Note: Today is the eighth in a series of posts that detail Eurasia Group's Top Risks for 2013
The dangers emanating from the ongoing shadow war with Iran are greater than many observers believe. This struggle has consisted of several components, including a cycle of mutual killings and cyber attacks. While there is no hard proof, it is a reasonable assumption that Israel and Iran (or at least some officials in Iran) are responsible. The final theater is the ongoing proxy war in Syria.
In early 2013, the West will also become engaged in an effort to negotiate a solution to the standoff over Iran's nuclear program. Western countries, led by the U.S., would very much like a peaceful resolution, while Iran sorely needs relief from stiff economic sanctions. Talks will be intensive but on balance the talks will probably fail by late spring. The Iranian elite have an almost existential commitment to the nuclear program, while Supreme Leader Ali Khamenei possesses a deep seated enmity for the U.S.
As a result, the West and Iran will probably return to escalating sanctions and shadow war, with two drivers boosting the ferocity of that struggle. First, the Iranian regime will feel compelled to show resolve and retaliate in the face of new sanctions. Second, the regime faces a period of profound economic weakness, though it will not collapse. But weak governments are prone to lashing out, both to rally domestic support and to portray an image of strength.
These new drivers will likely intensify the shadow war and could lead to new fronts. The chance of miscalculation and overreaction on both sides would rise, especially in the face of provocations such as a successful assassination plot in the U.S. similar to the alleged attempt against the Saudi ambassador in October 2011 or an episode such as the 2008 swarming of U.S. Navy frigates by Revolutionary Guard boats.
Iran's nuclear program is the second area of concern in 2013. Israeli rhetoric will remain at a high pitch, but is intended to increase diplomatic leverage and economic sanctions. Still, the probability of an Israeli attack in 2013 is low because Iran's nuclear program is unlikely to pose an imminent threat this year. Also, Israel can inflict only limited damage on Iran's nuclear facilities and there will be a lack of consensus among its political leaders about the wisdom of a strike. Polling also shows the Israeli public firmly opposes unilateral action. Finally, the U.S. would likely attack only if Iran tries to acquire a nuclear weapon and that is unlikely.
There are, however, a number of worrying scenarios. Developments at the Fordo enrichment facility make up one. Iran will have enough medium-enriched uranium to make a bomb by early summer, but weekly IAEA inspections leave enough time for detection and action. The central question is whether the Israeli government will trust the U.S. or strike on its own. Israel is unlikely to attack, but this dilemma slightly boosts the chance of Israeli strikes during 2013 (to roughly 20 percent).
A scenario involving a detectable Iranian breakout would probably elicit a U.S. attack. Yet Tehran has been very cautious and slow. Iran probably wants to become a latent nuclear power; that is, the world knows it could develop a bomb quickly. But Iran's threat perception will become more dire this year, making an irrational dash to a bomb, and a U.S. attack, slightly more likely.
Next week, we'll profile Risk #9: India
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By Carroll Colley
Washington is on the verge of completing an improbable trifecta in U.S.-Russian relations. In August, the Obama administration helped guide Russia across the finish line for World Trade Organization membership. Congress is now fast tracking an end to the Jackson-Vanik amendment, a piece of Cold War-era legislation that ties trade policy to human rights, and one that has remained a bone of contention between Moscow and Washington for more than twenty years. Finally, Congress is also about to establish "permanent normalized trade relations" with Russia.
So why are relations on the verge of a potentially serious turn for the worse-and perhaps a reassessment of the "reset" in U.S.-Russian relations? Because this legislation will also include the so-called Magnitsky Act, which publicly rebukes the Kremlin for its poor human rights record.
Sergei Magnitsky, an attorney investigating a corruption case involving tax fraud charges against a UK-based investment firm, announced he had uncovered evidence of collusion among police, organized crime figures, bankers, and the Russian judiciary to push the company out of business. In November 2008, Magnitsky was arrested on corruption charges and held for 11 months without trial. He then died in prison under disputed circumstances. An independent human rights organization, Moscow Helsinki Group, has accused Russian security of torturing him. Magnitsky's death provoked international criticism, but a defiant Russian government continues with a posthumous criminal case against him.
The Magnitsky Act will publicly name and shame Russian officials involved in the case, bar them from receiving US visas, and freeze any assets they hold in the United States. Moscow, as you might imagine, is incensed. The Kremlin sees the bill as evidence of continued anti-Russian sentiment in the United States - -Mitt Romney's campaign comments about Russia were grist for this mill -- and as an intrusion by the U.S. into Russia's domestic affairs. The House looks set to vote on the legislation tomorrow, the third anniversary of Magnitsky's death. The Kremlin promises to respond to the bill's passage by retaliating in kind.
The Magnitsky Act won't damage President Vladimir Putin inside Russia. He remains Russia's dominant political figure, his approval numbers are strong, and few Russians closely followed details of this case. Yet, Moscow remains extremely sensitive to international charges of human rights abuses and corruption of government officials. That leaders of Russia's nascent opposition movement have endorsed the Magnitsky Act aggravates the Kremlin even more.
Moscow has already floated suggestions for a 'black list' of US officials, including those connected with the extradition and trial of convicted arms dealer Viktor Bout or with the prison at Guantanamo Bay. Of more concern is the likelihood of increased pressure on U.S. industry operating in Russia, including, for example, unannounced tax inspections of U.S. companies, delayed or denied licensing or registration procedures, and other bureaucratic complications.
While the Magnitsky Act will punish those involved in the case, it won't do much to improve Russia's human rights regime in the near term. Several incidents since Putin's inauguration in May demonstrate that the state continues to use force to weaken the political opposition. Russian officials recently announced the arrest of political activist Leonid Razvozzhayev on charges of orchestrating a series of riots. Razvozzhayev insists that Russian security officials kidnapped him in Ukraine where he was applying for political asylum, transported him back to Russia, and gained a confession from him by torturing him and threatening his children. Politically connected murders of journalists and human rights activists are no closer to being resolved.
U.S.-Russian relations are now likely to enter a period of strain and recrimination, though pragmatism on both sides will prevent a total collapse. The U.S.-Russian "reset" was a good idea at the time and produced significant results, but there is only so much it can accomplish with so much continuing mistrust on both sides.
Carroll Colley is an analyst in Eurasia Group's Eurasia practice.
By Cliff Kupchan
In Iran last week, sanctions pressure pushed frustration into violence. Iran's currency has lost half its free market value over the past month, and a clumsy policy response made matters worse.
The rial's dramatic depreciation is stoking a level of inflation that has become the most serious threat now facing the regime. The official inflation rate stands at 23.5 percent, but anecdotal evidence suggests the rate is much higher and climbing. The government's lack of a coherent anti-crisis strategy, economic mismanagement, corruption, and heavy transaction costs imposed by sanctions suggest the worst is yet to come. Sporadic protests are likely to become a fact of life in Tehran.
As a result, the bickering within Iran's political elite is becoming more vitriolic. President Mahmoud Ahmadinejad blames foreigners and their sanctions for the current crisis; parliamentary speaker Ali Larijani instead points the finger at the incompetence of Ahmadinejad's government. Ahmadinejad can't seek re-election next June, but his exit won'tprevent these fights from heating up in advance of the vote.
Yet, there is no evidence that Iran is
close to the boiling point. Following the controversial presidential election
of 2009 and the street demonstrations that followed, the regime proved it can
and will use deadly force to intimidate Iran's fractious opposition. Nothing
has happened to suggest that new protests would produce a different result.
So what should Western governments, anxious to slow Iran's momentum toward a nuclear program, be hoping for? Iran's economic turmoil is unlikely to topple the regime, at least not anytime soon, but it just might bring about a more conciliatory Iranian approach to nuclear talks after the U.S. presidential election -- and especially after Iran's presidential election next year.
