By Carlos Ramirez

At first glance, the Institutional Revolutionary Party (PRI) is the clear winner of Mexico's July 1 presidential election. But a closer look at the results reveals a more muddled picture. On the surface, the PRI certainly came out ahead: After 12 years in opposition, Mexico's once-hegemonic power reclaimed the presidency and engineered a strong congressional coalition. Also, when Enrique Pena Nieto is inaugurated on December 1, the party will have governors in place in 22 states and control of a majority of state legislatures. Meanwhile, the PRI's main rival, the currently ruling National Action Party (PAN), fielded a third-place presidential candidate, lost control of the key states of Jalisco and Morelos, and saw itself reduced to the third-largest party in the lower house of congress.

The PRI's pick-ups and the PAN's failure to retain the presidency were largely predicted in the weeks preceding the election. What came as a surprise was Pena Nieto's inability to reach the critical 42 percent threshold of total votes, which translated into a weaker performance for the PRI in the congressional races. The party failed to achieve working majorities in both chambers, and the outcome fell far short of the PRI's expectations-especially in the senate, whose members are elected every six years. So in a dramatic turn of events, Pena Nieto will assume the presidency but will have to depend on legislative support from the PAN to secure his agenda.

The electoral outcome has damaged the center-right PAN, but it does have this one lifeline. As a pivotal party in congress, it will be the only powerbroker with which the PRI will be able to negotiate structural reforms. This is the inverse result of the 2006 election, which may provide some consolation to PANistas who watched the policies of outgoing president Felipe Calderon repeatedly held up by the PRI over the past six years. This time, it is the PRI that will be tied to the PAN for the entirety of the Pena Nieto administration.

This ironic turn of events clearly was not part of the PRI's plan. Pena Nieto intended, after winning by a double-digit margin and capturing both chambers, to propose moving forward on many long-stalled reforms, to secure congressional approval with or without PAN support, and to avoid having to undermine the vested interests that make up his constituency. The goal was to demonstrate the PRI's effectiveness from the outset and achieve solid results. The Mexican public, in turn, would see 12 long years of obstructionism and stalled reforms quickly vanish. But that plan collapsed last weekend.

So why, exactly, is the outcome so bad for the PRI? From a business perspective, it seems reasonable that the PRI and the PAN would come together to enact needed reforms. According to Pena Nieto and his advisers, the PRI is pursuing the same reforms that the PAN tried (and failed) to pass during the Vicente Fox (2000-2006) and Calderon (2006-2012) administrations: fundamental changes in the areas of labor, fiscal policy, energy, and competition. The PAN has no deep-seated ideological opposition to any of these (unlike the other major party, the Democratic Revolution Party, or PRD). And it does not have strong ties to the groups with an interest in maintaining the status quo. Conventional wisdom, therefore, would say that Pena Nieto will find a way to get the PAN on board to pass the relevant legislation.

It is not that simple, however. If the PAN learns from its historic defeat, it will quickly come to terms with the fact that it now has a golden opportunity over the next six years to push for a much deeper transformation of Mexico's political and economic landscape. In particular, the PAN can offer support for the PRI's structural reforms in exchange for dismantling the vestiges of the old PRI-led corporatist coalition that survived Mexico's transition to democracy. (The PAN struggled against this coalition during its 12 years in the presidential residence.)

Accomplishing such a feat is a pretty straight-forward task, as there is no shortage of issues on which the PAN can seek concessions in exchange for supporting reforms. The list is large -- underscoring the many problems left untouched during the past dozen years-but certainly achievable. Here are some of the topics that could be up for negotiation:

• Changes to the political regime: Allowing legislators and municipal presidents to be reelected, instituting a second round in presidential elections;
• Improved governance: Reforming Mexico's dysfunctional federalist arrangement, seeking to reduce the power of unions in the education system and within the public sector-bureaucrats, oil company Pemex, and the Social Security Institute, for instance-by mandating transparency and democracy within them;
• Macroeconomic reforms: Limiting the capacity of governors to go into debt and making them more accountable for expenditures, forcing state governors to keep transparent fiscal accounts, reforming Mexico's various broken pension systems;
• Changes to the energy sector: Allowing risk-sharing contracts in the oil sector and preparing Pemex for a future stock float, opening the refining and petrochemical sectors; and
• Enhancing competition: Strengthening the power of the regulatory agencies including the Federal Commission of Telecommunications and the Banking Commission.

