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Annual Forecast 2015

Forecast
January 12, 2015 | 10:30 GMT Print Text Size
2014 was the year in which the world was finally shaken out of complacency.
Ukraine triggered Russia's inevitable confrontation with the United States and
Europe. Economic malaise in Europe became impossible to ignore, with antiestablishment groups growing louder with each passing election. An intensifying
anti-corruption drive in China exposed how far and deep the Chinese leadership is
willing to go in trying to manage political resistance amid a slowing economy.
Stratfor has long emphasized that two of the three pillars of the international
system Europe and China were in structural decline while the United States,
buoyed by an energy boom, would maintain a position of relative hegemony. As
Robert Louis Stevenson would remind us, sooner or later, we will sit down to a
banquet of consequences. Indeed, as we begin 2015, the price of Brent crude oil
has been slashed by more than half of what it was a year ago and now hovers
around $50 a barrel.
Related Links
2014's Forecasting Report Card
Stratfor's Second Quarter Forecast 2014
Stratfor's Third Quarter Forecast 2014
Stratfor's Fourth Quarter Forecast 2014
While energy traders, politicians and producers alike scramble to find the bottom of
the barrel the nadir of global oil prices the world's ability to cope with or
exploit an oversupplied oil market will shape many of the trends we are looking at
for 2015. The standoff between OPEC swing producers and U.S. oil producers will
wind down as low oil prices reach a point where U.S. production growth will stall. At
the same time, OPEC's key producers Saudi Arabia, Kuwait and the United Arab
Emirates have shown little interest in pulling back on their own production levels
in order to increase oil prices (which would have them effectively subsidizing U.S.
shale oil producers), leaving the oil market oversupplied.
The global energy climate will help bring about a de-escalation in the conflict over
Ukraine. Russia can tolerate more economic pain than most countries, but deep cuts
into energy revenue combined with sanctions are too much for even Russian
President Vladimir Putin to bear as he tries to manage an increasingly shaky
Kremlin. Russia maintains energy leverage over Kiev and can temper a frozen
conflict in eastern Ukraine to sway the Europeans toward easing up on sanctions.
The United States will not let up as easily and will continue beefing up military ties
with states along the former Soviet periphery, but Washington will also be mindful
of the consequences of unraveling Russia.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa

East Asia
Latin America
South Asia
Sub-Saharan Africa
Germany will play a role in moderating the conflict with its eastern neighbor, but
faces much bigger problems to its west. The artificial calm that was created by the
European Central Bank and embraced by financial markets for the past two years is
due to end with a rude awakening. Italy, Greece and Spain will bear close watching
for triggers to a financial panic, while France and Germany will remain locked in
conflict over how to revive the eurozone. Little will be done in the end to address
the structural ailments fueling the political crisis on the Continent.
With various tensions persisting in Eurasia, the United States will try to reorient
itself from peripheral issues in the Middle East to more central issues on the
European mainland. This will be easier said than done. The fight against the Islamic
State will be slow, as Washington relies on air power and the gradual buildup of
local forces divided along multiple ethnic and sectarian lines. The United States'
negotiations with Iran may not culminate in a grand rapprochement this year, but
their working relationship will hold steady as lower oil prices fortify the Iranian
government's resolve to reopen its economy, albeit at an unavoidably slow pace.
Out of all the oil producers stuck with slashed budgets, Venezuela has the most
potential to tip over the edge this year. The country's finances are already highly
strained, and as the government becomes less able to fund imports, social unrest
will be inevitable. The security architecture around the government designed by
former President Hugo Chavez is one of current President Nicolas Maduro's main
vulnerabilities as he balances multiple competing factions while the government's
inherited security patron, Cuba, re-engages with the United States.
We are now in the midst of the second wave of a generational shift that began in
2008-2009, with a global financial crisis that exposed Europe and China's
weaknesses, a shale revolution that dramatically increased U.S. energy output and
a Russian military invasion in the Caucasus that reminded the world of Moscow's
need to maintain its buffer space. As we look at what 2015 holds in store, we know
the oil markets are oversupplied, Europe and China will continue to stagnate, and
Russia will work under heavy constraints to deny the West a strong foothold in
crucial areas of its periphery while the rest of the world deals with the repercussions
of these trends. The ebb and flow of this tumult is covered in the forecast that
follows.
Regional Map - Forecasts - FSU
Click to Enlarge
Former Soviet Union
Russia's Ongoing Competition with the West
The Ukrainian crisis and the ensuing standoff between Russia and the West was the
result of a collision between two geopolitical imperatives: Russia's imperative to
maintain buffer space in its former Soviet periphery particularly Ukraine to feel
secure and project power, and the United States' imperative to prevent the rise of a
hegemon in Eurasia.

In 2015, the tension between Russia and the West will persist but de-escalate.
Russia began the year at a disadvantage; there is no major military move Moscow
can make without triggering a larger, and potentially crippling, response from the
West. Moreover, because of Russia's increasingly vulnerable economy, Russian
President Vladimir Putin will have to consider the state's economic survival, as well
as stability within the Kremlin, in any decision he makes in trying to protect Russian
interests in the former Soviet periphery. Russia will thus avoid making a major
military push into Ukraine, opting instead to keep the conflict in eastern Ukraine
frozen with the potential for the separatist territories to resume economic ties and
political contacts with the rest of the country. Russia also will avoid any major
military actions to undermine the pro-Western governments of Moldova and
Georgia, but will continue using opposition groups, protests and its existing military
presence in their breakaway territories to maintain pressure on these countries.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa
East Asia
Latin America
South Asia
Sub-Saharan Africa
At the same time, the West will likely refrain from taking action that risks pushing
Russia a massive, nuclear-armed country over the edge. The Europeans in
particular do not want to see Russia collapse, given the potential impact to their
own economic and security standing. Barring any major miscalculations on either
side, the European Union is unlikely to increase meaningful sanctions against Russia
this year. The current European sanctions in place will automatically expire
throughout the year, and extending them would require approval from all 28 EU
member countries. Thus, an easing is more likely than an extension or
intensification of the current sanctions. Russia will follow this timeline carefully and
moderate its behavior accordingly to ensure it has enough European support to
neutralize the sanctions, even as more hardline states, such as Poland and the
Baltics, fight to sustain this economic pressure.
On the security front, NATO is unlikely to push into Central and Eastern Europe
beyond the rotational exercises and ballistic missile defense deployments already
planned. Meanwhile, Ukraine, Moldova and Georgia will not be brought into the
military alliance, although the United States could increase bilateral security
assistance, including potential weapons sales, to these countries. The United States
also has the option of leveraging strategic weapons systems, such as long-range
missiles and nuclear weapons, in its military posturing, to the detriment of existing
Cold War-era treaties. However, such threats will remain rhetorical, as Europe will
resist the increasing deployment of such weapons systems on the continent.
Russia Struggles Economically and Politically

Sanctions are only part of Russia's economic woes. Low oil prices and the effects
that ongoing tensions with the West are having on Russia's investment climate will
make the Russian economy one of Moscow's greatest challenges in 2015, inflicting
both social and political pressures on the Kremlin. Market hysteria aside, the
Russian economy will continue to decline in 2015, but it will not sink to the depths
of the 1998 crisis.
Russia will go into recession officially in 2015 as inflation rises to double digits,
foreign investment remains low and capital flight remains high. With the decline of
oil prices, the Russian ruble will continue to weaken, its value changing chaotically.
Additionally, the major Russian firms including energy, banking and industrial
firms will have limited access to credit and will face mounting debts.
According to the Russian government's current budget, which is based on oil at $80
per barrel, Russia could face a fiscal crisis unless Moscow makes deep spending cuts
and withdraws a large amount from its cash reserves. Russia does have
approximately $400 billion in those reserves as of December 2014, but the debate
over where and how much to spend will only add to friction within the Kremlin.
Russia will have to prioritize financial assistance for many strategic state firms and
banks, such as Rosneft, Novatek, VTB Bank and Sberbank. Social spending will be
key for Moscow as it tries to mitigate the social costs of the recession, such as
increasing inflation and higher unemployment, by subsidizing gasoline prices or
capping food prices. The poor economic situation will likely spur demonstrations
across Russia, though the government will be able to manage the unrest.
Russia will increase defense spending moderately this year but will postpone its
large armament programs until after 2015. This will allow Moscow to maintain its
current military presence and projection in the former Soviet periphery, but Russia's
long-term overhaul of its military and defense sector will be put off for the time
being.
Amid Russia's economic troubles and its standoff with the West, divisions will grow
deeper among the Kremlin elite over how to address the country's various crises.
The declining economy means that the Kremlin's power circles will have less money
to draw from for their own clans and companies. Moreover, Russian President
Vladimir Putin will face increasing pressure from many oligarchs, whose companies
and fortunes are in massive decline. However, the Kremlin will focus mostly on the
elite and on companies in the business of energy and banking, such as Rosneft,
Novatek, Sberbank, and VTB, instead of the oligarchs and most of the private sector.
The increasing competition among the elite will force Putin to spend more time
arbitrating, though this will keep the competing clans focused on each other instead
of the Russian leader, enabling Putin to manage any potential challenges to his rule
this year.
Ukraine's Internal Challenges
Like Russia, Ukraine will face significant economic challenges this year. With a gross
domestic product decline of 7.5 percent in 2014 and an ongoing separatist conflict
in eastern Ukraine, Kiev comes into 2015 under significant economic and financial
strain. However, foreign financial assistance is likely to keep Ukraine afloat this year.
The International Monetary Fund and foreign governments will follow through with

their current commitments and provide Ukraine with additional financial assistance
as needed. Such aid will require the implementation of significant new austerity
measures, including cuts in subsidies and social spending, which will lead to some
protests. Ukraine's weak economy and volatile political situation will allow Russia to
exert influence over Ukraine in areas like energy, trade and security matters,
though on the whole Kiev is likely to maintain an economic and political orientation
toward the West.
Ukraine also will encounter greater domestic security challenges as far-right and
nationalist groups seek to pressure the government with protests. Some armed farright groups that fought in eastern Ukraine will remain active throughout the
country. On the other side of the spectrum, Russia-backed groups are likely to
launch terrorist-style attacks in Ukrainian cities such as Kharkiv, Odessa and
Mariupol, though these attacks will be limited in their scope and effectiveness.
On the energy front, a deal that Kiev and Moscow reached at the end of 2014 for
the resumption of natural gas imports from Russia will continue into the early
months of 2015 in order to avoid major energy shortages in Ukraine during the
winter. However, periodic cutoffs could occur later in the year as the two sides
negotiate over a longer-term agreement regarding natural gas pricing and
deliveries. A large-scale cutoff that affects Europe is unlikely for 2015.
On foreign policy, Ukraine will take steps to integrate further with the European
Union within the framework of the EU Association Agreement, and Kiev will seek to
increase cooperation with NATO and the individual militaries of NATO states.
However, actual EU and NATO membership will not be considered for Ukraine. A
low-level frozen conflict will continue with pro-Russian separatists in eastern
Ukraine, but Ukraine will not seek to militarily regain control of Crimea and the selfdeclared republics in Donbas.
The Ukraine Crisis Has Regional Reverberations
The effects of the standoff between Russia and the West over Ukraine will continue
to spill over across the former Soviet periphery.
Amid continuing efforts by Ukraine, Moldova and Georgia to get closer to the West,
Russia on Jan. 1 launched the Eurasian Union with Belarus, Kazakhstan and
Armenia, and Kyrgyzstan is scheduled to join mid-year. This initiative will increase
economic and security integration between Russia and these countries. The other
Eurasian Union member countries will feel the negative effects of Russia's economic
crisis due to their dependence on Russia and their integration with Russia in areas
such as trade, remittances and currency pegs. These economic weaknesses will
make protests and social unrest more likely. Belarus in particular will seek to build
closer economic ties with Europe, but it will also maintain a strong military and
security relationship with Russia.
The Baltic states will increase their efforts to diversify their energy supplies away
from Russia, primarily with regional pipeline connections and Lithuania's liquefied
natural gas import terminal. This greater independence from Russian energy
supplies will give them more room to maneuver politically regarding Moscow. NATO
will maintain its commitments to the Baltics in terms of semi-permanent troop