Over the past half decade, Tehran has demonstrated an almost existential commitment to the nuclear program, but the sanctions-induced pain is squeezing Iran's economy ever tighter, and that could make Iran more flexible. In turn, it's now very important for Western negotiating partners to offer a diplomatic proposal that allows Iran's government to save face before its people.
The Iranian government will never negotiate away its domestic legitimacy, but there might be room for a crucial compromise on the nuclear issue. Without such a breakthrough and relief from tightening sanctions, the Iranian regime has a bleak future -- and the country's leaders know it.
Cliff Kupchan is director of Eurasia Group’s Eurasia practice.
ALI AL-SAADI/AFP/Getty Images)
By Willis Sparks
Before the Republican National Convention opens the 2012 presidential campaign season on August 27 and returns the country's focus to its domestic hopes and fears, Mitt Romney is headed abroad to try to build some credibility on foreign policy. Having focused his campaign almost exclusively on the fragile U.S. economy, Romney wants to narrow Obama's polling advantage on foreign policy questions and offer an image of himself as "leader of the free world." The most obvious way to accomplish this is to stand alongside key U.S. allies facing traditional U.S. foes. Romney will make stops along the way in Britain, Israel, and Poland.
The visit to London is a reaffirmation of American foreign policy tradition and a chance to place Romney inside the "special relationship." With his appearance at the London Olympics, it's also an opportunity to remind voters of the leadership Romney brought to the 2002 Salt Lake City Winter Games -- the least controversial line on his resume.
The stop in Jerusalem underlines another special relationship -- and reminds voters that Obama has yet to visit Israel as president. It's certain to produce warm photos of Romney with Israeli Prime Minister Benjamin Netanyahu, old friends who met while working together at Boston Consulting Group in 1976. The images will offer a stark contrast with the frigidly formal shots we've seen following Netanyahu's strained meetings with Obama. Romney will promise that Iran will not build a nuclear weapon on his watch -- and (at least) imply that a nuclear Iran is inevitable if Obama is re-elected.
And Poland? A Pew poll released in June found that only 50 percent of Poles express confidence in Obama. Compare that with 80 percent in Britain, 86 percent in France and 87 percent in Germany. In some cases, this is a legacy of the preference among some Warsaw Pact countries for Republican presidents, but it's also a function of some notable Obama mistakes.
Obama trod on Poland's diplomatic sensitivities in May when he referred to Nazi concentration camps located in Poland as "Polish death camps" during a ceremony to bestow America's highest civilian honor on a Polish resistance fighter. Expect Romney to honor the Polish victims of Nazi atrocities.
And don't forget Obama's live mic gaffe with Russian President Dmitri Medvedev, the one where he asked outgoing president Medvedev to ask incoming president Putin for "space" in exchange for "flexibility" on the question of U.S. missile defenses scheduled to be deployed in Poland and the Czech Republic. Romney hopes his visit to Poland, at the invitation of former Polish president and anti-Communist icon Lech Walesa, will help him make the case that only he can forcefully meet threats from Russia, which he has (oddly) labeled America's "no. 1 geopolitical foe," carrying on in the tradition of uncompromising Cold Warriors like Ronald Reagan.
Governor Romney can't match the ecstatic reception candidate Obama received in Berlin in 2008. Nor can he share credit for killing Osama bin Laden or ending the unpopular war in Iraq, Obama's signature foreign policy achievements.
But he can remind voters that Republican presidents like to draw clear lines between America's friends and foes -- and that while Obama remains remarkably popular in much of the world, at least a few U.S. allies are probably hoping for a Romney win.
Willis Sparks is an analyst in Eurasia Group's Global Macro and United States practices.
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By Carroll Colley
While Russia will enter the WTO in late August, U.S. industry will be left on the sidelines until Congress removes the Cold War-era impediment to greater trade between the former foes. But it's a safe bet that Congress won't graduate Russia from the Jackson-Vanik amendment, which is necessary to grant permanent normal trade relations to Russia and take advantage of its accession to the WTO, before the November election. The reason? Russia is perpetually steeped in controversy, and U.S.-Russia relations have become a campaign issue in the race between Republican Mitt Romney and President Barack Obama. U.S. industry likely won't be able to take advantage of greater market access in Russia until the lame-duck session at the end of the year, and possibly later.
The White House is much more focused on November 6 (Election Day) than August 23 (the approximate date of Russia's WTO entry). Only after repeated requests from Republican lawmakers for senior level officials to testify on the Hill -- widely viewed as a Republican maneuver to force the administration to speak on the record about its Russian policy -- did the administration relent by sending the duo of Deputy Secretary of State William Burns and U.S. Trade Representative Ron Kirk to testify before the House Ways and Means Committee and the Senate Finance Committee. The White House calculates that a "yes" vote on graduating Russia from Jackson-Vanik (a 1974 provision that ties trade relations to freedom of emigration and other human rights considerations) would have little electoral upside, and might even harm Obama before the election.
Obama's meeting on June 18 with President Vladimir Putin on the margins of the G20 in Los Cabos seemingly failed to produce a breakthrough on Syrian policy. Headlines about ongoing arms shipments bound for Syria and the potential for continued Russian intransigence at the U.N. Security Council also represent potential political liabilities during the election home stretch, not to mention a host of domestic political issues. Romney, meanwhile, has called Russia the U.S.'s greatest political "enemy" -- and later changing that description to "foe" -- because he senses a potential weakness in an Obama foreign policy that has otherwise produced several notable successes.
It would be much simpler, politically, if supporters of graduating Russia from Jackson-Vanik could cast it as a vote for American business, as Secretary of State Hillary Clinton did in a recent opinion piece. But they can't. Passage is complicated by the Magnitsky bill, human rights legislation that targets government officials involved in the case of Sergei Magnitsky, a Russian lawyer who died in police custody in 2009. Largely viewed as a replacement for Jackson-Vanik, the stated aim of the bill is to deny visas to corrupt officials, freeze any U.S. accounts they have, and publish their names. The reality is that the Obama administration last summer instituted its own visa ban and any potential offenders have long ago transferred any funds from the U.S.. The net effect of the bill, therefore, is the "naming of names," which would represent a significant embarrassment to the Putin regime. The bill enjoys broad bipartisan support, with a number of lawmakers stating publicly that passage of the Magnitsky bill is a prerequisite for their vote on Jackson-Vanik.
The Obama administration has sent contradictory messages about its support for the Magnitsky bill. While originally opposing the bill, the administration seems to have accepted the inevitable and has been working with its primary author, Democratic Sen. Ben Cardin of Maryland. One recent Senate version provides for the public list as well as a confidential annex, which would largely allow the administration to circumvent the thrust of the bill by invoking national security exemptions. This is strongly opposed by a number of senior lawmakers, including Sen. John McCain, who was a co-sponsor of the effort to repeal Jackson-Vanik on the caveat of corresponding passage of the Magnitsky bill.
As the August recess rapidly approaches, the window for graduating Russia from Jackson-Vanik prior to its WTO accession closes. Obama appears to have little room to maneuver in expending political capital on the matter without raising the risk of elevating Russia-and its collateral baggage including Syria, Georgia, Iran, and domestic protests-to a legitimate campaign issue. Unless Congress moves forward on its own prerogative-which appears unlikely-the repeal of Jackson-Vanik won't get passed before November, or later, leaving the world's largest economy unable to take advantage of the accession of the WTO's newest member.
Carroll Colley is the director of Eurasia Group’s Eurasia practice.
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 Damien Ma
Though the curious case of blind Chinese dissident Chen Guangcheng has badly embarrassed China's leaders, it has provided them one important benefit -- it has diverted attention from the far more dangerous story of Bo Xilai. Regardless of the outcome in either case, the Communist Party's image has been badly tarnished. For a Chinese government that seems bent on investing in soft power, these last few months have offered clear reminders that soft power cannot be bought. It must be earned.
