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Introduction
We noted in our annual forecast that 2005 will mark a shift in international attention away from Iraq and the Middle East and toward Eurasia -- particularly Russia and China. This is already happening. The main focus in Iraq is on developing a new government, and the pace and scope of insurgent attacks appear to be leveling. Though the end of the attacks is not yet in sight and the U.S.-jihadist war is not over, it is becoming background noise, and Washington (and the rest of the world) is shifting attention to other strategic issues.
Russia recently faced geopolitical setbacks -- the expansion of the European Union and NATO and the Westward shifts in the former Soviet republics of Moldova, Ukraine and Kyrgyzstan. Moscow is in a geopolitical crisis -- one to which it is impossible for the system not to respond. In 1989, Russia lost its outer rim territories. In 2004 and 2005, it is losing its inner circle. The pressing question in Moscow now is whether Russia itself can remain unified.
Moscow likely is just keeping up appearances with its apparent inaction, but the covert actions of Russia -- a once and future master of the art of subversion -- ultimately will prove most important. Russia will start resisting the West's geopolitical encroachment, sooner or later. It probably will not involve tanks rolling through the streets of Kiev, and statements out of Moscow likely will remain conciliatory, but Russia will revert to the tried-and-true method of covert operations -- shaking hands with the West but holding a dagger behind its back.
Moscow's moves will not be obvious and will happen in multiple places, often far from Russia itself. Russia already has sent a clear signal to the United States by offering man-portable air defense systems to Syria, nuclear technology to Iran and Backfire bombers to China. Each of these threatens a fundamental U.S. security interest.
Across the border, there is no longer a question of whether China has a banking crisis. The questions are whether China can manage the situation and whether other factors will help mitigate the structural problems. Otherwise, Beijing will lose control. Three overlapping core dynamics continue to stress China's very fabric: Beijing's ability to maintain social stability by economic means, local and provincial governments' interests conflicting with those of the central government and the fundamental struggle between political realities and economic realities.
China's leadership needs to let money flow to keep the ever-increasing ranks of the unemployed from striking back -- but that flow supports the inefficiencies of the state-run economy, undermining the overall strength of the economy and, ultimately, the Communist Party itself. In making uncomfortable decisions, the central government battles the financial and power interests of local and regional leaders who have learned through years of planned economy how to exploit a system in which corruption has become ingrained. Ultimately, for the Chinese government, the ability to continue economic reforms without political reforms is reaching its limits.
China has taken few real steps to fix its economy -- the political and social repercussions are apparently too great. Instead, it simply shuffles around players, never truly threatening the alignment that created the situation in the first place for fear of triggering social collapse. At the same time, Beijing turns to nationalism -- often at its own expense, as seen in the EU arms embargo issue -- to rally the populace together. This creates an increasingly volatile situation.
Russia/Former Soviet Union
This quarter, Russian President Vladimir Putin will make a last-ditch effort to continue Westernizing Russia as a response to continuing pressure from the United States. At the same time, he will try to make Washington hurt while avoiding a direct confrontation. This means Russia will make its moves in other countries -- some far from Russian borders -- to convince Washington that cooperation with Moscow is a better choice than confrontation.
Putin's maneuvers this quarter will include developing closer relations with Europe -- to persuade it to distance itself from Washington's policies regarding the former Soviet Union (FSU) -- and agreeing to ship Eastern Siberian oil to China first or at the same time as it sends the oil to Japan via a planned pipeline. Moscow also will negotiate more arms deals with potential and current U.S. adversaries (such as Syria, Venezuela and Iran) and support international initiatives within and outside of the United Nations that are contrary to Washington's wishes. Germany, France, China, India, Brazil and Venezuela -- which have their own interests in forging an alliance with Moscow -- are likely to be Russia's major partners.
Other expected tactics include advancing international agreements and initiatives that might curb U.S. global domination and trying to block sanctions and other actions against U.S. adversaries. Russia and China had even planned military exercises for the summer, but those plans were derailed by disagreements over location and scope. The exercises will take place in the fall.
Putin also will make a dramatic attempt to change Washington's and Western Europe's minds about Russia this quarter. There is no better chance for that than Russia's May 9 celebration of V-Day in Europe -- an event to which virtually all major world leaders are invited.
Putin's attempt to come to a general agreement with U.S. President George W. Bush probably will fail. Bush will want more unilateral concessions from Russia (such as allowing the United States to inspect active Russian nuclear arms sites), and Putin, on top of being incapable of fulfilling Bush's demands, will be frustrated with Washington's refusal to respect Russia's national interests.