There is no question that the PAN will support these structural improvements. After all, the party's only chance of returning to power relatively quickly is if Mexico breaks with its corporatist past and modernizes at a faster pace. The real question is whether Pena Nieto is serious about enacting real change-serious enough that he is willing to defy the rent-seeking coalition that backs him. If he is truly committed to advancing reforms (and is ready for the epic, vociferous resistance sure to emanate both from within his own party and from the PRD), then Pena Nieto might succeed in becoming the first president to usher in a historic transformation. In that scenario, the country will have undergone unprecedented economic reforms during his administration and will function in 2018 within a renovated institutional framework that empowers Mexicans to reach their real potential. If, however, Pena Nieto is not committed enough -- if he ends up preferring accommodation rather than transformation, and if the dead weight of the PRI's past prevails once again -- then Mexico will remain condemned to the same mediocre performance witnessed over the past decade.

The stakes for Pena Nieto are clear. Will Mexico's new president be transformational, or will he prefer to continue playing the role of a soap-opera actor? Like Mexico's famed telenovelas, the election had a surprise ending.

Carlos Ramirez is an analyst in Eurasia Group's Latin America practice.

By Carlos Ramirez

Allegations that WalMart-Mexico's executives bribed local officials to speed up permitting for new stores highlight the issues of corruption in Mexico, but will have little impact. In the short term, the Mexican federal government has announced an investigation regarding the federal permits granted to the retailer. But that seems to be a political response to the growing criticism of inaction by the authorities rather than a serious case against the company. Because the allegations of wrongdoing relate to local-level permitting, any federal investigation will likely turn up little, if anything, of note. Furthermore, with the present federal administration entering its last few months, the investigation will probably fail to reach any meaningful result before its November 30 deadline.

In reality, federal officials are legally constrained from pursuing the allegations. They would first need a formal accusation by a third party before being able to launch any investigation regarding the alleged bribery. Furthermore, the division of powers under Mexico's constitution gives states and municipalities control over construction and most environmental permits, and national prosecutors have limited leeway to investigate local affairs other than when federal crimes are suspected.

A formal investigation at the state and/or municipal levels is even less likely. Since Mexico's transition to democracy, political power has shifted from the once all-powerful presidency toward the 32 state governors and the mayors of some of Mexico's biggest cities. The governors have strengthened their leverage over important decision-making within their jurisdiction through their control of local institutions. Increased budgetary and debt resources, with little related accountability and transparency (which increase the likelihood of corruption), have only reinforced the governors' political clout. Moreover, because the alleged corruption occurred five or six years ago, and reelection is banned in Mexico, politicians who served at that time will no longer be in office, which would further complicate a formal investigation.

Ultimately, both federal and local governments welcome companies that bring jobs and economic activity and that will likely to trump other considerations. WalMart-Mexico is currently Mexico's largest private sector employer with more than 210,000 employees. Local and federal authorities are unlikely to constrain WalMart-Mexico's growth, particularly when citizens cite jobs as among their principal concerns. In fact, federal and local authorities are likely to continue to regard the company as an important contributor to the economy.

In the short term the most likely immediate outcome for WalMart-Mexico is increased scrutiny of its operations by the media, competitors, and NGOs that oppose its presence in the country, but this is unlikely to hamper the company's ability to keep expanding in Mexico.

The episode does raise questions about whether Mexico's next president, to be chosen in July, will be able to tackle the lack of local-level transparency and accountability. Not only do governors face few checks, but the ban on reelection also means that politicians have few incentives to govern with any concern for their longer-term public reputation. If Enrique Pena Nieto from the Revolutionary Institutional Party (PRI) wins the July election, cooperation between federal and local authorities would improve in some areas. Calderon was frustrated with the lack of cooperation from the states on security, leading to tense relations, especially with PRI governors.

But the fact that the PRI controls most states and many municipalities means there are few incentives for a PRI president to seriously attempt to improve transparency. If elected, Pena Nieto is likely to prioritize the need to win support from governors for his own agenda, rather than pursue the complex political reforms needed to seriously tackle accountability and transparency issues at a local level.

Carlos Ramirez is an analyst with Eurasia Group's Latin America practice.

By Adam Siegel

Colombian president Juan Manuel Santos is likely to open the Sixth Summit of the Americas in Cartagena next month with a standard welcome for Barack Obama and the 33 other leaders of the Western Hemisphere, but maybe there's a more fitting greeting for the U.S. president: "This is an intervention." After decades of partnering with the U.S. to pursue an aggressive, often controversial 'war on drugs,' a number of Latin American leaders say they're ready to discuss major shifts in regional anti-drug policy. Some of them have begun talk of "decriminalization" -- and they want to do it at the Summit, where the United States will have no choice but to talk up the merits of the prohibition policies it has long favored.

The former presidents of Brazil, Colombia, and Mexico generated headlines in 2009 by jointly declaring that "the war on drugs has failed" and calling for decriminalization of marijuana, but the commentary was dismissed in some quarters as an easy argument to make for men no longer politically accountable as heads of state. Since then, however, several sitting Latin American leaders (on both the left and right) have called for candid debate of current drug policy. Among them: Mexico's Felipe Calderon, Costa Rica's Laura Chinchilla, Argentina's Cristina Kirchner, Guatemala's Otto Perez Molina, and Colombia's Santos -- who told Britain's The Observer last year that "A new approach should try and take away the violent profit that comes with drug trafficking... If that means legalizing, and the world thinks that's the solution, I will welcome it."