rotations and exercises, but these will not expand significantly. Pro-Russian
demonstrations and activities will worry the Baltic governments, but they will be
more of an irritant than a serious threat to stability.
In the Caucasus, Georgia will see an increase in political instability as the ruling
Georgian Dream party experiences greater internal divisions, though this will not
offset the country's broader EU and NATO integration drive. With Russia more
focused on domestic and economic issues and thus less likely to intervene in
skirmishes over Nagorno-Karabakh, Azerbaijan will try to challenge the status quo of
its conflict with Armenia with more military activity on the front line. Although
increased hostilities on the border can be expected, a full-scale military conflict
drawing in larger neighbors is unlikely.
Gradually rising tensions have been a common feature in Central Asia for the past
few years, though 2015 could see these tensions spike. Tajikistan and Kyrgyzstan,
both of which have seen significant political and security turmoil in recent years, will
hold parliamentary elections this year. Perhaps more important, Uzbekistan will hold
presidential elections in March 2015, just as the country is in the middle of a shaky
succession process. All three countries will experience greater economic pressures
as remittances from migrants in Russia decline, further contributing to the potential
for political and security volatility in the region. Further adding to Central Asia's
security challenges is the risk of greater militancy as a result of the U.S. drawdown
in Afghanistan and the potential return of militants fighting in the Syria/Iraq theater.
On the energy front, the cancellation of South Stream will make finding replacement
projects a priority for both Russia and the Europeans as they seek to circumvent the
troublesome Ukrainian transit route. Russia will build closer energy ties with Turkey.
The Europeans will court Azerbaijan and Turkmenistan to participate in new projects
on the Southern Corridor route though Turkmenistan, still mindful of Russian
interests, is not likely to participate in any such projects this year.
Regional Map - Forecasts - Europe
Click to Enlarge
Europe
Europe, Ukraine and Russia
The European Union, divided as it is among widely varying interests, will remain
largely reactive to events in Ukraine and to the standoff with Russia overall. NATO
will continue its rotation of troops in Poland, Latvia, Lithuania and Estonia, but
barring an unexpected event (such as the downing of the Malaysian Airlines flight
MH17 in 2014) the European Union is unlikely to force an escalation of tensions with
Moscow. It will keep the current sanctions regime in place during the first half of the
year but allow parts of the sanctions package to expire when they come up for
review in mid-2015 if Russia appears more cooperative.
Even as Germany maintains firm demands on Russia regarding the crisis in Ukraine,
both sides will prioritize keeping their communication channels open. As far as
Berlin is concerned, it is Moscow's responsibility to take the first steps to deescalate the crisis. Russia is likely to act first, giving Germany the political room to
support letting the sanctions expire in mid-2015. Meanwhile, Berlin will back

multilateral forms of financial aid for Kiev while pushing the Ukrainian government
to implement structural reforms.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa
East Asia
Latin America
South Asia
Sub-Saharan Africa
Trends in the Eurozone
In 2015, the currency bloc will have to deal with four major problems: economic
stagnation, high unemployment, low inflation and high debt. There will be intense
debates about how to address these problems, but the diverging interests of
member states and the artificial calm created by the European Central Bank will
undermine the European Union's efforts to take coherent measures to deal with its
long list of unfinished business.
The debate between countries pushing for more stimulus in the eurozone (such as
France and Italy) and countries insisting on further economic reforms (led by
Germany) will continue. Paris and Rome will keep pushing for greater EU-wide
investment and more investment plans in Germany. However, Germany's domestic
constraints will limit its ability to take action. The zero-deficit policy is very popular
among German voters, and conservative sectors of the government and the
Euroskeptic opposition are pressuring Berlin to avoid making concessions to
countries in the eurozone periphery. As a result, Germany is not likely to apply any
significant stimulus packages at home or at the European level in 2015.
However, Berlin will likely tolerate eurozone countries that are not honoring their
debt and deficit commitments. For example, during the first quarter of the year,
France and Italy will apply modest economic reforms aimed at partial economic
liberalization to appease the European Union. By the end of the first quarter, the
bloc will assess those measures and will decide not to apply sanctions against
France and Italy.
This will have two main effects. On one hand, Paris and Rome will slow their
economic reform to avoid an escalation of social unrest and to prevent the political
divisions within their center-left governments from widening. On the other, these
governments will become increasingly ineffective, and social discontent will remain
strong. A relaxation of fiscal consolidation measures also will take place in Spain
and Portugal, both of which will hold general elections in late 2015. Germany and
the European Union will not make any real moves to punish Madrid and Lisbon.
In addition to the "stimulus versus reforms" debate, there will also be a fierce
discussion about the European Central Bank's role in fighting deflation and
promoting economic growth. In 2014, the bank applied a series of controversial

measures, including negative interest rates, cheap loans for banks and assetpurchase programs. In 2015, the institution will have to deal with the difficult
question of whether or not to undergo a large-scale purchase of sovereign debt, a
move commonly known as quantitative easing.
The introduction of quantitative easing in the form of the European Central Bank
directly purchasing sovereign debt from countries in the eurozone periphery will
face resistance from the German government, which believes the measure would
prevent such countries from applying structural reforms. The Bundesbank and other
central banks in the eurozone will oppose the measure as well. As a result, the
European Central Bank will delay a decision on quantitative easing for as long as
possible while assessing whether ongoing policies are working. The European
Central Bank will try other measures (for example, corporate bond purchases)
before buying sovereign debt. The European Central Bank could also authorize
alternative forms of debt purchases, such as allowing national central banks to do
so themselves, letting them assume the risk instead of the European Central Bank.
The European Central Bank could also limit triple-A countries' purchases of
alternative debt to mitigate German resistance. Even if quantitative easing is
introduced at some point this year, Stratfor believes it will do little to resolve
Europe's structural shortcomings and the growing political crisis on the continent.
In fact, the eurozone is sleepwalking into a new financial crisis. Soaring sovereign
bond yields a problem that the eurozone's policymakers thought they had
consigned to the past could reawaken the currency bloc in 2015. In December
2014, Standard & Poor's put Italy's sovereign credit rating just one notch above the
speculative grade, mostly because of the country's political uncertainty and lack of
reforms. In Greece and Spain, popular left-wing parties are campaigning on a
promise to renegotiate their countries' sovereign debt. It would take further
downgrades of Italy's credit rating or a serious push by Greece or Spain to
renegotiate their public debt for the European Central Bank's promise of
intervention to be tested and for financial instability to return to the eurozone. Such
a scenario would weaken Berlin's resistance to a new round of unorthodox
measures.
Finally, the eurozone is also waiting on the European Court of Justice to rule on the
legality of the European Central Bank's bond-purchasing program. Although they
may introduce a few conditions, the European magistrates are likely to rule that the
program is legal, making quantitative easing harder to challenge and more
politically acceptable. In any case, quantitative easing would probably not be the
silver bullet many think it will be. Such a measure would buy distressed eurozone
countries more time, but it would not solve the bloc's underlying problems.
Euroskepticism on the Rise
Six years into the European economic crisis, nationalist, protest and anti-EU parties
have evolved to a point where they could actually enter governments. Because of
this, 2015 will be a year when mainstream parties make alliances to remain in
power that seemed unthinkable before the crisis began. In some cases, the alliances
will allow the mainstream parties to survive longer; in others, they will not.

Several EU members including the United Kingdom, Spain, Portugal, Finland,


Poland, Greece, Denmark and Estonia will hold general elections in 2015. In most
of these elections, parties that oppose different aspects of the European Union will
perform strongly.
In the United Kingdom, the elections will lead to a fragmented parliament and
difficult coalition talks. The electoral system (in which the candidate with the
highest number of votes, not necessarily a majority, is elected) will keep the U.K.
Independence Party from winning a substantial number of seats in parliament. The
mainstream parties likely will retain power, but only after long negotiations to form
a government, and a second election cannot be ruled out. The United Kingdom's
electoral system will come under harsh criticism, but the reform process will
probably not be completed until after 2015.
Regardless of who wins the elections, London will also campaign to get back
prerogatives from Brussels and strengthen the role of national parliaments. The
European Union will agree to discuss some of the measures proposed by the United
Kingdom, but Stratfor does not expect Brussels to accept any proposals that involve
treaty change. Moreover, the United Kingdom will introduce additional bureaucratic
controls for immigrants from other EU nations.
The situation will be more dramatic in Spain, where the strong performance by the
protest Podemos party will put an end to the country's traditional two-party system.
Closer cooperation between the mainstream center-right and center-left seemed
impossible in 2014 but will become likely after the general elections in late 2015. A
"grand coalition" in Spain cannot be ruled out.
In Greece, the general elections will not end the country's political instability
quite the opposite. The elections are likely to result in a fragmented parliament and
long coalition talks. Greece will have a new government eventually, but it will be
weak. Regardless of who is in charge, Athens will ask its international lenders to let
it relax its austerity measures. The European Union will likely reach an agreement
with Athens regarding the slowing of economic reforms, but Brussels will not accept
a renegotiation of Greece's debt. While the political situation in Greece will remain
very volatile, Stratfor does not expect Greece to leave the eurozone in 2015.
Political Frictions and Energy Options in Central and Eastern Europe
Domestic political friction is likely in Romania because the country has a center-right
president and a center-left government. However, this will not affect Bucharest's
foreign policy; Romania will remain interested in its alliance with the European
Union and the United States. The Romanian part of NATO's ballistic missile defense
system will be installed in the country's southwest in 2015. Romania will also try to
attract investment in its energy sector to reduce its dependence on energy imports.
Something similar will happen in Poland, where the two main political forces will
compete before the general elections slated for the final quarter of 2015. However,
Warsaw will remain interested in keeping close ties with the White House, ties that
allow it to purchase arms and receive military protection.

