Note: Today is the third in a series of posts that detail Eurasia Group's Top Risks for 2013.
The Middle East will enter a new phase in 2013. Arab Spring will give way to Arab Summer, as the region faces a series of increasingly complicated overlapping conflicts. As Americans and Europeans resist deeper involvement, rivalries among Saudi Arabia, Iran, and Turkey, competition for influence between Sunni and Shia, a lack of economic progress, and a resurgence of militant groups will each heighten tensions.
Syria remains the central arena of conflict, as Shia powers -- Iran and Lebanese Hezbollah -- on the one side, and Sunni states -- Turkey, Saudi Arabia and Qatar -- on the other compete for leverage. Jihadists have also entered the fray, and turmoil has spilled across the country's borders into Lebanon, Turkey, Jordan, and Iraq.
Emerging conflicts elsewhere are less obvious. Egypt, Tunisia, and Morocco now have moderate Islamist governments. In Jordan and Kuwait, Islamist opposition groups threaten the governing dominance of secular administrations. But while the words and actions of mainstream parties like Egypt's Muslim Brotherhood and Tunisia's Ennahda make headlines in the West, the more serious risk comes from militant organizations that threaten the ability of new leaders to govern and maintain security.
Fueling this trend is the reality that, across the region, new leaders are trying to consolidate power and build popularity at a time when complicated economic problems demand solutions that will make large numbers of people angry. New governments in Tunisia, Libya, Egypt, and Yemen will last only if they can deliver tangible economic progress for an increasingly frustrated and impatient public.
The risk that a Salafist or jihadist group can exploit these frustrations to seize power in 2013 is low, but groups like al Qaeda in the Islamic Maghreb, al Qaeda in the Arabian Peninsula, al-Shabab, and smaller affiliates continue to attract support and new followers by using resentments against local regimes to foster anger at America and the West.
But Iraq may become 2013's newest hotspot. Sunni-Shia tensions are growing, and none of Syria's neighbors is more vulnerable to the threats created inside that country by radical Wahhabi clerics, often with Saudi or Qatari support, now fueling the emergence of an increasingly radicalized and militarily experienced Salafist movement. The Kurdish regional government is becoming more aggressive in promoting its energy development agenda at Baghdad's expense, and Sunni-led violence inside the country might well encourage Iraq's Shia-led government to forge closer ties with Tehran, antagonizing the governments of Saudi Arabia and Turkey.
The Obama administration wants to focus on domestic challenges and an ongoing foreign policy shift toward Asia. But regional rivalries are heating up, and Americans and Europeans will only add to the uncertainty by keeping their distance -- in hopes that they don't get burned.
On Wednesday, we'll profile Risk #4: Washington Politics.
By Mark Rosenberg
South African politics is broiling. The exceptional violence surrounding the wildcat strike at Lonmin's Marikana platinum mine -- where police killed 34 strikers and 10 people died in an inter-union clash -- reflects poorly on the leadership of President Jacob Zuma, who is up for re-election as head of the ruling African National Congress (ANC). By weakening Zuma's allies and strengthening his foes, the Marikana incident and its aftermath make Zuma's hold on the ANC presidency-and thus the presidency of South Africa-extremely tenuous.
The most immediate political victim of Marikana is the National Union of Mineworkers (NUM), the largest affiliate of the powerful Congress of South African Trade Unions (COSATU). The violence at Marikana began with clashes between members of the NUM and the splinter Association of Mineworkers and Construction Union (AMCU), which has exploited discontent over NUM-negotiated wages and its perceived coziness with management to make significant inroads into the NUM's membership rolls throughout the platinum industry. Meanwhile, the NUM has faced similar criticisms from COSATU's acerbic Secretary General Zwelinzima Vavi, who has accused the union of favoring management and higher-skilled workers over its rank-and-file. The NUM, for its part, has accused Vavi of sowing dissension in its ranks, and its leaders have been at the forefront of a politically-driven effort to replace Vavi at COSATU's upcoming elective conference in September. Given Marikana -- where the NUM was utterly unable to contain the situation -- Vavi's criticisms will reverberate within COSATU, whose leaders are freshly focused on preventing the kind of union splintering which has struck the NUM. As a result, the NUM's influence in the federation -- and thus its challenge to Vavi's leadership -- will be weakened.
This damages Zuma, who is close to the NUM and has actively pushed for Vavi -- a former ally and now vocal Zuma critic -- to be replaced. Vavi's likely re-election will probably deprive Zuma of COSATU's endorsement heading into the ANC's December elective conference in Mangaung. COSATU is in a "governing alliance" with the ANC, and many of its 1.8 million members are also members of the ruling party: Its rejection of Zuma (whom the labor federation forcefully endorsed in 2007) will not only cost the incumbent votes, but it will also highlight Zuma's weakness among his erstwhile base. Indeed, the COSATU conference may well spur anti-Zuma factions to push Deputy President Kgalema Motlanthe into a more explicit challenge to the party's leadership. Motlanthe -- who is closer to Vavi and favored by the ANC's more statist elements -- is Zuma's most viable challenger, though he has thus far been reluctant to take on Zuma directly.
Zuma's hold on the ANC presidency is also threatened by direct political fallout from Marikana. The fact that Zuma ordered police to bring the Lonmin strike under control has exposed him to accusations of being aligned with (mostly white-owned) mining companies and of complicity in the miners' deaths. Leading the anti-Zuma charge is Julius Malema, the expelled ANC Youth League leader and populist demagogue. While Malema has no official influence in the ANC election, he is still viewed sympathetically by the party's "nationalist" faction and its youth wing. More broadly, the incident reinforces the impression that Zuma is a leader who is not in control of his government or his party. His consensus style of leadership is not suitable for containing ANC factionalism or the rise in popular discontent among many of the ANC's core supporters, opening a window to potential challengers such as Motlanthe at Manguang in December.
Mark Rosenberg is an analyst in Eurasia Group’s Africa practice.
STEPHANE DE SAKUTIN/AFP/GettyImages
By Ayham Kamel
Iranian leaders believe more and more that Western and Arab involvement in the uprising against Syrian President Bashar al Assad is designed to weaken the Islamic Republic. Tehran feels threatened by the so-called Sunni Triangle's (Turkey, Qatar, and Saudi Arabia) support for Syrian rebels, which Iran views as a complement to sanctions that aim to limit its regional influence and prestige. The United States's alliance with these countries makes it more difficult to resolve any disagreements over Syria. In this context, Iran finds supporting Assad -- at least in the near term -- as the best worst option. This policy isn't new, but the parameters of what Tehran is willing to provide have expanded.
The audacious bombing of the National Security Council in Damascus on 18 July probably represented a watershed moment in Iranian thinking about the uprising in Syria. The "nuclear" option, dispatching units of the Iranian Revolutionary Guard Corps to assist Assad's weakened forces, is very unlikely -- it would likely trigger a so-called Chapter 7 UN resolution authorizing Western military intervention or provide enough impetus to inspire a coalition of the willing. But Tehran, now more than ever, is willing to do more to help Syria's embattled president.
First, the Iranian regime is likely to divert perhaps tens of millions of euros to help Assad counteract the flight of foreign reserves. It views support of Assad as important enough to justify the diversion of scarce reserves despite the increasing domestic economic pain caused by international sanctions. Second, Iran is likely to boost its provisions of arms and intelligence to the Assad regime. It has so far been reluctant to provide a large amount of support out of fear that doing so would play into the Syrian opposition's efforts to divide the regime's base on sectarian grounds. As the threat to the Assad regime has grown, that calculus has changed. Finally, Hezbollah forces have a great deal of fighting experience that would be valuable to Assad. However, the regime will likely dispatch them in a covert manner to avoid destabilizing the Lebanese government.
Iran, for now, may have an unrealistic view of Assad's chances of staying in power, and of its own ability to influence the outcome. It is likely that Iran will eventually reduce or eliminate its assistance to Assad as the latter's position grows increasingly untenable. Biting sanctions, declining oil revenues, rampant inflation, and dwindling foreign reserves will force Iran to focus internally. In the long run, the Islamic Republic will not be able to afford supporting a sinking Syrian regime either financially or diplomatically.
Ayham Kamel is an analyst in Eurasia Group's Middle East practice.
By Famke Krumbmüller
The Dutch have long been one of the eurozone's and the EU's most reliable members. Since the introduction of the euro in 2000, the country has easily met EU economic targets for the maximum allowable budget deficit (3 percent of GDP) and national debt (60 percent of GDP), generally turning in better numbers than even Germany. That policy position has been supported by broad consensus among political parties and the general population. But in a timely reminder that the politics of austerity are tough, even for fiscally conservative countries, the Dutch political system is now wracked by some of the same tensions that are roiling politics in the EU's peripheral members. The Netherlands faces important general elections in early September as a consequence of failed budgetary talks. The Socialist Party is polling well with a populist policy platform that resists ongoing fiscal austerity, with possible implications for broader management of the EU's ongoing crisis.
