3rd Quarter 2002
One Year Later -- Where Are We?
8 July 2002

Summary

The third quarter of 2002 rounds out a year since the attacks by Islamic militants on the World Trade Center and the Pentagon. In that time, the tenor of global politics has changed deeply and comprehensively. But one year later, is the United States any closer to ensuring its security than it was on Sept. 11, 2001? The third quarter finds much of the world well under way in adapting to Washington's global crusade against al Qaeda, but the burning question remains: Who will strike next, and when?

Analysis

At Stratfor, we try to avoid analyzing the world from an exclusively U.S. perspective. But, given the scope and intensity of the United States' war on al Qaeda, there are few countries, groups or issues that have not been impacted by the campaign, even if that impact is that they are now ignored as peripheral to Washington's main foreign policy focus. Therefore, this third quarter forecast is largely driven by the U.S. war on al Qaeda.

This quarter will mark the first anniversary of the Sept. 11 attacks on the World Trade Center and the Pentagon. The shock of those attacks has worn off, the Pentagon's façade has been restored, the World Trade Center debris has been removed. Initial fears of follow-on attacks, born out of staggering ignorance of the threat, have been mitigated to some degree through an all-out effort by U.S. and allied intelligence services. Around the world, countries have had time to evaluate the thrust of U.S. pressure and have settled into strategies for dealing with Washington. Overall, the U.S. war on al Qaeda has settled into something of a lull, at least on the surface.

The burning questions for the third quarter are: What exactly is the status of the war on al Qaeda? How real is this apparent lull, and how long will it last? Is al Qaeda succeeding in mustering the Islamic world against the United States? Has the United States succeeded in fracturing the group, or in thwarting potential strikes? Most important, which side strikes next, where, and how?

Attempting to discern the status of the war from the scattered intelligence currently available is potentially misleading. We simply lack the parameters, variables and data necessary to empirically determine the situation on the battlefield.

While U.S. intelligence knows how many al Qaeda suspects it has identified, arrested or killed, it does not know al Qaeda's initial size or its regeneration rate. Al Qaeda's global distribution and constantly shifting tactics offer the group a potentially limitless set of targets, rendering it nearly impossible to define a set of likely targets. The only validation that U.S. homeland security efforts have succeeded is in the negative -- but does the lack of an attack mean one was thwarted or that one was never planned in the first place?

This uncertainty -- the idea that with al Qaeda, anything is possible -- was demonstrated clearly in the months after Sept. 11, when the U.S. government issued almost daily warnings of potential attacks from shopping malls to monuments, with anthrax, nuclear weapons, truck bombs or crop dusters.

If the game is connect the dots, STRATFOR can scarcely do better than anyone else in discerning the course of the war. But if we step back and look at the fundamental goals of al Qaeda and the United States, we can rephrase the question of the status of the war to one of how successful al Qaeda and the United States have been in achieving their respective goals. From this we can hope to determine the degree of urgency on both sides for altering the tempo or substance of the conflict.


The War From Al Qaeda's Perspective

From al Qaeda's perspective, the year since the attacks on New York and Washington has yielded mixed returns. The militant group did not expect the strikes to drive the United States from the Middle East, nor does it expect to oust U.S. political, military and economic influence from the region through unilateral military action.

Rather, al Qaeda sees itself as a vanguard. Its mission is to inspire popular uprisings throughout the Islamic world in order to topple secular and heretical regimes beholden to the United States and ultimately recreate the Islamic empire of the 15th Century. More than an attempt to spark terror in the United States, Sept. 11 was an exercise in inspirational propaganda aimed at the Islamic masses. It was a recruiting advertisement.

On that front, al Qaeda has been less than successful. Aside from some sporadic and short-lived demonstrations in Lebanon, Egypt, Saudi Arabia, Pakistan and elsewhere, there was no groundswell of popular unrest. The Saudi, Egyptian and Pakistani governments, on the front lines of the struggle with Islamic militants, have all managed to solidify their hold on power.

Though there was no mass uprising in response to Sept. 11, the degree to which individual recruits have been inspired to become involved in the struggle is not yet apparent. Al Qaeda has succeeded in dramatically shifting the perception of U.S. power in the region, challenging the notion of the United States as an unassailable superpower. It also has demonstrated that it could strike the very heart of the United States and survive. Ironically, it has been assisted in this by the Bush administration, which daily goes before television cameras to reiterate what a massive threat al Qaeda poses to U.S. citizens and interests.