For countries in Central and Eastern Europe, the diversification and security of
energy supplies will be key issues in 2015. The year will be defined by numerous
debates about projects to build liquefied natural gas terminals and interconnectors
between Central and Eastern European countries. Some projects will actually
become operational in 2015, including the Slovakia-Hungary interconnector and
Poland's liquefied natural gas terminal. However, most of the debate will remain at
the rhetorical level, especially when it comes to potential alternatives to the South
Stream natural gas pipeline.
Regional Map - Forecasts - Middle East and North Africa
Click to Enlarge
Middle East
The U.S. Attempts to Minimize the Burden of the Middle East
While the United States prioritizes a strategy to hem in Russia, its strategy for the
Middle East will focus on trying to minimize distractions stemming from this region.
This mission appears simple on the surface, but will be complicated in practice.
Russia will use the Middle East to influence its engagement with the United States.
In the first part of the year, Russia is likely to propose negotiations to reach a powersharing agreement in Syria to end the civil war. This agreement will lack
enforcement and is unlikely to gain much traction, but Moscow will use the proposal
to position itself as a responsible mediator. Understanding that it will not be able to
derail U.S.-Iranian cooperation, Russia will try to insert itself into the negotiations
between Washington and Tehran by positioning itself as Iran's nuclear fuel supplier,
thus making the United States more dependent on Russia to manage the region's
conflicts. Russia will also use its tight energy relationship with Turkey to try to
undermine Southern Gas Corridor energy projects designed to circumvent Russia.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa
East Asia
Latin America
South Asia
Sub-Saharan Africa
Russia's moves in the Middle East will do little to deter Washington from the main
thrust of its strategy for the region: Avoid a large-scale commitment of ground
troops to this theater and try to shift more of the burden to regional players to
manage common threats like the Islamic State. The divergent interests of those
regional players, as well as the U.S. preference to prepare local forces to lead
ground offensives against the Islamic State, mean progress in Iraq and especially in
Syria will be slow and uneven.
The Islamic State Under Strain
The Islamic State has risen to challenge al Qaeda as the leader of the global jihadist
movement, but it will remain concentrated in the Iraq/Syria theater of operations.
The group will find itself increasingly constrained by unreliable support networks

and attacks on its logistic and financing networks. Although the Islamic State will
retain its ability to carry out conventional and terrorist attacks in its existing areas
of operation, the group will not be able to mass forces or significantly expand the
territory under its control.
Even if other jihadist groups or grassroots jihadists from beyond Iraq and Syria take
up the Islamic State banner, the group's capabilities are not likely to improve
significantly. Given the Islamic State's focus on Iraq and Syria and its general lack of
transnational terrorist tradecraft, a major shift that would lead to an appreciable
spike in transnational terrorist attacks is unlikely. Moreover, jihadists in Iraq, Syria,
Yemen, Pakistan, the Caucasus, Somalia and Africa's Sahel region are likely to
remain under considerable military pressure this year. While assisting local ground
forces in the fight against Islamic State, the United States will rely principally on air
power to strike at jihadist targets in the region primarily in Iraq and Syria but
potentially elsewhere.
Baghdad's Web of Negotiations
Mobilizing local forces in Iraq and Syria to dislodge the Islamic State will be a slow
and trying process. In Iraq, attempts to muster a national army to deal with the
threat will be plagued by distrust among both Sunni and Kurds toward Baghdad. The
Kurds will want to exchange security cooperation for energy rights, spurring calls for
autonomy in Basra. The Sunnis, while assembling their own militias, will want to
bargain for rights to energy resources in Kurdish-held disputed territories in
exchange for security cooperation. The actions of less-disciplined Shiite militias
operating in Sunni areas will run the risk of undermining political progress in these
negotiations. Baghdad will limit how much it concedes to any of these groups as it
tries to preserve central authority in Iraq while trying to deal with the more
immediate issue of the Islamic State.
As Stratfor anticipated in 2014, Turkey drew a line at underwriting Kurdish
independence in Iraq and has instead chosen to re-engage with Baghdad on an
energy understanding with the Kurdistan Regional Government. Financial strain and
the common threat of the Islamic State have driven the Kurdish authority in Arbil
back to the negotiating table with Baghdad, which will allow increased oil output in
the north and more exports through the north in 2015 to add to Iraq's overall
production. However, with a number of core issues unresolved, including the status
of disputed territories, this compromise remains vulnerable to disruption. Turkishbacked projects to develop and transport natural gas by pipeline from northern Iraq
to Turkey will also stress the agreement between Baghdad and Arbil in the absence
of a framework that stipulates which party will have the right to sell the natural gas.
The Islamic State Persists in Syria, Tries to Push into Lebanon
In Syria, President Bashar al Assad's government will focus on re-taking Aleppo and
will make some progress toward this end. However, government forces will be
hampered overall by rebel activity in Idlib and Daraa as well as an ongoing push by
the Islamic State to seize Deir al-Zour in the east. In trying to dilute the military
strength of Assad's forces, the Islamic State will try to recruit jihadists to push
against Hezbollah in the Qalamoun area of Syria bordering Lebanon's Bekaa Valley.
The potential for a jihadist push into Lebanon will attract greater military support for

Beirut. Hezbollah and its patrons in Iran will use the common threat to further
negotiations with their sectarian rivals over a power-sharing agreement in Lebanon.
Holding Steady with Iran
Maintaining a relationship with Iran remains critical to U.S. strategy in the Middle
East, but a comprehensive agreement broadcasting a U.S.-Iran diplomatic
rapprochement is not likely in 2015. The relationship between Iran and the United
states will not make a public leap forward. Rather, diplomacy will continue publicly
while both sides cooperate quietly in areas where their interests coincide, such as
Iraq and Syria, even if Washington and Tehran go to great lengths to deny such
cooperation publicly.
The nuclear issue is only one piece of this broader negotiation. An understanding
between Washington and Tehran will endure this year and Iran will maintain limits
on enrichment activity while the United States gradually eases sanctions, relying
principally on executive power to do so. Lower oil prices will constrain Iran as will
the prospect of Iran becoming a more politically viable energy alternative to Russia.
These limits will help underpin this negotiation. However, the political complexities
surrounding this process, along with technical constraints, mean the Iranian energy
sector is unlikely to see a revival this year that significantly increases the amount of
Iranian oil on the market.
Iranian President Hassan Rouhani's inability to significantly improve economic
conditions in Iran this year will only add to the domestic pressures he faces in
sustaining the negotiations with the United States. Pre-emptively, Rouhani will try to
undercut his opponents in the Islamic Revolutionary Guard Corps through anticorruption charges and other means that aim to undermine the corps' position as a
central cog of Iran's political economy. The corps will push back but ultimately will
lack the institutional strength needed to significantly destabilize the Rouhani
government and derail the negotiations.
An Alienated Turkey
Though the United States and Turkey share a number of interests, from keeping
Russian ambitions in check to stabilizing the Middle East, their partnership will
remain strained in 2015.
Turkey will maintain a defensive military posture along its borders in spite of
Ankara's ambitious calls for the implementation of a no-fly zone in Syria a
proposal the United States will keep its distance from as it remains focused on the
fight against Islamic State. Turkey's backing of Islamist groups modeled after the
Muslim Brotherhood, combined with its military reticence, will alienate Turkey from
much of the Arab world, denying Turkey the broader following it seeks to legitimize
its role as a regional leader.
Also, Turkey will keep its distance from the U.S.-led effort to contain Russia,
preferring instead to maintain a careful balance between Russia and the West. For
example, Turkey will proceed with the Trans-Anatolian Natural Gas Pipeline, TransAdriatic Pipeline and other Southern Corridor projects that circumvent Russia while
strengthening its energy relationship with Russia. Unable to break its energy
dependence on Moscow, Turkey would rather reap the commercial benefits as a

transit state while taking advantage of the tense political climate to increase trade
with Russia as European demand continues to lag.
Turkey will also be preoccupied for much of the year with the lead-up to the June
general election. The election will occur amid slowing economic growth, rising
unemployment and a growing chorus of criticism against the ruling Justice and
Development Party's foreign policy. The opposition will remain too fragmented to
deny the ruling party a victory, but the Justice and Development Party's popularity
in the polls will erode, making a two-thirds majority in parliament unlikely for the
party. However, this will not prevent Turkish President Recep Tayyip Erdogan from
recentralizing power under his presidency. Erdogan will face charges for violating
the constitution, but the allegations will not be backed by enough institutional heft
to paralyze the government or prevent Erdogan from managing the country.
The Justice and Development Party will vie for the Kurdish vote through the ongoing
peace process with the Kurdistan Workers' Party, and Kurdish factions in Turkey will
in turn use this election year to push forward their demands by way of street
demonstrations and occasional attacks. There may be rhetorical claims of progress
at certain points, but this negotiation will remain hampered by a number of
constraints. With active battlefields on Turkey's borders, Ankara is not going to
succeed in disarming the Kurdistan Workers' Party, and the Justice and Development
Party does not have enough political strength to unilaterally approve sensitive
components of a peace deal.
Gulf States Step Up
With Turkey weighed down, the Gulf Cooperation Council (GCC) states, led by Saudi
Arabia, will attempt to fill a void in the region, reflecting a rare and growing
assertiveness as the bloc works to secure Sunni Arab interests that it believes it can
no longer rely solely on the United States to defend. The GCC began 2015 in a
tenuous truce among member states as they pool their political and economic
resources to combat the Islamic State through air power and support of local ground
forces while trying to manage Iranian ambitions in the region.
This will remain a fragile working relationship as divisions persist over working with
political Islamists and over member countries' varying levels of engagement with
Iran. Bahrain and the United Arab Emirates will adhere closely to Saudi policy while
Kuwait and Oman pursue a more cautious line. Qatar will cooperate selectively with
this group to avoid isolation but will use its re-engagement to push other GCC
members to integrate, rather than eliminate, Doha-backed political Islamists in
places such as Egypt, Libya and Syria.
With ample currency reserves, GCC coordination on energy will continue through
2015. Gulf producers will continue resisting production cuts and trying to defend
their market share from the expansion of unconventional hydrocarbon production
technology beyond North America.
Yemen Remains Restive
Yemeni President Abd Rabboh Mansour Hadi's embattled regime will balance
ministerial positions and other key posts among the factions jockeying for power as
one way of staving off civil war. The al-Houthi sectarian group will continue to

