172696_stratfor - q2 2010 Forecast

8/12/2019 172696_stratfor - q2 2010 Forecast

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STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.com

SECOND QUARTER FORECAST

A p r i l 8 , 2 0 1 0

This analysis may not be forwarded or republished without express permission from STRATFOR.For permission, please submit a request [email protected].
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2010 STRATFOR 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1-512-744-4300 www.stratfor.com

Second Quarter Forecast2010

The second quarter of 2010 will be defined

by three global trends. The United Stateswill be looking for a new approach to Iranand pressing harder in its economic

disputes with China. Russia will push

forward confidently with its plans to re-establish a regional sphere of influence,and Europe will be busy fighting corrosion

at the foundations of its economic andpolitical unity.

STRATFORs annual forecast for 2010 addressed two primary trends: Russias expanding influence inits periphery, and the potential for a crisis to erupt over Irans nuclear program. Moreover, the diverserepercussions of 2009s global economic crisis stood at the top of our list of regional concerns. During

the first quarter, the Russian revival continued apace, but a series of events led the major globalpowers to retreat from confrontation with Iran. Meanwhile, the challenges facing Europe and Chinagrew to become global trends.

We begin with a plot twist in the Middle East. Three months ago, Israel seemed to have run out ofpatience with Irans attempts to become a nuclear-armed state, and the United States seemed broadly

in line with its ally on the need to either impose devastating sanctions to force Iran to change orconduct military strikes to set back the nuclear program. Now, however, with sanctions in tatters andintelligence holes making Washington unwilling to accept the risks of a preemptive attack, the

impending crisis has lost its immediacy and given way to diplomatic deferrals. This is not to say that

the Wests aggravation with Irans expanding influence and nuclear ambitions has dissipated. Rather,the United States has shown it has no stomach for risking a third Middle Eastern war, and Israel hasnoisily resigned itself to the reality, knowing that it cannot afford to further alienate its chief security

ally.

Meanwhile Iran sits in a position of strength, as it has seen the international powers postpone several

deadlines as well as dilute, delay and disagree on proposals for new sanctions. In the second quarterthe United States will work harder with its regional allies to encircle Iran, while making new diplomaticovertures to the Iranian leadership. Though Tehran ultimately wants the United States to extract itself

from the region, it recognizes that it has an advantage over Washington by virtue of its ability toinfluence conditions on the ground in Iraq and Afghanistan. In these matters, Iran will not be easilyconvinced to offer many concessions. The crisis with Iran is not over, but for now it appearsincreasingly likely that it will not be military in nature.

No such twist has prevented Russia from rebuilding influence in places once dominated by the Soviet

Union. First, Moscow eliminated commercial and economic barriers with Belarus and Kazakhstan.Then, Ukrainian elections formally brought a pro-Russian government into power, giving Moscowinfluence again over a stretch of land that is integral to a secure Russian state.

Thus Russia will press forward more confidently in consolidating influence in Kazakhstan, Belarus andUkraine, along with Georgia and other former Soviet states, while searching for ways to undercut

European and U.S. ties with the Baltics. Also, in the coming months, Russias diplomatic game with itsmost influential neighbors Germany, France, Poland and Turkey will become more important asRussia seeks to secure the tacit understandings necessary to pursue its interests elsewhere.

In Europe, the iteration of the financial crisis that STRATFOR predicted in our annual forecast hasgiven way to a crisis of political confidence that promises to have longer-term and further-reaching
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ramifications. The proposal to rescue Greece from debt default is a temporary solution, but it hasreduced the chances that financial collapse will occur in the second quarter. This means that other

Mediterranean states also clinging to flimsy rafts will not get sucked into a Grecian whirlpoolduring this quarter either.

A more troubling psychological challenge for the European Union has arisen as a result of the evident

lack of internal coherence in addressing Greeces troubles. In short, this experience gave every EUstate a hint of the self-interested struggles that will ignite should the union face greater tribulations

whether economic in nature, or arising from external security threats such as those posed by an

increasingly formidable Russia.

And so EU members have realized that the unions most recent governing treaty the Lisbon Treaty

though purportedly a means of bringing members closer, in truth only strengthens German andFrench leadership over the bloc. This is a bad thing for those member states averse to their leadership

or incapable of dealing with Russia alone. In the second quarter, while domestic economic and politicaltroubles will still tear at European states from within, the critical trend for the Continent will be

increasing dissent among member states as they try to frame Continental policy while grappling withthe implications of their own disunity.

As with Europe, Chinas struggle to cope with post-crisis economic conditions has become a globally

significant trend. Beijing would have plenty to worry about were its woes solely domestic: It is already

facing the dilemma of how to better control its massive stimulus efforts without causing an even moredestabilizing slowdown. But Beijings economic policies have attracted harsher criticism from foreign

countries that see China as operating at the expense of their own recoveries and have begun todemand change.

