STRATFOR.COM's Weekly Global Intelligence Update - January 10, 2000 By The Internet's Most Intelligent Source of International News & Analysis http://www.stratfor.com/ __________________________________________ Stratfor Intelligence Services clears the fog of decision making for corporate strategists and executives. http://www.stratfor.com/services/ __________________________________________ CHECK STRATFOR'S SITE TODAY FOR OUR READERS' SURVEY As a valued reader of Stratfor.com, We'd like to hear your opinions and ideas. Please take a few minutes to complete our reader survey. GO TO http://www.stratfor.com/ __________________________________________ STRATFOR.COM Weekly Global Intelligence Update January 10, 2000 2000 Annual Forecast: The Year of Eurasia We had called 1999 "A New and Dangerous World" [ http://www.stratfor.com/services/giu/1999.asp ]. The year 2000 will be the year in which the world gets down to the business of creating the new epoch in world affairs: the serious business of great powers and their conflicts and alliances. The world will be in the process of defining the constellation of relationships that will characterize the coming generation. At the center of that process are the two great question marks: Russia and China. In our view, these two countries will not only be at the center of attention in the next year, but will be the keys to the operation of the global system. Russia and China together constitute the geographic and demographic center of gravity of the Eastern Hemisphere. How they behave is one of the engines driving the history of any epoch. When Moscow and Beijing rule unified empires and ally with each other, as they did in the 1950s, they create an enormous mass around which the rest of Europe and Asia fearfully revolve. When they are united but hostile to each other, as they were in the 1970s and 1980s, they neutralize each other, creating opportunities for other powers. And if they were to collapse into simultaneous chaos, they would create a massive vacuum that would suck in the rest of the world in conflict and cause a feeding frenzy. Usually, the reality of Eurasia's heartland is fairly well defined and stable. The year 2000 marks one of those rare moments where nothing can be taken for granted. Both Russia and China are, in our view, in the process of redefining themselves and their relationship with each other and the rest of the world. Nothing in 2000 will be more important than how these two countries define themselves. In a very real sense, what happens there defines what will happen elsewhere. Let us begin with the easier question: Russia. 1999 saw the formal end of liberalism in Russia. The real foundations of that liberalism had already exploded in August 1998. Russian liberalism was less ideological than geographical; it was the desire to become a European nation participating in Europe's economic expansion. Between desire and reality there is a massive chasm that can only be bridged by wrenching transformations of society. The Russians focused on a flow of investment from the West. Of course, a flow of investment without Western institutions - courts that enforce property rights without fear or favor, and banks that exercise fiduciary responsibility - is simply a river that will disappear. For nearly a decade, Western politicians, bureaucrats, businessmen and bankers worked mightily to ignore the obvious, which was that their investments would, on the whole and with some exceptions, never amount to anything. In August 1998, during the great Russian financial crisis, it was no longer possible to avoid the obvious. Russia's experiment with reform and liberalism had failed. Western investment, from public or private sources, dried up. The dream that Russia would join in European prosperity dried up with it. The chasm could not be bridged. Russia has been transitioning since August 1998 from a country that had hoped it could bridge the chasm to a country that recognized that it was hopeless. Russia's inability to construct institutions that are the prerequisite to capitalism dried up the flow of Western cash. In one sense, Russia was trapped. In another sense, it was liberated. Ever since Mikhail Gorbachev, the Soviet Union and then Russia were obsessed with how they were perceived by the West. Endless policies were set in terms of Western perceptions on the assumption that the solution to Russia's problems lay with the West. With the collapse of the financial flow into Russia, Russia's internal politics no longer had to be constructed with the IMF or with Western bankers in mind. The result was Vladimir Putin. Now, it is important not to think of Putin as the antithesis of Boris Yeltsin. He grew out of the same soil and participated in the same policies, but there is a fundamental difference between Putin and Yeltsin. Putin has the institutional foundation in the intelligence services to at least attempt to craft a new policy for Russia. That policy is clear and has the following elements: * Use Russian nationalism to cement together a fragmenting nation. Putin's enormous popularity in Russia derives from two points. The first is that he does not appear paralyzed. Russians badly want a strong leader. The second is that he appears determined to reverse Russia's deterioration in its international standing. Russians know that Putin has no magic formula for economic recovery. They are nonetheless delighted with resurrected national pride. * Use military force, very publicly and very brutally in Chechnya to signal the rest of Russia and the rest of the former Soviet Union that a change has taken place in Moscow. The