coordinate loosely with elements of Yemen's armed forces and some local tribes to
push back against al Qaeda in provinces under al-Houthi influence. Though the alHouthis made a large show of strength in 2014, they are not likely to attempt to
seize power in Sanaa and rule directly. Instead, the al-Houthis will use their
enhanced influence and military prowess to bargain with the government over
political and economic rights.
Al Qaeda in the Arabian Peninsula will remain active in Yemen, staging attacks
against the state military and intelligence apparatus, opposing tribes and the alHouthis. However, battling all of these groups will limit the al Qaeda franchise's
ability to significantly expand control beyond its traditional territory in the east and
parts of the south and will curtail its ability to stage large-scale and operationally
successful attacks in the capital. In southern Yemen, the secessionist movement,
emboldened by the al-Houthi expansion and a weak central government, will
continue to stage protests and hold strikes in efforts to extract concessions from
Sanaa. The southern secessionists, unable to achieve their goal of a federalist
Yemen divided between the north and south in negotiations over the constitution,
could resort to violence.
Meanwhile, Saudi Arabia will keep a watchful eye on Yemen and balance among its
neighbor's factions, including local jihadists, with the primary goal of preventing a
spillover of violence northward. The Saudis will retain the option to intervene
through air strikes should the need arise.
An Israeli-Palestinian Impasse
Israel will undergo a political transition this year that will pull the government
further to the right. Israel's greater intractability on policies toward the Palestinian
territories will strain relations with Washington and further enflame tensions in the
West Bank and Israel proper as militants resort to more resourceful tactics against
Israeli targets and as Fatah's influence continues weakening in the West Bank. Israel
will maintain a pre-emptive military posture and strike with impunity against targets
in neighboring states when the need and opportunity arises.
Egypt's Government Faces Opposition, Jihadists
The military-backed government of President Abdel Fattah al-Sisi will try to
consolidate its power this year. A key component of this process will be the March
parliamentary elections. A fragmented Islamist and secularist landscape, along with
skillful electoral engineering, will allow al-Sisi to realize a divided and thus pliable
legislature. Disagreements over how much political space to cede to Islamists who
do not oppose the government, such as the Salafist al-Nour Party, could limit the
extent of the government's success. The government will still be dealing with
protests from the Muslim Brotherhood, though those protests will remain largely
contained. At the same time, Cairo will expend a great deal of energy trying to
combat jihadist groups such as Ansar Beit al-Maqdis and Ajnad Misr both in Sinai
and on the mainland.
Egyptian security forces will continue focusing on the Sinai and Nile Delta regions as
they seek to contain domestic insurgent activity, though the country's long desert
border with an increasingly chaotic Libya will also warrant Cairo's attention. Cairo
will work with its Gulf backers and the recognized Libyan government in Tobruk to

limit the threats emanating from eastern Libya. However, Egypt's involvement will
fall short of direct military intervention: Cairo's participation in the Libyan conflict in
2015 likely will be limited to logistical support, weapons and ammunition, and
coordination in air strikes.
Libya's Divisions Persist
Fragmentation will define Libya over the next year, with regional governments and
the international community pursuing various and often competing strategies. The
country has missed self-imposed deadlines for drafting a constitution and holding
elections for a permanent government, and now Libya's transition has ground to a
halt as competing factions of revolutionaries, Gadhafi-era figures and militias from
various ideological and sectarian backgrounds vie for influence. Violence and
insecurity will prevent Libya from reaching full oil production capacity, and strikes,
protests and attacks will continue to cause swings and dips in overall output over
the course of the year. However, the strategic value of Libyan oil supplies to
international markets will diminish, especially as Gulf producers maintain production
levels and output from other OPEC members Iraq and Nigeria expands or stabilizes.
The United States and its coalition partners will watch Libya closely for significant
jihadist activity. So long as groups affiliated with al Qaeda or the Islamic State
remain isolated within small pockets of Libya and do not begin to organize attacks
against neighboring Algeria, Egypt or the European Union, there will be less
pressure for outside forces to strike proactively against Libyan militants a move
that could further destabilize the country. Saudi Arabia, the United Arab Emirates
and Egypt likely will limit themselves to logistical support and air strikes in their
ongoing support for forces allied to the internationally recognized national
government in Tobruk.
There will be no clear or easy victories for the competing governments either in
Tripoli or Tobruk; various parties are likely to express support for negotiations and
enter talks, but neither lasting cease-fires nor a stable transition is expected in
2015. Any constitution written under the aegis of the government in Tobruk will not
have national support, and if ratified it likely will prove temporary, extending Libya's
political instability beyond 2015.
Algeria Seeks Reform and Manages Succession
Algeria's constitutional reforms will likely be announced this year. Of particular
importance are the reforms pertaining to the structure of the government as a
presidential or prime ministerial system, economic shifts including the further
liberalization of the hydrocarbon sector and the creation of a more civilian-led
state after decades of military dominance. The transition from ailing President
Abdelaziz Bouteflika to his successor is not likely to happen this year, barring any
unexpected health complications, and the current political machinery behind
Bouteflika probably will remain largely in place to help manage the transition
process.
Beyond the internal workings of the political elite, Algiers will work to improve ties
with France and the European Union to help bolster the government and attract
much-needed foreign investment into the non-energy sectors of Algeria's economy,
especially mining, steel and automobile manufacturing. Securing against regional

militancy will remain Algeria's top security priority, especially regarding neighboring
northern Mali, Tunisia and Libya. Tunisia will work to form a new government in early
2015, giving Algiers ample opportunity to entrench security and political
cooperation with Tunis further. Algiers also will work to persuade western Libya's
myriad tribal, militia and local political groups to participate in internationally
backed negotiations between the feuding Libyan governments in Tripoli and Tobruk.
Regional Map - Forecasts - East Asia
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East Asia
China Looks to Tame an Economic Slowdown
China enters 2015 amid a deepening economic slowdown. Steady declines in home
prices, home sales and real estate-related investment, combined with the impact of
still-weak external demand and rising input costs for Chinese exports, all but ensure
that China's economic growth in 2015 will fall to its lowest level since 1990. Stable
growth in services industries, buttressed by rising household consumption, will
mitigate some of the negative social and political effects of slowing industrial
activity. However, these components of China's economy are not yet strong enough
to offset the inexorable winding down of China's decadeslong export and
investment boom. The core questions for China in 2015 do not concern whether or
for how long the country's economic slowdown will continue declining growth will
remain the norm this year. Rather, the questions are how this slowdown will play out
socially and economically across China's many diverse regions and whether the
country's political and administrative structures can evolve to meet its rapidly
changing needs.
Slowing economic growth in 2015 will bring to the forefront deep-set regional
economic imbalances not simply between the coast and the interior, but between
different parts within coastal and inland China. Some provinces will feel the pain of
declining housing and infrastructure construction disproportionately. Northern
China's traditional coal, steel and heavy industrial hubs like Hebei, Shanxi, Inner
Mongolia and Heilongjiang, where reliance on the health of nationwide real estate
markets is highest, will be hardest hit. Naturally, these provinces will be the locus
for local government and corporate debt concerns in 2015. As average home prices
fall further, the likelihood of localized debt, economic and employment crises in
these regions rises substantially.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa
East Asia
Latin America
South Asia
Sub-Saharan Africa
At the same time, China's internal regional economic and financial fragmentation
will limit these economic crises to a few provinces, providing a subtle but powerful
buffer against nationwide financial contagion. This is the same fragmentation that

Beijing seeks to overcome in the long run. Thus, even as the resource- and heavy
industry-based northern Chinese economies grind to a halt this year, the country's
more prosperous and heavily urbanized coastal and Yangtze River regions will see
more stable growth bolstered by stronger services industries, more robust internal
consumption bases and rising investment into higher value-added manufacturing.
The Chinese government will not seek to reverse the country's economic slowdown
this year. Instead, it will rely on a combination of tools to ensure that the slowdown
remains measured. First and foremost, it will use centrally allocated infrastructure
investment, direct capital injections and targeted relaxation of local government
housing and spending controls to support strategically significant industries and
regions or to soften the impact of crises in others. Additionally, it will act as needed
to ensure that the core state-owned banks and their provincial branches have ample
liquidity to metabolize rising non-performing loan ratios and maintain a steady flow
of credit to favored businesses. Beyond these measures, however, the Chinese
government will let the country's economic slowdown do what central authorities
have long struggled, and failed, to accomplish: push forward industrial
consolidation, weed out unprofitable and wasteful investment, and curb endemic
housing and basic materials oversupply. Ultimately, this process could pave the way
for a more competitive and productive Chinese economy. However, during 2015,
China will feel much of the pain and few of the benefits of industrial consolidation,
all while maintaining just enough support to the economy to prevent that pain from
becoming critical.
Beijing will take advantage of the housing and construction slowdown to implement
a number of long-awaited economic and social reforms in 2015. First, it will expand
fiscal reform measures, such as a municipal bond pilot program and value-based
resource taxes, in an effort to reduce local government reliance on land sales for
revenue, thus removing a key structural driver of China's post-1990s housing and
infrastructure boom. In conjunction with fiscal reforms, the expansion of property
taxes to more regions and the creation of a national property registration system,
both set to take effect in the first half of the year, will undermine real estate
speculation and help bring prices further in line with real average income levels,
especially in the small- and medium-sized cities Beijing has targeted for future
urbanization. China also will establish a national deposit insurance program, widely
seen as a key step toward building a more mature and open financial system.
Moreover, Beijing will adjust its household registration, or hukou, system to better
manage shifting labor flows as some parts of the economy slow faster than others.
Finally, the year will bring tangible progress on efforts to make the state-owned
sector more internally competitive and to open key emerging industries notably,
shale gas exploration to greater private and foreign participation.
Implementing these and other reforms will not be easy. The central government's
powerful security and Internet censorship apparatuses will keep visible signs of
outright opposition to a minimum. Yet at the local level and within state-owned
enterprises and ministries, resistance to measures that threaten employment, social
stability and vested interests will run high. The deepening economic slowdown and
rising urgency of reform will fuel continued efforts by Chinese President Xi Jinping
and his closest allies to consolidate their influence over Communist Party,
government and military apparatuses and to bolster the central leadership's public