In the early days of the eurozone's predicament, the Dutch were in the forefront of the drive for austerity. In September 2011, the minority coalition government led by Prime Minister Mark Rutte slashed €18 billion from the budget. And when the economy slid into recession in spring 2012, the government was forced to cut another €12.4 billion in spending. But Rutte's coalition made up of the People's Party for Freedom and Democracy (VVD) and the Christian Democratic Appeal (CDA) with parliamentary support from far right Party of Freedom (PVV) collapsed at the end of April when Geert Wilders, the PVV's leader, withdrew its support. He claimed that the budget cuts would hurt growth, purchasing power, and the elderly, a populist tactic designed to attract voters fed up with further austerity. A broad coalition of five parties (including the VVD and the CDA) passed the budget shortly after Wilder's defection, but the minority coalition's collapse echoed the messy politics of austerity that are playing out across the EU's peripheral countries and which provide an opportunity for parties at the extremes of the political spectrum to gain ground.
The next challenge comes with the 12 September elections. So far it looks as though the politics of austerity are favoring the leftist Socialist Party, which is leading in the polls after winning support from Labor Party (PvdA) voters disenchanted with their party's backing of the pro-austerity Rutte government on European issues. The Socialists are running on a platform that rejects the EU-imposed austerity measures and any further transfer of sovereignty. The party argues for policies that favor growth and social agendas. At the other end of the political spectrum, the PVV continues to maintain solid support with its anti-European platform that includes a euro exit. Together these two fringe parties currently have support from about one-third of voters. Both parties (but especially the PVV) have populist tendencies and aim to capitalize on Dutch voters' disenchantment with austerity and any discomfort with financial support for peripheral countries that provides few obvious domestic benefits.
The next Dutch government will continue to be pro-European and support sound public finances, but voter concerns will make it more difficult for it to justify continuing hardship for the sake of the EU. This outcome is likely because the Dutch political system features a number of small centrist parties that will always be needed to build a ruling coalition. That dynamic will likely ameliorate any dramatic shift in policy. As a result, public finances will return to health, but perhaps not on Germany's and the European Commission's preferred time line, and Berlin may lose the support of what has been a close ally in the drive for austerity. Nonetheless, strong supranational supervision will remain a precondition for further financial or monetary policy integration, in part to ensure that Germany and France do not break their own rules. But the next Dutch government will find it difficult to secure domestic support for any further transfer of sovereignty to the EU. The Socialists' increasing popularity will also encourage a debate on the social consequences of the eurozone crisis and the European project in general.
JERRY LAMPEN/AFP/Getty Images
By Carroll Colley
The story grabbing most of the headlines in Russia the last two weeks has a racy hook, but it's not the story the international community should be watching. Sure, the criminal trial against feminist/garage band Pussy Riot has its share of political intrigue. But that trial is more about church-state relations than the political repression of the women involved. Criminal charges against opposition leader and blogger extraordinaire Alexey Navalny, however, are far more serious, and they provide a window into the Kremlin's current strategy of zero tolerance for political opponents. If Navalny is convicted and jailed, the opposition would be weakened, but it could well provoke even larger protests and greater political uncertainty.
First, the more colorful case. The state is prosecuting Pussy Riot for the band's performance of a musical rant against President Vladimir Putin in Moscow's largest cathedral, and the case exposes the dark underbelly of the Russian judicial system: incompetent prosecutors, questionable witnesses, and a highly politicized judge. Instead of pursuing administrative charges -- which many Russians favor -- the government is throwing down the gauntlet by pursuing a criminal case, though some legal scholars claim that the charges themselves are outside the scope of Russian law.
While a corrupt judicial system creates problems of its own, allegations of incompetence and corruption in Russia's court system are nothing new, and the state's position in this case is more a product of the Putin regime's wish to reward the Orthodox Church's political loyalty than to punish a little-known feminist punk band. Putin, the first Russian ruler since the era of the tsars to be a practicing Orthodox, wants to support one of the political system's most stalwart supporters which called on its members to vote for him in the March presidential election.
The three women face up to seven years in prison for "hooliganism" for performing an "anti-Putin hymn" ("Holy Mother, Drive Putin Out"). After meeting with British Prime Minister David Cameron last week in London, Putin said the women have already been punished enough -- they have been held in pre-detention for five months -- and should not be judged too harshly. The use of the legal system to prosecute Pussy Riot may be clumsy-and it has backfired by turning the band into an international cause celebre -- but in the end, it's little more than a colorful footnote to a worrisome trend.
On the other hand, the renewed criminal charges of embezzlement against Navalny (he was previously investigated on similar charges but cleared) should be recognized for what they are -- increased pressure against out-of-system opposition leaders that will grow under a third Putin presidential term.
Navalny has used his blog to wage a successful anti-corruption campaign against the government for several years, making him a major irritant for the ruling elite. He is the face of the opposition movement and has demonstrated that he can send a crowd of protestors into Moscow's streets. Most recently, he exposed that the head of Russia's Investigative Committee -- the Russian equivalent of the FBI -- violated Russian law by owning property in the Czech Republic and holding a Czech residence permit. The Investigative Committee responded quickly with these most recent charges.
Interestingly, Navalny remains free, which suggests that the Kremlin is making him an offer: Stop the anti-government shenanigans or risk 10 years in prison. If his past actions are a good indicator, Navalny won't take this deal; he has been playing this cat-and-mouse game with authorities for some time and has yet to blink. Among the opposition, Navalny appears to be the most charismatic and ambitious figure, one who could possibly rally Russia's disparate opposition movement and mount a credible political career. A potential show trial -- if the standard set with Pussy Riot is to be followed -- and subsequent prison sentence would create yet another political martyr and drastically underscore the authoritarianism of Russia's political dynamic.
If Navalny's case goes to court, he can't expect the leniency that Pussy Riot may ultimately receive. He'll probably get prison time, a verdict that would enrage the opposition (the upper-middle classes in Moscow and a handful of other major cities) and probably provoke greater unrest. But the outcome would be largely supported as a sign of strength by Russia's majority, the working middle and lower classes that support the current system. It will also send yet another signal that the Kremlin's patience with the democratic opposition has reached its limit.
Carroll Colley is an analyst in Eurasia Group's Eurasia practice.
Alexey SAZONOV/AFP/Getty Images
By Crispin Hawes
Iraqi Prime Minister Nouri al Maliki is losing patience with his fractious coalition and is trying a number of tactics to force it into line, including ceding concessions on some contentious issues designed to win over Sunni factions and weaken political opponents. The current political impasse has delayed much legislation, preventing progress on issues such as ongoing power shortages that are damaging the economy and the quality of life for most Iraqis. While Maliki has threatened to call new elections in an effort to sway his coalition, a vote is unlikely this year, as is any long-term easing of the current political impasse. A vote is possible, however, in 2013, one year before the next elections are currently scheduled.
Maliki continues to perform well in Iraq's limited opinion surveys, despite strong negatives in some parts of the country. His relative popularity results from his reputation for forceful government, and Maliki now views the legislative deadlock as a major problem that could undermine his position. As a result, Maliki wants his coalition to pass important legislation and has shifted his focus from backroom negotiations to openly confronting his political partners and rivals.
Maliki is also preparing the ground for elections. His chief tactic has been to allow the reinstatement of Sunni officers in the military and security forces, a decision reached in June and intended to ameliorate some of the anger among Sunnis. Maliki is not allowing across-the-board reinstatement and instead has instructed the military to focus on recruiting expelled officers from Anbar province. The political goal is to undermine support for the main political opposition Iraqiya.
Maliki has threatened snap elections, in large part to spur his coalition into action. He can do this because opinion polling indicates he would have won an election held in July this year, while some of his most fractious allies and opponents would have performed particularly badly.
The tactic may well result in some legislation being approved, a step that could add further gloss to Maliki's reputation for forcefulness. But a resolution on important issues, such as the long-running dispute between the Kurdistan Regional Government (KRG) and the Baghdad government over the legality of disputed oil contracts, will almost certainly be delayed until the next government. And even if some legislation is approved in the near term-which would be enough to delay any snap general election-structural issues will encourage tensions to eventually resurface.
As a result, Maliki is unlikely to make good on his threat to call elections this year, but is actively considering calling early polls in 2013. Despite his skepticism of opinion surveys, the consistent results could tempt him to schedule a vote a year ahead of schedule in an effort to maintain his position atop the delicate balance of forces in Iraq. Early polls would probably also favor his more coherent State of Law party list over other coalitions, such as Iraqiya.
Crispin Hawes is the head of Eurasia Group’s Middle East and North Africa practice.
Wathiq Khuzaie/Getty Images
By Adam Siegel
As part of a recent crackdown, Colombian authorities have seized some of the latest tools favored by drug trafficking groups. Forget private planes, speedboats, and homemade submarines. These guys are investing in backhoes and bulldozers -- because some of Latin America's best organized criminal gangs have gone into the mining business.
Colombia's drug trafficking organizations -- from rebel groups like the FARC and ELN to paramilitary successor gangs known locally as Bacrim -- are methodically asserting control over illegal mining operations in the country, including the unlicensed extraction of gold and other metals thought to compose at least 30 percent of Colombia's total mineral exploitation. Current Minister of Mines Mauricio Cardenas has argued that unlicensed mining "should be given the same treatment as drug trafficking," while the recently-retired chief of the National Police, General Oscar Naranjo, calls the involvement of drug gangs with mining the greatest future challenge for Colombian law enforcement.
With Latin America in the midst of a new "gold rush" (and the price of gold rising from $270 to as much as $1,800 per ounce over the past decade), expanding to mining is in many ways a logical step for Colombian gangs. Profit from mining operations is high and relatively low-risk compared to other revenue-generating activities like cocaine trafficking, extortion, or kidnapping for ransom. In a mineral-rich region like Antioquia- -- here royalties from legal gold mining already provide over 45 percent of state revenue -- the governor is clear about the changing calculus for drug gangs: "Gold is now more lucrative than coca."
