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Fifteen years ago, when an unknown Russian bureaucratic functionary named Vladimir Putin rose to power, Stratfor began charting the resurgence of Russia. The former KGB officer neutralized a Chechen insurgency, reined in Russia's powerful oligarchs and transformed the country's natural resource firms into state champions. Putin's Russia then took advantage of the United States' distractions to re-create a zone of influence throughout the former Soviet periphery while crafting a strategic relationship with Germany across the North European Plain. It was just a matter of time before the United States would feel the need to respond to Russia's redefinition of its borderlands with Europe. The Cold War deja vu that settled over Eurasia in the past quarter was by no means the beginning -- nor the end -- of the U.S.-Russia standoff. Stratfor has chronicled the push and pull of the struggle, including the 2004-2005 Orange Revolution, in which American and European nongovernmental organizations tried and eventually failed to anchor Ukraine to the West, and the 2008 Russian invasion of Georgia, which Putin designed to underscore the limits of Western support to any country on the edge of Russia. Each time the United States tried to set boundaries for Moscow, as it did in 2011 when U.S. nongovernmental organizations encouraged anti-government protests in Russia, Putin had a response prepared.
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Introduction Former Soviet Union Europe Middle East and North Africa East Asia South Asia Latin America Sub-Saharan Africa
At the end of 2013, when Russia first outmaneuvered the United States on Syria and then showcased Edward Snowden's National Security Agency leaks with a deliberate intent to undermine the United States' relations with its allies, the United States was also timing its response. It was at this point that Stratfor miscalculated just how hard Washington would push against Moscow while trying to balance other foreign policy priorities, such as the delicate negotiations with Iran. Our 2014 annual forecast assessed that Russia would succeed in neutralizing Ukraine following then-Ukrainian President Viktor Yanukovich's decision to back away from signing an EU association agreement. While we expected demonstrations, we did not anticipate that the United States and the Europeans would latch onto the protests and use the opportunity to hit Russia in the most sensitive spot in its periphery. But certain fundamentals that framed our forecast remain. Germany is not prepared to rupture its relationship with Russia over Ukraine, certainly not while trying to manage an increasingly fragmented eurozone. And the United States, while happy to remind Russia of its covert reach, is not yet in a position to sustain a high level of confrontation with Moscow. Looking ahead, we expect the flare-up of the first quarter to settle back into a framework that defined much of the Cold War. The United States and Russia are abandoning the fiction of
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coordinating policies with a divided Europe. Both sides will, of course, discuss matters with the Europeans, but the limits of this confrontation will be defined in negotiations between the United States and Russia. This is not to say that the United States and Russia are prepared to reach a comprehensive deal this year that draws a line between the West and Russia in the European borderlands. This is a long conflict in which both sides will carefully highlight their levers of influence throughout Eurasia and beyond while staying below a certain threshold of conflict. Ukraine remains fundamental to this dynamic. For Russia, the need to sway, or at least neutralize, Ukraine is a critical national security interest. For the United States, Ukraine is a tool that can be used in efforts to keep Moscow in check while Russia still enjoys disproportionate power on the continent. Russia therefore will be playing the long game in Ukraine. The revolutionary euphoria in Ukraine will fade quickly as austerity measures set in and reinvigorate the natural divisiveness in Kiev's political scene. Just as it did following the Orange Revolution, Moscow will spend the rest of the year playing off Ukrainian divisions and exploiting the country's inescapable economic dependence on Russia to slowly and steadily rebuild its influence. The Baltic states, Moldova and Georgia will also come into play. Russia will rely on its traditional message of defending ethnic Russian minorities abroad to telegraph threats in the Baltic states while accentuating its influence in Georgian and Moldovan breakaway territories. Even as tensions persist, Russia will be mindful of its constraints and avoid predatory military moves in its near abroad. The Crimea annexation was designed to demonstrate Russia's willingness to resort to military measures to defend its interests. An invasion of eastern Ukraine, much less a foray across the Dnieper toward Moldova, would be overkill and would be costly for the Russians -- something Putin knows well. The United States likewise will demonstrate restraint toward Russia. Washington cannot count on a coherent European response to reinforce a line against Moscow. While the question of Moldova and Georgia's economic integration with the European Union will be subject to negotiation, the United States will refrain from pushing the much more fundamental issue of Ukraine and Georgia's integration with NATO. There will still be room for more limited U.S. and NATO military assistance to countries along the eastern European rim as the Nordic states and the Visegrad quartet -Poland, the Czech Republic, Slovakia and Hungary -- debate with each other and with the United States on how to develop a more unified military stance against Russia. But this is a lengthy process, and if the U.S.-Russia standoff stays within certain limits, there will not be enough momentum to move from debates over military integration into meaningful action this year. The second quarter of the quasi-Cold War deadlock between the United States and Russia may not be as eventful as the first, but there will still be plenty of action on the sidelines. We remain optimistic about the U.S.-Iranian negotiating track, even though Moscow can be expected to attempt to create distractions for the United States in the Middle East. An assertive Russia is just one of several critical issues confounding Europe as nationalist parties continue to gain popularity. And with no substantial economic relief in sight, China will have to continue postponing structural reforms as it attempts to manage steadily growing financial issues.