The worst of the news for Beijing is that the United States is foremost among these critics, as itseconomy is the most closely intertwined with Chinas and therefore its problems most plausibly

imputed to China not least because U.S. leaders no longer see the benefit in allowing a nearly $5

trillion economy to shirk international rules. Chinese and American leaders have several occasions inthe coming months to negotiate, but Washington has signaled that it is ready to get tougher if its

demands are not met, and Beijing cannot afford to appear weak or give too much ground. So beneaththe diplomacy the pressure will inevitably rise.

Global Trends

Global Trend: The Iranian Nuclear Issue

With Irans suspected pursuit of nuclear weapons driving security concerns in the Middle East,

STRATFOR forecast that the year 2010 will be about Israel attempting to force a conflict, the

Americans attempting to avoid it, the Iranians preparing for it and the Russians manipulating all sides

to make sure that a resolution to the standoff does not come too soon. While we clearly saw a crisisbuilding, a shift that we detected in the U.S.-Israeli track toward the latter end of the quarter has, inour eyes, lowered the probability of a military confrontation occurring in the Persian Gulf this year.

Irans skills in denial and deception, along with its extensive militant proxy network and ability towreak havoc in the Strait of Hormuzto send global energy prices soaring, appear to have convinced

Washington for now that the cost of a military campaign against Irans nuclear facilities is too great.When it came time to review the results of the war simulations and intelligence reassessments on

Irans nuclear program in the first part of the year, the result was a much more complex mission thanthe United States was willing to take on.

Lacking the military capability to act on its own against Iran, Israel has for now resigned itself to this

uncomfortable reality. The simple truth is that Israel needs the United States more than the United
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States needs Israel in the region. If the United States has put the brakes on the military pressurecampaign against Iran, there is not much Israel will be able to do about it this quarter. Efforts will be

made on both sides to ramp up intelligence collection on Iran and efforts at sanctions will be made(with little success), but the threat of war is currently subsiding.

For lack of better options, the U.S. administration will attempt toredefine its Iran problem.While

pursuing a containment strategy against Iran through Turkey and the Gulf Arab states, the UnitedStates may attempt another diplomatic outreach to Tehran. Between the United States trying to forge

regional power balances in Iraq and Afghanistan and Iran wanting U.S. troops off its doorstep, there is

no shortage of issues for the two sides to bring to the negotiating table. That said, there will be littlehiding the fact that the United States will be negotiating from a position of weakness, and with acloudy picture of who in Tehran is actually calling the shots. Iran can be expected to keep its guard up

and talk around Washingtons diplomatic overtures this is not the time for Tehran to be making real

concessions. Israel, meanwhile, will see its relationship with the United States come under furtherstrain as it watches its options on Iran narrow.

Global Trend: Diverging Europe

In our 2010 forecast, STRATFOR highlighted two major trends for Europe that are deeply intertwined:

the economic crisis and a new sense of disunity within the European Union. Thus far in 2010, Europesfocus has been on the economic situation particularly inGreece.

As the second quarter of the year begins, the Greek debt crisis continues, but disaster is no longerimminent. The bailout agreementthe European Union passed on March 25sets out harsh conditionsdrafted byGermany.In short, it is a life preserver Greece will think twice about reaching for. Greece

may be able to survive until the end of 2010 without asking for the bailout. In the long term, however,

poor demographics and a chronically uncompetitive economy could set Athens up for an economicdisaster that likely will spill over into the social and political realms. Greece will get a foretaste of thisin the second quarter, withmore strikes and potential violence,especially in the pressure cooker that

is Athens.

Europes second major trend for 2010 divergence is about to become very clear. Regardless of

the outcome for Greece,the manner in which Europe has handled the Greek crisiswill haveconsequences for the Continent as a whole and the European Union as a political entity.

In October 2009, Irish voters approved theLisbon Treaty,after initially rejecting it. The vote largelyreflected concerns in Ireland (mirrored in most of Europe at the time) that saying no to a stronger

and more efficient European Union which the treatypurportedly created would mean beingleftoutof the union and the eurozone.

Now, the mood could not be more different across the Continent. Scandinavian countries who

contemplated joining the European Union (Norway andIceland)or the eurozone (Denmark andSweden) are beginning to be glad they stayed out. The Club Med countries (Portugal, Greece, Spain

and Italy) are lamenting how the Germans have treated them.Germanyis tired of Club Meds historic

treatment of Berlin as a cash cow and the southerners economic inefficiencies. The Central andEastern Europeans (Poland, the Czech Republic, Hungary, the Baltic states, Romania and Bulgaria) are

wondering why nobody is paying attention to Russias resurgence on Europes doorstep and areconcerned that the Greek crisis will lead to stiffer eurozone membership criteria, thus delaying entryfor several Central and Eastern European states.