Unauthorized mining itself is not new in Colombia, where small-scale, artisanal mining has been practiced for hundreds of years with relatively little interference from the state. Many of the illegal mining operations are plainly visible, but Colombian authorities are often reluctant to shut down mines because they don't want to trigger unrest by depriving poor miners of their livelihoods. These miners are treated more as opportunists than as criminals, lack of permits notwithstanding.
But this laxity has opened doors for criminal gangs, whose physical presence at the mines is (in many cases) minimal. Reports from local media and authorities detail a number of methods used by groups like the FARC or prominent Bacrim like the surging Rastrojos: Some charge a five to 10 percent "tax" on daily production or monthly earnings, while others charge "protection" fees or make money by providing heavy machinery, like the aforementioned bulldozers.
Yet the sheer scale of these illegal armed groups' involvement in the industry is quickly changing the government's calculus. President Juan Manuel Santos called the new trend "a cancer," and his administration has launched a number of offensives aimed specifically at shuttering these operations. In the Cordoba department, for example, the first phase of Operation Trojan ended in July with more than 400 arrests, 87 mines closed, and 155 bulldozers in state hands. In all of 2011, Colombian authorities shut down 276 mines and arrested more than 1,200 people. By May 2012, an unofficial accounting by the National Police showed 363 closed mines and at least 900 arrests.
The urgency of the Santos administration underscores some serious security challenges: Revenue from mines helps bankroll a decades-long insurgency, while competition for access to resources stokes violence among illegal groups and within the local communities already burdened with poverty and high levels of forced displacement. The environmental impact, in the form of mercury runoff and pollution, is severe.
The alarm is being raised in neighboring Peru as well, where the business consulting firm Macroconsult recently issued a headline-generating report estimating that illegal mining profits surpassed those of drug trafficking last year. With Peru's coca economy again on the rise and less concrete evidence that the rebel group Shining Path is making the same mining inroads as insurgents in Colombia, the issue of illegal mining still has the "social problem" and "economic issue" veneer seen previously in Peru's northern neighbor. Mexican authorities, meanwhile, have taken a more aggressive stance, opening a number of investigations into the escalating ‘protection' fees that drug traffickers like the Gulf Cartel and Los Zetas are said to be charging local mine operators.
The details of the problem vary from country to country, but there are implications for Latin America as a whole -- and for the region's mining industry, with more than $425 billion in investments already announced over the next ten years. As demonstrated in Colombia, the profits from supporting and extorting illegal mining are too large (and too easy) to pass up. By some estimates, in the past five years the FARC has transitioned into making some 20 percent of its total earnings from mining operations and 35 percent from drug trafficking. Put another way, that's hundreds of thousands of dollars in monthly income (for relatively little work) going to the rebel group's locally operating fronts. Countless additional illicit funds from drug trafficking are also laundered through these operations because they ultimately produce a legal item.
Organizations like the FARC, with operatives in Ecuador and Venezuela, are well-positioned to extend their mining ventures into those countries. In fact, there is evidence they already have. Groups like the Zetas are present in Mexico and Guatemala, and they have shown no hesitation in taking on new activities as they expand through Central America. Indeed, a key lesson here is that even in Colombia -- long the cocaine-producing capital of the world -- traffickers are always looking for ways to keep their income fluid and diversified (and, according to some reports, are even willing to team up with rivals to do so).
For the global mineral market, it is unclear whether the trend is toward dominating the "illegal" industry or extorting the legal one. Either way, the presence of these groups may create an unwelcome new "gold standard" for the region: greater violence, more corruption, and a higher cost of doing business.
Adam Siegel is a researcher in Eurasia Group's Latin America practice.
EITAN ABRAMOVICH/AFP/Getty Images
By Samantha Grenville and John Watling
Australia's reputation for being a lucky country has certainly been polished to a high gloss over the past few years. Its buoyant economy contrasts mightily with the gloom and doom dominating the headlines in Europe and the U.S. But the country is abuzz with concerns about housing and whether or not the country is about to face the consequences of a busted bubble. The argument is vociferous but evenly matched, with partisans on both sides variously claiming imminent disaster or fevered imaginations. One thing seems certain though: the politicians are unlikely to intervene, even though in most such cases they would be falling over themselves to soothe the population's jagged nerves.
The arguments in favor of a bubble depend in large part on the meteoric rise in housing prices over the past decade and a half (by some estimates they were up about 150 percent between 2004 and the recent peak in 2010). Much of this increase was driven by higher household debt, which had many economists clucking in concern. Demand for housing has also been propped up by the soaring economy. China's gigantic appetite for the country's minerals and other primary resources has spurred strong growth in Australia's mining and allied sectors (including reports of unskilled mine workers earning six-figure salaries and attendant health and social issues), boosting the currency in the process. Other parts of the economy, such as tourism and domestic manufacturing have not been so lucky and are suffering because of the Australian dollar's surge. The recognition of the two-speed economy combined with elevated housing prices have spurred considerable popular fear among Australians that the country is on the brink.
Doomsday forecasters argue that the bursting of the housing bubble will cause the economy to implode, with the banks acting as the transmission mechanism. Collapsing home prices would destroy bank balance sheets, forcing the banks to raise capital in volatile markets, or to deleverage and withdraw credit from the real economy. That move would further depress home and other asset prices in a negative feedback loop.
So then why does Australia's government seem unwilling to intervene? Prime Minister Julia Gillard and Treasurer Wayne Swan have quietly deflected questions about housing with gentle bromides and urgings to the private sector to talk up the economy. They have likely made the wise decision, politically at least.
First, there may not be a housing bubble. Policymakers at Australia's Reserve Bank certainly seem to believe there is no danger. Reserve Bank assistant governor Guy Debelle speaking at a recent mortgage industry conference claimed he was more worried about the EU and that housing risk is not something that keeps him awake at night. Home prices have been declining steadily over the past year or so, and if that continues, household debt ratios may drop even further, freeing up the central bank to ease rates. In the meantime however, the Reserve Bank is clearly concerned that lowering rates would boost the wrong sort of confidence, encouraging still relatively indebted households to continue borrowing.
Second, there may be no need to act even if there were a dramatic decline in housing prices. Australian banks are considerably stronger than they were before the 2008/09 crisis. The IMF recently stress-tested the major banks by hypothetically invoking an Ireland-style housing bubble and bust, and found that banks would be buffeted but remain solvent. In perhaps the strongest vote of confidence in the local economy, Germany's Bundesbank -- arguably one of the world's most conservative central banks-is considering buying Australian dollars, signaling the country's emergence as a true safe haven.
Gillard may also be disinclined to tackle the issue lest it add to her burdens. Authorities are already facing a tough battle over the incoming carbon tax, which opposition Liberal Party leader Tony Abbot has used as a cudgel against the incumbent Labor Party government. Any misstep on housing would have the unfortunate side effect of giving Abbot another target.
All of these considerations argue in favor of a gentle hand on the tiller and against dramatic action until it may be absolutely necessary.
Samantha Grenville is an associate with Eurasia Group's Comparative Analytics practice, John Watling is a senior editor with Eurasia Group.
Ian Waldie/Getty Images
By Alexander Kliment
Russian President Vladimir Putin's last minute decision to skip a G8 summit with President Barack Obama is a snub to Washington, but the Russian president's no-show may in fact increase the chances for a constructive relationship between the two countries.
Last week, just days after his inauguration, Putin let it be known that he would not attend the upcoming G8 summit at Camp David, where he and Obama were set for a one on one meeting.
The White House, in turn, said Obama wouldn't attend the 2012 Asia Pacific Economic Conference (APEC) summit this fall in Vladivostok, Russia -- though it was always hard to imagine Obama skipping the Democratic National Convention.
According to the Kremlin's official explanation, Putin can't leave Russia right now because approving the cabinet nominations submitted to him by Prime Minister Dmitry Medvedev is too sensitive a task for Putin to oversee by phone from Maryland. So Medvedev will send the list to Putin and head to the summit himself.
Putin's decision is a breach of G8 protocol, which expects that sitting heads of state will attend the group's summits. French President Francois Hollande, for example, will attend, just days after his 15 May inauguration. And by sending his number two to an organization in which Russia is already something of a second fiddle, Putin is raising questions about the wisdom of keeping Russia in the group at all.
Accordingly, many analysts have cast the move as a brazen rebuke to the U.S., which Putin alleges is behind the unprecedented street protests that have become a feature of Moscow life since last December.
It's true that the Kremlin's official explanation isn't wholly credible. Most cabinet decisions have likely been agreed upon already, Putin's re-election was never in doubt, and the G8 summit's date has been known for some time. That said, he reassumes the presidency amid rising popular opposition, which has sowed fresh doubts about his legitimacy. Keen to prevent infighting or, worse, insubordination among Russia's powerful elites, Putin could well be preoccupied with some last minute horse-trading at home.
The timing may, in fact, be no better in Washington than it is in Moscow.
Obama is entering a challenging re-election campaign in which he has already drawn fire from his Republican opponent Mitt Romney about the pursuit of a reset with Russia and his broader foreign policy track record. U.S.-Russia ties have deteriorated recently -- on account of disagreements over Syria, continuing friction over missile defense, and Putin's allegations of U.S. complicity in the protest movement -- meaning the U.S. president would be under pressure to take a hard line with Putin.