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Fourth Quarter Forecast 2013 Second Quarter Forecast 2013 Third Quarter Forecast 2013
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International Monetary Fund loan was approved at the end of the first quarter. However, the political costs attached to implementing the reforms required for the bailout, including raising household natural gas prices and employing a flexible exchange rate, will exacerbate splits among political factions and could threaten the government altogether. The bumpy road to presidential elections, currently slated for May 25, will revive unrest in Ukraine. Russia can be expected to question the legitimacy of the vote and support protests and unofficial armed groups in the south and east, where a significant number of pro-Russian Ukrainians are already wary of political decisions being made in Kiev. Even if the election timetable falters this quarter as a result of the unrest, a push toward decentralizing power in Ukraine will give Russia more leverage in these regions to counter pro-Western tendencies in the long run.
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Introduction Former Soviet Union Europe Middle East and North Africa East Asia South Asia Latin America
Sub-Saharan Africa Russia also will use economic means to undermine the Ukrainian government, such as restricting imports from Ukraine. Moscow can also maintain high natural gas prices, refusing to give an energy discount to what Russia regards as a fractured and still untrustworthy government in Kiev.
Pro-Western politicians in Kiev naturally will look to the European Union and United States to insulate Ukraine from Russian economic pressure. For the second quarter, at least, Western support will be enough to keep Ukraine from defaulting and buckling under Russian pressure. However, in the longer term, as it becomes clear that Ukraine is not going to be able to fulfill its debt obligations, the European Union -- coping with its own economic crisis -- will limit its assistance to the crippled country. In spite of its military posturing, Russia is unlikely to intervene militarily in mainland Ukraine. However, Russia will use its forces along the Russian border and in Crimea, Transdniestria and Belarus to maintain military pressure on Ukraine. Russia and NATO will continue matching each other's measured defense maneuvers. NATO most likely will bolster its eastern position with more forward positioning of troops and equipment in the Russian borderlands, such as the Baltic states. Such deployments will be accomplished through long-term training missions in which forces can be rotated on a temporary basis. Critically, the United States will refrain from permanent basing on Russia's border and will avoid the discussion of NATO integration for Ukraine and Georgia. Russia will in turn bolster its military position in Belarus and in western Russia, but will not invade mainland Ukraine.
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most the United States can do in terms of energy assistance is provide technology and investment for long-term (and costly) diversification projects. A fundamental restructuring of NATO and regional military forces also will take considerable time. As the United States proceeds with caution in dealing with Russia, more assertive states such as Poland will make it a point to air their disappointment in the level of U.S. commitment. More prudent states such as Romania will be content to keep such matters quiet and under debate. While Georgia, Moldova and the Baltic states will strengthen integration with the West, other states in the former Soviet periphery will instead seek greater collaboration with Russia. Belarus, a close Russian ally, will increase security ties with Russia, including stationing more Russian fighter jets within its territory. Western nongovernmental organizations could attempt to influence Belarusian opposition groups and protests, especially through Poland and Lithuania, though such attempts will be very limited in their effectiveness. In the meantime, Russia will continue strengthening integration within its economic and security blocs. Russia, Belarus and Kazakhstan are scheduled to formally sign the transition of the Customs Union economic grouping into the Eurasian Economic Union on May 1. Armenia will also sign the treaty in May and will join the bloc at the beginning of 2015, when the Eurasian Union is set to formally launch. Russia also will strengthen integration within its Collective Security Treaty Organization -- which includes Belarus, Armenia, Kazakhstan, Kyrgyzstan and Tajikistan -- via weapons buildups and military exercises.
