Fw: Stratfor's Fourth Quarter Forecast
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Sun Oct 17 07:27:26 MDT 1999
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Sent: Monday, October 04, 1999 9:16 AM
Subject: Stratfor's Fourth Quarter Forecast
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> October 3, 1999
> Fourth Quarter Forecast
> As we enter the final quarter of 1999, we are struck by
> how much the world has changed since the year began. The virtual
> disintegration of Russia's experiment in liberalization and China's
> dramatic retreat from many of its internal and external openings,
> coupled with its growing tensions with the United States, show the
> distance we have come and the increasing velocity of the processes
> we have been tracking.
> It is our view that the major trends described in our
> Annual Forecast [ http://www.stratfor.com/services/giu/1999.asp ]
> remain intact. The Asian economic bloc has not developed as quickly
> as we thought it would and the Ukrainian crisis has been delayed by
> events in the Caucasus, Central Asia and Moscow. While we no longer
> expect these developments this year, we do very much continue to
> expect them. On the other hand, our other forecasts have either
> come to pass or are likely to come to pass before the end of the
> The fourth quarter will see a continuation and intensification of
> the central global process: the realignments of domestic politics
> and foreign policy in both Russia and China. We continue to see
> tension, turmoil and instability throughout the Eurasian land mass,
> particularly in Eurasia's two leading powers. We expect Russia,
> with the support and encouragement of China, to intensify the
> process of expanding its influence into the old Soviet Empire. We
> expect China to continue and intensify its efforts to control
> internal centrifugal forces, while intensifying its confrontation
> with Taiwan and the United States. A summit meeting appears to be
> set between Russian President Boris Yeltsin and his Chinese
> counterpart, Jiang Zemin, in November and, assuming that both
> survive politically until that date, we expect that summit to be a
> critical event not only for the year but for the coming decade
> In China, Jiang took off his Western suit and tie, put on a Mao
> suit, and stood watching while gigantic portraits of Mao and Deng
> passed by and tanks and missiles deployed, in the largest military
> show of force in about 15 years. His change of costume is a self-
> conscious symbolization of the dramatic change China is undergoing.
> Jiang is desperately trying to recreate the Communist regime that
> had been permitted to fray during the country's economic boom.
> While party cadre and army officers were busy making money in
> lucrative deals with Westerners, Communist symbolism and even
> institutions seemed to become archaic and irrelevant.
> Now that the halcyon days are past, Jiang urgently needs to create
> a new center of gravity for China. All he has to call on is the
> Party. In dusting off his old Mao suit, Jiang hopes to lay claim to
> the charisma of China's founder in order to save the regime from
> the cynicism and corruption that destroyed the Soviet Union.
> Jiang also seeks to save his own hide. After all, he presided over
> China's reversal of economic fortune. Thus, while trying to
> resurrect the authority of the Party over the country, Jiang was
> trying also to make it clear that he controls the Party. Standing
> on the reviewing stand, Jiang became Chairman Jiang, the heir to
> Mao and Deng in everything but name. And that is what we find
> fascinating. It would be much more effective to be named Chairman
> Jiang than to merely look like Chairman Jiang. In fact, trying to
> look like a chairman without being given the title reveals more
> weakness than strength.
> The reason Jiang was not named Chairman is obscure, but we think
> the key to the reasons might be found flanking him on the reviewing
> stand. On one side, Prime Minister Zhu Rongji, still there, still
> unfireable, regardless of Jiang's best efforts. Jiang has done
> absolutely everything possible to make Zhu the scapegoat for
> China's economic problems. Indeed, Jiang has a case, in the sense
> that Zhu was the architect and spokesman for many of China's
> reformist economic policies. Nevertheless, Jiang does not seem to
> have the strength to hang Zhu from the yardarms. Even more
> interesting, on Jiang's other side was Li Peng, stalwart
> conservative, disapproving of many of the reforms. Li, who had
> apparently been eclipsed by history, has not only survived, but
> seems to point the way to the future - a future filled with Mao
> suits and perhaps new editions of little red books.
> Jiang's dilemma was clearly revealed on the reviewing stand. He is
> not chairman because he does not command a unified coalition. The
> Chinese Communist Party is deeply split. The split is far from
> simple and can hardly be reduced to two factions. Indeed, there is
> a swirling complexity to Chinese politics that is difficult to
> discern clearly from the outside. Nevertheless, this much is
> clear: Jiang did not have the clout to make himself chairman before
> the Oct. 1 celebrations. Instead, he could only act like one. Nor
> could he depose Zhu or Li. The best he could do to hold on to power
> was to use the deep split in the Party to create a space somewhere
> between them. Jiang has become politically indispensable without
> having the power to make himself undisputed boss.