The Greek crisis has left Europe feeling less united than it was before the Lisbon Treatys narrowapproval. Peripheral member states are realizing that Lisbon does not make Europe any more united;

it onlygives Germany and France the toolsto increase their control of EU institutions. Furthermore,Berlins role in imposing harsh terms on Athens has left the rest of the union wondering where theacquiescent and compliant Germany that they remember went.
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The second quarter will be inherently unstable for Europe. First, the streets of European capitals willbecome embroiled in social angst as unions across the Continent protest budget austerity measures

and plans to cut government outlays. This will not be confined to the countries looking to implementausterity measures; France, Germany and the United Kingdom are already experiencingstrikesas

well. Upcoming elections in the Czech Republic (May), Hungary (April), Slovakia (June) and the UnitedKingdom (likely May) could also become sources of instability and possibly unrest.

Protectionism and nationalism likely will increase across the continent as economicgrowth remains

tepid.This will make it harder for European states to work together. Exacerbating the problem are

domestic challenges facing key European leaders: German Chancellor Angela Merkel has lostpopularity in Germany due to the crisis and is dealing with splits within her coalition; French PresidentNicolas Sarkozy lost key regional elections and is facing a brutal challenge from the unions over

proposed pension reforms; the United Kingdom is embroiled in a bitter election that will lock London

down for the entire quarter if not longer, and Spanish Prime Minister Jose Luis Rodriguez Zapatero islosing support as unemployment reaches 20 percent.

Greeces debt crisis and the accompanying disunity is likely to spill over to varying degrees intoseveral key policy areas that EU member states expect to begin handling, or at least debating, in the

second quarter. Issues on the table are the Common Agricultural Policy, a Franco-German proposal on

Europe-wide banking taxes, how to define Europes economic government and a new diplomaticcorps called for under Lisbon Treaty.

The other major European issue is how to handle aresurgent Russia.The Central and Eastern

Europeans could not getFrance and Germany to agreeon countering Russia before the crisis; suchagreement is even less likely now. If Europe continues ignoring Poland, Hungary, Romania and theBaltic states concerns about Russia, then Central and Eastern Europes economic interests (EU

membership) will begin to diverge from their political and security interests (a military alliance withthe United States).

The Greek debt crisis paralyzed Europe for four months. STRATFOR believes that the non-economicresults of the crisis will have far wider and deeper repercussions than the economic results, startingwith a far-reaching realization that the European Union is not the shield from either economic calamity

or a resurgent Russia it was once believed to be. In the second quarter, various EU members andnon-members will begin considering how to deal with (or exploit) this realization.

Global Trend: China vs. the United States

Chinas economic imbalances as it tries to manage its rapid,stimulus-driven growthare a major global

trend in 2010; not only do they dominate one of the worlds largest economies, but they also affectthe United States. In the second quarter of 2010, the economic standoff between China and the UnitedStates will rise to the level of a global trend.

Over the past year, China and the United States repeatedly have imposed duties and tariffs on each

others goods in response tosharpening trade disputesamid global economic troubles. But the

disagreement between Beijing and Washington runs deeper. For three decades the United States hasgranted China access to itsconsumer markets,enabling China to build up massive manufacturing

capacity and export revenues. The Chinese have enhanced competitiveness in the U.S. market notonly through their abundance of cheap labor, but also by pegging their currency, the yuan, to the U.S.

dollar. This policy comes at the expense of Chinas competitors including U.S. producers and thushas long been a source of tension that both sides have sought to manage in order to maintain theiroverall beneficial relationship.

Managing these tensions has become more difficult. The global economic crisis left China with massiveforeign exchange reserves from years oftrade surpluses,and China continues to grow rapidly.

Meanwhile, the United States is suffering from prolonged unemployment at nearly 10 percent and a
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weakened manufacturing sector. Hence, Washington has begun pressuring Beijing more aggressivelyto open its markets further to U.S. goods and remove the fixed currency advantage. China argues that

trade surpluses arise for other reasons and that too much appreciation of the yuan in too short a timewill cut deeply into the already thin profit margins of its criticalexport sector.Forcing such issues, the

Chinese say, risks ruining Chinas own attempts ateconomic reformand triggering a destabilizingslowdown that could hurt both countries and the global economy.

Thus the second quarter of 2010 is shaping up to be a critical juncture in the Sino-U.S. relationship.

