THIRD QUARTER FORECAST 2010 Three major global trends continue to dominate the international system.

First, the Greek crisis and attendant economic problems continue to place great stress on European systems, driving the region toward a political and economic redefinition. Second, U.S. operations in Iraq are moving toward a milestone as U.S. combat forces are scheduled to be drawn down by the end of August even as progress is proving elusive in Afghanistan. Third, the Russians, in part using the disarray in Europe and U.S. preoccupation with the Middle East to consolidate its gains in the former Soviet Union, are opening the door to new economic relationships - particularly with the Germans -- designed to modernize Russia's economy. Certainly the issue that is both most important and new is Europe. For much of the financial crisis, the Europeans held up the continental model as superior to the "Anglo-Saxon" model. Slower growth with stronger social safety nets seemed superior to the more aggressive, less protective, American and British model. The continental Europeans are now facing both cuts in social services and slow growth. More important, this is not equally spread among countries. Southern Europe is in the weakest position and Northern Europe, particularly Germany, is being called on to underwrite the stability of the eurozone. This is causing profound political difficulties in Germany, which, in turn, have prompted Berlin to demand greater controls over the economic policies of its fellow EU countries, via new regulations and supervisory bodies. Germany's plans are creating a serious rift in Europe that has geopolitical implications. We expect that process to continue during the next quarter. For the time being, European institutions are safe, but it is not clear that the system can withstand any greater shocks. At the other end of the global spectrum -- Middle Eastern military affairs -- new international and bilateral sanctions have been imposed on the Iranians to get them to abandon their alleged nuclear weapons program. There are numerous ways for Iran to get around these sanctions, and therefore their effects will be limited. But ultimately the issue on the table is not Iran's nuclear program, but its conventional power.

scheduled to withdraw its "combat" forces by August, leaving 50,000 troops behind, including at least six brigade combat teams redubbed "advisory and assistance brigades." Each reduction of U.S. forces in Iraq increases Iran's influence on the region. If the nuclear program were abandoned tomorrow, Iran would still be the dominant conventional power native to the region. This means that the United States must stay in Iraq to balance Iran, but the United States must also leave to re-establish a strategic military reserve. With the United States caught in this position, we expect Washington to continue quiet efforts to reach some sort of accommodation with Iran. The issue is, of course, whether Iran has any interest in helping to solve this problem for the United States. The world continues to resonate from the twin shocks of September 2001 and September 2008: the U.S.jihadist war and the global financial crisis. It has been processing these events for several years, and it will continue to do so this quarter. Global Trends - Global Trend: The Sovereign Debt Crisis and Europe's Response The eurozone sovereign debt crisis that began with Greece in December 2009 will dominate the third quarter. However, the focus will shift from Greece to Spain and to the Continent's beleaguered banking system, which has escaped much scrutiny for the past six months because attention has been focused squarely on eurozone governments. The events in the eurozone thus far have necessitated crisis management, patching up the holes in the eurozone (Greece) in order to prevent a system-wide crash. Now, however, Germany and the rest of the European Union want to create an architecture that will not only fix the current problems but also prevent future crises. The current crisis has led Germany to force other EU member states to adopt new rules on the monitoring and enforcement of eurozone budgetary rules. It is too early to call Germany's moves successful -German leadership of the European Union faces resistance from Germany's peers and also domestically -- but Berlin has done more to get Europe's economies on the same page in the last three months than has been accomplished in the last decade. The third quarter will give a sense of whether Germany's efforts are working, or whether European governments are unwilling to comply with the austerity measures essentially pushed on them by Berlin. The

