- SUMMARY
-
- * Russia will begin the process of recreating
old Soviet empire in 1999. The most important question of 1999: will Ukraine
follow Belarus into federation with Russia?
-
- * Russia and China will be moving into
a closer, primarily anti- American alliance in 1999.
-
- * Asian economies will not recover in
1999. Japan will see further deterioration. So will China. Singapore
and South Korea will show the strongest tendency toward recovery.
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- * China will try to contain discontent
over economic policies by increasing repression not only on dissidents,
but the urban unemployed and unhappy small business people. Tensions will
rise.
-
- * Asia will attempt to protect itself
from U.S. economic and political pressures. Asian economic institutions,
like an Asian Monetary Fund, will emerge in 1999.
-
- * The Serbs, supported by the Russians,
will test the United States in Kosovo. There is increasing danger of a
simultaneous challenge from Serbia and Iraq, straining U.S. military capabilities
dramatically.
-
- * The main question in Europe will be
Germany's reaction to the new Russia. The Germans will try to avoid answering
that question for most of the year.
-
- * Latin America appears ready to resume
its economic expansion, beginning late in 1999.
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-
- FORECAST
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- The Post-Cold War world quietly ended
in 1998. A new era will emerge in 1999. It will appear, for a time, to
be not too dissimilar to what came before it, but looks can be deceiving.
In fact, we have entered an era with a fundamentally different global dynamic
than the previous era. We should not think of the period 1989-1998 as
an era. It was an interregnum, a pause between two eras. 1999 will see
a more conventional, natural world, in which other great powers in the
world will unite to try to block American power. In 1998 the United States
worried about Serbia, Iraq and North Korea. In 1999, the United States
will be much more concerned with Russia, China, France and Japan. The
world will not yet be a truly dangerous place, but it will begin the long
descent toward the inevitable struggle between great powers.
-
- Two forces are converging to create this
world. The first is the recoil of Russia from its experiment in liberalism.
The other is the descent of Asia into an ongoing and insoluble malaise
that will last for a generation and reshape the internal and external politics
of the region. In a broader sense, this means that the Eurasian heartland
is undergoing terrific stress. This will increase tensions within the
region. It will also draw Eurasian powers together into a coalition designed
to resist the overwhelming power of the world's only superpower, the Untied
States. Put differently, if the United States is currently the center of
gravity of the international system, then other nations, seeking increased
control over their own destinies, will join together to resist the United
States. Russia will pose the first challenge. Asia will pose the most
powerful one.
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-
- Russia Begins its Quest to Recover Great
Power Status
-
- The die has been cast in Russia. We
wrote in our 1998 Forecast http://www.stratfor.com/services/giu/1998.asp:
"Whether or not Yeltsin survives politically or personally is immaterial.
The promise of 1991 has become an untenable nightmare for the mass of
Russians. The fall of Communism ushered in a massive depression in the
Russian economy while simultaneously robbing it of its global influence."
In 1998 we saw the consequences of this. The reformers in Russia were
systematically forced out of power. Power seeped out of Yeltsin's hands.
Finally, a new Prime Minister was selected -- the former head of the KGB's
international espionage apparatus. A restoration of sorts is well under
way in Russia.
-
- Personalities are unimportant. What
is important is that in 1998, the massive failure of the reformers resulted
in their being forced from power. The West, which had invested in Russia,
realized that it would never recover those investments nor many of the
loans they made. As a result, investment and credit ceased flowing into
Russia and, therefore, Western influence plummeted. There was no reason
to appease the West if no further money was forthcoming. The Russian love
affair with the West came to an abrupt halt. As so many times before in
Russian history, the pendulum is moving from adoration of the West to suspicion
and contempt. As before, the Westernizers who dominated Russia for the
past decade are being replaced by Slavophiles, who will seek to root out
Western influence while they liquidate the Westernizers.
-
- Russian politics has searched for a center
of gravity ever since the reformists began to lose credibility. In December
1998, that center of gravity emerged in the form of Russian chauvinism
and anti-Americanism. When the United States bombed Iraq without even
consulting the Russians, the lid suddenly came off of the pent up anger
Russians felt at their loss of great power standing. The one thing that
every significant faction in Russian politics agree on today (save for
the dwindling band of liberals) is that the loss of great power status
is intolerable. Primakov, Zhirinovsky, the Communists and even Yeltsin
agree on little save this -- Russia must recover its great power status.
It is the only unifying principle left in Russian life.
