Annual Forecast 2016
With old geopolitical realities resurfacing across Eurasia and commodity prices stuck in a slump, 2016 is shaping up to be an unsettling year for much of the world.
A logical place to begin is the country that bridges Europe and Asia: Turkey. This is the year when Turkey, nervous but more politically coherent than it was last year, will likely make a military move into northern Syria while trying to enlarge its footprint in northern Iraq. Turkey will not only confront the Islamic State but will also keep Kurdish expansion in check as it raises the stakes in its confrontations with its old rivals, Russia and Iran.
The last thing Russia wants is a confrontation with Turkey, the gatekeeper to the Black and Mediterranean seas, but confrontation is something it cannot avoid. Russia risks mission creep this year as it increases its involvement on the Syrian battlefield. But the Islamic State will be only part of Moscow’s focus in Syria; Russia will try to draw the United States toward a compromise that would slow a Western push into Russia’s former Soviet space. The United States will be willing to negotiate on tactical issues, but it will deny Moscow the leverage it seeks by linking counterterrorism cooperation to a broader strategic discussion. The U.S. administration will work instead to shore up European allies on the front lines with Russia.
Regardless of the participants’ secondary motives, an intensified military campaign against the Islamic State will surely damage the militant group’s core. However, the fledgling caliphate will not be eradicated this year. A lack of reliable ground forces will hamper the anti-Islamic State campaign. And the more the Islamic State’s conventional capabilities weaken, the more actively the group and its affiliates will try to conduct terrorist attacks outside the Middle East to maintain its relevance. This in turn will drive competition within the jihadist landscape as al Qaeda factions in the Arabian Peninsula, the Maghreb, West Africa and South Asia try to keep pace.
The jihadist threat will fuel Islamophobia in the West and catalyze the fragmentation of Europe. Border controls and calls for preserving national identity will dilute the EU principle of allowing free movement of people. Closed borders will create a bottleneck of migrants in the Western Balkans, a region already rife with ethnic and religious tension. But the main story in Europe for 2016 will center on France and Germany, the two pillars of the European Union. Both will be preparing for 2017 elections, and both are leaning in a more nationalist and Euroskeptic direction. Over time, Germany will become more outspoken and much less willing to compromise on matters of EU integration.
The continuation of quantitative easing and another year of low oil prices will have a palliative effect on the deeper frictions in Europe as global commodity markets continue to suffer. The addition of Iranian oil to the market in the first half of the year will offset a drop in U.S. production. Any change to Saudi Arabia’s oil output would come later in the year, after Riyadh has assessed the price impact from Iran’s return as well as the effect on U.S. shale producers. Any attempt by Riyadh to coordinate a drop in production with Kuwait and the United Arab Emirates would come only after this assessment. Regardless of Iran’s impact, Saudi Arabia will still be prepared to take on more debt and draw down reserves to cope with low oil prices.
China will not bring about relief in commodity prices, either. Consumption growth will slacken as Beijing struggles to implement reforms amid growing dissent among the Party elite. Even as Beijing faces the threat of party factionalization, it will still have enough economic heft to offer incentives to Southeast Asian states to counterbalance a stronger U.S. security presence in the region.
Low commodity prices and rising U.S. interest rates, which affect currencies, will also spell another difficult year for much of Latin America. The threat of impeachment will hang over Brazilian President Dilma Rousseff and further sour the investment climate in Brazil in the short term. Argentina may have a new, reform-minded president, but his struggle with high inflation and foreign currency shortages means any moves to settle debt and to raise protectionist measures will be limited. In Venezuela, the end of Chavismo is near. An embattled United Socialist Party of Venezuela will eventually splinter under growing political and economic pressure, and the country risks defaulting on its foreign debt this year.
The defining events of 2016 will raise apprehension around the world, leading into what will likely be an even more tumultuous 2017 as an array of developing conflicts comes into sharper focus. The essential thing to bear in mind is that all these trends are connected. The U.S.-Russia standoff, surging nationalism in Europe, Turkey’s re-emergence and other geopolitical currents will tie in to and feed off of one another. We will keep our eyes fixed on the bigger picture in 2016, for there is a much more complex one developing in 2017.
Forecasts by Region
Europe
Germany and France Move to the Right
Greece Remains Troubled
Political Fragility in Southern Europe
The British Question
The Migration Crisis Risks Reigniting the Balkans
The Eastern Front
Former Soviet Union
A Broad Standoff Endures
Russia Focuses on Security and the Economy
Ukraine’s Domestic Troubles
Political and Security Concerns in the Former Soviet Space
Middle East and North Africa
All Eyes on Turkey
The Islamic State Persists
Iran Returns to the Oil Markets
The Next Phase of the Yemen Conflict
Israel’s Security Dilemma Grows
A Difficult but Manageable Year for Cairo
North Africa Fights Instability
East Asia
Pushback in Beijing
Southeast Asia’s Balancing Act
Japan’s Regional and Domestic Role
Notable Elections in the Region
Latin America
Venezuela’s Decline Continues
Brazil’s Economic and Political Challenges
Argentina’s New Government Addresses Debt Problems
Colombia Nears a Peace Deal With Rebels
Mexico’s Criminal Groups Fragment
Bolivia’s President Seeks Another Term
Peru’s Economy Stays Afloat
South Asia
India Struggles With Reform
Pakistan Pursues Security
Peace Talks With the Afghan Taliban
The Islamic State and the Evolution of the Afghan Insurgency
Afghan Insurgents Raise Regional Concerns
Sub-Saharan Africa
Leaders Throughout Africa Cling to Power
South Africa: The ANC’s Slow Decline
Nigeria: Slow Progress on Energy, Corruption and Security
West Africa Tries to Cope with Low Oil Prices
East Africa Attempts to Put Itself on the Global Energy Map
Security Concerns in East Africa
Europe
Germany and France Move to the Right
This will be a transition year for Germany and France. Both countries have elections in 2017, and politically both are moving in a more nationalist and Euroskeptical direction. The foundation of the European Union, the Franco-German relationship, will show signs of cracking as the interests of Paris and Berlin inevitably begin to diverge. Germany will oppose France’s proposals to deepen continental integration (especially among eurozone countries) and increase spending across the bloc. Berlin and Paris will find it increasingly difficult to find common ground on measures to protect the European Union.