Santos' caveat -- "[if] the world thinks that's the solution" -- nods to the global reach of Latin America's drug trafficking organizations, underscoring the desire for a debate that includes producers and consumers (who are concentrated in the U.S. and Europe). This distinction is important; indeed, personal consumption of drugs like marijuana and cocaine is already technically decriminalized in Mexico, Costa Rica, and Colombia, while the total number of convictions for personal drug possession in Guatemala and Argentina combined was just 161 in 2009, according to the Inter-American Drug Abuse Control Commission. So when an ex-military general like Perez or a former defense minister like Santos talks about decriminalization, it's not because they care so much about personal liberties. Rather, they have one major goal in mind: choking off the resources that fuel drug cartels and the violence they practice.

As Perez explained recently in advance of a Central American conference on alternative drug strategy sponsored by his administration in Antigua, "drugs are expensive precisely because they are prohibited...traffickers will lose if they cease to be profitable." While no detailed proposal is yet on the table, his idea of decriminalization is clear: create a legal framework to make the production and transport of cocaine legal, at least throughout Central America -- a region through which approximately 80 percent of the cocaine heading to the United States stops. Bringing the business of this $37 billion industry out into the open, it is assumed, would reduce the imperative of traffickers to corrupt public officials and their need to use violence against both governments and rivals for access to the best trafficking routes.

Other leaders, from Vice President Joe Biden to Nicaraguan president Daniel Ortega, have rejected the decriminalization proposals out of hand. Nevertheless, the coordinator of Obama's trip to Colombia recently indicated that the U.S. was "ready to have a good dialogue between all countries to hear their views," though he reiterated that U.S. opposition to any legalization will not change. Of the suggestions offered at the Guatemala conference last weekend, some could be endorsed by the U.S. -- such as the creation of a regional Central American court for trying traffickers that would reduce local corruption and relieve pressure on national justice systems, while others -- mandating that the U.S. take "co-responsibility" and pay individual countries for every drug raid or plant eradicated -- don't stand a chance.

Obama's challenge at the Summit will be to offer policy alternatives to the status quo. Latin American leaders warn that Washington has asked them to take tough choices over the years, and they want to see the U.S. demonstrate the political courage to consider a few of their own. Latin Americans are far from united on decriminalization or any other single solution, but the gathering in Cartagena will make clear that they have become increasingly willing and able to propose new ideas they know that Washington won't like. If Guatemala's Perez Molina gets his way, we'll even see him start discussions on a formal drug transit corridor for moving cocaine between South America and the United States.

Wartime U.S. presidents talk often of the need to "listen to the generals on the ground." In coming years, beginning in Cartagena, Washington can expect its "frontline partners" in the war on drugs to offer up strategies and ideas that U.S. policymakers won't like. Some Latin American leaders may give Obama a break during an election year, but they aren't prepared to wait much longer.

Adam Siegel is a researcher in Eurasia Group's Latin America practice.

By Carlos Ramírez and Allyson Benton

The ruling National Action Party's (PAN) Josefina Vázquez Mota won the internal party presidential primary on 5 February, easily defeating former finance secretary Ernesto Cordero by about 15 percentage points. This is the first time that a mainstream political party in Mexico has selected a female candidate for president. Although surprising for some outside observers, the news was not unexpected for those watching PAN politics over the past year. A variety of opinion polls had consistently shown that Vázquez Mota's service as Secretary of Social Development, Secretary of Education, and most recently as PAN legislator and lower chamber party whip had raised her name recognition and popularity well above the other competitors.

Vázquez Mota's selection will raise hopes among some groups that Mexico will elect its first female president. However, the incumbent PAN faces several challenges from its main rival, the Institutional Revolutionary Party (PRI), and its candidate, the telegenic Enrique Peña Nieto. A recent poll by Consulta Mitofsky reflects the uphill battle she faces: Peña Nieto commands 40 percent support to Vázquez Mota's 24 percent, with the left-leaning Andrés Manuel López Obrador from the Democratic Revolution Party (PRD) only four points behind her; 17 percent of voters expressed no preference and 1 percent supported another small party. Although the PAN will see increased support after having finally named a candidate and the start of formal campaigning at the end of March, the party and its first ever female candidate face three critical challenges.

The PAN has held the presidency since 2000. Any incumbent party, especially a two-term one, needs a highly favorable economic environment to counteract the erosion of support that accompanies voters' increasing familiarity with the government in power. The PAN successfully navigated the 2008-2009 global financial and economic crisis and a deep domestic economic recession, but voters may find it difficult to reward a party that has overseen lackluster average yearly per capita GDP growth of 0.5 percent during the two terms. The modest growth expected over the next few months is unlikely to assuage voter concerns.