especially if the markets continue pressuring Spain and/or European banks.regional parties whose loyalty must be purchased. The vote in September on Spain's 2011 budget is a possible flash point. there are some outstanding issues that could derail this temporary detente in the third quarter. This gives Europe considerably more room to maneuver than it has had to this point. Thus far. making Russia seem like a more attractive partner and destination for investment. The Kremlin has decided that Russia needs a massive domestic modernization program. But the trick is for Russia to open up to the West without losing control in the process. The beauty of EFSF's design.quarter will also be dominated by the activation of the European Financial Stability Facility (EFSF). Moscow is giving concessions to outside powers to encourage them to resume doing business with Russia. but the markets are pressuring it nonetheless. 2010 has seen some major Russian successes in rolling back Western influence and re-establishing its domination of numerous states. however. this means swapping economic assets. is that its functions are as yet undefined. Second. . Moscow has already signed on to the latest round of sanctions and signaled that it could give more if needed. Ukraine and Kyrgyzstan. But to persuade the United States. Should the United States feel impelled to prove its commitment to these countries in some tangible way. The original motivation for the EFSF was to prop up troubled Club Med economies in case they need a Greek-style bailout. this quarter it will introduce a new foreign policy document in which the Kremlin takes a more nuanced stance on foreign relations. Global Trend: Modernization in the Former Soviet Union This is the year in which Russia has shown the fruits of its multi-year campaign to consolidate its former Soviet sphere. which is very difficult when austerity is required.Iran for technology -. First. Madrid has a minority government that has until now relied on regional parties to govern -. This stalemate is expected to continue through the third quarter. 11 attacks. including the United States. like France and Germany. during which complex dealings between the two sides will publicly manifest largely in the context of the nuclear issue. Fundamentally. In order to convey its new "pragmatic" image. Any sign of political instability in Spain would precipitate a crisis of confidence in its austerity measures. Global Trend: Iran and Iraq The United States and Iran have spent the first half of this year aggressively trying to undermine each other's negotiating position. the 440 billion euro ($552 billion) fund set up in Luxembourg to provide loans to eurozone governments. What it can and cannot do will therefore be decided (primarily by Berlin) in the third quarter. One thing that is clear about the EFSF is that it has been purposefully set up as an independent "special purpose vehicle" that is outside the bounds of EU treaties. But Russia is shifting some of its focus from its resurgence to what it needs to become strong enough internally to maintain its influence in these external territories for years to come. Spain's economy is nowhere near as troubled as Greece's. Russia could respond in several areas. Some of the pro-Western former Soviet states (like Georgia) and peripheral states (like Poland) have noticed warming relations between Moscow and Washington and are wondering whether the United States is still committed to their security. Moscow is taking two approaches. and Moscow will tie the plant's future to Russia's relations with the United States. How the EFSF is tasked and how it operates will ultimately be determined by Berlin and will depend on the extent to which the rest of the eurozone is following its instructions on budget cuts. This modernization plan has been in the works for a few years. One such area is Russia's completion of the Bushehr nuclear facility in Iran (scheduled for August). Belarus. This tradeoff -. but it also gives the world something to focus on.approaching foreign businesses and governments to make myriad deals that involve investing in and modernizing Russia. to assist in this program -meaning that Russia has to act (at least on the surface) like a pragmatic power and not a territorial bear swiping at any Western state near its territory. increase the cost of financing its debt and put its troubled regional banks under even more pressure. however. Russia will have to give up some ground on Iran. Spain is therefore the EFSF's test case. However. Such deadlines for completion have come and gone in the past. including Kazakhstan. but only in the second and third quarter of 2010 is Russia officially launching the program internationally -. For many states.represents the warmest relations have been between the United States and Russia since the immediate aftermath of the Sept. Moscow realizes that it needs the technology and expertise of outside powers.