-
- The corollary to this is a growing Russian
consensus that Russia has been victimized both by Western investors and
by the United States. Investors are seen has having taken advantage of
Russia's eagerness to please the West, exploiting it shamelessly. The United
States has treated Russia as if it were a third world country, subjecting
it to continual humiliation. All of this has tapped into a deep vein
of Russian chauvinism and xenophobia. In a country that has become virtually
ungovernable, this powerful nationalism is now the only means of uniting
the country. No one can govern Russia any longer except on a powerful,
nationalist platform.
-
- The situation in Russia reminds us of
the last days of Weimar Germany. Unable to provide either prosperity or
national security, Weimar Germany was replaced by a regime that used national
security issues as a means to unite Germany and revive the economy through
military spending. Yeltsin's Russia has lost all credibility, failing
to provide either prosperity or national security. Where Germany focused
on the Rhineland, Sudetenland and the Danzig Corridor, Russia will focus
on the Baltics, Ukraine and Central Asia. We expect to see massive increases
in defense spending, intended both to increase Russian power and stimulate
the Russian economy.
-
- As with Germany, not all of the former
fragments of the old Soviet empire are opposed to reintegration. On December
25, 1998, exactly six years after the dismantling of the Soviet Union,
Russia signed a treaty with Belarus, essentially establishing the foundations
of reunification. That set, the focus for 1999 will be Ukraine. If Ukraine
follows Belarus back into federation with Russia, the geopolitical essence
of the former Soviet Union will have been recreated. Then the focus will
be on the Caucuses, Central Asia and the Baltics. But first and foremost,
the burning question of 1999 will be Ukraine. We predict that Ukraine
will join Belarus in returning to federation, in spite of belated efforts
by the West to keep them out.
-
- After that, Russia will face a generation
of reabsorbing its former constituents. Each step of reabsorption will
bring it into greater conflict with other nations. Its move back into
Central Asia will bring it into direct conflict with the United States,
which has made huge investments in oil development in the region. Its
move south into the Caucuses will collide with Iran and Turkey. But it
is the move west that will be the most dangerous. In 1999, Russian troops
will once again find themselves on the Polish border, a Poland now part
of NATO. As Russian pressure grows on the Baltic States, this border area
will become explosive.
-
- But the first confrontation will come,
we think, over Serbia, where we expect Russia to increase direct aid to
Serbia openly, thereby challenging U.S. policy in Bosnia and Kosovo. Serbia,
watching U.S. fumbling over Iraq, and emboldened by Russian support, is
clearly preparing a new challenge to the United States over Kosovo. Serbia
is calculating that the United States will not risk a major confrontation
with Russia, and France may choose to oppose a full-scale anti-Serbian
intervention. The dangers of a new confrontation with Serbia rise as Russian
nationalism intensifies. There is particular danger if Serbia and Iraq
challenge the United States simultaneously.
-
-
- Asia Seeks Political Solutions to Continuing
Economic Malaise
-
- Russia will not represent a global threat,
but it will challenge U.S. power along its periphery, in a contest that
will begin in 1999, but will take a generation to play out. Nevertheless,
the United States will face threats globally, owing to the evolution of
the Asian financial process. Note that we say process and not crisis.
Asia is no longer in crisis. It is now in an endemic malaise, from which
it cannot, generally speaking, recover. Asia's economic dysfunction is
no longer a crisis, but a long- term Asian condition.
-
- Since some are predicting recovery in
1999, let us explain why we are so negative. The essence of the Asian
crisis, as we have said many times, is to be found in the appallingly low
rate of return on capital that Asian economies have experienced. This
low rate of return is rooted in the ability of Asian governments to abort
the business cycle through export-generated growth and high savings rates.
Because interest rates were kept artificially low, businesses that had
no business surviving actually expanded. They grew in spite of the fact
that they were only minimally profitable, if at all. These businesses
soaked up available credit, while continuing to erode financially. In
the end, they could not even repay their loans.
-
- Recessions are normally triggered by
rising interest rates. The rising cost of money forces marginally profitable
business to restructure or fail. This is an essential aspect of the discipline
of capitalism. Capitalism without business cycles is a contradiction in
terms. Nevertheless, Asian governments managed to avoid this discipline
for almost half a century. They avoided business failures, lay-offs, restructuring
and all the nastiness of capitalism. The net result is a group of economies
that are breathtaking in their inefficiency.