Al Qaeda has seized the initiative and set the agenda, focusing U.S. attention on the fight to the exclusion of many other concerns. It has redefined the global priorities of the only superpower -- no small feat for a group of some 3,000 dedicated militants. It has shown its ability to instill in the United States a feeling of deep insecurity.

The group also has succeeded in achieving another of its goals: demonstrating the collaborative nature of local regimes. Pakistani President Pervez Musharraf, after much squirming, is clearly and actively assisting the United States against Islamic militants. Jordan has done nothing to hide its continued affiliation with the United States, nor have Qatar, Bahrain or Oman. And Yemen, though dancing to the same contortionist beat as Pakistan, continues to assist Washington. But this collaboration has failed to incite broad rejection of the regimes.

Al Qaeda has had limited success in pitting the United States against Islam, in dragging the United States into an interconnected, region-wide web of conflict and in building tension between the United States and both Middle Eastern regimes and Washington's European allies. It sacrificed Afghanistan to this effort -- and though the Taliban did not dig in and fight as al Qaeda might have preferred, normal Afghan tendencies ensure that U.S. nation-building experiments in Kabul are destined to be sidetracked by simmering rural warfare. Both Riyadh and Pakistan inadvertently assisted in this effort, attempting to tie the United States down in intractable conflicts in Kashmir and the Palestinian territories. Yet here too, the campaign has failed to pan out at the grassroots level.

Over the past quarter, U.S. officials reported increasing communications traffic among identified and suspected al Qaeda operatives. Although this at first resembled the diversionary tactics used by al Qaeda prior to previous attacks, this time it appears to be the byproduct of an internal security check. It was only through excruciating attention to security that al Qaeda was able to stage large-scale, multi-year, multi-continent operations such as the African embassy bombings and Sept. 11.

Following the September attacks, the United States launched a global sweep -- tracking the militants' communications, movements and finances and arresting people who might possibly have some affiliation with al Qaeda. But authorities did not arrest everyone. Al Qaeda knew which of its members were dead or in custody, but it could not know which ones were compromised but left under observation in the field. The group faces a serious counterintelligence challenge and so has been pulsing the system, looking for leaks from within the organization as well as weak spots in U.S. security measures. This uncertainty in the face of security risk may explain why there were no significant follow-on attacks after Sept. 11: Al Qaeda could not afford the risk.

Recent reports suggest al Qaeda may be taking a radical approach in dealing with this uncertainty. The organization reportedly is devolving planning and operational control to mid-level leaders, essentially breaking up and dispersing into a number of mini-al Qaedas. This strategy will allow an increased tempo of operations against a broader distribution and variety of targets. But, without global planning and integration, the strikes will have lower impact and more operations will fail.

In sum, al Qaeda is probably not as far ahead in the Middle East as its members would like to have been by now, but the organization is patient and on the right track. And an Islamic empire cannot be created overnight. Strategically, al Qaeda has no burning need to strike again soon, but tactically, it couldn't hurt. If the militants go much over a year without responding to the continuing wave of U.S. arrests, they will start to lose momentum. The most productive operation for al Qaeda may not be a "terror" attack but rather manipulation of one or more existing conflicts in the Islamic world to drag Washington into an ever more complex and costly military engagement.

The $50 billion question is, will al Qaeda launch a major strike in the third quarter, perhaps on one of the many holidays that promise major crowds or high symbolic value -- Independence Day, Labor Day, Rosh Hashana, Sept. 11 or Yom Kippur? Though it is a gut-wrenching call to make, we would have to argue that the security environment rules out a major attack, though one or more smaller attacks of the scale of the Khobar Towers or USS Cole bombings are highly possible.


The War From the United States' Perspective

The United States' primary and immediate goal is to avoid being attacked again. That may seem obvious, but as the bedrock of U.S. foreign and domestic policy, it generates a number of questionable compromises and near-term priorities. It leads to tactical leaps at the expense of long-term strategic interests. And it hands the initiative in the war to al Qaeda: Avoidance of injury is a reactive, defensive principle.

