Third Quarter Forecast 2013

At the beginning of 2013, Stratfor said this would be the year that the deep, structural weaknesses in Europe and China would present the leaders of these two pillars of the international system with a painful reality: The short-term remedies implemented so far will not be enough to prevent greater instability down the line. Indeed, in the past quarter, Europe's leaders began a critical discussion on ways to address youth unemployment while grappling with existential questions on the costs and benefits of deepening European integration in order to manage the crisis. And as the third quarter begins, China is making painful moves to address major imbalances in its financial system amid slowing worldwide growth.

Europe's crisis is still at a stage in which a deceptive calm will prevail in the street and in the financial markets. Softer deficit targets, a guarantee of European Central Bank intervention in sovereign markets, healthy tourism receipts from the still-sizable number of foreigners vacationing in Europe, and European parliaments' inability to pass legislation while in summer recess have created a relatively quiet period for the Continent. However, unemployment rates are steadily rising throughout Europe, and though Germany will be preoccupied with the final stretch of its campaign season, there is a growing acknowledgment that Berlin, Brussels and the institutions and tools they are using to try to manage the crisis are quickly losing legitimacy.

For China, the next three months will bring more layoffs, bankruptcies, protests and trade frictions as the new administration attempts to rein in credit expansion and cut back structural inefficiencies. Periodic injections of liquidity to manage the turmoil will send mixed signals about China's intentions but reflect the simple truth that while China has the funds to manage financial stress, it remains anxious over its ability to maintain political stability amid a dramatic reshaping of its economic model.

Russia, by no means immune to the economic slowdown despite its natural resource wealth, will gain some and lose some as it tries to maintain economic leverage in Europe. While natural gas negotiations this quarter will be arduous for Russia and fuel a growing power struggle within the Kremlin, the country will make quiet but substantial progress in expanding its economic footprint in Central and Eastern Europe.

The Middle East will see no relief from the broader sectarian war engulfing the region, but in Syria, the equilibrium of violence between the regime and rebel forces assures a stalemate. The regime will have an advantage in the amount of external support it receives, but it will also be overextending itself in this quarter's multipronged counteroffensive against the rebels. And while the United States -- among other foreign powers -- will be open to providing weapons to certain rebel factions, our forecast emphasizing U.S. restraint in its military involvement in the Middle East will endure this quarter.

In Latin America, the Mexican government will make progress in the third quarter, introducing laws to Congress that would attract much-needed investment in the energy sector. Farther south, the region's ideological divide will grow as member countries of the Mercosur customs union face pressing problems at home. With Brazil and Argentina distracted by domestic matters, Mercosur will remain in a state of flux while the more dynamic Pacific Alliance strengthens.

Though we did not foresee the protests in Brazil and Turkey that broke out in the second quarter, the dynamics driving both were reflected in our earlier forecasts. Following last quarter's popular demonstrations, several of Turkey's larger domestic and foreign policy ambitions will be put in check in the coming months. The consequences of the flow of militants out of Mali, a violent strike season in the South African coal sector, Russia's expanding influence in Ukraine and Georgia, and three-way energy feuds in Iraq are among many of the other developments we expect to cover for our readers in the next three months.Europe









On the surface, Europe will appear relatively quiet this quarter. The European Central Bank will maintain its promise of intervention in sovereign markets to keep financial markets calm. Per our prediction from the beginning of the year, the European Commission's relaxation of deficit targets last quarter and general shift away from austerity policies will also give troubled countries in the eurozone periphery some breathing room. The summer tourism season in Europe will bring in enough foreign traffic to temper strikes and protests in the Mediterranean countries, where youth unemployment is highest. Most European parliaments will also be in recess this summer, which will delay decisions on controversial reforms that could provoke unrest.

Growing Unemployment Adds to Europe's Existential Crisis

But while the financial crisis has been contained for now, Stratfor has emphasized in previous forecasts that the sovereign debt crisis was just the first phase of a much deeper socioeconomic predicament. This larger crisis will take time to play out, but it will tear at the foundation of the European Union. Indeed, unemployment rates will continue to climb and increasingly affect the core of Europe.

The growing acknowledgment of this trend will intensify a debate among European leaders over how to address rising unemployment (particularly, youth unemployment) and over the tools to collectively manage the crisis (such as the creation of a banking union). These debates center on the risks and benefits of deeper integration. While Germany and France's irreconcilable differences over the issue continue to fester, discomfort from the Netherlands, nudged between the two powers while also facing rising unemployment, will become more apparent as the Dutch caution against the expansion of Brussels' powers. The centrifugal forces influencing the debate over European integration will prevent discussions about EU-wide structural reforms from translating into action this quarter.
EU Members Tackle Domestic Agendas

France, in trying to balance its need for an alliance with Germany against rising social pressures at home, will see the slow re-emergence of the conservative opposition (former President Nicolas Sarkozy's Union for a Popular Movement party) and growing criticism from the far right (the National Front party) as Socialist President Francois Hollande's popularity continues to wane. France's unavoidable task of trying to improve the competitiveness of its economy will take the form of debate over pension reform this quarter. A draft of the reform will be prepared but is unlikely to be approved by the end of the summer. As he did with France's recent labor reform, Hollande will seek consensus with trade unions and employers' organizations, which will dilute the proposal. The sensitivity of the issue will likely lead to street protests by some labor unions in France, but the level of unrest will not reach a point where the government will fundamentally destabilize.