image. In 2015, as in the past two years, the anti-corruption campaign will be the
central vehicle for doing both. As before, anti-corruption drives in 2015 will target a
combination of high-level officials across the military and strategic industries and
regions as well as local-level officials and middle-level functionaries, with perhaps a
growing emphasis on combating local corruption through policies like the national
property registry. In line with this, 2015 will likely bring several waves of large-scale
arrests and demotions, along with rising capital flight as officials accused of
corruption seek to move assets overseas.
China's Maneuvers in its Periphery
Economic, social and political stress at home will not halt China's push to expand its
diplomatic and security presence in the countries with which it shares land borders.
China also will work to expand its overland transport, trade and energy connections
with its land neighbors. In particular, Beijing will focus in 2015 on bolstering security
and investment ties with Central Asian countries and Afghanistan and Pakistan as it
seeks to stifle unrest in Xinjiang and curb its rising dependence on overseas trade in
energy, resources and goods. Likewise, Beijing will continue cementing
infrastructural ties to mainland Southeast Asia, with a focus on expanding rail and
road transport between southwest China, the Greater Mekong Subregion and
Myanmar. Last but not least, China's leading energy firms will deepen cooperation
with their Russian counterparts in 2015 as Beijing looks to diversify its energy
supply routes and hedge against Japanese-Russian energy cooperation.
This year will not be quiet by any means in the East and South China seas,
especially with several Chinese construction projects on islets and atolls in island
chains such as the Spratleys scheduled for completion. Likewise, as Stratfor has
noted before, the steady proliferation of naval and commercial maritime vessels in
both seas raises the likelihood of accidental collisions or confrontations. However,
Beijing will also work to mitigate strong reactions from its maritime neighbors.
Although China is seen as an assertive, and by some accounts aggressive, power in
the South China Sea, it also carefully weighs its actions to avoid the strongest
countermeasures. Beijing will make its maritime security elements essentially its
coast guard more active than its navy in order to force China's neighbors to focus
their procurement dollars on coast guard rather than naval vessels. It also will
continue to hold out a potential code of conduct to the Association of Southeast
Asian Nations as a way to keep the group divided and reticent of stronger military
ties with outside partners, as they see some opportunity to constrain Chinese
actions without being caught between Beijing and Washington and Tokyo.
Japan's Abe Focuses on Revival
National snap elections in December 2014 gave Japanese Prime Minister Shinzo Abe
and his hopes of precipitating a Japanese economic, diplomatic and military revival
a second wind. In 2015, Abe will try to use his strong parliamentary position to push
through the politically sensitive structural economic and social reforms necessary to
transform the temporary gains of monetary easing and fiscal stimulus the first
two "arrows" of his economic strategy, known colloquially as Abenomics into
sustainable, long-term economic growth.
At the top of Abe's agenda this year will be reforms to the worker dispatch law to
make it easier for businesses to hire and fire employees, and measures to increase

immigration and expand female workforce participation. Efforts to open domestic


agriculture markets to foreign competition will help pave the way for Japan's
accession to the Trans-Pacific Partnership in 2015. At the same time, Abe will
continue pushing Japanese conglomerates to raise wages, offsetting the costs to
businesses by further cutting corporate tax rates. In 2015, these measures will
compound continued monetary expansion and steady fiscal stimulus to stem the
tide of recession from 2014. However, unless and until structural reforms are firmly
in place and have the desired effect of raising worker productivity and
substantially expanding the workforce any gains likely will be temporary,
especially as prolonged low oil prices dampen the effects of the Bank of Japan's
monetary stimulus efforts.
Abe's economic maneuvers will meet with stiff resistance from powerful industrial
lobbies and ministries, including the Ministry of Finance and elements within the
Bank of Japan concerned about the mounting costs of servicing Japan's staggering
sovereign debt and covering other social expenditures. During 2015, resistance
within and beyond the government is not likely to reverse Abenomics, but will
constrain any future move by the prime minister to expand bond purchases and
fiscal stimulus.
Economics is only one component of Abe's national revival strategy. Equally
important are military normalization and diplomatic engagement, especially in
Southeast Asia. In 2015, Abe will make as much, if not more, lasting headway on
these fronts as on the economy, with Japanese investment and trade ties with
ASEAN set to grow and with Abe set to push harder for a formal revision of Article 9
of the Japanese Constitution, which would allow the country to have a regular
military instead of just self-defense forces. However, in 2015 these matters will take
a backseat to the debate over Abenomics.
In the area of foreign policy, some progress could occur in Japan's relations with
Russia. Tokyo and Moscow are simultaneously facing constraints and compulsions
that make it more vital than before to move beyond their lingering territorial
disputes and enhance their energy and resource investments and trade, and both
countries' leaders see a brief period where action can be taken to solidify a deal.
Although far from guaranteed, a diplomatic agreement on the disposition of the
Kuril Islands, which Japan calls the Northern Territories, is likely in the first half of the
year, paving the way for both the formalized end to any lingering uncertainties from
World War II and a shift in Japanese investments in the Russian Far East. Overall,
Russia can be expected to be more active in Japan and China and both Koreas in
2015 and in expanding its economic relations in Southeast Asia, particularly
Vietnam.
Southeast Asia's Economic Ambitions
This will be something of a watershed year for Southeast Asia. Plans to integrate the
region into a single market for investment, trade and skilled labor by Dec. 31
under the rubric of an Association of Southeast Asian Nations (ASEAN) "Economic
Community" will by no means be realized fully. Stratfor nonetheless expects
significant discussion and concrete steps to be taken toward reducing the regulatory
hurdles and bridging the political and economic divides that have long undermined
ASEAN unity. As a result, Southeast Asia is likely to remain a favorite destination for

overseas investment in 2015, especially from Northeast Asian investors like China,
Japan and South Korea.
Regionwide integration and investment trends will be amplified and in some
cases constrained by internal developments in individual ASEAN member states.
Indonesia faces an ongoing struggle to recentralize political and regulatory powers
and create a more stable and transparent environment for investors. Thailand is
attempting to maintain unity and cohesion in the face of still-simmering regional
divisions and a looming royal succession. In Myanmar, the government is making
efforts to reach some form of accord with ethnic rebel groups before general
elections late 2015. On all fronts, Stratfor expects progress to be halting and
limited, constrained as each country's leaders are by other forces.
Regional Map - Forecasts - Latin America
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Latin America
Venezuela's Tumultuous Year Ahead
All the elements are in place to make 2015 a year of protests and difficult political
decisions that will challenge the stability of the Venezuelan government. The
downturn in global oil prices will strain Venezuela's public finances, which require oil
prices to be much higher to satisfy the country's extensive social spending a key
element in guaranteeing voters' support for the government. Venezuela will struggle
to fund imports at levels sufficient to meet public demand, and prices of food and
goods will continue rising throughout the year. These shortages and inflation will
lead to rising discontent among the Venezuelan public, which could spur another
wave of protests. As the economic crisis mounts during the year, factions within the
ruling United Socialist Party of Venezuela will have more incentive to undermine
President Nicolas Maduro's rule. With rising discontent from potential voters and
impending legislative elections in December, these factions could move to erode
Maduro's power or even seek his resignation.
The stress on Venezuelan government finances will force Caracas to make crucial
economic decisions. The government will try to obtain foreign currency wherever
possible, but social spending cuts remain very likely. The degree of unrest on the
streets will influence the scope of the government's cost-cutting plans. If
widespread protests persist, Caracas will likely prioritize funding for domestic needs
over debt payments to foreign bondholders or private firms. Venezuela's deepening
economic recession likely will lead the government to continue reducing oil and
refined product shipments to nations in the Petrocaribe energy alliance and to Cuba
in an effort to maximize the country's foreign currency availability.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa
East Asia
Latin America
South Asia
Sub-Saharan Africa

The Venezuelan government will also face a key political challenge in the December
elections. The ruling United Socialist Party of Venezuela will go into these elections
without a strong and charismatic leader at its helm and in a severely depressed
economic environment. If the ruling party suffers an electoral setback, such as the
loss of the legislature, rifts within the party will widen, and political rivals could
begin efforts to challenge Maduro.
Driven by the potential threat posed by Cuba's re-engagement with the United
States and the immediate threat from its ongoing domestic economic crisis,
Venezuela will pursue a political rapprochement with the United States. Although
Caracas will be looking for economic or political lifelines, Washington alone will not
be able save the Maduro regime. The success of Venezuela's overtures to the United
States will largely depend on Washington's desire to engage Venezuela.
Cuba Seeks to Reconnect with the U.S.
With Venezuela spiraling downward, the Cuban government will compensate for the
destabilization of its ally by re-engaging with the United States. Cuba and the
United States will continue bilateral meetings and negotiations toward reestablishing full political and economic relations. Discussions on the resumption of
diplomatic contacts, travel and trade will continue throughout the year, and
agreements on individual issues within the negotiations are likely. However, a full
rapprochement is not plausible this year, because numerous political issues remain
unsettled, including the nature of a Cuban political transition away from the
administration of Raul Castro and toward a government acceptable to the United
States. Consequently, the United States' economic embargo on Cuba is unlikely to
be lifted in 2015.
Colombia Could Reach a Deal with FARC
The Colombian government and the Revolutionary Armed Forces of Colombia,
known as the FARC, will enter the final phase of negotiations, in which issues critical
to negotiating a successful peace agreement will be discussed. A peace deal
between the two is plausible in 2015. The Colombian government is likely to yield
on key issues, such as the dismissal of outstanding criminal cases against specific
FARC commanders, and will begin crafting the transitional justice mechanisms for
guaranteeing the demobilization of the militant group. The government has
tentatively set an October deadline for a national referendum for voters to approve
an eventual peace deal, but this is a soft deadline that could be moved if the two
sides fail to reach an agreement on time.
The Colombian government will also attempt to bring the smaller National
Liberation Army, or ELN, into negotiations. If the government makes notable
progress in talks with FARC throughout the year, it raises the likelihood of the
smaller group joining the negotiations.
Argentina Continues Its Attempts to Escape Default
Argentina will hold presidential elections in October 2015. The election could result
in a more free market-oriented, politically moderate candidate taking office. The
vote is not likely to strongly affect Argentina's national economy or regulatory
framework this year, since the winner will not take office until December.

Argentina will begin negotiations with holdout creditors with the aim of reaching an
eventual deal with that will allow Buenos Aires to exit its state of selective default
on foreign debt payments. The seriousness with which the Argentine government
pursues a final deal this year will depend on the state of its public finances
throughout the year. A rise of cash inflows from agricultural exports and reduced
spending on energy imports could give Buenos Aires the financial leeway to pursue
a lengthy negotiation with the holdouts rather than hurriedly negotiating an
agreement in the coming year.
Mexico Focuses on Energy and Security
With energy reforms legally locked in place, Mexico will focus on laying the
foundation for an eventual rise in hydrocarbons production. The government will
hold several rounds of energy auctions, auctioning off the first fields in the second
half of the year.
Mexico City will continue working to establish or strengthen the rule of law in
several regions of the country. Many of the principal security concerns in 2014, such
as the proliferation of self-defense militias, the expansion of fuel theft, social unrest
in the southwest and high levels of criminal violence, have continued into 2015. As
a result of these continuing challenges, President Enrique Pena Nieto will attempt to
overhaul his existing national security strategy in 2015 by pushing for constitutional
reforms regarding public security that could better enable the federal government
to strengthen, or bypass, weak local and state institutions that can impede the
federal security strategy.
Tamaulipas state and Mexico's southwest region, particularly Michoacan and
Guerrero states, will continue to draw the focus of the national security strategy.
The weak to nonexistent rule of law in many areas of the southwest which has
fostered particularly high levels of criminal violence, the proliferation of civilian
militias, and current unrest triggered by the abduction of student teachers will
continue to challenge Mexico City's efforts to contain the crime and unrest.
However, if the government fails to contain the situation, it risks another expansion
of militias, the emergence of anti-government guerrillas, and prolonged or
expanded unrest in Mexico's southwest region in 2015. Continued protests in the
southwest could also continue driving protests in Mexico City and elsewhere in the
country during the year as participants seek to influence the country's national
elections, scheduled for July.
Brazil Copes with a Sluggish Economy
The slow economic growth that has characterized the past two years for Brazil will
continue into 2015. Uneven trade with economically stagnant Argentina will
continue to hamper the steady growth of Brazilian manufacturing exports, which will
spur Brasilia to seek increased exports to other South American and international
markets. Brazil's slow growth will lead to government spending cuts this year
equivalent to about 1.2 percent of the country's gross domestic product. Such cuts
are unlikely to affect the popularity of the ruling Workers' Party, as the cuts will
avoid targeting major social spending programs that have underpinned its
popularity.
Ecuador's Correa Prepares to Seek Re-Election

