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Second Quarter Forecast 2011Created Apr 11 2011 - 16:52

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In our 2011 annual forecast, we highlighted three predominant issues for the year: complicationswith Iran surrounding the U.S. withdrawal from Iraq, the struggle of the Chinese leadership tomaintain stability amid economic troubles, and a shift in Russian behavior to appear moreconciliatory, or to match assertiveness with conciliation. While we see these trends remainingsignificant and in play, we did not anticipate the unrest that spread across North Africa to thePersian Gulf region.

In the first quarter of 2011, we saw what appeared to be a series of dominoes falling, triggeredby social unrest in Tunisia. In some sense, there have been common threads to many of theuprisings: high youth unemployment, rising commodity prices, high levels of crony capitalism,

illegitimate succession planning, overdrawn emergency laws, the lack of political and mediafreedoms and so on. But despite the surface similarities, each has also had its own unique andindividual characteristics, and in the Persian Gulf region, a competition between regional powersis playing out.

When the Tunisian leadership began to fall, we were surprised at the speed with which similarunrest spread to Egypt. Once in Egypt, however, it quickly became apparent that what we wereseeing was not simply a spontaneous uprising of democracy-minded youth (though there wascertainly an element of that), but rather a move by the military to exploit the protests to removeEgyptian President Hosni Mubarak, whose succession plans were causing rifts within theestablishment and opening up opportunities for groups like the Muslim Brotherhood.

As we noted in our annual forecast; “While the various elements that make up the state will bebusy trying to reach a consensus on how best to navigate the succession issue, several politicaland militant forces active in Egypt will be trying to take advantage of the historic opportunity thetransition presents.” In this quarter, we see the military working to consolidate its control, balancethe lingering elements of the pro-democracy movement, and keep the Muslim Brotherhood andother Islamist forces in check. Cairo is watching Israel very carefully in this respect, as Israelimilitary actions against the Palestinians or against southern Lebanon could force the Egyptianleadership to reassess the peace treaty with Israel, and give the Islamist forces in Egypt apolitical boost.

In Bahrain, we saw Iran seeking to take advantage of the general regional discontent tochallenge Saudi interests. The Saudis intervened militarily, and for now appear to have thingslocked down in their smaller neighbor. Tehran is looking throughout the region to see whichlevers it is willing or capable of pulling to keep Saudi Arabia unbalanced while not going so far asto convince the United States it should keep a large force structure in Iraq. Countering Iran isTurkey, which has become more active in the region. The balancing between these two regionalpowers will be a major element shaping the second quarter and beyond.

We are entering a very dynamic quarter. The Persian Gulf region is the center of gravity, and thecenter of a rising regional power competition. A war in or with Israel is a major wild card thatcould destabilize the area further. Amid this, the United States continues to seek ways todisengage while not leaving the region significantly unbalanced. Off to the side is China, moreintensely focused on domestic instability and facing rising economic pressures from high oilprices and inflation. Russia, perhaps, is in the best position this quarter, as Europe and Japanlook for additional sources of energy, and Moscow can pack away some cash for later days.

Middle East

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Regional Trend: Iranʼs Confrontation with the Arab World

The instability in the Middle East carrying the most strategic weight is centered on the PersianGulf, where Bahrain has become a proxy battleground between Iran and its Sunni Arab rivals.Iran appears to have used its influence and networks to encourage or exploit rising unrest inBahrain as part of a covert destabilization campaign in eastern Arabia, relying on a Shiiteuprising in Bahrain to attempt to produce a cascade of unrest that would spill into the Shiite-heavy areas of Saudi Arabiaʼs oil-rich Eastern Province. Saudi Arabia responded by sendingmilitary forces into its island neighbor.

Continued crackdowns and delays in political reforms will quietly fuel tensions between theUnited States and many of the Gulf Cooperation Council (GCC) states as Washington strugglesbetween its need to complete the withdrawal from Iraq and to find a way to counterbalance Iran.The Iranians hope to exploit this dilemma by fomenting enough instability in the region to compelthe United States and Saudi Arabia to come to Tehran for a settlement on Iranian terms or tofracture U.S.-Saudi ties, thereby drawing Washington into negotiations to end the unrest andthus obtain the opportunity to withdraw from Iraq. So far, that appears unlikely. Iran hassuccessfully spread alarm throughout the GCC states, but it will face a much more difficult timein sustaining unrest in eastern Arabia in the face of intensifying GCC crackdowns.

Iran probably will have to resort to other arenas to exploit the Arab uprisings. In each of thesearenas, Iran also will face considerable constraints. In Iraq, for example, Iran has a number ofcovert assets at its disposal to raise sectarian tensions, but in doing so, it risks upsetting the U.S.timetable for withdrawal and undermining the security of Iranʼs western flank in the long term.