But that could risk an unpredictable flare-up with the notoriously sharp-tongued and pugnacious Putin. At the very least, it might complicate White House attempts to secure congressional support for granting Russia normal trade relations status so that U.S. companies can benefit from Russia's WTO accession.
In short, with both men facing heightened domestic concerns and pressures, Obama's meeting with Medvedev, who has warmer relations with Obama and who is seen chiefly as a messenger for Putin, carries much less political significance, but also much lower political risk. The practical result is that it leaves open the chance of greater flexibility between Washington and Moscow that could help maintain a pragmatic relationship in the medium term.
Alexander Kliment is an analyst with Eurasia Group's Eurasia practice.
JEWEL SAMAD/AFP/Getty Images
By Antonio Barroso and Mujtaba Rahman
Francois Hollande's May 6 victory in one of France's tightest presidential elections ever will have few implications for the EU's management of the eurozone crisis. Hollande is taking shape as a pragmatist who will follow reason on the European front, as signaled by the candidates he's likely to put in important positions in France's new government.
The president-elect claims he has already selected the new prime minister, who will be revealed on May 15 after Hollande takes office. Socialist Party (PS) leader Martine Aubry and long-time socialist politician Jean-Marc Ayrault are the most likely candidates, although a surprise choice (for example Hollande's campaign director Pierre Moscovici) is not completely out of the running. Aubry's selection -- who the majority of the French left support, according to opinion polls -- would hint at a more leftist course for Hollande's government. Ayrault's nomination, however, would imply policy pragmatism. The former minority leader in the National Assembly would likely be better able to build consensus among the many leftist factions in parliament, especially if the government must adjust policies to match the challenging economic situation.
Michel Sapin, a socialist, is frequently mentioned as the candidate most likely to take the crucial post of finance minister. Sapin, who has already served as finance minister, is a close ally of the president-elect and helped draft Hollande's economic program. Another possible choice is Jerome Cahuzac, a socialist former president of parliament's finance committee who actively supports austerity and deficit reduction. Both men would make a good finance minister, given their experience and their commitment to a balanced budget.
But Hollande's victory will not fundamentally change how the EU is managing the ongoing eurozone crisis, though there will likely be some changes around the margins. Hollande's desire to introduce some focus on growth in the fiscal compact is easy for German Chancellor Angela Merkel to accept and there are already tentative signs that Berlin will support such efforts. Hollande's objective of securing a capital increase for the European Investment Bank (EIB) also is unlikely to prove controversial. But the biggest obstacle to growth -- moving away from regressive agricultural payments toward greater use of structural adjustment funds in the EU budget -- is actually more difficult for France to overcome than it is for Germany. Also, Hollande's pledge to seek a change in the European Central Bank's mandate is a non-starter. Such a change requires all 27 member states to agree, but it will face stiff opposition in Germany, where it is perceived as a French strategy to inflate away debt.
Antonio Barroso and Mujtaba Rahman are analysts in Eurasia Group's Europe practice.
By Anne Fruhauf
Zimbabwe's Robert Mugabe is a man of many talents: independence hero, accomplished educator, wily political strategist, cunningly cruel autocrat, and lately, a man skilled at cheating death. At his 88th birthday bash back in February, he cheerfully proclaimed to have "beaten Christ" (by being resurrected several times). The Old Man -- as he is usually referred to in Zimbabwe -- has outlived fellow rulers like Gabon's Omar Bongo and Malawi's Bingu wa Mutharika, whose (un)timely death this month will perhaps save Malawi from a deepening economic crisis and popular rebellion.
Cut from tougher cloth, Mugabe has outlasted more than a decade of political and economic crisis, in which the country's economy shrank by almost half, Zimbabwe set new records for hyperinflation (picture shoppers using bundles of 100 trillion Zimbabwe dollar notes), unemployment reached 80 percent, and millions of Zimbabweans fled the country in search of jobs and/or food.
But nearing 90 and suffering from metastatic prostate cancer, even Mugabe will (probably) one day meet his maker. His absences from the country have become more frequent, including at least nine 'medical tourism' trips to Singapore in 2011. In fact, the Old Man will probably leave office feet first (or through some form of incapacitation that is impossible to conceal). A smooth, negotiated retirement seems unlikely given succession squabbles inside his ZANU-PF party.
It is widely believed that Mugabe's departure will be a watershed moment, releasing the country from a tyrant's grip on its political culture and economy. True, without his departure, Zimbabwe's political transition, which began hesitantly with the formation of a unity government in 2009, will stagnate, as will progress on the economic front. In this scenario, the long-suffering opposition MDC, now ZANU's unlikely bedfellow in the unity government, will win free and fair elections (technically due in 2013) and preside over political and economic reforms. That's assuming they prove themselves true reformers, of course.
But Mugabe's critics shouldn't be too hopeful just yet. ZANU-PF and especially its generals -- few of whom are democrats or reformers -- are planning for a post-Mugabe future. Emmerson Mnangagwa, the country's fearsome defense minister, seems to be positioning himself for takeover against party rivals such as Vice-President Joyce Mujuru.
ZANU-PF knows that it faces potential implosion, and that its success at the next elections is not assured unless it builds its war chest and relies on coercion. That is why the country is now enduring an extended scramble for resources -- the indigenization drive against international mining companies, the controversial exploitation of the Marange diamond deposits and more recently a gold rush around Kwekwe, the country's mining heartland.
Zimbabweans have long lived by the motto that things can only get better. But life may yet get a little harder still.
Anne Fruhauf is an analyst in Eurasia Group's Africa practice.
JEKESAI NJIKIZANA/AFP/Getty Images
By Michal Meidan
A growing economic juggernaut and rising political power, China has many reasons to look to the Middle East: to import oil, extend its diplomatic influence, diversify its trade ties, and undermine U.S. hegemony. In that context, it seems hardly surprising that Beijing (alongside Moscow) vetoed a recent U.N. Security Council resolution on Syria and set aside its commercial dispute with Iran to conclude an oil import deal -- undermining U.S. and European sanctions on Tehran.
But Beijing's Middle East strategy is hardly the coherent, well-thought-out doctrine that some believe. Instead, it's the product of a number of (sometimes competing) domestic interests that must be coordinated each time a crisis unfolds. Worryingly for Beijing, as China's commercial ties to the Middle East increase, it will inexorably become more involved in the region's politics. In the process, the risk of antagonizing an important commodity supplier, getting on the wrong side of Washington, or fueling unwanted domestic debates will become more costly and more complicated.
Some argue, simplistically, that when China blocks pressure on Iran to protect its commercial relations with that country, it pays no price for it. The reality is not nearly that simple.
First, Beijing's decisions on Iran and Syria have clearly irked Washington. Secretary of State Hillary Clinton dubbed the Syria veto "despicable." Moreover, ongoing oil trading between China and Iran has already led Washington to slap sanctions on a Chinese trader. In a year of presidential elections in the U.S. and political turnover in China, when both sides are trying to keep tensions at bay, Middle East politics will burden an already complicated relationship with an unwelcome irritant.
But Beijing has more than the United States to worry about. Take China's ties with Saudi Arabia, which provides China with almost one fifth of its oil. Beijing's reluctance to support Western-led sanctions on Iran isn't going down well in Riyadh either. Nor has China's decision to veto the U.N. Security Council's Syria resolution, a choice that Beijing claims was intended to prevent the situation on the ground from escalating further.
Finally, several diplomatic principles -- non-interference in a third country's sovereignty, support for non-proliferation, China's rise as a responsible stakeholder -- are increasingly being called into question by other governments. The decision to veto the U.N. Security Council resolution on Syria may have been motivated by diplomatic principles of non-interference in a country's sovereignty and by Beijing's desire to prevent the situation from getting worse, but it has plainly damaged popular perceptions of China elsewhere in the region, and Premier Wen Jiabao's criticism of the Iranian nuclear program rings hollow to Western ears.
When thinking about its foreign policy goals, does Beijing really want to provide the security framework for the Middle East? These are difficult debates that Chinese leaders must have, but they will certainly want to postpone them until after Beijing's leadership transition is complete next year.
In short, the more deeply Beijing becomes involved in the Middle East, the more complicated its foreign relations and internal policy-making processes become -- and the more China has to lose. The choice between alienating an oil supplier, challenging an important trade partner and a global political power or opening up its diplomatic principles for debate is one that Beijing would like to avoid. But as its global reach extends, so will the trade-offs it has to make.
By Jennifer Lee
The new, young regime in North Korea surprised more than a few observers when it agreed last week to a moratorium on its nuclear activities in return for 240,000 tons of U.S. food aid so soon after Kim Jong Un assumed leadership. Instead of the legitimacy-building provocations expected from the young Kim (who is in his late 20s), the world got a measured concession from a totalitarian regime that demonstrated a degree of consensus and decision-making ability. In some ways, it was the story of the young son continuing his father Kim Jong Il's efforts to improve relations with the U.S. prior to his death.
There is general optimism surrounding the agreement, which stalls North Korea's uranium enrichment program, and nuclear and long-range missile tests, and allows the International Atomic Energy Agency to inspect the Yongbyon nuclear facility. Last week's step forward, however, does not necessarily presage a more substantive shift in North Korea's posture. The agreement allows North Korea to possibly address its immediate concerns (economic sanctions) and affect domestic politics in South Korea, without ceding its ability to provoke or flip the switch (again) on its nuclear program.
