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Stratfor: Ukraine's slow recovery and Russia's economic decline

Author : Stratfor

13:59, 13 January 2016
Stratfor: Ukraine's slow recovery and Russia's economic decline

Author : Stratfor

Jihadist threat will fuel Islamophobia in the West and catalyze the fragmentation of Europe

13:59, 13 January 2016

Stratfor, American publisher and global intelligence company, has released its annual forcast for 2016 year.

Фото из открытых источников

With old geopolitical realities resurfacing across Eurasia and commodity prices stuck in a slump, 2016 is shaping up to be an unsettling year for much of the world.

A logical place to begin is the country that bridges Europe and Asia: Turkey. This is the year when Turkey, nervous but more politically coherent than it was last year, will likely make a military move into northern Syria while trying to enlarge its footprint in northern Iraq. Turkey will not only confront the Islamic State but will also keep Kurdish expansion in check as it raises the stakes in its confrontations with its old rivals, Russia and Iran.

The last thing Russia wants is a confrontation with Turkey, the gatekeeper to the Black and Mediterranean seas, but confrontation is something it cannot avoid. Russia risks mission creep this year as it increases its involvement on the Syrian battlefield. But the Islamic State will be only part of Moscow's focus in Syria; Russia will try to draw the United States toward a compromise that would slow a Western push into Russia's former Soviet space. The United States will be willing to negotiate on tactical issues, but it will deny Moscow the leverage it seeks by linking counterterrorism cooperation to a broader strategic discussion. The U.S. administration will work instead to shore up European allies on the front lines with Russia.

Related: Capping 2015: Russia and its Year of Wars

Regardless of the participants' secondary motives, an intensified military campaign against the Islamic State will surely damage the militant group's core. However, the fledgling caliphate will not be eradicated this year. A lack of reliable ground forces will hamper the anti-Islamic State campaign. And the more the Islamic State's conventional capabilities weaken, the more actively the group and its affiliates will try to conduct terrorist attacks outside the Middle East to maintain its relevance. This in turn will drive competition within the jihadist landscape as al Qaeda factions in the Arabian Peninsula, the Maghreb, West Africa and South Asia try to keep pace.

The jihadist threat will fuel Islamophobia in the West and catalyze the fragmentation of Europe. Border controls and calls for preserving national identity will dilute the EU principle of allowing free movement of people. Closed borders will create a bottleneck of migrants in the Western Balkans, a region already rife with ethnic and religious tension. But the main story in Europe for 2016 will center on France and Germany, the two pillars of the European Union. Both will be preparing for 2017 elections, and both are leaning in a more nationalist and Euroskeptic direction. Over time, Germany will become more outspoken and much less willing to compromise on matters of EU integration.

Related: NY Times: Russia seeks world supremacy, prepares for standoff with the West

The continuation of quantitative easing and another year of low oil prices will have a palliative effect on the deeper frictions in Europe as global commodity markets continue to suffer. The addition of Iranian oil to the market in the first half of the year will offset a drop in U.S. production. Any change to Saudi Arabia's oil output would come later in the year, after Riyadh has assessed the price impact from Iran's return as well as the effect on U.S. shale producers. Any attempt by Riyadh to coordinate a drop in production with Kuwait and the United Arab Emirates would come only after this assessment. Regardless of Iran's impact, Saudi Arabia will still be prepared to take on more debt and draw down reserves to cope with low oil prices.

China will not bring about relief in commodity prices, either. Consumption growth will slacken as Beijing struggles to implement reforms amid growing dissent among the Party elite. Even as Beijing faces the threat of party factionalization, it will still have enough economic heft to offer incentives to Southeast Asian states to counterbalance a stronger U.S. security presence in the region.

Low commodity prices and rising U.S. interest rates, which affect currencies, will also spell another difficult year for much of Latin America. The threat of impeachment will hang over Brazilian President Dilma Rousseff and further sour the investment climate in Brazil in the short term. Argentina may have a new, reform-minded president, but his struggle with high inflation and foreign currency shortages means any moves to settle debt and to raise protectionist measures will be limited. In Venezuela, the end of Chavismo is near. An embattled United Socialist Party of Venezuela will eventually splinter under growing political and economic pressure, and the country risks defaulting on its foreign debt this year.

The defining events of 2016 will raise apprehension around the world, leading into what will likely be an even more tumultuous 2017 as an array of developing conflicts comes into sharper focus. The essential thing to bear in mind is that all these trends are connected. The U.S.-Russia standoff, surging nationalism in Europe, Turkey's re-emergence and other geopolitical currents will tie in to and feed off of one another. We will keep our eyes fixed on the bigger picture in 2016, for there is a much more complex one developing in 2017.

