1417 stratfor 2007 annual forecast

7/28/2019 1417 STRATFOR 2007 Annual Forecast

1/58

2 0 0 7 A n n u a l F o r e c a s t :T i m e t o L o o k I n w a r d


2/58

ii

J a n u a r y 2 0

trategic Forecasting, Inc. 700 Lavaca Street, Suite 900 Austin, TX 78701 Tel: 1.877.9STRAT4 www.stratfo

2 0 0 7 A n n u a l F o r e c a s t2 0 0 7 A n n u a l F o r e c a s t : Ti m e t o L o o k I n w a r d . . . . . . . . . . . . . . . . . . . . . . . . 1

M i d d l e E a s t : P i v o t i n g o n D e v e l o p m e n t s

B e t w e e n Wa s h i n g t o n a n d Te h r a n . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5

E a s t A s i a : D o m e s t i c P o l i t i c s C o m e t o t h e F or e . . . . . . . . . . . . . . . . . . . 1 4

F o r m e r S o v i e t U n i o n : T h e K r e m l i n G a t h e r s S t r e n g t h . . . . . . . . . . 21

E u r o p e : C h a n g i n g o f t h e G u a r d . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 7

S o u t h A s i a : P a k i s t a n i P o l i t i c s i n t h e S p o t l i g h t . . . . . . . . . . . . . . . . . 3 2

L a t i n A m e r i c a : A Ye a r o f I n t r o s p e c t i o n . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 7

A f r i c a : A t t r a c t i n g O u t s i d e I n t e r e s t ,B u t C o n f l i c t s C o n t i n u e . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 3

G l o b a l E c o n o m y : A S h o r t U . S . S l o w d o w n ,A P r o l o n g e d C h i n e s e P r o b l e m . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 8

A b o u t S t r at f or. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 5

C o n t a c t S t r a t f o r . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 6

Ta b l e o f C o n t e n t


3/58

1

J a n u a r y 2 0


2 0 0 7 A n n u a l F o r e c a s tT i m e t o L o o k I n wa r

2 0 0 7 A n n u a l F o r e c a s t : T i m e t o L o o k I n w a r d

In 2006, the U.S.-jihadist war appeared to reduce itself to the scope of Iraqand to be transformed into a U.S.-Iranian confrontation. Hopes of a political

settlement blew apart in the middle of the year, focusing global attention

on the outcome in Iraq. But, contrary to the self-indulgent myth, appearances

are not reality. The reality is that Iraq is not synonymous with the war, and

the U.S.-jihadist war is not the most important thing going on in the world.

In 2006, the Russians began aggressively transforming the face of Eurasia,

moving to reclaim the sphere of influence they lost in the 1990s. And China

started to deal with its severe financial problems chiefly, by avoiding the

consequences. It let the economy roar ahead, failing to bring it under control

and thereby buying time while it increased the power of the Communist Party

and the security apparatus, making sure that whatever fallout there

is will not endanger the regime. In 2007, Russia and China certainly will rank

as least as high in importance as the U.S. conflicts in the Muslim world.

Indeed, these developments will force the United States to reconsider just

how many resources it can afford to devote to the jihadist war when faced

with an increasingly dangerous world filled with great powers, if not

superpowers.

In 2007, Russia and China wi ll rank at leas t as high in importance

as the U.S. conflicts in the Muslim world.

The year 2006 ended with U.S. President George W. Bush trying to recoup

in Iraq. With the Iranians blocking the emergence of a coalition government

in Baghdad, it became clear that the Iranians expected the United States

to fail in Iraq. Indeed, following the U.S. elections in November, most reasonable

people expected the United States to begin withdrawing forces. If that were

the case, the United States would have no ability to influence events in Iraq.

Bush chose to confound expectations by actually increasing the number

of troops. The term surge is a misnomer. Still, it was not what was expected,

and Bushs hope is that this strategy will cause all parties to the warto reconsider their comfortable assumptions about the United States in Iraq.

In 2007, we will see whether the strategy succeeds. The fact is that the

United States cannot simply withdraw forces from Iraq, as that would leave

Iran the dominant power in the region. That is an unacceptable outcome


4/58

2

J a n u a r y 2 0


for the United States, and for Saudi Arabia and other Persian Gulf states.

However, an increase of about 20,000 troops will not provide the resources

needed for a military solution. At the same time, the Iranians are risking much

too. If they overplay their hand, they know that the United States has bothresources and limits. The United States is blocking Iranian ambitions as much

as Iran is blocking American ambitions. As 2007 unfolds, this will open new

possibilities for political arrangements. We would not be surprised to see

some moves, however tentative, toward a political settlement in 2007. This

war will not end in victory for anyone. That is the basis of all negotiations.

This will raise the broader question of al Qaeda. The situation in Afghanistan

has deteriorated dramatically. As we have always argued, the Taliban

retreated from the cities, but they never were defeated. Now they are back.

The Soviets failed to defeat the Afghans with 300,000 troops and an endlesssupply of ruthlessness. The United States and its allies will not succeed with

a small fraction of that number. The war against jihadists has now spread

to Somalia and elsewhere. Iraq is not the whole of the war by any means,

and in 2007 we expect to be hearing a great deal more about problems

military and otherwise in the rest of the Muslim world, from the Atlantic

to the Pacific.

In Iraq, the United States is blocking Iranian ambitions as much

as Iran is blocking American ambitions. As 2007 unfolds, this will

open new possibilities for political arrangements. This war will notend in victory for anyone. That is the basis of all negotiations.

Meanwhile, the weakness of the Bush administration clearly is not ending.

Bush seems to be acting decisively, until one considers how small his room for

maneuver actually is. These things happen periodically in the United States.

Presidents Nixon, Johnson, Truman all ended their years in office unable

to wield power. The United States always recovers from this. Nevertheless,

such cycles in the presidency create opportunities for other powers to act.

Whenever the worlds leading power moves toward political paralysis, others

become much more aggressive. We see this and will continue to see this

in places from Venezuela to Asia. But the most important actions will be taken

by the great powers, Russia and China.



5/58


6/58

4

J a n u a r y 2 0


reserves but then so did Japan, South Korea and Taiwan. Those reserves

historically have not stabilized Asian banking systems when the consequences

of undisciplined lending come home to roost. Chinese enterprises have used

exports as did Japan and South Korea and Taiwan to maintain cashflow to pay loans. But surging profitless exports merely exacerbates the

problem. The Chinese government tried to stop the runaway train in 2006;

it failed to do so. Westerners have again confused high growth rates with

economic health, as they did with Japan and East Asia. But where rates

of return on capital are extremely low or even negative, high growth rates

are a symptom of disease.

Chinas financial system already has changed dramatically from the way

it was a few years ago. Internal lending and financing patterns have shifted,

and foreign direct investment excluding money being recycled by theChinese has declined substantially. Many deals that were launched with

high expectations five years ago are facing substantial problems or failure.

But the most important changes in China can be seen in its politics. The

Communist Party chief in Shanghai and hundreds of his allies have been

arrested for corruption. Incidents of resistance to land seizures have increased,

bringing with them violence and arrests. The Party has reasserted itself

as the master of the state, and the Chinese security services have increased

their intrusiveness and vigilance. In China, putting off the reckoning as long

as possible and controlling the social and political consequences as efficiently

as possible are the orders of the day. Beijing is trying to regain control of the

economy but it is more likely to do so through political power than througheconomic processes.

Whenever the worlds leading power moves toward political

paralysi s, others become much more aggressive . We see this and wi ll

continue to see this in places from Venezuela to Asia. But the most

important actions will be taken by the great powers, Russia and

China.

For Westerners, the question on China is, when will it crash? For the Chinese,the question is, how do you save the Party apparatus in the face of enormous

economic and social stress? It should be recalled that Japan did not just fall

apart one day. It experienced an enormous growth surge, followed

by a managed decline of growth in which the pain was distributed economically.