With elections in Germany slated for September, the country's domestic issues will contribute greatly to the decision-making paralysis at the EU-level this quarter. Like France, Germany will be caught in a difficult balance between its need to maintain enough cohesion in the European Union to guarantee German access to a large consumer market and its need to maintain the health of the German economy when growth rates across the Continent are either stagnant or in steady decline. This dilemma will result in mixed signals to the German electorate during the campaign season: Candidates will emphasize the need for deeper integration to ensure continued access to the European market while also trying to reassure voters that German interests (and taxpayer money) will be protected. Domestic concerns over minimum wages, taxes and energy policies will heavily influence the vote. German Chancellor Angela Merkel likely will sustain her popularity during this election campaign, but regardless of the emerging coalition's political leanings, the election itself will not fundamentally change how Germany manages the crisis.

The Italian parliament will begin discussions on constitutional reform (which is expected to be completed at some point mid-2014) and a new electoral law this summer. Italians will also debate real estate and value-added taxes -- a debate that will escalate in September. These issues, along with the legal problems of former Prime Minister Silvio Berlusconi, will generate tensions within the fragile ruling coalition, but they are unlikely to lead to government collapse.

The Spanish parliament will debate pension system reform, but approval is not expected this quarter. In light of the European Union's relaxation of Spain's deficit targets, the country's autonomous regions will push for more leniency from Prime Minister Mariano Rajoy's government. Ultimately, Madrid will agree to softer deficit targets with its autonomous regions.
Outsiders Challenge the Mainstream Political Elite

In our annual forecast, we outlined that while the widening gap between the ruling elites and the masses in Europe would enable Euroskeptic parties to gain popularity, mainstream political parties would still largely be able to hold their ground this year. This trend remains on track for the upcoming quarter. When Austria holds general elections Sept. 29, the Euroskeptic Team Stronach party likely will enter the parliament, but Austria's traditional parties will probably maintain control.

Greece's fragile ruling coalition, now with the New Democracy party and the Panhellenic Socialist Movement holding a slim majority in the parliament, will invite increased pressure from the anti-establishment Coalition of the Radical Left, commonly known as Syriza. Greece's lenders will maintain pressure on Athens to apply reforms, but they will show leniency as needed to keep the government together.

Outside the eurozone, political turmoil is likely in Poland over the summer. The government's low approval ratings stemming from slowing economic growth will create more political challenges for Prime Minister Donald Tusk. The prime minister probably will avoid a government collapse, but he will contend with increasing pressures from both inside and outside his party.
Central Europe Moves to Defy Brussels

The gradual fragmentation of Europe highlighted in the annual forecast will also escalate in Central Europe, where Hungary will lead a trend of centralizing political control in defiance of EU norms. EU leaders will criticize Hungary's controversial legal reforms and taxes on banks and the telecommunications industry but lack the political will and means to effectively pressure Budapest to reverse its course. Romania will also show subtle yet growing signs of distancing itself from EU norms out of economic and political necessity. Meanwhile, Russia will take advantage of the European Union's weakened influence on Central Europe to expand its economic presence in the region.
Former Soviet Union








Russia Continues its Strategy with Europe

Europe's continuing weakness presents Russia with challenges and opportunities. As Stratfor forecast at the beginning of the year, Russia has adjusted its interactions with Europe to appear less aggressive and more cooperative in business deals with select partners. The strategy, designed to help Russia respond to increased competitiveness in energy markets while taking advantage of strategic investment opportunities in Europe, will remain a key theme for the third quarter.

Whereas previous forecasts focused on Russia's strategic partnerships with core countries such as Germany, in this quarter Moscow will make quiet but substantial progress in its commercial dealings in Central and Eastern Europe. Russia is likely to use subsidiaries or shell companies rather than its more prominent state giants to acquire manufacturing, chemical and transport assets in its European periphery.

Russia and its European clients typically resume negotiations on natural gas contracts in the summer, before storage tanks are filled for the winter. Italy, France and Poland are among the countries Russia will be negotiating with in the coming months as Moscow aims to secure long-term contracts in exchange for price breaks or new tax schemes to make these deals more palatable to the Europeans amid heightened competition in the energy market.
Pressures Grow Within the Kremlin

Russia's attempts to maintain a large presence in European energy markets will fuel a debate within the Kremlin this quarter over key reforms in Russian energy investment policies. The policies in question concern Gazprom's monopoly on Russia's natural gas exports, as well as current restrictions on foreign investment in shale oil development. Competing energy factions in Russia will lobby the Russian leadership to break up Gazprom's monopoly to allow other natural gas firms to compete in the market. Russia's major energy clients, including Germany, the United Kingdom, France, China and Japan, will also continue applying political and legal pressure on Russia to adjust its pricing formulas and create more competition among Russian energy firms. Ultimately, the decision on these policies rests with Russian President Vladimir Putin, who will continue balancing the various lobbies and delay action for at least another quarter.