> This means there is a political crisis fairly near at hand in
> China. First, economic deterioration requires political
> realignment. China is moving backwards to older administrative
> models. This will create tremendous tension between those who were
> losers during the reformist regime and want to go back, and those
> who fear a conservative future. Such tension could tear any country
> apart and China is, after all, just another country. Jiang clearly
> does not have enough power to suppress the tension. This leaves
> him with two choices. He either acts quickly and decisively to gain
> control of the situation, or he allows the myriad factions in
> China, without a credible and strong central power, to tear the
> country apart. We believe the make-or-break point is near at hand
> and China's die may be cast in this coming quarter. Our best guess
> is that Jiang will try, and temporarily succeed, in consolidating
> his power, but that, in the long run, fragmentation will overwhelm
> both him and quite possibly the central apparatus as well.
> In Russia, as expected, reform has completely collapsed. There are
> now those who profited from the corruption of the reform period and
> want to hold on to power, and those who want to sweep away the
> entire memory of the period. The latter are not part of the Russian
> regime. Some are in the Duma. The most important non-regime
> elements are the Russian people themselves. The masses of Russians
> outside of Moscow and St. Petersburg have seen Russia go from a
> poor but powerful nation to one much poorer and much less powerful.
> The problem is simply this: Everyone in the current elite is
> tainted with the regime's corruption. Even Prime Minister Vladimir
> Putin, the former KGB man and FSB head, is intimately tied to the
> oligarchs. The situation in Russia is unsustainable. No nation can
> be in the condition that Russia finds itself without a cataclysmic
> political readjustment. The only question now is how it will come.
> The public debate in Russia today is between two factions. First,
> there are the oligarchs who used reform to steal for themselves
> fantastic amounts of money and who are now engaged in brutal
> battles with each other and everyone else. Then there are the old
> Gorbachevites, like Putin, who started the whole process. The old
> KGB hands were the first to realize that the Soviet Union was
> falling behind the West and that it needed Western technology and
> investment to catch up. Gorbachev's policy was to encourage that
> investment in the context of the Soviet regime. When the regime
> collapsed, the distinction between liberals and Gorbachevites
> That distinction has returned in Putin, whose core policies are to
> rebuild the basic institutions of a centrally-planned economy and
> expand the influence of Russia throughout the former Soviet Union,
> without either fully doing away with the market or actually
> stripping away the money and power of the oligarchs. It is a
> hopeless policy, but it will dominate the next quarter.
> As Putin attempts to tread water, Russia will be focused on
> December's Duma elections - an event described by the Russian press
> as a battle over who will control the distribution or
> redistribution of property and power. The Duma elections will, in
> turn, set the stage for the presidential elections next June.
> Currently leading in the polls is the "Fatherland - All Russia"
> electoral bloc headed by Moscow Mayor Yuri Luzhkov and former Prime
> Minister Yevgeny Primakov. This bloc, which builds on the support
> of many regional governors, as well as most of the now-splintered
> Agrarian Party, enjoys the financial and propaganda backing of
> Vladimir Gusinsky's MOST Group empire. Interestingly, the MOST
> Group, primarily a media empire built around the MOST Bank, is
> heavily permeated by KGB officers.
> Former KGB First Deputy Chairman (under Vladimir Kryuchkov) Gen.
> Filipp Bobkov heads MOST's analysis and planning office. As for
> coup leader Kryuchkov himself, he reportedly works for AFK Sistema,
> the Moscow city government's holding company. Fatherland-All Russia
> looks increasingly like the party of the KGB, which may signify
> that it has the support of Putin. Not that it matters, since the
> KGB wins whether Putin or Primakov takes the presidency.
> In other words, electoral politics in Russia now all lead back to
> the same place: the KGB and the oligarchs to whom they are
> intimately connected. The central question here is whether this
> faction can survive. To put it simply, it is either this faction or
> a revolution. We are increasingly of the opinion that Russia is in
> a pre-revolutionary state, which might well be as cataclysmic as
> 1917. We simply do not see how Russia's corrupt and collapsing
> institutions can sustain themselves in the face of almost universal
> bitter contempt and hostility from virtually every segment of
> society. The choice is between a brutal repression by the secret
> police or chaos and revolution followed by brutal repression by the
> revolutionaries. It seems to us that the second option is
> increasingly the more likely outcome.
> This does not, however, affect our forecast for Russia in the
> Fourth Quarter. We expect Russia to be absorbed in the elections.
> However, in being absorbed, Putin and Yeltsin will both be
> motivated to demonstrate their mastery of the state and their will
> to return Russia to greatness. This is already observable in the
> Caucasus, as Russia maneuvers to impose its power in Chechnya as a
> prelude for regaining control over the strategic Caucasus. In
> general, we will see a growing Russian assertiveness within the old
> borders of the Soviet Union, partly motivated by domestic politics
> and partly by strategic considerations.
