SECOND QUARTER FORECAST

April 8, 2010

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Second Quarter Forecast 2010

The second quarter of 2010 will be defined by three global trends. The United States will be looking for a new approach to Iran and pressing harder in its economic disputes with China. Russia will push forward confidently with its plans to reestablish a regional sphere of influence, and Europe will be busy fighting corrosion at the foundations of its economic and political unity. STRATFORs annual forecast for 2010 addressed two primary trends: Russias expanding influence in its periphery, and the potential for a crisis to erupt over Irans nuclear program. Moreover, the diverse repercussions of 2009s global economic crisis stood at the top of our list of regional concerns. During the first quarter, the Russian revival continued apace, but a series of events led the major global powers to retreat from confrontation with Iran. Meanwhile, the challenges facing Europe and China grew to become global trends. We begin with a plot twist in the Middle East. Three months ago, Israel seemed to have run out of patience with Irans attempts to become a nuclear-armed state, and the United States seemed broadly in line with its ally on the need to either impose devastating sanctions to force Iran to change or conduct military strikes to set back the nuclear program. Now, however, with sanctions in tatters and intelligence holes making Washington unwilling to accept the risks of a preemptive attack, the impending crisis has lost its immediacy and given way to diplomatic deferrals. This is not to say that the Wests aggravation with Irans expanding influence and nuclear ambitions has dissipated. Rather, the United States has shown it has no stomach for risking a third Middle Eastern war, and Israel has noisily resigned itself to the reality, knowing that it cannot afford to further alienate its chief security ally. Meanwhile Iran sits in a position of strength, as it has seen the international powers postpone several deadlines as well as dilute, delay and disagree on proposals for new sanctions. In the second quarter the United States will work harder with its regional allies to encircle Iran, while making new diplomatic overtures to the Iranian leadership. Though Tehran ultimately wants the United States to extract itself from the region, it recognizes that it has an advantage over Washington by virtue of its ability to influence conditions on the ground in Iraq and Afghanistan. In these matters, Iran will not be easily convinced to offer many concessions. The crisis with Iran is not over, but for now it appears increasingly likely that it will not be military in nature. No such twist has prevented Russia from rebuilding influence in places once dominated by the Soviet Union. First, Moscow eliminated commercial and economic barriers with Belarus and Kazakhstan. Then, Ukrainian elections formally brought a pro-Russian government into power, giving Moscow influence again over a stretch of land that is integral to a secure Russian state. Thus Russia will press forward more confidently in consolidating influence in Kazakhstan, Belarus and Ukraine, along with Georgia and other former Soviet states, while searching for ways to undercut European and U.S. ties with the Baltics. Also, in the coming months, Russias diplomatic game with its most influential neighbors Germany, France, Poland and Turkey will become more important as Russia seeks to secure the tacit understandings necessary to pursue its interests elsewhere. In Europe, the iteration of the financial crisis that STRATFOR predicted in our annual forecast has given way to a crisis of political confidence that promises to have longer-term and further-reaching

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 ramifications. The proposal to rescue Greece from debt default is a temporary solution, but it has reduced the chances that financial collapse will occur in the second quarter. This means that other Mediterranean states also clinging to flimsy rafts will not get sucked into a Grecian whirlpool during this quarter either. A more troubling psychological challenge for the European Union has arisen as a result of the evident lack of internal coherence in addressing Greeces troubles. In short, this experience gave every EU state a hint of the self-interested struggles that will ignite should the union face greater tribulations whether economic in nature, or arising from external security threats such as those posed by an increasingly formidable Russia. And so EU members have realized that the unions most recent governing treaty the Lisbon Treaty though purportedly a means of bringing members closer, in truth only strengthens German and French leadership over the bloc. This is a bad thing for those member states averse to their leadership or incapable of dealing with Russia alone. In the second quarter, while domestic economic and political troubles will still tear at European states from within, the critical trend for the Continent will be increasing dissent among member states as they try to frame Continental policy while grappling with the implications of their own disunity. As with Europe, Chinas struggle to cope with post-crisis economic conditions has become a globally significant trend. Beijing would have plenty to worry about were its woes solely domestic: It is already facing the dilemma of how to better control its massive stimulus efforts without causing an even more destabilizing slowdown. But Beijings economic policies have attracted harsher criticism from foreign countries that see China as operating at the expense of their own recoveries and have begun to demand change. The worst of the news for Beijing is that the United States is foremost among these critics, as its economy is the most closely intertwined with Chinas and therefore its problems most plausibly imputed to China not least because U.S. leaders no longer see the benefit in allowing a nearly $5 trillion economy to shirk international rules. Chinese and American leaders have several occasions in the coming months to negotiate, but Washington has signaled that it is ready to get tougher if its demands are not met, and Beijing cannot afford to appear weak or give too much ground. So beneath the diplomacy the pressure will inevitably rise.