Similar pressures will build against Russia's privatization and modernization programs that were championed by Prime Minister Dmitri Medvedev to bring more foreign investment and technology to Russia. Proposals are already on the table for many of these privatization bids to be shelved. Medvedev's position in the Kremlin will continue to weaken as Russia returns to more selective engagement with foreign investors.

As the debate over energy and investment policies intensifies, so will the Kremlin's internal struggles. The anti-corruption crackdowns that Stratfor forecast at the beginning of the year will continue this quarter, as personnel is switched out to reflect Russia's changing economic priorities. Political skirmishing in Russia will also escalate ahead of regional and Moscow mayoral elections in September. In the race for Moscow's mayor, Putin's rumored successor Sergei Sobyanin, known for his ability to moderate among the Kremlin's competing factions, will likely pass an important popularity test against prominent opposition figures.
Moscow's Continuing Influence in its Former Soviet Territories

Russia and Ukraine will make progress in negotiations over a new natural gas deal. Ukraine will begin unbundling state energy firm Naftogaz, thus legalizing foreign management of its pipeline distribution system and opening the door to Russia. Numerous technical and political hurdles make an official deal unlikely before the fourth quarter, but this is the quarter where the most headway toward a compromise will be made.

Russia is scheduled to begin construction of the onshore section of the South Stream natural gas pipeline in Bulgaria in July, but this project will face several complications. The first is domestic political instability in Bulgaria, where a fragile government will be contending with frequent street protests. Second, progress in natural gas negotiations between Russia and Ukraine could undermine the original rationale for the pipeline. Third, Azerbaijan's choice of the Trans-Adriatic Pipeline over Nabucco West for its Southern Corridor energy project eliminates key competition that South Stream was designed to counter. Finally, Russia's energy projects in East Asia and the United Kingdom are more commercially viable than the costly South Stream project. These factors will eliminate the urgency Russia has felt about South Stream, but Moscow will not abandon the project yet.

Lithuania has assumed the European Union's rotating six-month presidency and will use this platform to advance its energy diversification plans and try to persuade Ukraine and Belarus to cooperate more with the European Union. Crucial to Lithuania's attempts to diversify its energy sources is a shift of transmission operations from Russia's Gazprom to Lithuanian firm Amber Grid by the end of July.

Georgia's political scene will be vibrant in the third quarter ahead of the presidential election set for October. In line with our annual forecast, Georgian Prime Minister Bidzina Ivanishvili and his Georgian Dream movement will continue consolidating power at the expense of the rival camp of Georgian President Mikhail Saakashvili through arrests, political appointments, corruption charges and other tactics.
Political and Financial Turmoil in Central Asia

Political instability and security threats will worsen in Tajikistan ahead of a presidential election slated for November. Protests, targeting of opposition elements, and a greater potential for violence can be expected this quarter.

Though not previously discussed in our forecasts, costly energy projects like development of the Kashagan and Karachaganak oil fields will strain Kazakhstan's finances. The Kazakh government's financial difficulties will become more evident this quarter, but they will not threaten regime stability.
East Asia








China's Economic Woes Remain Difficult but Manageable

As we forecast in the annual, the predominant trend in East Asia remains Beijing's struggle to maintain social and political stability while its economy slows. The transition to a new economic model continues to be slow and painful, fraught with risks of unemployment and financial system distress. This quarter, China's gaze will turn inward as the new and apprehensive administration of Xi Jinping struggles to manage the slowdown while seeking to reinforce expectations at home and abroad that it is committed to economic reform and rebalancing.

China's financial instability will remain a central preoccupation. The policy-driven tightening of money and credit points to a concerted effort to begin the arduous process of correcting imbalances in the financial system. However, with massive debt, hidden risks, slowing growth and a new administration seeking to establish credibility, the conditions exist for more banks and companies to default or even collapse, aggravating the situation. Premier Li Keqiang and the People's Bank will have to moderate their positions and inject liquidity into the system or bail out failing entities as necessary. Such loosening of policy will send mixed signals, preserving stability in the near term but at the expense of reform. However, the state has sufficient funds to manage acute crises and we do not expect uncontrollable financial turmoil this quarter, even as China's economic condition further deteriorates. The general slowdown will force China's leadership to contend with layoffs, bankruptcies, protests and trade frictions with the developed world.