S. but it will certainly slow European growth in the meantime.or at least mitigate -.S. perhaps on a global scale. right now regional security. can be met by the 50.There are two main reasons why the U. there are few signs that the other major economic centers have generated their own domestic recoveries.looking to restrict credit from flowing into particularly overblown sectors. Complicating matters further for the AKP is the resurgence in attacks by Kurdish militants.has stalled in the second quarter. which have undermined its political initiative to deal with the thorny issue of Kurdish separatism. Instead of looking to stoke local demand.S. this core contention between the two sides is not about to be resolved in this quarter or even this year. a return to recession in the United States in the third quarter is a distinct possibility. in no small part due to the intra-elite power struggle in Tehran. but U. for the time being.000 troops. despite both sides' complicated maneuvers and the changes to the political and security environment in Iraq. Instead. which will be a test of the AKP's popularity. Therefore. It is far too soon to consider such an outcome probable.000 troops who will remain in Iraq. In addition to the obvious problems on the international scene. employment or the stock markets -. The United States would be willing to offer such guarantees in return for credible assurances that Iranian regional ambitions regarding the east coast of the Arabian Peninsula (in other words. the United States will be drawing down its military forces by the end of August from the current 75. This is intended to head off -. It was not able to force Israel into meeting its demands after Israeli forces raided a Gaza-bound Turkish aid ship in international waters.-Iranian impasse will persist.000 to roughly 50. At the same time.piecemeal and tentatively -. backed by air power.S. consumer demand. Second. This mix of anemic demand and strong export supply are the textbook causes of a deflationary environment.N. First and foremost. Furthermore.be it consumer demand. Japan's domestic economy has yet to show signs of life. however. these problems come at a time when the country's top court has largely approved the constitutional amendment package that the AKP government had proposed. China is -. all three of these major economies are looking to export their way back to economic health. Not only did the Turks fail to get the United States to pressure Israel into accepting an international probe on the incident or apologizing for the deaths. the formation of an Iraqi government is not a prerequisite for the U. barring any major shifts in Iraq's security environment. plan to reduce its forces in the country. the U. Saudi Arabia and its oil-rich Eastern Province) will not threaten global oil supplies. the U. objective is to prevent Iran from dominating the Persian Gulf -. and even in the worst-case scenario.-Turkish relations took a hit after Ankara's decision June 9 to vote against the U. Security Council resolution imposing fresh sanctions against Iran. global deflation would not begin in the third quarter or even in 2010. Germany is unwinding the deficit-driven spending of the past two years and using its economic clout to force budget discipline upon all of its European partners. To accomplish this.S. Barring renewed strength in U.S. Iran has set long-term goals that involve seeking security guarantees from Washington. is the central issue driving U. Obviously. resulting in the deaths of nine Turkish nationals. employment and investment could actually be possible.S. the United States will need to pull those forces out as well in order to rebuild its reserves. not Iraq.a goal that. The Global Economy Economic growth in the United States appears to be slowing. Eventually. Washington will need to reach an agreement with Tehran. In other words. Aware that the United States poses an unpredictable long-term threat.-Iranian dealings. Overall activity -. this is the first time since the 1930s that a reinforcing cycle of reductions in demand.-Iranian struggle will not see any breakthroughs in the coming quarter. Turkey's ruling Justice and Development Party (AKP) is facing criticism for its failures on the flotilla issue at home. Middle East Regional Trend: Turkey's Position The May 31 flotilla incident has left Turkey bruised. .a massive debt crisis. paving the way for a public referendum in September. But with global growth tepid at best.

any notable improvement in their bilateral dealings is unlikely. But serious challenges remain as both sides attempt to achieve more decisive results before winter. While Turkish-Israeli relations are likely to remain at a low point. Regional Trend: Pakistan's Struggles While the Pakistanis will be busy trying to dominate the move toward a political settlement with the Afghan Taliban.000 U. Pakistan This quarter will see the completion of the troop surge in Afghanistan to 105. East Asia . The concentration of U. Labor incidents will add .Regional Trend: Continuing Fighting in Afghanistan. there will certainly be attempts to play up what progress there is. and Ankara will try to use its position to exploit the U. 18 parliamentary elections -. this process likely will continue into the third quarter.S. Despite piecemeal reform. Reform entails continuing to gradually tighten controls on credit and certain sectors at risk of overheating (such as real estate). troops -. given the continuing disagreements about negotiating with the Afghan jihadists. South Asia . Forces-Afghanistan and the NATO-led International Security Assistance Force. U. Beijing will seek carefully to contain these issues by using the state unions and security measures to prevent labor activity from spreading spontaneously and becoming uncontrollable. strategy in Afghanistan under consideration even before Gen. Given that these efforts are in their preliminary stages. Washington has acknowledged Pakistan's lack of resources. there will also be an intensification of efforts on the political front. Barring any major Islamist militant attacks targeting India. Turkey will put greater effort into mending its relationship with the United States. Though there were some modifications to the U..