Global Trends
Global Trend: The Iranian Nuclear Issue With Irans suspected pursuit of nuclear weapons driving security concerns in the Middle East, STRATFOR forecast that the year 2010 will be about Israel attempting to force a conflict, the Americans attempting to avoid it, the Iranians preparing for it and the Russians manipulating all sides to make sure that a resolution to the standoff does not come too soon. While we clearly saw a crisis building, a shift that we detected in the U.S.-Israeli track toward the latter end of the quarter has, in our eyes, lowered the probability of a military confrontation occurring in the Persian Gulf this year. Irans skills in denial and deception, along with its extensive militant proxy network and ability to wreak havoc in the Strait of Hormuz to send global energy prices soaring, appear to have convinced Washington for now that the cost of a military campaign against Irans nuclear facilities is too great. When it came time to review the results of the war simulations and intelligence reassessments on Irans nuclear program in the first part of the year, the result was a much more complex mission than the United States was willing to take on. Lacking the military capability to act on its own against Iran, Israel has for now resigned itself to this uncomfortable reality. The simple truth is that Israel needs the United States more than the United

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States needs Israel in the region. If the United States has put the brakes on the military pressure campaign against Iran, there is not much Israel will be able to do about it this quarter. Efforts will be made on both sides to ramp up intelligence collection on Iran and efforts at sanctions will be made (with little success), but the threat of war is currently subsiding. For lack of better options, the U.S. administration will attempt to redefine its Iran problem. While pursuing a containment strategy against Iran through Turkey and the Gulf Arab states, the United States may attempt another diplomatic outreach to Tehran. Between the United States trying to forge regional power balances in Iraq and Afghanistan and Iran wanting U.S. troops off its doorstep, there is no shortage of issues for the two sides to bring to the negotiating table. That said, there will be little hiding the fact that the United States will be negotiating from a position of weakness, and with a cloudy picture of who in Tehran is actually calling the shots. Iran can be expected to keep its guard up and talk around Washingtons diplomatic overtures this is not the time for Tehran to be making real concessions. Israel, meanwhile, will see its relationship with the United States come under further strain as it watches its options on Iran narrow. Global Trend: Diverging Europe In our 2010 forecast, STRATFOR highlighted two major trends for Europe that are deeply intertwined: the economic crisis and a new sense of disunity within the European Union. Thus far in 2010, Europes focus has been on the economic situation particularly in Greece. As the second quarter of the year begins, the Greek debt crisis continues, but disaster is no longer imminent. The bailout agreement the European Union passed on March 25 sets out harsh conditions drafted by Germany. In short, it is a life preserver Greece will think twice about reaching for. Greece may be able to survive until the end of 2010 without asking for the bailout. In the long term, however, poor demographics and a chronically uncompetitive economy could set Athens up for an economic disaster that likely will spill over into the social and political realms. Greece will get a foretaste of this in the second quarter, with more strikes and potential violence, especially in the pressure cooker that is Athens. Europes second major trend for 2010 divergence is about to become very clear. Regardless of the outcome for Greece, the manner in which Europe has handled the Greek crisis will have consequences for the Continent as a whole and the European Union as a political entity. In October 2009, Irish voters approved the Lisbon Treaty, after initially rejecting it. The vote largely reflected concerns in Ireland (mirrored in most of Europe at the time) that saying no to a stronger and more efficient European Union which the treaty purportedly created would mean being left out of the union and the eurozone. Now, the mood could not be more different across the Continent. Scandinavian countries who contemplated joining the European Union (Norway and Iceland) or the eurozone (Denmark and Sweden) are beginning to be glad they stayed out. The Club Med countries (Portugal, Greece, Spain and Italy) are lamenting how the Germans have treated them. Germany is tired of Club Meds historic treatment of Berlin as a cash cow and the southerners economic inefficiencies. The Central and Eastern Europeans (Poland, the Czech Republic, Hungary, the Baltic states, Romania and Bulgaria) are wondering why nobody is paying attention to Russias resurgence on Europes doorstep and are concerned that the Greek crisis will lead to stiffer eurozone membership criteria, thus delaying entry for several Central and Eastern European states. The Greek crisis has left Europe feeling less united than it was before the Lisbon Treatys narrow approval. Peripheral member states are realizing that Lisbon does not make Europe any more united; it only gives Germany and France the tools to increase their control of EU institutions. Furthermore, Berlins role in imposing harsh terms on Athens has left the rest of the union wondering where the acquiescent and compliant Germany that they remember went.