Besides using its existing tools, the United States will intensify its pressure tactics. The U.S. Treasury

Department says it will delay a decision on whether to brand China a currency manipulator until thethird quarter, but this option remains in play, and U.S. legislators are also calling for retribution. Forits part, China is attempting to mitigate U.S. anger by calling attention to efforts to restructure its

economyand signaling that it will gradually resume appreciation and import more U.S. goods. Beijing

is also indicating greater willingness to work with Washington in other areas, such assanctions on Iranor restarting international talks with North Korea.

The countries leaders have several bilateral and multilateral meetings planned in the second quarter,so there are ample opportunities to make deals to avoid a major disruption in the relationship. But

U.S. President Barack Obama has already shown willingness toplay hardball with China.And as theNovember midterm elections approach, the top priority for voters is joblessness, which voters feel is

exacerbated by Chinas economic policies. Furthermore, the U.S. administration could benefit from

appearing tough on a major foreign policy issue. If the United States does not make bold moves thenit will expect Beijing to follow through on promised concessions, and will retain the option of hittingChina harder later in the year.

Global Trend: Russias Continued Resurgence

One of the dominant trends STRATFOR has followed for years and one of the primary issues in our

2010 annual forecast is Russias resurgence as a major power. The progress Russia has made along

its path to resurgence is the culmination of years of work to re-establish Moscows influence in theformer Soviet sphere.

Already this year, Russia has seen three key countries Ukraine, Kazakhstan and Belarus return tothe Russian fold. Russia formed acustoms union with Kazakhstan and Belarus,beginning the processof formally reintegrating the countries, and apro-Russian government returned to Kiev,officially

ending Ukraines pro-Western Orange Revolution. Russia has also continued laying the groundwork toexert more influence in other former Soviet states, like Armenia and Azerbaijan with Moscowcontinuing to be the hinge from which theTurkey-Armenia negotiations over normalizing relationsandtheArmenia-Azerbaijan talks over Nagorno-Karabakhswing.

Moscow still has some housecleaning to do in the second quarter in Ukraine, Kazakhstan and Belarus.

Government shakeups are taking place in Ukraine and Kazakhstan as the countries chart their pro-Russian courses. Belarus is more subdued and easier for Moscow to control. Russia will also bewatching in the second quarter for countermoves to its consolidation plans in countries that would be

supported by foreign powers, like the United States or the Europeans, though such moves are unlikely.

The United States has been too preoccupied by issues in the Middle East to interfere, and the

Europeans are mired in a financial crisis. Moscow feels confident that if either power begins focusingon Eurasia, the Kremlin has enough momentum to continue its reconsolidation plans.

With Ukraine, Belarus and Kazakhstan in its grasp, Moscow will start focusing on the next group of

countries on its shopping list: Georgia and the Baltic states of Latvia, Lithuania and Estonia. These

countries are all vehemently anti-Russian and will not be as easy to influence as the three major statesalready in the Russian fold. Ahead of the second quarter, Moscow was already focusing on Georgia,forging relationships with variousGeorgian opposition groups.Russia has also been formalizing its
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military hold on the Georgian secessionist regions of Abkhazia and South Ossetia, over which Russiafought Georgia in 2008.Moscow also will look for ways to profit from thepolitical chaos in Kyrgyzstan.

Russia does not have as many tools in the Baltic states which are NATO and EU members as ithas in Georgia. Also, Moscow knows that any aggressive actions in the Baltics will send Russia and

NATO meaning the United States into direct conflict. Russia must first roll back Western influence

in the Baltics before it can entrench its own a difficult task, and not one that the United States andits NATO allies will make any easier.

In the second quarter, Russia will also focus on its relationships with the Eurasian regionalheavyweights Germany, France, Poland and Turkey. Russian President Dmitri Medvedev will holdbilateral summits with leaders from each of these countries in the second quarter. Moscow knows that

for a Russian resurgence in the former Soviet sphere to succeed, the Kremlin must forgeunderstandings with these regional powers, which are capable of scuttling or at least greatlyobstructing Russias plans.

This focus on the Eurasian heavyweights, Georgia and the Baltics will not be wrapped up in the secondquarter; rather, it will be escalated and more sharply defined.

The Global Economy

The U.S. economy is indeed growing again, but it is weak growth. Two indicators STRATFOR uses to

evaluate the health of the U.S. economy remain in what we consider to be positive territory: growth in

retail sales (demand) remains consistently stronger than growth in business inventory (supply). Solong as that is the case, STRATFORbelieves that future employment trends

should be positive.

Furthermore, first time unemployment

claims our preferred indicator formeasuring employment trends arefalling while the Standard & Poors 500

our preferred indicator for determining

investor sentiment is rising. But whathas attracted our attention is that most

of these trends have lost a significant

amount of momentum in the firstquarter.