7/58

5

J a n u a r y 2 0


For China, the problem is the failure to slow growth. This failure has told the

leadership that they need to increase the power of the state, and of the

Party over the state. In a hundred ways, that is happening.

At the same time, China is becoming more insecure about its geopolitical

position. Issues ranging from trade disputes to Taiwan are being exacerbated

by the insecurity that clearly is being felt by Beijing. The regime sees the

United States as a threat to its security over the long term, and is taking steps

to assert itself against the United States. Chinas lasers hit U.S. satellites last

year as a demonstration of prowess, and a Chinese submarine penetrated

the perimeter of a U.S. carrier battle group. China is not about to undertake

military adventures in 2007, but it also is not prepared to be a passive

onlooker in the Pacific. There will be more friction.

The United States, Russia and China are the active great powers. The Europeans

and Japan remain largely passive and reactive. They will not be shaping the

global environment in 2007. Latin America will churn and shift, but there

is no decisive event coming there. Africa remains what it has been. Thus,

2007 will be a year for great powers and for that matter, for those who

would challenge great powers, particularly the United States.

M i d d l e E a s t : P i v o t i n g o n D e v e l o p m e n t sB e t w e e n W a s h i n g t o n a n d T e h r a n

Our 2006 forecast said that the United States would succeed in creating

a political solution in Baghdad that would allow for a drawdown in the Sunni

insurgency and the implementation of a U.S. exit strategy from Iraq.

For much of the year, this forecast held true: In June 2006, Abu Musab

al-Zarqawi was killed in an airstrike followed by the complete formation

of the Iraqi government and an announcement by the United States that

it would reduce its force in Iraq by two brigades. Al-Zarqawis death

signaled a commitment from the Sunni bloc to the political process, and it

was then up to the Shiite bloc to reciprocate.

However, we made a critical error in reading Irans intentions at this point.The Iranians saw an opportunity to use their militant and political assets

in Iraq to delay a political resolution through a major escalation in Sunni-

Shiite sectarian violence. As a result, the United States was buried deeper



8/58

6

J a n u a r y 2 0


in Iraq, and Iran was able to strengthen its negotiating position substantially.

The Iranian strategy involved activating Hezbollah, which manifested in the

summer war between Hezbollah and Israel that left Israel politically and

militarily paralyzed. Contrary to our prediction that the general trend for theMiddle East would be toward political accommodation, the region witnessed

a number of flare-ups that were largely attributed to the Iranian calculus

in consolidating its gains in Iraq.

We were correct, however, in forecasting that the Iranian nuclear issue would

make its way to the U.N. Security Council, but no substantive punitive measures

would be taken against Iran. In the Israeli-Palestinian arena, we correctly

forecast that Hamas would emerge as a major player on the Palestinian

political scene in the wake of the parliamentary elections in January, and that

this would lead to major internal upheaval within the Palestinian territories.However, despite the gains it made in the elections, Hamas was unable

to assume control of the security forces as we anticipated. We were right

in saying that the Kadima Party in Israel would win the March elections and

a center-left coalition would emerge, but would not be able to make

significant headway toward unilateral disengagement from the Palestinian

territories.

The United States is at a critical juncture: It no longer can afford

to dedicate U.S. troops to an unattainablemission of securing the

country solely through military force.

We also anticipated that Syrian President Bashar al Assad would be able

to keep his regime intact despite the blowback incurred from the assassination

of former Lebanese Prime Minister Rafik al-Hariri, and that fledgling militant

Islamist movements in Lebanon would make their presence known in the

Levant, but would not be able to ignite sustainable insurgencies. Regarding

the al Qaeda movement, we accurately said the group would further devolve

into local insurgencies, though the group did not end up losing its grip on Iraq

as we anticipated.

The U.S.-Iranian standoff over the fate of Iraq will have a profound impact

on the course of geopolitical events in 2007. After the 2003 U.S. invasion

of Iraq, Iran seized the opportunity to assert itself as the regional kingmaker

while the United States became increasingly paralyzed in Iraq. The United

States now finds itself at a critical juncture: It no longer can afford to stay the



9/58

7

J a n u a r y 2 0


course in Iraq and dedicate U.S. troops to an unattainable mission of securing

the country solely through military force. As advocated by the Baker-Hamilton

report, the time has come for the United States and Iran to stop giving each

other the silent treatment and work toward a comprehensive settlement forIraq.

But the United States is still far from its desired negotiating position, and thus

will continue to shy away from the Baker-Hamilton reports recommendations

until it can level the playing field against Iran. Before Washington moves

forward on the diplomatic front, it will need to disprove the perception that

the United States has been permanently marginalized in Iraq and ultimately

will have to withdraw its forces something that would leave Iran to pick

up the pieces and project Shiite influence into the heart of the Arab world.

This perception of marginalization is what has driven heightening Sunniconcerns that United States no longer will be the security guarantor against

an empowered Shiite bloc, led by Iran.

To shatter these expectations and demonstrate that the United States is still

very much in the game, U.S. President George W. Bush announced Jan. 10

a strategy to surge U.S. troops in Iraq. The increase will total 21,500

troops, with a peak of 17,500 in Baghdad and another 4,000 in Anbar

province. Ultimately, this looks unlikely even to bring the total level of U.S.

forces to their peak strength of 160,000 the number of troops that were

in Iraq in November and December 2005, in the buildup to the general

elections Dec. 15. It is likely to be accompanied by a shift in tactics to focusmore specifically on counterinsurgency operations.

Without stability in Baghdad, there can be no Iraqi state.

The forces will certainly be useful assisting with security inside Baghdad

and leaving units that would otherwise be shifted to the capital available

to confront issues in their respective areas of responsibility. However, in and

of itself, this new deployment will be insufficient to turn the tide in Iraq.

Operation Together Forward the failed attempt after Abu Musab

al-Zarqawis death to use a small surge in troop levels in Baghdad to imposesecurity there is a case in point. Together Forward was essentially the U.S.

militarys last, best effort to secure Baghdad with the existing force structure.

Baghdad remains the key. Without stability there, there can be no Iraqi state.

But the proposed surge of 21,500 troops without a new, concerted

diplomatic effort is unlikely to succeed in effecting a political resolution

in Baghdad.



10/58

8

J a n u a r y 2 0


However, there is a key psychological element to this strategy. The United

States will spend the coming months taking an aggressive stance against

Iranian operations in Iraq, including additional raids on Iranian diplomatic

offices and arrests of Iranian officials in the country who are suspectedof orchestrating attacks against U.S. and Iraqi forces. The U.S. military will

be posturing to dispel the Iranian perception that the battleground will

remain within Iraqs borders. The United States could also step up covert

efforts to ramp up the militant activities of Irans indigenous separatist

groups, such as the Ahvazi Arabs in the oil-rich province of Khuzestan

in western Iran. Coinciding with U.S. moves, Israel will accelerate its own

psychological warfare campaign, using a variety of leaks and denials

to heavily publicize Israeli military plans to strike Iranian nuclear sites.

By upping the ante against Iran, the United States is placing a critical bet

that the Iranians will reconsider their Iraq strategy and come to the negotiatingtable rather than risk a serious miscalculation.

Iran wi ll push it s nuclear agenda for ward, and the U.N. Securi ty

Council will be unable to pressure Tehran into curtailing its

nuclear program.

To go along with the troop surge, the United States will focus on rearranging

the Iraqi Cabinet to try to create a stronger, more functional government

in Baghdad. This will involve sidelining allies of Shiite rebel leader Muqtada

al-Sadr and bringing in a stronger Sunni presence, which will undoubtedlybe a complicated and messy affair. Iraqi Prime Minister Nouri al-Maliki also

could resign in as little as four months, triggering a struggle for power and

a substantial flare-up in intra-Shiite frictions over his replacement. By the

years end, Iraqs largest and most influential Shiite party, the Supreme

Council for Islamic Revolution in Iraq, might be better able to solidify its

position in the government.