German Chancellor Angela Merkel will come under pressure as divisions widen between conservative and progressive members of her coalition. Regional elections in March will serve as a popularity test for Merkel’s Christian Democratic Union. Should her party perform poorly in the elections, calls for her resignation will grow louder.
Thanks to pressure from the conservatives, border controls will remain frequent, and Berlin will look for ways to prevent people from arriving in Germany. The conservatives will also compel Berlin to take a tougher stance on Greece, especially because Athens, in an effort to avoid social unrest, will drag its feet in enacting economic reforms.
Greece Remains Troubled
In Greece, the government of Prime Minister Alexis Tsipras faces two main problems: political fragility and social unrest. The Greek economy has another year of negligible growth and extremely high unemployment ahead of it. This will lead to repeated protests and frequent conflicts within the government, which in turn will force the administration to slow the process of reform.
A collapse of the Greek government cannot be ruled out because Tsipras leads only a very small parliamentary majority. However, the Greek establishment wants to avoid early elections, so even if the government fell, it would be replaced by a technocratic or coalition government that would still be able to approve legislation.
In 2016, Greece’s main threat will be social unrest, not debt repayments. A repeat of the 2015 crisis seems unlikely because Greece does not face a particularly pressing calendar of debt maturities. This means that the risk of a Greek default or exit from the eurozone is lower than in 2015. But Germany’s tenacity and Greece’s resistance will make every bailout review tense, and negotiations over potential debt relief will probably be delayed until late 2016. We do not expect Greece to exit the eurozone in 2016, but Greece’s problems are far from resolved. Increasing resistance to reforms, initially among the public but then in the political sphere as well, set the country up for another inevitable confrontation with its creditors down the line.
Political Fragility in Southern Europe
In Portugal, a fragile coalition of left-wing parties will struggle to remain in power, and early elections are likely. Following Dec. 20 elections, Spain will spend the first weeks of the year trying to form a sustainable government. An agreement will finally be reached, but Spain’s limited experience with coalition governments will make decision-making slow and cumbersome.
Neither Portugal nor Spain will return to the financial instability that defined the early years of the European crisis. Most of the main political parties in both countries are pro-market and defend the membership of their countries in the eurozone, so political frictions will not lead to a dramatic change of direction in Lisbon or Madrid. In addition, a combination of low oil prices and the European Central Bank’s intervention in debt markets should prevent an escalation of the economic crisis in the Iberian Peninsula.
However, both countries will probably reverse some of the reforms that were applied by their predecessors. In the long run, this will re-create the conditions that led to the crisis in the first place. The behavior of countries in Mediterranean Europe will also make the European Commission increasingly ineffective.
In Italy, the government of Prime Minister Matteo Renzi will seek a balance between introducing economic reforms and increasing public spending. One of the main challenges for Rome will be the introduction of reforms in the pension system to make it more sustainable. Italy will also hold a referendum in the second half of the year on the constitutional reforms that were approved in 2015.
Renzi will continue to deal with resistance within his own party, but the prime minister will probably manage to make his reforms. A key event to watch for in 2016 is the evolution of the center-right as conservative and Euroskeptical forces try to form a common front to compete in the next elections (which are technically scheduled for 2018 but will probably happen before then). Italy’s underlying economic situation will continue to deteriorate; Rome will increase spending while failing to deal with its debt problems, creating problems for itself (and Europe) in the near future. But although increasingly troublesome indicators are likely to arise — such as rating agency downgrades or intensifying problems in the Italian banking sector — no systemic crisis is expected in 2016, mainly because of the European Central Bank’s ongoing bond-buying program.
The British Question
One of the main issues in 2016 will be the British referendum on EU membership. The vote is expected in late 2016 or early 2017. Some of London’s proposals for EU reform, such as reducing red tape and increasing competitiveness, are uncontroversial and are likely to produce an agreement among member states. The United Kingdom will probably also be promised protection for non-eurozone countries against measures that affect the currency union, and London will even receive the ability to opt out of the concept of an “ever closer union.” The United Kingdom’s push to reduce in-work benefits for immigrants will prove more troublesome and will require London to compromise.
London’s proposals for EU reform will produce different alliances over different issues. Some countries, including the Netherlands and Poland, will support the demands to give national parliaments veto power over EU legislation. Other countries, mostly in Northern Europe, will support the demands to restrict access to welfare for immigrants, but countries in Central and Eastern Europe will resist them. Countries in Central and Eastern Europe (specifically Poland, Hungary and Romania) will defend policies to protect non-eurozone countries from eurozone decisions.
As a result, British Prime Minister David Cameron is likely to make compromises and present them as a political victory at home. Though opinion polls show very different results when it comes to British citizens’ view of EU membership, London will try to keep the United Kingdom in the bloc. If there is a referendum on the issue in 2016, the “in” side will win.
The Migration Crisis Risks Reigniting the Balkans
The immigration crisis will continue its cyclical behavior: During the early months of the year, cold temperatures and bad weather will probably lead to a reduction in the inflow of people into Europe. The flow will increase as summer approaches, but asylum seekers will find a different Europe in 2016. Border controls will become more frequent, and countries along the so-called Balkan routes will be less tolerant of immigrants crossing their territories. For the first time since its creation, the Schengen Agreement will not end the year as it began it; either free movement will be somewhat constrained, or fewer countries will be members.