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Central Asian states will come under stress -- particularly those who rely heavily on remittances from migrant workers in Kazakhstan and Russia. Workers from Uzbekistan, Tajikistan and Kyrgyzstan are all feeling the effects of the decreased value of their remittances, though there are few options for these workers to go elsewhere. Leery of social instability stemming from the economic troubles, Central Asian governments are likely to tighten policies on banks and currency exchanges in trying to prevent liquidity crises.
Europe
Discord Characterizes Europe's Stance on Russia
Russia's activities in the European periphery might seem to be the antidote to European fragmentation as countries band together with the United States against a common and Click to Enlarge familiar threat. However, divisions in Europe are likely to grow -- not only because of the rise of nationalist parties amid stagnant economic conditions, but also because of the European Union's inability to form a coherent view on how to deal with Russia amid significant political and economic stresses at home. We wrote in the annual forecast that Germany would check Russian advances in Eastern Europe but would take care not to disrupt its strategic relationship with Moscow. The European Union and its members will officially back the interim government in Kiev, but Germany and others will prioritize their economic relations with Russia, make quiet overtures to Moscow and ensure that the European Union stays below the threshold of issuing trade sanctions against Russia. Ambiguity in the European position toward Russia will constrain U.S. policy toward the country, keeping frictions at a manageable level overall.
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Introduction Former Soviet Union Europe Middle East and North Africa East Asia South Asia Latin America Sub-Saharan Africa
Moscow will apply strategic pressure on Europe while maintaining working relationships with Berlin, London and Paris. Russia will target Ukraine, Moldova and Georgia in particular through economic restrictions, sponsored protests and military buildups. The Baltic states and Poland could also see restrictions on cross-border trade, waves of military posturing by Russia, and provocations and rallies by proRussian groups. This dynamic will drive countries across Europe to consider increasing their defense budgets after years of cuts. The debate over foreign and military policy will be particularly intense in Nordic and Baltic Europe. For Sweden and Finland, the issue means questioning their neutrality and debating NATO membership and deeper defense cooperation in the region. In the Baltics and Poland, the call for deeper regional collaboration and greater U.S. participation will be high on the political agenda. As the United States tries to measure its response, however, such issues will remain under discussion. Meanwhile, NATO will try to demonstrate its commitment to the region with largely symbolic measures such as air patrolling missions and pledges to send additional forces and military equipment to the eastern front. Countries in Central and Eastern Europe share a deep, underlying fear of Russia but disagree on how and when to deal with Moscow. Poland will be frustrated by its more risk-averse neighbors and by what it perceives as a slow and insufficient U.S. response to Russian aggression. Even though Hungary, the Czech Republic, Bulgaria and Slovakia will criticize Moscow's actions in the former Soviet periphery in the short term, they will remain interested in developing commercial and energy ties with Russia. This will blunt any Western efforts to escalate sanctions against Russia significantly or complicate Russian plans for the construction of the South Stream pipeline, which will bypass Ukraine and service Central Europe. Across Europe, countries will debate how to establish energy independence from Russia, but we do not anticipate a shift in policy in the second
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quarter as each country prioritizes keeping energy prices at a politically tolerable level. Meanwhile, Germany will reform its energy policy in the second quarter to reduce the cost of the transition to renewable energy sources (a process that began years before the Ukraine crisis.)
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months. France, Italy and Spain will present fiscal reforms, in some cases reducing taxes on personal income and in others reducing taxes for companies. Tax hikes in other areas and modest spending cuts will make up for the impact the tax cuts will have on state revenues. EU warnings to not violate deficit limits largely will be ignored. The reforms will be approved by national parliaments late in the second quarter or early in the third quarter, before the summer recess. Their effect will not be felt in the short term, and only marginal reductions in unemployment can be expected during the rest of the year. Portugal will end its bailout program in May. The Portuguese government will be under strong pressure from the opposition and the Portuguese public to not ask the European Union and the International Monetary Fund for a precautionary credit line, which would be linked to further economic reforms. Following Ireland's steps, Lisbon will decide not to request that assistance in order to avoid a political crisis at home. However, the offer from the International Monetary Fund and the European Union will still be available should Lisbon decide to accept it later. After reaching an agreement with its lenders in late March, Greece will spend the quarter approving some of the measures discussed with the European Union and the International Monetary Fund. Athens will seek a balance between approving additional spending cuts in the public sector and relaxing taxes paid by employers and employees. While some of these measures will lead to protests and generate frictions within the fragile ruling coalition, we do not expect the Greek government to fall during the quarter. Athens also will continue negotiations with its lenders about further aid. It is unlikely that an agreement will be finalized in the next three months, but Greece is likely to receive further help (in the form of additional loans or better repayment terms) later in the year.
