Quarterly Forecast: Emerging from the Wreckage

Stratfor Strategic Forcasting ^ | 10/11/01 | N/A

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Quarterly Forecast:
Emerging From the Wreckage
1730 GMT, 011001

Summary

STRATFOR uses a net assessment methodology in building and maintaining forecasts. Through geopolitical analysis, we build a virtual model of the world: the net assessment. We then search daily for the anomalies that reinforce, modify or refute this model and the forecasts that emerge from it.

In building the net assessment, we attempt to identify, weigh and factor in all pertinent economic, political, strategic, demographic and geographic variables. Terrorist attacks can be anticipated and factored in. But terrorist attacks of the magnitude the United States experienced Sept. 11 are like asteroid strikes: One cannot plan for them; one can only pick through the wreckage to see what is left to carry forward.

In hindsight, STRATFOR's third-quarter forecast, entitled "Lesser Powers Make Their Voices Heard," seems almost eerily accurate. No, STRATFOR did not forecast the attacks on Washington and New York. Like others, we failed to anticipate the capability or intent of militant extremists to carry out a coordinated attack of this magnitude.

STRATFOR did note that, as the major powers paused in the third quarter to evaluate their relations, "… factions such as Islamic militants and Colombian guerrillas will seize this time to make their voices heard and to stake their places in the new global constellation."

However, we anticipated the militants would focus on vying for support among the great and secondary powers. Our forecast continued, "… with the United States more aggressively confronting China, Russia and most everyone in between, opportunities for militants to profit from being useful have begun to re-emerge. We anticipate a gradual but steady increase in violent political action through the next quarter and into the foreseeable future."

Clearly, our expectations of militant activity undershot the mark. But overall, our third-quarter forecast was on track.

As STRATFOR forecasted, the third quarter saw the major powers step back and re-evaluate their positions while secondary powers struggled to find their new place in the middle. China -- with World Trade Organization accession and an Olympic bid on the table, and with a succession debate under way -- tried hard to maintain a positive external image. Russia remained placid, still fixed on forging relations with Europe and finding a place alongside the United States. Washington, while not withdrawing from its positions on issues like the Kyoto accord and missile defense, began to temper some of its unilateralist rhetoric.

Although the European Union did not fracture to the extent STRATFOR expected, national interests over those of the union continue to strain the collective fabric of Europe. In Japan, Prime Minister Junichiro Koizumi presented a series of uninspiring economic reforms and subsequently diluted them. Other secondary and tertiary powers such as Venezuela, Malaysia and India attempted to redefine their roles as regional leaders while Washington, Beijing and Moscow reassessed their global positions.

September 11

On the morning of Sept. 11, this slow evolution of international relations was abruptly derailed. Underlying assumptions of countries' political and economic priorities were shattered. Caught off guard by militant extremists who are believed to have had ties to Osama bin Laden's al-Qa'ida network, the United States declared it was going to war.

Over the long term, the strategic interests that shape countries' foreign and domestic agendas will not change. Geography, demographics and economics impose immutable constraints on countries' political options and military actions. But over the short term, and within those constraints, countries are free to order and act on shifting priorities.

The Sept. 11 attacks on New York and Washington created new challenges and new opportunities for the United States and the rest of the world. Washington has declared a war on an elusive, amorphous and transnational enemy, one that will require substantial trade-offs on other U.S. priorities. Would-be allies are already submitting their bills for cooperation in this campaign, and their demands are costly and often contradictory.

On the economic front, any hope of a U.S.-led global recovery this year is gone, leaving Europe and Japan to sink deeper into recession and threatening the collapse of weaker economies like Argentina or Turkey. U.S. economic fundamentals are still strong and -- bolstered by government defense and disaster relief spending -- will pull the United States out of its recession, but not until next year.

Meanwhile, the U.S. defense, intelligence and foreign policy apparatuses are off-balance, and the time is ripe for an opportunistic strike. Indonesia and the Philippines are high-risk targets for follow-on attacks by the al-Qa'ida network. The conflict in Macedonia, now low on Washington's priority list, could flare up from either side. Chechen militants have already resumed major attacks on Russian forces, complicating Washington's relations with Moscow. And with progress on resolving the Israeli-Palestinian conflict now central to U.S. efforts to build a regional coalition, both sides in that dispute are looking for ways to exploit the situation.

The third quarter ended with the U.S. foreign policy agenda in tatters. The fourth quarter will see Washington attempt to pick up the pieces. It will also see U.S. allies and enemies seek to take advantage of this disruption.