The deterioration of Mexico's security environment since President Felipe Calderon took office in December 2006 is another potential liability for the PAN. Mounting drug-trafficking-related violence continues to grab headlines, and there is an overwhelming sense that the country is losing the war against the drug traffickers. As a result, the election will be in good part a referendum on Calderon's security strategy, a pillar of which has been the use of armed forces instead of local law enforcement agencies. Although Calderon retains considerable support on this front, a majority of voters support a change in the security strategy, although they are undecided about what the new approach should be.

The PRI candidate meanwhile benefits from several advantages heading into the race. Peña Nieto has successfully staked out a centrist position that appeals to a broader constituency than just the traditional PRI faithful. The strategy appears to be assuaging voter concerns about the potential return to power of the formerly authoritarian party. The PRI also has a structural political advantage given its control of 20 governorships out of 32. Governors have emerged as powerful political figures in Mexico's evolving political landscape and they can marshal significant state-level resources to assist in campaigns.

Despite these challenges, Vázquez Mota is likely to be a competitive candidate this July. She has strong national-level name recognition and likely counts on solid support from the PAN's traditional constituents in the middle classes and the business community. Additionally, her status as the first female candidate from a mainstream party could help her attract independents (about one-third of the electorate) and first-time voters. Many swing voters might be reluctant to support the PRI -- despite Peña Nieto's best efforts at convincing voters that it has changed -- or the more radical left-leaning López Obrador. Vázquez Mota's likely strategy is to present herself as representing continuity with popular PAN polices, such as its free-market and pro-investment economic policies and its popular healthcare and housing initiatives -- but as also able to critique the current administration on other fronts, such as security policy, where she will offer improvements.

The PRI remains favored to win the race, but Vázquez Mota's selection has probably made it a much closer race than originally anticipated.

Carlos Ramirez and Allyson Benton are analysts in Eurasia Group's Latin America practice.

By Ayham Kamel

Recent, though futile, efforts to resolve the crisis in Syria have demonstrated the absence of leadership from global powers such as the U.S. and likely set the stage for possible contagion. The unwillingness of the major powers to intervene in crises such as in Syria -- a marker of what Eurasia Group has called the G-Zero World -- has allowed regional players to step into the breach, notably Qatar via the Arab League. But the League's efforts have also exposed a regional power vacuum and tensions among Middle East nations that could potentially escalate into a proxy war in Syria.

The Arab League's late-January initiative called on President Bashar al-Assad to step down, leaving the vice president to negotiate with the opposition, but it reflects neither the complexity of the Syrian conflict nor the domestic power balance. For example, the opposition is still deeply divided and there is still considerable support for the regime among business interests and some minorities. The Syrian regime is likely to retain power throughout most of 2012, but the risk of collapse will rise considerably in the last quarter.

Other players have taken advantage of major powers' unwillingness to get involved in Syria. Qatar has been pushing for more hawkish Arab League policy on Syria, but the organization lacks the power to push through such initiatives. Turkey, Iran, and Saudi Arabia have also staked out a role. But, the lack of interest in producing a negotiated solution effectively means that the Syrian regime can disregard the Arab League on many issues.

Divisions in the League between Gulf Cooperation Council (GCC) states and other members also limit the group's ability to formulate and pursue effective policies. The 24 January decision by the GCC to withdraw monitors from Syria highlights this division. Both Egypt and Algeria, traditionally important players in the organization, are uncomfortable with what is increasingly seen as Qatari and Saudi dominance. In the near term, Egypt's leverage will likely decrease given its own political transition, but major stakeholders (such as the military and the Muslim Brotherhood) will eventually seek a more proactive foreign policy. Within the GCC, there is also a subtle, but important, tension between Qatar and Saudi Arabia. Saudi royals are wary of Qatari calls for direct military intervention as a tool for democratic reform in Syria or any other Arab countries, a precedent that could be later used against Riyadh.

Syria is a key part of the regional balance of power between moderate pro-U.S. states and the so called resistance camp lead by Iran. Seeking a broader realignment in the Middle East, regional powers are likely to increase their support of their local allies. Saudi Arabia, Turkey, and Qatar are actively encouraging the uprising driven by conservative Sunnis. Meanwhile, Iran is providing the Assad regime with intelligence, and technological equipment to suppress the uprising.