Iraq is unlikely to split up into federal zones in the coming year, but neither

will it behave as a coherent state entity. Violence will escalate on all sides:

Shiite, Sunni, jihadist and even Kurdish, with the Sunni-Kurdish fault line

in northern Iraq becoming active toward the end of the year, as the Kirkuk

referendum issue approaches.

For its part, Iran has been keen to bring the Americans to the negotiating

table on its terms. It wields the ability, through militants, to manipulate the

security situation in Iraq and thus to keep an effective government from



11/58

9

J a n u a r y 2 0


taking power in Baghdad, but it lacks the means to impose a government

of its own creation there. Tehran will focus this year on increasing the political

and military costs to the United States of remaining in Iraq by lending

more support to militants there, including Shiite gunmen and segments of theSunni insurgency but ultimately, given the limitations and uncertainties on

both sides, it is possible that a political settlement of sorts, however weak and

tenuous, will be forged in 2007.

Iran will also use this year to push its nuclear agenda forward. The U.N. Security

Council will be unable to pressure Tehran into curtailing its nuclear program.

Iran will use the U.S. distraction in Iraq to move closer to its objective

of becoming a full-fledged nuclear power, which will in turn strengthen

Tehrans bargaining position on Iraq and expand its influence in the region.

The United States and Israel are militarily occupied by Iraq and Hezbollah,

respectively. The logic behind Irans strategy is to use this window of opportunity

to advance its nuclear program to the point where a nuclear Iran will have

to be accepted as part of any deal the United States wants on Iraq.

A major shake-up in the Iranian regime i s l ikely, and i t could upset

Irans calculus in dealing wi th the United States on Iraq.

All the pieces might appear to be falling into place for Iran, but a major

shake-up in the Iranian regime is likely to happen this year, and it could upset

Irans calculus in dealing with the United States on Iraq. Iranian Supreme

Leader Ayatollah Ali Khamenei is terminally ill with cancer and could die

this year. His death will send a shockwave through the Iranian public, which

will come to doubt the Iranian governments ability to navigate the country

through this critical period. There will not, however, be a complete breakdown

of the Iranian political system. There are mechanisms in place to ensure the

leadership transition goes relatively smoothly.

While his health further deteriorates, Khamenei will likely position former

Iranian President Ali Akbar Hashemi Rafsanjani to lead the country. Rafsanjani

is believed to be committed to Khameneis vision for Iraq and the ascendanceof a nuclear-powered Iran, but he also is known for his pragmatic leanings

and ability to negotiate more easily with the United States. Rumors are also

circulating that Iranian President Mahmoud Ahmadinejads days could also

be numbered, and that Khamenei will make the arrangements this year



12/58

10

J a n u a r y 2 0


to remove the firebrand president from his post. Khameneis health will likely

dictate whether Rafsanjani receives the position as supreme leader or president

before the end of the year.

The United States will keep a close eye on any potential shake-ups in Tehran

to decide how to proceed in devising a diplomatic strategy. The questions

surrounding the Iranian leadership will ensure that 2007 will largely be a

waiting game over the fate of Iraq.

Israel will make a big show of the perception that its patience is rapidly

wearing thin as Irans nuclear ambitions develop into reality. Israels focus

for this year will be on pulling itself back together militarily and politically

following its defeat in the 2006 summer war against Hezbollah. Israel is still

unlikely to follow through with threats to launch pre-emptive strikes againstIranian nuclear facilities this year. Doing so unilaterally would only further

compromise the U.S. position in Iraq once Iran unleashes its militant proxies

in the region. Instead, Israels focus will turn toward Hezbollah. Iran made

it clear during the summer war that it will use Hezbollah as a lever in negotiations

over Iraq. Israel badly wishes to eliminate this lever, particularly since Israel

has a pressing need to create conditions under which it could launch

a pre-emptive strike against Iranian nuclear sites. Israels strategy to contain

Irans nuclear ambitions begins with the crippling of Hezbollahs militant arm.

This rationale likely factored into Israels decision to go forth with a full-scale

incursion into Lebanon this past summer, though the results surely defied

Israels expectations.

Israel is likely to revisit its objective of crushing Hezbollah in the summer

of 2007, and has already begun to justify a coming military escalation

in Lebanon through public declarations that Hezbollah and/or Syria will be

the one to instigate the conflict. Who ends up igniting the war is unimportant.

The big question for this year will be whether Israel can develop the capability

to root out Hezbollah forces in their strongholds in the Bekaa Valley. A good

deal of restructuring will have to take place first, beginning with former Is-

raeli Prime Minister Ehud Baraks return to the political scene.

Israel could move indirectly to destabilize Hezbollah in Lebanon ahead

of a military confrontation. Hezbollah is currently brimming with confidence,

but it also must be careful to preserve its legitimacy. By provoking sectarian

violence in Lebanon, Israel could pit Hezbollah fighters against fellow Lebanese,

which would wear down Hezbollahs military forces and tarnish its reputation



13/58

11

J a n u a r y 2 0


as a nationalist movement, making the organization more vulnerable to an

Israeli onslaught. The Israeli Mossad could also be engaged in attempts this

year to eliminate elements of Hezbollahs core leadership to further

destabilize the party.

Though Syria will be busy building up weapons acquisitions from its defense

partners in Moscow, the Syrian regime will be careful to avoid provoking

a major military conflict with Israel. In elections slated for March, Syrian

President Bashar al Assad will be re-elected by a wide margin, and

no opposition forces will be strong enough to challenge the al Assad regime

this year. Though Syria will keep the window open for talks with the United

States, it will continue with its agenda to re-consolidate influence in Lebanon,

which involves political intimidation frequently in the form of assassinations.

The Bush administration is unlikely to make any major overtures to Syria thiscoming year, knowing that Damascus falls well below Tehran in its ability

to wield any real influence in Iraq. Syria will be emboldened through its

alliance with Iran and could instigate a low-level insurgency in the Golan

Heights through a shadowy group of militant actors on the regimes payroll,

but will play its cards carefully for fear of inviting Israeli airstrikes on its own

soil.

While consolidating its power, Hezbollah will focus intently on

preparing for a mi li tary confrontat ion wi th Israel .

Lebanon will become an intense battlefield for Sunni-Shiite influence, mainly

played out between the Saudis on one side and the Syrians and Iranians

on the other. The expiration of Lebanons lame-duck President Emile Lahouds

term in office will come in September and will be preceded by intense

political jockeying between Lebanons rival factions over his replacement.

In the end, the next president will likely be a friend to the Syrians. Hezbollah

will be able to expand its influence in the government by forcibly increasing

the number of seats that it and its allies hold in the Lebanese Cabinet. With

veto power, Hezbollah will be able to block any major legislation that harms

Syrian, Iranian or Hezbollah interests, including disarmament of Hezbollahs

militant arm or any punitive measures against the Syrian regime for theFebruary 2005 assassination of former Lebanese Prime Minister Rafik

al-Hariri. While consolidating its political power, Hezbollah will intently focus

on preparing for a military confrontation with Israel.



14/58

12

J a n u a r y 2 0


The Sunni Arab reaction to a rising Iran will intensify in the coming year.

Though the Sunni Arab states are highly dependent on the United States

to ensure their national security, they will make it clear that they are not

going to sit idle while the United States fumbles around in Iraq. The Arabstates, particularly Saudi Arabia and Egypt, will increase pressure on the

Americans to act by strengthening the Sunni insurgency in Iraq and by

showcasing plans to develop civilian nuclear programs to counter Iran.

The sudden departure of Saudi Ambassador to the United States Prince Turki

al-Faisal brought to light rifts within the Saudi regime over how to deal with

Irans expansion at the expense of the U.S. military position in the region.

Even though the kingdom has recently enacted a succession law to oversee

the transfer of power, tensions over the Iraq situation could exacerbate

matters. Moreover, Saudi King Abdullah has sought to bring in people fromoutside the royal family to fill key positions within the foreign policy establishment,

which will further complicate these tensions.