The Military Dilemma

The United States enters the fourth quarter having declared war on terrorism. More specifically, it has declared war on the various groups operating in loose affiliation under the banner of al-Qa'ida and on the countries that aid and abet them as well as on countries that refuse to assist the United States in this campaign.

Tactically, this war is an asymmetric nightmare. Groups and individuals involved in al-Qa'ida are present in some 60 countries, but active combatants number perhaps only in the tens of thousands. The militants' wide dispersal and minimal physical infrastructure limits available targets for U.S. attacks and minimizes the amount of overall degradation to the organization the United States can inflict. Available targets are rarely appropriate for the U.S. military's preferred weapons and tactics, and each strike requires the deployment of massive amounts of political and military resources.

In turn, al-Qa'ida's tactics, deployment and nature make further attacks inevitable but extremely difficult to predict or defend against. al-Qa'ida is a collection of autonomous groups, which in turn operate in autonomous cells, which are already deployed in target countries spanning the globe. It is an organization capable of mustering 19 suicide attackers for a single coordinated operation and simultaneously bombing targets in multiple countries. Al-Qa'ida has demonstrated its capability for tremendous operational secrecy, and it has carried out effective disinformation and psychological warfare campaigns. Its unconventional, small-unit actions can cause disproportionate damage while exposing only a small portion of the group to retaliation.

Al-Qa'ida appears to be developing a new strategy that transcends terrorism. Terrorism is a simple tactic that aims to frighten a population into forcing its government to abandon or alter a policy. It is a psychological technique, and it is difficult to find a case in which that technique has worked. The World Trade Center and Pentagon are symbolic targets, good for terrorist tactics, but they had tangible value as well.

Intentionally or inadvertently, however, the attacks on Washington and New York caused substantial damage to the U.S. financial and transportation infrastructures. They shut down air transport for days and disrupted it for weeks. They closed and then battered the U.S. stock market. The economic effects of the attacks will last well into next year.

Al-Qa'ida may have taken to heart the conventional warfare experience of its affiliated groups on the battlefields of Afghanistan and Chechnya. This could have spilled over into the group's strategic planning. But if the attackers did not plan this outcome, they are now well aware of such potential. Infrastructure attacks will feature prominently in the future.

Targeting al-Qa'ida is a strategic nightmare as well. The organization is not a monolith, single-mindedly targeting the United States out of blind hatred. It comprises groups involved in a number of longstanding and complex regional disputes. To target al-Qa'ida is to take on such intractable struggles as Kashmir, Chechnya, Mindanao and Israel. Each of these conflicts is more than the governments involved have been able to solve. The United States now seeks to confront them all.

The wide dispersal of al-Qa'ida and its supporters makes any attempt to fight it extremely costly. The United States will need assistance in intelligence-gathering. It will need bases and access. It will need help from the banking and legal sectors of dozens of countries. And it will need political support. This marks a major reversal from the first half of this year, when the United States pushed ahead unilaterally with controversial policies that drew the ire of friend and foe.

The rest of the world is well aware the United States now needs assistance, and it is already drawing up the bill. It will not be cheap, nor will it be simple to pay.

India and Pakistan are prime examples. Prior to the attacks, the United States was courting India as a strategic partner. India has a large economy, it has a large navy, and it is emerging as the dominant power in the Indian Ocean basin. India was quick to offer intelligence and bases for U.S. retaliatory strikes. Its price was the inclusion of Pakistan and Pakistan-backed Kashmiri rebels among the list of targets.

However, for an effective attack on Afghanistan and to stabilize Afghanistan after the campaign is over, the United States needs the support of Pakistan -- a country with little to offer but an amateur nuclear program, hordes of Taliban recruits and the keys to Kabul. Moreover, if the United States accepts Indian aid at the expense of Pakistan, it risks losing the support of other Muslim countries throughout the Middle East. In short, the price for just a portion of only the first battle in the war on terrorism is the potential loss of a valuable strategic ally, India.

Russia's bill is higher. Russian President Vladimir Putin is ready to offer the use of bases within the Commonwealth of Independent States as well as Russian intelligence, logistical and possibly even military support for retaliatory actions in Afghanistan. Russia also offers valuable access to the governments of Iraq, Iran and Syria.

In return, Moscow wants free rein to suppress the Chechens as it sees fit, recognition of its sphere of influence in Central Asia, no NATO expansion into the Baltic states or Ukraine, no national missile defense program, more trade and investment and an enhanced role on the international political stage.