The new leadership will not formally launch its reform agenda until the fourth quarter. Since implementation will mostly wait until after that time, this quarter primarily will involve negotiating the specifics, priorities and scope of reforms. Institutional debates between corporations and governments as well as public figures will heat up. Amid economic transition and policy differences, social and ideological tensions will increase.Japan Grows More Competitive

Japan is becoming more competitive internationally as the new administration capitalizes on public and bureaucratic support. When we forecast Japan's reinvigorated military and economic pursuits at the beginning of the year, we did not anticipate its aggressive monetary stimulus. The government will continue with its recent economic stimulus along with its more energetic pursuit of international trade and investment deals, as well as its acceleration of military normalization. In the third quarter the ruling party will concentrate especially on building further political momentum at home for its national revitalization effort. This will include campaigning for upper house elections in July, and afterwards trying to push through domestic legal and regulatory reforms necessary to boost growth in a more lasting way than stimulus could achieve. Tokyo's actions remain within the close confines of demographic decline, resource dependency and reliance on the United States, but in this quarter it will build domestic momentum for its policies.
China's Reverberations Around the Region

China's slowing economy will affect the rest of East Asia and the Pacific, particularly commodities exporters like Australia and Indonesia. North Korea has offered negotiations, but while other states have shown some receptiveness, neither the United States nor North Korea has the political strength or need to break the deadlock this quarter. Vietnam's ruling party will struggle to maintain stability as it launches financial bailouts and a new round of economic restructuring. Myanmar will prioritize negotiations over military attacks in dealing with ethnic minority groups during a season when fighting will continue but could slow. Rising violence between Buddhists and Muslims will continue across the country and will likely complicate cross-border clashes and militancy.

Tensions in the South and East China seas will dominate regional security concerns. China is building up its maritime position and undermining those of other countries, which are forming relations with each other in response. The third quarter will also see China and the member states of the Association of Southeast Asian Nations seeking tactical advantages for upcoming multilateral negotiations on a code of conduct for disputes in the South China Sea. Despite clashes last year, Beijing is showing interest in multilateral talks to pacify critics and discourage outside parties from interfering. Still, China and other states will assert their claims on territory, so the risk of clashes among any of the claimant countries remains.
Middle East








Syria's Stalemate Becomes More Deadly

Syria remains the pivot of a broader sectarian war in the region. As we said in our annual forecast, the battle for control of Damascus could well take years; the resilience of the regime forces and the inability of any one group to wield authority over the country will continue prolonging the conflict. This quarter, Syrian President Bashar al Assad's Alawite-dominated forces will make gains against Sunni rebel fighters in some areas as loyalist troops use the momentum gained from last quarter's battle of Al-Qusayr to press forward with a multi-pronged counteroffensive. Loyalist forces will continue targeting remaining rebel positions in the Homs crossroads and Damascus suburbs in order to reinforce control over core regime territories.

However, the regime will also have to split its attention between a drive southward toward Daraa to reinforce control over a key supply route from Jordan and a drive northward from Homs toward the main rebel stronghold in Aleppo. The long distances between the regime's core staging ground and Aleppo, combined with strain on supply lines and personnel, will put the regime at risk of overextending itself in this counteroffensive. It is therefore highly unlikely that the Syrian regime will be able to wrest complete control of Aleppo from the rebels this quarter.

Increased external support will work in the regime's favor, however. Iran, Russia and Hezbollah will continue investing money, weapons and fighters to reinforce the regime. Hezbollah will also focus on reinforcing the regime's Lebanese supply routes into Syria while weakening pockets of Sunni resistance across northern Lebanon, making northern Lebanon the region most susceptible to spillover sectarian violence this quarter.

Russia will continue providing crucial weapons aid to the Syrian regime while leveraging the threat of delivering more advanced weapons systems to the loyalists in its broader, ongoing negotiations with the United States. Russia will balance its continued support for the regime with occasional symbolic diplomatic efforts, but any attempt this quarter to negotiate a multilateral political settlement for Syria will fail.

Sunni rebel factions will receive weapons, fighters, supplies and money from countries such as Saudi Arabia and Qatar. The United States, France and the United Kingdom will also begin providing direct military aid to the rebels. However, despite this external support, the rebels will remain unable to match the regime's firepower.

The supply chain from the Arabian Peninsula to rebels in southern Syria depends heavily on Jordan's cooperation. Thus, Amman will come under political and economic pressure from both Saudi Arabia and Iran (including Iraq, by extension) as Tehran and Riyadh attempt to influence the level of Jordanian involvement in the crisis. Amman will continue to balance both sides of the conflict in line with its own domestic security concerns.

Turkey's preoccupation with domestic issues and concern over Iranian- and Syrian-sponsored militant backlash within Turkey will constrain the role the country can play in supporting the rebels from the north. Speculation will continue over a U.S.-led no-fly zone in northern Syria to halt the regime's advance toward Aleppo, but we believe this is unlikely. U.S. policy toward Syria will be driven primarily by restraint as the U.S. president deals with rising domestic challenges and tries to avoid major foreign entanglements. Turkey and other foreign sponsors will try to downplay the role of more prominent and experienced Salafist jihadist groups and elevate what they perceive to be the more moderate rebel factions. The question of which rebel factions should be armed will remain the biggest constraint to the amount and types of weapons that reach the rebels this quarter.
Iraq Remains Restive

Sunni unrest in Iraq will continue, but is unlikely to fundamentally destabilize the Shiite-dominated government in Baghdad this quarter. Jihadists traversing the Syrian-Iraqi battlespace will prioritize the fight in Syria and will thus channel the bulk of resources there. Jihadist activity in Iraq will remain intense and claim a high number of casualties, but it will not draw a large number of Sunni nationalists into a reignited civil war with the Shia. The majority of Sunni nationalists and tribal forces will limit cooperation with the Iraqi government while also keeping their distance from jihadists.