However, Putin might create a gap between Washington and Europe on their policies regarding Russia by signing an EU-Russian overall strategic agreement. The agreement, outlining cooperation in international and internal security, economy and human rights, is expected to be signed at the May 10 Russian-EU summit.
Putin's grip over the country, and especially the elite, will weaken this quarter, with some members of his government -- secretly or otherwise -- working against him and trying to gain political strength to use in a Russia without Putin. Russia will see major protests, this time mainly against new liberal reforms in housing and utilities that will impoverish more Russians than the monetization of social benefits; everyone will be affected by these reforms, with just a handful of the rich able to bear it well. Both leftist (nationalist and Communist) and right-wing (liberal, pro-Western) oppositions will try to capitalize on the protests and on Putin's decreased popularity.
Peculiar alliances between the left and right will become possible. Some of Putin's "friends" will initiate contact with nationalist forces trying to lift Russia out of its perceived subjugation to Washington, while others will work with pro-U.S. forces and Washington itself in hopes of leading Russia's pro-Western movement. Putin's response will be limited, as he will try to play the opposition camps off each other. He could sack some ministers -- and even the whole government -- if protests become too powerful to contain without such an action.
The largest protests resembling "pro-Western revolutions" in other FSU nations (Georgia, Ukraine, Kyrgyzstan) will happen in non-Russian areas of the Russian Federation, where a majority or a significant minority are ethnic non-Russians -- especially its Muslim-dominated autonomous republics, such as Bashkortostan, Tatarstan and the North Caucasus republics.
In the war against Chechen militants, the Russians have the upper hand and will try to maintain that by attacking Chechen positions and assassinating Chechen leaders. In particular, Russian forces will continue their systematic campaign to hunt down Chechen and foreign militant commanders in this quarter, having had some success in killing or capturing some commanders already.
In part because of this campaign and increased counterintelligence efforts, Russians will be able to uncover some -- but not all -- militant attack plots. The Chechen militancy, which is morphing into an Islamist militancy, could try to launch large-scale attacks, probably even targeting Moscow. Attempted attacks against nuclear facilities are possible but not very likely, as Russian intelligence will lead Moscow to increase security at strategic sites.
In the Chechen theater, the militants will continue to lose influence among the locals, who are growing tired of war and angry with hardcore Islamist militants taking prime roles within the resistance. The nationalist wing will wane and play a secondary role in the war, but the war will continue in Chechnya, with Islamist militants trying to expand the fighting to other parts of the North Caucasus.
The West's geopolitical offensive into the FSU will continue in full force this quarter; Europe will remain aligned with Washington on the issue of changing pro-Russian or neutral regimes or policies into pro-Western regimes or policies in FSU states. Openly pro-Western FSU regimes, such as Moldova's current government, will stay in power; any radical pro-Western opposition that could arise would get only limited support from the West. Leaders who try to remain on the fence will face direct threats of popular "revolutions," with the West applying pressure toward that end.
Putin's unwillingness to challenge Washington directly in the region -- and other FSU leaders' fears of confronting the West -- will prevent the formation of an FSU front united against new "revolutions." Yet Kazakh President Nursultan Nazarbayev and Putin could try to form such an alliance this quarter. Opposition will increase in Armenia, Azerbaijan, Kazakhstan and Tajikistan; even tightly ruled Uzbekistan will see mass protests this quarter. Kyrgyzstan probably will be in turmoil this quarter after the ouster of former President Askar Akayev, and regional and interethnic tensions will prevail. We think the current FSU governments will survive this quarter, only to see more trouble later in the year.
Russia's influence will weaken further within the FSU and around its borders, with more small states starting -- with the West's official or unofficial encouragement -- to put forward territorial claims on Russia this quarter. An agreement on withdrawing Russian bases from Georgia earlier than planned probably will be reached. Georgia, using the momentum gathered from strong support from the United States and Russia's continued weakening, could try to increase diplomatic pressure and even pursue a military solution to the problem of its breakaway regions.
Asia
In our annual forecast, we said that 2005 would be seen, in retrospect, as the year the Chinese economy began to go south. This already is starting to show as Western media and investment firms begin a more open discussion of China's economic problems, as scandals in the banks once again emerge, as the stock markets continue their decline and as consumption in high-end products, such as automobiles, slows.