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The second quarter will be inherently unstable for Europe. First, the streets of European capitals will become embroiled in social angst as unions across the Continent protest budget austerity measures and plans to cut government outlays. This will not be confined to the countries looking to implement austerity measures; France, Germany and the United Kingdom are already experiencing strikes as well. Upcoming elections in the Czech Republic (May), Hungary (April), Slovakia (June) and the United Kingdom (likely May) could also become sources of instability and possibly unrest. Protectionism and nationalism likely will increase across the continent as economic growth remains tepid. This will make it harder for European states to work together. Exacerbating the problem are domestic challenges facing key European leaders: German Chancellor Angela Merkel has lost popularity in Germany due to the crisis and is dealing with splits within her coalition; French President Nicolas Sarkozy lost key regional elections and is facing a brutal challenge from the unions over proposed pension reforms; the United Kingdom is embroiled in a bitter election that will lock London down for the entire quarter if not longer, and Spanish Prime Minister Jose Luis Rodriguez Zapatero is losing support as unemployment reaches 20 percent. Greeces debt crisis and the accompanying disunity is likely to spill over to varying degrees into several key policy areas that EU member states expect to begin handling, or at least debating, in the second quarter. Issues on the table are the Common Agricultural Policy, a Franco-German proposal on Europe-wide banking taxes, how to define Europes economic government and a new diplomatic corps called for under Lisbon Treaty. The other major European issue is how to handle a resurgent Russia. The Central and Eastern Europeans could not get France and Germany to agree on countering Russia before the crisis; such agreement is even less likely now. If Europe continues ignoring Poland, Hungary, Romania and the Baltic states concerns about Russia, then Central and Eastern Europes economic interests (EU membership) will begin to diverge from their political and security interests (a military alliance with the United States). The Greek debt crisis paralyzed Europe for four months. STRATFOR believes that the non-economic results of the crisis will have far wider and deeper repercussions than the economic results, starting with a far-reaching realization that the European Union is not the shield from either economic calamity or a resurgent Russia it was once believed to be. In the second quarter, various EU members and non-members will begin considering how to deal with (or exploit) this realization. Global Trend: China vs. the United States Chinas economic imbalances as it tries to manage its rapid, stimulus-driven growth are a major global trend in 2010; not only do they dominate one of the worlds largest economies, but they also affect the United States. In the second quarter of 2010, the economic standoff between China and the United States will rise to the level of a global trend. Over the past year, China and the United States repeatedly have imposed duties and tariffs on each others goods in response to sharpening trade disputes amid global economic troubles. But the disagreement between Beijing and Washington runs deeper. For three decades the United States has granted China access to its consumer markets, enabling China to build up massive manufacturing capacity and export revenues. The Chinese have enhanced competitiveness in the U.S. market not only through their abundance of cheap labor, but also by pegging their currency, the yuan, to the U.S. dollar. This policy comes at the expense of Chinas competitors including U.S. producers and thus has long been a source of tension that both sides have sought to manage in order to maintain their overall beneficial relationship. Managing these tensions has become more difficult. The global economic crisis left China with massive foreign exchange reserves from years of trade surpluses, and China continues to grow rapidly. Meanwhile, the United States is suffering from prolonged unemployment at nearly 10 percent and a