Related: 16-year rule of Vladimir Putin: the key findings

Russia Focuses on Security and the Economy

The Russian economy will continue to be a major priority for Moscow in 2016. The Kremlin has taken steps to insulate it from the effects of the Western sanctions, including seeking investment from Russia's neighbors to the east, using Russian banks for financing and postponing large projects that require either foreign investment or technology restricted under the current sanctions. Russia probably can withstand another year of sanctions, but beyond 2016 they will jeopardize the country's financial stability and ability to maintain current levels of energy production. Therefore, out of necessity, Moscow will be more accommodating with its Western energy contracts in 2016 as it works to increase energy ties with the east by prioritizing regional pipeline integration projects, such as the Eastern Gas Program and the Eastern Siberia-Pacific Ocean oil pipeline.

Related: Ukraine in 2016: Russian frost, European chill, and new elections

Economic growth in Russia will be relatively flat; the Russian Ministry of Economic Development has forecast growth of 0.7 percent for 2016. The economic decline that sent Russia into a recession will slow, as will capital flight and drops in industrial production. Major Russian industrial firms will have fewer international debt payments due in 2016 ($16 billion, compared to more than $30 billion in 2015). This will make it easier for these firms to receive financial assistance from the government or to broker assistance from major Russian banks to restructure their debts. The ruble is expected to remain volatile; the Russian Central Bank intends to step in only periodically to support the currency. This volatility could help Russian industrial and energy firms whose export revenues are in dollars, but it will put further economic strain on the Russian people, who are already experiencing high inflation and rising poverty rates. The weak ruble will exacerbate Russia's socioeconomic issues. Not only will the currency's weakness limit travel opportunities, but also the price of imported consumables not otherwise included in the Russian consumer price index calculations will increase. These circumstances could give rise to social unrest across the income spectrum, including medium- and high-income earners. Growing economic pressures will lead to protests across Russia.

The Kremlin will allow minor protests related to economic conditions to take place, but it will attempt to defuse any large and well-organized protests that take on more of an anti-Kremlin tone. Moreover, increased anti-Islamic State rhetoric from the government could fuel an uptick in ultra-nationalist unrest that culminates in protests and vigilantism targeting immigrant communities, similar to incidents seen in 2013. The Federal Security Services will attempt to use threats from the Islamic State and other Islamist militant groups to expand its security and intelligence powers within and outside of Russia. In addition, ahead of parliamentary elections in September, the Kremlin is likely to crack down on opposition groups and leaders in an attempt to keep them from organizing a more widespread movement.

Related: Russia to try settling trade relations with EU and Ukraine, - Putin

Infighting among members of the Kremlin elite will intensify in 2016. Disputes involving major energy firms' political backers, the ministers of finance, economy and energy, and even the security services will erupt over the future of Russia's energy policies. Points of contention will include financial assistance for big energy firms and projects, whether to privatize Rosneft, and the possible end of Gazprom's monopoly on natural gas pipelines. Disagreements will emerge among the various security services and military forces over who holds the portfolios for handling the ongoing situations in eastern Ukraine, Syria and other hot spots, and debates will arise over the balance of power, influence and financial resources among the security and military groups. Russian President Vladimir Putin's ability to manage these disputes is declining, which will lead him to rely more on ultra-loyalists who have some distance from the core areas of contention.

Ukraine's Domestic Troubles 

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The persistent conflict in eastern Ukraine will be only one of many serious challenges for Kiev in the next year. Far-right and nationalist groups will continue to undermine the Ukrainian government and hamper Kiev's ability to follow through with its political concessions to the separatists. This, in turn, will guarantee that Donetsk and Luhansk will remain beyond Kiev's political control, though certain economic links could be restored out of necessity for both sides over the course of the year. The unpopularity of painful austerity measures and the slow pace of legal and judicial reform are likely to lead to a significant shake-up in Kiev in 2016, potentially including the replacement of embattled Ukrainian Prime Minister Arseniy Yatsenyuk.

Nevertheless, Ukrainian President Petro Poroshenko will likely maintain Kiev's pro-West course. Access to Western financial support and security assistance from NATO and the United States in particular are key to the survival of the Ukrainian government. After contracting 10 percent in 2015, Ukraine's economy will begin to slowly rebound in 2016, although high inflation and unemployment will continue to spur protests and occasional unrest. Kiev's economic links with Moscow will likely weaken as the two countries debate debt repayments, energy and electricity supplies, and Ukraine's implementation of a trade deal with the European Union that takes effect Jan. 1. Trade in resources such as energy supplies and agricultural goods will decline between Ukraine and Russia as Kiev gradually reorients its economy and broader strategic interests away from Russia and toward the West. 

Related: Obama: Russia loses its influence in Ukraine

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