The U.S. administration spent the last quarter allowing itself to be distracted in Israel/Palestine and in Kashmir. Both diversions were promulgated by erstwhile allies seeking to dodge U.S. pressure to cooperate in the war against al Qaeda. Saudi Arabia tendered an Arab-Israeli peace proposal while simultaneously backing Palestinian militants. Pakistan, due to a crisis it allowed to develop in Kashmir, was "forced" to withdraw some of the forces it had tasked with helping the United States round up al Qaeda members.

Washington ended the quarter having at least temporarily shoved both conflicts to the back burner. The United States is finally recovering some clarity of focus and has pointedly reiterated its expectations of cooperation to both Saudi Arabia and Pakistan. The third quarter will test the ability of Riyadh and Islamabad to withstand intensified internal and external pressure.

But while the United States is emerging from a three-month detour with an improved grasp of the mission on a tactical level, it is not much better off strategically. Forward deployment of U.S. intelligence assets and the concerted efforts of the U.S. intelligence community clearly are generating some successes -- notably scores of arrests and the apparent interdiction of some minor al Qaeda plots. But Washington is still trying to discern and adopt an overall strategy. It continues to vacillate between talk of a marginally valuable but emotionally satisfying bombardment of Baghdad and a broad forward deployment of contingency forces waiting to respond to whatever may erupt.

Washington is still struggling to find some traction and focus. It has not been able to seize initiative in war and, after the second quarter, has lost a great deal of momentum as well.

Though the United States continues to stumble, it is stumbling in a clear, if unacknowledged, direction: It is stumbling into empire. Al Qaeda is a globally dispersed foe, operating at the grassroots level in more than 60 countries. Combating it requires not only a series of open-ended deployments to places as far-flung as Kyrgyzstan, Georgia, the Philippines, Kenya and Yemen but also deep U.S. involvement in the political and social workings of these countries. Seeking only to secure its own defense, the United States is occupying and usurping the sovereignty of countries throughout Eurasia and Africa.

Though in strategy the United States is not wantonly imperial, its tactical behavior is inexorably driving toward empire. Other countries -- great and regional powers such as Russia, China, Iran and India -- see this, and they are beginning to consciously adopt strategies for dealing with it. Though this evolution will play out well beyond the coming quarter, the roots of long-term relationships are forming now.

The aimless lull into which the war on al Qaeda has settled will be filled this quarter with rancorous domestic politics. Restructuring of the U.S. intelligence community and definition of the Department of Homeland Security will consume energy not devoted to the war and begin to sap energy from the war. Washington's bureaucracies have a life-or-death battle to wage for political and budgetary turf. The now-common string of corporate mea culpas and the accompanying congressional wrist-slappings will but add harmony to these political feuds.

Topping it all off, this domestic conflict will intensify in advance of the November congressional elections, placing tremendous pressure on the Bush administration to make something happen. Americans are an impatient lot and are not fond of ambiguity. The administration already has promised Osama bin Laden's head by Sept. 11 and by September will be desperate for a clear victory or substantial campaign to demonstrate focus, leadership and action.

Therefore, like al Qaeda, the Bush administration will find itself needing to seize the initiative in the third quarter. The military forces and political framework are not in place for a Desert Storm-scale attack on Iraq, and the Afghan model of warfare is not applicable to Iraq's situation either. Realistically, the United States can achieve the most gains against al Qaeda in Saudi Arabia and Pakistan, but these are messy, complicated and not particularly telegenic campaigns. The administration may have to settle for some pinpoint strikes on al Qaeda cells internationally -- backed by successful interdictions of plots at home -- to regain momentum in the public eye.


The Battlefield

The Middle East -- actually the broader Islamic world -- has had something of a reprieve for the past quarter as the United States became tied up in the Kashmir and Israeli-Palestinian conflicts. That interlude has ended: Washington, too long delayed from its primary mission, shut down or backed out of these two peripheral quagmires.

But while it is clearly through with distractions, Washington has yet to express a focus. Questions of the next target and the next strategy remain unresolved. Will the United States launch a conventional attack on Iraq? Will it send more forces to Pakistan? Will it freeze Saudi bank accounts? With massive power at its disposal, a wealth of potential targets and no clear guiding strategy, the United States is a very heavy brick suspended over the entire region. All those not wishing to get squished -- that is to say, everyone -- are trying to find nice, deep holes in which to hide.

