DJ, To paraphrase the late Chairman named Mao, "chao everywhere, and so all is well under the heaven"
Chugs, Jay
Third Quarter Forecast: The Pivot of the War
July 07, 2004
stratfor.com
The U.S. presidential election will be the dominant issue of the third quarter. To the extent that the U.S.-jihadist war has become the pivot of the international system, the presidential election will become the pivot of the war. The key issue separating U.S. President George W. Bush and his Democratic opponent, Sen. John Kerry, is this: Bush carried out a series of military campaigns without considering Franco-German views; Kerry has made the enlistment of the Franco-German bloc into the American war effort the centerpiece of his campaign thus far. Kerry is prepared to reshape the American war effort to accommodate their views.
Bush's view is that limiting freedom of action is not worth the benefits of Franco-German support. This is not a trivial matter, but it is not, in the end, an earthshaking difference in opinions. Kerry is not prepared to challenge the basic premise of the war. His argument is that Bush has mishandled the war -- and particularly Iraq -- and that he, Kerry, is more capable than Bush. That means, from a global point of view, the outcome of the election is of relatively little consequence.
The exception to this is in the Islamic world, where Bush's defeat would be enormously significant. Osama bin Laden has made the argument that the Islamic world is much more influential than it knows. He points to the war in Afghanistan and the defeat of the Soviet Union and its collapse as his major examples. Another is the fall of the Spanish government after the Madrid bombings. These events validate both al Qaeda and its view of the world. If Kerry defeats Bush -- regardless of the issues on which the election turns -- the perception in the Islamic world will be that it was another triumph for Muslims.
There is another viewpoint: Al Qaeda regards Bush as incompetent and therefore wants him to remain in power. We see no evidence for this argument, which transfers the view of Bush's domestic opponents to al Qaeda. From al Qaeda's standpoint, however, one American president is about the same as another. Its audience is Muslim, and its desire is to be seen as deciding the fate of Western governments.
Al Qaeda will focus its attention this quarter on doing what it can to undermine Bush's credibility in the United States. That means using the Iraqi jihadists to destabilize the new regime in Baghdad to the extent possible, along with raising tension levels in oil-producing countries to generate a war premium on the price of oil. This process was under way in the second quarter, and it will continue. We also continue to believe al Qaeda wants to carry out a major action in the United States, but we remain uncertain as to whether it has the resources to do so -- or if it does, whether U.S. intelligence can disrupt the attack. The covert dueling continues, with time now running against al Qaeda.
We also expect the third quarter to be dominated by the redefinition of U.S.-Iranian relations. The shift in U.S. policy during the April offensive in Iraq has created a fundamental crisis for Iran -- with its decade-long goal of a neutral or pro-Iranian government in Baghdad fading. Late in the second quarter, crises with the United States and Britain broke into the open. Iran's nuclear program, coupled with the capture and release of British sailors, drove home the fact that relationships are deteriorating. We cannot forget the reports out of Iran of training camps for suicide bombers or renewed interest in Hezbollah by both Iran and Syria. We strongly suspect that Iran will be critical for the next few months. The U.S. elections might also give the Iranians some leverage.
Since this is the third-quarter forecast and the presidential elections are in the fourth quarter, we are relieved of the responsibility of calling the election. Nevertheless, we note the fact that at his worst showing -- in May, following the April rising in Iraq -- Bush remained at 44 percent in the polls, only 7 percentage points behind Kerry. That is not a good place to be, but if that is the level of support Bush has when the situation seems completely out of hand, we expect a rebound. In our view, Bush is still the likely winner. His hard-core support is sufficient enough that -- without a further disaster -- he will never be out of striking distance of re-election.
But that is speculating on November. For the next quarter, the issue is whether Bush can avoid major problems in the war -- and whether al Qaeda can create some for him. The last is the most important question. We know what they would want to do; we simply do not know if they can.
MIDDLE EAST
In the third quarter of 2004, three Middle Eastern states -- Iraq, Iran and Saudi Arabia -- will be the most significant geopolitically. In each case, the center of gravity is the action of the United States.
The main event or issue this quarter will involve the governments' responses to U.S. pressure to rein in al Qaeda in Saudi Arabia, to desist from creating problems for the United States in Iraq and to contain Iran's bid to become a regional hegemon. In turn, the actual outcome will be a function of dealings between Washington and the three states individually, as well as the action of third parties -- such as al Qaeda militants in Saudi Arabia, jihadists and Iraqi insurgents in Iraq and the European triumvirate in the case of Iran.
The dynamic in each of the three Gulf states is intimately connected to the dynamic of the others. For example, if the U.S.-Saudi relationship deteriorates, Iran's position in the Gulf substantively will change. If al Qaeda militants in Saudi Arabia heed the call of Iraqi jihadists and cross the border, the strength of the regime in Baghdad -- and the U.S. military posture in Iraq -- will be undermined. If there is a political -- or worse, military -- crisis involving the United States and Iran, Baghdad and Riyadh will be called on to support the U.S. position.