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administration will retain enough executive power to continue moving negotiations toward a more comprehensive framework.
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Turkish Prime Minister Recep Tayyip Erdogan will interpret his comfortable victory in local elections as a mandate to pursue the presidency in Turkey's first direct presidential elections in August. Some political finessing will be required to enable Erdogan to run for the presidency while still holding membership in the ruling Justice and Development Party. Erdogan will also ensure that whoever takes his place as prime minister (Turkish President Abdullah Gul is still a viable candidate) will work with him rather than with his political rivals. The Hizmet movement of Fethullah Gulen was instrumental in Erdogan's early political rise and the neutering of the military, but Erdogan will turn against his former allies, using his renewed confidence to try to purge Gulenist influence in institutions within Turkey and abroad. The political fight will be messy and could continue to unnerve foreign investors, but retaliatory corruption probes and leaks will have relatively little impact on the electorate. Erdogan will seek out Azerbaijan's cooperation in pursuing his political adversaries, as Baku has long shared Ankara's distrust of the Hizmet movement. Turkey also will prioritize its relationship with Azerbaijan in the second quarter to show Russia that it intends to hold the line in the Caucasus and insulate southern corridor energy projects from Russian meddling as it battles for influence in Europe. Turkey will express its alarm at Russia's moves in the Eurasian borderlands through NATO forums but will not be able to go beyond rhetoric in challenging Russia. While Iraq remains mired in political haggling over a new government, Turkey will remain on the sidelines, providing limited and piecemeal financial support to the Kurdistan Regional Government while avoiding a confrontation with Baghdad. As we highlighted in the annual forecast, Turkey is also likely to move forward with normalizing ties with Israel in order to edge its way into eastern Mediterranean energy negotiations, but it still faces major obstacles in negotiating a similar peace with Cyprus.
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East Asia
China's Economic Troubles Worsen
China has undertaken months of private and public debate over prospective economic, social and political reforms -- a process bookended by the November 2013 Third Plenary Session and the March 2014 National Click to Enlarge People's Congress meetings. Now, China's leaders must take up the more difficult and prosaic task of implementing recently ratified reforms while assuaging the economic and financial problems that have spread to some of China's largest and most politically sensitive industries, such as coal, steel and housing construction. The government's struggle to manage the manifold risks posed by high debt and slowing economic growth, a growing horde of insolvent coal and building materials companies, and stagnant or falling housing prices in many smaller cities will be the dominant theme in China this quarter. As in the past, implementing tough reforms likely will take a backseat to efforts to maintain economic stability. Between April and June, nearly 200 billion yuan (roughly $32 billion) of trust products (a prominent shadow lending and investment device) will mature, several billion of which are tied to loans to heavily indebted businesses in industries such as coal, steel and cement. Already, 2014 has seen several technical defaults and near-misses by debt-laden resource companies caught between rising production costs, government-driven industrial consolidation and falling prices. With demand growth and prices for coal and other raw materials set to fall even further in the coming months, this trend is likely to intensify.