After a relatively calm second quarter between Baghdad and the Arbil-based Kurdistan Regional Government, the Kurdish leadership will attempt to advance its plans to develop an alternative energy export route through Turkey that is independent of Baghdad's control. The pipeline is unlikely to be completed this quarter, but attempts to advance construction will drive up tension between the Kurdish leadership and Prime Minister Nouri al-Maliki's government. However, intra-Kurdish competition ahead of Sept. 21 local elections for the Kurdistan Regional Government -- including possible unrest following attempts to postpone presidential elections -- will limit the extent to which the Kurdish leadership is able to challenge Baghdad on energy this quarter.

Between managing Sunni dissent and trying to contain Kurdish ambitions for expanded autonomy, Baghdad will face a steadily growing threat to its authority in the oil-rich region of Kirkuk, which sits in the borderland between the Sunni and Kurdish conflict zones.
Domestic Troubles Distract Turkey

A wave of street demonstrations against Turkish Prime Minister Recep Tayyip Erdogan's government that erupted late in the second quarter is unlikely to sustain itself in the coming months. As Stratfor noted in the annual forecast, domestic political skirmishing is likely ahead of the 2014 election season, but the Turkish opposition is unlikely to significantly undermine the ruling party's popularity. Supporters of the ruling Justice and Development Party can be expected to hold rallies to demonstrate this point.

However, Erdogan's seal of intimidation has been broken, and Turkey's wide array of opposition currents have regained confidence to openly challenge the government. While the Justice and Development Party will remain Turkey's most popular political party, Erdogan will likely fail in his more ambitious political goals in the short term, including his bid to transform Turkey from a parliamentary system to a presidential system to extend his rule beyond 2014. Erdogan's waning political momentum will also hamper slow-moving peace talks with the Kurdistan Workers' Party since the Turkish leader will lack the political consensus to move forward with more controversial reforms to see that peace process through.

The rising challenges on Turkey's plate could also lead Ankara to stall in its commitments to the Kurdistan Regional Government in Iraq this quarter, especially given the uncertain political future of its main ally, Kurdistan Regional Government President Massoud Barzani. The move to create a direct pipeline link between northern Iraq and Turkey without Baghdad's consent is a momentous one that risks eliciting backlash from both Iraq and Iran. This is not an action that Ankara is likely willing to take in the next three months while it tries to calm public unrest at home.
New Leadership Takes Over in Iran

The transition from outgoing President Mahmoud Ahmadinejad to President-elect Hassan Rouhani (whose inauguration will take place in August) will begin the lengthy process of political reconsolidation in Iran. After eight years of Ahmadinejad's polarizing policies, the country's core political, religious, business and security institutions will attempt to coalesce internally again. Though legal measures will likely be taken against Ahmadinejad to limit his clout beyond his presidency, his legacy in challenging the clerical establishment will be subdued, but not erased.

The Rouhani administration will engage in more conciliatory rhetoric toward the West, but there will be no fundamental shift in Iranian foreign policy this quarter. Iran will continue its regional prerogative to shore up its sectarian allies in Syria and Iraq, and the United States will maintain its sanctions against Iran.
Egypt's Continuing Crisis

The July 3 military coup that ousted the Muslim Brotherhood government of former President Mohammed Morsi has plunged Egypt into a period of political uncertainty. The Muslim Brotherhood will attempt to prolong public unrest and use its organizational capabilities to undermine the military-backed transitional government as long as its interests continue to be excluded. The loss of Islamist political fortunes, despite a handful of electoral victories, could prompt some Islamist forces in the region to move away from the political system and back into violent tactics to further their agenda, while transnational jihadists likely will try to take advantage of the opening provided by the Morsi ouster.

Rising summer temperatures will exacerbate the challenges facing the transitional government. Seasonal energy demand will strain the nation's power grid, with rolling blackouts increasing in frequency. Planned subsidy cuts and rationing programs, although unlikely to come into full effect in the third quarter, will add to public frustrations. While negotiations with the International Monetary Fund are expected to continue, Cairo will remain dependent on regional foreign aid to cover its import bill. Though the Persian Gulf Arab states (Saudi Arabia and the United Arab Emirates) will provide financial assistance to support the provisional authority, Cairo's economic situation is likely to suffer additional setbacks due to the instability.