For a Chinese government that prefers to keep its differences behind closed doors, the Bo Xilai episode is a nightmare, in part because the involvement of the U.S. and British governments in the case has brought an unusual degree of international media scrutiny. (One of Bo's deputies briefly took refuge in the U.S. embassy, and Bo's wife has been implicated in the murder of a British businessman.) China's familiar tools of propaganda have been overwhelmed by frenzied speculation about the case in the Western press and China's social media echo chamber -- yet another reminder that Beijing can no longer afford to ignore Sina Weibo, China's version of Twitter.
The party leadership has dismissed the Bo Xilai saga as a sideshow and Bo himself as an aberration within the country's otherwise upstanding roster of senior officials. But little of China's blogosphere appears to be buying it. Instead, Bo's story signals for many that China remains a corrupt and opaque place, that the unbridled capitalism practiced in China has mainly benefited politically-connected VIPs, and that greed has infected the leadership right to the top.
And though the drama surrounding Chen Guangcheng has given the public something new to speculate about, in some ways, the story reinforces the cynicism that Bo Xilai has exposed. Chen and Bo -- a powerless and once illiterate legal activist and a powerful political scion who long stood above the law -- seem polar opposites. But they have something important in common; both were left without a place to hide when the leadership decided they should be punished.
Few within the country believe that Bo or his wife will have their day in court, reinforcing public fear that average citizens have no real protection within a system manipulated for the benefit of the party. That Chen, like Bo Xilai's deputy, first sought sanctuary in the U.S. embassy underscores a point not lost on the Chinese public: The United States, not China's own government, offers protection of last resort in times of political turmoil.
These stories are engendering a growing trust deficit between the government and the informed public -- the very elites that the party counts as its crucial constituency. A perception of systemic "rot from within" and the lack of legitimacy it implies undermine the regime's monopoly hold on domestic political power.
Despite Premier Wen Jiabao's constant talk of political reform, the last decade of the Hu Jintao/Wen Jiabao administration saw an economy that raced ahead and a political system that changed very little. But to repair this latest damage to its "brand," the party may feel it has to produce some real change. Some within the leadership are already using this opportunity to push for political liberalization. In his closing arguments as premier, an increasingly legacy-conscious Wen Jiabao is making a final pitch for real political reform. But Wen is a lame duck.
Over the course of the next few months, China will introduce a new generation of top leaders. Any political changes they might produce are unlikely to fundamentally recast Chinese politics or to appear soon. But they may soon find that delivering go-go growth is no longer enough. They may find that, particularly in the online public square provided by social media, a growing segment of China's people will expect a new degree of accountability -- and a new kind of change.
Damien Ma is an analyst in Eurasia Group's Asia practice.
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By Ayham Kamel
It may be tempting to view the plethora of recent gatherings -- the Arab League summit, the U.S.-Gulf Cooperation Council Strategic Cooperation Forum, and the Friends of Syria conference -- as evidence that the global community is getting more serious about addressing the violence in Syria. But the summits really just exposed the rifts among the relevant players that will prevent a viable and coordinated response. Syrian President Bashar al Assad, in turn, will profit from the lack of coherence; he will only nominally entertain Kofi Annan's peace plan as he maintains his grip on power, and the bloodshed will worsen.
International powers remain hesitant regarding any form of direct intervention. They considered initiatives calling for buffer or humanitarian zones, but ultimately no country seems prepared to act. Key powers appear to be pursuing their distinct policies, with only a hint of coordination.
Saudi Arabia and Qatar will provide extensive support -- including arms -- to the Syrian opposition, but are unlikely to supply the heavy arms that would lead to an immediate change in the balance of power. Heavy arms are more difficult to smuggle and training rebels would be much more challenging than during the Libyan conflict. Moreover, the escalation could provoke an un-calculated response from Assad's military. While their interests differ, the two powers see Assad's survival as a threat to their influence. Riyadh's purpose is to limit Iran's regional influence. Meanwhile, Doha has invested significant diplomatic and political capital in the struggle against Assad and any failure to deliver would represent a tangible setback to its prestige. Behind the armament policy is also a deep concern that if Assad regains control, Damascus and Tehran would aim to destabilize the al Saud and al Thani ruling families' grip on power.
Arming the rebels, who have had trouble obtaining ammunition sine the regime began its extensive military campaign in early February, will provide much needed psychological support and will help weaken Assad's forces. While the resolve of Syria's opposition will not abate, arms from the Gulf will neither arrive overnight nor will they immediately change the balance of military power, which is still heavily tilted in the regime's favor. An equally important element of the Gulf strategy is providing monetary incentives to officers in the Syrian army to incite defections. But Assad has built multiple safeguards to prevent defections, a tactic he inherited from his father.
The U.S. is willing to overlook, perhaps even support, GCC efforts to weaken Assad. But Washington is definitely not interested in playing an active role. It is concerned about Saudi Arabia's and Lebanon's support of Salafist rebels and al Qaeda leader Ayman al Zawahiri's call for jihad in Syria. While Sunni monarchies in the Gulf benefit from rising sectarianism in Syria, the U.S. interest in long-term regional stability could be compromised if the Sunni-Shia confrontations spread to Iraq and other countries. U.S. officials believe that a political settlement will be needed to prevent prolonged instability. Verbal support for the Annan process is a reflection of the desire to keep negotiations open, but U.S. officials are convinced that under current conditions the Annan plan will only enable Assad to retain power.
Assad will probably not implement key elements of the Annan peace plan, which calls for a halt of hostilities from all sides, and a negotiated settlement between the regime and the opposition. The regime views cooperation with the UN envoy as a way to secure the successes achieved by its military strategy and to gain some breathing space. While Annan is a shrewd diplomat, there are few reasons to think that success is in reach. Syria's opposition will probably not negotiate with Assad or agree to a settlement that keeps him in power. Meanwhile, there are no indications that the Lion of Damascus has reached a point where he would accept his own ouster.
Ayham Kamel is an analyst in Eurasia Group's Middle East and North Africa practice.
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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
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.
DON EMMERT/AFP/Getty Images
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.
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By Cliff Kupchan
On Sept. 16 and again on Sept. 19, the Palestinian Authority's President Mahmoud Abbas stated that his government would apply to the U.N. Security Council for full membership at the UN this week, a move which will further stoke already significant strains. The United States will almost certainly veto the application, however, amplifying ill-will among all interested parties.
Security Council approval requires at least nine votes and no vetoes; some international diplomats believe there is a chance that the Palestinian Authority (PA) will fail to secure the nine "yes" votes, obviating a U.S. veto. In any case, a membership application to the Security Council takes time, ranging from weeks to months. This would provide an interlude for other diplomatic actions, including a shift of focus to the U.N. General Assembly and efforts to return to the peace process, though that outcome is not likely.
Despite Abbas' statements, there is still a small chance that the Palestinians will go straight to the General Assembly and avoid the provocative Security Council option. Significant debate is ongoing within the PA, with Abbas and his senior advisor Nabeel Shaath favoring the Security Council route. Prime Minister Salam Fayyad favors a less inflammatory path. At the General Assembly, the PA would apply for non-member state status. Most observers believe the PA would need a two-thirds majority to attain that status, which appears to be within easy reach. The weight of that majority would be enhanced by affirmative votes from France and, probably, Britain. Again, the United States would vote against the proposal.
The Palestinians are taking the U.N. path because the PA has given up on the peace process in its current form. A high-level Palestinian recently visited Washington, delivering the message that leverage between Israel and Palestine had to be equalized and that U.N. membership or de facto recognition (non-member state status) was the only peaceful option. The PA leadership appears genuinely committed to a two-state solution, and does not believe its gambit will lead the Israelis to abandon further negotiations.