As a result, asylum seekers will find it harder to reach Northern Europe. Some of them will be forced to look for new routes while others will be stuck in the Western Balkans. This will increase the probability of violence in the region as some people become involuntary immigrants in countries already experiencing high unemployment, ethnic tension and fractious politics.
The Eastern Front
2016 will be intense for Poland and Romania, the largest countries on the eastern EU border. In Poland, the conservative government will push the European Union to maintain a hard-line stance on Russia and will criticize Germany’s handling of EU issues, including immigration and relations with Moscow. Berlin will argue that the Minsk peace agreement is not being completely respected and will pressure Southern European countries that have more flexible relations with Russia to continue the sanctions. At the same time, Berlin will try to protect its energy ties with Moscow (for example, by defending the Nord Stream 2 project), which will antagonize Germany’s eastern neighbors.
Poland will demand a greater NATO presence in Central and Eastern Europe while trying to develop stronger ties with the Visegrad Group (which also includes Hungary, the Czech Republic and Slovakia) and Romania. As Poland becomes more distant from Brussels and Berlin, it will draw closer to the Visegrad countries and occasionally the United Kingdom. Warsaw will also make controversial moves at home, such as lowering the retirement age and creating special taxes on sectors such as banks and supermarkets. These policies will invite criticism from both the European Union and foreign investors.
In Romania, the technocratic government will have an auspicious start but will lose steam over time. Bucharest will remain committed to its alliance with the United States and its membership in NATO and the European Union. Romania will also continue to support Moldova’s path to EU accession and maintain a cold relationship with Russia. However, political support for the government will erode gradually, especially as the parties that support the technocratic administration begin making their own calculations ahead of the general elections in December.
Countries along the European Union’s eastern border will spend 2016 trying to improve regional cooperation and to boost NATO’s engagement in the area. During a NATO summit in Warsaw in July, Poland and others will request a permanent NATO presence in Eastern Europe. Some members of the alliance, most notably Germany, will resist this idea, as will some Central and Eastern European countries that prefer to stick to troop rotations as they try to manage relations with Moscow.
Former Soviet Union
A Broad Standoff Endures
The standoff between Russia and the West has been central in shaping the global system for the past two years. Stratfor expects it to stay in place in 2016, though the levels of conflict and potential cooperation will wax and wane from issue to issue. The war in eastern Ukraine is likely to become a long-term frozen conflict, with fighting less intense than that seen in 2015 but periodic skirmishes continuing between Ukrainian security forces and Russian-backed separatists. The Minsk Protocol will continue to serve as the backbone of diplomatic negotiations. However, Russia and the separatists have a different interpretation of the Minsk agreement’s political components than Ukraine and the West do, and these differences will prevent a broader political and military settlement from being reached in 2016.
Moreover, the United States and the European Union are almost guaranteed to keep sanctions against Russia in place this year, unless Moscow proves willing to relinquish access to and control of the border between Russia and the separatist territories and allow monitors from the Organization for Security and Co-operation in Europe into Donbas. Moscow is unlikely to give in on either issue.
In the meantime, Russia and the West will continue fast-paced military exercises and weapons buildups focused on the European borderlands. NATO will add troops to its rotational deployments in Central and Eastern Europe, and Russia will add air and defense assets in areas such as Belarus and Kaliningrad. There will be no direct military conflict between Russian and NATO forces, but both sides will build up deterrence capabilities and shore up their respective security alliances.
Russia will continue its military involvement in Syria, which will complicate its relationships with Turkey, the United States and Europe. Russia will coordinate with these powers to deconflict the battlefield, particularly regarding cooperation against the Islamic State, although Moscow’s reinforcement of Syrian President Bashar al Assad’s government will entail targeting Sunni rebels and runs the risk of mission creep. Russia’s role in Syria will most notably undermine its relationship with Turkey. As Turkey draws closer to its NATO allies, Moscow will be cautious in how far it takes its confrontation with Ankara. The two countries will enact tit-for-tat trade restrictions and delay joint energy projects. Both countries will also compete for influence in the Caucasus — particularly in Azerbaijan — and try to shape the talks over the Nagorno-Karabakh dispute.
Russia Focuses on Security and the Economy
The Russian economy will continue to be a major priority for Moscow in 2016. The Kremlin has taken steps to insulate it from the effects of the Western sanctions, including seeking investment from Russia’s neighbors to the east, using Russian banks for financing and postponing large projects that require either foreign investment or technology restricted under the current sanctions. Russia probably can withstand another year of sanctions, but beyond 2016 they will jeopardize the country’s financial stability and ability to maintain current levels of energy production. Therefore, out of necessity, Moscow will be more accommodating with its Western energy contracts in 2016 as it works to increase energy ties with the east by prioritizing regional pipeline integration projects, such as the Eastern Gas Program and the Eastern Siberia-Pacific Ocean oil pipeline.
Economic growth in Russia will be relatively flat; the Russian Ministry of Economic Development has forecast growth of 0.7 percent for 2016. The economic decline that sent Russia into a recession will slow, as will capital flight and drops in industrial production. Major Russian industrial firms will have fewer international debt payments due in 2016 ($16 billion, compared to more than $30 billion in 2015). This will make it easier for these firms to receive financial assistance from the government or to broker assistance from major Russian banks to restructure their debts. The ruble is expected to remain volatile; the Russian Central Bank intends to step in only periodically to support the currency. This volatility could help Russian industrial and energy firms whose export revenues are in dollars, but it will put further economic strain on the Russian people, who are already experiencing high inflation and rising poverty rates. The weak ruble will exacerbate Russia’s socioeconomic issues. Not only will the currency’s weakness limit travel opportunities, but also the price of imported consumables not otherwise included in the Russian consumer price index calculations will increase. These circumstances could give rise to social unrest across the income spectrum, including medium- and high-income earners.