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Introduction Former Soviet Union Europe Middle East and North Africa East Asia South Asia Latin America Sub-Saharan Africa
Defaults by mining, steel and related businesses on loans tied to shadow lending products could lead to credit crunches, heightened insolvency risks and even bankruptcies by small and medium-sized banks in regions heavily reliant on these sectors. Local government debt crises stemming from troubled resource and financial sectors in regions like Shanxi and Hebei cannot be ruled out in the second quarter. Beijing could allow some defaults and bankruptcies in order to impose discipline on troubled sectors. However, if local crises threaten to spread across sectors and regions or to affect general trust in the financial system, Beijing will step in with credit infusions and partial or full bailouts, whether through state-owned companies or direct government action. Risks stemming from struggling resource industries, small and medium-sized banks and indebted
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local governments are inseparable from mounting problems in the country's property sector. China faces a crisis in property markets in third- and fourth-tier cities nationwide. This, combined with turmoil in other sectors, suggests the economic situation will worsen considerably in the second quarter. Barring a total collapse of confidence in property markets -- an event that would send China's economy into a free fall -- a major stimulus package is unlikely in the coming months, especially considering Beijing's need to maintain faith in its commitment to reform. Instead, authorities will seek to prevent local crises from spreading through targeted bailouts, infrastructure spending and other tools. Concurrently, the Xi administration will intensify efforts to clear Party and government ranks of obstacles to its policy agenda by expanding the ongoing anti-corruption drive to more parts of the state sector and to the military. Amid rising economic volatility, intensifying political purges and widespread public fear over domestic terrorism in the wake of the March attack in Kunming, China's security apparatus will be intensely occupied this quarter.
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the various interested parties to express their concerns through a combination of symbolic moves and limited force in trying to attract U.S. attention. Beijing will also show increasing assertiveness with its neighbors over regional security issues in the aftermath of the Kunming attacks. As internal pressures drive more Uighurs to flee China, Beijing will seek better intelligence, security and diplomatic cooperation from Myanmar, Laos, Thailand, Malaysia and Vietnam (as well as South Asian and Central Asian states) in handling Uighur refugees and militants. This focus will obstruct Beijing's earlier efforts to expand border trade and low-level connectivity with its neighbors, though China will not discontinue large infrastructure projects. In Thailand, pro- and anti-government factions are likely to remain in deadlock while power players negotiate behind the scenes as to whether the ruling party will remain in power. If the ruling party is removed, a new cycle will begin in which its supporters prepare to retake power in the future. If the ruling party is not removed, the current limbo will continue. Military intervention is unlikely unless widespread violence begins to spread between factions or the ruling party attempts extraordinary actions to seize back power it has lost. In Indonesia, the focus will be on presidential elections in July, following April's parliamentary elections. Regional political groups will try to attract attention through campaign tactics and stunts. Militant attacks are also possible. Domestic politics and nationalism will stifle any expectations for the government to settle differences with foreign investors over controversial trade and industrial policies.
South Asia
Unrest Expected in India
India's general election will run through May 12 and will then give way to an intense period of coalition building. Foreign investors are hoping for a victory for the Bharatiya Janata Party and the rise of pro-business candidate Narendra Click to Enlarge Modi. However, any initiative by India's next government, regardless of which party prevails, will face hard political, social and economic constraints. Both the Bharatiya Janata Party and the Congress Party will be dealing with increasingly powerful local interests, especially as local parties gain more of a presence on a regional and national scale and as a prolonged economic slowdown raises the risk of public opposition to social reforms. With the central government entering a largely lame-duck period in this quarter's political transition, no significant shifts in India's foreign relations should be expected. With a possible El Nino effect already dampening expectations for this year's harvest, erratic weather throughout April and early May in the traditional monsoon season could spark unrest as rural populations demand government support. Rising temperatures beginning in the second quarter historically trigger increased electricity demand, and if monsoon rains are delayed or less robust than expected, thermal coal imports -primarily from Indonesia -- could rise in an attempt to offset the loss in hydropower production.
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Introduction Former Soviet Union Europe Middle East and North Africa East Asia South Asia
Latin America Large rallies and protests are to be expected throughout India in Sub-Saharan Africa April, but places like Hyderabad and Andhra Pradesh, Uttar Pradesh, New Delhi and Mumbai are particularly susceptible. Local elections scheduled throughout April and May in Andhra Pradesh ahead of Telanganan statehood will increase the risk of social unrest in that region. The central government will remain alert for sectarian and communal violence in Uttar Pradesh and a potential uptick in Naxalite and Islamist militant attacks.