While it is easy to think that the U.S. food aid "carrot" must have been the main reason behind North Korea agreeing to this deal, it is unlikely the case. North Korea is not known for being particularly concerned about the hunger of its people (allegedly more than one million people died during the famine in the 90s, and food security has been dismal for the past few decades); and the totalitarian nature of the regime means that its leaders are not very concerned about their approval ratings.
North Korea is more concerned about the economic condition of the state and the long-term implications of sanctions (North Korea's version of the statement mentions that it would want to discuss the lifting of sanctions and provision of light water reactors if the Six Party Talks resume). The current move is probably a gambit to see if it can resume the Six Party Talks and have sanctions lifted without giving up the nuclear program. The deal is also likely an effort by Pyongyang to slight the Lee Myung-bak administration in Seoul, which it views with hostility, in the hope of increasing the chances of the liberal parties in South Korea's presidential election in December.
The U.S. and South Korea both have presidential elections this year. The agreement is likely North Korea's way of buying time for a year or so until the South Korean administration changes, while trying to extract concessions from an Obama administration that does not want any more conflicts on its hands during an election year. This is also a moratorium that is to last only while "productive dialogue continues." Everything North Korea has promised is reversible if it decides to back out. And it certainly has set a precedent for doing so. Furthermore, this moratorium applies only to the Yongbyun nuclear facilities; it is widely believed that there are several other nuclear development sites throughout North Korea that will be out of reach under this agreement.
It should not be forgotten that North Korea's nuclear capability has been extolled within North Korea as Kim Jong Il's most important legacy. It is undoubtedly seen as the single most powerful card that North Korea has, and with the recent leadership transition to a young new leader, there is little chance that the country will completely forgo this leverage, especially after the NATO operation in Libya that removed Muammar Qaddafi.
There is still a possibility that this could turn into something positive and lasting for U/S.-North Korea relations or North Korea's future behavior. Last week's agreement demonstrates that the totalitarian regime in North Korea was able to take a rational step for its self-interest. But it does not demonstrate that North Korea is contemplating giving up its nuclear weapons, or that it is on the verge of changing its behavior.
Jennifer Lee is an associate in Eurasia Group's Asia practice.
By Hani Sabra and Willis Sparks
Some of the outsiders inspired by last year's protests in Tahrir Square and the power of ordinary Egyptians to oust their long-time dictator expressed surprise when the country's transitional government began in December to target prominent NGOs as agents of foreign (read Western) governments. They shouldn't be. So far, the great lesson of Egypt's ongoing "transition" is that it remains awfully hard for old dogs to learn new tricks.
Egyptian authorities are now prosecuting more than 40 people for operating NGOs without licenses and for receiving "illegal foreign funding." Among the accused are 19 Americans, including the Washington-based International Republican Institute's Sam LaHood, son of U.S. Transportation Secretary Ray LaHood.
The case is but one example of how far Egypt's revolution has unraveled. A year ago, after Hosni Mubarak's exit, even those Egyptian activists least willing to trust the Supreme Council of the Armed Forces (SCAF) believed that the generals understood that the country could not continue as it had for six decades, that power had to be shared, and that democracy demands much more than the conduct of hastily arranged elections.
The activists, and the rest of the country, watched the generals leap aboard the "January 25 Revolution" bandwagon and salute the struggle's young martyrs. Protesters believed they had an unspoken understanding with SCAF that the military would retain some political influence -- and some of the commercial assets they had amassed over the years -- in exchange for a willingness to pass political power to a pluralist civilian government following a period of transition, to reform state institutions, and to respect the rights of citizens to organize.
In the months that followed, minds changed and understandings evaporated. When the military killed more than two dozen Egyptian Christian activists in October, the illusion was publicly shattered. Clashes between activists and security forces in November and December upped the stakes. As 2011 drew to a close, it became clear that SCAF generals, who first rose to prominence via the intensity of their loyalty to Hosni Mubarak, shared their former leader's authoritarian worldview.
Over the course of 2011, SCAF froze out the protest leaders and struck a separate deal with the Muslim Brotherhood, one that gives various Islamist parties a dominant position in crafting Egypt's domestic policy while leaving the army in charge of foreign policy and key segments of Egypt's economy. Islamist parties, including the Muslim Brotherhood, won about two-thirds of seats in recent parliamentary elections. The protesters, now marginalized, are becoming more confrontational.
The crackdown on NGOs reveals the understandings that are implicit in the Muslim Brotherhood-SCAF understanding. Credible allegations have emerged that Islamist groups have received foreign funding too, from Gulf Arab countries, but SCAF has taken virtually no action against them. It's the groups that lobby for human rights -- and who have criticized SCAF -- that have been targeted.
If these NGOs have indeed broken laws, they are Mubarak-era laws. SCAF has changed the rules on elections and the formation of political parties, but their unwillingness to tolerate civil society shows the limits of their willingness to change.
The generals' inflexibility bodes ill for Egypt's future. The Brotherhood, eager to finally enjoy a share of formal power, has become the army's enthusiastic partner. But neither group appears to recognize that elections alone will not guarantee stability. Their broader public popularity and the power of state television ensure that, especially outside of Egypt's largest cities, the military and Muslim Brotherhood represent the "silent majority."
But the vocal minority will keep pushing back, and the potential for violence is on the rise.
Hani Sabra is an analyst in Eurasia Group's Middle East practice. Willis Sparks is an analyst in the firm's Global Macro practice.
Jeff J Mitchell/Getty Images
Davos 2012 -- jam-packed, exciting. A bargain? Not quite. But did the rewards outweigh the costs for attendees? Given the extraordinary time commitment and expense folks go through to attend, is Davos worthwhile?
In my opinion -- definitely yes. Here's why.
1. Davos gives me the chance to meet with pre-vetted folks in fields I don't know particularly well...but need to. Anyone looking for insight on these subjects would otherwise have to invest too much time to figure out who the true experts are, and how to reach out to them. I know who I really rate in thinking about global politics, and when I have questions or want to bounce an idea off a few people, there's no problem. But what about subjects that aren't my forte? What about food scarcity? Or climate change? Urbanization? Microfinance? Gender inequality? If you're interested in pattern recognition, systems thinking, and getting out of your box, Davos is a virtually unparalleled opportunity. Anyone with a global element to their work can benefit immensely from this type of exposure.
2. Davos is not just about finding experts in fields that aren't your specialty. You're also with top folks in your own field, and the audience is global and experienced. So you need to bring your A-game. Last year, Niall Ferguson, Ken Rogoff and I squared off at dinner in front of 50 CEOs on global rebalancing. This year it was global security, and I spoke alongside Richard Haass, John Chipman and Yan Xuetong. The audience has heard the top voices before, and they're a decidedly skeptical bunch; there's not much scope for misstep. Needless to say, it's an exciting opportunity that Davos provides.
3. If you're in a global field, you can pack six weeks' worth of meetings into five days. Just the breadth of people in attendance from governments, corporations and NGOs across the world -- I'm not somebody who likes to live out of a suitcase and spend my life on an airplane. That means picking and choosing your trips. Davos allows me to consolidate, and skip those extra couple visits to the major financial and industrial capitals and instead spend an extra week on the ground in China, or a frontier market I've been meaning to visit.
Bottom line: this little snowy town is as alluring as the incredible people who make the trek to get out there. It's a real chicken-or-the-egg affair, where people go because...people go.
On to my Davos 2012 awards.
Boris Johnson. On Thursday, the mayor of London gave a fantastic address on behalf of the London 2012 Olympic Games. One of the highlights: Johnson quipped that London's murder rate is one-quarter of New York's. It was perhaps the most well received Davos speech I have ever attended.
Best new theme:
While it is not exactly new, state capitalism seemed to finally catch fire in the Davos debate this year. In light of developed economies' woes and emerging markets' resilience to the financial crisis, state capitalism is receiving a serious look (even though it is by no means a viable alternative to free market capitalism). At Davos, David Cameron addressed state capitalism directly, explaining how Western leaders need to actively combat it and stand up for what he has been calling ‘popular capitalism' in his recent speeches. And it didn't hurt that The Economist topic du jour was state capitalism going into last week too.
I have to admit it -- the Google party really did steal the show. The ‘green' dance floor that measured the watts exerted by those brave enough to dance was a highlight. Every year at Davos, Googlers really seem to make up for lost time spent in the library throughout their youth.
Senator Saxby Chambliss (R-Ga.). Chambliss is completely old school, and he understands the polls and the pols alike -- when I chatted with him, it was plain to see why he's so popular in Georgia. More on our meeting in my previous post.
Thank you, Azeri government. Awfully kind. See my earlier post.
Davos outperformer (country):
Brazil took the cake. They were taking the lead sponsorship for the first time at Davos and nailed it. Between World Cup and Olympics chatter on top of promising fundamentals when it comes to infrastructure build-up and stable governance, the Brazilians were the delegation to beat. Honorable mentions: Indonesia and Turkey. Both delegations had a strong technocratic presence in Davos and focused on attracting investment.
Davos outperformer (company):
McKinsey was the best represented company in Davos -- they are consistently the best attended, and Rik Kirkland had thought leaders streaming into the Seehof Hotel for intelligent conversations on key global issues in droves. It was so busy that there was even a camera set up in...a shower. (Gotta scrub those videos. Or perhaps Rik is moonlighting...)