In the Levant, Iran could look to its militant proxy relationships with Hezbollah in Lebanon andPalestinian Islamic Jihad in the Palestinian territories to provoke Israel into a militaryconfrontation on at least one front, and possibly on two. An Israeli military intervention in theGaza Strip would put pressure on the military-led regime in Egypt as it attempts to constraindomestic Islamist political forces. Syria, which carries influence over the actions of the principalPalestinian militant factions, can be swayed by regional players like Turkey to keep this theatercontained, but calm in the Levant is not assured for the second quarter given the broaderregional dynamic.

In the Arabian Peninsula, Iran can look to the Yemeni-Saudi borderland, where it can fuel an

already-active al-Houthi rebellion with the intent of inciting the Ismaili Muslim communities inSaudi Arabiaʼs southern provinces in hopes of sparking Shiite unrest in Saudi Arabiaʼs EasternProvince. This represents a much more roundabout method for trying to threaten the Saudikingdom, but the current instability in Yemen affords Iran the opportunity to meddle amid thechaos.

Regional Trend: War in Libya, Fears in Egypt

Libya probably will remain in a protracted crisis through the next quarter. Though the Westernleaders of the NATO-led military campaign have tied themselves to an unstated mission ofregime change, an air campaign alone is unlikely to achieve that goal. Gadhafiʼs support base,while under immense pressure, largely appears to be holding on in western Libya. The easternrebels meanwhile remain an amateurish group that is not going to transform into a competentmilitant force within three months. The more the rebels attempt to advance westward acrosshundreds of miles of desert toward Tripoli, the easier Gadhafiʼs forces can fall back to populatedareas where NATO is increasingly unable to provide close air support for fear of inflicting civiliancasualties. The geography and military realities in Libya promote a stalemate, and the historicsplit between western Tripolitania and eastern Cyrenaica will persist. The elimination of Gadhafiby hostile forces or by someone within his regime cannot be ruled out in this time frame, nor cana potential political accommodation involving one of Gadhafiʼs sons or another tribal regimeloyalist. Though neither scenario is likely to rapidly resolve the situation, a stalemate could allowsome energy production and exports to resume in the east.

Coming out of its own political crisis, Egypt sees an opportunity in the Libya affair to projectinfluence over the oil-rich eastern region and position itself as the Arab power broker for Westerncountries looking to earn a stake in a post-Gadhafi scenario. However, domestic constraintsprobably will inhibit Egyptian attempts to extend influence beyond its borders as Cairo continuesits attempts to resuscitate the Egyptian economy and prepare for elections slated for September.Egypt also has a great deal to worry about in Gaza, where it fears that a flare-up betweenPalestinian militant factions and Israeli military forces could embolden the Egyptian oppositionMuslim Brotherhood and place strains on the Egypt-Israel peace treaty.

Regional Trend: Syria Locking Down

The minority Alawite Syrian regime will resort to more forceful crackdowns in an attempt to quellspreading unrest. There is no guarantee that the regimeʼs traditional tactics will work, but SyrianPresident Bashar al Assadʼs government appears more capable than many of its embattledneighbors in dealing with the current unrest. The crackdowns in Syria occurring against thebackdrop of a stalemated Libyan military campaign will expose the growing contradictions in U.S.public diplomacy in the region, as the United States and Israel face an underlying imperative tomaintain the al Assad regime in Syria which, while hostile, is weak and predictable enough to bepreferable to an Islamist alternative. Both the GCC states and Iran will attempt to exploit Syriaʼsinternal troubles in trying to sway the al Assad regime to their side in the broader Sunni-Shiiteregional rivalry, but Syria will continue managing its foreign relations in a cautious manner,keeping itself open to offers but refusing commitment to any one side.

Regional Trend: Rising Turkey

The waves of unrest lapping at Turkeyʼs borders are accelerating Turkeyʼs regional rise. Thisquarter will be a busy one for Ankara, as the country prepares for June elections expected to see

the ruling Justice and Development Party consolidate its political strength. Turkey will be forcedto divide its attention between home and abroad as it tries to put out fires in its backyard. Thecrisis in Libya provides Turkey an opportunity to re-establish a foothold in North Africa, while inthe Levant Turkey will be playing a major role in trying to manage the situation in Syria to avoid aspillover of Kurdish unrest into its own borders. Where Turkey is most needed, and where itactually holds significant influence, is in the heart of the Arab world: Iraq. Iranʼs destabilizationattempts in eastern Arabia and the United Statesʼ overwhelming strategic need to end its militarycommitment to Iraq will put Turkey in high demand for both Washington and the GCC states as acounterbalance to a resurgent Iran.

