1999 Annual Forecast: A New and Dangerous World
GLOBAL INTELLIGENCE UPDATE
stratfor.com
January 4, 1998
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. |
