Giraffe,
Along similar lines, stratfor.com's latest quarterly update:
stratfor.com
3rd Quarter 1998, Released July 6, 1998
Resistance to U.S. Power Grows
The main feature of the international system remains the intensifying resistance to American global power by secondary powers. This pattern, described in both our Annual Forecast and our Forecast for Second Quarter 1998, is both inevitable and the defining characteristic of the global system today. Since the collapse of the Soviet Union, the international system has been in extreme imbalance. A single power, the United States, suddenly found itself in an extraordinarily powerful position. Relatively insulated from international pressure, the United States was not constrained to act in either a consistent or predictable fashion. The result was inevitable. U.S. foreign policy was shaped by domestic political considerations or fell into the hands of politically influential business interests who worked to shape foreign policy to suit their needs. Since there was no overarching strategic imperative at work to limit their interests, U.S. foreign policy became particularly sensitive to these pressures.
From the standpoint of the rest of the world, U.S. policy has become peculiarly erratic. It requires a deep understanding of the political process in Washington to predict U.S. policy initiatives and responses. The American response to crises and processes seems random and unpredictable. As a result, resistance to U.S. global domination has been spreading and intensifying on a global basis. It remains a fragmented resistance, not yet coordinated due to a lack of a single unifying power willing to challenge the United States. Nevertheless, its spread and intensification has been marked in the last quarter and we expect this trend to continue to intensify with increasing inter-regional coordination.
During the last quarter, resistance has increased in several areas and over several issues. The growing crisis in Kosovo, for example, has been defined by Russian unwillingness to allow the United States the right to dictate policy in an area it regards as within or close to its own natural sphere of influence. The nuclear tests on the Indian subcontinent represented direct challenges by both India and Pakistan to U.S. policy, as neither power was willing to subordinate its own national interests to the American sponsored nuclear regime. Saudi Arabia has pulled away from its traditional relationship with the United States. China has taken every opportunity not only to resist American blandishments over human rights, but also to make it clear that they are pursuing an independent foreign and defense policy. Resentment and resistance to the United States, coupled with an almost sublime American indifference to this sensibility, has been the dominant theme thus far this year and will continue to dominate in the third quarter.
It should be remembered that this deterioration of American political power is inevitable. A unipolar world is untenable unless the dominant nation is overwhelmingly and indisputably powerful, which the United States is not. The paradox of the American position has been that, as the world's only global power, the United States is too weak too exercise an absolutely definitive authority but too powerful to evade responsibility. As powerful as the United States was and is, that
power is far from sufficient to allow Washington to impose true global hegemony. As a result, the United States finds itself with a peculiar responsibility for virtually every event in the world, without having the resources to influence more than a small handful. Apart from irritating the world for its seeming indifference and inability to act, this weakness has created space for secondary and tertiary powers
to assert their own, regional interests. This last quarter saw a good deal of this, and the next quarter will see even more.
We are also seeing a search for patronage on the part of these powers as tertiary powers seek secondary powers for political, military and economic support. Three nations seem to be increasingly undertaking this role. France, for one, has been particularly aggressive in challenging American power. For example, the French have been flirting with the Saudis at precisely the same time that Saudi-U.S. relations are worse than they have been in decades. Another power is Russia
which, following its defeat by the United States on NATO expansion, has been resisting American policy in the Balkans and the Middle East. We expect them to increase their opposition to American power in Central Asia in the near future. Finally, China has made it clear that it regards itself as a major regional power, and that it expects the United States to treat it as such. These three powers serve as the
focus of potential anti-American coalitions in the future. We continue to expect continued cooperation between the three over the coming months, to the consternation of Washington.
* U.S. Economic Strength Continues Unabated
This ongoing geopolitical process is taking place against the backdrop of unparalleled American prosperity. The United States is, without a doubt, in an economic golden age. Given where the international system was ten years ago, it is odd to say that American economic power is today greater than its political power. Nevertheless, it is true. The most dramatic feature of the international system is the robustness of the American economy. We do not expect the American economy to weaken materially. American exports represented only about 8.5 percent of Gross Domestic Product in 1997. Total exports to Asia represented about a quarter of this total. If the U.S. lost twenty percent of its exports to Asia, this would represent a loss of less than one-half of one percent. Assuming a multiplier effect of decreased sales to Europe due to the Asian decline, it is still hard to believe that a complete
disaster in Asia would slice more than one percent off of America's GDP. Since the economy is growing faster than this, the worst case scenario would be that Asia will cause a slow- down in the American market. In an odd way, the lack of Asian leverage on the United States is due to its own policy of aggressive exports and protection against imports. These policies mean that the U.S. is not very vulnerable
to Asia's problems and not likely to do much to solve them.