Regional Trend: Yemen in Crisis

The gradual erosion of Yemeni President Ali Abdullah Salehʼs regime over the next quarter willplant the seeds for civil conflict. Both sides of the political divide in Yemen agree that Saleh willbe making an early political exit, but there are a number of complications surrounding thetransition negotiations that will extend the crisis. As tribal loyalties continue to fluctuate amongthe various political actors and pressures pile on the government, the writ of the Saleh regime willincreasingly narrow to the capital of Sanaa, allowing rebellions elsewhere in the country tointensify.

Al-Houthi rebels of the Zaydi sect in the north are expanding their autonomy in Saada provincebordering the Saudi kingdom, creating the potential for Saudi military intervention. An ongoingrebellion in the south as well as a resurgence of the Islamist old guard within the securityapparatus opposing Saleh will meanwhile provide an opportunity for al Qaeda in the ArabianPeninsula to expand its areas of operation. Salehʼs eventual removal — a goal that has unifiedYemenʼs disparate opposition groups so far — will exacerbate these conditions, as each partyfalls back to their respective agendas. Saudi Arabia will be the main authority in Yemen trying tomanage this crisis, with its priority being suppressing al-Houthi rebels in the north.

South Asia

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UnionEuropeSub-SaharanAfricaLatin America

Regional Trend: Intensifying Taliban Actions in Afghanistan and Pakistan

Our annual forecast remains on track for Afghanistan. With the spring thaw, operations by bothsides will intensify, but decisive progress on either side is unlikely. The degree to which theTaliban is capable of mounting offensive operations and other intimidation and assassinationefforts in this quarter and the next will offer an opportunity to assess the impact of InternationalSecurity Assistance Force (ISAF) operations. It may also reveal the Talibanʼs core strategy forthe year ahead, namely, whether it intends to intensify the conflict or hunker down to encourageand wait out the ISAF withdrawal.

The Pakistani counterinsurgency effort has made some progress in the tribal areas, but thePakistani Taliban have yet to really ramp-up operations. The tempo of operations that thePakistani Taliban are able to mount and sustain this quarter and next will be telling in terms ofthe strength of the movement after Islamabadʼs efforts to crack down.

The Raymond Davis case brought ongoing tensions between the United States and Pakistanover the U.S.-jihadist war to an all-time high in the past quarter. Though the issue of the CIAcontractor killing two Pakistani nationals was resolved via a negotiated settlement, the severalweeklong public drama has emboldened Islamabad, which the Pakistanis will build upon to try toshape American behavior. While a major falling out between the two countries is unlikely, theRaymond Davis incident as well as the increasing perception in the region that Washingtonʼsposition has been significantly weakened will allow Pakistan to assert itself in terms of the overallU.S. strategy for South Asia, and especially on Afghanistan.

Islamabad will be trying to leverage further gains by Afghan Taliban insurgents to move theUnited States toward a negotiated settlement and exit strategy that does not create problems forPakistan. However, there is little sign of meaningful negotiation or political accommodation so farthis year. While there have been efforts to reach out behind the scenes, neither side is likelyready to give enough ground for real discussions to begin.

East Asia

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Regional Trend: Chinaʼs Inflation Challenge

Chinaʼs challenge in this quarter is inflation, namely, finding a way to balance inflationʼsimpact on society without overcompensating. Inflation is expected to peak this quarter, andpolitical leaders have pledged to get tougher on constraining price increases. Yet policytightening remains cautious, and new threats to growth have emerged in the form of slackeningexports, encouraged by the Japanese slowdown, and rising raw materials costs and otheruncertainties in global trade and capital flows. The government will try to prevent or delay priceincreases for consumers, but kinks in supply and demand, including hoarding and price gouging,will occur and trigger reactions from the most affected social or occupational groups andcorporations.

Government fears about economic and social instability and political dissent have triggered anunusually intense security crackdown on dissidents, journalists, newspapers and the Internet.April to June is historically the prime time for strikes, protests, and other incidents and containssensitive anniversaries like Tiananmen. Given inflation pressures, such incidents are likely tooccur in the second quarter. Beijing therefore has no inclination to relax its grip, and is morelikely to squeeze harder if social unrest seems to spread more widely or become morecoordinated.

The government will delicately handle relations in high-level meetings with major partnersincluding the United States, Australia, Russia, Brazil, India and others, with economic dealspreventing tensions from exploding. However, Beijingʼs growing sensitivity toward dissent andpotential foreign influence means its actions may attract more criticism internationally. A high-profile, serious incident in China relating to human rights or mistreatment of foreigners couldinvite international moves toward punitive measures, though there is no movement in thatdirection now.