The pressure clearly is on Saudi Arabia and Pakistan. Riyadh has been roundly uncooperative with the U.S. war on al Qaeda, bobbing and weaving and making excuses. But al Qaeda's finances trace back to Saudi Arabia, as do its ideological roots and a good portion of its membership and recruiting base. Washington must put more pressure on Riyadh and will do so this quarter.

The Saudi regime, running out of diversions, appears to be hardening its position in response to the U.S. pressure. Already a rigid theocracy domestically, Saudi Arabia has been stepping up its overt support for the radical Palestinian group Hamas. Riyadh also has looked to Baghdad and Tehran for political support -- having failed to inspire Moscow to resume its Cold War agenda in the region -- and it essentially has thrown out the U.S. military. Perhaps Riyadh feels, like Iran, that its oil renders it untouchable and while the United States may attempt to isolate it politically, it will still buy Saudi oil. Whatever the calculus, Riyadh and Washington are headed for a standoff, sooner rather than later.

As for Pakistan, prospects of a full-scale war with India have been dampened by the monsoon season as well as by U.S. pressure, but militants likely will begin filtering back into Kashmir in a month or so. This could reignite the conflict by mid- to late-September, depending on how blind an eye Musharraf turns to the situation.

October's provincial and national parliamentary elections in Pakistan and Kashmir will add a measure to the baseline violence in the region, but the U.S. war on al Qaeda will remain the major engine of conflict.

In the meantime, Washington will increase pressure for Pakistan to root out al Qaeda militants and sympathizers, not only in the tribal regions along the Afghan border but also in Pakistani cities. A recent clash between Pakistani forces and al Qaeda members suggests either that Pakistan is answering U.S. demands to step up its sweeps or that al Qaeda is shifting its rules of engagement to confront Pakistani soldiers directly -- possibly both.

Clashes on the Pakistani side of the border will be matched by increasing clashes on the Afghan side. Taken together, official news reports and STRATFOR's sources indicate that underreported guerrilla war is taking place in Afghanistan. This was to be expected, given the factionalization and politics there; both tribal infighting and attacks on U.S. and allied forces, as well as on the government in Kabul, will only intensify over the coming quarter and into next year. Washington's experiment in nation-building will gradually descend into an exercise in propping up an embattled regime. Russia and Britain have waited long enough to say, "We told you so."

Countries not obviously in the U.S. crosshairs will do all in their power to stay that way. This means being only as helpful as necessary and otherwise as unobtrusive as possible.

Syria, in particular, will keep a low profile. Having finally gained a modicum of stability in Damascus and Lebanon, President Bashar Assad will watch events in the region closely and react as little as possible. Mounting pressure from the United States will ensure continued intelligence-sharing by Syria and perhaps even the arrests of some militants, but otherwise Damascus will continue to focus on domestic stability and political "reform." Syria also will seek to expand relations with the European Union as a future counter to U.S. hegemony. Damascus is not cooperating with the United States on the Israeli-Palestinian conflict or on Iraq. It cannot afford to: Both are core geopolitical concerns for Syria. This could prove problematic if Washington gets dragged back into the Israeli-Palestinian mess, or if the best idea U.S. planners can come up with is to take on Iraq again.

Egypt is focused on its economy and social stability. Cairo's emphasis on promoting and profiting from regional natural gas distribution means it needs to promote regional stability, but government officials know they have lost the initiative to Saudi Arabia. That may be just as well, given that Egypt has no desire to be the focus of U.S. pressure. For the next quarter, Cairo will downplay the Palestinian issue as much as possible, taking the lead only when things seem to be getting out of hand. Meanwhile, President Hosni Mubarak will forge ahead with economic development. On the downside, Egyptian leaders thought they would get a free trade agreement out of Washington, but the deal hasn't materialized. This is a significant blow to Cairo's economic plans, and the government will seek alternative partners in hopes of pressuring Washington.

North Africa, Sudan, Yemen and the smaller Gulf states have little leverage with either the United States or al Qaeda. As a result, they can be expected to tie their fortunes closely with whoever has the upper hand. Right now, that is the United States.