Even the worst case scenario is counterbalanced by a benefit to the United States from Asian troubles -- capital flows. As Asia has melted down, money has fled Asia. This includes not only Asian money, but U.S. and European money being held back or pulled out. This money has tended to gravitate toward safety, which is represented by the American capital markets. This process is not over by any means. The tendency of the conventional wisdom to underestimate Asian problems
has meant that many investors have tried to hold tight to their positions. Successive crises have shaken loose more and more of this money, but there is plenty left and it is flowing toward the U.S.. This makes up for lost trade in very positive ways.
Fleeing Asian money has facilitated new capital formation. This means that while labor shortages are a real problem, interest rates are extraordinarily low for this stage of a business cycle, and the Federal Reserve Bank has had no problem maintaining a positive net reserve situation. We see no reason to expect the U.S. economic expansion to end in the next quarter or even this year. Thus, our
prediction in our 1998 Annual Forecast stays in place: "The United States has become the safe haven for investments as well as the lender of last resort on a global basis. As Asian economies weaken, the flow of money into the United States increases... This flight to safety will serve to cushion weaknesses in the American markets and limit the negative phase of the U.S. business cycle." It has worked thus far and will continue to work.
* Asian Economic Crisis Catches Up With China
At the same time, the Asian economic calamity continues unabated. Predictions that the worst is over have consistently been proven false. We wrote in our Second Quarter Forecast that, "The region appears about to enter phase three of the crisis. The first phase was the long, slow deterioration of the Japanese economy. The second phase was the sudden implosion of the Korean and ASEAN economies. The third phase will be the intensification of the Japanese crisis and its spread to China." This continues to be our view. We have certainly seen the intensification of the Japanese crisis. We have not seen the problem spread to China as yet. More precisely, the problems have spread but the consequences have not yet followed. As we pointed out in a recent Weekly Update, we remain convinced that the pressure on Chinese exports will force a devaluation of the yuan, which will, in turn, trigger economic crisis in China.
China, of course, is working diligently to avoid this. One of its strategies is to encourage a continued inflow of Western investment. In order to achieve this, China must create the illusion of invincibility. Part of this requires that economic statistics be presented in such a way as to encourage investors. China, for example,
has emphasized the continued growth of industrial production at pre-crisis levels. Unmentioned has been the fact that inventories in China are soaring, as unsold products pile up. By emphasizing industrial growth over other variables, the Chinese are leaning on the one variable they can control, in the hope that Western investors will continue to pump in hard currency with which the yuan can be supported.
The other part of this strategy is an extremely aggressive foreign policy stance, in which China appears to be utterly self-confident and even cocky. China is doing everything it can to maintain the illusion of the robustness of the Chinese economy. It has worked so far. We do not believe it can work indefinitely and we believe that Japan's problems will take down the Chinese economy in the coming months. We
see Chinese management of Clinton's recent trip to China as part of this strategy. Clinton, by affirming Chinese power and treating China like America's senior Asian partner, helped minimize China's risk in the eyes of Western investors. Now, Western investors already exposed in China are certainly hoping that the Chinese can pull of their strategy. This is the origin of the heavy pressure on Clinton to
minimize friction with China. The hope is that China will invest its way out of its crisis. We do not think it will work. We expect China to join the rest of Asia shortly.
* Economic Failure in Russia Foreshadows Death of Liberal Experiment
Russia has already joined Asia, for all intents and purposes. The Russian economy simply does not work. Outside of a handful of major cities, Russia is in the grip of a depression of unprecedented proportions. Now, the Kiriyenko government is struggling to hold together the fabric of Russia's urban economy by keeping the
banking system afloat. They cannot succeed. The rates of return on investment nearly a decade after the fall of communism simply cannot sustain the development of Russia into a modern democratic society. As we put it in our 1997 Annual Forecast: "The Russians have given away their empire in return for very little. The people that Westerners speak to -- English speaking intellectuals and businessmen -- are not the gauge of Russia. The vast hinterland, with its mid-sized and small
industrial cities and its farms, is an impoverished disaster. Reforms have created disorder and confusion and have increased corruption. They have provided precious little rewards beyond uncertainty and poverty."