Initially, King Abdullah chose advisers and strategists such as Adel al-Jubeir

and Nawaf Obaid a new crop of young, educated Saudis selected for

their expertise rather than members of the royal family. Although

technocrats long ago replaced royal figures in the kingdoms oil and

economic sector, it seems the current king plans to gradually replace royals

with technocrats in the foreign policy arena. An example of this was the

appointment of al-Jubeir as Riyadhs ambassador to Washington after Prince

Turki abruptly resigned.

Egypts poli tical system is in a period of uncertaint y, since it is

dependent on the fate of aging President Hosni Mubarak.

A Cabinet reshuffle could result in new oil and foreign ministers. While the

Oil Ministry will continue to be managed by a technocrat, the Foreign

Ministry portfolio would likely remain in the hands of the royal family.

Despite disagreements within the top ruling circles on how to deal with

an assertive Iran and the rise of the Shia in the region, it is unlikely that the

key players within the House of Saud will allow these disagreements to leadto instability within the system at least not while the sons of Abdul Aziz,

the founder of modern Saudi Arabia, remain firmly in control of the reins

of power.



15/58

13

J a n u a r y 2 0


Egypts political system has also entered a period of uncertainty, as President

Hosni Mubarak given his advanced age and hence deteriorating health

could either die or become incapacitated during the course of the next year.

Mubaraks absence would have a destabilizing effect on the countrys politicalsystem, as questions would arise over his potential successors ability

to govern as effectively. Mubaraks probable replacement will be Omar

Suleiman, the countrys intelligence chief. The stage will likely be set for

Suleiman this year when Mubarak nominates him as vice president. The

uncertainty surrounding Mubaraks fate has developed into a key issue

as Cairo is under domestic and, to a lesser extent, international pressure

to effect political reforms. The government could conduct a referendum

on the constitution and replace the emergency laws that have been in force

since 1981 as a means to sustain its hold on power and counter the rise

of the Muslim Brotherhood, which is the largest opposition group in the country.

The devolution of al Qaeda will continue, as the movement struggles

to carry out a major attack outside its main theaters of operation in

Iraq, Afghanistan and Pakistan .

On the Israeli-Palestinian front, Hamas and Fatah will continue to struggle

over how to create a power-sharing agreement in the government. As long

as Hamas can continue to be bankrolled by the Iranians and the Gulf Arab

states, the party can avoid making any serious concessions to Fatah in reshuffling

the Cabinet. Palestinian National Authority (PNA) President MahmoudAbbas will not resort to calling for early elections unless he can be assured

that Hamas would be marginalized in the polls an unlikely prospect for

the near future. The stalemate in the Palestinian territories will lead Hamas

leadership to make gestures with heavy caveats toward recognizing Israel,

though Israel will not take the bait. The Israeli government will work to ensure

that Hamas and Fatah are prevented from coming together in an agreement;

while Israel is sorting out its own issues at home, it will much prefer to have

the Palestinians fighting each other than focusing their attention on attacking

Israel. The impasse in the territories will prevent the Israelis and the Palestinians

from engaging in any serious final-status negotiations this year.

Turkey will have presidential elections in May and parliamentary elections

in November. Barring a major domestic crisis, the military is unlikely to force

early parliamentary elections to prevent the ruling Islamist-grounded Justice

and Development Party (AKP) from gaining the presidency, though the AKP



16/58

14

J a n u a r y 2 0


could see its parliamentary majority weaken. Turkeys continued resistance

to the European Unions demands on Cyprus will ensure that EU accession

talks will remain stalled this year. Turkeys withering EU aspirations will lead

the country to turn its attention more toward its Arab backyard, where Iraqsworsening situation becomes a direct concern for Ankara. Turkey will do its

best to prevent U.S. forces from redeploying to northern Iraq. For Turkey,

a built-up U.S. military presence in northern Iraq would be an obstacle

to Turkish interests in containing Iraqs Kurdish faction. As the United States

makes shifts to its Iraq strategy throughout the year, Turkey will warn Iraqs

Kurdish faction not to make any bold moves to consolidate its autonomy and

lay claim to the oil-rich city of Kirkuk.

The devolution of al Qaeda will continue in 2007, as the movement struggles

to carry out a major, successful attack outside its main theaters of operationin Iraq, Afghanistan and Pakistan. Though the jihadist forces in Iraq were

largely eclipsed by Sunni-Shiite sectarian fighting in Iraq in the latter half

of 2006, they are likely to receive a boost this year as the need for a robust

Sunni insurgency grows among the Sunni Arab states. Iran, at the same time,

has an interest in maintaining the Sunni jihadist component of the insurgency

to target U.S. forces. The Egyptian node of al Qaeda will likely pull off its

annual attack in the Sinai Peninsula, giving the Mubarak government another

excuse to crack down on the countrys Islamist opposition. Al Qaeda will try

to spread into the Maghreb, the Levant and deeper into the Persian Gulf this

year, though any attempted attacks are likely to fail.

E a s t A s i a : D o m e s t i c P o l i t i c s C o m e t o t h e F o r e

This will be a political year in East Asia.

Japans new leadership is focused on constitutional change and a test for

the Liberal Democratic Party (LDP) leadership in the House of Councillors

elections early in the third quarter. Chinas Communist Party Congress in the

fourth quarter will identify the next generation of leaders, who will formally

take over in 2012. South Korean presidential elections in December could

see the return of the more conservative Grand National Party (GNP). Taiwan

will hold legislative elections in December (ahead of a presidential election

in early 2008), which will see a strong showing by the Kuomintang and the

People First Party, but could stir a final burst of pro-independence activity.

Even North Korea might see some political readjustments as leader Kim Jong

Il considers younger cadres to replace the aging (and dying) current officials.



17/58

15

J a n u a r y 2 0


In Southeast Asia, Vietnam will adjust its party and government leadership

in order to align with the economic changes accompanying its World Trade

Organization (WTO) membership. Vietnamese parliamentary elections are

slated for May, and a presidential election is scheduled for September.Thailand will be focused on the continued political and social distress from

the September 2006 coup. The Philippines will readdress defense relations

with the United States around the time of the legislative elections in the

second quarter. Even Australia will hold parliamentary elections in the fourth

quarter.

In all, with the United States still heavily focused on Iraq and Iran, and with

the U.S. presidential race already in full swing, Asia will grow more intro-

verted in 2007, as the key countries deal with domestic politics. This is a year

of preparation and transition.

China

Our annual forecast for East Asia once again revolves around China. We have

been pessimistic about the country for a decade, predicting financial troubles

leading to social and political destabilization. We are consistently asked

when this economic crisis will strike China. But that is the wrong question.

It is not a matter of when financial troubles will strike; they already have.

It is a matter of how they manifest, how the Chinese deal with them and

whether the Chinese are capable of controlling the situation.

If China already is in the grips of an economic crisis, why is no one noticing?In part, it is because the problems are manifesting primarily in social and

political reactions, not in raw economic numbers. In part, it is because Chinas

sheer size makes it difficult to fathom economic collapse. And in part,

it is because investors and observers have consistently been behind the curve

on noticing negative trends in Asian economies. Look at Japan.

The Japanese economic malaise struck in the late 1980s with little fanfare,

and most investors and observers did not even notice there was a problem

until several years later. Early indicators, including the massive rush of Japanese

capital abroad, were ignored or seen as signs of strength. But Japan went

from being the next rival to the United States to being the moribund economic

sluggard of East Asia. China can only hope to have such a controlled

slowdown.



18/58

16

J a n u a r y 2 0


In our annual forecast for 2006, we said that signs of instability in the

Chinese economy would manifest themselves and they did. International

ratings agencies issued reports citing massive inefficiencies and bad debts

in the banking system. Foreign direct investment (FDI) into China stagnatedfor the third year in a row in 2006. A closer look at the FDI numbers, however,

reveals that while the total dollar amount has remained relatively steady

since 2004, the percent of FDI coming from Hong Kong and the free ports,

such as the Virgin Islands, has increased. That means FDI from the United

States and Asia is dropping. Though it is not making headlines, an unseen

hand is at work. The shine is rubbing off China, and money is slowing down.