-Pakistani cooperation on both sides of the Durand Line will continue. U. However.S.S.S.particularly in Kandahar -. and phasing out some stimulus policies. the broad strokes of the strategy are expected to continue to be pursued. No substantive change. overall policy will remain broadly stimulus-oriented and focused on furthering economic recovery. but no major developments are expected. Already there are signs of increased cooperation between Afghanistan and Pakistan as part of an effort to bring insurgent leaders to the table. it will still pursue certain foreign policy agenda items. India.will intensify combat with the enemy and efforts to establish security. It is unlikely that Islamabad will (or can) expand its counter-jihadist military operations to North Waziristan. Labor issues especially.S. Beijing's chief concern is to slowly move forward with economic reforms -. is expected on that front. this is the AKP's weakest point since it rose to power in 2002. The foreign policy setbacks will also have Ankara reassessing its strategy to become a major global player. however. Even though domestic politics will be Turkey's main focus. Issues such as Iraq and Iran present an opportunity for Turkey to talk with the United States. Stanley McChrystal was replaced by Gen. without being blunt or unconditional. from demands for higher wages to strikes to shifts in patterns of migrant labor. Although the battlefield will heat up. need for support on those fronts. troops and around 40. especially since Ankara will need Washington in order to press the Israelis. the Turkish government will spend the better part of the third quarter focusing on the domestic front in an effort to regain strength. NATO and Afghan forces will be stretched thin between trying to escalate counterinsurgency operations and providing security to facilitate the Sept. as India will want to see Pakistan take concrete steps against anti-Indian militant forces. will continue to arise and command greater attention from central and local governments than before.in preparation for a "post-crisis" future -.S.Regional Trend: China's Economy and Social Stability China faces a tricky domestic situation in the third quarter.without jeopardizing economic recovery. David Petraeus as commander of U. they will continue to struggle with their own Taliban rebels. The stalemate between the jihadist insurgency and Islamabad's counterinsurgency is likely to persist throughout this quarter and even beyond.a situation that the Taliban will try to use to their advantage. Pakistan is also attempting to move forward in improving relations with its main regional rival. With the Pentagon under considerable pressure to demonstrate progress. no significant breakthroughs can be expected this quarter.000 coalition forces. with bilateral meetings between quite a few senior officials.For all these reasons.S. There was some notable progress during the second quarter. It is also unlikely that Washington will get any substantial intelligence help from Islamabad on the Afghan Taliban.

has made China wary of future U. and the remainder will mostly consist of rhetoric from all concerned parties. or other such moves -. will also pressure the U. alliance as much as the late President Lech Kaczynski did.yet another item to the long list of risks to social stability -. crime and government corruption -.S. The crucial pending decisions in the U. Pyongyang is likely to stage another controversial action -. ceasing to rely on Warsaw's U.including economic disparity. Regional Trend: U. intentions.S. Moreover.S. The country's multi-tiered . both sides will avoid an irreparable rift in relations this quarter. China's currency policy remains the most contentious of a range of economic. This will mean trying to work with Berlin and Paris on security and defense issues (which is one of Warsaw's key issues for its EU presidency in the second half of 2011). to address what it sees as China's deliberate undervaluation to benefit its exporters.S. North Korea is scheduled to hold a thrice-in-half-a-century session of the Supreme People's Assembly to elect new leaders and further solidify Kim Jong Un as the country's next leader. administration and Congress to take retaliatory action. Europe .S. declining production and debilitating corruption. Latin America . Commerce Department and in Congress that will determine whether Washington will take tougher punitive trade measures can be delayed.before it attempts to compromise. currency is only one dispute out of many. Tensions will therefore continue rising beneath the surface.S.Regional Trend: Changes in Poland The Polish presidential election victory by Bronislaw Komorowski on July 4 gives Prime Minister Donald Tusk effective control of all the levers of power in Poland. the incident has passed.ranging from border provocations to missile tests to another nuclear test. The U. Komorowski is Tusk's hand-picked candidate for the presidency and removes the virulently anti-Russian influence of the Law and Justice party from the corridors of power in Warsaw for the first time since 