public brutality is important in two senses. First, it signals to other countries about Russian resources and the willingness to use them. Second, it signals to them that the West will not protect them nor will Russia be concerned about repercussions in the West. * Maintain a flirtation with China to demonstrate to the West, and to the United States in particular, that Russia's policy reversals are not merely tactical but strategic, and can affect the global balance of power. * Use the popularity of his government, regional aggressiveness and his relationship with China to force the West to reconsider its economic embargo on Russia, and to resurrect, on some basis, financial flows into Russia. There is, therefore, a deep tension in Putin's policies. On one side, liberated by the absence of financial support, Putin can create a popular regime and secure Russia's frontiers while becoming a global player. This is an end in itself. At the same time, Putin cannot resist the hope of rebuilding the bridge to the West. Therefore, a policy that is an end in itself is also being used as a means toward an end-a very different and even contradictory end. That causes good policy-making to be difficult indeed. This is Putin's Achilles' heel. He is prepared to act as a Russian nationalist, but he is not quite prepared to rupture relations with the West. This will lead, in the short run, to complex and contradictory policies. Putin needs to liquidate the oligarchs. He is, however, not only personally linked to them, but they are his link to the West. Therefore, he will continue half measures. Putin needs to not only crush the Chechens but also needs to establish Russia's sphere of influence in the Caucasus, particularly in Georgia. At the same time, Putin does not want a confrontation with U.S.-backed Georgia. Putin could easily wind up in the same place that Yeltsin was, not because he lacks will, but because he dreams contradictory dreams. We expect this to dominate Russian politics during much of the year 2000. But it will not go on indefinitely. Whether it is Putin or someone else, Russia crossed a line in 1999 from which it will not return. We will see increasing pressure all along Russia's frontiers, from the Baltics to Central Asia, as Russia works to recreate, at the very least, a sphere of influence where the former Soviet Union used to be. Russia can do this tactically, country by country, but it requires a strategic foundation. To be more precise, while it has sufficient power to shape events along its borders based on the regional balance of power, it needs to block Western, and particularly American, support for countries like the Baltic states or Ukraine. In order to achieve its tactical ends it needs a strategic block to the United States. Part of that strategic solution is nuclear weapons. Russia's mere possession of them gives the United States pause, but not paralysis. To paralyze the United States, Russia needs to either divert American attention or to create a coalition that is of sufficient weight to deter American meddling. That is why China is so important to the Russians. An American obsession with China gives Russia room for maneuver. Now it is important to understand that we are not predicting a new Cold War, certainly not in 2000 or any time after that. The Cold War was a global confrontation between two superpowers. Russia is incapable of posing a global threat. What we are talking about is Russia increasing its presence and pressure within the frontiers of the former Soviet Union and the environs, thereby increasing friction, but not confrontation, with the United States. Indeed, that is why the China card is so important. It increases pressure without increasing confrontation. And that is why China is so wary of playing Russia's game, although it is certainly tempted. China's situation has deteriorated dramatically over the past year. At the beginning of 1999, serious observers were congratulating the Chinese for having avoided the Asian slowdown. Now, not even the Chinese are denying any longer that they have very serious economic problems. The real question in China is what the political consequences of those problems are and what policy outcomes are likely. At its political center, China appears to be divided into three factions. One faction wants to intensify the economic liberalization process, even if it means shutting down state enterprises and inefficient businesses and creating mass unemployment. Another faction, fearing the effects on China's social and political stability, wants to strengthen the Party apparatus, the state security services and the military, and accept inefficiency in order to avoid unemployment. In the middle is President Jiang Zemin, trying to maintain his balance and trying to satisfy both factions. The result is a confusing melange of inherently contradictory policies. On the same day that Beijing declares major new market reforms that will devastate state enterprises, it also makes a call for a strengthened and ideologically purified Communist Party. China, internally, is now in a completely tactical mode. Rather than generating a grand strategy for solving its economic policies, the best that China can do is to promulgate tactical moves designed to ease pressure and divert attention. China lacks the political consensus needed for solving its economic problems. Like Russia, the one card that China can play to generate political support is nationalism. The creation of periodic crises over Taiwan and the generation of anti-American sentiment is a useful tool for political cohesion. But nationalism is a complex