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weakened manufacturing sector. Hence, Washington has begun pressuring Beijing more aggressively to open its markets further to U.S. goods and remove the fixed currency advantage. China argues that trade surpluses arise for other reasons and that too much appreciation of the yuan in too short a time will cut deeply into the already thin profit margins of its critical export sector. Forcing such issues, the Chinese say, risks ruining Chinas own attempts at economic reform and triggering a destabilizing slowdown that could hurt both countries and the global economy. Thus the second quarter of 2010 is shaping up to be a critical juncture in the Sino-U.S. relationship. Besides using its existing tools, the United States will intensify its pressure tactics. The U.S. Treasury Department says it will delay a decision on whether to brand China a currency manipulator until the third quarter, but this option remains in play, and U.S. legislators are also calling for retribution. For its part, China is attempting to mitigate U.S. anger by calling attention to efforts to restructure its economy and signaling that it will gradually resume appreciation and import more U.S. goods. Beijing is also indicating greater willingness to work with Washington in other areas, such as sanctions on Iran or restarting international talks with North Korea. The countries leaders have several bilateral and multilateral meetings planned in the second quarter, so there are ample opportunities to make deals to avoid a major disruption in the relationship. But U.S. President Barack Obama has already shown willingness to play hardball with China. And as the November midterm elections approach, the top priority for voters is joblessness, which voters feel is exacerbated by Chinas economic policies. Furthermore, the U.S. administration could benefit from appearing tough on a major foreign policy issue. If the United States does not make bold moves then it will expect Beijing to follow through on promised concessions, and will retain the option of hitting China harder later in the year. Global Trend: Russias Continued Resurgence One of the dominant trends STRATFOR has followed for years and one of the primary issues in our 2010 annual forecast is Russias resurgence as a major power. The progress Russia has made along its path to resurgence is the culmination of years of work to re-establish Moscows influence in the former Soviet sphere. Already this year, Russia has seen three key countries Ukraine, Kazakhstan and Belarus return to the Russian fold. Russia formed a customs union with Kazakhstan and Belarus, beginning the process of formally reintegrating the countries, and a pro-Russian government returned to Kiev, officially ending Ukraines pro-Western Orange Revolution. Russia has also continued laying the groundwork to exert more influence in other former Soviet states, like Armenia and Azerbaijan with Moscow continuing to be the hinge from which the Turkey-Armenia negotiations over normalizing relations and the Armenia-Azerbaijan talks over Nagorno-Karabakh swing. Moscow still has some housecleaning to do in the second quarter in Ukraine, Kazakhstan and Belarus. Government shakeups are taking place in Ukraine and Kazakhstan as the countries chart their proRussian courses. Belarus is more subdued and easier for Moscow to control. Russia will also be watching in the second quarter for countermoves to its consolidation plans in countries that would be supported by foreign powers, like the United States or the Europeans, though such moves are unlikely. The United States has been too preoccupied by issues in the Middle East to interfere, and the Europeans are mired in a financial crisis. Moscow feels confident that if either power begins focusing on Eurasia, the Kremlin has enough momentum to continue its reconsolidation plans. With Ukraine, Belarus and Kazakhstan in its grasp, Moscow will start focusing on the next group of countries on its shopping list: Georgia and the Baltic states of Latvia, Lithuania and Estonia. These countries are all vehemently anti-Russian and will not be as easy to influence as the three major states already in the Russian fold. Ahead of the second quarter, Moscow was already focusing on Georgia, forging relationships with various Georgian opposition groups. Russia has also been formalizing its

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military hold on the Georgian secessionist regions of Abkhazia and South Ossetia, over which Russia fought Georgia in 2008. Moscow also will look for ways to profit from the political chaos in Kyrgyzstan. Russia does not have as many tools in the Baltic states which are NATO and EU members as it has in Georgia. Also, Moscow knows that any aggressive actions in the Baltics will send Russia and NATO meaning the United States into direct conflict. Russia must first roll back Western influence in the Baltics before it can entrench its own a difficult task, and not one that the United States and its NATO allies will make any easier. In the second quarter, Russia will also focus on its relationships with the Eurasian regional heavyweights Germany, France, Poland and Turkey. Russian President Dmitri Medvedev will hold bilateral summits with leaders from each of these countries in the second quarter. Moscow knows that for a Russian resurgence in the former Soviet sphere to succeed, the Kremlin must forge understandings with these regional powers, which are capable of scuttling or at least greatly obstructing Russias plans. This focus on the Eurasian heavyweights, Georgia and the Baltics will not be wrapped up in the second quarter; rather, it will be escalated and more sharply defined.

The Global Economy

The U.S. economy is indeed growing again, but it is weak growth. Two indicators STRATFOR uses to evaluate the health of the U.S. economy remain in what we consider to be positive territory: growth in retail sales (demand) remains consistently stronger than growth in business inventory (supply). So long as that is the case, STRATFOR believes that future employment trends should be positive. Furthermore, first time unemployment claims our preferred indicator for measuring employment trends are falling while the Standard & Poors 500 our preferred indicator for determining investor sentiment is rising. But what has attracted our attention is that most of these trends have lost a significant amount of momentum in the first quarter. Until the U.S. economy strengthens appreciably and this must include employment the global system faces two problems. First, the United States is the worlds largest importer; weak U.S. growth directly translates into weaker global growth. Second, the U.S. government has some non-traditional tools it can use to generate domestic growth. Many of these can affect the global picture most are protectionist. At issue is that Japan, China and Germany the worlds second-, thirdand fourth-largest economies are