The biggest, and most likely, risk is of Palestinian unrest and violence directed against Israel, though casualties will likely be limited. The mood among the population in the West Bank is a mix of apathy and anticipation over the U.N. vote. PA officials have stated that they will prevent any violent reaction, though celebratory marches have already been planned. The population is likely to be emboldened, angry at the United States, and frustrated by lack of actual change on the ground following the vote, a factor that will grow stronger over time.
The combustible mix will probably lead to actions, peaceful or otherwise, against Israeli soldiers or settlers. In any case, a Palestinian mobilization will probably push Israel into a defensive crouch that could lead to preemptive actions. Israeli forces would probably curb movement by Palestinians and enter refugee camps and cities, settlers may commit hostile acts, and the government could withhold tax remittances. Palestinian security forces will likely seek to curb unrest, but at the risk of the PA's legitimacy. Fear of uncontrolled escalation on both sides will probably limit violence, but the West Bank could well remain unstable for a protracted period.
Any unrest would likely come in waves. Abbas is scheduled to address the United Nations and submit the Security Council application on Sept. 23, shortly after Israeli Prime Minister Netanyahu's speech; unrest could well occur on Friday. After that, disorder is most likely following Security Council or General Assembly action.
Cliff Kupchan is a director in Eurasia Group’s Middle East Practice
SAID KHATIB/AFP/Getty Images
By Michal Meidan
Vice President Joe Biden is in China this week, reassuring the United States' main creditor that the country is still a good investment and stressing the importance of policy coordination between Washington and Beijing. As with Thursday's bungled exhibition game between the United States and Chinese basketball teams, though, the road ahead could be bumpy for both countries. Just weeks after political wrangling in Washington led Standard & Poor's to downgrade U.S. debt, China's state-run media has been critical of Washington, with some editorialists suggesting that Beijing should use its holdings of U.S. treasuries as leverage to press Washington to prevent arms sales to Taiwan. But for all the finger wagging and chest thumping coming out of Beijing, there is also deep concern: that growth in the United States is slipping and that, combined with the sprawling debt crisis in Europe, global demand for Chinese goods may be subsiding.
China's economic growth model is highly dependent on exports, and officials in Beijing are fretting over who they'll be able to get to buy their appliances, clothes, and toys if the world economy slumps. Their hope is that Chinese consumers, or the average Zhou (pronounced "Joe"), will. Indeed, the shaky global economic outlook lends ballast to China's ambitious Five Year Plan -- a blueprint for the country's economy that aims to lean more heavily on domestic consumption. But in our in-depth analysis of the plan, Eurasia Group's China team argues that even though Beijing will work hard to engineer such a shift, the country will ultimately fall short of its goals.
Beijing can and will mandate periodic wage hikes and spend considerably more on fixing the country's frayed social safety net. This will help households save less and spend more. The rapid urbanization push, which will lead 300 million or so farmers (roughly the population of the United States) into China's cities over the coming decade, also will spur consumption. But this won't be enough. China's inherently conservative leaders, now jockeying for position ahead of the 2012 political transition, lack the stomach to push through bold reforms. They'll be reluctant to tackle powerful provincial leaders and large state-owned firms, both of which will resist paying additional dividends to support households. And financial sector reform, a precondition for developing a competitive private sector, as well as a key source of job creation, will be limited by the government's desire to keep banks under its wing as a means of directing industrial policy.
The bottom line is that in 2015 Chinese households will only be slightly richer and the Chinese economy will rely only a little less on external demand. U.S. investment and the average Joe's appetite for Chinese-made goods will therefore still be a significant driver of China's economic growth. And posturing aside, close coordination with the United States will remain as important as ever.
Michal Meidan is an analyst in Eurasia Group's Asia practice.
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By Risa Grais-Targow
By all rational measures, Cuba is effectively irrelevant to the United States. The island is small, its economy is about the size of New Hampshire's, and since the collapse of the USSR it poses no strategic threat. Yet the Castros have a habit of popping up in the headlines. In part, that is because of the inevitable fascination with a small country that has been a foreign policy irritant for the United States since 1959 and, more recently, its outsized role in Florida politics. But change is coming to Cuba, slowly but surely, and with change comes the possibility of unexpected volatility.
Cuba is gearing up for the first Cuban Communist Party (CCP) congress in 14 years, to be held April 16-19. Much of the event will be focused on formalizing Raul Castro's small steps toward economic liberalization (e.g., trimming the state's workforce and allowing more room for entrepreneurs) outlined in a November 2010 wish-list of 300 reforms. Another, perhaps more important, development will be the identification of the next generation of leaders, including the appointment of a new second-in-command for the CCP (the second most powerful position in Cuba). The long delay since the previous CCP congress suggests that there has been much internal wrangling over that issue.
The Castros are clearly on the way out (Fidel is 84 and Raul is 79), and the CCP has promised that the congress will usher in a new generation of leaders. Just how new and young they will be remains to be seen. On March 25, Raul Castro announced that the 50-year-old Economy and Planning Minister Marino Murillo, who has been the architect of much of the economic reform agenda, would now oversee its implementation as a sort of economic czar, signaling Raul's devotion to the reform process. The CCP may, however, simply shuffle senior party members into new positions rather than appoint younger reformers.
Such developments could also be important for the U.S. and perhaps trade with Cuba. Unless Congress decides to revisit the issue, the Helms-Burton Act of 1996 stipulates that the Cuban embargo cannot be lifted while the Castro regime is still in power. A shift in the leadership could also open the way to dealing with other potential concerns. For example, Cuba is actively exploring for oil in the Gulf of Mexico, raising U.S. concerns about how it would handle disasters similar to the 2010 Macondo well blowout.
But the CCP faces deeper challenges than this round of leadership refreshment. Most young Cubans are disenchanted with the regime. They have spent most of their lives in post-Soviet Cuba dealing with grinding economic hardship. Finding true believers among that generation is likely a difficult task and the regime's ability to implement meaningful reforms will affect the stability of Cuban politics further down the line.
Risa Grais-Targow is an analyst in Eurasia Group's Latin America practice.
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By Christopher Garman
The turmoil in the Middle East and Japan has almost completely overshadowed U.S. President Barack Obama's trip to Latin America, but his visit to Brazil is a strategic down payment on improved relations with an emerging world power.
Under former President Luiz Inacio Lula da Silva most of Brazil's foreign policy initiatives were driven primarily by the Ministry of Foreign Affairs (Itamaraty) with a long-standing preference for improved South-South ties or by Lula personally.
Brazil's President Dilma Rousseff, however, is more interested in economic concerns and there are already signs that such issues will have more impact on her foreign policy, perhaps yielding a better relationship with the United States. Some of that shift can be explained by Rousseff's economic training and her many years as a government technocrat. Equally important, however, is her underlying pragmatism, something that many pundits failed to identify during the presidential campaign.
Her more skeptical view of China yields the clearest evidence of this change. Under Lula, Brazil sought to strengthen its relationship with Beijing driven in part by a desire to counter-balance U.S. geopolitical clout. By contrast, under Rousseff, private sector concerns over how Chinese imports are undermining the competitiveness of Brazil's manufacturing are surfacing more strongly in Brazilian policy. Where Lula blamed the U.S. Federal Reserve's quantitative easing for global imbalances, Rousseff has placed equal blame on China's managed currency policy.
It would be a mistake, however, to think this new focus will translate into a wholesale transformation of the relationship. Rousseff is not about to work jointly with the United States, either bilaterally or in multilateral settings such as the G-20, to pressure China on its currency policy.
Additionally, even though Brazilian policymakers are signaling a desire to supply the U.S. market with exports from its vast new oil deposits, Brazil's new statist exploration and production framework designed to develop the country's pre-salt reserves is much less attractive to U.S. majors. In fact, there seems to be more room for cooperation on renewables and environmental regulations in deep-sea drilling than in upstream E&P.