In the face of rising domestic challenges, the government in Cairo will continue its aggressive posturing against Ethiopia's planned Grand Renaissance Dam project. However, conflicting internal views and constraints on Egypt's military options will limit Cairo's protests against the project to diplomatic rhetoric this quarter.
Algeria's Succession Plans Founder Amid Security Threats

As Algerian President Abdel Aziz Bouteflika continues his convalescence following a stroke in May, constitutional procedures will keep the current government in place throughout the quarter in the event that Bouteflika be declared incapacitated or dead. Stakeholders in civilian, military and security circles will continue ongoing negotiations regarding a long-term future leadership transfer ahead of presidential elections in 2014. Any proposed amendments to the constitution regarding long-term succession plans, including potentially establishing a vice presidential position, will take a backseat to domestic and regional security issues as Algiers continues its efforts to manage security fallout in the region from the French-led intervention in Mali. Protests both in northern population zones and throughout the south will continue but will not be of a magnitude that could challenge the stability of the government.
Violent Power Struggles in Libya Affect Energy Production

Volatile negotiations over a new power balance in Libya between Tripoli and militia groups will result in wide fluctuations in Libyan oil production and exports this quarter. Displaced militias and local security forces will respond violently as Tripoli attempts to replace independent militant groups in Benghazi with national military and security forces. Tripoli's control over the distribution of oil revenues will be countered by militant threats against energy infrastructure in this struggle. A constrained Tripoli also will allow regional militants that have been displaced by the Mali intervention to operate in the country's southern desert.
South Asia








Negotiating with the Afghan Taliban

Stratfor identified at the beginning of the year that though numerous obstacles would arise, the U.S. imperative to militarily extricate itself from Afghanistan would drive it toward upgraded negotiations with the Taliban. The public talks between the United States and Taliban that were originally set to commence in mid-June likely will take place this quarter. With the United States still lacking a credible counter to the Taliban, a core disagreement about the extent of Taliban influence in a post-Karzai government will be a stumbling block. The talks will be further complicated by an escalation in Taliban attacks, with some factions trying to gain leverage in the negotiations and others trying to derail the talks altogether.

Pakistan's Delicate Position

Pakistan will be heavily involved in the U.S.-Taliban talks this quarter since the United States expects Islamabad to keep the Taliban in check and as Pakistan tries to ensure its influence in Afghanistan beyond the U.S. withdrawal. Pakistan's new government led by Prime Minister Nawaz Sharif will struggle in its efforts to engage with Pakistani Taliban rebels. Complicating this effort will be the government's attempt to enhance civilian authority over the military as it tries to influence a reshuffle of the military's top brass, scheduled for the beginning of the fourth quarter.
India Continues Diplomatic Efforts amid Domestic Difficulties

This year's monsoon -- earlier and wetter than last year's -- will bring welcome relief to New Delhi after weeks of protests by farmers and citizens facing rolling blackouts. New Delhi will face continued economic pressure from fluctuations in the value of the rupee and a growing trade deficit born of increased energy and gold imports. The Indian government will be unable to check the structural slowdown in growth, leading to a continuously weak performance in Indian manufacturing and exports, though some sectors will be able to maintain slow growth.

These domestic distractions will not impede India's ongoing diplomatic engagement with the broader Indo-Pacific basin: New Delhi's outreach will continue focusing on Myanmar, Japan and Australia even as India strives to become more accommodating toward Beijing. New Delhi will also be involved in low-level diplomatic discussions with Pakistan's new government as both countries look ahead toward the eventual U.S. drawdown of forces in Afghanistan. While Pakistan will rely on its links to the Taliban and various militant groups ahead of negotiations, India will continue supporting the Karzai administration through offers of military training, arms deals and infrastructure investment.
Bangladesh Endures Unrest Ahead of Elections

Dhaka will face a difficult quarter of sustained public unrest. The lead-up to local elections (which could take place as early as October) ahead of next year's national elections will instigate violent confrontations between supporters of the ruling Awami League and the opposition Bangladesh Nationalist Party. Political demonstrations -- both by Islamists and groups of laborers -- and associated violence will also be a pervasive theme of the third quarter as both groups take advantage of a distracted Awami League government to establish new political links and negotiations with the opposition ahead of potential national general elections in the fourth quarter.
Sri Lanka's Tamil Issue Takes Center Stage

Sri Lanka's Sinhalese nationalist government will attempt to reform its controversial 13th constitutional amendment ahead of Northern Provincial Council elections in September 2013. The parliament will attempt to limit the elections' use as a referendum on Tamil regional autonomy in an effort to cement Sinhalese authority over the country's traditionally restive Tamil Hindu and Muslim communities.

President Mahinda Rajapaksa will attempt to revise the 13th amendment, imposed by India in the 1980s, to limit the ability of the mainly Tamil northern region to set up a local government administration. The country's Tamil population and its supporters on the Indian mainland will appeal to New Delhi, but India's involvement in this dispute will be constrained as it struggles to balance its Tamil constituency with its strategic need to avoid pushing Sri Lanka deeper into China's sphere of influence.
Latin America








Mexico Focuses on Reforms and Security

Mexico's relatively steady progress on an array of legislative reforms is in line with Stratfor's annual forecast. Mexico will continue to see a flurry of legislative activity in the third quarter, likely including the country's most ambitious attempt at energy reform in decades. While energy reforms will be presented and negotiated in the coming three months, they are unlikely to be passed until the fourth quarter of 2013 or even early 2014. Because the ruling Institutional Revolutionary Party lacks a simple majority in both houses of Congress, these reforms will need the support of at least one other major party. The National Action Party is likely to partner with the Institutional Revolutionary Party to pass the reforms, but it will use its crucial support to exact concessions and try to shape the reforms according to its own designs. Mexico's other major party -- the Democratic Revolutionary Party -- will vociferously oppose the reform and encourage social unrest within limits to try to block the government's efforts.