Yeltsin's selection of Kiriyenko reveals the bankruptcy of his policies. Kiriyenko's selection means that Yeltsin sees Russia's problems as primarily technical -- inefficient tax collection, poor law enforcement, etc.. The selection of a 35 year-old whiz kid to solve these problems would make sense if Yeltsin was right. In fact, the problem is not technical but cultural, historical, and ultimately moral. The extraordinary poverty of Russia outside of Moscow and St. Petersburg, the loss of state dignity in the face of profound corruption, and the loss of the grandeur of the communist empire in exchange for very little, are all cancers eating at the soul of the
post-communist regime. The issue, as we have been saying for several years, is not whether liberal democracy will survive in Russia, but what will replace it? The selection of Kiriyenko is a last ditch effort to save Yeltsin's regime. It cannot be done. In the meantime, almost imperceptibly, Russia's foreign policy is returning to its old, imperial paths. We expect Russian activity in the Caucuses and Central Asia to be particularly intense in the coming quarter, moved by anti-American sentiment and the desire to get greater control over the region's oil supply.
* Oil Price Collapse Makes Iran Significant -- And Iraq a Target
Oil has become a driving force for Russia, as well as for other oil producers. Russia's problems have been exacerbated by the inability of oil producers to raise prices above historical lows. This has devastated Russia's economic plans. It has also devastated the economic plans of other oil producers, particularly Saudi Arabia. For example, Saudi Arabia has paid some major suppliers with bonds rather
than with cash. It had similar problems in 1993-94. This time the situation is worse, both because it comes after the debilitating 1993-94 period and because prices are relatively more depressed. The Kingdom borrows through its private banks, and these banks have recently financed a $2 billion government placement. This is, we
believe, the tip of the iceberg. The Saudi situation is truly precarious.
Saudi Arabia, along with Venezuela and Mexico, has agreed to cut production. As we said in our forecast for last quarter when we discussed the effect of the Riyadh Pact on oil prices: "This indicates to us that there is now a floor under the price of crude. However, this does not mean that the price will rise and without a rather
strong rise in the price of oil, which is not likely to happen by agreement alone, Saudi Arabia is in serious financial trouble." A floor has been set, but it is not clear that production cuts alone, particularly unenforceable production cuts, can raise the price of crude.
The only way to raise crude prices at this point is to force production off the market. From our point of view, the key problem is that production levels have been set since 1991 on the assumption that Iraq would not be exporting oil. Now that Iraq is in fact exporting, a massive overhang exists in the market. No one can afford to cut production to compensate for Iraq. It follows, therefore, that by pushing Iraq off the market again, oil prices would rise, by some estimates, as much as five dollars a barrel. While this might be excessive, it is certainly a temptation, particularly for a country as desperate as Saudi Arabia. Of course Saudi Arabia is not in a position to close off Iraq. The United States and Iran, however, are in a position to do so.
The recent American opening to Iran was predicted by STRATFOR. We wrote last quarter that, "It has been our consistent view that American fear of Iranian participation in the Greco-Syrian-Iraqi entente forced the United States to seek an accommodation with Iran. That process of accommodation, which we have tracked since September, continues to intensify. It has been our view that, to a large extent,
American bellicosity toward Iraq was part of an attempt by the United States to convince the Iranians that the United States is committed to bringing down Saddam and to rectifying the outcome of the Iraq-Iran War." This American courtship has broken into the open, with the Clinton Administration openly stating that they wish to improve relations with Iran. One of the key reasons for this is tremendous
pressure from Saudi Arabia which, facing serious economic problems from low oil prices, has been flirting with an alliance with Iran.
The Saudis are as naturally opposed to unilateral Iranian power as they are opposed to unilateral Iraqi power. But committed though they are to a balance of power in the region, the oil price situation has become an obsession that has driven prudence out the door. The issue now is not whether Iraqi oil will be forced off the market, but who will do it and what will the consequential power relations turn out to be. One rational U.S. maneuver would be to precipitate an intense confrontation with Iraq, designed to isolate Iraq, remove its oil from the market, raise prices and save the Saudi economy. Another scenario is that Iran will unilaterally act against Iraq, both to raise the price of oil and consolidate its position as the dominant power in the Persian Gulf. A third scenario would be one in which the U.S. and Iran
collaborated to isolate Iraq. It is not clear which of these will happen, but we remain convinced that someone is going to act against Iraq. Geopolitics and economics have combined to make Iraq intolerable. Indeed, given Washington's tendency to respond to pressure from special interests in formulating its international strategy, we see such an action against Iraq as consistent with this administration's operating principles. There are a lot of people who would be very unhappy to see a massive Saudi default. A lot of people want to see higher oil prices. Iraq is the key to this outcome.
Thus, we expect the next quarter to look very much like the past two. A robust American economy will parallel a weakening international position, punctuated by periodic bursts of politico-military activity motivated by domestic political and economic pressures. Asia and Russia will continue to deteriorate economically. There will be increasing attention on the Persian Gulf as the Saudi economic crisis
plays itself out. The logical consequences of the end of the Post-Cold War world continue to play themselves out. There will, we think, be few surprises but increasing distress. |