It comes as no surprise that Obama did not support Brazil's push for a permanent seat on the U.N. Security Council in the same way it supported India's bid. The United States may want to deepen its relationship with Brazil, but the ill will generated by Iran episode (Lula's attempt to broker a nuclear deal with Tehran) hasn't yet completely faded. Obama also remains constrained on trade, given protectionist pressures in the U.S. Congress that gives him little room to deliver either reduced U.S. agricultural subsidies or lower ethanol tariffs, both of which are high among Brazil's priorities in the bilateral agenda.
But with pragmatists leading the two largest countries in the Americas, relations look set to improve.
Christopher Garman is the director of Eurasia Group's Latin America team.
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By Heather Berkman
During last month's State of the Union address, President Obama said little about the region south of the border. There was no reference to Mexico, unless you count acknowledgment of the need to tackle immigration reform. There was the expected call for a congressional push on trade deals with Panama and Colombia. The White House's recent move to lift some restrictions on US travel to Cuba thankfully remained under the radar. He did announce that in March he would visit three countries in the region: Chile, Brazil, and...El Salvador.
Chile is one of the region's most dynamic emerging markets, one that has signed trade agreements in recent years with Japan, China, South Korea, and the European Union. Brazil is Latin America's heavyweight and an increasingly important player in international politics. But why is the president visiting El Salvador?
Central America's smallest country has a population of about 6 million, less than a third the population of metropolitan Mexico City. Locals call the country the "pulgarcito" (little thumb) in honor of its size and shape. Its economy depends heavily on remittances from the two million Salvadorans living in the United States and on U.S. consumers buying its exports. El Salvador is a member of the U.S. - Central America Free Trade Agreement, but its trade impact on the United States is negligible. Plagued with gang violence and high levels of organized crime, the country suffers from one of the highest murder rates in the world, and it has appealed to the United States for help in combating crime.
El Salvador's president, Mauricio Funes, has made strong relations with Washington a priority, and the country's current president of congress was photographed hugging a cardboard cutout of Obama shortly after he won the election in 2008. Flattered though he may be, this hardly explains why the real President Obama chose El Salvador for a presidential visit.
A broader look at the region brings the country's importance for Washington into sharper focus. U.S. policymakers have become increasingly concerned with the rise of drug trafficking in Central America, especially as Mexico's efforts to crack down on drug cartels have pushed traffickers and their operations into remote areas of Guatemala and Honduras. Both those countries share a border with El Salvador.
The U.S. military coordinates with Salvadoran authorities at the country's Comalapa Air Base to plan drug interdiction operations, which some Salvadoran officials say has helped their country avoid the spike in drug-related violence that plagues its northern neighbors. In addition, El Salvador has remained politically stable. Honduras is still regrouping following the ouster of President Manuel Zelaya in 2009. Guatemala's government lacks the resources and the political will to effectively combat drug traffickers. Throw in the likely reelection of Daniel Ortega in Nicaragua this year, Washington's ongoing tensions with Panama's mercurial President Ricardo Martinelli, and Costa Rica's lack of regional political weight, and El Salvador begins to look more like Washington's foothold in the region.
During the Cold War, U.S. policymakers watched Central America carefully for signs of communist encroachment. Today, it's mainly drug trafficking that Washington cares about, a less immediate priority. But if U.S. officials really want to see progress on that front, a deeper commitment to El Salvador's stability might be a smart use of resources. Obama's visit could be a useful step in that direction.
Heather Berkman is an analyst in Eurasia Group's Latin America practice.
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By Ian Bremmer and David Gordon
Amid a sluggish global recovery, China's return to go-go growth will generate plenty of resentment in 2011 -- and not just in Washington. Though China has become the world's second-largest economy, its leadership insists it must continue to manage the country's development at a measured pace. For some of China's biggest trading partners, that argument is beginning to ring hollow.
To rebalance the global economy, policymakers in both the developed and developing world have called on China to reduce its enormous trade surpluses by reducing the country's dependence for growth on exports and increasing Chinese consumer demand, both for foreign and domestically made products. Chinese policymakers would like to do exactly that. The Western financial crisis briefly created turmoil in China, not because Chinese banks were exposed to contagion from Western banks, but because reduced demand for Chinese products in Europe, the United States, and Japan hit local manufacturers hard and forced millions of Chinese from their jobs. Beijing scrambled to create new jobs, primarily by targeting massive state stimulus spending at infrastructure projects that required lots of manual labor. For the Chinese leadership, generating much greater domestic demand would make China less vulnerable to hard times elsewhere.
But China's plans for rebalancing will take a generation to accomplish, and a lot of its trade partners would like to see the change come much faster than that. In the near term, Beijing will offer only small adjustments to accommodate them because the leadership must negotiate demands from various interest groups within the leadership and because this transition will put many more workers on the street than the slowdown did, and the Chinese leadership knows it must manage that challenge carefully to avoid a dramatic surge in civil unrest.
Unsatisfied, outsiders will grouse that China's rate of export growth remains twice its rate of economic growth. In 2010, relations between the United States and China became much more contentious. In 2011, China will likely face increased pressure from Europe, Japan, and probably from emerging markets like India and Brazil. Further, China's security-driven assertiveness in East Asia will continue to provoke tensions with many of its Asian neighbors even as trade relations deepen.
In the past, China has taken the edge off international pressure by adjusting the pace of its reform efforts modestly just before major multinational gatherings -- for example, by depegging the renminbi from the U.S. dollar in advance of the June 2010 Toronto G-20 summit. But there aren't many "steam-releasing" events on the calendar in 2011. President Hu Jintao visits Washington later this month, but the North Korea crisis will occupy much of that conversation, decreasing the likelihood that China will see much value in any major moves on rebalancing.
The next G-20 meeting, this one in Cannes, won't be held until November. French President Nicolas Sarkozy has grand ambitions for this event, but frustration with China will build over the next 10 months and so too will the risks of market-moving international reactions to China's incremental, deliberate, consensus-driven policymaking process. At Cannes, tensions may come to a head as more countries than ever prove ready to confront Beijing on issues from industrial policy to intellectual property rights protections to currency valuation.
On Monday, we'll examine the threat from North Korea, which hits our list of this year's top risks at No. 5.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
FREDERIC J. BROWN/AFP/Getty Images
By Ian Bremmer and David Gordon
We've now released our annual report on the ten most important political risks for 2011. Over the next two weeks, we'll be discussing each risk in more depth in this space. We begin with a brief overview.
In the past, our coverage of political risk has centered on particular countries, regions, issues, or events. We worry about elections in brittle countries and their ability to generate unrest, military confrontations involving unpredictable governments, or a policy shift with serious implications for a country's business climate and growth trajectory. For 2011, we're focused on a fundamental ongoing change in the global order.
As we step into 2011, headlines in the United States suggest a little more optimism about recovery, but market players and business decision-makers aren't convinced. Gold prices remain relatively high, and trillions of dollars that could be invested remains on the sidelines. Why the caution?
We're entering an entirely new world order with new ways for states to relate to one another, both politically and economically. That problem could provoke new areas of conflict, and it will highlight an emerging vacuum of power in international leadership -- and the uncertainty that comes with it.
We're calling this new order the G-Zero, because no country or bloc of countries has the political and economic leverage today to drive an international agenda. The G-20 helped build a useful crisis response when the financial crisis hit, but as the sense of urgency evaporated, so did the unity. The G7 is an anachronism. The G2 (the United States plus China) won't work, because the United States can't afford to keep up its role as primary provider of public goods, and China (like other emerging states) is much more interested in protecting domestic growth and stability than in accepting new burdens abroad. The G3 (the United States, Europe, and Japan) isn't viable, because Europe is shoulder deep in a bid to save the eurozone, and Japan's government is dysfunctional.
There's no international leadership, and each government will increasingly protect its gains at the expense of others. That's why the dominant economic trend of the last 50 years, globalization, now faces a direct challenge from geopolitics. Governments in both the developed and the developing world have every incentive to throw up barriers to commerce and investment that are designed to protect their own workers and companies -- and no country or bloc of countries has the will or the muscle to reverse this trend.