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attempting to export their way out of the recession. Yet none of them can and most are not seriously attempting to foster meaningful demand at home. With U.S. demand weak (and global demand weaker), there is concern within the United States that other countries are not doing enough to stimulate their own economies internal demand, leaving it up to the United States to drag the world out of recession. The perceived effect of this on U.S. employment is roundly negative and is triggering trade tensions. China in particular has been singled out in Washington as part of the problem not so much because China is not stimulating its economy, but because its stimulus is exacerbating imbalances in its economy that are detrimental to the United States and other countries. Chinas policy for the past 18 months has been to flood its system with credit beyond the usual level so that exporters can continue to generate products even if there is no demand for those products. Cash is being thrown at domestic investment projects that are poorly aligned to economic realities, creating overcapacity even with global growth tepid at best. Moreover, Chinese stimulus-generated demand for industrial and infrastructural expansion is keeping raw material supply costs relatively high further reducing the chance of recovery elsewhere. These circumstances mean the second quarter will bubble with debate, and potentially action, on Chinas economic policies. We will take particular interest in the ongoing battle between Beijing and Washington on Chinas currency because it is directly related to Chinas efforts to support exports and to U.S. political concerns about rising unemployment. We have discussed Europes banking problems and the evolution of the Greece crisis at length, but in the first quarter the two trends became deeply intertwined. The European strategy for supporting government stimulus spending (which includes keeping Greece on life support) has been to allow banks to take out nearly unlimited loans from the European Central Bank (ECB), most of which are used to purchase government bonds. Banks demand for bonds allows governments to keep their economies on life support, while Europes troubled banks can make a guaranteed albeit very slim profit serving as middlemen. This cannot continue forever; the past 20 years of Japanese economic non-growth shows what happens when systems that have become accustomed to artificially cheap credit can no longer be propped up. The ECB must rein in that credit at some point; in fact, it began that process in December 2009 and likely will finish by the end of 2010. When it does, it will put considerable stress on the Greek economy, but also on Europes weak financial system, which has thus far flown under the radar as the Greek debt crisis unraveled.

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Middle East
Regional Trend: Finding a Middle Eastern Balance The United States is attempting to reestablish a balance of power in the Middle East. At the heart of this challenge lies Iraq, where Iran will be focused this quarter in keeping the political balance tilted in its favor. While Tehran faces significant obstacles in trying to establish a pro-Iranian government in Baghdad, it can prevent Iraq from emerging as a strong counterweight to Iranian power. Iran will seek to strengthen its position through its Shiite allies in the formation of the Iraqi government. The coalition negotiations remain in flux at the time of this writing, but the possible sidelining of the Sunnis in this negotiating process could escalate the level of violence in the country. For the next quarter, the U.S. military presence in Iraq will continue to be Washingtons main check on Iran, but the United States will also look for other possible means of counterbalancing Persian power. With the U.S.-Israeli relationship under strain, Washington will increasingly look to Turkey to fill the power vacuum in the region. Regional Trend: Turkeys Rise U.S.-Turkish relations hit a diplomatic snag in the first part of the year over a resolution in the U.S. Congress on the Armenian genocide issue, and while a number of sticking points remain between Ankara and Washington, there is enough mutual strategic interest on both sides to uphold their relationship. Still, Turkey will continue to publicly play up its differences with the United States and Israel to help burnish its credentials as a regional leader. Turkey will continue to entrench itself in the Mesopotamian power struggle, but will be just as active this quarter in promoting its soft power in other areas of the Middle East, the Balkans and Central Asia. In the Caucasus, Turkey will backburner its attempt to form a rapprochement with Armenia, giving Ankara some room to try to mend relations with its estranged ally, Azerbaijan while using energy cooperation as its primary tool to keep relations with Russia on an even keel. Turkeys internal power struggle between a rising, Islamist-rooted Anatolian class and the traditional secularist elite will continue to intensify, but is unlikely to hobble Turkeys plans abroad. Regional Trend: Israel in Political Flux and a Palestinian Flare-Up The next quarter will be a trying one for Israel. As pressure lets up enough to give Iran room to breathe regarding its nuclear program, Israels helplessness to change the situation and dependency on the United States will become ever more apparent. Unfulfilled Israeli demands on the Iranian nuclear issue will threaten the stability of Israeli Prime Minister Benjamin Netanyahus already fragile coalition. In trying to hold his Cabinet together, Netanyahu will have to balance between managing his relationship with the United States and appeasing hard-liners at home. This will inevitably cause friction in the Israeli-Palestinian theater this quarter. While competing Palestinian factions attempt to exploit the strain in U.S.-Israeli relations by launching attacks, Netanyahus government will execute its own military response to the conflict to brandish its national security credentials at home. Such moves will run the risk of increasing Israels diplomatic isolation and further straining Israels relationship with the United States.

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Regional Trend: Egypts Political Succession Political uncertainty is rising in Egypt following President Hosni Mubaraks major surgery in Germany during the first quarter. Arab political leaders tend to be quite resilient in their old age, and Mubarak is no exception, but with the 81-year-old leaders health in question, this quarter authorities will prepare to carry out a succession plan. The plan is for the countrys intelligence chief, Omar Suleiman, to serve for one presidential term before leaving the office to Hosni Mubaraks son, Gamal. Suleiman made an oath to Mubarak in 2003 that he would protect Gamals political future, and he appears to have the militarys support in this regard. Mubaraks health will determine when this plan takes effect, but we do not anticipate a major power struggle to ensue in the event of Mubaraks death. The state retains the tools to forcibly contain the main opposition group, the Muslim Brotherhood, should it attempt to exploit the impending political transition.