Growing economic pressures will lead to protests across Russia. The Kremlin will allow minor protests related to economic conditions to take place, but it will attempt to defuse any large and well-organized protests that take on more of an anti-Kremlin tone. Moreover, increased anti-Islamic State rhetoric from the government could fuel an uptick in ultra-nationalist unrest that culminates in protests and vigilantism targeting immigrant communities, similar to incidents seen in 2013. The Federal Security Services will attempt to use threats from the Islamic State and other Islamist militant groups to expand its security and intelligence powers within and outside of Russia. In addition, ahead of parliamentary elections in September, the Kremlin is likely to crack down on opposition groups and leaders in an attempt to keep them from organizing a more widespread movement.
Infighting among members of the Kremlin elite will intensify in 2016. Disputes involving major energy firms’ political backers, the ministers of finance, economy and energy, and even the security services will erupt over the future of Russia’s energy policies. Points of contention will include financial assistance for big energy firms and projects, whether to privatize Rosneft, and the possible end of Gazprom’s monopoly on natural gas pipelines. Disagreements will emerge among the various security services and military forces over who holds the portfolios for handling the ongoing situations in eastern Ukraine, Syria and other hot spots, and debates will arise over the balance of power, influence and financial resources among the security and military groups. Russian President Vladimir Putin’s ability to manage these disputes is declining, which will lead him to rely more on ultra-loyalists who have some distance from the core areas of contention.
Ukraine’s Domestic Troubles
The persistent conflict in eastern Ukraine will be only one of many serious challenges for Kiev in the next year. Far-right and nationalist groups will continue to undermine the Ukrainian government and hamper Kiev’s ability to follow through with its political concessions to the separatists. This, in turn, will guarantee that Donetsk and Luhansk will remain beyond Kiev’s political control, though certain economic links could be restored out of necessity for both sides over the course of the year.
The unpopularity of painful austerity measures and the slow pace of legal and judicial reform are likely to lead to a significant shake-up in Kiev in 2016, potentially including the replacement of embattled Ukrainian Prime Minister Arseniy Yatsenyuk. Nevertheless, Ukrainian President Petro Poroshenko will likely maintain Kiev’s pro-West course. Access to Western financial support and security assistance from NATO and the United States in particular are key to the survival of the Ukrainian government.
After contracting 10 percent in 2015, Ukraine’s economy will begin to slowly rebound in 2016, although high inflation and unemployment will continue to spur protests and occasional unrest. Kiev’s economic links with Moscow will likely weaken as the two countries debate debt repayments, energy and electricity supplies, and Ukraine’s implementation of a trade deal with the European Union that takes effect Jan. 1. Trade in resources such as energy supplies and agricultural goods will decline between Ukraine and Russia as Kiev gradually reorients its economy and broader strategic interests away from Russia and toward the West.
Political and Security Concerns in the Former Soviet Space
The Ukraine crisis will continue reverberating throughout the former Soviet Union in 2016. Belarus will gradually strengthen its economic ties with the West, but it will maintain its military and strategic alignment with Russia. Belarusian President Aleksandr Lukashenko will work to avoid the establishment of a Russian air base in his country in a bid to keep from creating more tension between Minsk and the West, but his position could change if NATO builds up its presence in neighboring Poland and the Baltic states.
In Moldova, a corruption scandal linked to the pro-EU government will create greater support for the country’s pro-Russia parties, but the paralysis in Moldova’s political system will ensure that Chisinau remains deadlocked on the issue of strategic integration with either Russia or the West. The Baltic states will make further strides toward energy diversification away from Russia this year as infrastructure and energy links are built up between the Baltics and Poland. These countries will also make more progress toward regional security integration; however, a permanent NATO or U.S. military presence there will not materialize in 2016.
Georgia will receive stronger Western security support in terms of exercises and involvement in the country’s new NATO training center, but actual NATO accession will remain off the table. Georgia will increase its economic ties with Russia in areas like energy and trade, even as Tbilisi stays strategically oriented toward the West.
The long-standing frozen conflict between Armenia and Azerbaijan over Nagorno-Karabakh could see significant change in 2016 as Russia tries to push along a negotiated deal involving a transfer of territory to Azerbaijan in exchange for economic and security guarantees for Armenia. Russia’s moves in the southern Caucasus will draw greater Turkish and U.S. attention as both work to counterbalance Moscow’s influence. If the talks over Nagorno-Karabakh collapse, an uptick in military hostilities can be expected. That said, a Russian-brokered diplomatic shift back to the status quo is more likely than a full-scale military conflict over the disputed territory.
A range of issues, including ongoing economic troubles, the return of migrant workers from Russia and the threat of rising Islamist militancy, will make Central Asia prone to heightened instability in 2016. Economic vulnerabilities will force some countries, such as Kazakhstan and Uzbekistan, to lobby for major foreign investment through planned privatization programs. Though this may garner minor interest and investment, neither country has undergone the kind of regulatory reforms that would inspire foreign investors to confidently go there.
Given their proximity to northern Afghanistan, Uzbekistan, Turkmenistan and Tajikistan will be particularly at risk from a security perspective, though the governments in these countries have an interest in playing up the Islamist militant threat as a reason to crack down on domestic opposition elements. Russia and the United States will also have an incentive to emphasize this threat as both pursue competing border security initiatives in Central Asia. Military cooperation between Azerbaijan and Kazakhstan, including joint exercises, will increase in the Caspian Sea as the West continues pursuing alternative energy projects like the Trans-Caspian Pipeline. At a Caspian Sea summit in Astana in August, Russia could voice support for working to delimit the seabed, although no major energy projects are likely to begin in 2016.