Because the connections are diverse and myriad, each regime will be watching the actions of its neighbors closely -- and looking for means and opportunity to manipulate the positions of its neighbors in order to better its own. Meanwhile, Washington will be forced to take into account the dynamic in each of the three Middle Eastern capitals before taking action regarding any of them.
This makes for an extremely complex and difficult situation, since each move and maneuver by any of the players involved -- al Qaeda, Baathists, the Iraqi government, Iraqi Shia, Iran, the Saudi regime, the United States -- can have effects across the board. In this volatile atmosphere, crises can develop and escalate at a frightening pace. Stratfor does not expect anything as serious as a U.S.-Iranian war, but does recognize the potential for things to get out of hand -- and quickly.
Iraq
During the third quarter, the United States gradually will withdraw its forces to military enclaves in western and southwestern Iraq, although troop levels will not grow or be reduced by more than 10 percent to 15 percent during the third quarter. A natural consequence of the June 28 transfer of power to the Interim Iraqi Government is that Iraqi security apparatuses -- police, military and intelligence -- will be scrambling to fill the void left by U.S. and coalition forces, whose assistance will become increasingly limited. As a result, Iraqi forces will deal with routine matters inadequately and incompetently; they also will have to manage a crisis situation whenever there is a sudden surge in militant attacks.
During the next few months, Iraq's legal code will be crafted, and a hectic drive to establish the infrastructure for elections in January 2005 will ensue. The sovereignty of the new Iraqi government likely will be restricted to domestic affairs -- and even then will be tempered by the U.S. military presence. There will be no Shiite uprising on the scale seen in April 2004, but there will be intense jockeying among the three major groups -- Shia, Sunnis and Kurds -- as well as posturing for greater influence within the IIG and the administration that will emerge following January's elections.
Security will remain tenuous. Insurgents, facing mostly Iraqi police and military forces, will be emboldened to stage increasingly frequent attacks. Guerrillas will continue to target Iraqi leaders. If they succeed in assassinating Prime Minister Iyad Allawi, the country could be thrown into a fit of violence that would exceed the levels of the April rising. The insurgents will include foreign jihadists as well as a medley of Sunni Iraqi players -- distinct from those who sought inclusion in the political process. The interim government will declare martial law or emergency laws in areas where militant activity is the most marked.
Guerrillas will respond with increased aggression and confidence -- an attitude that also might make them more careless. This in turn could give U.S. forces -- who for the most part will not be involved in daily security tasks -- more opportunity to gather intelligence.
Given their interest in the state of their fellow Shia and Sunnis in Iraq, both Iran and Saudi Arabia will be engaged with Baghdad. Iran's involvement will be quantitatively and qualitatively greater than that of Saudi Arabia. Tehran will actively support the multiple Iraqi Shiite factions as they seek to increase their influence over the IIG. Tehran will use its back channels with Washington toward this end. Although Saudi Arabia's goal is to prevent the emergence of a Shiite-dominated Iraq and an Iran-dominated Persian Gulf, Riyadh will be less active: To reduce its own internal threats, the government could try to push increasing numbers of al Qaeda militants toward Iraq by promoting it as a greener pasture for jihadist activities. Pursuing this strategy would bring down the wrath of the Bush administration on Riyadh. In any case, Washington will continue to use Iraq to play off Iran and Saudi Arabia.
Iran
Two issues will come to the fore during the third quarter for Iran: One is its national security policy -- for the past decade, a balance-of-power strategy -- concerning Iraq; the other is its nuclear program, which has been the target of a recent U.S.-European diplomatic offensive.
Iran is under intense Western pressure to reshape the prevailing international dynamics of the nuclear issue. Ideally, the Islamic republic would want to leverage its dealings with the United States on Iraq to make gains concerning its nuclear program. However, Tehran realizes Washington cannot be drawn into such a quid pro quo settlement.
Tehran will continue to try to exploit the differences between the United States and Britain on one hand, and continental European states -- especially France and Germany -- on the other, to avoid punitive action by Washington. It also will seek to finalize a deal with Russia about construction of the Bushehr nuclear reactor -- allowing Tehran to demonstrate good faith on the nuclear issue and to show it enjoys international confidence where nuclear technology is concerned. To buy time and maintain the strategic advantage, the clerical regime will vacillate between allowing inspectors from the International Atomic Energy Agency to (selectively) examine its facilities and refusing cooperation.
Iran also will seek leverage through diplomatic and military activities -- hoping to generate a crisis. Examples are leaking reports of troop movements along the Iran-Iraq border and fomenting disputes with neighboring Gulf Cooperation Council member states such as Kuwait and the United Arab Emirates. More detentions of foreign sailors are likely, as are boardings of vessels in Iranian waters in the Persian Gulf. Tehran also might foment unrest among the Shia in places such as Bahrain, Iraq and Lebanon -- signaling to Washington that problems are in store if the United States does not return to its original agreement for a Shiite-dominated Iraq.