The slowdown in new funds is affecting Beijings ability to move money

around within the country. Chinas economic growth has been anything but

even, and the regional wealth gaps, as well as the urban-rural split, arerising significantly. These are now the focus of government officials on all

levels and a frequent topic of discussion in the Chinese state media.

An abundance of individuals, state think tanks, research institutes and government

surveys are highlighting the problems, but there is a dearth of concrete

solutions.

Chinese President Hu Jintao is planning major changes in the

economy that likely will not be seen until after the 2008 Olympics.

The Chinese government has been nothing if not masterful in delaying and

diffusing the impact of its economic troubles. It has used tactics ranging from

a massive shell game with bad debt in the banking system (passing off the

problems to the asset management companies and inviting foreign banks

to buy stakes in order to flesh out the equity-to-debt ratio in the major banks)

to misdirection of public attention (to Chinas space program, the Olympic

preparations and disagreements with Japan over interpretations of history).

As Beijing selectively treats the symptoms of years of inefficient Asian-style

economic planning, it is hoping to postpone the pain indefinitely. Beijing wants

neither the Japanese-style economic malaise nor the sudden crash seen

in East Asia in 1997. The central government has thus far been unableto coerce or entice local and provincial leaders to accept the economic

reforms, so Beijing is turning to a tried-and-true method: sacking officials. The

September 2006 move against the leadership in Shanghai was just

a warning shot. Chinese President Hu Jintao is reshuffling the deck at the

local and provincial levels ahead of an overhaul of the top leadership at the

Party Congress later in the year.



19/58

17

J a n u a r y 2 0


This year likely will bring a new vice president, along with several replacements

on the Central Committee and Politburo. Though age will be the given reason

for the replacements, the underlying issue is the centrality of not only the

Party, but also Hus leadership. He is cleaning house, removing the remnantsof the Jiang Zemin regime and any opposition to his new left movement.

Hu plans major changes in the economy, not the least of which is recentralization.

These changes will not come all at once, and will be unlikely until after the

2008 Olympics. But the groundwork is being laid now.

Autocratic control from the center over the location and target of investment

and economic expansion will not be easy or painless, but Hu is tightening the

core of the Party and its various security organs in order to deal with it.

Beijing is looking to the example of South Korea in the 1970s (under theautocratic Park Chung Hee) or Singapore in shaping its future economic

policies tight control from the center but relative freedom on the edges,

so long as it coincides with government-set priorities. Social and political

opposition will be repressed in the name of stability and strength. But this will

really come in late 2008 or early 2009.

Beij ing wi ll have to deal wi th trade fr ic tions wi th the new U.S.

Congress as well as rising talk of Taiwanese independence.

For now, Hu simply needs to lock in his control and ensure that the leadership

from the top down owes its loyalty to him and not to foreign business interests.

He is doing this through purges, new guidelines for choosing local and provincial

leaders and scheduled changes in the top echelons.

China faces two potential domestic security challenges in 2007: the 10th

anniversary of Hong Kongs reversion to Chinese rule on July 1, and the 80th

anniversary of the Peoples Liberation Army on Aug. 1. Both provide high-

profile opportunities for domestic (and foreign-backed) opposition

to stir trouble. Beijing will be watching closely to prevent or dissuade acts

by pro-democracy and human rights activists, including those linked to the

Falun Gong. There also are rumblings that Uighur separatists mightbe regrouping after a decade of near silence, with the assistance and

instigation of Islamist militants in Afghanistan and Central Asia.



20/58

18

J a n u a r y 2 0


On the international front, Beijing will have two major issues to deal with

in 2007: trade frictions with the new Democratic Congress in the United

States, and rising talk of Taiwanese independence. As Taiwan nears

parliamentary elections ahead of its 2008 presidential election, outgoingPresident Chen Shui-bian is set to increase his push for independence. Even

if it is ultimately just rhetoric, Beijing cannot tolerate such actions and already

is warning of tensions.

Chen sees this year as a perfect opportunity to throw a monkey wrench into

Chinese politics. Beijing is desperate to keep China stable and attractive

ahead of the 2008 Olympics, and Chen hopes China will be forced

to exercise restraint in dealing with his political posturing. But Chen also sees

his actions as a way to complicate the leadership changes in China. Hus

supporters might be left in their future economic plans, but they also areless interested in waving Chinas military might around (at least until they

have the domestic situation under control). The Jiang faction Hu is ousting,

however, is much more hawkish, and debate over what to do about

Taiwanese moves toward independence will add a layer of turmoil to the

upcoming Communist Party Congress.

Japan and the Koreas

Elsewhere in Northeast Asia, Japans new prime minister, Shinzo Abe, will

push ahead with plans to change the constitution before the year is out.

Former Prime Minister Junichiro Koizumi laid the framework; it is up to Abe

to build the new Japan one that is structured like a normal country, witha military unrestricted by a defeatist constitution. Japan is looking to take

a place in the world that befits its status as the second-largest economy;

to do so, it must alter its constitution and restructure its Self-Defense Forces

into a true military.

Tokyo will be much more active internationally, but the big battle is at home,

where the ruling LDP will have to prove itself to domestic constituents in the

House of Councillors elections in July. Ultimately, the LDP will win, but at home

Abe and the LDP must show that the hints of economic recovery are sustainable.

Neighboring South Korea is dealing with its own political issues. The general

elections in December will bring in a new president, as the current rules only

allow a single term. President Roh Moo Hyuns Uri Party is fracturing and will

collapse in short order, to rebuild itself under a new name and new leadership.

The renamed party will seek to distance itself from Roh long before December,



21/58

19

J a n u a r y 2 0


and with his party leaving, Roh will focus his attention on a final push for his

own national initiatives namely, closer ties with North Korea and a restructured

military that ultimately allows South Korea to reduce its dependence on the

United States.

The conservative GNP appears set to win the December elections, and that

will bring a shift in U.S. relations. Unlike Roh, the GNP supports a stronger

line against North Korea and closer military integration with the United

States. This will leave Roh scrambling in his final months to lock in defense

programs more in step with his view of the future. Roh also will make a major

push for a second inter-Korean summit before his term is up.

An inter-Korean summit might intrigue North Korea as well. Pyongyang

already has been vocal in its attempts to impact the South Korean elections,and timing a summit for sometime in the late summer could weaken some

of the support for the GNP. With North Koreas 2006 nuclear tests bringing

few repercussions, relations with China growing stronger and the United

States still focused on Iraq, Kim feels more secure and could push forward

with a few new economic experiments.

South Koreas December elec tions wi ll bring in a new pres ident;

the conservative GNP appears set to win, and that would bring

a shift in U.S. relations.

To facilitate this, a few younger cadres could rise in the North Korean ranks,

on the heels of the death of Foreign Minister Paek Nam Sun. For the past

decade, Kim has relied on the support of his fathers associates to maintain

continuity and stability, slowly moving individuals of his own generation into

power. But there is a new generation of younger elite awaiting their

opportunity, and Kim can extend his reign and install potentially expendable

officials to lead economic and even political experiments aimed at strengthening

the nation for the future.

But before Pyongyang embarks on another round of dtente with South

Korea and pursues modest economic reforms, Kim might make one morestatement of strength and carry out another nuclear test. This will depend

on whether North Korea can convince the United States to lift economic

sanctions, particularly the restrictions on North Koreas overseas banking

(through which the countrys elite funnel their money). If negotiations fail

to bring about a shift in U.S. actions, a second test is more likely.



