remain critical
to Russia's economic stability, whether or not it succeeds in
luring back Western investment, and Moscow has set out to increase
its long-term future by securing control over Central Asia's oil
and gas exports.
In the name of defending the region against Islamic fundamentalism,
Russia has recently re-established strong military and intelligence
ties with the Central Asian states, and currently maintains a
garrison of troops in Tajikistan. Russia has also succeeded in
driving the United States to gradually abandon its attempt to
control the region's export routes. Lacking sufficient domestic oil
supplies to sustain its economy, Beijing is attempting to direct
Central Asia's export routes eastward. This is a direct challenge
to Russian economic and political security.
With Central Asia in the balance, Russia and China have begun a
short-term process of building alliances in the region, in the
apparent hope of encircling one another. Russia has declared its
intent to form a strategic partnership with India, a country that
is expanding its traditional rivalry with China into Southeast Asia
and the South China Sea. Russia has boosted sales to India of
front-line tanks, aircraft, missiles and naval vessels, and has
even gone so far as to announce it would take its relationship with
India into account before selling weapons to China. Moscow has also
attempted to build ties with Vietnam, Japan and the Koreas - all in
Beijing's area of interest.
Russia's most obvious snub to China came early this month when
Putin brought up the notion of a joint missile defense shield
between the United States and Russia. Although a host of technical,
diplomatic and security difficulties block such a proposal, the
message was clearly aimed at Beijing - the only remaining power
with a substantial nuclear capability.
China, in response, has locked down its relationship with Pakistan
and has opened to Iran, with an unprecedented June visit to Beijing
by Iranian President Mohammad Khatami. Russian relations with Iran
have cooled recently, apparently over the intensification of
Russian cooperation with Iraq as well as Iran's efforts to
establish export routes for Central Asian oil and gas. In addition,
China has increased its own military contacts with Ukraine, sending
Chinese intelligence officers to Kharkiv for training in Russian
language and military communications equipment, as well as
negotiating the purchase of Ukrainian-built Antonov transport
planes.
The first tangible indication of the state of Russian-Chinese
relations will come in July, with the meeting of Russian President
Putin and his Chinese counterpart, Jiang Zemin, at the summit of
the Shanghai Five - China, Kazakstan, Kyrgyzstan, Tajikistan and
Russia - in Dushanbe, the Tajik capital. Later in July, on his way
to the G-8 summit in Japan, Putin is scheduled to meet again with
Jiang during an overnight stop in Beijing.
As the competition evolves, it will present tremendous
opportunities for players like Iran, India and the Central Asian
states to profit by playing the two off against one another. The
coming quarter also sets the stage for a redefinition of relations
between Russia and China and the United States. Both need
investment, and neither wishes to be caught up in a costly military
confrontation. Russia, at present, is in a nightmare situation,
with China all but the political and economic darling of the West
and Russia a near outcast. Russia needs to turn the equation
around, and it may have an opportunity to try during the next
quarter.
An important irony will unfold, though. Precisely because there are
tremendous opportunities for exploitation by third parties, any
Sino-Russian competition is self-limiting. As third powers,
including the United States, begin to exploit the situation, China
and Russia will engage in self-regulating behavior. As third
parties become more aggressive, the rift between Russia and China
will close ranks. A Sino-Russian entente is the long-term, logical
response to American power.
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America Abroad
It must be remembered, of course, that with its economy booming and
its Cold War foe in tatters, the United States has become something
of a foreign policy dilettante. Washington looks abroad largely in
response to domestic political pressures, and the third quarter
will see those pressures surface again.
Outgoing President Bill Clinton has yet to secure his foreign
policy legacy. He has done nothing with the Iraqi dilemma he
inherited. His administration's adventure in Kosovo has received
mixed reviews. The U.S.-sponsored Russian experiment with liberal
democracy and capitalism was a mess when Clinton took office and
has only deteriorated. And the formal Middle East peace process
continues to creep along at its usual glacial speed. The closest
thing to a foreign policy triumph Clinton can claim is that China
remains economically engaged with the West, and his role in that
process - not to mention the real nature of that process - is very
much open to question.
With little that can be done at home, Clinton will turn his
attention abroad in the waning days of his lame duck presidency. We
expect an aggressive effort on the part of the United States to
extract its forces from Kosovo - and perhaps Bosnia - by trying to
reach an understanding with Belgrade. This understanding would
include the resignation of Milosevic without a war crimes
conviction, allowing the United States to proclaim victory without
actually dismantling the Serbian regime. It is not clear that the
attempt will succeed, if for no other reason than that Western
guarantees to dictators, in the wake of the Pinochet affair, no
longer carry substantial weight.
Nevertheless, Clinton would like to hand the appearance of a
victory to Gore before the November elections. The upcoming
elections will increasingly drive U.S. policy. With a generally
healthy economy and almost indistinguishable domestic policies, the
only arena for debate in the presidential campaign is foreign
policy.
Politics & The Price of Oil
The most salient issue will be the price of oil.
Oil prices continue to hover around $30 a barrel, sparking fears of
economic slowdown and inflation. Worse, they show no sign of
significantly dropping before the U.S. presidential election, a
fact that will plague the Gore campaign throughout the summer.
OPEC still holds the key to oil prices, and five nations hold the
key to OPEC. The production agreement is held together primarily by
Saudi Arabia, which has the capacity to export another 3.6 million
barrels of oil per day if it chooses to do so. Secondary players
include Kuwait, the United Arab Emirates, Mexico and Venezuela,
each of which is withholding a roughly 400,000 - 600,000 barrels
daily from the world market.
These five nations were instrumental in setting up the production
agreement and have proven remarkably resistant to U.S. pressure as
well as the financial temptation increase production and cash in.
The rest of the oil producers are operating at or near capacity,
leaving only the big five as major targets of U.S. attention.
The cartel is not invulnerable; it has a crack or two. Norway
abandoned its oil production ceilings last week. But Norway's
contribution isn't enough to shift prices much, though it may
encourage other producers to follow suit; and Saudi Arabia has
announced that it will. Even so, there is a time lag between
production increases and price changes at the pump, a fact that
would be compounded by bottlenecks at oil refineries, which are
already running close to capacity.
This fall, three significant events will converge to affect oil
supply. The OPEC summit in September will decide on another
potential production hike. The advent of cooler weather will bring
another rise in crude oil prices. And the United States will elect
a president.
High oil prices are an extraordinary handicap for Democratic
presidential candidate and incumbent Vice President Al Gore,
especially since there is essentially no difference between his
policies and those of George W. Bush. In the absence of real
issues, the plights of motorists will occupy the headlines and run
counter to Gore's claims about the strength of the economy. The
president will be tempted to preserve his successor and the summer
- before the OPEC meeting - is the time to exert pressure.
The United States will put an enormous amount of pressure on oil
producers in the coming months, cajoling small and large producers
alike. Energy Secretary Bill Richardson's tactics before the March
OPEC summit were criticized as heavy-handed and intrusive, and they
only resulted in the moderate increase that was quickly swallowed
up by increased demand.
But this time, the Clinton administration has no other options and
will do everything possible to strike a deal. The prime candidate
for U.S. pressure will be Mexico's new government, followed by
Kuwait and the United Arab Emirates. All depend upon the United
States for security or economic assistance.
(c) 2000 WNI, Inc.
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