Middle East and North Africa
All Eyes on Turkey
Turkey will be the most critical player to watch. Stratfor has long discussed the forces behind and obstacles to Turkey’s regional resurgence. Although Ankara has encountered a number of hurdles, a more politically secure government under the leadership of President Recep Tayyip Erdogan will be much more assertive beyond Turkey’s borders this year.
Turkey is already preparing for an operation west of the Euphrates River in northern Syria to flush out Islamic State militants along its border. In addition to countering the Islamic State, Turkey wants to keep a check on Kurdish expansion in northern Syria and ultimately wants to create a “safe zone” for Syrian refugees within Syria. Turkey is not interested in absorbing more of the refugee burden for the sake of easing European concerns, but Ankara does intend to use European anxiety about migrant flows to reinforce its foothold in Europe and secure backing for its military actions in Syria. The United States will likely facilitate Turkey’s heavy air campaign in northern Syria while pursuing a second offensive that will rely on mostly Kurdish rebel proxies east of the Euphrates. Turkey will emphasize its intent to rely principally on Sunni Turkmen and Arab rebel proxies to clear and hold the Islamic State-infested territory, but Ankara will also have a contingency plan ready in case it needs to deploy ground forces. Moreover, Turkey and the United States will work with Saudi Arabia, the United Arab Emirates, Qatar and possibly other Arab countries such as Egypt and Jordan to assemble a coalition for anti-Islamic State operations in Syria. This will add manpower to the current mission while also helping Ankara avoid reviving the historical resentment inherent in returning Turkish troops to Arab soil.
Russia will be the greatest complicating factor in Turkey’s plans. The Russian objective in Syria is multilayered, and Moscow will not stray from its partnership with the government of Syrian President Bashar al Assad in trying to weaken the Islamic State. This partnership means that Russia will need to confront forces trying to weaken the Syrian government, including the array of rebel forces that the United States, Turkey, Saudi Arabia, Jordan and Qatar are relying on in their own fight against the Islamic State. Russia’s dual targeting of Islamic State militants and Syrian rebels will prevent a more coherent coalition against the Islamic State from forming and will widen the divide between Turkey and Russia.
Russia will try to scuttle Turkey’s military plans by increasing its presence in Syria. This will mainly mean further use of air assets over northern Syria. Turkey will not necessarily stand down in the face of this pressure. Negotiations to deconflict the battlefield are likely, but they also do not eliminate the potential for skirmishes. As Russia-Turkey relations visibly deteriorate, Moscow will not want to push Ankara too far. The more Turkey finds common cause with its NATO partners, the more vulnerable Russia will be in the former Soviet sphere.
The deterioration of the relationship between Turkey and Russia will give the United States and its partners in Central and Eastern Europe an opportunity to draw Ankara into a tighter alliance. Neither Turkey nor Russia can afford a complete break in relations, but trade ties are bound to suffer while strategic energy projects are likely to experience further delays. This will give more urgency to Turkey’s push to pursue energy projects in Azerbaijan and the Kurdish regions of Iraq. Turkey will also be more compelled to make progress in negotiations over the reunification of Cyprus in order to edge its way into eastern Mediterranean energy projects.
The Syrian battlefield is split between a dizzying array of competitors and interests. This all but assures that any attempt to implement a cease-fire or forge a final power-sharing agreement will be extremely limited. The foreign stakeholders are now willing to increase military support for their proxies. Though this will balance out the battlefield, it will also further decrease the incentive for either side to compromise to advance negotiations.
As Turkey grows more assertive in the Middle East, its competition with Iran in Syria and Iraq will intensify. While reinforcing the al Assad government alongside the Russians, Iran will exploit divisions in the Kurdish regions of Iraq to counter Turkey’s efforts to tighten its economic and energy links in northern Iraq at the expense of Baghdad. Russia could also revive its ties with Kurdish militant factions as a lever against Ankara. Turkey will commit a limited number of troops to training operations for Sunni fighters in northern Iraq. Even as Turkey tries to build on its relationship with Massoud Barzani’s Kurdistan Democratic Party to deepen its foothold in the Kurdish regions of Iraq, Turkish relations with the Kurdistan Regional Government will inevitably run into complications as Turkey continues to pursue Kurdish rebels who use Iraq as their refuge.
The Islamic State Persists
The Islamic State core in Syria and Iraq will suffer notable losses this year, though the aspiring caliphate is unlikely to suffer total defeat. The weakening of the Islamic State as a conventional force in its core territory will encourage its leadership to call for more terrorist operations in the West and across the Middle East. As seen in the Paris attacks, hard-to-detect grassroots cells will continue to pose a serious threat. Competition within the global jihadist landscape will also motivate attacks, particularly in the Maghreb, Arabian Peninsula and West Africa, where al Qaeda nodes are most relevant.
Iran Returns to the Oil Markets
Major Middle Eastern oil producers are entering another stressful year of low oil prices and expensive foreign policy commitments. The implementation of the Iran nuclear deal at the beginning of the year will add at least 500,000 barrels per day to the oil market followed by a slower production increase over several months.
Iranian President Hassan Rouhani will trade on the success of the nuclear deal to campaign for moderates in February elections for the parliament and Assembly of Experts, which is the body in charge of appointing and reviewing the performance of Supreme Leader Ayatollah Ali Khamenei. However, it will take time for Iranians to see the positive economic benefits of the deal. Khamenei can be expected to use his informal influence over parliament and the Guardian Council, which vets candidates for the elections, to balance against the moderates, driving more competition in Iran’s conservative political landscape. This implies greater challenges ahead for the Rouhani government when it comes to limiting the political and economic influence of the Islamic Revolutionary Guard Corps as investors move into Iran.