2005. The United States will expect the yuan to rise against the dollar at a pace that suggests substantial appreciation in the coming months (perhaps in the range of 1 percentage point per month). but the country's ongoing electricity problems are just part of a broader economic crisis that is threatening the core stability of the state. The Korean Peninsula will continue to verge on instability. Tusk's consolidation of power comes down to Poland seeking to balance its multiple alliances and relationships with the untenable position of being wedged between Russia and Germany. Tusk will be looking to broaden Poland's horizons.that Beijing will manage with difficulty in the third quarter. China has publicly shown some willingness to cooperate on the yuan by taking it off its peg to the dollar. The approach of midterm elections in the United States. but it has also come at the cost of gross inefficiency. but the added uncertainty is causing the United States and South Korea to plan closer defense cooperation going forward. But as long as China is not wholly intransigent on the yuan. political and military disputes. Otherwise. This is of little importance in itself. and Washington has demonstrated its patience for further negotiations (namely by not accusing China of "currency manipulation" in the latest U. Venezuela's nationalization campaign has brought more money into government coffers for social spending and has made more laborers beholden to the state for their livelihood. Beijing does not want to see the United States establish greater involvement in its near abroad in the name of strengthening defense preparedness with South Korea. The transition process is under way and that suggests Pyongyang will be more focused on ensuring an internal balance of interests than accommodating foreign powers' concerns that tensions have gone too high. and South Korean response to the alleged North Korean attack on a South Korean ship – strengthening their military and political alliance -. so it will attempt to restrain North Korea -. Beijing also faces disagreements with the United States. but it will not suffer a fundamental destabilization.to the extent that it can -.S.-China relationship is the Korean Peninsula. and this in turn is leading China to become wary and to adjust its plans.Regional Trend: Crackdowns and Tensions in Venezuela Venezuela received enough rainfall to avoid a full-scale electricity crisis last quarter. given its domestic constraints and global economic uncertainty. Treasury Department report on the subject).while warning the United States and South Korea not to worsen the situation.-Korean Ties and Tensions with China Another source of rising tensions in the U. with voters focused on unemployment and the need to generate jobs. building up the European Union's currently paltry capacities in those areas and generally looking to broaden Polish relations with its immediate neighbors. but China will be unwilling to move boldly or quickly.S. But beyond the change in personalities.

Enough funds are flowing to sustain the regime for now and to carry the ruling United Socialist Party of Venezuela through legislative elections in September. given the opposition's participation this time around and the growing socioeconomic problems influencing the vote. the Venezuelan government will focus its efforts this quarter on reining in speculators (including those within the regime itself) whose profiteering is threatening the regime's ability to survive. particularly in dealing with Iran and the United States. to maintain Western investor interest in the development of these fields while prioritizing the capitalization of state-controlled Petroleo Brasileiro's pre-salt investment plan. The Cuban-aided crackdowns will exacerbate rifts within the Venezuelan government. Though Brazil will make its voice heard on the issues of the day. However. This racket now appears to be unraveling. there is no indication that the government is planning to impose any politically costly austerity measures to drive down inflation and public spending in order to address the very spending habits that triggered Argentina's default in the first place. will remain a thorn in Buenos Aires' side. relations between Colombia and Venezuela will remain at a low point. High on the Brazilian government's agenda will be the finalization and implementation of a legislative package designed to prepare the country to manage its future oil wealth from its pre-salt deepwater offshore reserves. The post-election environment will be tense. Venezuela is already deeply concerned about Santos' aggressive security posture and his country's close defense relationship with the United States. Argentina will be able to finance its trade in the global markets with greater ease in the months ahead.2 billion in debt held by investors who refused to participate in the exchange. the Chavez government is more likely to amplify threats. using its access to the international capital markets to incur greater debt at the expense of the country's long-term economic sustainability. such as supplying food and medicine. Sub-Saharan Africa . Though Argentina is gaining some economic reprieve this quarter. the Venezuelan government is unlikely in danger of an imminent collapse. making crucial upgrades and repairs to the country's electricity infrastructure and making payments to foreign service contractors to operate the oil fields that are vital to the state's income. along with the $7.5 billion in Paris Club debt that Argentina has shown little inclination to settle. Brazil will carefully manage its foreign relations. emanating from Colombia in an attempt to