Until the U.S. economy strengthensappreciably and this must include

employment the global system faces

two problems. First, the United States isthe worlds largest importer; weak U.S.growth directly translates into weaker

global growth. Second, the U.S.government has some non-traditionaltools it can use to generate domestic

growth. Many of these can affect the

global picture most are protectionist.

At issue is that Japan, China and

Germany the worlds second-, third-and fourth-largest economies are
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attempting to export their way out of the recession. Yet none of them can and most are notseriously attempting to foster meaningful demand at home. With U.S. demand weak (and global

demand weaker), there is concern within the United States that other countries are not doing enoughto stimulate their own economies internal demand, leaving it up to the United States to drag the world

out of recession. The perceived effect of this on U.S. employment is roundly negative and is triggeringtrade tensions.

China in particular has been singled out

in Washington as part of the problem

not so much because China is notstimulating its economy, but because itsstimulus is exacerbating imbalances in its

economy that are detrimental to the

United States and other countries.Chinas policy for the past 18 months has

been to flood its system with credit beyond the usual level so that

exporters can continue to generateproducts even if there is no demand for

those products. Cash is being thrown at

domestic investment projects that arepoorly aligned to economic realities,creating overcapacity even with global

growth tepid at best. Moreover, Chinese stimulus-generated demand for industrial and infrastructuralexpansion is keeping raw material supply costs relatively high further reducing the chance ofrecovery elsewhere. These circumstances mean the second quarter will bubble with debate, and

potentially action, on Chinas economic policies. We will take particular interest in theongoing battlebetween Beijing and Washingtonon Chinas currency because it is directly related to Chinas efforts to

support exports and to U.S. political concerns about rising unemployment.

We have discussed Europes banking problems and the evolution of the Greece crisis at length, but in

the first quarter the two trends became deeply intertwined. The European strategy for supporting

government stimulus spending (which includes keeping Greece on life support) has been to allowbanks to take outnearly unlimited loans from the European Central Bank (ECB), most of which are

used to purchase government bonds. Banks demand for bonds allows governments to keep theireconomies on life support, while Europes troubled banks can make a guaranteed albeit very slim

profit serving as middlemen. This cannot continue forever; the past 20 years of Japanese economic

non-growth shows what happens when systems that have become accustomed to artificially cheapcredit can no longer be propped up. The ECB must rein in that credit at some point; in fact, it began

that process in December 2009 and likely will finish by the end of 2010. When it does, it will putconsiderable stress on the Greek economy, but also on Europesweak financial system,which has thusfar flown under the radar as the Greek debt crisis unraveled.
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Middle East

Regional Trend: Finding a MiddleEastern Balance

The United States is attempting to re-

establish a balance of power in the Middle

East. At the heart of this challenge lies

Iraq, where Iran will be focused thisquarter in keeping the political balancetilted in its favor. While Tehran faces

significant obstacles in trying to establish a

pro-Iranian government in Baghdad, it can prevent Iraq from emerging as a strong counterweight toIranian power. Iran will seek to strengthen its position through its Shiite allies in the formation of the

Iraqi government. The coalition negotiations remain in flux at the time of this writing, but the possiblesidelining of the Sunnis in thisnegotiating processcould escalate the level of violence in the country.

For the next quarter, the U.S. military presence in Iraq will continue to be Washingtons main check on

Iran, but the United States will also look for other possible means of counterbalancing Persian power.With the U.S.-Israeli relationship under strain, Washington will increasingly look to Turkey to fill thepower vacuum in the region.

Regional Trend: Turkeys Rise

U.S.-Turkish relations hit a diplomatic snag in the first part of the year over a resolution in the U.S.

Congress on the Armenian genocide issue, and while a number of sticking points remain betweenAnkara and Washington, there is enough mutual strategic interest on both sides to uphold their

relationship. Still, Turkey will continue to publicly play up its differences with the United States andIsrael to help burnish its credentials as a regional leader.

Turkey will continue to entrench itself in the Mesopotamian power struggle, but will be just as activethis quarter in promoting its soft power in other areas of the Middle East, the Balkans and CentralAsia. In the Caucasus, Turkey will backburner its attempt to form a rapprochement with Armenia,

giving Ankara some room to try to mend relations with its estranged ally, Azerbaijan while usingenergy cooperation as its primary tool to keep relations with Russia on an even keel. Turkeys internalpower struggle between a rising, Islamist-rooted Anatolian class and the traditional secularist elite willcontinue to intensify, but is unlikely to hobbleTurkeys plans abroad.