Davos underperformer (country):
Russia. They did their best to dodge questions and kept the heavy hitters away. If Putin's too busy for debates, he's clearly too busy to attend Davos. Nouriel Roubini and I both used the conference to announce Russia shouldn't be a BRIC -- the response was very positive.
Davos underperformer (person):
Mick Jagger. Lots of folks were star struck, but he looked out of his element.
The best entrance probably belongs to Bill Gates, for its understated quality. He enters softly, softly, and suddenly he's there and his presence speaks for itself. He would probably be the last person in the conference to showboat, despite probably mattering more than anyone else there.
Steve Roach, definitely, as he escaped Davos protestors at an Open Davos event. More on that in an earlier piece of mine.
FABRICE COFFRINI/AFP/Getty Images
Today, we turn to the last in our series of posts on Eurasia Group's Top Risks for 2012 and answer the most common questions we've gotten about it.
Here's a summary:
Venezuela -- A lose-lose election. No matter who wins the October 7 presidential election, Venezuela's political and economic conditions are likely to worsen. President Hugo Chavez would maintain the same distorting economic policies, and the economy would struggle to overcome the effects of a large pre-election increase in spending and debt issuance. An opposition win would likely lead to an eventual improvement in economic policy, but the transition could produce instability as Chavez supporters, who would still control most of the state apparatus, try to counteract reform.
Q- Can Chavez win another election? What will affect the outcome?
A- Chavez has the edge because of his relatively persistent popularity despite a growing dissatisfaction with the status quo. The president's popularity (his approval ratings are currently around 50 percent) comes despite high inflation (estimated at nearly 28 percent in 2011), low growth, good shortages, and an electricity crisis. To alleviate these negatives, Chavez will likely engage in a massive campaign spending spree, fueled by high oil prices. His government will also issue a large amount of debt to provide dollar-denominated assets to curry favor and counteract dollar shortages. The major wild card is Chavez's health. He announced in July that he was diagnosed with cancer, but little is known about the severity of his illness. Should his health deteriorate significantly, Chavez's reelection chances will diminish, as the public's faith in his ability to lead drops.
Q- Who is the opposition?
A- The Coalition for Democratic Unity (MUD) will select its presidential candidate when it holds primary elections on February 12. Miranda Governor Henrique Capriles Radonski, a young and popular governor from one of Venezuela's most important states, is the favorite. The opposition hopes to capitalize on the growing dissatisfaction with Chavez and to continue the momentum from the 2010 legislative elections, when a unified opposition list of candidates won 54 percent of the popular vote against the president's United Venezuelan Socialist Party (PSUV). The MUD would promote more orthodox macroeconomic policies, likely leading to lower inflation and more fiscal stability in the long run. The opposition would also adopt oil-related policies that are more attractive to foreign investment.
Q- What are the different risks arising out of the election outcome?
A- A Chavez win would mean a continuation of the same economic policies that have produced widespread market distortions and a strained relationship with foreign oil companies. It will be even harder for the country to recover from the large uptick in spending and debt Chavez is likely to push to improve his election chances. Given Chavez's wide-ranging power within the government, however, it would be easier for a Chavez government than a more fragmented opposition to make some economic adjustments, such as devaluing the currency or tweaking the foreign exchange system.
An opposition win, while positive for long-run growth, could paradoxically lead to more instability in the short-run. The government would be opposed at every turn by Chavez allies, contributing to policy paralysis. The most stable outcome would probably occur if the opposition wins, and Chavez's health makes it difficult for him to continue leading his movement behind the scenes. The most unstable environment would likely arise from a rapid deterioration in Chavez's health, causing him to abandon the presidential race and creating a power vacuum that would roil both the governing party and the opposition.
JUAN BARRETO/AFP/Getty Images
Last night, I had the privilege of moderating a World Economic Forum dinner panel entitled, "The Future of Democracy," asking the following broad question that left ample room for debate: "How are established and nascent democracies being reformed and shaped to meet the challenges of the 21st century?"
The topic and a great group of panelists -- including Professor Timothy Garton Ash (U.K.), Archbishop Thabo Cecil Makgoba (South Africa), Kenneth Roth (U.S.), Amira Yahyaoui (Tunisia), and Jean-Francois Copé (France) -- made it easy for me to facilitate a spirited discussion. It largely revolved around one important theme: determining to what extent anti-democratic tendencies are on the rise globally.
Europe was an area of particular interest, where this threat broke down into two main categories: the disintegration of democratic institutions under the watch of Viktor Orban in Hungary, and a more general anti-immigration far right populism throughout Europe. There was general consensus that the threats to democracy don't extend as far as consolidated democracies like France, but with austerity in the equation for the foreseeable future, the periphery is poised to see this threat grow. An interesting debate arose between the Economist senior editor, who didn't see any of this as significantly anti-democratic, and Timothy Garton Ash, who certainly did.
It's interesting to examine this in countries that are bastions of democratic values and juxtapose it with tendencies in authoritarian states. Take the perceived trend in the other direction in Russia, for example, as we see the middle class publicly speak out and air its grievances.
Davos generally has a Western bent, with an underlying mentality that its customs and ideals will win out. Even with this in mind, there was a lot of talk about avoiding hypocrisy and the importance for Europe and the United States to get their own houses in order democratically before they champion these values abroad. This criticism was especially pointed with regard to the U.S., as people highlighted issues of wealth disparity and corporate influence on politics as areas where democracy seems to be eroding.
There was not as much on the role of technology as I would have liked, nor on the treatment of populations as consumers rather than citizens. But I tried to incorporate these trends into a broader question that I asked the entire audience. Given the following three trends, I asked, is the global environment becoming more supportive of democracy?
1. Exponential technology boosting communication avenues and the greater immediacy and availability of information
2. Volatility and the economic disparity of wealth
3. Challenges to an outmoded western model of international governance
I didn't take a formal poll, but responses came back roughly as follows:
Where do I stand? I'm mixed, perhaps with a toe in the "less favorable" camp.
The first day at Davos took its toll on me. A civilized 8 a.m. start, but then it was full tilt until 10 p.m., bouncing from one event to another. And I turned in early, which won't be an option from here on out. After all, the can't-miss evening events come tonight and tomorrow.
Today, The Call presents our top risks for 2012. Click HERE for Eurasia Group's complete report.
1. The End of the 9/11 Era -- It was a truism of globalization: economics drives markets, and national security drives geopolitics. No longer. Following the 2008 financial crisis, the killing of Osama bin Laden, the withdrawal of U.S. troops from Iraq, and an end date for the war in Afghanistan, politics and economics will overlap almost entirely in 2012. Political officials around the world will worry mainly over economic risks -- the eurozone crisis, the strength of U.S. recovery, and China's evolving role in the global economy in 2012. Market players, in turn, are anxious mainly about political decisions, especially those that will be made in Europe, America, and China this year, as shortsighted leadership from virtually all the major geopolitical players generates policy stalemate and uncertainty.
2. G-Zero and the Middle East -- The inability/unwillingness of major powers to bolster the region's balance of force will generate greater turbulence across North Africa and the Middle East as unresolved religious, sectarian, and ethnic tensions threaten more unrest. The lack of a viable regional security framework, continuing protests, autocracies at risk, and enormous challenges facing newly democratic regimes will add to the potential turmoil. As this dynamic plays out in Syria, Egypt, Iraq, Libya, Yemen and Bahrain, regional heavyweights -- Saudi Arabia, Iran, and Turkey -- will generate friction as they vie for proxy influence.
3. Eurozone: the rollercoaster ride rolls on -- In Europe, it's not the breakup of the Eurozone we need to fear in 2012 but the "reactive incrementalism" that could spin beyond the control of political officials. The uncertainty and volatility we saw in 2011 has only just begun.
4. United States: right after elections -- Once the votes are counted in November, lawmakers will take up the $5 trillion worth of tax and savings decisions that must be taken in the final nine weeks of the year. Investors face uncertainty about their taxes and government contracts as well as about the broader impact of lawmakers' choices on economic growth.
5. North Korea: implosion or explosion -- The world's most opaque nuclear-armed state enters a year of uncertainty as the battle for power and influence within the regime gathers force.
6 - Pakistan: turmoil, spillover -- The end of the 9/11 era threatens neglect of other hotspots, and none is more combustible than Pakistan, a terrorism-plagued, nuclear-armed power burdened with an unpopular civilian government, a meddlesome military, politically motivated judges and an increasingly dangerous security environment. The expected withdrawal of thousands of U.S. troops from Afghanistan this year will fuel regional competition for new influence.
7. China: trouble in the neighborhood -- The Obama administration's recent emphasis on Asia will embolden China's neighbors to take more assertive positions with Beijing. Rising nationalism in China, its ongoing political transition, and the leadership's unwillingness -- perhaps inability -- to resolve internal debates about the country's role in the world suggest Beijing is especially likely to meet provocation with provocation in months to come with both naval and economic muscle.
8. Egypt: a transition in trouble -- Egypt faces the risk of political disintegration this year as anger builds between military and civilian political forces, both Islamist and secular. Egypt's base-line stability, its economic recovery, and its broader regional influence will suffer.
9. South Africa: populism ascendant -- The struggle for leadership of the ruling African National Congress will slow the pace of both policy and economic growth at a time when the eurozone crisis already weighs heavily on South Africa's trade and currency.