distract the populace from a growing set of problems at home.and distortionary currency exchange regime has facilitated an elaborate money-laundering scheme that has pervaded every state sector. has allowed the country to settle more than 92 percent of the nearly $100 billion of debt it defaulted on in 2001-2002. but Venezuela's ruling party is likely to retain its majority in parliament. resulting in serious cash flow problems that are making it increasingly difficult for the state to deliver on basic services.Regional Trend: Nigerian Politics . The lead-up to those elections will be marked by a series of government crackdowns on the already fractured opposition. the country will be far more inwardly focused in the coming quarter as national elections in October draw closer. Regional Trend: Relations between Colombia and Venezuela As Colombian President-elect and former Defense Minister Juan Manuel Santos settles into office this quarter. Instead. even as its margin of support narrows. Regional Trend: Brazil's Internal Politics The Brazilian leadership spent a lot of its time in the second quarter making moves in the international arena to draw attention to Brazil's rise. from energy to electricity to food. Though many of the efforts the government makes this quarter to resuscitate the economy will be too little and too late. Argentina will continue along a populist-driven economic path. where a debate is escalating over the need to increase oil production. Ongoing lawsuits over the roughly $6. Regional Trend: Argentina's Return to the World's Credit Market Argentina will make a return to the international credit market this quarter following a relatively successful debt exchange that. particularly in state-owned oil company Petroleos de Venezuela. with sufficient progress on handling the country's debt. In realizing that this scheme has gone too far. along with a 2005 debt swap. As Venezuela's vulnerabilities increase. whether real or imagined.

the highest-profile TFG supporter -. however. This most likely means Ahmed will feel pressured to solidify the TFG's military and political alliance with Ethiopian-backed Somali Islamist militia Ahlu Sunnah Waljamaah (ASWJ). Ahmed will act cautiously. This force does not possess an offensive capability (or mandate). however. fully aware that his job could be on the line in the future.000. probably in September. This means that by the end of the third quarter. It is therefore unlikely that militants will be able to find the requisite political cover (both in the Delta region and in Abuja) to engage in high-profile attacks against oil targets. various northern-based factions will attempt to push their candidates to the forefront. One of the expected changes is an adjusted timetable for holding national elections. controls only a narrow coastal strip in Mogadishu. All of the TFG's allies support ASWJ's inclusion in the government as well. which is heavily influenced by the United States. it will allow Nigeria's next elections to take place in January 2011 (instead of April). Additionally. But these political tensions will not be centered in the Niger Delta as much as they were in the last national elections in 2007. which remains in firm control of wide swathes of southern and central Somalia. If this change occurs. Incumbent President Goodluck Jonathan will decide whether or not he intends to run for a fresh term. This would also move the date for the ruling People's Democratic Party (PDP) primaries up to this quarter. and political tensions in Nigeria will rise to a level not seen since the peak of the uncertainties regarding former President Umaru Yaradua's health in the winter of 2009-2010. most of the governors of the main oil-producing states in the Niger Delta are on track to be supported for a second term. his home region. The PDP primaries are tantamount to national elections in Nigeria. constitutional amendments are likely to be approved in Nigeria this quarter. as there are no other political parties in the country that can match the power of the PDP. because the militia represents the only fighting force that can help the government combat Somali jihadist group al Shabaab. Regional Trend: Security in Somalia Somali President Sharif Ahmed will come under increasing pressure from Ethiopia and Kenya.among other things -. and from the United States -. But since the TFG president is chosen not by the Somali people but by the seven member states of the East African bloc Intergovernmental Authority on Development. Ahmed will continue to resist ASWJ's full inclusion in the government. meanwhile. giving them less incentive to wage a militant campaign as a means of aiding their political aspirations. but the violence is not likely to rise to the level of the militant attacks on Delta oil installations seen in 2006 and 2007. for fear that one day the militia's power will outstrip his own.to improve the country's security situation in the third quarter. and the TFG's own army is even less capable of establishing a strong presence in al Shabaab-controlled territory. regional allies of the Transitional Federal Government (TFG). The TFG. and is kept alive by an African Union peacekeeping force numbering just over 6. The political violence that always accompanies Nigerian elections can be expected throughout the country. as well as several neighborhoods in northern Mogadishu. .After months of being on the verge of ratification. it should be clear who Nigeria's next president will be. Copyright 2010 Stratfor. Jonathan and his supporters have staked a large part of his reputation on his image as a ruler who can -.bring good governance to Nigeria and peace to the Delta.