South Asia
Regional Trend: Fighting in Afghanistan Fighting season in Afghanistan will kick into high gear this quarter as the United States continues to send troops into theater and focuses counterterrorism operations on southern Taliban strongholds in Marjah and Kandahar. As the United States fights with a heightened concern over collateral damage and civilian casualties, the Taliban will work around offensives which the United States and International Security Assistance Force (ISAF) will announce publicly and well in advance, thus giving the insurgents more time to react. The Taliban will continue their classic guerrilla strategy of declining direct combat and focusing instead on hit-and-run attacks and on building expertise in improvised explosive devices in their attempt to wear down U.S. and ISAF forces. Tactical successes and losses will be felt by both sides, but the success of the U.S. strategy will not measurable in the months ahead. While the military battles will be the main event, there is also a sideshow of negotiations that will attract some attention quarter as the United States attempts to crack the jihadist movement in Afghanistan. The demands on both sides remain irreconcilable at this point, making any meaningful traction in these negotiations unlikely for the foreseeable future. Regional Trend: Pakistans Counterterrorism Efforts and a U.S. Balancing Act Since the publication of STRATFORs annual forecast, Pakistan made some significant intelligence breakthroughs in its efforts to chip away at the Pakistani Taliban network. This has allowed Pakistan to work out the necessary tribal alliances to expand its counterinsurgency operations into the volatile northern tribal belt bordering Afghanistan, but does not preclude the potential for limited comebacks. Pakistans progress in its counterterrorism efforts has allowed tensions between Islamabad and Washington to calm significantly. STRATFOR expects this detente to continue into the next quarter but face renewed strain as the United States demands more Pakistani cooperation in providing intelligence on targets on the Afghan side of the border. Pakistan, feeling that its cooperation to date has been sufficient, will in turn demand that the United States deepen its partnership with the Pakistani state though political assurances, military aid and economic assistance and guarantees on limiting Indias presence in Afghanistan. The easing of U.S. pressure on Pakistan has already contributed to a rise in tensions between Washington and New Delhi as Indias fears of a Taliban political comeback in

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Afghanistan increase. The United States, unable to satisfy the demands of either Pakistan or its rival India, will continue a difficult balancing act on the subcontinent.

East Asia
New Regional Trend: Tensions Between Japan and the United States A new trend in East Asia for the second quarter is an escalation in disagreements between Japan and the United States. The Democratic Party of Japan (DPJ) was elected in 2009 claiming it would make Japan more independent from the United States. The first test of this pledge will take place in the second quarter as Japan proposes alternatives to the existing plan to relocate the U.S. military base on Okinawa. Washington is not inclined to renegotiate the deal, but is willing to allow limited alterations to maintain the relationship. The disagreement will see diplomatic sparks fly, but neither the United States nor Japan wants to do anything to fundamentally damage the security alliance especially as both have a common cause in dealing with Chinas rise. The DPJ does not want to appear as if it is failing to keep its pledge, especially as it faces a continued economic crisis at home and elections looming in the third quarter.

Former Soviet Union

Regional Trend: Internal Instability In the last days of the first quarter of 2010, a series of large-scale militant attacks occurred in Russia first in the Moscow subway system, then in the Caucasus republic of Dagestan. This escalation of attacks comes nearly one year after the Kremlin declared that it had successfully completed its war in Chechnya and announced plans to pull most of the Russian troops from the region at the end of winter. But these attacks have jeopardized the Kremlins reputation of keeping the country safe. Going into the second quarter, the Kremlin will have to clamp down on certain Northern Caucasus republics ranging from Dagestan to Ingushetia to Chechnya something that can never be done easily or nicely. The escalated attacks in Russia also have Russian Prime Minister Vladimir Putin and President Dmitri Medvedev pinning blame on the Interior Ministry and the Federal Security Service (FSB). These two entities are part of the same political clan and work very closely together; the FSB has influence within the Interior Ministry, and the two cooperate on security matters and investigations. The Interior Ministry was already in line for a political housecleaning, but now the tightly linked organizations will see increased pressure to reorganize and eliminate the perceived dead weight. This will feed into the already tense and dangerous Kremlin clan wars.