> We are seeing, therefore, a general political crisis gripping
> Eurasia as a whole. As part of this crisis, both Russia and China
> can be expected to be more self-absorbed. However, in their self-
> absorption, both will find it expedient to be not only indifferent
> to the West and the United States, but to be generally hostile in
> order to demonstrate domestically the assertive power of their
> regimes. Since both the Russian and Chinese leaderships are limited
> in what they can do domestically, they will need to appear decisive
> in foreign policy. Neither can solve the serious (and very
> different) economic problems confronting them. Each can appear to
> be dealing effectively with foreign policy issues. Thus, self-
> absorption creates foreign policy initiatives whose prime audience
> will be domestic, and in which strategic issues become a subset of
> broader considerations. This creates opportunities for strategic
> risk taking.
> We have already seen this in China's confrontation with Taiwan and
> Russia's behavior in Dagestan and Chechnya. However, there are
> severe limitations on the two countries' abilities to act
> definitively in either region. China may well initiate some sort of
> military action against Taiwan, but we don't think it has the naval
> capacity to invade and occupy the island. Russia will try to subdue
> Chechnya, but it lacks the military power to impose order in the
> Caucasus. In many ways, these military adventures reveal weakness
> more than they serve their true purpose - to showcase the authority
> and power of the regime.
> Given all of this, it appears both the Chinese and Russian
> leaderships are seeking some sort of triumph. Since they can't
> achieve it in economic policy or military adventure, we think they
> will seek it in an arena they can control and define: diplomacy.
> Specifically, we see the November summit between Jiang and Yeltsin
> to be a strategic opportunity for both to deliver a triumph that
> shows their mastery. The result will be, we think, a formal
> alliance between Russia and China, fairly explicitly directed
> against the United States.
> Since neither can expect economic help from the West, they have
> nothing to lose economically. More important, anti-Americanism
> sells in both countries, where resentment of American power is huge
> and many hold the United States responsible for their economic
> problems. We therefore think that, given domestic politics and
> economic realities, the November summit will bring dramatic changes
> to the international system. That assumes, of course, that internal
> political crises in Russia and China don't impede their current
> leaders' ability to act.
> This means that as Russia and China move toward internal crises
> with extremely uncertain outcomes, U.S. foreign policy is
> increasingly rudderless as the end of Clinton's presidency
> approaches. In one sense this is a safety valve, preventing
> unfortunate initiatives by the United States. In another sense, it
> leaves the global system without leadership in its most powerful
> state. This affects not only Russia and China, who are essentially
> beyond U.S. influence. Its greatest effect will be elsewhere, in
> non-Chinese East and Southeast Asia.
> We see a new politico-economic dynamic being established in this
> region. We see the current economic recovery as having two aspects.
> First, it is an upturn in a general, long-term down cycle and is
> therefore of limited long-term importance. Second, it is
> bifurcating Asia between countries that may have stopped declining
> and those, like Japan, that will continue to decline. Alongside
> this process, we are seeing the political consequences of economic
> dysfunction beginning to show. These consequences have taken their
> most extreme form in Indonesia, but the consequences are visible in
> the rest of Asia as well. In country after country, the old regimes
> struggle to contain the destabilizing forces that have been
> unleashed by economic decline. All of them will not succeed in
> containing these forces. In Japan in particular, a political day
> of reckoning, if not at hand, cannot be permanently postponed.
> These processes have created centrifugal forces in Asia. But at
> the same time, the World Bank's reversal on short-term capital
> controls means that the international financial community will now
> tolerate the creation of an Asian Monetary Fund to administer
> controlled capital markets in Asia. We expect a number of regional
> states to see this as an attractive opportunity to counteract the
> centrifugal forces. If the recovery does run out of steam, Asia in
> general and Japan in particular will be drawn in this direction.
> We also see political forces pushing Asia together. The Australian
> action in East Timor, followed by Australia's statement of its
> "deputy" role in Asian affairs, did not go over well in much of
> Asia. There is a growing realization in ASEAN that Asian nations
> must develop more control over Asian affairs. This sense will
> intensify if China and Russia simultaneously move closer and
> experience serious political crises while the United States becomes
> more inert. Non-Chinese East and Southeast Asia will be moved by
> economics and politics to overcome centrifugal forces and create
> some Asian entities.
> The creation of an Asian economic or political bloc will not happen
> in 1999, but the process may move from something not discussed in
> polite company to a serious, public policy debate in the region.
> All of this will increase pressure on Japan to take a more
> assertive leadership role in the region. But that will have to wait
> until the next decade.
> The Fourth Quarter of 1999 will be heavily focused on the drama
> being acted out in China and Russia. It will be increasingly
> difficult to understand what is going on in either country, as
> politics recede behind more traditional, conspiratorial curtains.
> The most interesting question will not be who controls the center,
> but whether the center can hold at all. At the same time - and not
> coincidentally - Russia and China will move closer to each other
> and become more antagonistic to the United States. In the midst of
> this, East and Southeast Asia will begin turning their attention to
> geopolitical issues that haven't been dealt with in over half a
> The Fourth Quarter will, we think, be a fitting preface to the
> coming century.
> (c) 1999, Stratfor, Inc.
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