22/58

20

J a n u a r y 2 0


Southeast Asia

In Southeast Asia, Thailand takes center stage. This former bastion of economic

stability (at least since recovering from the 1997 economic crisis, which was

precipitated by the collapse of the baht) is going through one of its periodicupheavals. The coup leaders have not been able to quickly and aggressively

gain control, and the ousted government and its allies remain strong and

emboldened. Though there was a public groundswell to oust former Prime

Minister Thaksin Shinawatra, this has not translated into solid support for the

military-backed interim regime.

The battle lines being drawn between the Thaksin supporters and the current

regime run not only through businesses and civil society, but also through the

military and police forces. The first spate of violence broke out in Bangkok

with the New Years bombings. Both sides are building toward a confrontation,and though it might remain confined to the courtrooms and newspapers, the

impact on Thailands economy is already starting to show. Investor confidence

in Thailand is slipping and will continue to fall until a more permanent solution

can be arranged. Unless the military and the interim regime crack down

swiftly on the growing opposition, stability and order might not even begin

to emerge until the end of 2007.

Lack of economic growth in the Phil ippines wi ll ta int the

parl iamentary elec tions, weakening support for President Gloria

Macapagal Arroyo.

In the Philippines, defense relations with the United States will again come to

the forefront, and the lack of economic growth will taint the parliamentary

elections, weakening support for President Gloria Macapagal Arroyo.

Though Manila believes it has finally killed the remaining founder of Abu

Sayyaf, its talks with the Moro Islamic Liberation Front appear to have fallen

apart, and the fighting in southern Philippines could flare up again in 2007.

The problems elsewhere in Southeast Asia will only add to the allure of

Vietnam, the regions newest WTO member. Hanoi has addressed many of

the problems that undermined its earlier attempts at opening economicallyand attracting foreign investments. With FDI stagnating in China, and places

such as Thailand and the Philippines facing domestic political and social

troubles, Vietnam becomes the regions darling. This will play into Vietnams

parliamentary and presidential elections, which will not be too contentious

but instead will reflect the continued focus on anti-corruption and economic

modernization.



23/58

21

J a n u a r y 2 0


Indonesia might also begin to see a return of foreign economic interest.

President Susilo Bambang Yudhoyono remains popular, does not face re-election

until 2009 and is bringing a sense of stability to a country that has been

politically and socially troubled since the fall of former President Suhartoin the wake of the 1997 Asian economic crisis. The insurgency in Aceh has

been quelled, East Timor relations are relatively calm and the separatism

in West Papua has not gained traction. Meanwhile, Indonesia avoided

a major militant attack in 2006, and security forces killed one of the top

Islamist militants threatening the country. In 2007, Yudhoyono will focus

on strengthening social cohesion, revitalizing Indonesias energy sector and

rebuilding Jakartas regional relations. Japan and China could enter into

some competition over economic and political relations with Indonesia in the

coming year as each eyes the nations strategic location.

In Australia, Prime Minister John Howard will head for another election

victory, though his partys lead might be slipping to the opposition. But the

Labor Party, under new leadership, has not managed to build a credible

threat to Howards rule. Unemployment and interest rates will be a challenge

for Howard, but not enough yet to give the Labor Party an edge. On the

international front, Canberra will continue expanding its role in Asia, dealing

with security issues in the Pacific islands nations, strengthening defense

relations with Indonesia and expanding economic and energy ties with China.

In all, East Asia in 2007 is a region focused first and foremost on domestic

political issues and secondarily on regional issues. The regions economies willslow in 2007, further complicating the political bickering. This is a year for

transition, retrenchment and preparation, as the regions leaders

anticipate a major shift in U.S. attitudes and actions by the end of 2008,

after the U.S. presidential election. Until then, Asia will look to itself, and the

growing rivalry for regional dominance between China and Japan will

become more defined closer to the end of the year.

F o r m e r S o v i e t U n i o n : T h e K r e m l i n G a t h e r s S t r e n g t h

The trend for 2007 in the Former Soviet Union will be Russias consolidation

of control over its internal affairs. As the parliamentary and presidential

elections approach, Russian President Vladimir Putin will centralize control

over the country and its periphery, set himself up for a post-presidential

career and install a successor who will perpetuate his policies. A significant



24/58

22

J a n u a r y 2 0


increase in military spending, coupled with a foreign policy aimed at ensuring

Russias domination of its near-abroad and control over strategic sectors

of its economy, will further strengthen the Kremlins hold on power.

Russia in 2006 followed a policy of consolidating power within its borders

and in its near-abroad, as we predicted in our 2006 annual forecast. Since

the influx of Western influence via color revolutions over the past several

years, Moscow has sought to reverse such advances and has managed

to reassert its influence in some but not all of the most essential regions

along its borders. While relations have improved between Russia and the

key peripheral state of Ukraine since the installation of pro-Russian Ukrainian

Prime Minister Viktor Yanukovich, Russia and Georgia are on increasingly

worsening terms.

Russia wil l cont inue to fie ld new weapons sys tems, and wil l cont inue

to make strategic aviation and deployable airborne regiments

a priority.

As we pointed out in 2006, Russia slowly began to field new weapons

systems this year, prompted by strong energy revenues although not

nearly as many types or numbers as Russian generals claim. Nevertheless,

the deliberate, persistent nature of this fielding will continue in 2007.

The fielding of the new Topol-M mobile land-based intercontinental ballistic

missile is, at this point, simply a matter of cranking them out of the factory.The naval Bulava and its parent missile submarine, the Borei, will likely

continue to encounter major setbacks, despite priority funding. Strategic

aviation will continue to be another priority, as will deployable airborne

regiments.

Russia has, as we predicted, continued to cooperate with Central Asian

regimes on pursuing military cooperation under the auspices of regional

organizations. However, contrary to our previous annual forecast, Russia has

not been able to entirely evict Western military from its periphery the U.S.

airbase at Manas, Kyrgyzstan, remains a thorn in the Russian side.

Russias relationship with the West, particularly the United States, in 2006

was punctuated by confrontational moves. Although toward the end of the

year Moscow and Washington brokered several friendly deals, the two Cold

War adversaries remain at odds. We accurately forecast Moscows strategy

of perpetuating conflict far from its borders in order to distract Washington



25/58

23

J a n u a r y 2 0


from meddling in its domain. This strategy has led to expanded Russian

relations with Iran, Syria and, to a certain extent, North Korea. Likewise, our

prediction that Russia would substantially increase energy prices for Western

Europe panned out in 2006.

Internally, Moscow met our expectations and ramped up itscentralization

of control over the economic sectors it considers strategic energy, precious

minerals and metals. The Kremlin deems it essential to run the industries that

bring it the most income, even though that control sometimes defies common

economic sense and even though state-controlled companies are not always

proficient at exploiting assets. The money already made from these sectors

allows Russia not to worry too much about the recent decline in oil prices.

With its stabilization fund of windfall oil revenue and the gold and currency

reserves totaling almost $400 billion, Moscow can handle a substantial dropin prices without missing a beat.

Moscow wi ll cont inue to expand state control over the oi l, natural

gas, gold , diamond and metals indust ries .

The consolidation trend will continue and increase in 2007, as Russia prepares

for the Dec. 2 parliamentary elections and the presidential election March

2, 2008. Expansion of state control over the oil, natural gas, gold, diamond

and metals industries will be coupled with the consolidation of political forces

and a crackdown on dissent. The deaths of former Russian Federal Security

Service agent Alexander Litvinenko and journalist Anna Politkovskaya have

been attributed to their outspoken opposition to the Kremlin, and others could

vanish from the political scene one way or another as elections draw near.

Because Russias electoral laws have been changed to favor larger and more

established parties, many smaller groups will seek to coalesce into larger

entities. The pro-Kremlin United Russia party is expected to take most of the

seats in the parliament, thereby gaining the ability to alter the constitution,

and the opposition forces remain weak and unable to unite into a viable

force. The new parliament, much like the current one, will exist solely

to implement the presidents will.