10. Venezuela: a no-win election -- The country's big political story this year is October's presidential election, which incumbent Hugo Chavez, if healthy enough for a vigorous campaign, is likely to narrowly win. But the outlook for economic and political stability is bad no matter the election result. Should Chavez die or abandon the race, the deep fissures between the Chavista movement and the opposition could stoke violence.
In addition, Eurasia Group identifies four red herrings, the big stories we don't believe will happen in 2012.
Fallout from the 2012 political transitions -- In 2012, we'll see political transitions in the U.S., China, Russia, and France, countries that together represent nearly half of global GDP and four-fifths of the UN Security Council. But there's surprisingly little at stake in the outcomes for geopolitics and the global economy.
This is probably the single most overrated risk of 2012. The political will to
maintain the eurozone remains strong among all the major political parties in
the core Eurozone states, almost across the board in the European periphery
and, just as importantly, among eurocrats in the ever-growing European
bureaucracy. And there's no effective political mechanism for a Eurozone
China's hard landing -- There are signs of overheated growth in China, but the state has the tools and resources to manage short-term trouble, and it will pull out every stop to prevent a serious slowdown, especially during a major political transition.
Mayan apocalypse -- Just isn't happening. And if it does, well, sorry.
Over the next three weeks, we'll be posting more ideas and information on each of these risks.
By James Fallon
President Ali Abdullah Saleh's sudden return to Yemen will be destabilizing, but will not change the underlying dynamics of the country's political conflict. Saleh recently returned to the capital Sana'a after some three months of medical treatment in Saudi Arabia following a June assassination attempt that left him severely wounded. His return came amid renewed clashes between pro- and anti-Saleh forces in the capital that erupted after security forces killed protesters on Sept. 18.
Saleh called for a ceasefire in an effort to position himself above the fray, but attempts to paint himself as a mediator are unlikely to succeed. Despite Saleh's absence from the country and nine months of protests against his 33-year reign, he retains some support, a factor that has led to a protracted stalemate rather than his overthrow.
Saleh will not be able to regain control of Yemen. He could, however, potentially extend the stalemate for months, degrading stability even further in the process. Although widespread military and political defections have occurred, pro-Saleh units are better equipped and led by loyal family members. Both sides enjoy some tribal support as well. The ultimate balance of military power remains unclear, but if fighting escalates, it is unlikely that either side would enjoy a decisive advantage.
Although this reality could spur dialogue, the more likely outcome is a protracted and indecisive armed conflict. A political agreement along the lines of the GCC-brokered transition deal is unlikely to solve Yemen's deeper crisis or restore central government control over the country. State stability is very likely to continue to devolve in any scenario.
Al Qaeda in the Arabian Peninsula (AQAP) is one potential beneficiary of this situation. AQAP has gained more space to operate as a result of the conflict, with Islamist militants sympathetic to the terror group seizing territory in the south of the country. The Yemeni regime has parlayed the AQAP issue to manipulate external support, resulting in a greater degree of patience from the international community than has been the case in other Arab uprisings.
There is both regional and international consensus on Saleh transferring power, but the same is not necessarily true for his family members and allies in key security positions. Outside actors probably still view maintaining the coherence of counter-terrorism units as a preferential outcome, despite their politicized role and intimate links to the Saleh regime. The European Union, United States, United Nations, and the Gulf Cooperation Council meanwhile are likely to continue to pressing for negotiations for a political transition, but they do not have the capacity to bring a swift end to the Yemeni crisis, further increasing the risk of a protracted and violent stalemate.
James Fallon is an associate with Eurasia Group's Middle East practice.
By Nick Consonery
Beijing seems strangely unconcerned about the global market turmoil caused by fears of a second global recession. U.S. economic data over the past month has been disappointing, to say the least. The sharp sell-off in European markets at the beginning of the week hints that the continent's sovereign debt levels have become a persistent wound that rather than healing is developing a life-threatening infection. Brazil, meanwhile, unexpectedly cut interest rates to protect their domestic growth.
But rather than pulling out all the stops to prepare for another slowdown, the Chinese government is still taking steps to slow its own economy. The speed of yuan appreciation --which will make Chinese exports more expensive on global markets -- surprised markets over the past month. Beijing also hinted recently that it might take some steps to slow momentum in its domestic auto sector, even though it used subsidized auto sales to stimulate the economy in 2009. And Premier Wen Jiabao reiterated his government's commitment to inflation-fighting last week, meaning that liquidity will remain constrained in China, further restricting growth.
There are several theories to explain China's unexpected behavior. One is that the Chinese government is actually feeling a bit more confident about global growth than some of its peers in the developing world. Another is that Beijing has no choice but to continue tightening, given ongoing concerns that the economy is overheating and driving inflation. A third is that shifting politics in Beijing are facilitating economic reform.
The truth is that all these factors are in play.
From a global perspective, however, this is a big change. In 2008, when it faced the global financial crisis, Beijing pegged its currency to the dollar and rolled out a massive stimulus package. This response maintained rapid economic growth in China, kept Chinese citizens employed, put a floor under global commodity demand, and allowed many emerging market countries to benefit economically by satisfying Chinese demand.
But it did little to move the global economy onto more sustainable footing by achieving any kind of "rebalancing."
Contrast that history with today's realities. The policies implemented by China over the past few weeks are much more conducive to rebalancing. This marks a clear shift away from policies that are China-friendly and toward policies that are more system-friendly. China's leaders said as much in a white paper released on Sept. 7, in which they promised to "accelerate the shifting of the model of growth," which they predicted will "create great space for the growth of the world economy."
It is unclear how long this progress will go on. The yuan has weakened slightly in the past few days, and if there is any hint of a hard landing in China, Beijing's cautious leaders will surely stimulate the economy again to boost growth. But for now, Beijing's recent behavior is a positive for the longer-term sustainability of the international economic order. Let's hope it lasts.
Nick Consonery is an analyst in Eurasia Group's Asia practice.
LAURENT FIEVET/AFP/Getty Images
By Antonio Barroso
A surprise proposal from Spanish Prime Minister Jose Luis Rodriguez Zapatero to amend the constitution to ensure that future budgets both satisfy EU mandates and are balanced has increased the opposition's Popular Party (PP) chances of victory in upcoming elections. There is a chance that a break down in discipline from the Socialist Party (PSOE) could trigger a referendum and jeopardize the approval process, but that looks unlikely. The amendment will, however, further alienate PSOE voters, who are already deeply unhappy with Zapatero's austerity policies, and looks like sealing its fate in the upcoming Nov. 20 elections.
The PP's leader Mariano Rajoy quickly stated that his party would support the amendment, but it did not take long before several senior members of the ruling PSOE and other smaller leftist parties expressed their unhappiness. The dissent is driven by the feeling that the amendment's timing and content represent an intrusion by markets and the European Union (especially Germany) in Spanish politics. Trade unions are also expected to mobilize against the proposal for the same reasons.
The final amendment needs the support of three-fifths of the deputies in each legislative chamber (210 lower house deputies and 156 senators) to be adopted. But it can be sent to a referendum if one-tenth of any of the two chambers (35 deputies or 26 senators) request it. At this stage, the reform has the support of the PSOE and PP, which together have 321 deputies and 246 senators. But there is a chance that some PSOE members of parliament (MPs) may join with smaller parties to force a national referendum. In that case, the amendment would probably fail.
That possibility seems unlikely at this stage. The PSOE's candidate for prime minister Alfredo Perez Rubalcaba has worked hard to convince the party that the reform is necessary and appears to have secured the support of most socialist MPs. Some MPs (especially the Catalan contingent) might vote against the reform, but it is unlikely that they will join the calls for a referendum from minority parties. A national referendum would likely be portrayed as a plebiscite on Zapatero and his policies, which is the last that the PSOE wants before the elections.
The constitutional amendment could nonetheless be the kiss of death for the PSOE's chances in the elections, despite earlier hopes of limiting the damage after the introduction of austerity measures. Rubalcaba is focusing his campaign on getting the party "back to the left" by proposing measures such as increasing the wealth tax or imposing a tax on bank profits that resonate with the party rank and file. The constitutional amendment undermines that strategy. Also, Spanish voters tend to punish internally divided parties. Given that a number of senior PSOE figures are openly rejecting the proposal, voters who would otherwise have likely voted for the PSOE are now probably going to consider other parties or abstain altogether. As a result, it looks likely that the economic crisis in Europe will claim another victim.
Antonio Barroso is an analyst in Eurasia Group's Europe practice.
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By Ayham Kamel
In a much publicized television appearance on Aug. 8, King Abdullah of Saudi Arabia withdrew his country's support for the Bashar al-Assad regime in Syria, where the government has been beating back protesters for the last five months. The spilling of innocent blood was "against values and ethics," the king said. The Saudi ambassador in Damascus was recalled the same day, prompting similar steps by Kuwait and Bahrain. The developments came in response to Syria's military operations in the Sunni strongholds of Hama and Deir al Zour -- events that rankled the Saudi leadership.
Nevertheless, the militarization of the protest movement over the last few weeks has made Damascus even more assertive and less tolerant of dissent. As such, the situation in Syria is exacerbating Sunni-Shia tensions and raising the likelihood of conflict in all multi-sectarian nations in the region. And while the Gulf Cooperation Council (GCC) states' moves will not inhibit the regime's heavy handed strategy -- more than a dozen protestors were killed on Wednesday -- they presage Syria's emergence as the nexus of a regional power struggle between Saudi Arabia and Iran.