Saudi Arabia
Without making any real threats, the United States will push Saudi Arabia to provide greater security for Western expatriates -- including permission to import Western security teams and allowing civilians to arm themselves. Riyadh also might bow to calls for a limited foreign security presence at key energy facilities, such as Saudi Aramco offices, or to call out elite squads of National Guard and Pakistani units of the Saudi military to fill the need.
Meanwhile, following the death of leader Abdel-Aziz al-Muqrin, al Qaeda militants will pause briefly to regroup, with new attacks likely toward the end of the third quarter and the beginning of the fourth. Moreover, many expatriates will take vacations during the severely hot weather of the next two months -- a further reason to delay major attacks until September.
For its part, the House of Saud will not pursue al Qaeda leaders and enablers -- such as sheikhs, tribal leaders, merchants and financiers -- at this stage, but instead will use its amnesty offer to gather intelligence on operational figures, while appearing to keep pressure on militants' supporters. Intermittent shootouts between militants and security forces -- and a few captures -- can be expected this quarter.
Riyadh also will launch a massive public relations campaign, complementing the lull in militant activity, to drive home the point with Washington and other Western governments that it is capable of dealing effectively with militancy. To do this, state-run television will broadcast news of the surrender of low-ranking militants and footage of their public confessions.
AL QAEDA
Al Qaeda is not likely to stage an attack against the continental United States before the presidential elections in November. The rationale for doing so assumes that al Qaeda would be trying to achieve what it won with the Madrid bombings in March: the ruling party voted out of office. Although the group would like similar results in Washington, its leaders understand the political dynamic in the United States is different -- so it is not likely to burn assets in an attack where the chances of political success are low. Al Qaeda likely has a limited number of resources in North America at this point, which could be more effectively deployed in an attack that is unrelated to the presidential elections.
GLOBAL ECONOMY
The dominant factor in the global economy to watch is inflation. At this point, the core rate (in which energy and food prices are factored out) remains low: 1.8 percent in the European Union, 1.7 percent in the United States and negative in Japan. But with global economic growth continuing to flirt with 20-year highs, this is the quarter when inflation will finally emerge as a factor that policymakers must take into account.
Market pundits have been screaming for some nine months that inflation is rising and that rates will need to be adjusted. In the coming months, they will be correct. But this does not mean that adjustments will be sharp -- at least not in this quarter. Rates are low not only because inflation has been tame, but also for political reasons.
Any rate hikes the U.S. Federal Reserve implements would be purely cosmetic. The independence-minded body is concerned that a broader tightening of monetary policy could be interpreted as a vote of support from the Bush administration. In past periods of monetary tightening, rates have jumped up some 3 percentage points in just over a year. In the third quarter, the U.S. economy will not require such dramatic moves; that will come after the elections. Two quarter-percentage hikes (June 30 was the first) -- with attendant mention of how subdued inflation remains -- are the most the United States is likely to see.
In Europe -- where governments have decided to do away completely with deficit curbs -- rates might rise a bit faster, since long-term inflation is becoming a real fear. Japan, where deflation is still entrenched, will leave rates untouched.
That leaves China, which will be the part of the global economy to watch in the third quarter. There, inflation is rapidly reaching decade highs. Given the country's bad loan problems, Beijing is doing everything it can to keep interest rates low; a sudden rise would force dozens of state-owned enterprises into formal bankruptcy at a time when Beijing is very conscious of outsiders' attention on the country's economic stability.
The third quarter is when reaction will start to appear from foreign companies that have purchased Chinese firms and have begun to look into their new assets. Since statistical fabrication has reached the level of an art form in China, we expect stunned reversal of opinion in some quarters.
At the same time, rising inflation will present Beijing with another problem: how to convince outsiders that the Chinese really do have control over their economy. In April, the government did this by enacting a lending moratorium -- simply shutting down new loans for several days. Stratfor expects leaders in Beijing to take even more creative action in this vein in an attempt to dial back breakneck growth in the coming months.
Such unorthodox methods are more likely to rein in the irrational exuberance that has held sway over the Chinese economy, and they are likely to cause problems for Beijing's crisis management officials. But even if China begins to hemorrhage foreign capital in the third quarter, we do not expect its economy to fall. China has the second-largest currency reserves in the world, allowing it to buy its way out of a lot of problems. The dollar-yuan peg also lends a great deal of stability -- and, of course, the People's Liberation Army is quite effective at crowd control.
One real shock for the global economy this quarter could be in the energy industry, where shortage is a real possibility. Simultaneous growth in the United States, Europe and Asia -- a rarity in economic history -- has pushed oil consumption to record highs. Guerrilla bombing attacks against Iraqi oil infrastructure, which pulled some 1.6 million barrels per day off the market in early June, served as stark reminders that Western commercial inventories remain low, supplies strained and prices volatile.
At this point, any other large-scale disruption -- which is possible in Iraq, Nigeria, Venezuela, Saudi Arabia or even Russia -- could hurl the world into a supply shortage that would force the governments of the developed world to tap their emergency supplies to stave off stratospheric price jumps.
... to be continued Message 20288624 |
