Annual Forecast 2011

Of course the MESA unrest is a big issue that will alter our forecasts, but besides that the rest of forecast seems mainly on track. Worldwide there are a few areas we want to re-assess. Some were obviously wrong, some have been affected by outside issues, some could use clarification and some are prob still on track but could use a second look. Main issues summarized here.

MESA

  • Pakistani-US relations: Do we see this issue heating up or slowing down over the next year. How does this affect counter-insurgency in Afghanistan? If it worsens how does it affect Russian -US relationship in Central Asia as well as elswhere b/c of increasing reliance on FSU transport links? How does this affect the broad US-Pakistan-India-China relationship. Can India take or China take advantage of this little spat?

Unrest

Obviously this is a very important development that we are currently focusing on and collecting intelligence on.

Specific Countries

  • Obviously its important to nail down what is happening and what will happen in Bahrain, Yemen, Kuwait, KSA, Iraq, Oman, Libya as well as places like Qatar, Algeria, Morocco, Djibouti

We need to address how these domestic unrests affect the broader region

  • US - Iranian negotiation. Iran seems to be strengthening its hand even more, while the possiblity for a clean US exit in the next few years seems even more remote, and Arab states are wondering how they may have to accomodate Iran if the US doesnt stand up to it.. How to this decrease or increase the chances both sides will move to or come to a political accomodation
  • Turkeys Foreign policy. Turkey faces pressure and a chance to step it up in the Middle East to serve as a bulwark against Iran and increase its influence, and can perhaps leverage this against the US for concessions. What will turkey do?
  • Egypt’s internal politics and Foreign policy: the Egyptian military is still dancing around, trying to placate the protestors while maintaining the regime. Domestically they need to figure out how to create a civilian face that will continue the basic policies of the regime, deal with a hurt economy, and keep the opposition divided. Abroad, they are facing prisoners in Gaza and elsewhere that have been languishing in Egyptian jails, while (even superficially) supporting the palestinian cause and showing progress on palestinian reconcilation could be a popular move. At the same time Israel is cautious, Libya is a mess, and Egypt has been showing some leadership of other Arab states.

Eurasia

  • US - Russian relation. The US looks even more dependant on Russia for supply routes given the tiff with Pakistan, while on a grander scale, any US disengagement from MESA is threatened by the recent unrest. At the same time Estonia’s elections didnt go the ideal way Russia. Does this change Russia’s modus operandi at all?
  • EU-Russian relationship: Poland and Sweden have just scored good economic gains, while Russia stepped in to save the day with oil and gas exports during Libya. How will Europe respond the new Russian behavior
  • Russian - Japan Kuril dispute: This may be nothing but it seems like something. Russia is not only icreasing its military presence, they are on a serious military blitz to leak details on it like crazy. Is this a threat of what Russia can do elsewhere if it chooses?
  • Financial Contagion: Do we need to reassess the ability of the EFSF to cover future bailouts? A new round of bank tests is on the way, Greece was downgraded again. Is Germany going to have to reactivate its national bank bailout fund?

East Asia

  • Jasmine protests: 1) Do they have a chance of becoming something and 2) Are the Chinese more scared than we realize b/c they know something we don’t? China is realizing exports wont be a solution any time soon or in far future. The miracle has ended. What do they do?

LatAm

  • High oil prices buoying Chavez regime. Can Chavez afford to be more anti-Colombian and more anti-US. Can he funnel more money to the Cubans.
  • If Chavez can funnel more money to the Cubans, will they rethink their opening. On a different note: What happens if the reforms fail? News coming out about them is bad. Meanwhile Cuba convicted the US contractor of espionage while it will soon release an American documentary. At the same time it is playing nice to Spain. How are the Cubans planning on going about their eventual opening

Introduction/Global Trends
The year 2011 is one of preparation and postponement, as Washington, Beijing and Moscow — among several others — are already looking to elections and leadership changes in 2012. The uncertainty of next year affects the actions of this year.
One of the biggest questions in 2011 concerns Iraq. The United States is officially obligated to complete its withdrawal of combat troops from Iraq by the end of this year, a move that could reshape the balance of regional power. If the United States withdraws, it leaves Iran the single most powerful conventional force in the region, and leaves Iraq open to Iranian domination. The ripple effect alters the sense of security for the Saudis and other Arab regimes, forcing them to accommodate a more powerful Iran. This effectively ends the balance of power in the Gulf region, something that Washington can little accept.

  • US withdrawal leaves Iran strongest in region,
  • Arabs have to accomodate changing BoP
  • US can little afford this

Analysis
If Washington does not carry out a meaningful withdrawal, then Iran retains the option of stirring up militias and unrest in Iraq, increasing conflict and the attendant U.S. casualties, all while the U.S. presidential election season begins ramping up. From the political perspective, this is not acceptable. From the geopolitical perspective, allowing Iran (or any other single power) to dominate the region is unacceptable. We think the latter will take precedence over the former, and the United States will seek to retain a strong presence in Iraq rather than withdraw from the region. However, the United States is not likely to carry out any major military action against Iran.