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Sri Lankan-Indian relations could be strained temporarily as New Delhi finds itself needing to accommodate the rising political clout of governments in India's regions, such as Tamil Nadu. However, low-level economic, military and political channels will remain open between New Delhi and Colombo. India will continue security cooperation with its neighbors, especially Nepal and Bangladesh, to manage the threat of regional Islamist militants. Competing with China along their shared Himalayan border, India also will attempt to shape Nepal's slow-forming national coalition government to ensure that Kathmandu remains a reliable partner for India's security and hydropower initiatives in the region. New Delhi will maintain its support of the Awami League government in Bangladesh even as Prime Minister Sheikh Hasina proceeds with controversial moves to contain her political opposition.
Latin America
Venezuela Faces Continuing Unrest
During the first quarter, a wave of protests led by Venezuela's political opposition swept across the country. The main grievances fueling the protests were high inflation, shortages of food and basic goods, and Click to Enlarge soaring crime. Inflation will remain a persistent problem in the second quarter and, although shortages may be alleviated during lulls in the unrest, they will not end. Because the government cannot easily address -- much less fix -- the underlying problems driving the political unrest, further protests will occur in the next three months. President Nicolas Maduro will also face difficult economic choices, such as raising the price of gasoline or increasing electricity costs, in the second quarter. However, he will be cautious in implementing these changes in an attempt to avoid losing support from his political base. The Maduro administration will continue using its security forces to clear the opposition from the streets, but it cannot rely solely on this strategy. Maduro will continue negotiations with the opposition to try to widen the rifts between opposition factions and mitigate unrest. The issues that will be discussed include liberalizing foreign exchange mechanisms, reducing
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Middle East and North Africa government social spending and easing price controls. However, the divisions in both the government and the East Asia opposition camps over the terms and the constraints on the South Asia government to deliver on concessions will prevent a meaningful Latin America settlement. Unilateral action by members of the ruling United Sub-Saharan Africa Socialist Party of Venezuela or the military to sideline Maduro remains possible in the second quarter, although not likely. Maduro has not yet lost support among the party's voter base to the point where his opponents within the regime could feel the need to oust him.
Venezuela's major foreign relationships probably will remain unchanged in the second quarter. China will continue acting as a financier for Venezuela despite the unrest. Russia also will maintain its ties to Venezuela and could undertake symbolic moves there, such as military visits, to highlight its presence in the United States' near abroad.
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The second quarter will be important for Argentina's efforts to reconcile with international investors as the country attempts to find a way out of its financial troubles. In line with our annual forecast, Argentina will begin negotiations with the Paris Club debtor nations in May. Having taken steps to reconcile its national inflation statistics with the demands of the International Monetary Fund in the first quarter, Argentina is demonstrating a new willingness to address the key issues that have kept the country out of the international capital market. However, a complete resolution of Argentina's standing with international creditors is unlikely in the second quarter. Argentina will see widespread protests, particularly in April, as labor negotiations spark political wrangling. The seasonal export of soybeans and other agricultural products will give the country some financial leeway, as the exports bring in much-needed foreign exchange. Further disputes between the agricultural sector and the government can be expected but will not significantly affect the flow of exports.
Sub-Saharan Africa
South Africa Holds Elections Amid Labor Disputes
South Africa will hold national elections on May 7. The ruling African National Congress is likely to win a comfortable majority, which means incumbent President Jacob Zuma will return for Click to Enlarge a second term. The African National Congress will govern as a party of no strong ideological bent despite some popular rhetoric. Ahead of the election, the African National Congress will position itself as the reliable party in terms of the interests of the majority black South Africans, with the Democratic Alliance to its right and the Economic Freedom Fighters to its left. Tensions in the South African platinum sector likely will continue in the second quarter. Negotiations to resolve the ongoing strike will not end to the satisfaction of the Association of Mineworkers and Construction Union or the platinum mining companies. While the strike likely will end following the May election (if not before), when the African National Congress has a more stable political base from which to compel a conclusion, the workers' full wage demands will not be met. However, the mining companies probably will end up paying more in wages than they would prefer. This means a repeat strike is likely when economic conditions improve. Outside of the platinum and the general mining sector, service sector labor agreements probably will be negotiated during the second quarter.
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Introduction Former Soviet Union Europe Middle East and North Africa East Asia South Asia Latin America Sub-Saharan Africa
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their political patrons are not yet in a position where they need to increase attacks to influence a political outcome. With campaign season under way, the government will have limited success in countering Islamist militant group Boko Haram. The group will be active in its northeastern base of operations and focus its attacks on civilian and government personnel.
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