The problem is not economic per se -- although there are serious structural deficiencies in the Chinese system that echo much of the rest of Asia. There are solutions for these structural issues, even if they are somewhat painful. The real problem in China is political. The Chinese government recognizes the problems -- perhaps even more so than outside observers, who continue to view China through rose-tinted glasses. The difficulty comes not in recognizing the problem but in acting.
A quick, sharp knife can cut out the deadwood of the Chinese economy. But the social shock waves would be tremendous, and Beijing is far from ready to deal with that. To further complicate matters, the central government has only tenuous control over the provincial and local leaders and Communist Party functionaries. Even if Beijing requires limits on lending and cuts off the flow of funds to the ailing state-owned enterprises (SOEs), the regional and local leaders would continue to lend, both to help out family and friends who run the SOEs and to avoid having a concentrated unemployment problem in their own jurisdictions.
In the second quarter, we expect to see the tensions between the central and regional governments begin bubbling to the surface. Beijing wants to act but has yet to find a complete solution. Thus it is acting piecemeal, often taking a few steps backward for every step forward. But as the central Party edicts become more pronounced, the regional leaders will find it harder to slip under the radar and will be forced to make a choice between giving in or blatantly ignoring or opposing the central government.
At the same time, Beijing is focusing on cleaning up its flagship state banks to prepare for listing and foreign investments. Already the head of the China Construction Bank has been canned, and more banking officials are sure to follow. But the removal of one corrupt element for another does little to solve the problem. And replacing the corrupt with uncorrupt officials who are simply another cog in the wheel of Chinese economics -- lending to keep SOEs afloat and postpone the crisis -- does even less.
For Beijing, however, the pressures are not only internal. The United States once again has set its sights on containing what it perceives as one of the few potential strategic threats for the future. As Washington rolls back the Soviet frontier in Europe and Central Asia, it is tightening the noose on China -- strengthening military ties with Australia, Japan, the Philippines, Taiwan and Indonesia. It is the addition of Indonesia to the chain of U.S. defense allies in East Asia that is most troubling for China, since Indonesia controls the southern flank of the South China Sea and -- in league with Singapore, another U.S. ally -- the vital Strait of Malacca.
Washington's ties with Canberra and Jakarta will grow this quarter, and public expressions of friendship (if not strategic partnership) will abound. Indonesia has broken free, largely, from the chains of its past actions in East Timor, and with or without Congressional approval, the U.S. executive branch is welcoming the prodigal son. China's response will be to push its claims on the South China Sea -- through attempts at energy exploration and through the resurgence of "scientific" voyages of naval vessels. Beijing is not yet ready to confront the United States, but it no doubt will make its displeasure known.
The tactical deployment of Chinese nationalism will play into this as well. This is sometimes a tricky thing, as the experience with the untimeliness of the Anti-Secession Law and the EU discussion of lifting the arms embargo has already shown. But the exploitation of anti-Japanese sentiments appears an easy and low-risk option for which Tokyo provides unlimited excuses. Though it might keep the Chinese populace focused on the imperial atrocities of half a century ago, it only buys time, and not much of that.
The place where it all comes together is North Korea. This quarter could see a breakthrough in the question of the North Korean nuclear crisis -- though not necessarily in the way Washington would prefer. If China feels threatened by the United States (and this seems a given), it will seek to exploit its relationship with Pyongyang to either relieve some pressure or increase Washington's pain elsewhere. Beijing also likely will try to exploit its emerging ties with countries, such as Venezuela, to needle the United States in its own backyard.
For North Korea, there is a growing belief inside Pyongyang that August is the end of the current nuclear crisis -- if the situation is not resolved through agreements, Pyongyang could simply stop talks and expect the world to accept it as a nuclear power. But that is still a few months off. In the meantime, Pyongyang will accelerate its exploitation of the rifts and weaknesses in the six-party-talk system. Just as Beijing is hoping to play the North Korea issue, Pyongyang sees the potential for the re-emergence of two sponsor states -- Russia and China -- decreasing the need for an accommodation with Washington.
Pyongyang also sees a South Korea that -- as long as Roh Moo Hyun is in charge -- appears rather locked into the process of integrating the North to the South economically and through common infrastructure development. And with Pyongyang, Seoul and Beijing all agreeing on their discomfort with the United States in Asia and their disdain for Japan's resurgence, there is growing room for cooperation.
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