-
- The key is Japan. Japan led Asia into
its current situation. Japan must lead Asia out. But Japan is institutionally
committed to preventing the needed massive, shattering, agonizing restructuring
of its economy. It cannot proceed. The huge dinosaurs of the Japanese
economy must be compelled to restructure. The only force that can compel
them to do this is rising interest rates. As Japanese credit worthiness
continues to decline, foreign investment and loans are either drying up
or available only at much higher interest rates. Internally, the Japanese
government continues to protect the dinosaurs by keeping interest rates
absurdly low. Japan understandably wants to prevent a massive collapse
of the economy. But unless the economy is permitted to collapse, it cannot
be reconstructed. In other words, Japan can neither endure the disease
it has caught or the medicine that can cure it. It is not Japan's politicians
that have created gridlock. It is the Japanese reality.
-
- This is the agonizing dilemma throughout
Asia. Having played with the business cycle for generations, inefficiencies
have built up to such a degree that the culling that must take place will
be cataclysmic. Socially, Asian societies are completely unprepared to
pay the price they must pay in terms of unemployment, declining standards
of living, and loss of control to foreign investors and creditors. Politically,
leaders are trapped between the economic and social realities. They are
therefore paralyzed. The inefficiencies continue to rise, hopes of recovery
are constantly aborted by economic realities, and social tensions rise.
-
- In weaker Asian societies, such as Indonesia,
society has already essentially exploded and the government is trying to
contain the consequences. In some countries, like Singapore and South
Korea, owing to fortunate circumstances and skillful political action,
restructuring is actually taking place within the existing political framework.
In Japan, however, the government's inability to bear the social consequences
of depression has paralyzed it. This is not because Japanese politicians
are stupid or weak as some have charged. The paralysis of the Japanese
state is built into the collision of the Japanese economy with Japanese
society. There can be no solution without a radical restructuring of the
Japanese political order, replacing it with a structure that is able to
impose pain on a society unprepared to endure it.
-
- This is precisely what China is trying
to do. On the one hand, China is permitting economic reality to ravage
its economy. It is shutting down inefficient businesses, allowing unemployment
to rise, allowing standards of living to begin falling. It is also taking
political steps to control the situation. Apart from its very public crushing
of dissent, Beijing is shifting its political base away from the coastal
regions to the interior agricultural regions, by shifting state investment
patterns. It is not clear that China will succeed in this partial, politically
controlled house cleaning. It may well be, as we strongly suspect, too
little and too late. But the combination of powerful political repression
with some degree of restructuring may well become an Asian model.
-
- It is a model that can mitigate the economic
problems, but cannot solve them. Asia cannot endure the long-term reconstruction
needed to make it competitive with a rampant America. As Asia becomes
less competitive, it will find that it must protect itself against American
economic encroachment. Obviously, the U.S. is sensitive to Asian exports
surging into the United States. But the real friction is caused by the
Asian need for U.S. investment and Asia's inability to pay the price it
must to get it.
-
- Japan badly needs U.S. investment and
credit. It cannot solve its problems without them. But U.S. investors
and lenders require a level of transparency and a degree of control that
is incompatible with Japanese social requirements. Someone lending billions
to bail out a Japanese bank will want a large degree of control over that
bank. American owners will want to make investments based on economic
rationality rather than on the bank's keiretsu relationships. The intrusion
of American capital would cause the very social chaos that Japanese politicians
badly want to avoid. This holds true throughout most of Asia. Asia is
unable to generate sufficient capital to solve its problems, unable to
restructure its economies to generate that capital, and unwilling to allow
an uncontrolled influx of American capital on American terms.
-
- Asia cannot solve its problems. It is
therefore caught in a process of mitigation, keeping things from becoming
unacceptably bad. In order to do this, Asia must seek to insulate itself
from the United States in particular and the global economy in general.
It appears to us that the Asian solution will be to create Asian institutions
to supplant the global institutions within which Asian economies are increasingly
uncompetitive. We expect to see increased resistance to American demands
for trade liberalization along with increased utilization of Asian solutions
to problems, from using the yen as a reserve currency to an Asian Monetary
Fund to Asian based security systems. We expect 1999 to be a year in which
Asia begins creating Asian institutions.
-
-
- The Sino-Russian Alliance Redefines the
World
-
- Asia's efforts to work around its fundamentally
insoluble economic malaise will lead to increased friction with the United
States on all levels. Most important immediately, we see the reemergence
of a Moscow-Beijing axis designed to block unilateral American actions
in Eurasia. Furthermore, this relationship will both insulate Russia and
China from U.S. political and military pressure, and create politico-military
counter-pressure on the United States designed to elicit greater economic
cooperation. 1999 will be the year in which this alliance will take full
shape.