matter in China. It is a vast and diverse empire of many elements, some bound together by the idea of China, others by loyalty to Beijing, others by ideology. Yet others are tied only by bonds of interest, which fray during times of economic difficulty. Finally, there are those who badly want out of China and have no loyalty at all. In this bewilderingly complex situation, Jiang has only one real solution. He must kick-start the Chinese economy again and he must do it without destabilizing China's internal social and political order. That is extremely difficult to achieve, particularly if China were to depend on its own resources. Therefore, the key to China's strategy must be to, once again, entice Western investors into China. After recent experiences, this is not easy to do. But generating new investment is far easier for China than it is for Russia. Three factors play in China's favor. First, there is the perception that Asia has recovered from its economic slump and that there are substantial bargains to be found there. Second, there is the deepening concern among investors that the American bull market has peaked and that there is serious danger of a correction or even collapse, particularly in high tech industries. That means that risk capital might find Asia attractive. Finally, China has forcefully demonstrated to the United States over the past year what bad relations with China would look like-and the United States did not enjoy it. Therefore, Washington is inclined to facilitate investment. We therefore expect China to play the Russian card, but to be much more successful in extracting for itself the outcome that Russia wants: Western money. We expect to see intensifying efforts on the part of China to get Western capital flowing into the country. There will certainly be an increase in investment in China by Western entities in 2000. This will help stabilize the situation, but it will be a temporary solution. It is our view that Asia, far from recovering from the 1997 crash, is deep in a long-term stagnation, in which there will be temporary up-turns, but in which the long-term trend remains neutral at best. Second, we do not believe that the long-term expansion in the U.S. economy is over. Downturns in the markets and economies will remain corrections in a general upwards trend. Finally, and most importantly, the United States is in an election year, in which China is a liability rather than an asset to candidates. The best that China can expect from the United States politically is quiet, institutional support and rhetoric that is not too inflammatory. We regard multi-year investments in China as a terrible idea, but we expect it to happen. It will hold things in check until the current uptick ends, and China must finally face the reality of a dysfunctional economy. The year 2000 will not be a year of culmination, but will be what might be called a process year. Basic strategies will play themselves out. We do not think that it will be a year of wrenching change. This is particularly true of the United States. U.S. foreign policy tends to shut down during presidential election years and this year is particularly listless. The four major candidates are all in general agreement. They all support the basic set of policies put into place by George Bush during the collapse of Communism and followed fairly faithfully by Bill Clinton. It might be said that Al Gore, having labor in his corner, is more wary of free trade than the others and that John McCain sounds more interventionist than the rest. But the fact is that once in office, each of them will operate their foreign policy pretty much like the others. It takes crises to shift U.S. or European foreign policies and we do not see 2000 as a year of systemic crisis. Russia is not ready to simply shed its relationship with the West and it will not be until it has reached a strategic accommodation with China. China is clearly not ready to do more than flirt with that strategic alliance, using it to create an atmosphere supportive of closer ties with China based on investments. The United States is paralyzed and Europe is utterly self-absorbed. Thus the defining events are taking place in Eurasia. We have made our long-term views known in our decade forecast [ http://www.stratfor.com/services/giu/forecast/decadetocome/default.asp ]. For the year 2000, we expect tension and friction in the Russian borderlands, continued cross-currents in Chinese politics coupled with the appearance - but not the reality - that things are getting back to normal, and somnolence in the United States and Europe. Underneath all this, powerful forces will be building throughout the year in Eurasia. Russia will be pulling itself together. China will be trying to keep itself from tearing apart. It will be a year of apparently small dangers. But when we think back on where we were in 1995, it will be startling how far we have come. It is a hint of how far we will go. (c) 2000, Stratfor, Inc. http://www.stratfor.com/ __________________________________________________ SUBSCRIBE to FREE, DAILY GLOBAL INTELLIGENCE UPDATES by clicking on http://www.stratfor.com/services/giu/subscribe.asp UNSUBSCRIBE FROM THE GLOBAL INTELLIGENCE UPDATES (GIU) http://www.stratfor.com/services/giu/subscribe.asp or send your name, title, organization, address, phone number, and e-mail to [EMAIL PROTECTED] ___________________________________________________ STRATFOR.COM 504 Lavaca, Suite 1100 Austin, TX 78701 Phone: 512-583-5000 Fax: 512-583-5025 Internet: http://www.stratfor.com/ Email: [EMAIL PROTECTED] ___________________________________________________