In 2015, the Ecuadorian government will implement the final legislative steps to
allow President Rafael Correa to run for a fourth presidential term in 2017. Ecuador's
fragmented opposition will most likely resort to legal measures and street protests
to prevent the decision. However, Correa's high popularity among voters and the
ruling party's overwhelming control of the legislature will limit the opposition's
ability to prevent Correa from standing for a third term.
Regional Map - Forecasts - South Asia
Click to Enlarge
South Asia
India's Modi Works Toward Reform
Indian Prime Minister Narendra Modi will remain fundamentally constrained in his
attempts to transform his ambitious reform plans for India into reality. In 2015, Modi
will grapple with challenges familiar to any Indian leader: securing a stable
environment for foreign investment, reining in rampant corruption and bureaucratic
inefficiencies and asserting the central government's authority over independentminded states. Modi will not reverse India's geopolitical realities, but he will
continue the slow process of consolidating national authority and garnering support
through populist measures before attempting broader structural reforms. Modi will
struggle to maintain the support of India's middle-class voters and the business elite
as he fights to rein in a large and diverse parliamentary majority that at times will
seem more committed to pursuing a Hindu nationalist ideology than Modi's more
pragmatic economic reforms.
Overall, economic growth in India will improve this year, driven primarily by higher
investor confidence, lower energy prices and a strengthening dollar that will help
exports. But overall gross domestic product growth is unlikely to top 5-6 percent
because of structural issues regarding inflation, currency fluctuations and
impediments caused by infrastructure deficiencies. The Modi government will
continue efforts to divest shares in state-owned enterprises, but labor unions and
bureaucrats are likely to stymie these plans. Large-scale strikes would affect coal
and iron ore output while adversely effecting the steel, power and manufacturing
sectors.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa
East Asia
Latin America
South Asia
Sub-Saharan Africa
India will increase government spending to upgrade its aging military equipment
and improve domestic security. It will renew the push to allocate resources to fight
Naxal rebels and reinforce borders threatened by Islamist militancy. Attempts to get
local governments to cooperate (especially in key Naxal-afflicted states such as
Jharkhand, Chhattisgarh and Odisha) will suffer as Modi continues struggling to

secure control over his own party while communal pressures exacerbated by rightwing Hindu nationalist policies will risk social unrest in states like Uttar Pradesh and
Bihar.
Modi will struggle to create an investment climate that meets the expectations and
promises made to a long list of states that sent officials to visit India in 2014.
However, he will gain the most traction in building India's business relations with
China, Bangladesh and the ASEAN countries and in ongoing efforts to upgrade ties
with the United States. Meanwhile, India's traditionally positive relationships with
Japan and Australia will face some tension as Tokyo and Canberra become frustrated
with the slower-than-expected pace of reforms that is delaying planned investment
projects. The resolution of a longstanding border dispute with Bangladesh will likely
happen in 2015, building on steadily improving relations between New Delhi and the
ruling Awami League in Dhaka.
Tensions with Pakistan will remain a concern as border violence continues into the
new year. New Delhi has an imperative to avoid escalating military tensions with
Islamabad, especially as the latter continues its anti-militancy campaign. However,
New Delhi's political leadership remains caught between domestic crises and
increasing hardline Hindu politicking, making it difficult for the Modi administration
to de-escalate the situation without a clear victory. Similarly, Pakistan's military will
need to avoid capitulating to India. Ongoing tensions will leave open the possibility
of a miscalculation, which could lead to an escalation in fighting.
Bangladesh Focuses on Drawing Investment
Dhaka will continue to work with the United States and the European Union to lift
trade barriers and bolster investment hurt by concerns over the 2014 elections. As
the Awami League works to consolidate domestic power, it will continue targeting
right-wing Islamists while keeping the option to negotiate with a weakened
Bangladesh Nationalist Party. Bangladesh will work primarily with China, Japan and
India to try to expand and diversify investment in manufacturing. Reforms to energy
regulations (especially to encourage more offshore exploration and domestic
production), an expansion of special economic zones and other efforts to move the
country up the manufacturing value chain are likely in 2015.
Protests, unrest and violence have accompanied political change in Bangladesh, and
2015 will be no exception. The ruling Awami League will be able to largely contain
the economic and social effects of protests and actions by the political opposition
(including the potential for internal dissent over negotiations with the Bangladesh
Nationalist Party) without serious risking the government's stability.
Social Unrest Expected in Sri Lanka
Sri Lanka begins the year with the ouster of strongman former President Mahinda
Rajapaksa. His successor, Maithripala Sirisena, vows to embark on an ambitious
political and economic restructuring of the island, including courting Indian and
Western support and balancing Chinese investment.
Social unrest and protests will are likely in weeks and months following the election,
but the core of support behind the Rajapaksa administration the economic elite,
mainstream Buddhist religious and social groups, and the majority of the island's

ethnic Sinhalese population still opposes the rising political clout of the island's
ethnic and religious minorities. Sirisena will have to expand his base of mainstream
Sinhalese supporters, including the military, in order to push through a new
constitution and move away from Sri Lanka's parliamentary system. Sirisena and his
supporters have vowed to dissolve parliament and write a new constitution
eliminating the role of president, but the new president leads an unruly coalition of
competing ethnic, political and religious minorities that will prove difficult to
organize into a stable coalition. Tamils and Sinhalese groups from the island's
central regions are likely to push for a federal style government under the new
constitution, creating rifts between hardline backers of the Rajapaksa administration
and Sirisena and the minority groups who helped vote the new president into office.
Clashes between hardline Buddhist elements and Muslims and Hindus could
increase, creating the possibility for retaliatory or insurgent attacks. The military will
continue its presence in northern Sri Lanka, and while a return to the levels of
fighting that took place on the island prior to the 2009 cease-fire are unlikely, Sri
Lanka faces an elevated risk of social and political unrest in the year to come.
Afghanistan and Pakistan's Post-NATO Cooperation
The coalition government comprised of the factions of Afghan President Ashraf
Ghani Ahmadzai and CEO Abdullah Abdullah will likely endure this year, but it will
come under intense strain, especially from Ahmadzai's decision to negotiate with
the Taliban and work with Pakistan. In anticipation of a drawdown of NATO forces
and the resulting vacuum that would allow Pakistani Taliban rebels to operate east
of the Durand Line, Islamabad and Kabul will be compelled to cooperate on military
matters and negotiate with the Afghan Taliban movement.
In Pakistan, the military's battles against jihadists will take precedence, and the
state will intensify security operations throughout the country. Social backlash from
these policies can be expected from conservative social forces. In addition, political
turmoil created by an opposition movement led by Imran Khan will force the
government of Prime Minister Nawaz Sharif to seek negotiations with Khan's
Pakistan Tehrik-i-Insaaf. The political unrest will constrain Islamabad's ability to
make headway in its plans to improve the economy primarily by reviving the power
and energy sectors.
Regional Map - Forecasts - Sub-Saharan Africa
Click to Enlarge
Sub-Saharan Africa
Nigeria Prepares for Elections
Nigeria will hold its presidential elections Feb. 14. Since the transition from military
rule in 1999, Nigeria has operated essentially as a one-party state in which the
ruling People's Democratic Party could be expected to win decisively. This, however,
is no longer the case. The previously fragmented opposition has united under the All
Progressives Congress, and the ruling party has suffered a number of defections to
the opposition because of President Goodluck Jonathan's eligibility to stand for reelection. Regardless, Jonathan will run to keep his position, and ongoing legal
attempts to block his bid for another term in office will fail.

The main opposition candidate is Muhammadu Buhari, a former military leader


whose personal support base is in the economically weak northern states. He will
attempt to broaden his base by trying to channel political discontent over Jonathan,
who hails from the Niger Delta, to win support from the economically powerful
Lagos region in the southwest. During his previous stint as Nigeria's head of state,
Buhari worked to minimize corruption. He may once again engage in significant
anti-corruption campaigns within the Nigerian government if he is elected. Such
campaigns are not likely to succeed in their aims and could lead to a degree of
political infighting as Nigerian politicians try to protect their financial interests and
patronage networks.
Table of Contents
Introduction
Former Soviet Union
Europe
Middle East and North Africa
East Asia
Latin America
South Asia
Sub-Saharan Africa
Should Buhari win, one critical task for him will be to ensure that Abuja maintains a
constructive relationship with the Niger Delta political and militant elite. Buhari
would have to incorporate representatives from Jonathan's home region into his
administration. During his previous rule, Buhari was criticized for not supporting this
region of Nigeria enough. If he does fail to bring the Niger Delta into the fold, violent
militancy could re-emerge in the region. If this were to occur, militants would
threaten onshore oil production, which constitutes approximately one-third of
Nigeria's production of 2.3 million barrels per day. Buhari, however, already has
shown some consideration for the interests of this region by appointing Rotimi
Amaechi, the governor from Nigeria's Rivers state, as director general of his
campaign.
The end of the election season will also see the return of important reform packages
to the National Assembly, such as the controversial Petroleum Industry Bill that aims
to reshape much of Nigeria's energy sector. However, the elections will leave the
National Assembly deeply divided between the two main parties, making any
sweeping reform bills unlikely to pass unless they are significantly watered down.
Boko Haram Remains A Threat
The Boko Haram insurgency in its northeastern states will continue to plague
Nigeria. The militant group's belligerence will persist regardless of which party or
presidential candidate wins the elections. A Buhari administration, however, would
make combating Boko Haram a higher priority. Throughout his time in power,
Jonathan has dealt with the insurgency reluctantly. This stems from his fears of
empowering the military and because Boko Haram operates in a part of the country
where Jonathan has little interest. There is little economic gain to be made in
northeastern Nigeria, and there is much to lose politically from Jonathan's support
base in the Niger Delta if he were to redirect significant government attention to the
north.