-
- There will be outriders to this alignment.
Japan is increasingly at odds with the United States over economic policy.
It also seems to be developing an independent assessment of the North
Korean threat. As U.S. pressure on Japan to liberalize its markets increases,
Japan's search for alternatives will increase as well. Its search for
economic alternatives is already well under way. But in order to create
economic alternatives to the U.S. sponsored global systems, Japan will
need political traction. Japan will not join in the Russo-Chinese alliance,
but it will use it to attempt to extract concessions from the United States.
-
- There will be other outriders. France
is already clearly cooperating with China and Russia. This was visible
in the Iraq affair. The question is what pressure it will put on the new
Europe. We were clearly wrong when we expected the Euro to fail. The Euro
is here and seems likely to work in the short run. However, with French
foreign policy increasingly anti-American, the question is whether the
rest of Europe will follow. To be more precise, the question is whether
the Germans will follow the French lead.
-
- Germany is now deeply torn. The political
instincts of the new government, forged in the 1960s, reflect a profound
uneasiness with the United States and its leadership. French policy is
attractive. However, fear of Russia is also a visceral feeling in Germany,
and mismanagement there could quickly destabilize the government. With
Russian troops on the Polish frontier, the old German nightmare, the Polish
question, is about to arise. Happy to have the buffer, but reluctant to
forward deploy in Poland (and unlikely to be welcomed by the Poles), the
Germans need the United States to counterbalance the Russians. At the
same time, a solid arrangement with the Russians is also attractive. Germany
is now in the process of defining an identity and a policy for the 21st
century. It is simply unclear to anyone, including the Germans, what this
identity will be. 1999 will not be the year this is settled.
-
-
- The United States Rolls Blithely On
-
- Then there is the United States. We
continue to expect the U.S. economy to expand. There will undoubtedly
be a cyclical downturn at some point, but it will not be historically significant
and it may not come for a while. We have heard a great deal from those
who expect the U.S. economy to implode because of Asia. Asia will undoubtedly
have some effect. But the Asian crisis has been in full swing from over
a year and the U.S. economy has been only marginally affected. We just
don't see indications that the expansion is about to end. We have been
bullish on the U.S. economy since 1995 and we continue to see this as a
massive, long-term movement driven by the restructuring of the 1980s.
-
- We expect others, particularly Latin
America, to benefit from this historical American expansion. In spite
of the problems in Brazil and Venezuela, we feel that the worst has already
been seen and the probability of an upturn later this year is extremely
strong. We continue to feel that Latin America will see the strongest
growth of any region in the first decade of the 21st Century. The 1998
downturn, while unexpected, represented the rapid cycling of capital markets
in an immature economy, not the wheezing senility of Asia. Just as Latin
America deteriorated with surprising vigor, it will, we think, recover.
By late 1999, we expect to see a major Latin American rebound underway.
-
- As rosy as the economic picture is in
the Western Hemisphere, the foreign policies of the United States are increasingly
unsettling. U.S. policy in Iraq has essentially collapsed. U.S. policy
in Serbia, where we expect another crisis shortly, is now going to be challenged
by the Russians, making the U.S. mission much more dangerous and much less
soluble. North Korea will similarly become unmanageable. The Wye Accords
between Israel and the Palestinians are coming apart at the seams. Whether
Bill Clinton survives his crisis is at this point, 1999, fairly irrelevant.
What is relevant is that the United States has not created a foreign policy
identity for itself, and has not planned for a world increasingly resistant
to its policies.
-
- That is the key to 1999. We are in a
world increasingly resistant to the one superpower. There is no second
superpower, but there are several great powers. These great powers are
in the process of cobbling together an alliance that, taken together, may
not fully counterbalance the United States, but will serve to limit American
freedom of action. Behind the shield of this alliance, built around China
and Russia, we expect to see increasing Asian economic integration, designed
to limit the effects of the global economy on their insulated societies.
We also expect to see increasing regional Russian imperialism, increasing
Chinese repression, increasing attempts by others to use the Russo-Chinese
alliance for their own ends and therefore, a new and dangerous world.
1999 is the first of many years of increasing tension and conflict involving
not only minor players, but also the world's great powers. It is the beginning
of what will prove to be a tense first decade in the 21st century.
-
-
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