Regional Trend: Israel in Political Flux and a Palestinian Flare-Up

The next quarter will be a trying one for Israel. As pressure lets up enough to give Iran room to

breathe regarding its nuclear program, Israels helplessness to change the situation and dependency

on the United States will become ever more apparent. Unfulfilled Israeli demands on the Iranian

nuclear issue will threaten the stability of Israeli Prime Minister Benjamin Netanyahus already fragilecoalition. In trying to hold his Cabinet together, Netanyahu will have to balance between managing his

relationship with the United States and appeasing hard-liners at home. This will inevitably causefriction in the Israeli-Palestinian theater this quarter. While competing Palestinian factions attempt toexploit the strain in U.S.-Israeli relations by launching attacks, Netanyahus government will executeits own military response to the conflict to brandish its national security credentials at home. Such

moves will run the risk of increasing Israels diplomatic isolation and further strainingIsraelsrelationship with the United States.
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Regional Trend: Egypts Political Succession

Political uncertainty is rising in Egypt following President Hosni Mubaraks major surgery in Germany

during the first quarter. Arab political leaders tend to be quite resilient in their old age, and Mubarak isno exception, but with the 81-year-old leaders health in question, this quarter authorities will prepare

to carry out a succession plan. The plan is for the countrys intelligence chief, Omar Suleiman, to serve

for one presidential term before leaving the office to Hosni Mubaraks son, Gamal. Suleiman made anoath to Mubarak in 2003 that he would protect Gamals political future, and he appears to have the

militarys support in this regard. Mubaraks health will determine when this plan takes effect, but we

do not anticipate a major power struggle to ensue in the event of Mubaraks death. The state retainsthe tools to forcibly contain the main opposition group, the Muslim Brotherhood, should it attempt toexploit theimpending political transition.

South Asia

Regional Trend: Fighting inAfghanistan

Fighting season in Afghanistan will kick

into high gear this quarter as the UnitedStates continues to send troops into

theater and focuses counterterrorismoperations on southern Taliban strongholdsin Marjah and Kandahar. As the United

States fights with a heightened concernover collateral damage and civilian casualties, the Taliban will work around offensives which the United

States and International Security Assistance Force (ISAF) will announce publicly and well in advance,thus giving the insurgents more time to react. TheTalibanwill continue their classic guerrilla strategy

of declining direct combat and focusing instead on hit-and-run attacks and on building expertise inimprovised explosive devices in their attempt to wear down U.S. and ISAF forces. Tactical successes

and losses will be felt by both sides, but the success of the U.S. strategy will not measurable in themonths ahead.

While the military battles will be the main event, there is also a sideshow of negotiations that willattract some attention quarter as the United States attempts to crack the jihadist movement in

Afghanistan. The demands on both sides remain irreconcilable at this point, making any meaningfultraction in these negotiations unlikely for the foreseeable future.

Regional Trend: Pakistans Counterterrorism Efforts and a U.S. Balancing Act

Since the publication of STRATFORs annual forecast, Pakistan made some significant intelligence

breakthroughs in its efforts to chip away at the Pakistani Taliban network. This has allowed Pakistan towork out the necessary tribal alliances to expand its counterinsurgency operations into the volatile

northern tribal belt bordering Afghanistan, but does not preclude the potential for limited comebacks.

Pakistans progress in its counterterrorism efforts has allowed tensions between Islamabad andWashington to calm significantly. STRATFOR expects this detente to continue into the next quarter butface renewed strain as the United States demands more Pakistani cooperation in providing intelligenceon targets on the Afghan side of the border. Pakistan, feeling that its cooperation to date has been

sufficient, will in turn demand that the United States deepen its partnership with the Pakistani statethough political assurances, military aid and economic assistance and guarantees on limiting Indiaspresence in Afghanistan. Theeasing of U.S. pressure on Pakistanhas already contributed to a rise intensions between Washington and New Delhi as Indias fears of a Taliban political comeback in
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Afghanistan increase. The United States, unable to satisfy the demands of either Pakistan or its rivalIndia, will continue adifficult balancing act on the subcontinent.

East Asia

New Regional Trend: TensionsBetween Japan and the United States

A new trend in East Asia for the secondquarter is an escalation in disagreementsbetweenJapan and the United States.The

Democratic Party of Japan (DPJ) waselected in 2009 claiming it would make

Japan more independent from the UnitedStates. The first test of this pledge will

take place in the second quarter as Japanproposes alternatives to the existing plan to relocate the U.S. military base on Okinawa. Washington is

not inclined to renegotiate the deal, but is willing to allow limited alterations to maintain the

relationship. The disagreement will see diplomatic sparks fly, but neither the United States nor Japanwants to do anything to fundamentally damage the security alliance especially as both have a

common cause in dealing withChinas rise.The DPJ does not want to appear as if it is failing to keep

its pledge, especially as it faces acontinued economic crisisat home and elections looming in the thirdquarter.