The Mexican government will continue consolidating control over the country's security agencies at the federal level and attempting to recast the drug cartels as a law enforcement problem rather than a military issue. However, there will not be a significant reduction in military operations in areas with high levels of violence. Any additional military deployments will occur only if the security situation in a particular region significantly deteriorates and threatens key commercial routes, as was the case in Michoacan in the second quarter, when the military was sent in to quell violence associated with organized crime and self-organized citizen militias.

Though we failed to highlight this trend in previous forecasts, Mexico is becoming more independent from the United States in its strategy to manage internal security. This became evident with the Pena Nieto administration's subtle but significant move in the second quarter to restructure the U.S.-Mexico intelligence relationship and centralize control in Mexico's Interior Ministry.
Venezuela Contends with Economic Problems

Venezuelan President Nicolas Maduro has strengthened control over the major pillars of the state with more ease than we initially expected, but he will continue struggling to reverse Venezuela's steady economic deterioration. With domestic production in decline and the government forced to import ever more consumer goods, foreign exchange availability and goods shortages will continue to plague Maduro's administration.

The government will probably hold another foreign exchange auction under the newly created Ancillary Foreign Currency Administration System, also known as SICAD, in July while attempting to implement a new foreign exchange system, with some limited success. The government will simultaneously continue working bilaterally with trade partners to secure food shipments. While these measures may temporarily ease shortages of food and other consumer goods in the third quarter, it will do little to address the underlying issues causing these problems.

Although a range of financing deals for the energy sector were signed in the second quarter, the poor state of energy infrastructure and the time needed to implement changes make a significant increase in production in the third quarter unlikely. The national oil company Petroleos de Venezuela could attract additional financing from existing partners such as Royal Dutch/Shell, but it is not likely to see substantial investment from new partners in the coming months.

Lacking credibility at home, Maduro will continue to stoke tensions with Venezuela's two most important neighbors: the United States and Colombia. Despite heated rhetoric, the relationships will remain at the status quo throughout the next quarter. Colombia, which relies on Venezuela's support in its ongoing peace negotiations with the Revolutionary Armed Forces of Colombia, or FARC, will do its best to avoid an escalation. U.S. Secretary of State John Kerry and Venezuelan Foreign Minister Elias Jaua met in the second quarter, re-establishing dialogue, but a more substantial improvement in the relationship such as exchanging ambassadors is unlikely to occur in the coming quarter.
Colombia Focuses on Peace Talks and Attracting Investment

Ongoing peace negotiations between the Colombian government and the country's largest rebel group, the FARC, will continue to advance slowly in the third quarter, despite the government's best efforts to speed up the process. Given the relatively solid foundation of the negotiations, we originally forecast that the government stood a good chance of concluding the talks by November. However, amid numerous obstacles the two sides have signed an agreement on only one of six points, meaning that a conclusive deal is unlikely to be reached before next year.

The Colombian government will continue promoting foreign direct investment, particularly in its mineral extraction industries, but will also face increasing pressure to mitigate the strains on the manufacturing and agricultural sectors caused by appreciating currency and increased competition from abroad.
Brazil's Government Attempts to Placate Protesters

The intensity of the unanticipated protest movement in Brazil that developed in the second quarter will diminish during the third quarter. Leftist groups affiliated with the ruling Workers' Party will quietly scale back their protests, and the remaining groups lack the organizational structure and leadership to maintain the intensity of the protests.

We do not expect President Dilma Rousseff's governing coalition to fracture, but the protest movement has exposed more clearly the deep rifts between Brazil's right and left political ideologies, and we expect polarization to increase throughout the quarter and in the lead-up to elections in 2014. Rousseff and former President Luiz Inacio Lula da Silva are likely to continue reaching out to the many social groups -- including unions, laborers and students -- that form the Workers' Party support base in an effort to reconsolidate the leftist bloc against the challenge of an increasingly vocal opposition.
Tensions Grow Within Argentina's Government

In Argentina, tensions between the judiciary and President Cristina Fernandez de Kirchner's administration will likely intensify in the third quarter. The courts recently blocked the president's plans to democratize the judiciary and the central bank's efforts to restrict currency convertibility; the government will probably challenge both of these decisions.

In the meantime, Fernandez will work assiduously to prevent currency and price instability from triggering a broader crisis ahead of the October legislative elections. Price and currency controls will be extended to mitigate inflation and capital flight. Meanwhile, the opposition will attempt to build coalitions on the provincial level in an attempt to prevent Fernandez's Front for Victory faction of the Justicialist Party from gaining the two-thirds majority needed to change the constitution.
Complications Develop Within Mercosur

As we identified at the beginning of the year, regional splits have deepened in Latin America, with additional countries joining Mercosur and members of the Pacific Alliance integrating further. A year after Paraguay's suspension from Mercosur, the trade bloc will offer the country the opportunity to be reinstated as a full member after President-elect Horacio Cartes is inaugurated in mid-August. Despite Paraguay's discontent with Venezuela's admission during its suspension, Paraguay probably will accept its readmission in order to maintain a healthy relationship with Brazil.