The reintroduction of Iranian oil to the market makes Saudi Arabia unlikely to significantly scale back production in the first half of 2016 to defend the price of oil. Once Saudi Arabia has been able to assess the price impact of Iran’s return — as well as taking into account declining U.S. production — Riyadh could modify its energy output in the second half of the year. However, the Saudi’s will not be able to coordinate a sustainable production cut with other major OPEC and non-OPEC producers. Mostly because of their smaller populations, the United Arab Emirates and Kuwait will have an easier time coping with another year of lower oil prices. Saudi Arabia, on the other hand, will have to finance a growing budget deficit through debt issuances while making small and incremental spending cuts.
The Next Phase of the Yemen Conflict
The Saudi-led coalition will continue to push forward on the battlefield in Yemen against Houthi fighters and forces loyal to former Yemeni President Ali Abdullah Saleh as they approach a resolution to the current phase of the crisis. Whether this resolution takes the shape of a military push into Sanaa or a negotiated settlement ahead of a push will depend on the resolve on the part of both sides to continue the fight. For the Saudi-led coalition and Yemeni anti-Houthi elements, a drive into the mountainous core of Yemen will mean a slow in the advance with considerable casualties and loss of equipment. Higher losses could increase friction between members of the coalition, such as Saudi Arabia and the United Arab Emirates, over which Yemeni parties to support. As Yemen moves toward resolution of the conflict, non-state actors will pose greater security threats while the Yemeni security apparatus is weakened and distracted. The Southern Resistance Movement’s growing autonomy will fuel calls for an independent “South Yemen,” moving the country along a path toward eventual split between north and south.
Israel’s Security Dilemma Grows
As the fight in Syria becomes more complex, the Israeli government will work to maintain a relationship with as many players on the battlefield as possible to be prepared for worst-case scenarios. Israel can be expected to keep close to both the United States and Russia to keep tabs on the battlefield. The country will also maintain its right to carry out airstrikes against Hezbollah and Islamic State targets near its border. Turkey’s growing role in the region will compel Israel to try to improve its relationship with Ankara.
The Israeli-Palestinian conflict will be defined by a cycle of persistent, low-level Palestinian radical attacks in the West Bank and Israel, which will provoke continued local retaliation and the Israeli security responses. From its base in Gaza, Hamas will try to avoid another direct confrontation with Israel, but Israel’s policy of holding Hamas responsible for endorsing attacks, along with attempts by a fledgling Islamic State in Gaza to goad Hamas into conflict, could broaden Israel’s intervention in the Palestinian territories. Hezbollah will welcome these distractions for Israel as the group tries to balance its commitments in Syria with defending its home turf against pockets of Sunni rebels trying to undermine Hezbollah’s role in the Syrian war. An emerging Saudi-Iranian consensus on selecting a Lebanese president will also help to defuse a more serious spillover of the Syrian conflict into Lebanon.
A Difficult but Manageable Year for Cairo
No credible challenge to Egyptian President Abdel Fattah al-Sisi’s hold on power will emerge this year. Taking advantage of lower oil prices, the government will proceed cautiously with subsidy reform in an effort to shore up its fiscal position and secure assistance from the International Monetary Fund. The opposition will remain fragmented, enabling the government to manage potential bouts of social unrest. A persistent jihadist threat concentrated in the Sinai Peninsula but with the potential to carry out attacks in core urban areas of the country will drive heavy defense spending and could further undermine the tourism sector. Russia will be able to leverage the jihadist threat to deepen its security relationship with Cairo, though the Egyptian government will continue to maintain a careful balance among its Gulf sponsors, the United States and Russia. Egypt’s offshore natural gas potential in the eastern Mediterranean will spur energy cooperation among Egypt, Cyprus and Israel.
North Africa Fights Instability
Algeria will be under significant financial stress as it struggles to cope with the fallout from low oil prices. Spending cuts and selective tax increases are unavoidable, though the government will manage to dodge major subsidy reform to avoid stoking significant social unrest. Slow and uneven movement can be expected on other reforms that aim to improve the country’s energy investment climate and ultimately increase energy production to shore up government revenues. Despite Algeria’s precarious economic position, the government will not sacrifice defense and security spending.
Preparations for Algeria’s eventual political transition will occur at a steady pace. Part of the preparation could entail some progress toward constitutional reforms designed to rebalance power between the president and prime minister. Algeria will encourage and host negotiations among competing Libyan factions to try to mitigate instability on Algeria’s eastern border while avoiding direct military engagements beyond its borders.
U.N.-brokered negotiations to form a Libyan unity government between rival camps in Tripoli and Tobruk will continue dragging under the weight of intractable disputes between warring parties. Libyan oil production and exports will fluctuate but will remain depressed overall in 2016. International oil companies will continue to prefer to work with Tripoli-based institutions over parallel institutions out of Tobruk. This will push the internationally recognized Tobruk government toward compromise with its rival. However, sustaining a power-sharing agreement will be extraordinarily difficult. The inevitable sidelining of more hard-line factions will feed into ongoing security challenges.
The growing Islamic State presence in Libya, especially given the militant group’s increasing propensity for foreign attacks, will trigger greater foreign involvement in the country. However, this activity will be limited primarily to air and special operations strikes and working with local actors to undermine the group. The Islamic State in Libya will focus on consolidating its power in the city of Sirte but will seek to extend westward toward Misrata from Abu Grein and eastward toward Ajdabiya from Nawfaliya. As the Islamic State emerges as a power player in Libya, Misrata militias will direct more of their efforts against the militant group.
East Asia
Pushback in Beijing
China’s reform process has reached a precarious phase. The much-needed transition to an economy based on domestic consumption has been neither quick nor without cost. Divisions are already showing among China’s regions: the services sector is bolstering the southern and coastal provinces, while weak housing and heavy industry sectors are dragging down the northern and inland provinces. The 2016 agenda includes state-owned enterprise reforms, with a particular focus on consolidating bloated sectors and imposing additional oversight on assets. This will likely involve issuing more crude oil import licenses to private refiners and spinning off the pipeline operations of China’s national oil companies.