The Syrian conflict has fanned Sunni-Shiia tensions and the risks of contagion in Lebanon, Jordan, and Iraq are considerable. In Iraq, Sunnis are emboldened by a resurgence of conservative movements across the Middle East. Lebanon could become more unstable as the Syrian conflict has divided political factions in an increasingly delicate struggle. Jordan's own communities could reconsider their allegiance to the Hashemite monarchy as communal divisions between Jordanians of Palestinian descent and tribal elites begin to increase. Potential Syrian or Iranian support to Kurdish separatist groups in Turkey is likely to become a problematic issue. Finally, covert action by either the Sunni axis (Saudi Arabia, Qatar, and the Arab League) or Shiias (Iran and Iraq) entails significant risks to regional stability and could spur a violent proxy war that would hurt the business environment and oil flows.

Ayham Kamel is an analyst in Eurasia Group's Middle East practice.

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 21^st 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:

• 60 percent thought the environment was becoming more favorable for democracy.
• 20 percent thought less favorable
• 20 percent were mixed.

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, we turn to risk #4 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:

The United States- Right after elections. Congress won't accomplish much as members face re-election and the presidential horserace develops over the first ten months of the year. But once the votes are counted, a couple of multi-trillion-dollar decisions with substantial long-term importance must be made quickly.

Q- You say that the lame duck session will be especially important this year. Why are the stakes so high?

A- Decisions have to be made by the end of 2012 on the future of the Bush tax cuts and on whether to waive the automatic spending cuts triggered by the failure of the congressional super-committee to agree on a long-term deficit reduction deal. Together, these issues will involve more than $5 trillion over the next decade, an amount large enough to have lasting influence on the trajectory of the U.S. economy. Even if there were more clarity on who will win the presidential election and on the post-election congressional balance of power, it would still be difficult to predict whether (and exactly how) the two parties can resolve these looming questions. In the meantime, companies and investors will have to cope with a lot of uncertainty in 2012 -- particularly about their own taxes and government contracts. This uncertainty will also weigh on economic growth this year.

Q- Isn't it possible that Democrats and Republicans will fail to agree on anything and that nothing will happen?

A- It's always possible that the leadership of the two parties and the White House will fail to reach a deal. But in this case, the failure to decide is a decision, because higher taxes would automatically go into effect and $1.2 trillion in cuts to government spending will move forward. Should lawmakers fail to agree on a solution by January 1, the next Congress could move in 2013 to retroactively reverse the impact. But the next class of legislators may prove no more amenable to compromise than the current one. Even if they succeed, these adjustments and readjustments would prove highly disruptive.

Q- How will the election results play into this risk?

A- If either party takes a big hit at the polls, its leaders will have clear incentives to reach a deal on tax and spending policies before their numbers decline in the new Congress. The other side would then have most of the bargaining leverage. But if the elections produce a continuation of divided government, the two parties would be much more likely to deadlock. The realistic best-case scenario is not so great either: Both sides could agree before the end of the year on yet another temporary fix, such as a partial or full extension of the tax cuts, combined with a delay on automatic spending cuts, and punt a solution to 2013. That outcome would be less disruptive than an expiration and a retroactive fix, but it would extend the uncertainty that companies and investors dread into next year.

Next up, keeping a watchful eye on North Korea.

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.

Eurozone breakup -- 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 breakup.

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 Michal Meidan 

The Senate bill that aims to punish China for holding down the value of its currency and that is now in the hands of the House will not trigger a trade war between China and the United States (as feverish speculation has suggested). That said, as both Beijing and Washington head toward political transitions in 2012, politicians will have to take tough stances on sensitive issues to please domestic audiences-while trying to keep bilateral relations stable. Maintaining its footing between these sometimes opposing demands will become increasingly challenging for Beijing as its campaign season revs up.

China's leaders aren't formally campaigning the way U.S. presidential candidates do, but jockeying for the country's top political positions is underway. Current leaders, as well as the younger crop they hope to promote, are therefore vulnerable to criticism from hardliners within the government, as well as from an increasingly nationalistic public. China's expanding economic clout, combined with a sense that American primacy has reached its end, is fuelling calls for more assertive responses to perceived provocations from Washington. In the run up to the Senate vote, Beijing therefore made every effort to lobby U.S. lawmakers to reject the bill. And once the bill had passed, Chinese politicians were compelled to express their displeasure vociferously. Government spokespeople slammed the bill as a protectionist move that could hinder the global economic recovery, while the state-run media denounced Washington's attempts to use the yuan as "a scapegoat for the U.S. politicians' incompetence."

Now that Beijing's rhetorical dues to its people are paid, though, it is unlikely to rock the boat further. By retaliating with currency devaluation or a trade war, Beijing could embolden lawmakers in Washington to push the bill forward. Instead, Beijing reckons that as things stand there's only a slim chance that the bill will become law. Even if the bill moves forward, China's leaders will likely wait for President Barack Obama to either water it down or veto it altogether. That is, Beijing will give the White House a chance to uphold the tacit bilateral agreement to keep cool.