Regional Trend: Japanʼs Postwar Low

The earthquake, tsunami and nuclear crisis have brought Japan to its lowest point since WorldWar II. The second quarter will see the full force of the negative impact on Japanʼs economy andon the global economy, where the ripples will be limited but measurable. The power shortagesaffecting the Kanto area will be manageable because of seasonal low demand. But as theweather warms up, the power shortfalls will increase — affecting more industries — and theneed to conserve will become more pressing on the public. Japan typically recovers quickly fromearthquakes, but recovery will not gain momentum until after this quarter at the earliest.

The political aftermath of the disaster will focus in the short term on budgeting and stimulus forreconstruction. Political partiesʼ unity in the face of disaster will prove superficial. The rulingpartyʼs perceived success at managing recovery in the devastated northeast and containing thenuclear crisis will determine its standing. But as the levels of radiation that escape from thedamaged plant and the effects of contamination on water, agriculture, health and internationalcommerce increase, so too do the chances for an extensive shakeup of political leadership.

Popular anger could lead to outbursts of large protests or social instability that are otherwise rarein Japan, but the ramifications of any such activity will be contained within the current politicalsystem.

Regional Trend: Ongoing Tensions on the Korean Peninsula

Korean Peninsula tensions have fallen since the fourth quarter of 2010, but remain relativelyhigh. South Korea and the United States have warned that further provocative behavior from theNorth, such as a third nuclear test, may occur in the second or third quarter. Seoul andWashington are maintaining a high tempo of military exercises to deter the North. The nextepisodes in the North Korean leadership succession and indications of an impending return tointernational negotiations also suggest that the North may stage another surprise incident thisquarter as a prelude to a return to talks.

The North is deeply engaged with back-channel discussions with the United States, and despitea potentially provocative act by the North, movement back toward the negotiating track is theoverall trend for the quarter.

Former Soviet Union

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IntroductionMiddle EastSouth AsiaEast AsiaFormer SovietUnionEuropeSub-SaharanAfrica

Latin America

Regional Trend: Russiaʼs Dual Foreign Policy

In terms of Russiaʼs dual foreign policy, Moscow is comfortable in its current position going intothe second quarter. The United States has become involved in a third war, this one in Libya,which is further distracting U.S. attention away from Eurasia and toward the Middle East. TheEuropeans have differences over the Libyan intervention and are dealing with financial andeconomic turmoil and governmental shifts. Meanwhile, energy prices are rising and key countrieslike Italy and Japan are looking to Russia to make up for the loss of energy supplies from Libyaand the Fukushima nuclear crisis, respectively.

All of these energy developments provide Moscow with opportunities, not the least of which is tofill state coffers. The last time Russia received such an infusion of cash during a time of peakingenergy prices, Moscow made a serious show of force in the Russia-Georgia war in August 2008.This time, Russia is putting the cash in the bank and investing in large domestic projects in orderto improve the countryʼs long-term internal strength.

There will be two lines of focus for Russia in the second quarter — Europe and the former Sovietstates. With Europe, Russiaʼs maneuvers will start to take shape via its relationship with theUnited States. Russian President Dmitri Medvedev and U.S. President Barack Obama will havetheir first meeting of the year in May. Russia is focusing the talks on the issue of ballistic missiledefense — something the United States is less inclined to address at present. Russia, then, willuse the issue to shape perception of both the United States and Russia in Europe. The WesternEuropeans would like to keep out of the discussion, but Moscow will seek to draw them in asRussia tries to exploit and expand differences between the United States and its WesternEuropean allies, as well as between Washington and the Central Europeans. Russia, however,will continue to pursue its dual-track diplomacy, and will not push Washington too far away. ForMoscow, it is important to balance its assertiveness with a dose of cooperation.

One potential problem that could emerge for Moscow is in the Caucasus. Tensions have beenheating up between Armenia and Azerbaijan as preparations are made to reopen a rebuilt airportin the breakaway territory of Nagorno-Karabakh in May. Armenian President Serzh Sarkisian hasannounced he would be on the first flight from Yerevan to the rebel regionʼs capital, and this hasset the stage for a standoff as Azerbaijan has threatened to shoot down flights that violate itsairspace. If a conflict breaks out, it will draw in Russia, as well as Turkey and possibly the UnitedStates, though it is more likely this will play out politically rather than militarily.