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Latin America
Regional Trend: Venezuelas Political Crisis STRATFOR forecast that political control would be the issue for Venezuela in 2010. The survivability of Venezuelan President Hugo Chavezs regime could come into question toward the end of this quarter. Though he has led a resilient regime, Chavez has few short-term options to alleviate a worsening electricity crisis affecting the country. Infrastructure that has been neglected for years, an overreliance on hydropower and rampant corruption have all contributed to the crisis, but El Nino-induced drought conditions are driving the electricity shortage. The Chavez governments political fate lies in the Guri dam reservoir, which, along with other nearby reservoirs, supplies nearly 70 percent of the countrys energy and whose water level is coming dangerously close to its collapse zone of about 262 yards (240 meters) above sea level. If the water level drops to this point, most of the dams turbines will have to be shut down and Venezuela could lose roughly 50-60 percent of its daily power. We are not meteorologists, and so cannot say whether Venezuela will receive the rainfall it needs to avert this crisis. But based on our studies of El Nino patterns, the historical behavior of the Caroni River that feeds the dam and various mathematical models done by technical engineers who have worked on the problem, we believe there is a reasonable chance that Venezuela could hit this crisis point in the third month of the quarter. Venezuela will come under considerable stress in the first part of the quarter as the government, under Cuban guidance, turns to survival instincts. The lower the water level drops at Guri, the more severe the government will become in imposing rationing. The government will spare Caracas and the oil-producing facilities from the harshest effects of the crisis for as long as it can. However, the Venezuelan interior will bear the brunt of the crisis, particularly in the Guayana highlands where heavy industry is located. The potential shutdown of these industries will indicate the severity of the situation, as will the more grave potential for rolling blackouts in Caracas. In such a scenario, transportation services could be shut down, communications would be cut off, refrigeration would fail, gas stations would be unable to pump fuel, daily productivity would plummet and crime would skyrocket, creating a situation in which Chavez would likely have to turn to his Chavista militias for security reinforcement. Such a move likely would lead to friction within the armed forces and further threaten the stability of the regime. As conditions deteriorate over the quarter, political challengers to Chavez are likely to emerge and position themselves for a potential break within the regime ahead of September parliamentary elections. The ruling elite will attempt to preempt such moves with more stringent crackdowns on the media and political and student opposition to prevent these forces from coalescing into a unified, strategic threat. The government has strong capabilities in this regard, but increased repression could lead to a public backlash at a time when many Venezuelan citizens are already facing difficulties in finding basic food staples on the shelves and crime is at record levels. The worst-case scenario for Venezuela is not assured for this quarter (since so much depends on the weather). Nonetheless, the country is in for rougher times ahead, and a political crisis remains a distinct possibility.

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Regional Trend: Political Continuity in Colombia Colombia will be keeping a close eye on its neighbor and rival, Venezuela, this quarter. Bogota does not want to get involved in the Venezuelan fray, but it will maintain a strong line of defense along its border with Venezuela to guard against potential fallout from the electricity crisis. The Venezuelan government, meanwhile, can use border tensions with Colombia in an attempt (albeit a weak one) to distract its own citizenry from the crisis at home. Colombias main focus this quarter will be on its general elections, split between two rounds in late May and June. As stated in STRATFORs annual forecast, the winner of this election is unlikely to steer the country in a radically different direction from Colombian President Alvaro Uribes hard-line security agenda and relatively investment-friendly policies. The countys main security threat, the Revolutionary Armed Forces of Colombia, will make itself heard in the lead-up to these elections through a combination of attacks and hostage releases, but will have difficulty influencing the elections either way. Regional Trend: Mexicos Cartel War The first quarter of 2010 saw some significant shifts in the cartel conflict in Mexico. The most significant was a split between longtime partners Los Zetas and the Gulf Cartel, which has created another conflict zone in the cities of Reynosa, Nuevo Laredo and Monterrey. The Gulf Cartel has sought help from former rival cartels Sinaloa and La Familia Michoacana in the fight against Los Zetas for control of the South Texas-Mexico drug trafficking corridor. The battle will continue into the second quarter, causing increased violence in the Mexican northeast. Another shift will develop this quarter in the U.S.-Mexican relationship. The idea of U.S. government personnel expanding operations in Mexico has long been a touchy issue for Mexicans, but the everincreasing violence in the Mexican northeast is leading many Mexican civilians, politicians and security personnel to reconsider U.S. involvement in counter-cartel operations. The assassinations of three people tied to the U.S. Consulate in Ciudad Juarez, Chihuahua state including two U.S. citizens at the hands of the Los Aztecas gang, which has well-established links to the Juarez cartel, has sent a message to Washington, intentionally or not, that U.S. government personnel are not immune from the Mexican cartels. The potential for this to develop into a trend of cartel attacks against U.S. diplomatic targets will drive Washingtons considerations in expanding its participation in this war. Though the debate over expanded U.S. counter-cartel operations in Mexico will intensify this quarter, we do not expect the debate to manifest into a significant shift in policy until later.