Such conciliatory logic prevailed around the $5.9 billion arms sale to Taiwan that the United States announced last month. The Obama administration agreed to refurbish the F-16 jets it sold to Taiwan in 1992, but did not sell the island the latest model of the fighter plane, as some in both Washington and Taipei had hoped. China's response was low-key: Beijing called off a few military-to-military dialogues but did not sever ties (as it did after the previous announcement, in January 2010), despite strong calls at home to be more assertive. As long as Washington keeps its side of the bargain, Beijing can get away with such moderation.

But appeasing nationalistic voices while keeping bilateral ties on an even keel will be increasingly difficult for Beijing in the coming year, as contentious issues are likely to emerge. Presidential elections in Taipei in January could rattle nerves in both Beijing and Washington, as might flare-ups in the South China Sea. Particularly as the two countries grapple with an uncertain global economic outlook and try to coordinate their approach to the Middle East, any or all of these issues could make the campaign season acrimonious.

Michal Meidan is an analyst in Eurasia Group's Asia practice.

By Heather Berkman and Sean West  

U.S. Trade Representative Ron Kirk told the House Ways and Means Committee on Feb. 9 that the Obama administration is serious about progress on the South Korea, Panama, and Colombia free trade agreements. He wouldn't commit to a timeline, but we think Congress will pass all three deals this year -- though not without a round of serious political deal making.

Obama campaigned on the need to extract additional concessions from South Korea, Colombia and Panama before any of these deals, all of which were negotiated and signed by President George W. Bush, deserved ratification. For example, automakers and the United Auto Workers complained that the South Korea deal opened the U.S. auto market to Korean imports without securing reciprocal liberalization.

The United States took two years to tell South Korea exactly what it wanted changed, but the two sides have finally negotiated a side deal in which the Koreans made additional concessions. With the new agreement providing political cover, Obama now officially endorses the deal and will send it to Capitol Hill for ratification soon.

The path forward for the Panama and Colombia FTAs is a bit murkier. The Panama deal -- which, frankly, will have negligible economic impact on either country -- was first held up because Pedro Miguel Gonzalez, who later became leader of the Panamanian National Assembly, was indicted by a U.S. grand jury on charges he shot and killed a U.S. serviceman in 1992. When Gonzalez left government in 2009, U.S. trade skeptics shifted their criticism to Panama's alleged role as a tax haven, forcing the Ricardo Martinelli administration to reluctantly sign a Tax Information Exchange Agreement with the Treasury Department.   

The Colombia deal faces a more difficult battle. U.S. labor unions loudly oppose the pact because so many Colombian trade unionists and labor leaders have been murdered by paramilitary organizations. The number of murders has fallen in recent years, and though Colombia probably still has the highest murder rate of union members in the western hemisphere, it probably also has the highest rate of murders of priests, schoolchildren, and bus drivers. In short, despite significant government progress in cracking down on armed groups and reducing the homicide rate, Colombia remains an intensely violent place -- for labor leaders and many others. There's no way to solve that problem in the context of a trade negotiation.

By pushing these trade deals forward, the Obama administration is making a political bet. The White House knows the left has a long list of gripes with the president, and that pushing hard on trade deals will add fuel to the fire. But presidents benefit from the economic boosts provided by trade -- and Obama views the deals as a way to reach out to the independent and moderate voters he'll need in 2012.

Aware that Washington can't expect much more from these countries, the Obama administration will court reluctant Democratic lawmakers by extracting relatively minor concessions -- like a pledge from the Panamanian government to ratify a tax treaty or from the Colombian government to put more of those who kill union leaders on trial.

What will Democratic lawmakers want in return? They may well call on the White House to work much harder to enforce existing agreements before moving forward with new ones. That means moving forward with antidumping and countervailing duty cases against China -- both at the World Trade Organization and through domestic remedy. 

With so little expected from a divided Congress, the White House will trumpet these deals as important accomplishments. But it will have been the U.S. political context that changed -- not the content of the deals.

Heather Berkman is an analyst in Eurasia Group's Latin America practice. Sean West is a U.S. political risk analyst with the firm.

By Emily Hoch and Scott Rosenstein

In the shadow of Haiti's ongoing turmoil, infectious disease tracker ProMed published a report on Jan. 21 that polio had may have been detected in Port de Paix and Port au Prince.  Information remains scant. But if this report is only the tip of the iceberg, this mostly forgotten scourge could regain a foothold in Haiti. This is bad news for Haiti, the region, and a global polio eradication effort that in the last few years has come tantalizingly close to success.

Polio is highly contagious and can become entrenched in communities, like Haiti, with weak water and sanitation systems. There is no cure, and few supportive therapies exist. Most cases do not cause significant illness but approximately 1 percent of all cases result in some form of paralysis and approximately 10 percent of these cases result in death.