Regional Trend: Kremlin Infighting

Kremlin infighting increased at the end of the first quarter and will continue into the second. Anew evolution is emerging: pushing out old siloviki businessmen (who also happen to bepoliticians) and replacing them with more Western-minded businessmen (who appear morecompetent). Moreover, announcements of serious cuts in government jobs will start in a matterof months. A backlash is brewing among those being pushed out, something that Prime MinisterVladimir Putin and President Medvedev are already struggling to keep a handle on in the lead-upto elections at the end of 2011 and in 2012.

Regional Trend: Powder Keg in Central Asia

Central Asia will continue to simmer in the second quarter, especially with low-level instabilitypersisting in Kyrgyzstan and Tajikistan. However, the Kazakh elections in the beginning of April,in which incumbent President Nursultan Nazarbayev secured a comfortable re-election, havesharpened the focus on the real issue in the country — Nazarbayevʼs succession crisis.STRATFOR is hearing rumblings that large reshuffles will happen right after the elections, andaside from the movement made in the political sphere, instability can be played out in othercritical areas as well, such as energy and finance. This is what really scares global powers withstakes in the country, which will be watching Kazakhstan closely.

Europe

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IntroductionMiddle EastSouth AsiaEast AsiaFormer SovietUnionEuropeSub-SaharanAfricaLatin America

Regional Trend: Closing the Circle on the Eurozone Periphery

The eurozoneʼs sovereign debt crisis continues, but with social unrest and natural disaster inother parts of the world, the focus of the markets has shifted away from Europe, providing thecontinent with a temporary respite. As STRATFOR stated in its Annual Forecast, the EFSF,Europeʼs bailout mechanism, is more than capable of accommodating the Portuguese bailout —and even bailouts for Belgium and Spain, if need be. Rising energy prices due to geopoliticalinstability in the Middle East could, however, hinder the recovery of private consumption. Privateconsumption is not as important for Europe as it is for the United States, but Mediterraneancountries tend to rely on it for a greater proportion of their gross domestic product (GDP) thannorthern European countries. They also tend to be less efficient at using energy and oil tends tomake up a higher proportion of their overall energy profiles. The last thing the Spanish economyneeds is additional headwinds, as it is expected to grow only 0.8 percent in 2011. A seriousrevision of the 2011 Spanish GDP closely following the Portuguese bailout could refocus the

markets on Madridʼs — and therefore the wider eurozoneʼs — sovereign debt problems.

The aspect of Europeʼs economy most concerning to STRATFOR is the status of the eurozoneʼsfinancial system, specifically the health of its banks. As the sovereign debt crisis recedes, thebanks are returning to the forefront. For many countries, these issues are two sides of the samecoin (as in the cases of Ireland and Spain) and for others there is a danger that banks havetroubled sovereign bond holdings. The ECB is expected to unveil new support mechanisms inthe second quarter, particularly for restructuring banks in Ireland, and it will likely expand themechanism to the rest of the eurozoneʼs restructuring banks, probably by the end of the quarter.However, many European banking systems are integrated into local politics — GermanLandesbanken being one example — and there could be resistance to restructuring.

Regional Trend: Austerity Measures and Political Costs

Getting to the point where it could manage the sovereign debt crisis took a great deal of work forEurope. Bailing out Greece and Ireland, setting up the EFSF and pushing through toughausterity measures across the continent was, and continues to be, politically expensive. Thenon-traditional, anti-establishment parties are gaining popularity. This annual trend shouldcontinue across the continent and is not only confined to the eurozone. Instability in the Balkansis growing as well, with Croatia and Bosnia-Herzegovina, both EU candidates, facing aparticularly unstable quarter.

Furthermore, German Chancellor Angela Merkel has lost a number of state elections and willlikely face more negative election results throughout 2011, resulting in a severe loss of politicalcapital. This will not play an immediate role on pushing through changes to EFSFʼs capacity orthe ability of bailout mechanisms to purchase government bonds directly, but rather will reduceher ability to go against her conservative base in the event that a new crisis emerges. If theupcoming German Federal Constitutional Court decision on the constitutionality of the bailoutmechanisms rules against the mechanisms, this would certainly precipitate a crisis, and remainsthe event to watch in the second quarter. Such a ruling would reopen the fundamental questionof whether Berlin stands behind the eurozone — supposedly answered in the affirmative with theGreek and Irish bailouts.