Government and industry leaders both will push for consolidation, while Beijing will impose reductions on metals production. This suggests that commodity consumption growth will remain sluggish in 2016. Rising corporate debt, exacerbated by slowing domestic economic growth, will generate further risks to the reform process. This does not mean, however, that Beijing will deliberately slow or reverse reforms, as such a decision would carry its own risks. Nonetheless, China’s leadership is looking at a troubled year as it manages the economic and social impacts of economic change. The new year will also likely see further, cautious loosening of currency controls to further the internationalization of the yuan, as well as domestic fiscal reforms intended to boost the tax revenues of local governments.
China’s policymakers will make it a priority to minimize social and economic disruption while moving forward with reform plans. As in previous years, resistance to change will manifest in bureaucratic inertia and political maneuvering. As President Xi Jinping’s political consolidation and anti-corruption campaign intensifies ahead of the 2017 Party Congress, members of China’s elite will band together in small factions to gain protection from the consolidated center. Competition for positions ahead of 2017 will accelerate this trend — a further sign of the shift away from the system of consensus rule that has been the status quo since the era of Deng Xiaoping. This transition will mean greater uncertainty in China over the next few years.
Beijing is also launching a long-awaited and ambitious series of military reforms. These will significantly alter the structure of the People’s Liberation Army, ultimately bringing it more in line with Western military models. This will involve large cuts in personnel, reorganization of military regions, and the removal of a significant number of staff officers. Beijing will carefully match these changes with economic incentives for those who are demobilized or moved out of powerful positions. Beijing could also reduce the role of political commissars, at least at the lower levels, to allow for more flexibility in military operations, particularly at the tactical level.
Southeast Asia’s Balancing Act
In Southeast Asia, the expected U.S. interest rate hike will place pressure on some of the regional economies, particularly Malaysia and Indonesia, both of which rely heavily on foreign lending. However, the Chinese economic slowdown will continue to be the single greatest source of economic difficulty in Southeast Asia, though impacted countries will still be compelled to balance their economic dependence on China with their growing security reliance on the United States. Even as China’s economic growth slows, Beijing will use its heft to offer incentives to push Southeast Asian nations to cooperate, warning them of both economic and military consequences should they resist.
Efforts to establish or implement regional trade and economic agreements in Asia will accelerate in 2016. The U.S.-led Trans-Pacific Partnership will come up for ratification in several regional countries, while others petition for inclusion in the second round of membership. Negotiations toward the Regional Comprehensive Economic Partnership will intensify, as will moves by China, South Korea and Japan to create a trilateral free trade agreement. Members of the Association of Southeast Asian Nations (ASEAN) will begin implementing the blueprint for the new ASEAN Economic Community. None of these developments will radically alter the economic situation in Asia in 2016, but each will create new challenges and new opportunities for businesses in the Asia-Pacific region.
These deals will also provoke domestic challenges from players trying to defend their particular interests amid the changing environment. This will contribute to delays in ratification and implementation of new agreements. At times, this will yield short, but sharp political disruption, particularly in countries such as Japan, Malaysia, Indonesia and South Korea, which are already facing internal economic and political stresses.
The desire for economic cooperation may rein in regional security competition. It will not, however, fully ameliorate political and territorial disputes. The South China Sea in particular will remain a central focus. China will continue asserting its claims over disputed territories, and the United States will continue freedom of navigation patrols around Chinese-occupied islets and expand its military cooperation with several littoral countries. Maritime tensions could flare up again as the Netherlands-based Permanent Court of Arbitration makes its initial findings on the Philippines’ case against Chinese South China Sea claims. Although the court decision does not identify sovereignty issues, and though China is not participating in the case, the rulings nonetheless will add another layer of complexity to the maritime disputes and questions about whether the disputed islets even serve as legal bases for determining the extent of territory. The United States has budgeted for increased defense-related training and sales in Southeast Asia (and Taiwan) in 2016 and will expand defense cooperation with Japan and Australia.
Japan will continue to debate whether it is politically or militarily ready to join in South China Sea patrols, but no decision is expected until the second half of the year, after Upper House elections. Even then, Tokyo is more likely to limit its direct patrols to aerial reconnaissance rather than anything involving surface vessels. The United States will also push Australia to take on a more active role in the South China Sea. As with Tokyo, however, Canberra will find itself carefully weighing the costs and benefits of any significant action, given its tight economic relationship with China.
Despite continued U.S. activities in the South China Sea and an expected U.S. arms sales package to Taiwan, China is unlikely to significantly curtail bilateral military ties with Washington or threaten its standing invitation to join the Rim of the Pacific Exercise (RIMPAC), one of the world’s largest multilateral naval exercises. Meanwhile, to shape regional perceptions and put the existing U.S.-Japan-South Korean alliance structure under stress, Beijing could make concessions in 2016 in negotiations on establishing a maritime boundary with South Korea.
Japan’s Regional and Domestic Role
In 2016, Japan’s “Abenomics” economic agenda will provoke growing criticism from a disillusioned public. The government could try to reshape the terms of the program’s successes, shifting attention away from the monetary “arrow” — one of the three core aspects of the strategy — and toward structural reforms and the progress being made. Longer-term plans, such as a 2017 sales tax increase, could be delayed even further as the economy remains at the edge of recession. Should the Abenomics program officially end, government bond yields likely will not spiral to disaster, as others are predicting. Instead, Japan will take a path similar to the one it pursued before Prime Minister Shinzo Abe took power — increasing government spending, raising debt levels, and pushing the problems further down the road.