Oral polio vaccine (OPV) is included in Haiti's routine child immunization program, but coverage remains poor at only 52 percent, well below the percentage necessary to provide herd immunity. Before the earthquake, 25 percent of children were malnourished (a significant risk factor for polio infection) and 40 percent did not have access to basic health services. Add to this equation mass displacement and nonexistent infrastructure and the prognosis becomes even more worrying.

The Americas were certified polio free in 1994. Since then, the only verified outbreak in the region was 21 cases in Haiti and the Dominican Republic in 2000-01. Surveillance in Haiti is difficult in the best of times and while there were no cases reported since 2001 some have speculated that failure to completely eliminate polio during this outbreak may have left the door open for its return. 

Unless the Haitian Ministry of Public Health and the international community can act quickly and contain this outbreak, there is a considerable risk of it traveling to neighboring countries. Relations with the Dominican Republic, strained by decades of border disputes and the post-earthquake inflow of Haitian refugees, could worsen if polio, like cholera, makes its way into their country (on Friday the Dominican Republic reported its first cholera death). The Dominican Republic's polio immunization rate is considerably higher but still leaves them at the lower end of recommended levels. The United States has not had a polio case since 1993 and the vaccine coverage rate for 2009 was 93 percent, suggesting sufficient levels of herd immunity exist to prevent a significant outbreak. But coverage rates vary widely and growing vaccine skepticism in some communities has left large populations of children exposed to vaccine preventable diseases, making it impossible to rule out a limited return to the United States if there is a large uptick in cases within the Americas.

As we saw with H1N1 (swine flu) in Mexico, countries struggling to contain disease outbreaks in their own countries are quick to lay blame elsewhere. Regional spread of polio, if it occurs, will almost certainly see the majority of this blame placed on Haiti's shoulders. Travel restrictions and significant diplomatic disputes remain a very low likelihood scenario, but further demonization of Haitian communities can be expected if this outbreak is not contained.

After smallpox was eradicated in 1977, WHO pledged in 1988 that polio would be the next disease to be eliminated. 30 years later, endemic polio transmission is occurring in only four countries (Afghanistan, India, Pakistan, and Nigeria). However, politics and funding shortfalls threaten to thwart these efforts.  A 2003 drive to eliminate polio in Nigeria collapsed after a combination of rumor, mistrust and poor communication convinced local leaders to boycott polio immunization, and subsequently led to outbreaks throughout Africa and as far away as Indonesia, which had been polio free for ten years.  Vaccination drives in Afghanistan and Pakistan have been hampered by conflict, natural disasters, mobile populations, and religious refusals.  Additionally, the Global Polio Eradication Initiative (GPEI) is perpetually struggling to meet its funding needs.

Details of this possible outbreak in Haiti will likely emerge in coming days and weeks. If cases persist, it will once again raise questions regarding the short-term trajectory of the polio eradication campaign, and it will be another in a laundry list of reconstruction challenges for this troubled Caribbean nation.

Emily Hoch and Scott Rosenstein are analysts in Eurasia Group's Global Health practice.

 *This post has been edited since its initial publication to reflect that reports of polio in Haiti are currently suspected and unconfirmed.

By Heather Berkman

In September, we noted that Cuba was likely on the verge of major economic reforms, given a struggling economy and Raul Castro's announcement of state-worker layoffs, agricultural reforms, and the granting of licenses for some types of self-employment. Since then, Cuba's president has laid the groundwork for an upcoming April 2011 meeting of the Cuban Communist Party, where the Cuban congress is likely to approve guidelines for economic reforms that the government published in early November. The 32 page, 291-point "guidelines for socio-economic policy" clearly aims to tackle some of Cuba's major challenges: a heavy reliance on food and energy imports; an inefficient export sector; a bloated state payroll; crumbling transportation and vital infrastructure; and a rampant black market that the government now sees as a potential source of tax revenues via the legalization of informal jobs.

Given their government's on-again-off-again approach to reform in the past, many Cubans are skeptical that the government will follow through. Is Cuba really ready for plans to create wholesale markets, delegate more responsibility to local governments, and diversify exports? These changes will be tough to undertake in a country where the population has for decades depended on the state for jobs, healthcare, food rations, and education.  

Whatever its tolerance for setbacks, Cuba certainly appears eager to attract investment in key sectors, and that will present its foreign allies and other international investors with a huge opportunity to influence the path the country takes. Foreign governments and businesses will have more leeway to invest in infrastructure, construction, electricity generation and transmission, oil and gas exploration and production, and transportation. These countries may also offer input that could shape the Cuban government's future policy decisions. The road ahead for Castro and his cronies will be fraught with difficulties, but Cuba's allies will be along for the ride.