Regional Trend: The Devolution of Cold War Institutions

Another trend to observe in the second quarter is the long-term devolution of two Cold Warinstitutions: NATO and the European Union. The Libyan intervention plays into this process verywell, since it has strained member state relations in both organizations. But Libya is a symptom,not a trigger, of a process long under way. Three trends in particular are evident in the Libyansituation:

France has been eager to prove to Germany and the rest of Europe that it still leads thecontinent in terms of foreign and military affairs. But to do so in foreign policy it has had toforce the Libyan intervention in close cooperation with its military allies the United Kingdomand the United States. If this signals a firm transatlantic commitment by Paris, it could beginto drive a wedge in the Franco-German leadership of the European Union. It could alsosour Franco-Russian relations, as Moscow sees more clearly where Parisʼ true loyalties lie.

Germanyʼs focus is being drawn away from NATO and transatlantic links and towardCentral and Eastern Europe, a traditional sphere of influence referred to as Mitteleuropa,

and Russia.

Central Europeans have for some time expressed their displeasure with NATO being usedfor operations outside the European theater. As a result, Central Europe will have littlesupport in the second quarter in pushing back Russia on its periphery and will be forced tostand with the status quo — an uneasy acquiescence to Russiaʼs gains in its former Sovietsphere of influence.

Sub-Saharan Africa

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IntroductionMiddle EastSouth AsiaEast AsiaFormer SovietUnionEuropeSub-SaharanAfricaLatin America

Regional Trend: Fallout from North Africa

We will be watching in the second quarter for unrest from the revolutions occurring in NorthAfrica spreading into sub-Saharan Africa. A number of governments in the region have facedlow-level protests, including Senegal, Angola, Gabon, Sudan, Burkina Faso and Mauritania, butso far no protests in sub-Saharan Africa have emerged on a scale that has significantlythreatened a government. We cannot say that any specific government will be vulnerable thisquarter, but even so, these governments and aspiring opponents will be calculating throughoutthe quarter how to best advance their interests.

Regional Trend: Nigerian Elections

Nigeria will hold national elections in the second quarter, an event that could trigger considerableviolence as incumbent and aspiring politicians maneuver to win office and the significant perksthat accompany it. The election timetable is staggered, with parliamentary elections currently

scheduled for April 9, a presidential vote April 16, and gubernatorial and local governmentelections April 26. A new president will be inaugurated by the end of May. Although localizedprotests and violence can be expected, there is a strong chance that militant activity in the oil-producing Niger Delta region will be restrained. A combination of political, financial and securitymeasures will be used to manage Niger Delta militancy.

Reforms to the oil and natural gas sector in the form of the Petroleum Industry Bill (PIB) will bediscussed before the dissolution of parliament leading up to the presidential inauguration. Whilethe bill is unlikely to pass during this period, the speed at which the new parliament pursues itspassage will indicate the level of consensus for reform that exists within the government. The PIBwould restructure state participation in the sector, increasing government revenues andintroducing a legal framework for the countryʼs natural gas operations.

Regional Trend: Southern Sudanese Independence

Sudanʼs ruling National Congress Party and the Sudanese Peopleʼs Liberation Movement partywill use the entire quarter to negotiate terms of Southern Sudanese independence, expected tobe declared July 9. Negotiations will not likely be concluded this quarter, however, as the issues— particularly oil revenue sharing — involve deeply entrenched interests. Still, ad hoc workingcommittee-level agreements on how to deal with oil likely will serve in place of the more difficultformalized relations. While there likely will be flare-ups along the border in Abyei and places likeMalakal, a return to full-scale war is not expected.

Regional Trend: Consolidating Gains Against Somaliaʼs al Shabaab

African Union peacekeepers deployed in Somalia together with other pro-Somali governmentforces and militias will use the second quarter to try to consolidate gains against al Shabaab, ahard-line Islamist militia operating in Somalia. Efforts will focus on Mogadishu; fewer resourceswill be devoted to counterinsurgency operations in southern and central parts of the country.Political negotiations over the end of the Transitional Federal Government mandate in the thirdquarter will accelerate as Somali politicians and donor stakeholders try to cut a deal over whatpolitical groupings in Mogadishu can best isolate al Shabaab.

Regional Trend: Ongoing Tensions in Ivory Coast

Ivory Coast is likely to remain tense this quarter as President Alassane Ouattara works toentrench his government in Abidjan following former President Laurent Gbagboʼs removal frompower April 11. Ouattara and his government, led by Prime Minister and Defense MinisterGuillaume Soro, will need the full quarter and then some to promote reconciliation in the countryand to try to prevent residents in Abidjan loyal to Gbagbo from carrying out guerrilla attacks,including assassination attempts on Ouattara and Soro.

Both activities will be necessary to protect the Ouattara government from reprisal attacks bygunmen armed by the former Gbagbo regime. Ouattara will take the lead on politicalreconciliation while Soro will assume the task of disarming pro-Gbagbo loyalists. Internationaleconomic sanctions applied against the Gbagbo regime will be dropped shortly after Ouattaraconsolidates his hold on power, and revenues that will flow again from cocoa and othercommodity exports will be used to buy good will among southern Ivorians, civil servants andsecurity personnel to reduce their hostility toward the new government.