Former Soviet Union

Regional Trend: Internal Instability

In the last days of the first quarter of

2010, a series of large-scale militantattacks occurred in Russia first in the

Moscow subway system, then in theCaucasus republic of Dagestan. This

escalation of attacks comes nearly oneyear after the Kremlin declared that it had

successfully completed its war in Chechnya

and announced plans to pull most of theRussian troops from the region at the end of winter. But these attacks have jeopardized the Kremlins

reputation of keeping the country safe. Going into the second quarter, the Kremlin will have to clampdown on certainNorthern Caucasus republicsranging from Dagestan to Ingushetia to Chechnya

something that can never be done easily or nicely. The escalated attacks in Russia also have RussianPrime Minister Vladimir Putin and President Dmitri Medvedev pinning blame on the Interior Ministry

and the Federal Security Service (FSB). These two entities are part of the same political clan and work

very closely together; the FSB has influence within the Interior Ministry, and the two cooperate onsecurity matters and investigations. The Interior Ministry was already in line for a political

housecleaning, but now the tightly linked organizations will see increased pressure to reorganize andeliminate the perceived dead weight. This will feed into the already tense and dangerousKremlin clanwars.
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Latin America

Regional Trend: Venezuelas Political

Crisis

STRATFOR forecast that political control

would be the issue for Venezuela in 2010.The survivability of Venezuelan President

Hugo Chavezs regime could come intoquestion toward the end of this quarter.Though he has led a resilient regime,

Chavez has few short-term options to

alleviate aworsening electricity crisisaffecting the country. Infrastructure that has been neglected foryears, an overreliance on hydropower and rampant corruption have all contributed to thecrisis,but ElNino-induced drought conditions are driving the electricity shortage.

The Chavez governments political fate lies in theGuri dam reservoir,which, along with other nearbyreservoirs, supplies nearly 70 percent of the countrys energy and whose water level is coming

dangerously close to its collapse zone of about 262 yards (240 meters) above sea level. If the waterlevel drops to this point, most of the dams turbines will have to be shut down and Venezuela couldlose roughly 50-60 percent of its daily power.

We are not meteorologists, and so cannot say whether Venezuela will receive the rainfall it needs toavert this crisis. But based on our studies of El Nino patterns, the historical behavior of the Caroni

River that feeds the dam and various mathematical models done by technical engineers who haveworked on the problem, we believe there is a reasonable chance that Venezuela could hit this crisispoint in the third month of the quarter.

Venezuela will come under considerable stress in the first part of the quarter as the government,

under Cuban guidance, turns to survival instincts. The lower the water level drops at Guri, the more

severe the government will become in imposing rationing. The government will spare Caracas and theoil-producing facilities from the harshest effects of the crisis for as long as it can. However, theVenezuelan interior will bear the brunt of the crisis, particularly in the Guayana highlands where heavy

industry is located. The potential shutdown of these industries will indicate the severity of thesituation, as will the more grave potential for rolling blackouts in Caracas. In such a scenario,transportation services could be shut down, communications would be cut off, refrigeration would fail,gas stations would be unable to pump fuel, daily productivity would plummet and crime would

skyrocket, creating a situation in which Chavez would likely have to turn to his Chavista militias forsecurity reinforcement. Such a move likely would lead to friction within the armed forces and furtherthreaten the stability of the regime.

As conditions deteriorate over the quarter, political challengers to Chavez are likely to emerge and

position themselves for a potential break within the regime ahead of September parliamentary

elections. The ruling elite will attempt to preempt such moves with more stringent crackdowns on themedia and political and student opposition to prevent these forces from coalescing into a unified,strategic threat. The government has strong capabilities in this regard, but increased repression could

lead to a public backlash at a time when many Venezuelan citizens are already facing difficulties infinding basic food staples on the shelves and crime is at record levels.

The worst-case scenario for Venezuela is not assured for this quarter (since so much depends on theweather). Nonetheless, the country is in for rougher times ahead, and a political crisis remains adistinct possibility.
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Regional Trend: Political Continuity in Colombia

Colombia will be keeping a close eye on its neighbor and rival, Venezuela, this quarter. Bogota does

not want to get involved in the Venezuelan fray, but it will maintain a strong line of defense along itsborder with Venezuela to guard against potential fallout from the electricity crisis. The Venezuelan

government, meanwhile, can use border tensions with Colombia in an attempt (albeit a weak one) todistract its own citizenry from the crisis at home.