  • If US doesnt meaningfully withdrawal, Iran can harass the US, which is bad politically in US
  • But changed BoP is unnacceptable Geopolitically
  • Geopolitical trumps political, so US will seek to maintain strong presence
  • But US unlikely to carry out major military action against Iran

On Track
in that we havent seen moves to drawdown below the August 31 2010 end of major combat operations numbers, but we have questions:
Questions
What are some benchmarks as to “meaningful withdrawal” and “strong presence?” Is this determined by troop numbers or mainly by positioning or air and artillery assets.
Need to clarify relationship between 2011 Posture and SOFA renegotiation
Legally the US can keep its force posture in Iraq until Dec 31 2011, or the last day covered by this annual. It can even raise it. Logistically if the SOFA is not renegotiated, it will have to begin the drawdown long before then, and the withdrawal mandated by the expiration of the SOFA would leave in effect only Embassy security. Thus there of course is the question as to whether the US begins a drawdown earlier. But most important is the renegotiation of the SOFA for the next few years (which will determine the US posture at the end of 2011)
The US is hinting that they wants to keep a strong force that can balance Iran (Gates comments specifically on air power and intelligence) and that is our analysis. But the Iraqi’s recently decided to defer F16 purchase and many in the Iraqi government including Maliki have said they would not renegotiate the SOFA (Maliki said in the last few days of 2010 “This agreement is not subject to extension, not subject to alteration. It is sealed." )
Can the US force the issue? How much has Iran’s behind the scenes interference in the Iraqi political process created a situation where they can at least substantively block US desires?



That leaves one path if the United States wants to get out of Iraq at some future point: an accommodation (even if quiet) with Iran to ensure both U.S. and Iranian interests. While it is not likely to be very public, we expect a significant increase in U.S.-Iranian discussions this year toward this end.

  • Thus US needs accommodation with Iran (private or public)
  • Thus significant increase in US -Iran discussions this year

Haven’t seen much yet:
Of course the forecast says it prob wouldnt be public. Recent Iran - P5+1 talks ended in nothing (which can be good as it signals a easing of pressure). Turkey has said it will help Iran draw up a new roadmap to a resolution of the nuclear issue, and the US has called on the green movement and Iranians to protest and continues more effective sanctions. There is still a long way to go.
Reassesment: With those Arab governments feeling threatened and instability in Iraq on the rise, how will this affect the broader negotiations as the US to come to an accommodation with Iran. With Iran involved in destabilization efforts and the US accusing Iran of those efforts, will the two sides pull back from negotiations as they maneuver for advantage, raising the possibility for tensions ? Or will the US see chaos in its future and seek to come to an accommodation quicker than they would have before?
While Washington looks to extricate itself from Iraq without leaving power in the region unbalanced, farther east China is struggling with its own economic imbalances. STRATFOR has long been perceived as bearish on the Chinese economy. We are less bearish than realistic, and the reality is that the longer an economic miracle continues to be miraculous, the more likely it is to end its amazing run. We cannot help but notice the similarities between China and its East Asian economic predecessors: Japan, South Korea and the Southeast Asian “Tigers.” The Chinese have shown great resilience, but the global economic crisis revealed the weaknesses of China’s export-based model. While government investment now makes up the lion’s share of the Chinese economy, Beijing is walking a very difficult path between rampant inflation and rapid economic slowing.

  • The longer growth Miraculous, the closer to ending
  • China similar to JAP, ROK, and 90’s Asian tigers
  • China balancing inflation and Slowdown in Growth

More a preamble to what is below. However we will know a lot more about the economic outlook and planning for China when the NPC is done in a few days. Wen’s recent comment saying that they will be focusing on inflation more so than growth is definitely a balancing act bought on by inflation. Hard to say how much of that would have happened without the recent protest threat in China and how much of that protest activity was actually linked to economic dissatisfaction. Either way, it is certainly well within the forecast.
As China’s leaders search for a solution and try to avoid the social consequences of a slip in either direction, they are also focused on the next major generational leadership transition, slated to begin in 2012. This discourages any radical or daring economic policies, and stability will remain the watchword as the politicians jockey for position. But given the status of the Chinese economy, and the continued effects internationally of the global slowdown, daring policies and ideas are perhaps what China needs. While Beijing is likely to procrastinate in making any radical economic policy changes, and thus avoid the likely short-term chaos that could entail, the longer the leaders delay fundamental action, the worse things may be when the system starts to unravel.