Putin will select a successor, and the two front-runners for that position First

Deputy Prime Minister Dmitry Medvedev and Defense Minister and Deputy

Prime Minister Sergei Ivanov will expand their public roles in 2007. The

two men have been exhibiting pragmatic foreign policy outlooks, as we



26/58


27/58

25

J a n u a r y 2 0


In order to avoid becoming a complete peon of the Kremlin, Lukashenko will

have to look Westward for investment and support, and this option gives him

at least some leeway against Moscow. Belarus has been beholden to Russia

for Lukashenkos entire 13-year presidency. The country is now at leastsomewhat in play, but Russia still has the tools to counter Belarus Western

ambitions. The oil cut-off on Jan. 8 signaled Russias willingness to inflict

damage to its own economy in order to bring the wayward republic under

control.

Tensions are set to escalate in the Caucasus, as relations between Georgia

and Russia show no signs of improving, and as Armenia and Azerbaijan inch

toward an escalation of the Nagorno-Karabakh conflict. As Tbilisi further

extricates itself from economic ties to Moscow, the conflict over Georgias two

secessionist regions, South Ossetia and Abkhazia, will intensify. The UnitedNations is almost certain to grant independence to the Serbian province

of Kosovo; this will prompt Russia to call for the same status for secessionist

entities outside its own borders. Russia is likely to seek to increase its presence

in Abkhazia and South Ossetia under the guise of peacekeeping efforts, and

Georgia will respond in kind. Given the poor state of relations between

Moscow and Tbilisi, the conflict is likely to escalate to something just short

of outright war, perpetuating the scenario laid out in our 2006 annual

forecast.

Azerbaijan has significantly increased its income from energy projects and

has pledged to spend approximately $1 billion on defense in 2007, up from$700 million in 2006. Although Azerbaijans military has been inferior

to Armenias, the spending hike could bring increased confrontation between

the two over the Armenian-controlled Nagorno-Karabakh region in Azerbaijan.

As with Georgias secessionist regions, the determination of Kosovos status

will prompt an escalation in the Nagorno-Karabakh conflict. A diplomatic

solution is not likely in the near future.

Russia historically has dominated Central Asia, with most of the countries

especially regional leaders Kazakhstan and Uzbekistan ruled by Soviet-

era cadres with allegiance to Moscow, and the others deferring to their

giant neighbor anyway. At the end of 2006, Russia gained an opportunity

to expand its influence further. The Dec. 21 death of Turkmenistans president-

for-life, Saparmurat Niyazov, another Soviet-era leader, has prompted

Russia, China and other regional players to attempt to project greater

influence in the energy-rich state. Acting Turkmen President Gurbanguly



28/58

26

J a n u a r y 2 0


Berdimukhammedov is the certain winner of the Feb. 11 poll, but the shape

of his agenda remains unclear, since not much is known about the man. While

neighboring Kazakhstan and Uzbekistan will want to assure that Turkmenistan

is friendly, or at least innocuous, Russia has a keen interest in maintainingcontrol over Turkmenistans natural gas deposits the fifth-largest in the

world. If the new president is unwilling to cooperate with Moscow, the Kremlin

will use its available tools ranging from political pressure to assassination

to ensure that he will not hold office for long.

Russias neighboring sta tes, especially Kazakhstan and Uzbekistan ,

will become increasingly concerned for their own sovereignty.

As Russia moves to solidify its presence in Central Asia via Turkmenistan,

neighboring states, especially Kazakhstan and Uzbekistan, will becomeincreasingly concerned for their own sovereignty. While Kazakhstan remains

politically loyal to Moscow, it has economic partnerships particularly in the

lucrative energy sector with companies from many other countries, including

India, South Korea, China and the West. Should Astana grow disconcerted

by Moscows encroaching presence, the Kazakh government could seek

to counterbalance Moscow and expand its relationship with Beijing via

Kazakhstans new Chinese-educated Prime Minister Karim Masimov and

China is certainly looking to increase its influence in Central Asia.

Uzbek President Islam Karimov is also likely to be concerned for his regime

as Russian influence expands. Karimov might continue giving Russia control

of energy assets in order to preserve his own rule, while keeping open the

option to turn to China. However, as long as the Russians do not employ

heavy-handed tactics in Turkmenistan, Uzbekistan and Kazakhstan both will

seek to perpetuate their existing relationships with Moscow.

Russia also has been looking to expand its influence in Africa. Closer relations

are likely in 2007, as Moscow forgives African countries Soviet-era debt

and looks to increase cooperation in the mining sector. As Russia consolidates

control over its own industries, expanding into Africa and other regions could

be the next step toward increasing control over the worlds deposits of high-value commodities. But for this to work, Moscow has to do something in Africa

that it has been loathe to do at home: invest its own money. Should Russia do

that, Moscow could gain a lot of assets and influence very quickly.



29/58

27

J a n u a r y 2 0


Russia will attempt to maintain the status quo in its relations with the United

States and Europe in order to focus on domestic issues. However, Moscow will

continue to cooperate with Iran, Syria, the Hamas-led Palestinian government

and other regimes considered unfriendly to the United States. In theserelationships, Russia profits from arms and equipment sales and derails U.S.

goals in the Middle East while dividing Washingtons attention. Relations with

European leaders are not likely to see improvement; German Chancellor

Angela Merkel will make European energy security a priority of Germanys

EU presidency, and whoever is elected the next French leader will not view

Russia in the same favorable light as President Jacques Chirac has.

E u r o p e : C h a n g i n g o f t h e G u a r d

The most significant development in Europe in the year 2006, as we expected

in our last annual forecast, was Germanys re-emergence as a major global

power. Under Chancellor Angela Merkel, Berlin seized the mantle of European

leadership from Paris and has been the mover and shaker of European

politics.

On some of the details in our previous annual forecast, we did stumble. For

example, we expected British Prime Minister Tony Blair to step down in 2006

and whatever Italian government formed after Italys general elections

to fall; neither event happened. But both of these aberrations only reinforced

Germanys centrality. In staying on, Blair has destroyed his ability to transferpower to someone (Chancellor of the Exchequer Gordon Brown) who might

regenerate the Labor Partys political fortunes. Italys Romano Prodi now

leads a nine-party coalition that makes the preceding, haphazard

government look rock-solid. Add in a France that is also in the midst

of an internal leadership feud with elections scheduled for April and May

2007 and the stage was cleared for Merkel to lead Europe in spirit

in 2006. Even events beyond Europe primarily the repeated energy crises

involving Russia only weakened the European Unions ability to act and

strengthened Berlins.

Germany will attempt to capitalize on this in 2007.

Merkel, now with a year of experience under her belt, faces a rare opportunity.

Germany is one of only a handful of countries that will not be mired

in internal politics in 2007. Russia, the United States, South Korea and China



30/58

28

J a n u a r y 2 0


are all gearing up for elections; and France, the United Kingdom and Egypt

are managing leadership transitions. This makes Germany the country with

the greatest opportunity to impact European and global developments.

Merkels only challenge is not biting off more than she can chew.

However, this does not necessarily mean Berlin will be successful.

Germany has the greatest opportunity to impact European and

global developments.

The EU presidency is a funny thing, rotating as it does in six-month stints

among the member states and thus giving Malta and Luxembourg as much

time to shape the EU agenda as the unions powerhouses receive. Normally,

only the largest EU states have the power and authority to meaningfullyaffect union-wide policies. Since one of those states holds the presidency for

the first half of 2007 and since that state is Germany this will be the

European Unions best chance to fix its various institutional problems.

Successful EU presidencies are marked by the choice of one or two specific,

manageable, achievable programs that no major EU state opposes. For

example, the most successful EU presidencies in the past several years have

been Finland (1999), Sweden (2001) and Spain (2002), which dealt with

Kosovo, demographics and terrorism, respectively. During all three presidencies,

the leaders of those states selected topics over which there was little

disagreement and, in some cases, an agreed-upon urgency.

