2011 Annual Forecast Summary

One of the biggest questions in 2011 concerns Iraq. The United States is officially obligated to complete its withdrawal of combat troops from Iraq by the end of this year, a move that could reshape the balance of regional power. If the United States withdraws, it leaves Iran the single most powerful conventional force in the region, and leaves Iraq open to Iranian domination. The ripple effect alters the sense of security for the Saudis and other Arab regimes, forcing them to accommodate a more powerful Iran. This effectively ends the balance of power in the Gulf region, something that Washington can little accept.

 If Washington does not carry out a meaningful withdrawal, then Iran retains the option of stirring up militias and unrest in Iraq, increasing conflict and the attendant U.S. casualties, all while the U.S. presidential election season begins ramping up. From the political perspective, this is not acceptable. From the geopolitical perspective, allowing Iran (or any other single power) to dominate the region is unacceptable. We think the latter will take precedence over the former, and the United States will seek to retain a strong presence in Iraq rather than withdraw from the region. However, the United States is not likely to carry out any major military action against Iran.

That leaves one path if the United States wants to get out of Iraq at some future point: an accommodation (even if quiet) with Iran to ensure both U.S. and Iranian interests. While it is not likely to be very public, we expect a significant increase in U.S.-Iranian discussions this year toward this end.

While Washington looks to extricate itself from Iraq without leaving power in the region unbalanced, farther east China is struggling with its own economic imbalances. STRATFOR has long been perceived as bearish on the Chinese economy. We are less bearish than realistic, and the reality is that the longer an economic miracle continues to be miraculous, the more likely it is to end its amazing run. We cannot help but notice the similarities between China and its East Asian economic predecessors: Japan, South Korea and the Southeast Asian “Tigers.” The Chinese have shown great resilience, but the global economic crisis revealed the weaknesses of China’s export-based model. While government investment now makes up the lion’s share of the Chinese economy, Beijing is walking a very difficult path between rampant inflation and rapid economic slowing.

As China’s leaders search for a solution and try to avoid the social consequences of a slip in either direction, they are also focused on the next major generational leadership transition, slated to begin in 2012. This discourages any radical or daring economic policies, and stability will remain the watchword as the politicians jockey for position. But given the status of the Chinese economy, and the continued effects internationally of the global slowdown, daring policies and ideas are perhaps what China needs. While Beijing is likely to procrastinate in making any radical economic policy changes, and thus avoid the likely short-term chaos that could entail, the longer the leaders delay fundamental action, the worse things may be when the system starts to unravel.

Meanwhile, Russia will continue to attempt to roll back U.S. influence in Eurasia and solidify its own. Russia has largely completed its retrenchment to the borders of the former Soviet Union, with the notable exception of the Baltic states and to a lesser extent the Caucasus, and Moscow is now secure enough to shift from its more assertive stance to one that appears more conciliatory. This new strategy will play to all its relationships around the world, but will be effective in moving Russia’s influence farther beyond its former Soviet sphere and into Europe — where the United States has been dominant since the end of the Cold War. Russia’s focus this year is to mold understandings with states like the Baltics, while entrenching its strong relationship with Germany. Moscow knows that its time to act freely is ticking down as Russia watches the United States wrap up some of its commitments in the Middle East, but Moscow will also be looking internally, as the political elite position themselves ahead of the 2012 elections.