  • Leaders also focused on 2012 transition, so radical change discouraged, stability is key
  • Thus Beijing likely to procrastinate in making any radical economic policy changes which also means likely to avoid short term chaose
  • makes things worse in long run

On track:
The forecast is that Beijing is likely to procrastinate in making any radical economic changes. If that forecast holds true then the second one is that they are likely to avoid short term chaos. We have seen some small changes (property investment rules, and more govt spending as second round of stimulus) but these are part of already existing long term changes. Biggest changes may be not announcing loan quotas and measuring total credit, but that does not count as radical.
More detail:
Regarding changes to to property investment: a few other cities such as Qingdao and Shanghai had already implemented similar policies where there is a restriction on ownership of houses per family, along with non-Beijing residents being denied the opportunity to purchase property and Beijing is moving to enact similar policies with ‘State 8’ . Also there are another 60 cities around China apparently watching and ready to implement similar/same policies) and govt spending (basically the second instalment of the stimulus/growth package which will see around RMB1.5n spent throughout the country on infra, etc.).
Another small shift is the Party’s/CBRCs decision to remove the concept of a lending cap for the year and instead target their efforts to control lending/inflation/NPLs on a bank by bank basis. A second little shift is the implementation of the total social financing statistical measure of overall injections of credit in to the Chinese economy rather than just bank loans. A third minor shift is the implementation of property tax in Chongqing and Shanghai. The fact that it is only two, even though tier one cities that are implementing the tax regime and that the actual level of taxation is pretty damned small stops this from being seen as ‘radical change’, but it is a notable move toward radical change.

Meanwhile, Russia will continue to attempt to roll back U.S. influence in Eurasia and solidify its own. Russia has largely completed its retrenchment to the borders of the former Soviet Union, with the notable exception of the Baltic states and to a lesser extent the Caucasus, and Moscow is now secure enough to shift from its more assertive stance to one that appears more conciliatory. This new strategy will play to all its relationships around the world, but will be effective in moving Russia’s influence farther beyond its former Soviet sphere and into Europe — where the United States has been dominant since the end of the Cold War. Russia’s focus this year is to mold understandings with states like the Baltics, while entrenching its strong relationship with Germany. Moscow knows that its time to act freely is ticking down as Russia watches the United States wrap up some of its commitments in the Middle East, but Moscow will also be looking internally, as the political elite position themselves ahead of the 2012 elections.

  • Russia continue trying to rollback US influence in Eurasia and Solidify its own influence
  • Russia shifting from assertive to conciliatory stance all over world
  • This Will be effective in moving Russian influence farther into Europe
  • Russia’s focus = mold understandings with states like baltics and entrench German relationship
  • Moscow political elite positioning for 2012 election

Mainly answered in the regional section. Wanted to raise one question.
On track
Russia has signed a number of deals recently with US and European companies in everything from automobiles to energy. They have signed a new deal allowing US transit to Afghanistan. They have shown Europe they can be nice (and make some money) providing increased energy supplies during the Libya crisis. Also they have not reacted too toughly to the europeans “pressure” on Belarus, and while they have been vocal about START and european missile defense they have not pushed the issue too far. At the same time they have reminded the US they have open contracts to supply S300s to Venezuela, they are calling for an easing of sanctions on Iran (provided it make some confidence building gestures). The German relationship continues to grow, one sign we should watch for is whether Russia gives Germany spot pricing. Elite’s wise we continue to see shuffles in the military, governmental and party areas.
Question:
Russia’s most aggressive moves this quarter have focused on the Kuril Islands dispute with Japan. Russia went from a machine gun outpost and very few visits or rhetoric, to major visits and a seemingly ceaseless announcement of what future military emplacements will be there, while nsight says the Russians are showing Japan the Island issue is dead. Insight says the Japanese are not really willing to invest despite what they say, and all they talk about is the Island issue instead, and that Russia considers Japan not a power anymore.
The question is why push now? Is this trying to develop the relationship so that eventually Japan will invest? Is this a warning the US and European nations what Russia can do if they try to fuck with Russia elsewhere. Russia announced S300 or 400 emplacements on the island which lauren has said have been there for 6 ms already. that and the other armaments issues have been leaked in a steady stream. Why the political decision to announce all this now?
Russia: South Korean Investors Receive List Of Kuril Island Projects - Japan: Russia's Kuril Islands Approach Criticized - Russia: Breaks For Foreign Investment In Kurils - Japan: Russian Defense Commission Visits South Kuril Islands - Japan: Official Declines Russian Invitation To Island Investment Meeting - Russia: President Calls For Development In Kuril Islands Region - Russia: Military Presence On Kurils To Be Expanded - Russia: Japan Must Reconsider Stance On Kuril Islands - FM - Japan: Russian, Chinese Companies Plan To Farm Off Disputed Island - Japan: Russia Offers Economic Cooperation In Kurils - Russia: Territorial Dispute Should Not Define Japan Treaty - Official -
Middle East/South Asia
Obviously the biggest correction that needs to be made is to address the wave of unrest from Tunisia to Oman and how it affects every other trend in the region
The most important question in the Persian Gulf is the degree to which the United States will draw down its forces in the region. The answer to this question determines the region’s geopolitical reality.