Jordan is in Washington's back pocket to stay, but the re-occupation of Areas A and B in the West Bank must be worrisome to King Abdullah. He can easily imagine how occupation could turn quickly to deportation and thus will take extra care to maintain good ties with the United States, which he hopes will keep Israel from pushing the Palestinians into the East Bank. However, Jordan has received its free trade deal from Washington and is vigorously pushing economic reform. The next three months will be focused internally unless Israeli Prime Minister Ariel Sharon does something rash.

Neither the Israelis nor the Palestinians have any reason or room to back down. To the contrary, Palestinian leaders once again see regional and international attention slipping away, just as Israel is gearing up to retake territory. If Israel moves forward with territorial conquests, violence will grow. Unless and until the Palestinians succeed in regaining the attention of the Arab and international community, violence will grow.

Washington's primary concern is keeping this conflict contained. As it is, the conflict is a distraction from the war on al Qaeda, and the Palestinian need to attract international support will drive some factions to attempt attacks outside Israel -- melding and compounding the two conflicts. In short, though Washington has pulled back from the Israeli-Palestinian conflict for the moment, it cannot remain detached for long: Frustration at the constant distraction likely will raise sympathies within the Bush administration for a more aggressive Israeli response.

Iran is an interesting case: It has not yet come under heavy U.S. pressure, but Tehran sees the prospect looming with a near-complete encirclement by U.S. forces. U.S. troops are deployed in the southern Caucasus, Central Asia, Afghanistan, Turkey and along the western edge of the Persian Gulf. U.S. intentions toward Iraq have yet to congeal, but Tehran is not counting on its interests being taken into account in Washington's final decision.

Iran's internal political struggle continues but is taking a back seat to the foreign policy crisis. Both conservatives and reformists are seeking a refuge, but, quite frankly, there isn't one. The reformists want dialogue, but neither side trusts Washington. Both will seek to intensify relations with Europe and the Gulf states, but otherwise they can only watch to see what happens in Baghdad and Riyadh. Iran's situation is complicated this summer by the fact that its long-time supporter, Moscow, has in effect abandoned it to push for closer economic integration with the West and exploitation of Caspian oil resources.

Domestically, Iran will see a resumption of the annual summer violence, fueled by heat, a bad economy and poor social services and utilities. This year's protest anecdotes seem more dangerous than last year's. However, oil prices remain sufficient to keep social services afloat, and Tehran has yet to lose control of the security forces, so we do not anticipate a regime-challenging event this quarter.

Neither do we see a regime-challenging event in Iraq. The United States has neither the military nor the political pieces in place to topple the regime in Baghdad: Would-be coup plotters have a wealth of bad precedents to quench their fervor; Turkey is not about to endorse the creation of a greater Kurdestan, and Iraq is not socially or militarily analogous to Afghanistan, rendering an "Enduring Freedom Two" approach inappropriate. If there is a change in power in Baghdad this quarter, it will come from within the regime and will at best change the nameplate on the presidential office. The United States is not yet exerting sufficient pressure to make that change necessary.


U.S. Economy in the Third Quarter

The bright spot in this conflict is that the U.S. economic recovery continues, albeit slowly, and remains the growth engine for much of the rest of the world. The true nature of the U.S. recovery is beginning to show through: steady, if a little timid, and certainly not as robust as first-quarter growth initially made it appear. The first quarter set up unrealistic expectations, which contributed to the recent drop in consumer confidence. Nevertheless, fundamentals are sound, and the economy is now settling into a steady, if unexciting, pace of recovery.

Because inflation remains low, the Federal Reserve can avoid raising interest rates for the time being, giving a boost to corporate investment. Inventories have been clearing out for months, and the yield curve is positive. Despite failing confidence in May, consumer spending should remain healthy so long as there are no major shocks to the system. The U.S. dollar's decline against the euro likely will continue, which could give a slight boost to U.S. exports.

As for flagging investor confidence in the wake of the Enron, Arthur Andersen and WorldCom debacles, the fact is that investors simply lack good options beyond the U.S. markets. Japan is hopeless, Europe remains questionable and most emerging markets are shaky at best. Emerging market debt is in no way the attractive alternative it appeared in the 1990s since it is roughly split between Russia, Turkey, Argentina and Brazil -- all risky propositions. This leaves bonds, cash or crisis commodities like gold, none of which offers much of a return.

The world simply lacks the market liquidity to soak up a massive sell-off. That is not to say a massive sell-off can't happen, but people have to be really worried about U.S. markets to abandon them altogether. Investor confidence will remain shaky over the next quarter, but a recessionary double-dip appears unlikely this quarter.