Heightened pressure on the Syrian regime will not lead to the immediate collapse of Assad's regime, but it will chip away at his power. The policy shift will leave Damascus more isolated and may lead Syria's political and economic elite, particularly Sunnis, to reconsider their allegiance to Assad. The GCC countries' change of heart likely also precedes a coordinated international upsurge of diplomatic and economic pressure. Secretary of State Hilary Clinton has already signaled a firmer U.S. stance toward the regime, and new U.S. and European sanctions are expected in the next few weeks. Today, in fact, the US Treasury imposed sanctions on the commercial bank of Syria and its Lebanon-based subsidiary, as well as Syriatel, the country's largest mobile phone operator. These moves, like those of the Arab states, seek to nudge the middle classes in Aleppo and Damascus, which so far have not joined the ranks of the demonstrators en masse. But the Syrian regime remains unlikely to rethink its strategy. The country's military and security establishments are firmly committed to confronting the protesters aggressively, arguing that any other approach would strengthen the opposition.
Saudi leaders, meanwhile, are still on the fence about what the kingdom's Syria policy should be. They know that a political transition would be problematic and could spark a regional confrontation, which is why the king's speech, while criticizing the Syrian regime, also called on Assad to be courageous and introduce reforms. If Syrian policy remains unchanged over the next few weeks, however, the kingdom's position will likely shift toward outright opposition. Iran, in contrast, feels threatened by the potential loss of the Assad regime and of Iran's strategic depth on the shore of the Mediterranean, and has therefore reinforced its support of the Syrian government.
These opposing moves by Riyadh and Tehran suggest that Syria will become the focal point of Iran and Saudi Arabia's regional tussle for power. Indeed, many in Riyadh are beginning to perceive the upheaval as an opportunity to contain Iranian influence in the Middle East. In the meantime, all eyes are on Ankara to see if Turkey's leaders will be able to convince Assad to accelerate his reform program and resolve the crisis.
Ayham Kamel is an analyst in Eurasia Group's Middle East practice group.
By Hani Sabra
The chance of a confrontation between the ruling military council and Egypt's revolutionary activists in the country's turbulent political transition is rising. This is because the military council has failed to address activist concerns, particularly their calls for speedy trials of former regime officials and security sector reform. Despite the growing tensions, the two sides will likely achieve a short-term deal, but risks are growing.
Until recently the military council and the activists that led the occupation of Tahrir Square made efforts to appear as partners in the transition. The two sides still need each other, but the hostility is no longer hidden. Egypt's secular leaning "youth" activists are less concerned with electoral politics and are more focused on making a cleaner break from the Mubarak-era, including jail for human rights violators -- something the military wants to avoid. Frustration among the activists was accelerated by recent court rulings that delayed trials or exonerated police officers accused of killing protestors. A late June clash between police and activists in Tahrir Square also raised the stakes.
The council had gambled that it could avoid reforms while directing the transition unimpeded. It hoped that the activists were no longer capable of mobilizing large numbers of protestors, something that activists have shown is a false premise. A long planned demonstration on July 8 was well attended, and the reinvigorated activists have articulated a more specific set of demands. These include speedier trials for police accused of killing protestors and Mubarak-era regime figures, an end to military tribunals, and limits to the military council's power. The military council is unlikely to respond positively to all demands, but it will likely make new overtures in order to avoid a confrontation, especially in light of the July 8 protest and the fact that the activists remain popular with a substantial segment of the urban population.
The activists, however, did not secure the same level of support that they did in January and February. Hosni Mubarak is gone, summers are extremely hot, and many people have tired of protests. But the activists have proven that the military council must contend with them, even as the broader Egyptian public has begun to sour on the council.
The military council likely believed that their tacit understanding with the Islamists would split the opposition and limit the efficacy of protests, but they misread the situation. The Islamists are organized, powerful, and will do well in elections. But the more secular activists have the support of the intellectuals, some of the middle class, and retain the capacity to mobilize a large force of people. In addition, many Islamists, particularly the younger ones, remain suspicious of the military council and continue to participate in protests.
A key signal will be developments regarding Prime Minister Essam Sharaf and his cabinet. Sharaf, who was the activists' choice for the job, has seen his legitimacy wane over the past few months and many now perceive him as a stooge of the military council. His first overture to the activists on July 9 was not well received. But if Sharaf quits and the council appoints some more amenable, the risk of instability will rise sharply.
Hani Sabra is an analyst with Eurasia Group's Middle East practice.
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By Risa Grais-Targow
Cuba. Oil. Two words that tend to get U.S. politicians hot under the collar, though usually not in the same sentence. That could change as the 2012 campaign season heats up in the U.S. and as Cuba's plans for offshore oil exploration materialize. The Chinese-built, Italian-owned Scarabeo 9 rig is scheduled to enter Cuban waters in August or September, and a consortium of international oil companies is set to begin drilling soon after. The struggling island nation, which currently depends on generous oil deals from its friend and neighbor Venezuela, has high hopes that its potential offshore resources might rev up its sagging economy. (Cuba claims that it has 20 billion barrels of "probable" oil in the continental shelf just off Havana, while the U.S. Geological Survey thinks that number is closer to 5 billion barrels.) But as the rig makes its steady way from Singapore, officials in Washington are getting anxious. Many lawmakers doubt that Cuba has the regulatory capacity or expertise to drill safely, particularly without the U.S.-manufactured equipment that the more than 50-year-old embargo has kept out of Cuban hands. And with BP's spill in the Gulf of Mexico still fresh in the U.S. public's mind, politicians are flagging the possibility of a Macondo-like spill 50 miles off the Florida coast.
The specter of such a disaster has already prompted several legislative efforts to punish foreign firms that drill in Cuba -- or at least those who chose not to comply with U.S. safety standards. Since January, Congressional hardliners from Florida have introduced three bills proposing to deny contracts to such firms or visas to their employees. The bills are designed to appeal to anti-Castro constituencies in the run-up to the elections, but widespread haggling over the issue is set to increase as Cuba's drilling plans progress, and the issue could become a talking point for presidential candidates in battleground states. For its part, Cuba will keep scrambling to convince the international community that it will uphold international safety standards. But those PR efforts will do little to cool the heated debate brewing on the Hill.
That said, none of the bills is likely to move anytime soon, given another powerful constituency: oil. Pro-drilling legislators in the House will be wary of punishing foreign oil companies (some of which have U.S. operations). The issue will also be overshadowed by pre-election priorities such as job creation. In the absence of Congressional action, the administration will likely take an ad-hoc approach. It might twist companies' arms behind closed doors, as it recently tried to do with Spain's Repsol, to get them to abandon their plans altogether. Or, if that doesn't work, it might simply push for guaranteed safety compliance. Measures that involve engaging directly with Cuban officials are unlikely, leaving room for less controversial alternatives such as allowing companies that specialize in emergency response to contract with Cuba and creating some kind of exception to the embargo that allows Cuba to use certain U.S.-manufactured equipment to prevent or minimize spills.
Risa Grais-Targow is a member of Eurasia Group's Latin America practice.
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By Bob Herrera-Lim
The strong win by Pheu Thai (PT) Party representing the allies of former prime minister Thaksin Shinawatra at the July 3 parliamentary elections will allow the country to avoid any serious near-term instability. The incoming PT-led coalition government will have about 300 seats out of 500, which makes it much harder for anti-Thaksin groups to reduce the new government's majority, either through disqualifications or defections, and engineer a legal takeover as they did in 2008.
In the meantime, the military and the crown will pragmatically avoid any outright provocation or direct confrontation, a strategy the PT will also pursue. Army chief Prayuth Chan-ocha is strongly anti-Thaksin, but he cannot move without justification, such as a popular or political movement similar to large anti-Thaksin rallies in 2006. Prayuth will likely negotiate some near-term deal that avoids a major shuffle of military commanders and secures Thaksin's agreement not return to the country without proper legal proceedings.
The monarchy will be similarly constrained. The king appears disinterested in current politics, so it is the queen and Privy Council President Prem Tinsulanonda who will guide the monarchy's strategy. They too can only be effective if there is some "popular" movement that has effectively mobilized against the government. In the past, the Yellow Shirts (organized and financed by media mogul Sondhi Limthongkul) provided this momentum. But Sondhi's relationship with the military and the Bangkok elites has eroded significantly since 2008 when the Yellow Shirts blockaded the airport and precipitated a political crisis.
There has been some speculation that the PT's political agenda could provoke the military or the monarchy, but this risk remains relatively low. All signals indicate that the PT is aware of how any early and public attempt to secure Thaksin's return, or ban party dissolution could lead to an early and distracting political battle. Prime Minister-elect Yingluck Shinawatra was quick to emphasize national unity and deemphasize an immediate return by her brother. Laying the legal groundwork for his return, managing the political dynamics around it, and negotiating with the other elite factions will likely be done over the next few months behind the scenes. Constitutional change will also be pursued carefully to avoid triggering a similar fight.
Whether this temporary peace will lead to longer-term stability remains uncertain. The anti-Thaksin factions among the elites may now recognize that elections will sometimes deliver results they disagree with, but which they must respect. But they may instead maintain their belief that the popular vote is unreliable, that the electorate is susceptible to promises of economic largesse and populist rhetoric, and that when necessary the results must be overturned. The future of Thai democracy will be decided by the outcome of that decision.
Bob Herrera-Lim is a director with Eurasia Group's Asia practice.
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The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.