Even Washington's NATO allies see the U.S. predicament as a chance to contain Washington's unilateral foreign policy. Sources indicate they have already begun to resist U.S. requests for intelligence support.

Israel poses the biggest dilemma for the United States. Washington needs Israeli intelligence, but it also needs Israel to maintain a low profile so as not to drive away Muslim support for the U.S. campaign. Israel sees this as an opportunity to lock down unambiguous U.S. backing for its actions against the Palestinians. To offer such support, however, would only exacerbate one of the core sources of opposition to the United States in Muslim countries.

The Muslim states, likely battlegrounds in this war on terrorism, present another problem. Support for al-Qa'ida and its agenda runs deep among the populations and sometimes within the governments of these countries. Support for the United States risks enflaming domestic opposition or exposing official complicity in al-Qa'ida's actions. Pakistan and Saudi Arabia, both critical to the campaign, are particularly at risk.

The fourth quarter will see little on the military front. The United States lacks the intelligence assets, the basing, the logistics and the forces in theater to begin anything of substance. It must temper its initial actions to maintain an alliance necessary for a protracted campaign. An ill-conceived symbolic strike not only could portray a lack of U.S. options but also could be counterproductive -- proving assumptions of U.S. blind heavy-handedness, destabilizing alliances and risking opportunities to strike effectively in the future.

Winter is approaching in Afghanistan, and activity on the ground is likely to focus on assisting the Northern Alliance in securing positions to survive until spring. This will also serve to establish a beachhead in Afghanistan for a more effective campaign next year. Some effort will have to be expended on tending to the refugee crisis as well, both to build support in Afghanistan and maintain it throughout the Middle East.

Finally, debate is emerging over homeland defense and security measures. This will divert energy from other aspects of the anti-terrorism campaign. Recriminations and restructuring of the U.S. intelligence community will likely slow the U.S. campaign as well.

The Economic Fallout

Until the Sept. 11 attacks knocked the wind out of the U.S. economy, the United States was poised for a comeback. The question had been, would the American recovery come fast enough and be robust enough to ultimately pull the rest of the world back to strong growth?

That is all gone. American consumer confidence and the dollar tumbled predictably. Investments will follow, and the U.S. airline industry will remain on government-subsidized life support for the remainder of the year, at the very least. The United States is now stuck in recession at least until the first quarter of 2002.

The follow-on effects are deep and pervasive. As expected, Japan was already experiencing negative growth during the third quarter. Now, without American consumers to buy Japanese exports, its economic implosion will pick up speed. Japan has run out of feasible monetary policy options and is quite literally begging the United States and Europe to weaken the yen.

Europe was teetering on the verge of recession, with the three largest euro-economies -- France, Germany and Italy -- together averaging negative growth. Europe's near future, though not as dark as Japan's, is also grim. And while Japan only has to worry about Japan, Europe is frantically preparing to launch its new currency. The first real test of European unity under fiscal duress begins now.

The economic crises in Argentina and Turkey will reach breaking points during the fourth quarter, with defaults and devaluations now a foregone conclusion. In Mexico, President Vicente Fox's plans for tighter links to the United States are essentially dead. U.S. security restrictions have not yet seriously impacted cross-border truck trade, but if the United States truly wants to crack down on terrorism, it's only a matter of time before Mexico hears slamming doors.

Although NAFTA will survive, other as-yet-unborn trade agreements will be deferred indefinitely. As nations scramble to defend their economies from the economic fallout, the World Trade Organization might as well cancel its November summit, and the Free Trade Area of the Americas will be left to collect dust. This quarter's themes are security and terrorism; trade will go nowhere.

The oil states could feel the heaviest economic blows. Barring a major U.S. military action against an oil producer, oil prices will plummet mercilessly. With a global recession manifesting and OPEC unable -- at least initially -- to enact cuts, the stage is set for a price glut. Oil producers on any continent will feel the pinch.

U.S. economic fundamentals, however, remain solid. The United States was in the beginning of its recovery, having already trimmed the fat from the markets, particularly in the tech sector. American defense and security spending may pull the United States out of its new recession, but that will not happen this quarter.

Most important, it cannot be forgotten that terrorist attacks are by their very nature disruptive and unpredictable. This forecast assumes that the power behind the Sept. 11 attacks will fail to pull off any other economically significant or substantially damaging attacks against the United States, its allies or its interests.

If that assumption proves false, all bets are off.

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