Regional Trend: Labor Unrest in South Africa

In South Africa, the second quarter is the period when the potential for labor unrest over annualwage negotiations emerges, though any strike action usually occurs in the third quarter. Lastyear, the country experienced widespread strikes by civil servants and private sector employeesin the wake of the 2010 World Cup.

Pretoria will be keen to avoid a repeat performance in the sectors where negotiations are takingplace, but will unlikely be able to meet wage demands due to its need to control inflation. Anysignificant concessions to labor will come as a result of the ruling African National Congressprioritizing its need to placate the ruling allianceʼs union members at the expense of the countryʼseconomic priorities. South Africa will also hold local government elections May 18, and while nomajor changes in voting trends are expected, the government will want to make sure that majorlabor disputes do not affect voter preferences.

Latin America

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IntroductionMiddle EastSouth AsiaEast AsiaFormer SovietUnionEuropeSub-SaharanAfricaLatin America

Regional Trend: Venezuelaʼs Delicate Stability

Venezuela continues to struggle with challenging economic conditions, but this is not likely to bethe quarter when things come crashing down. Although Venezuela is not currently experiencingthe drought that plagued its hydroelectric system last year, the general decline of the electricitysector after decades of neglect is causing periodic blackouts and disruptions throughout thecountry, which will likely worsen over the course of the second quarter. However, thanks to highoil prices — which currently hover around $100 per barrel for the Venezuelan oil basket — the

government of Venezuelan President Hugo Chavez has enough extra cash on hand to ensureregime stability through the quarter. Domestic economic challenges will keep most of this cash athome, leaving Caracas with little additional money to spread around the region. Given thesechallenges, we should expect to see continued Chinese interest in Venezuela as China seeksadditional investment opportunities and Venezuela looks to form economic and political ties withany country besides the United States.

Regional Trend: Elections in Peru

Peru will select a new president in the second quarter. The first-round election held April 10 waswon by leftist candidate Ollanta Humala, who will face either Keiko Fujimori, the daughter offormer President Alberto Fujimori, or Pedro Pablo Kuczynski in a June 5 runoff (the results arenot yet finalized). Although Humala has forcefully distanced himself from the extreme leftism ofVenezuelan President Chavez in favor of the more business-friendly leftism of former BrazilianPresident Luiz Inacio Lula da Silva, it is not clear at this point how much of his (relatively recent)moderated rhetoric is purely for effect, and how much will translate into policy. If elected, Humalawill be constrained by the lack of a majority in the legislature, so any radical policy shifts wouldbe difficult.

Regional Trend: Brazil Charts a Course

This quarter will be the one to watch for the evolving foreign and domestic policies of BrazilianPresident Dilma Rousseff. Particularly important this quarter will be any movement Brazil makestoward formulating a strategic policy regarding China, Brazilʼs most important trading partner withwhich Brazil has an increasingly tense relationship as a result of rising Chinese exportscompeting with Brazilian domestic manufacturers. Some limited movement toward tougher traderules on a number of Chinese goods can be expected as Brazil seeks to protect domesticindustry from international competition. However, Brazil has no interest in alienating China, somajor strategic shifts are unlikely this quarter. Brazilʼs foreign policy overall will take a backseatthis quarter under the Rousseff administration as she focuses on economic management. Apending decision on which fighter jet Brazil will purchase will continue to be an issue in thesecond quarter, with France and the United States both lobbying for the contract. With the U.S.presidentʼs visit to Brazil out of the way and Rousseff settling on her overall policy strategy, wecould possibly see movement in the second quarter on the long-delayed decision.

Regional Trend: Political Alliances in Mexico

In Mexico, negotiations continue between the Revolutionary Democratic Party (PRD) and theNational Action Party (PAN) over the possibility of an alliance in Mexico state for the July 3gubernatorial election. It is unlikely either party could beat the Institutional Revolutionary Party(PRI) on its own, so an alliance would be beneficial, but the parties would need to agree on acandidate and a platform, which is no small feat. The PRD and the PAN will have to settle theirdifferences before the end of the quarter if the coalition candidate is to have time to campaignagainst the as-yet-undeclared PRI candidate. As unlikely as it is, if the PRD and the PAN cancome to an agreement in Mexico state, it could set them up for further cooperation ahead of the2012 presidential election, for which the PRI appears to be well-positioned.