In contrast, the most spectacular failed presidencies were Belgium (2001)

and the United Kingdom (2004). In both cases, the states leaders took

on controversial topics that faced deep opposition: establishing an EU-wide

tax and reforming the Common Agricultural Policy, respectively.

Germany seems ready to try to rectify Europes institutional problems.

Currently, the European Union uses the same decision-making structure that

existed when the unions predecessor, the European Economic Community, was

founded in 1958 with only six members. After Bulgaria and Romanias Jan. 1accessions, the European Union now has 27 members. States have the right to

veto any policy with which they disagree, ranging from foreign and military

policies to cheese and legal issues. As such, the union is largely ungovernable

and is in dire need of reform. Merkel wants to use her turn in the big chair

to dust off the European constitution and establish a roadmap for its ratification.



31/58

29

J a n u a r y 2 0


In this she will fail. The constitution, while far from perfect, would somewhat

streamline the European Unions decision-making process and lessen the use

of national vetoes. Merkel wants to see the constitution adopted in full, in its

current form. However, two of the unions most pro-integration states France (under Gaullist President Jacques Chirac, no less) and the Netherlands

have already voted down the constitution in national referendums. All EU

members must approve the constitution for it to take effect.

Put another way, it is an already failed document with no future. If anything,

should Merkel succeed in restarting the ratification process, it could well

prove to be the worst of all worlds. Two Europhilic states have already voted

it down (and are likely to do so again), not to mention that it never even went

before the Euroskeptic electorates of Poland and the United Kingdom the first

time around. Though such a document is essential if Europe is to federalize,unfortunately for Europeanists, it is not an approvable document.

The EU constitution is an already failed document with no future.

Letting it die its ignoble death in France and the Netherlands would have

been the smartest action. Letting it die now would be the second-best choice.

But burning resources in order to go through the motions of submitting

it to another preordained death is simply a waste of one of Europes last

chances to reform in the near future (aside from the upcoming 2008

presidency of France, another major EU power. Italy, hardly the harbinger

of logical organization does not take the reins until 2014). It is time forEurope to cut its losses and work with what it has. The decision to do just that

will ultimately be made just not in 2007.

The doomed constitution is not the only project Merkel aims to tackle. By luck

of the draw, Merkel will be in the big chair when potential crises in Bosnia,

Kosovo and Serbia come to a head; she will bear the responsibility

of relaunching partnership talks with the Russians; and she wants to initiate

free trade talks with the United States. Any one of these issues would make

for a busy presidency, and Merkels ambition risks causing her to fail at all

of them although we have to give her kudos for trying.

Still, even if Germany fails to implement its agenda, it is the only major

power that has the freedom to set one. And there may yet be time for

Merkel to shift gears. If she can select an issue that the entire European Union



32/58

30

J a n u a r y 2 0


can agree on and a policy that everyone can get behind such as a common

European reaction to the Russian-Belarusian energy crisis that is brewing

she could become Europes strongest post-World War II leader.

The opportunity is hers to lose, and the lengthy agenda she has cooked

up as of the years beginning is perhaps the most efficient way to do that.

The expansion of the European Union has reduced the possibility

of a European superpower to a mere idea.

While Germany settles into its leadership role, France will see the end of its

Gaullist era. Former French President Charles de Gaulle believed France was

not simply a middle-sized continental power, but a global power. Thus, he felt

it was Frances duty and right to punch well above its weight on the worldstage a mindset that often put Paris at odds with Washingtons policies.

A united Europe was de Gaulles brainchild in many ways, as it was a means

of suppressing German nationalism and diverting German energy into

actualizing de Gaulles view of the world. Ultimately, de Gaulles goal was

to use Europe as a platform from which France could act as a credible global

power.

Chirac is the most recent torchbearer of de Gaulles legacy and has been

at or near the top of the French political system for 33 years. Though Chirac

and his Gaullist predecessors successes in uniting Europe should never

be ignored, the expansion of the European Union has reduced the possibility

of a European superpower to merely an idea. The United Kingdom would

never allow itself to be subservient to Paris, Europes neutrals want no part

in a common military policy and the states of Central Europe feel more

kinship with the United States than they ever have with France.

But most of all, it is Germanys reawakening that has killed de Gaulles vision.

Germany is once again making policies more sophisticated than apologizing

for World War II, and is now developing interests independent of Paris. With

Germany back in the game, France simply lacks the economic, political and

demographic heft to lead Europe. It might remain a powerful state withan undeniable stake in the Continents future, but it will never be the

pre-eminent leader of a superpower.



33/58

31

J a n u a r y 2 0


We will not attempt to call the outcome of Frances April-May 2007 presidential

election. For now, socialist Sgolne Royal and conservative Nicolas Sarkozy

appear evenly matched. They disagree on a number of issues, from crime

to immigration to globalization to labor reform. But on one thing they agree:de Gaulles legacy has failed, and it is time to try something else.

Germany is making policies more sophisticated than apologizing

for World War II, and is now developing interest s independent of

Pari s.

France will still be a powerful and vibrant state, but it will be a France with

a more realistic view of its place in the world. This could bring it more power

as it focuses on internal reform or on revitalizing relations with powers

such as London, Warsaw and even Washington at which de Gaulle would

have chafed. But what is sure is that France will no longer seek to lead

Europe on its own, and this, if nothing else, will punctuate European attempts

to form a superpower.

The implications of such abandonment are deep and many. They include, but

are not limited to:

Any serious talk of a special partnership with Russia will end, laying the

groundwork for more businesslike and colder relations.

Most common European positions, such as they are, on foreign policy

issues will collapse, leading to a large-scale removal of a Europeanapproach to global issues in which the European Union does not have

a direct economic interest.

Outside powers will have the opportunity to play individual European

powers against each other something of critical importance when one

considers that each of the unions 27 members retains veto power over

many EU policy realms.

France is on the cusp of change. In May, it will have a new president; in June,

it will have a new Parliament. And the country and the Continent will

never be the same.



34/58

32

J a n u a r y 2 0


S o u t h A s i a : P a k i s t a n i P o l i t i c s i n t h e S p o t l i g h t

As we expected, India and Pakistan made little progress in normalizing

relations in 2006. Though the Kashmiri militant group Lashkar-e-Taiba carriedout a deadly railway attack in Mumbai in July, relations between the rival

countries remained in the usual state of distrust, preventing any major break-

throughs. We noted that Pakistani President Gen. Pervez Musharraf would

face a galvanized opposition and would be forced to decide whether to stay

on as the countrys military chief. Musharraf successfully staved off opposition

attempts to unseat him, allowing him to keep his dual portfolio as president

and head of the military. In line with our 2006 forecast, the Baloch nationalist

insurgency added to Musharrafs list of worries. He dealt with the insurgents

through a combination of military and negotiation tactics.

Pakistan wi ll be the main focus in South Asia as it gears up for it s

general elec tions in January 2008 .

Our forecast that Indias leftist parties would develop a stronger presence

in the government and further hamper Indian Prime Minister Manmohan

Singhs privatization efforts was correct. India also worked to expand its

global influence by signing a landmark civilian nuclear deal with the United

States. The insurgencies in Nepal and Sri Lanka remained significant in 2006,

though we failed to predict in the annual forecast that the Maoist rebels and

the political alliance in Kathmandu would be able to forge a power-sharingagreement and strip Nepals King Gyanendra of his powers.

In 2007, the main focus in South Asia will be on the Pakistani political scene,

as the country gears up for general elections slated for Jan. 15, 2008. Mush-

arraf battled a heavy wave of domestic criticism this past year, exacerbated

by continued U.S. pressure on Pakistan to cooperate on the counterterror-

ism front and by U.S. airstrikes against Taliban and al Qaeda targets on

Pakistani soil that resulted in a high number of civilian casualties. Accusations

have been flying that Musharraf has spent too much time hobnobbing with

U.S. officials in Washington rather than defending Pakistans territorial integ-

rity; but the gener

1417 stratfor 2007 annual forecast

Documents