Two other countries -- Bolivia and Ecuador -- will make progress toward becoming the bloc's sixth and seventh members. This will expand Mercosur at a moment when two of the founding members of the bloc, Brazil and Uruguay, are growing more dissatisfied with the organization due to Argentina's protectionist policies and ongoing economic malaise.

Reaping fewer benefits from Mercosur and facing tough economic climates at home, both Brazil and Uruguay will continue looking elsewhere to develop relationships with new partners (the European Union for Brazil and the Pacific Alliance for Uruguay) while Mexico looks to Asia. They will make incremental progress toward this end in the third quarter, but ultimately they will be constrained by a geopolitical and strategic commitment to Mercosur.
Sub-Saharan Africa







South Africa Focuses on Strikes

In the coming quarter, South Africa's attention will be consumed by the country's "strike season," which will be detrimental to the mining sector. Most wage agreements between unions and coal mines will expire at the beginning of the third quarter or the end of the second quarter. Wage agreements in other mining sectors, including but not limited to platinum and gold, are set to expire as well.

Last year's strike season was hijacked by aspiring politicians before the December 2012 African National Congress conference. No similar political event will occur this year to increase the level of violence during strike season. However, protests, strikes and some bloodshed will occur this quarter. The more hostile Association of Mineworkers and Construction Union, which has gained a larger share of workers than the National Union of Mineworkers in the platinum sector, will be the most militant player in this struggle.

The platinum, gold and diamond sectors will probably be most affected by strike season. Companies producing these types of minerals have been hit harder by falling commodity prices and increased energy and labor costs, and they have the least amount of room to negotiate on unions' demands. This puts them at a higher risk of instability. Other sectors, such as coal and iron, will see relatively tamer unrest. Should the violence escalate significantly or the negotiations stall, particularly in the coal sector, the African National Congress and the rest of the government will intervene to mitigate disruptions.
Political Strife Could Hamper Development in Mozambique

As we noted in the annual forecast, Mozambique will continue attempting to develop its infrastructure and attract foreign investment in the natural gas and coal industries. However, internal political tension could lead to an escalation in militant activity by the opposition group Mozambican National Resistance, also known as Renamo, in the central provinces where the country's young coal industry is concentrated. Renamo could follow through with threats to attack commercial trains and trucks in an attempt to force the government to grant it greater inclusion.
Mali Progresses as U.N. Takes Over Stabilization Efforts

The African stabilization force in Mali will come under U.N. command in the third quarter. The deployment will include troops from various member states, but African forces will make up the core of the mission. The U.N. operation will be able to secure population centers, aided by the continued drop in jihadist attacks by groups such as the Movement for Unity and Jihad in West Africa.

Countrywide elections are scheduled for July 28 and will be a critical first step in negotiations between southern and northern Mali to determine the political status of the Tuareg. The National Movement for the Liberation of Azawad -- the Tuareg group in control of the northern capital of Kidal -- will limit its participation in this political process. The group's priority will be maintaining influence over Kidal and surrounding areas.

Militant elements that declined combat in Mali when France intervened have traveled through the vast desert and crossed the porous borders of Mali, Algeria, Niger, Chad and especially Libya. These jihadists are capable of conducting infrequent attacks against relatively exposed targets and thus will pose a moderate threat in the region. Militants who survived the French intervention have escaped to remote locations but have not yet acquired the kind of sanctuary needed to rebuild their capabilities for more significant operations. Niger, which has contributed troops to the security operations in Mali, will remain a key target for militants attacking local security forces and French assets in the region.
Nigeria's Fight Against Militancy Continues

In line with our previous forecasts, Nigerian security personnel will continue pressuring Boko Haram and Ansaru in the country's north, particularly in Yobe and Borno states. Even if Nigerian President Goodluck Jonathan lifts the state of emergency in those states, the military will maintain a counterinsurgency offensive against the two groups. Boko Haram and Ansaru thus are unlikely to conduct attacks in the country's south. As pressure from the Nigerian military mounts, they will rely on the porosity of Nigeria's borders with Niger, Chad and Cameroon to escape the Nigerian offensive.

Armed assaults, theft, oil bunkering and kidnappings by Niger Delta militants will damage pipelines and affect southern oil production, but a sustained offensive is unlikely. Politicians from the south will renew their efforts to pass Nigeria's Petroleum Industry Bill as the National Assembly returns in September after a short recess in August. However, the bill is unlikely to pass in the third quarter. Nigeria's oil and natural gas industry will see a further redistribution of its exports toward India and other Asian energy importers as the United States (its traditional market) continues to increase its domestic production.
Sudanese-South Sudanese Tensions Endure

An ongoing energy dispute between Sudan and South Sudan will continue this quarter as Juba maintains its support of rebel groups operating in Sudan and as Khartoum threatens to cut off oil exports. Despite the aggressive rhetoric on both sides and the legitimate threat of sporadic disruptions to oil production, the two will avoid sustained cutoffs due to their mutual interest in maintaining oil revenues.

Read more: Third Quarter Forecast 2013 | Stratfor