Colombias main focus this quarter will be on its general elections, split between two rounds in late

May and June. As stated in STRATFORs annual forecast, the winner of this election is unlikely to steerthe country in a radically different direction from Colombian President Alvaro Uribes hard-line securityagenda and relatively investment-friendly policies. The countys main security threat, the

Revolutionary Armed Forces of Colombia, will make itself heard in the lead-up to these electionsthrough a combination of attacks and hostage releases, but will have difficulty influencing the electionseither way.

Regional Trend: Mexicos Cartel War

The first quarter of 2010 saw some significant shifts in thecartel conflict in Mexico.The most

significant was a split between longtime partners Los Zetas and the Gulf Cartel, which has createdanother conflict zone in the cities of Reynosa, Nuevo Laredo and Monterrey. The Gulf Cartel has sought

help from former rival cartels Sinaloa and La Familia Michoacana in the fight against Los Zetas forcontrol of the South Texas-Mexico drug trafficking corridor. The battle will continue into the secondquarter, causing increased violence in the Mexican northeast.

Another shift will develop this quarter in the U.S.-Mexican relationship. The idea of U.S. governmentpersonnel expanding operations in Mexico has long been a touchy issue for Mexicans, but the ever-increasing violence in the Mexican northeast is leading many Mexican civilians, politicians and security

personnel to reconsider U.S. involvement in counter-cartel operations. The assassinations of threepeople tied to the U.S. Consulate in Ciudad Juarez, Chihuahua state including two U.S. citizens atthe hands of the Los Aztecas gang, which has well-established links to the Juarez cartel, has sent a

message to Washington, intentionally or not, that U.S. government personnel are not immune fromthe Mexican cartels. The potential for this to develop into a trend of cartel attacks against U.S.diplomatic targets will drive Washingtons considerations in expanding its participation in this war.

Though the debate over expanded U.S. counter-cartel operations in Mexico will intensify this quarter,we do not expect the debate to manifest into a significant shift in policy until later.

Sub-Saharan Africa

Regional Trend: South Africas

Internal Focus

With the leadership transfer in South Africa

complete, 2010 will see the country begin

its resurgence as a dominant regionalpower, much to its neighbor Angolaschagrin. Thecompetition between Angola

and South Africais just starting in areas

ranging from economics to consolidatinginfluence over regional players likeZimbabwe.
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But in the second quarter, South Africas focus and agenda will be sidelined by a major event: theWorld Cup soccer tournament, which will take place in South Africa in June and July. Pretoria has two

critical concerns as it prepares to take the global stage:securityandenergy.These concerns couldlead the state to conduct massive consolidations in its security apparatus and the electricity sector,though these would not be completed in the second quarter.

The World Cup presents serious security issues, as the sudden influx of hundreds of thousands ofvisitors from all over the world runs up against South Africas already chronic crime problems. The

potential for a militant attack does not make things any easier for Pretoria, which is terrified of being

embarrassed on the world stage. South African President Jacob Zuma, who will have had a year ofexperience in office by the time of the opening whistle, will be relying on the countrys securityapparatuses to prove that Pretoria has sufficient control over the security environment during thegames.

There is also the possibility of a power shortage in the country at a time of considerably increaseddemand due to the influx of tourists for the World Cup. The government has struggled to finance

expansion plans in the energy sector since serious problems were first exposed with a series ofblackouts in 2008. The government has hinted that its citizens should consider reducing their

electricity consumption during the World Cup to ensure that there is enough to go around a tall

order that could spark a public backlash if Pretoria does not tread lightly. Meanwhile, the state energyfirm will continue to campaign for significant increases in electricity tariffs so that it can stay solvent

and ensure uninterrupted energy supplies in the years ahead.

New Regional Trend: Increased Niger Delta Militant Activity

In the first quarter of 2010, the Nigerian militant group Movement for the Emancipation of the Niger

Delta (MEND) ended itscease-firewith the government. Since then, the group has only carried outone attack.However, MEND has publicized its plans to increase the tempo of attacks in the secondquarter. Not to be outdone by MEND, other militant groups in the Delta specifically the Niger Delta

Peoples Volunteer Force,which is attempting a comeback after falling quiet for some time, and theJoint Revolutionary Council likely will increase the tempo of their activities in turn.

Starting in the second quarter, politics will spur the uptick in attacks as Nigeria begins to prepare inearnest for national elections scheduled for 2011 (although they could be held in late 2010). Militantgroups will aim to secure votes to support their benefactors agendas and to line their own pockets, as

is the norm in Nigeria, where violence tends to intensify during campaign season. The second quarterwill witness the start of this cyclical phenomenon as national elections approach.
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172696_stratfor - q2 2010 Forecast