Japan’s economic, political and security relations throughout Southeast Asia will spread in 2016, despite domestic economic constraints. Although Japan faces economic challenges at home and “Abenomics” is far from accomplishing its main goals, Tokyo still has a fair number of financial incentives it can offer Southeast Asia and will more actively pursue infrastructure contracts throughout the region, often going head-to-head with China. Southeast Asia will reap the benefits of increasing competition between the two powers as each seeks to expand regional economic cooperation, loans, infrastructure development and investment.
Notable Elections in the Region
Though Stratfor does not predict the outcome of elections, and though governments are constrained by geopolitical realities that limit their ability to radically alter policy directions, a handful of elections slated for 2016 are worth noting.
In January, Taiwan will elect a new legislature and president, and most polls suggest the opposition Democratic Progressive Party is poised to take over from the ruling Kuomintang. China will pay particular attention to this election; the Democratic Progressive Party traditionally is considered a pro-independence party, though its current platform asserts that it wants to maintain Taiwan’s current relationship with China. Although we do not expect any radical changes in the first six months of the new government, there will be plenty of room for political miscalculation.
China will also be closely watching May’s elections in the Philippines — a country at the center of the South China Sea dispute. Ahead of the vote, Beijing could make it a point to appear more cooperative on maritime issues and economically in hopes that a more conciliatory government will take over in Manila.
In Malaysia, the embattled government of Prime Minister Najib Razak could choose to call an election in 2016. The ruling United Malays National Organisation and Barisan Nasional will court the ethnic majority, potentially adding stress to increasingly unstable internal relations with the ethnic Chinese, a critical component of the Malaysian business community.
In South Korea, rising labor unrest will contribute to periods of public demonstration and occasionally violent protests leading up to the April parliamentary elections.
Although not truly a national election, North Korea’s Workers’ Party congress will mark the solidification of the rule of Kim Jong Un and could end the frequent leadership shuffles that have characterized the past few years. Additional nuclear and missile tests, driven more by technological than political requirements, cannot be ruled out.
And finally, in Myanmar the military will work to retain its place in the new government, adding uncertainty to the handover of power to the National League for Democracy.
Latin America
Venezuela’s Decline Continues
The deterioration of the Venezuelan economy and the loss of the National Assembly to the opposition will weaken the ruling United Socialist Party of Venezuela’s (PSUV) and create more room for social unrest, financial default and political conflict among the branches of government. The opposition has won a significant majority in the National Assembly and can leverage it to undertake substantial economic and political reforms. Under pressure from this majority, segments of the ruling party could open negotiations with the opposition with the intent of forming alliances. But the PSUV could also use the court system to keep a hostile legislature in check. Regardless of the government’s strategy, divisions within the ruling party will likely worsen, and the PSUV elite will probably perceive the Dec. 6 electoral loss as a harbinger of another defeat in the 2019 presidential election.
The strain on Venezuela’s public finances will worsen in 2016. During the past year, Venezuela depleted its foreign reserves and funds to maintain imports and government spending. Without that cushion, the government will have to carefully prioritize public spending. Caracas will probably reduce imports further in 2016 to maintain both foreign debt payments and reinvestment into state-owned energy firm Petroleos de Venezuela (PDVSA). This is a risky strategy: While it preserves Venezuela’s limited access to foreign credit for the energy sector, the country’s primary source of dollar revenues, it will fuel inflation and exacerbate food shortages. Even with the government attempting to honor its debt, low revenue from PDVSA and depleted finances make a default a possibility for 2016.
Venezuela’s worsening food shortages and rising food prices will spur further isolated demonstrations, particularly in rural areas and states outside of Caracas. The government can manage such unrest as long as it does not coalesce into larger demonstrations. Given the level of public discontent in Venezuela concerning inflation and shortages, demonstrations could expand into wider unrest capable of worsening the country’s political stability.
Brazil’s Economic and Political Challenges
Brazil’s government will face the difficult tasks of maintaining employment and limiting inflation amid a domestic economic downturn and low global prices for its principal commodity exports. The effects of a 2014 corruption scandal at state-owned energy firm Petroleo Brasileiro (Petrobras) will linger into 2016. The government will take measures to address the negative economic effects of the scandal, such as allowing contracting firms currently banned from doing business with Petrobras to again sign contracts with it. Petrobras will also try to raise additional capital through asset sales and government funding, given its heavy debt obligations and need to fund exploration and production activities.
On the political front, the ruling Workers’ Party will encounter persistent challenges to its authority. Even if Brazilian President Dilma Rousseff survives the threat of impeachment, the Workers’ Party will remain highly dependent on its allies to fend off additional challenges to its power.
Sluggish demand growth for Brazilian export commodities and a slowing domestic market will push Brazil to look for additional foreign markets throughout the year. Despite disagreements with Argentina, Brazil is likely to press ahead with negotiating a free trade agreement between the Common Market of the South (known by its Spanish acronym, Mercosur) and the European Union. The divide between Argentina and Brazil concerning foreign trade strategies will likely deepen in 2016; Argentina will remain reluctant to subscribe to any trade agreements that weaken its already uncompetitive manufacturing base or lead to a significant trade imbalance.
Argentina’s New Government Addresses Debt Problems
With a new president at the helm, the Argentine government will begin taking steps in 2016 to address the legacy of economic problems from the previous administration. The government will likely try to begin negotiations with creditors that are demanding the repayment of debt owed from Argentina’s 2001 default; a successful negotiation would eventually give Argentina renewed access to global capital markets. In the meantime, additional funding from China or other creditors could give Argentine public finances some breathing room, but with the country in an economic decline, Buenos Aires will probably work toward opening talks with holdout creditors. The new government will also begin reducing public spending and devaluing the currency to close the gap between the official and parallel exchange rates. Despite the likelihood of some economic adjustments, structural problems such as