Countries like China, Brazil, and Venezuela already have investments in the works to help upgrade Cuba's port infrastructure, oil refining capacity, and electricity generation. Oil companies from Norway, Spain, Russia, and Canada are focused on boosting oil exploration and production in the Gulf of Mexico off Cuba's coast. With an eye on the Cuban government's commitment to revitalizing its domestic agriculture sector, South African officials hope to export agricultural machinery and supplies to the island -- and have forgiven $137 million in debt to restore the two countries' relationship. Just last week, France reestablished bilateral cooperation with Cuba following a seven-year freeze.

The United States will be left out of the game. As Cuba reaches out to its allies and interested foreign investors for help -- and makes efforts to deal with its foreign debts, promote industrial production, and revamp its energy matrix -- its government, once cornered by the U.S. economic embargo, is making it abundantly clear that an economic opening can and will be made without U.S. help or influence. The Cubans can't get Texas-based oil drilling technology, but China's ready to help build a rig. U.S. agriculture exports are tied up in legislative and regulatory knots, but Vietnam's happy to export rice to the island until Cuba's domestic production recoups.

The incoming chair of the House Foreign Affairs Committee, Ileana Ros-Lehtinen (R-FL) wants to isolate Cuba and cut funding for the State Department and assistance to foreign governments. Castro and his advisors don't care. They're working around Washington -- and creating opportunities for the governments, companies and investors that are ready to seize them.

Heather Berkman is an analyst in Eurasia Group's Latin America practice.

Most of the press following the recent G-20 summit in Toronto focused on President Obama's inability to persuade Europeans that the global recovery is too fragile for a slowdown in stimulus spending. But the real story was his administration's pledge to move forward on a long-delayed free trade agreement with South Korea.

The Korea-US free trade agreement (KORUS) was completed in 2007, but congressional Democrats, under pressure from labor unions, have refused to vote on ratification. They charge that, among other problems, the deal would allow South Korea to continue blocking entry to American automobiles and beef. Obama said he wants renegotiations to be completed before he visits Seoul for the next G-20 gathering in November and that he intends to submit the deal to Congress for a vote after the mid-term elections. This is Obama's first explicit public commitment to push on a specific trade deal with a clear timeline for passage.

America's 9.5 percent unemployment rate and a very challenging election season might make this a surprising time to try to move forward. But political and security developments in East Asia help explain the timing. China's recent announcement that it will allow some upward movement in the value of its currency has not appeased critics in Congress, and U.S.-China trade frictions will continue. More importantly, the crisis created when North Korea sank a South Korean naval vessel has sharply increased tensions in the region. These developments provide good reason for the United States and South Korea to move closer together. In Toronto, Obama went so far as to describe South Korea as "the lynchpin" of American policy in Asia -- a comment that raised a few eyebrows in Tokyo.

The South Koreans passed this deal long ago and have refused to reopen it to address congressional complaints. But anxiety over what's happening in North Korea will make it easier for South Korean President Lee Myung-bak to argue for compromise and better relations with the United States. The Obama administration assumption is that passage will become easier after the midterms have passed as enough pro-trade Democrats join Republicans to close the deal.

Forward movement on KORUS could add momentum behind other free trade proposals. House Majority Leader Steny Hoyer (D-MD) has argued that trade agreements with Panama and Colombia should move forward at the same time. The move also creates a possible opening for a U.S.-Japan trade agreement framework, something the president will consider more favorably now that new Japanese Prime Minister Naoto Kan is working to improve ties with Washington damaged during the turbulent tenure of Yukio Hatoyama.

The Doha round is going nowhere, but combine the latest moves with a reinvigorated U.S. push for Russia to join the World Trade Organization, and the Obama administration might finally have itself a trade agenda.

Thus far, the Obama administration isn't making much of a showing. Undersecretary of State Bob Hormats did a strong job on yesterday's U.S.-China panel. But there's little coordination and not much of a message. If Secretary of State Clinton is too busy, why not send Vice President Biden? Combined with perfunctory foreign policy mention in the State of the Union, I'd suspect it's a feeling that anything but domestic issues isn't going to play well politically. That's not the strategy I'd be going with.

So for the American delegation, it's the U.S. private sector that's leading the charge here. And the omnipresent Barney Frank -- who yesterday told a private industry group to stop listening to what congress says, and look at actual policies ... do they have anything to complain about? Heads nod reasonably sagely.   

Meanwhile, criticism of imminent political explosion grows as the nights wear on. Rogue economist/historian/documentarian Niall Ferguson, distinctly unshaven (proffered excuse--he forgot his razor on his flight from Delhi), wagered me $100 that the United States would have a new Secretary of Treasury by June 1st this year. Wager accepted. Howard Lutnick of Cantor Fitzgerald said he'd go $100 for Sept. 1. The bankers are always pushing it. 

Ian Bremmer will be blogging from Davos this week sending reports and commentary from inside the World Economic Forum.