Regional Trend: Persistent Cartel Violence

In the cartel war, Tamaulipas and Nuevo Leon states continue to be hotly contested territorybetween the Gulf cartel and Los Zetas, with the latter group most firmly entrenched in Monterreyand Nuevo Laredo. Mexican military and law enforcement have made inroads in the Zetaleadership structure, successfully capturing or killing eight mid- and upper-level leaders(including one of the original core group) in Nuevo Leon, Tamaulipas, Oaxaca and Quintana Roostates. Chihuahua, Guerrero, Sonora and Durango states all are seeing an increase in violenceas the Sinaloa Federation expands into the regional cartelsʼ conflicts. The military is fighting anuphill battle, with cartel leaders being replaced as quickly as they are captured.

Quarterly

Source URL: http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011

Links:[1] http://www.stratfor.com/forecast/20110107-annual-forecast-2011[2] http://www.stratfor.com/forecast/20110107-2010-annual-forecast-report-card[3] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#Introduction[4] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#Middle East[5] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#South Asia[6] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#East Asia[7] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#Former Soviet Union[8] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#Europe[9] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#Sub-Saharan Africa[10] http://www.stratfor.com/forecast/20110407-second-quarter-forecast-2011#Latin America[11] http://www.stratfor.com/analysis/20100215_special_coverage_us_withdrawal_iraq[12] http://www.stratfor.com/analysis/20110221-jasmine-protests-and-chinese-social-management[13] http://www.stratfor.com/analysis/20110114-tunisian-president-leaves-army-coup[14] http://www.stratfor.com/analysis/20110203-breakdown-egyptian-opposition-groups[15] http://www.stratfor.com/analysis/20110211-mubarak-gone-egypts-system-stays[16] http://www.stratfor.com/weekly/20110207-egypt-israel-and-strategic-reconsideration[17] http://www.stratfor.com/analysis/20110314-saudi-led-gcc-forces-moving-bahrain[18] http://www.stratfor.com/weekly/20110307-bahrain-and-battle-between-iran-and-saudi-arabia[19] http://www.stratfor.com/geopolitical_diary/20110314-history-repeats-itself-eastern-arabia[20] http://www.stratfor.com/analysis/20110318-friday-protests-and-iranian-influence-persian-gulf[21] http://www.stratfor.com/analysis/20110328-behind-easing-israeli-palestinian-tensions[22] http://www.stratfor.com/analysis/20110225-libyas-tribal-dynamics[23] http://www.stratfor.com/geopolitical_diary/20110303-turkeys-moment-reckoning[24] http://www.stratfor.com/analysis/20110318-yemen-crisis-special-report[25] http://www.stratfor.com/weekly/20110330-aqap-and-vacuum-authority-yemen[26] http://www.stratfor.com/weekly/20110216-threat-civil-unrest-pakistan-and-davis-case[27] javascript:launchPlayer('m5i0n8d2', 'http://www.youtube.com/watch?v=HxQcA6jkl_Q', 640, 360)[28] http://www.stratfor.com/analysis/20110208-another-interest-rate-hike-china[29] http://www.stratfor.com/analysis/20110131-chinas-peoples-bank-and-prudent-monetary-policy[30] http://www.stratfor.com/analysis/20110405-chinas-wrangling-over-price-controls[31] http://www.stratfor.com/analysis/20110405-china-security-memo-april-6-2011[32] http://www.stratfor.com/analysis/20110315-damage-japan-earthquake-and-tsunami[33] http://www.stratfor.com/analysis/20110325-political-aftermath-japan-earthquake[34] http://www.stratfor.com/analysis/20101220-north-koreas-restraint-and-offers[35] http://www.stratfor.com/forecast/20110107-annual-forecast-2011#Former Soviet Union[36] http://www.stratfor.com/analysis/20110321-russia-finds-opportunity-libyan-crisis[37] http://www.stratfor.com/analysis/20110309-us-russian-relations-biden-visits-moscow[38] http://www.stratfor.com/analysis/20110331-potential-flash-point-between-armenia-and-azerbaijan[39] http://www.stratfor.com/analysis/20110324-kazakhstans-succession-crisis[40] http://www.stratfor.com/forecast/20110107-annual-forecast-2011#Europe[41] http://www.stratfor.com/analysis/20100630_europe_state_banking_system[42] http://www.stratfor.com/analysis/20090514_germany_implementing_bad_bank_plan[43] http://www.stratfor.com/analysis/20101104_german_designs_europes_economic_future[44] http://www.stratfor.com/analysis/20110115-how-austere-are-european-austerity-measures[45] http://www.stratfor.com/analysis/20110324-eurozone-finances-inspiring-anti-establishment-sentiment

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