Sub-Saharan Africa
Regional Trend: South Africas Internal Focus With the leadership transfer in South Africa complete, 2010 will see the country begin its resurgence as a dominant regional power, much to its neighbor Angolas chagrin. The competition between Angola and South Africa is just starting in areas ranging from economics to consolidating influence over regional players like Zimbabwe.

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2010 STRATFOR

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But in the second quarter, South Africas focus and agenda will be sidelined by a major event: the World Cup soccer tournament, which will take place in South Africa in June and July. Pretoria has two critical concerns as it prepares to take the global stage: security and energy. These concerns could lead the state to conduct massive consolidations in its security apparatus and the electricity sector, though these would not be completed in the second quarter. The World Cup presents serious security issues, as the sudden influx of hundreds of thousands of visitors from all over the world runs up against South Africas already chronic crime problems. The potential for a militant attack does not make things any easier for Pretoria, which is terrified of being embarrassed on the world stage. South African President Jacob Zuma, who will have had a year of experience in office by the time of the opening whistle, will be relying on the countrys security apparatuses to prove that Pretoria has sufficient control over the security environment during the games. There is also the possibility of a power shortage in the country at a time of considerably increased demand due to the influx of tourists for the World Cup. The government has struggled to finance expansion plans in the energy sector since serious problems were first exposed with a series of blackouts in 2008. The government has hinted that its citizens should consider reducing their electricity consumption during the World Cup to ensure that there is enough to go around a tall order that could spark a public backlash if Pretoria does not tread lightly. Meanwhile, the state energy firm will continue to campaign for significant increases in electricity tariffs so that it can stay solvent and ensure uninterrupted energy supplies in the years ahead. New Regional Trend: Increased Niger Delta Militant Activity In the first quarter of 2010, the Nigerian militant group Movement for the Emancipation of the Niger Delta (MEND) ended its cease-fire with the government. Since then, the group has only carried out one attack. However, MEND has publicized its plans to increase the tempo of attacks in the second quarter. Not to be outdone by MEND, other militant groups in the Delta specifically the Niger Delta Peoples Volunteer Force, which is attempting a comeback after falling quiet for some time, and the Joint Revolutionary Council likely will increase the tempo of their activities in turn. Starting in the second quarter, politics will spur the uptick in attacks as Nigeria begins to prepare in earnest for national elections scheduled for 2011 (although they could be held in late 2010). Militant groups will aim to secure votes to support their benefactors agendas and to line their own pockets, as is the norm in Nigeria, where violence tends to intensify during campaign season. The second quarter will witness the start of this cyclical phenomenon as national elections approach.

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2010 STRATFOR

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STRATFOR is the world leader in global intelligence. Our team of experts collects and analyzes intelligence from every part of the world -- offering unparalleled insights through our exclusively published analyses and forecasts. Whether it is on political, economic or military developments, STRATFOR not only provides its members with a better understanding of current issues and events, but invaluable assessments of what lies ahead. Renowned author and futurologist George Friedman founded STRATFOR in 1996. Most recently, he authored the international bestseller, The Next 100 Years. Dr. Friedman is supported by a team of professionals with widespread experience, many of whom are internationally recognized in their own right. Although its headquarters are in Austin, Texas, STRATFORs staff is widely distributed throughout the world. Barrons has consistently found STRATFORs insights informative and largely on the money-as has the companys large client base, which ranges from corporations to media outlets and government agencies. -- Barrons What We Offer On a daily basis, STRATFOR members are made aware of what really matters on an international scale. At the heart of STRATFORs service lies a series of analyses which are written without bias or political preferences. We assume our readers not only want international news, but insight into the developments behind it. In addition to analyses, STRATFOR members also receive access to an endless supply of SITREPS (situational reports), our heavily vetted vehicle for providing breaking geopolitical news. To complete the STRATFOR service, we publish an ongoing series of geopolitical monographs and assessments which offer rigorous forecasts of future world developments. The STRATFOR Difference STRATFOR members quickly come to realize the difference between intelligence and journalism. We are not the purveyors of gossip or trivia. We never forget the need to explain why any event or issue has significance and we use global intelligence not quotes. STRATFOR also provides corporate and institutional memberships for multi-users. Our intelligence professionals provide Executive Briefings for corporate events and board of directors meetings and routinely appear as speakers at conferences. For more information on corporate or institutional services please contact sales@stratfor.com

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2010 STRATFOR

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Austin, TX 78701

Tel: 1-512-744-4300

www.stratfor.com