Boko Haram will continue expanding the geographic reach of its attacks southward,
possibly attempting to demonstrate a sustained capability to strike at soft targets
using suicide attacks there. In the northeast, Boko Haram will continue its activities,
ranging from suicide attacks to large raids. The group is also likely to continue
staunch resistance in order to maintain territorial control over large swathes of
Borno state and adjoining states and to expand its territorial control where possible.
Lower Oil Prices Affect Economies Throughout the Continent
Whoever wins Nigeria's national election, the country will face the significant
consequences of lower oil prices. The government depends greatly on oil export
revenues for its budget, and the current government has already trimmed its
budget to accommodate these lower prices. The value of the naira, Nigeria's
currency, has also suffered, and this could impact Nigeria's ability to afford
important imports such as food and petroleum products. While the price of exported
oil has dropped, the price of domestically consumed petroleum products, has not,
and demand for fuel subsidy increases could put yet more strain on the government
budget as Nigeria's citizens wish to see lower oil prices reflected in domestic
petroleum product prices.
Other African countries will also notice the effects of the lower oil prices. Angola will
be forced to rethink its current development plans to carry out large infrastructure
projects across the country. Angola already has announced austerity measures and
now will have to reprioritize public expenditures. This puts an increased strain on
the government's already limited efforts to diversify the Angolan economy away
from its dependence on oil exports and specific infrastructure projects connected to
those exports. Politically, low oil revenue will not significantly alter or strain the
relationship between the national oil company Sonangol and the ruling Popular
Movement for the Liberation of Angola and President Jose Eduardo dos Santos. This
relationship is multifaceted and has lasted nearly 40 years despite a civil war and
long periods of lower oil revenue. The Angolan government may have to slow down
spending on some public policy and infrastructure initiatives, but the ruling party
will not relax its grip on Angola, so the country's robust security services will contain
any popular dissent arising from poor economic performance.
In other, smaller, West African oil producers, domestic budgeting will be affected
similarly, but in general investment in the oil industry is not expected to slow down.
Particularly in areas where exploration is occurring or about to begin, larger
investments and oil production are still five to 10 years away. The current low oil
prices will not necessarily affect the smaller investments required to continue with
exploration, particularly in areas with a great deal of potential.
In East Africa, the process of initiating oil production in Uganda and Kenya will
continue, although in 2015 it will reach only the preliminary stages of development.
In Tanzania and Mozambique, the development of offshore natural gas fields will
continue, and security and political dynamics hold little potential as disruptors.
Tanzania will hold elections in October but the interests in natural gas development
will be the same regardless of who wins. The Tanzanian government will support the
approval of a new national constitution that redefines areas of responsibility
between the Tanganyika mainland and the Zanzibar archipelago. However, the

promising offshore natural gas sector will remain within the purview of the national
government.
South Africa, while not a significant oil producer, will also feel the consequences of
slowing growth in global oil markets. The South African economy depends greatly on
mineral exports and globally determined commodity prices more generally, which
means that constraints on public spending and the weakness of the rand will
continue. There is no single pressing event such as an election taking place in 2015,
however, so the African National Congress-led South African government will delay
making difficult policy decisions and instead will carry out policy adjustments that
tweak the economy rather than making more fundamental changes. The exception
is the power sector, where moderate reforms and a bailout package for Eskom, the
national electric utility company, will take place in early 2015. Labor negotiations in
South Africa's gold sector also will be impacted by the government's limited ability
to accommodate the demands of the workforce and the potential resulting strikes
could further affect the South African economy.
Possible Instability in Congo and Uganda
This year, the leaders of the Democratic Republic of the Congo and Uganda are
much like Jonathan in Nigeria seeking a controversial next term in office ahead of
elections in 2016. These efforts could result in increased opposition activity and
instability. In the Democratic Republic of the Congo, President Joseph Kabila's reelection attempt would require a constitutional change unless Kabila can delay the
elections. Either an attempt to postpone the vote or an early battle for succession
could lead to a breakdown of political stability in the Democratic Republic of the
Congo, where conflict often has pulled in many regional actors with interests in the
country. In Uganda, opposition to the potential for another term for President Yoweri
Museveni could lead to street protests and efforts to consolidate opposition parties
and actors. These efforts will be conducted over the course of the year.
Alternatively, Museveni could step down, but only to ensure that his successor
would be a trusted ally.
Read more: Annual Forecast 2015 | Stratfor
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2014's Forecasting Report Card
Forecast
January 12, 2015 | 10:15 GMT Print Text Size
Editor's Note: This report card evaluates Stratfor's 2014 annual forecast and
provides concise predictions for 2015.
Integration Efforts in South and East Africa
Prediction: The economic and transportation supply chain infrastructure in southern
and eastern Africa will become more deeply integrated. Angola and South Africa as
well as Kenya and Uganda will take major steps in 2014 to deepen their supply
chain connectivity, including pipelines, roads, rails and energy infrastructure.
Scorecard A
Click to Enlarge

Evaluation: There have been announcements of major infrastructure developments


in southern and eastern Africa. Angola, for example, announced extensive upgrades
to port and railway connectivity within the country and across the region. South
Africa, as a regional economic power, has invested limited resources in
infrastructure integration. Countries in eastern Africa and the Great Lakes region
have begun securing funding and signing agreements with construction companies
for major infrastructure projects. The implementation of the projects is at an early
stage, but countries like Tanzania secured a large amount of Chinese funding to
begin projects sooner.
Outlook for 2015: This dynamic will continue throughout 2015; many large projects
are still in the process of being completed. Anticipated oil and natural gas projects,
particularly in eastern Africa, will continue to drive infrastructure investment and
development.
German-Russian Relations
Prediction: Germany and Russia will take care to maintain their bilateral
relationship, but the two countries will bargain over Central Europe, Ukraine and the
European Union's energy strategy.
Scorecard A
Click to Enlarge
Evaluation: Though Germany has supported and imposed sanctions on Russian firms
and individuals in response to the annexation of Crimea and the activities of
Russian-backed separatists in eastern Ukraine, Berlin and Moscow have worked to
maintain their political relations, with Germany playing a central role in mediating
between Russia and Ukraine.
Outlook for 2015: Germany and Russia will keep communication lines open.
Germany will continue to support the new government in Kiev and mediate its
conflict with Moscow. Berlin will continue its strategy of keeping political pressure on
Russia, and it is ready to maintain the sanctions in place during the first half of the
year. However, Germany will also support lifting the sanctions when they start to
expire in mid-2015.
European Fragmentation
Prediction: Europe will be able to muddle through another year of stagnant
economic growth and high unemployment, but the political and social pressures
developing on the Continent will impede the very structural reforms needed to
manage the crisis in the long run. Credit conditions for households and companies
will remain tight, undermining domestic consumption and hopes for a strong
economic recovery. Efforts made by the European Central Bank to provide easier
access to credit for small and medium-sized businesses will have limited success.
Nationalist and Euroskeptical parties will perform strongly and achieve record
results in most of the elections to the European Parliament.
Scorecard A
Click to Enlarge

Evaluation: As forecast, the economic situation in Europe was defined by stagnating


economic growth and high unemployment, especially in the eurozone periphery.
Credit conditions remained tight, and the European Central Bank's attempts to
boost growth had a very limited impact. Meanwhile, Euroskeptical parties continued
to rise throughout the Continent, with groups such as France's National Front and
the U.K. Independence Party reaching record levels of popular support. We also saw
the emergence of new players on the right, such as the Sweden Democrats, and the
left, such as Podemos in Spain, challenge the establishment
Outlook for 2015: This will be another year of very low growth for Europe, with very
modest growth in Germany and stagnation in France and Italy. In this context, the
core of the debate will revolve around the European Central Bank and its policies to
address Europe's low inflation and meager growth. With general elections scheduled
in key EU member states, including the United Kingdom and Spain, anti-EU parties
will continue to challenge the establishment. As a result, the two-party system that
characterized national politics in most of these countries will be shattered.
China's Economic Rebalancing
Prediction: In 2014, China will continue to adjust the fiscal relationship between
central and local levels of government, widening taxes on natural resource
production and property and creating avenues for local governments to raise capital
through municipal bond sales. These measures will be crucial for stabilizing and
reforming the housing sector.
Scorecard A
Click to Enlarge
Evaluation: In May 2014, China began a municipal bond pilot program in 10 regions
and municipalities throughout the country. On Dec. 1, it imposed a value-based
resource tax on coal production. In December, Beijing issued rules for a national
property registry, a key step towards widening property tax schemes currently
being piloted in Chongqing and Shanghai.
Outlook for 2015: This will be a decisive year for fiscal reform efforts in China, with
new property registration rules set to go into effect March 1 and further expansion
of municipal bond and property tax programs likely to follow.
Argentina's Economic Woes
Prediction: A debt, inflation or current accounts crisis does not appear to be on the
one-year horizon, but the economic situation will nevertheless continue
deteriorating throughout 2014. Buenos Aires will continue to make piecemeal
concessions to attract investment, particularly into its energy sector. However,
overall the government will be constrained from deviating from the protectionist,
interventionist economic policies it has systematically implemented over the past
decade.
Scorecard B+
Click to Enlarge
Evaluation: Stratfor correctly forecast that Argentina would not face any kind of
crisis related to its debt, mounting inflation or strained public finances in 2014.
Argentina faced a default on foreign debt because of a U.S. federal court decision,

not because of an inability to pay. Inflation increased steadily, although not to


critical levels, and the country did not enter into a current account crisis. Argentina
continued tentative steps toward eventually developing its energy sector,
particularly its shale deposits, but high inflation and restrictive regulations on
foreign direct investment hampered the country's ability to make meaningful
progress in developing its energy sector.
Outlook for 2015: Argentina will begin negotiating with holdout creditors with the
intent of reaching a deal that will allow Buenos Aires to exit its state of default.
These negotiations will be lengthy, and a deal will not necessarily be reached in the
coming year. Inflation, the state of default, and the country's restrictive domestic
regulatory environment will continue hampering foreign direct investment
throughout the year.
The Islamic State
Prediction: Regrettably, Stratfor was remiss in excluding a specific forecast on
Islamic State in the 2014 Annual Forecast. However, just prior to the publishing of
the Annual Forecast, Stratfor forecast in December 2013 the growing threat of the
group as well as the potential for a U.S. intervention in our "Gauging the Jihadist
Movement" special series:
In terms of terrorist tradecraft, insurgent forces and control of territory and
revenue from oil production, the Islamic State in Iraq and the Levant is growing in
power; if left unchecked, it has the potential to be the next jihadist group to
establish an emirate. While the organization has not yet demonstrated an interest in
attacking beyond its core territory, the group's rising power will undoubtedly attract
the attention of the Unites States and its allies, who do not want to permit the
emergence of a jihadist emirate in the heart of the Middle East.
Scorecard C
Click to Enlarge
Evaluation: The Islamic State has certainly grown on the ground in Iraq and Syria by
absorbing other groups and by recruiting new local and foreign fighters. We simply
did not foresee the organization being able to conquer as much land in Iraq as it did,
and we were surprised by how quickly the Iraqi army broke in the north. However,
we have not seen the group expand beyond its core areas of operation in a
meaningful way.
Outlook for 2015: The split between al Qaeda and the Islamic State has divided and
weakened the jihadist movement globally, making a significant expansion of Islamic
State's capabilities on a transnational level highly unlikely. The Islamic State will
remain concentrated in the Iraq/Syria theater of operations and the fight against the
group, carried out primarily by local forces, will be slow and uneven. Even as the
group will retain its ability to carry out conventional and terrorist attacks in existing
areas of operation, the Islamic State will not be able to mass forces and significantly
expand its territorial control.
The Ukraine Crisis