Our list of risks for 2011 includes the potential for crisis in Europe, tensions at the intersection of cybersecurity and geopolitics, China's unwillingness to bow to a growing surge of international pressure for economic policy changes, provocations from North Korea, and the risk of a spike in currency controls. All these risks are intensified by this transition to a G-Zero order.
Next up, we'll look at the G-Zero in greater depth, because it's our top risk for 2011.
Ian Bremmer is president of Eurasia Group. David Gordon is the firm's head of research.
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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.
By Roberto Herrera-Lim
Western governments recently cheered Aung San Suu Kyi's release, but don't expect any major changes to their Myanmar (formerly known as Burma) policies in the near term. By contrast, Asian countries will probably increase their level of engagement, no matter what the country's politics, because they want access to its natural resources. So what does this all mean for Myanmar's relations with the East and West?
Divining the intentions of Myanmar's generals is never easy, especially their calculations around the release of the country's most famous dissident. It could be an act of economic desperation, the result of a power play between the old guard and relatively more moderate factions within the military, or simply the regime's efforts to achieve some form of normalization. Regardless of the motives, however, the effects are clear: While the West remains distrustful of recent moves, other Asian countries will increase their dealings and investments with Pyinmana, giving these governments greater leverage with the generals who effectively run the country (albeit in civilian clothes). In other words, there will a widening gap between how the West and Asia deals with the Burmese regime, for the next year at least.
The current U.S. administration, whose priorities in Asia lie elsewhere, will not expend much political capital on the country. Influential pro-democracy constituencies in Washington can easily find arguments for continued sanctions and against engaging with the country's nominally "civilian" leadership. While the country held its first general election in 20 years on Nov. 7, it was not free, fair, nor credible. Furthermore, most Myanmar watchers are mindful of May 2003 when, barely a year after Suu Kyi's first release from detention, an armed group apparently recruited by the regime's front, the Union Solidarity and Development Association (USDA), attacked her convoy, killing about 100 people. Senior generals seen as responsible for the attack are now in the new parliament as part of the government-sponsored majority belonging to the Union Solidarity and Development Party (USDP), the successor of the USDA. ??
Meanwhile, many countries in Asia (including China, India, and Thailand) will continue to pursue policies toward Myanmar based on their economic interests and a sense that the country is an arena for strategic competition with rivals. China is already Myanmar's de-facto regional patron. Other countries are now pursuing postures more similar to Beijing's than to Washington's, which, in turn, eases the environment in Asia for further Chinese pursuit of Burmese resources such as natural gas. This year, for instance, CNPC started construction for its oil and gas pipeline projects from Arakan (Rakhine) state off the Andaman Sea to the southern Chinese province of Yunnan. The gas pipeline will draw its supply from the Shwe fields off the Arakan coast in the Bay of Bengal and transport it to Kunming and Nanning in China. The oil pipeline, meanwhile, will transport oil offloaded by tankers from the Middle East at Ramree (Maday) Island in Kyaukphyu to Ruili in China's Yunnan province; it will be able to carry roughly 10 percent of China's imports from the Gulf. For Thailand, meanwhile, Myanmar supplies about a fourth of Thai gas needs, and the amount is expected to increase by 2013, based on new agreements by Thai state energy company PTT.
The next few months will be critical for Myanmar's political and economic trajectory. In the days after her release, Suu Kyi was understandably vague about her plans. She did, however, emphasize "national reconciliation" and flirted with the line that Western sanctions might need to be rethought. Increasingly, Suu Kyi will likely test the limits of the government's tolerance and willingness to pursue political reform. But she'll have to be careful, as the generals will probably be assessing whether their experiment of releasing Suu Kyi succeeds -- and they'll recalibrate as necessary. If they sense that increased instability is the likely outcome of her freedom, the leadership will likely revert to old practices, including increasing the military's role in maintaining order and possibly finding an excuse to again arrest Suu Kyi. On the other hand, if Myanmar's leaders believe their gamble has paid off -- and that the economic and diplomatic gains from her release outweigh the risks to their control over the country -- the pro-democracy movement could be given some breathing room. In this case, if the regime can claim it has fulfilled former prime minister Khin Nyunt's seven-step roadmap (announced in 2003), then a more significant, though slow, thawing of ties with the West becomes more likely. This process will, of course, take time. But if the momentum generated by Suu Kyi's release is sustained, some change might become a more realistic expectation within a couple of years.
Roberto Herrera-Lim is a director in Eurasia Group's Asia practice.
By Henry Hoyle
Last week, Jim O'Neill, head of Goldman Sachs Asset Management and a longtime China expert, made the bold claim that China's allowing the yuan to appreciate is part of a "grand bargain" with the United States to win support for enlarging Beijing's clout at the International Monetary Fund (IMF). (The yuan has gained about 3 percent against the dollar since June.) O'Neill's assertion echoes others who have argued that IMF governance reform should be made contingent on concessions from China to revalue its currency. The theory may be entertaining to discuss, but there's no real evidence of a quid-pro-quo here.
The United States has long supported giving China more power at the IMF -- even in the face of the yuan's painfully slow pace of revaluation. The United States backed China's bid to expand its influence at the IMF as early as 2006, and then did so again at the G-20 summits in 2009, when China was refusing to let its currency budge.
If a deal was indeed struck, as O'Neill claims, it raises a couple of questions. First, why would China abandon its longstanding refusal to negotiate the value of its currency? And second, why would Washington believe Beijing even if the Chinese promised to let the yuan rise? China has strengthened its currency this year only when foreign pressure was nearly over the boiling point, and even reversed appreciation when international attention temporarily dwindled over the summer.
To O'Neill's credit, the concept of a "grand bargain" did factor into the original U.S. rationale for backing IMF reform that favored China. According to what a senior Treasury Department official said in 2006, granting China more voting rights at the IMF would encourage Beijing to abide by international rules and accept best economic practices. But for the past few years, Chinese policymakers seem to have operated under the assumption that once China's economy grew large enough, the West would support the expansion of China's IMF voting rights regardless of whether they made concessions. In light of the IMF's recent decision to approve China as its third most powerful member, that assumption appears to have been correct.
If, despite all this evidence, O'Neill is still right, one thing is certain: The West certainly didn't strike a very good deal. China secured its expanded voting rights in the IMF without falling into line with international norms on currency rates, export subsidies, or market access. Calling the G-20 deal a grand bargain puts too positive a spin on it. We might as well call it a giveaway.Henry Hoyle is an associate in Eurasia Group's Asia practice.
Almost as soon as the midterm elections ended, President Barack Obama set off on a 10-day Asia swing. He's found friendly footing abroad so far: a receptive India looking for a general counterweight to China and a rapturous day in Indonesia, where Obama spent several formative years as a child. Next came a G20 summit hosted by South Korea, a strengthening U.S. ally, and then he'll hit Yokohama for an APEC summit and to commemorate the fiftieth anniversary of the U.S.-Japan alliance. But this happy-go-lucky itinerary doesn't even hint at an overarching foreign policy. Which got me thinking, is Obama ever going to come up with one?
Plenty of commercial and defense deals were delivered during the India visit, which shows how that relationship is improving. There were high hopes for a breakthrough in Seoul on the U.S.-Korea trade agreement, though that now seems unlikely (at least for now). The Japan visit should include broad agreement on Tokyo moving ahead (along with the United States) with a trans-Pacific partnership (TPP). But these are all small things.
What's the big picture?