Prediction: Russia's moves in the former Soviet periphery this year will mostly
involve defending and consolidating the gains it has made thus far. This will be a
politically volatile year for Ukraine in the run-up to the presidential election slated
for early 2015, and protests against the president will occur periodically throughout
the year. Germany and the European Union will try to maintain some influence in
Ukraine through their support of opposition leaders like Vitali Klitschko, but Russia
will maintain the upper hand in Ukraine overall.
Scorecard CClick to Enlarge
Evaluation: Stratfor has long emphasized that a U.S.-Russia standoff was inevitable
and that Ukraine would be a key battleground. However, we shared in Russian
President Vladimir Putin's intelligence failure in reading the intentions of the United
States. When we gamed out this forecast, Russia had already compelled the
Ukrainian leadership to not sign the EU association agreement, and we did not
believe that the United States and certain European countries were prepared at the
time to trigger a confrontation with Moscow over Kiev. Once the crisis broke out,
Stratfor correctly predicted in quarterly forecast updates the limits of Russia's
military thrust into Ukraine and the unlikelihood of a broader European natural gas
cutoff.
Outlook for 2015: The tension between Russia and the West will persist but will deescalate. With Russia's economic vulnerabilities growing, Russia will temper its
actions abroad and avoid making a major military push into Ukraine, opting instead
to keep the conflict in eastern Ukraine frozen with the potential for the separatist
territories to resume economic ties and political contacts with the rest of the
country. While we expect an easing of European sanctions on Russia by mid-year,
conventional military posturing between the United States/NATO and Russia will
continue.
Read more: 2014's Forecasting Report Card | Stratfor
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Tis the season to make lists, and a list shall be made. We tend to see each year as
extraordinary, and in some senses, each year is. But in a broader sense, 2014 was
merely another year in a long chain of human triumph and misery. Wars have been
waged, marvelous things have been invented, disease has broken out, and people
have fallen in love. Nonetheless, lists are called for, and this is my list of the five
most important events of 2014.
1: Europe's Persistent Decline
The single most important event in 2014 was one that did not occur: Europe did not
solve its longstanding economic, political and social problems. I place this as
number one because regardless of its decline, Europe remains a central figure in the
global system. The European Union's economy is the largest in the world, taken
collectively, and the Continent remains a center of global commerce, science and
culture. Europe's inability to solve its problems, or really to make any significant
progress, may not involve armies and explosions, but it can disrupt the global
system more than any other factor present in 2014.

The vast divergence of the European experience is as troubling as the general


economic malaise. Experience is affected by many things, but certainly the inability
to find gainful employment is a central feature of it. The huge unemployment rates
in Spain, Greece and Southern Europe in general profoundly affect large numbers of
people. The relative prosperity of Germany and Austria diverges vastly from that of
southern Europe, so much so that it calls into question the European Union's
viability.
Indeed, we have seen a rise of anti-EU parties not only in Southern Europe but in
the rest of Europe as well. None have crossed the threshold to power, but many are
strengthening along with the idea that the benefits of membership in a united
Europe, constituted as it is, are outweighed by the costs. Greece will have an
election in the coming months, and it is possible that a party favoring withdrawal
from the eurozone will become a leading power. The United Kingdom's UKIP favors
withdrawal from the European Union altogether.
There is significant and growing risk that either the European Union will have to be
revised dramatically to survive or it will simply fragment. The fragmentation of the
European Union would shift authority formally back to myriad nation-states.
Europe's experience with nationalism has been troubling, to say the least
certainly in the first part of the 20th century. And when a region as important as
Europe redefines itself, the entire world will be affected.
Therefore, Europe's failure to make meaningful progress in finding a definitive
solution to a problem that began to emerge six years ago has overwhelming global
significance. It also raises serious questions about whether the problem is soluble. It
seems to me that if it were, it would have been solved, given the threat it poses.
With each year that passes, we must be open to the possibility that this is no longer
a crisis that will pass, but a new, permanent European reality. This is something we
have been pointing to for years, and we see the situation as increasingly ominous
because it shows no signs of improving.
2: Ukrainian and Russian Crises
Historically, tensions between Russia and the European Peninsula and the United
States have generated both wars and near wars and the redrawing of the borders of
both the peninsula and Russia. The Napoleonic Wars, World War I, World War II and
the Cold War all ended in dramatic redefinitions of Europe's balance of power and its
map. Following from our first major event of the year, the events in Ukraine and the
Russian economic crisis must rank as the second most important event.
Stratfor forecast several years ago that there would be a defining crisis in Ukraine
that would be the opening to a new and extended confrontation between the
European Peninsula and the United States on one side and Russia on the other. We
have also forecast that while Russia has regional power, its long-term sustainability
is dubious. The same internal factors that brought the Soviet Union crashing down
haunt the Russian Federation. We assumed that the "little Cold War" would begin in
the mid-2010s but that Russian decline would not begin until about 2020.
We have seen the first act, and we continue to believe that the final act isn't
imminent, but it is noteworthy that Russia is reeling internally at the same time that

it is trying to cope with events in Ukraine. We do not expect Russia to collapse, nor
do we expect the Ukrainian crisis to evolve into a broader war. Nevertheless, it
seems to me that with this crisis we have entered into a new historical phase in
which a confrontation with significant historical precedents is re-emerging. The
possibility of conflict is not insignificant; the possibility that the pressures on Russia,
internally and externally, might not speed up the country's own crisis cannot be
discounted. Certainly the consequences of oil prices, internal economic dislocation,
the volatility of the ruble and sanctions all must give us pause.
The Russians think of this as an event triggered by the United States. In the
newspaper Kommersant, I was quoted as saying that the American coup in Ukraine
was the most blatant in history. What I actually said was that if this was a coup, it
was the most blatant in history, since the United States openly supported the
demonstrators and provided aid for the various groups, and it was quite open in
supporting a change in government. The fact that what I said was carefully edited is
of no importance, as I am not important in this equation. It is important in that it
reveals a Russian mindset that assumes that covert forces are operating against
Russia. There are forces operating against it, but there is nothing particularly covert
about them.
The failures of Russian intelligence services to manage the Ukrainian crisis and the
weakening of the Russian economy raise serious questions about the future of
Russia, since the Russian Federal Security Service is a foundation of the Russian
state. And if Russia destabilizes, it is the destabilization of a nation with a massive
nuclear capability. Thus, this is our second most important event.
3: The Desynchronization of the Global Economy
Europe is predicted to see little to no growth in 2015, with some areas in recession
or even depression already. China has not been able to recover its growth rate since
2008 and is moving sideways at best. The United States announced a revision
indicating that it grew at a rate of 5 percent in the third quarter of 2014. Japan is in
deep recession. That the major economic centers of the world are completely out of
synch with each other, not only statistically but also structurally, indicates that a
major shift in how the world works may be underway.
The dire predictions for the U.S. economy that were floated in the wake of the 2008
crisis have not materialized. There has been neither hyperinflation nor deflation.
The economy did not collapse. Rather, it has slowly but systematically climbed out
of its hole in terms of both growth and unemployment. The forecast that China
would shortly overtake the United States as the world's leading economy has been
delayed at least. The forecast that Europe would demonstrate that the "AngloSaxon" economic model is inferior to Europe's more statist and socially sensitive
approach has been disproven. And the assumption that Japan's dysfunction would
lead to massive defaults also has not happened.
The desynchronization of the international system raises questions about what
globalization means, and whether it has any meaning at all. But a major crisis is
occurring in economic theory. The forecasts made by many leading economists in
the wake of 2008 have not come to pass. Just as Milton Friedman replaced John
Maynard Keynes as the defining theorist, we are awaiting a new comprehensive

explanation for how the economic world is working today, since neither Keynes nor
Friedman seem sufficient any longer. A crisis in economic theory is not merely an
academic affair. Investment decisions, career choices and savings plans all pivot on
how we understand the economic world. At the moment, the only thing that can be
said is that the world is filled with things that need explaining.
4: The Disintegration of the Sykes-Picot World
Sir Mark Sykes and Francois Georges-Picot were British and French diplomats who
redrew the map of the region between the Mediterranean Sea and Persia after World
War I. They invented countries like Lebanon, Jordan, Syria and Iraq. Some of these
nation-states are in turmoil. The events in Syria and Iraq resemble the events in
Lebanon a generation ago: The central government collapses, and warlords
representing various groups take control of fragments of the countries, with
conflicts flowing across international boundaries. Thus the Iraqi crisis and the Syrian
crisis have become hard to distinguish, and all of this is affecting internal Lebanese
factions.
This is important in itself. The question is how far the collapse of the post-World War
I system will go. Will the national governments reassert themselves in a decisive
way, or will the fragmentation continue? Will this process of disintegration spread to
other heirs of Sykes and Picot? This question is more important than the emergence
of the Islamic State. Radical Islamism is a factor in the region, and it will assert itself
in various organizational forms. What is significant is that while a force, the Islamic
State is in no position to overwhelm other factions, just as they cannot overwhelm
it. Thus it is not the Islamic State, but the fragmentation and the crippling of
national governments, that matters. Syrian President Bashar al Assad is just a
warlord now, and the government in Baghdad is struggling to be more than just
another faction.
Were the dynamics of the oil markets today the same as they were in 1973, this
would rank higher. But the decline in consumption by China and the rise of massive
new sources of oil reduce the importance of what happens in this region. It still
matters, but not nearly as much as it did. What is perhaps the most important
question is whether this presages the rise of Turkey, which is the only force
historically capable of stabilizing the region. I expect that to happen in due course.
But it is not clear that Turkey can take this role yet, even if it wished to.
5: The Births of Asher and Mira
I was given two new grandchildren this year. For me, this must be listed as one of
the five major events of 2014. I am aware that it is less significant to others, but I
not only want to announce them, I also want to point out an important truth. The
tree of life continues to grow new branches inexorably, even in the face of history,
adversity and suffering. The broad forces of history and geopolitics shape our lives,
but we live our lives in the small things. As much as I care about the other four
matters and I do I care much more for the birth and lives of Asher and Mira and
my other grandchild, Ari.
Life is experience in the context of history. It is lived in intimate contact with things
that history would not notice and that geopolitics would not see as significant.
"There are more things ... than are dreamt of in your philosophy," Hamlet said to his

friend Horatio. Indeed, and their names are Asher, Mira and Ari. This must not be
forgotten.
Have a happy New Year's, and may God grant you peace and joy in your lives, in
spite of the hand of history and geopolitics.
Read more: The Top Five Events in 2014 | Stratfor
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