I was thinking about this while listening to Undersecretary of State Bob Hormats around-the-world speech at the World Affairs Council in Washington last week. I couldn't help but compare it with a similar speech from Secretary of State Hillary Clinton a couple months before. They both talked about the necessity of focusing on issues of bilateral cooperation with China, on Japan as the lynchpin of U.S. policy in the region, on the necessity of promoting free trade, the determination to stay focused on fighting terrorism, and to continue to support democracies around the world. There was talk about not neglecting traditional U.S. allies in Europe. And then, at the end, both emphasized the need to maintain strong commitments with America's key allies in the Western hemisphere, Canada, and Mexico.
I also thought about a speech I had heard from then Secretary of State Colin Powell in 2005. How different were the speeches? How much had the basic precepts of U.S. foreign policy changed over the course of the last two administrations, and during the past five years? To be charitable, I'd say 2 percent. Maybe. Primarily, the difference is that Asia is now taking up a little more attention, Europe getting slightly shorter shrift. Yet in that same period of time, the world has clearly changed more than 2 percent.
I'd say the world has hit a decisive inflection point, even more profound than after the collapse of the Soviet Union. The fall of the wall produced a new global security balance, to be sure -- the United States emerged as the sole hegemon. But in terms of the global economic and policy order, the world basically moved from the G7 to the G7+1. And to be blunt, the +1 sped up the process of globalization, but it did not reflect a new world order. Once the financial crisis hit, by contrast, the G7+1 became the G20. And that, however unworkable, is indeed a completely new ordering principle. It means different types of countries and governments vying for influence, power, and preference on key issues of global governance-from trade to currency to the politics of austerity, on climate, and on conventional and cyber security.
Yet there's a stark disconnect between our drastically changed world and US foreign policymaking. Over the past few decades, foreign policy has been the preserve of presidents, successful or not (think about the Carter, Reagan, Clinton, and Bush "doctrines"). But two years and a Nobel Peace Prize into the Obama administration, there's no sign of an Obama doctrine. This U.S. president has handled foreign policy primarily by managing conflict as it arises (stepping in directly when absolutely required), and otherwise making small, incremental policy gains on fronts with momentum. Obama has shaped America's foreign policy apparatus accordingly, with a strong and relatively autonomous Secretary of State in Clinton, a series of senior, competent special envoys in the State Department to handle intractable, longstanding foreign concerns, and loyal but comparatively weak, non-strategic national security advisers (namely, Jim Jones and now Tom Donilon, who primarily serve to coordinate policy communication and untangle disputes, not to leverage the National Security Council as a mechanism for executive policymaking.
The biggest new idea that the Obama White House flirted with, albeit briefly, was the prospect of a G2 -- a notion that the new world order could be jointly managed by the United States and China. But that concept was essentially stillborn as the first efforts to realize it came to an embarrassing naught at the Copenhagen climate summit last December. Since then, U.S-.China relations have steadily deteriorated on most fronts. For the world at large, that means a growing disconnect on global architecture -- think Gondwanaland, inexorably splitting into continents while the old government still embraces a single state. But faster.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
JIM WATSON/AFP/Getty Images
The 11 people arrested and accused of spying for Russia have titillated the tabloids and reminded Cold War veterans of the good old days. But they won't do much damage to U.S.-Russian relations. In fact, the two governments are getting along much better at the moment. There are three major reasons for this, and all of them have to do with the view from the Kremlin.
recently ailing economy is now feeling much better. The financial crisis
inflicted more damage on Russia
than on most other emerging markets, in part because of a steep drop in oil
prices. When Obama first proposed a "reset" in U.S.-Russian relations, Moscow was hemorrhaging
reserves, and Kremlin officials hadn't arrived at any clear idea on what to do
about it. Prime Minister Vladimir Putin was traveling the country assuring local workers
that complacent oligarchs, not state officials, were to blame for the
volatility, and that their government would ensure that all would again be
well. President Dmitry Medvedev and his more western-oriented advisors were
beginning to look like convenient scapegoats should the public become restive
and Putin run out of businessmen to punish.
Things have changed. The economy has picked up thanks to some skillful economic management and a rise in oil prices out of the danger zone.
is feeling much better about its neighborhood. The Orange Revolution is now a
distant memory. In 2004, a presidential election in Ukraine lifted the Putin-endorsed
Viktor Yanukovych over Viktor Yushchenko. But Ukrainian nationalists and
several Western governments charged fraud, and the race was re-run. Yushchenko
won the do-over, fueling suspicion and hostility in Moscow. But his leadership earned little
public confidence during his five-year tenure, and Ukraine's latest election elevated
Yanukovych, who has now taken his country's bid to join NATO off the table for the foreseeable future.
Alex Wong/Getty Images
For the sixth time in less than four years, the U.N. Security Council has voted to impose new sanctions on Iran in connection with its nuclear program. Nothing new there. U.S. officials wanted stronger measures, but the Chinese in particular pushed back hard. Nothing new there either. The sanctions, which are still significantly tougher than earlier models and include tightened restrictions on arms sales, new headaches for Iranian shipping, and an assault on the finances of the Revolutionary Guard and about 40 Iranian companies, will not persuade Iran's government to renounce its nuclear ambitions. Nor is there anything new there.
The real news is that Turkey and Brazil voted no. That's a diplomatic coup for Tehran, which in five previous UNSC votes had won virtually no support. Qatar voted no on the first round of sanctions in July 2006. Indonesia abstained on the fourth round in March 2008. Support from regional heavyweights like Turkey and Brazil (and an abstention from Lebanon) give Iran something tangible to build on as its embattled government works to ease its isolation and to persuade other governments to resist U.S. and European calls for further sanctions outside the U.N. process.
President Ahmadinejad's recent dance card-a Russia/Turkey summit on security just before the sanctions vote and a trip to Beijing just after-illustrates the value of that strategy.
But there's a larger point here about the current state of international politics. It's getting harder for Washington to exercise international leadership. With 10 percent unemployment, an ambitious legislative agenda, an oil spill, and mid-term elections to worry about, President Obama has limited time and energy to invest in grand strategy on foreign policy. Managing geopolitical risk has also become much more complicated in a world that has shifted from a G7 model of international leadership to a G20 model that brings countries like Brazil and Turkey to the international bargaining table. And there is no emerging power willing and able to fill the gap left by new limits on American power and resources, because European powers, China, Russia and others who might lead on key transnational issues are likewise occupied with complex challenges at home.
In other words, no one is really steering this ship, and we can't expect it to sail smoothly through troubled waters.
Ian Bremmer is president of Eurasia Group and author of The End of the Free Market: Who Wins the War Between States and Corporations?
Mario Tama/Getty Images
Count the books now on store shelves that "reconstruct the crimes" that triggered the global meltdown. Count the Goldman Sachs jokes on late night TV. Count the hours that C-Span will devote to congressional inquiries into what happened, why it happened, and who is ultimately to blame. Forensics is a necessary process if we're to learn from our mistakes.
But while many are focused on the rearview mirror, the road ahead is sure to be bumpy for free market capitalism. That's what my book is about. And though I wrote a bit about this trend in last week's back and forth with Tom Barnett, I want to make the case here for the conflict to come.
The global economic and financial turmoil of the past two years has shifted the world's balance of political and economic power like no event since the end of World War II. The financial crisis has hastened the transition from a G7 world, one in which key international decisions were taken almost entirely among leaders of the developed world, to a G20 model that makes room at the international bargaining table for representatives of developing countries that don't share Western assumptions about the proper role of government in an economy.
It's already been a tough year for the rich world. Greece has demonstrated that Europe's weakest links can push the euro zone to the brink. Japan's indebted and dysfunctional government is treading water. America's real unemployment rate, the number that includes part-time workers who can't get full-time work and those who have simply stopped looking, reached 17.1 percent in April.
As the West struggles to its feet, China is again off to the races with 11.9 percent first quarter growth. The world's second largest economy embraced capitalism a generation ago, but it has never accepted the centrality of a capitalism driven primarily by market forces. China's brand of capitalism is driven mainly by its government.
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.
ERIC FEFERBERG / AFP / Getty Images
Dubai may be a no show, but Japan's here and not doing much. General thoughts from my conversations here:
1) The Democratic Party of Japan (DPJ) doesn't look like it's going to win a clear majority in upper house elections this summer. A precipitous change of events from a few months ago ... but indecisiveness and scandal has crippled Japanese Prime Minister Hatoyama, who was on the Davos programme, but cancelled last minute. Hmm.
2) DJP kingmaker Ozawa is locked in a battle to the death with independent prosecutors. consensus Japanese view in Davos: a) Circumstantial evidence shows Ozawa's guilty as sin; b) Prosecutors are operating above the law, with no countervailing force to stop them, and the Japanese media is out of control; c) Careers are at stake for both sides, with no backing down. Surprisingly enough, there's a growing belief that Ozawa is forced out. But the timeline (weeks, months, or more) is completely unclear. More hmm.
3) U.S.-Japan foreign policy is heading for trouble given what looks like a scuttled military base deal ... but nobody's worried very much in the context of broader Japanese policy woes. Plus, Japan doesn't really have foreign policy (and China, as we're seeing, does). Dangerous trumps ineffectual; advantage Japan. No hmm at all.
Ian Bremmer will be blogging from Davos this week sending reports and commentary from inside the World Economic Forum.
Kiyoshi Ota/Getty Images
By Ian Bremmer and David Gordon
Before Copenhagen, the prevailing
presumption was that 2010 would be the year when a global treaty, including the
United States, China and India, really got done. After Copenhagen, we look years
away from such a treaty, and there is a growing likelihood that it will never
From a market and industry perspective, the failure to establish clear timetables and goals at Copenhagen complicates investment decision-making for everything from renewable energy investments to forest product management to commodity price forecasting. On the latter, natural gas markets emerge as a loser from the climate change gridlock. While the overall trend is toward greater use of natural gas-fired generation for electricity in North America, the implementation of an actual carbon price is crucial to unleashing new investment and encouraging fuel-switching. The absence of this catalyst (outside of the European Union) increases the likelihood that the current weak price environment for natural gas is likely to continue, creating problems for gas exporters from Russia to Bolivia.
The Copenhagen outcome makes it even less likely that the United States Congress will pass cap-and-trade legislation in 2010. Though Obama's political advisors see a big push for cap-and-trade as a way to energize the base and sharpen distinctions with Republicans ahead of November's mid-term elections, they don't have an international treaty to use as a pressure tactic to move votes forward in the Senate. Opponents of the legislation will use the absence of a substantive agreement with China as further reason to balk at American commitments. Moderate Democratic senators in poor and energy-intensive states strongly oppose the climate change measure and will not provide the votes that Obama needs.
The Copenhagen failure also makes it more likely that individual countries will move to "nationally appropriate" mitigation measures. Countries like China, India, Canada, Brazil, and eventually even the United States will move toward an increasingly heterogeneous set of policy responses, including intensity-based goals, renewable energy mandates, and even carbon taxes, creating a greater challenge for international coordination.
The lack of an international framework will complicate compliance efforts by multinational corporations that have carbon footprints in dozens of countries at once. More significantly for global politics, technical disputes over implementing and verifying actual emissions from these uncoordinated systems will create diplomatic tensions, particularly between the United States and China. And a multilateral stalemate is likely to intensify the existing rift between industrialized and G77 countries. Lastly, the risk of trade disputes over carbon will rise as disparate policy responses heighten concerns over firms relocating to countries with more lax carbon policies, and border adjustment measures gain traction as a result.
Next stop: Brazil.Ian Bremmer is president of Eurasia Group, and David Gordon is the firm's head of research.
ROBERTO SCHMIDT/AFP/Getty Images
By Ian Bremmer and David Gordon
Over the next two weeks, The Call will feature the political risks that we at Eurasia Group consider the most important for 2010. We begin today with an overview and a few introductory comments.
We've just been through a year of enormous economic turbulence,
and yet in most ways 2009 was mercifully quiet. The financial crisis hit the
previous September and most things that could have gone wrong didn't, allowing
the world to focus on the digging out. 2009 saw no big geopolitical crises, no
tussles with North Korea or Iran. The war
on drugs in Mexico
didn't spill across the American border in a big way. Iraq didn't
blow up. There were no massive terrorist attacks (though Christmas saw a close
call in the United States).
No killer hurricanes, no huge earthquakes, and the H1N1 virus didn't prove
that threatening a pandemic after all. Governments around the world focused
overwhelmingly on the domestic, putting tough policy decisions on hold. (And
when they didn't, as with President Obama's Afghanistan and healthcare plans,
the results were seriously watered down, and actual policy risk was limited.)
This year, that's going to be much harder to accomplish. If the 2009 top risks
were first and foremost about developed states having their wits sufficiently
about them to get through the financial crisis (with the U.S. Congress leading
the pack), as the world now emerges from recession, the risks begin to shift to
the challenges created by the emergence of a new global order -- developed vs.
developing states, the old unipolar system vs. the emerging non-polar one, and
the old dominant globalized system of regulated free market capitalism vs. the
growing strength of state capitalism.
The biggest risk for 2010 comes from the point at which these three trends converge: U.S.-China relations. Simply put, 10 (percent unemployment in the United States) plus 10 (percent growth in China) does not equal 20. There's been an enormous effort by the leadership of both governments to keep a functional U.S.-Chinese relationship in place, much like the international approach to the G20, so that everyone could see the seriousness of the enterprise. But with the world's principal actors under less immediate strain, there's less pressure to keep up appearances. This year, the gloves start coming off.
Next up is Iran, where a deteriorating domestic and international environment combined with toughening sanctions pressure will create greater incentives for Tehran to provoke conflict. Along with the continuing (though limited) risk of Israeli military strikes on Iran's nuclear sites, this is the year to watch for serious trouble emanating from the Islamic Republic.
We'll also still see significant concerns within developed states this year -- weaker states in Europe under massive fiscal pressure; financial regulatory reform in the United States; and the impact of a political revolution in Japan. A few surprises from emerging markets -- Brazil's at risk this year, as coming elections are more troubled than people expect. India-Pakistan risk resurfaces after years of quiet engagement (while Afghanistan, making headlines throughout the year, is effectively pushed as a top risk to 2011 by the U.S. troop surge). Unemployment coupled with a spate of elections merit a spot for Eastern Europe in the top ten. And a host of domestic and international stresses puts Turkey on the list too, though barely.
Terrorism doesn't make the list. It's a growing global concern, but as a specific risk, it's a fat tail. It can really upset markets when an attack hits, but short of that it's principally a growing drag on global growth. Yemen is emerging as a focus for al Qaeda, and no doubt we'll see significant fighting there ... with direct American engagement. But short of Yemen actually failing as a state (unlikely in the nearest term), it won't have significant impact globally -- or even on neighboring Saudi Arabia. After many years, climate change finally sees its place on the top 10 list, mostly because of the growing policy and market impacts of the continued absence of effective international coordination on responses, a trend we'll see more often in our increasingly non-polar world.
There are all sorts of country risks that don't quite make the list -- Colombia, Dubai, Malaysia, Mexico, Nigeria, and Thailand to name a few. Each is worthy of concern for those with direct exposures in these economies, but none will grow to the level of global risk in 2010.
And then some interesting red herrings. These include U.S. and British financial centers, the death of which has been greatly exaggerated; Iraq, where investment and new oil will be a much bigger story than security risks; the Persian Gulf, which we generally like quite a bit (Dubai's problems notwithstanding); and the dollar, where really slow and steady-ish still wins the race.
First up, risk #1: turbulence in U.S.-Chinese relations...
Ian Bremmer is president of Eurasia Group. David Gordon is the firm’s director of research.
SAUL LOEB/AFP/Getty Images
The Call, from Ian Bremmer, uses cutting-edge political science to predict the political future -- and how it will shape the global economy.