Barring another unexpected, counter-cyclical series of events, oil prices should remain in the mid-range of OPEC's $22-$28 price band. Though the cartel's current quota regime will continue, cheating will increase as countries like Venezuela seek more revenues and others look to get a jump on a possible quota increase in the fall. More important, Russia will continue to raise output, and investment -- both from Russian companies benefiting from high oil prices and from oil majors hot on getting into Russia -- will allow Moscow to expand export capacity. With the global economy in slow-growth mode, supplies should keep up with demand.

Things look less rosy for electric power. U.S. power merchants are being pounded by investors and ratings agencies and will continue to retrench in efforts to improve their balance sheets. The result will be delays in many new power projects -- particularly in Latin America but also in South and Southeast Asia.


The Rest of the World in Time of War

The U.S. war on al Qaeda has divided the world into three broad categories.

The first are countries directly involved in the war, including the United States and the Islamic countries, from Morocco to the Philippines and from Tanzania to Kazakhstan. Politics, economics and military affairs in these countries are regularly subsumed by the U.S. campaign.

Second are those peripherally involved in the war, including Europe, Russia and Australia. Under only sporadic and limited pressure from the United States, these seek to profit from the help they can give Washington in its campaign or from the scraps they can pick up in countries battered by the United States.

Finally, there are those that have fallen into a kind of backwater -- outside Washington's peripheral vision and low on its list of priorities. These include Latin America, sub-Saharan Africa, Northeast Asia and peninsular Southeast Asia. These countries and regions are becoming introverted, driven by local issues as they are left to fend for themselves.

This segmentation is more than just a convenient theoretical construct. It shapes the foreign policies and economic prospects of these countries. The segmentation has been deepened by an underlying concern that preceded Sept. 11: the global economic downturn and slow recovery.

Economic hardship, security risks and political pressure from an angry hegemon have sparked a worldwide trend toward conservatism or populism, nationalism, introversion, regional segmentation and isolation. That is not to say fascism is breaking out all over; the trend is subtle and varies by region.

Europe

Riding a moderate groundswell of nationalism and anti-immigrant sentiment, Europe has seen a rapid and dramatic shift of leadership from social democrats to conservatives across France, Italy, Spain, Austria, Portugal, Denmark and the Netherlands. Germany's elections for chancellor on Sept. 22 could cap that trend since Conservative Edmund Stoiber has a slight lead over incumbent Social Democrat Gerhard Schroeder. The final outcome is likely to hinge on Germany's economic prospects around election day: Although the European economy is growing again, recovery is slight, and Germany still trails the pack. The longer the German economy takes to gain steam, the better Stoiber's chances of unseating Schroeder.

Economically, Europe can't quite seem to snap out of the doldrums. Just when the Continent's major industrial economies began picking up pace, labor troubles erupted -- first in Italy, then Germany. In mid-June, large strikes were under way in Germany, France and Greece. These strikes will sap growth and keep Europe from gaining momentum in the third quarter.

France could be the next country with labor troubles, if President Jacques Chirac moves quickly while his mandate is fresh to modify France's 35-hour workweek and reform the overburdened state pension system. A tiff between France and Brussels is likely as Chirac's new government moves quickly to cut taxes and tries to renegotiate -- or ignore -- commitments to the EU to balance the federal budget. Germany already has rebuked Chirac, and tensions could escalate as Paris begins to cut taxes.

Overall, the European economy will see slowly accelerating growth, which should help the euro hold onto most, if not all, of its recent gains against the dollar and help keep inflation under control. Europe remains dependent upon the United States to take the lead in economic recovery, though trade tensions between Brussels and Washington appear to be waning as the Bush administration begins to make concessions on steel tariffs.

Otherwise, barring a dispersal of al Qaeda attacks, Europe should have a quiet summer. Most initiatives related to EU expansion, such as agricultural reform and immigration policies, will be put on hold until after the German election. On the periphery of the U.S. war on al Qaeda, Europe will do its best to keep its head low and deal with its own regional and national domestic concerns.

Russia

Russia, too, is on the sideline of Washington's crusade, but it is a very useful sideline. Russian influence in and intelligence on Central Asia and the Caucasus -- not to mention so-called rogue states such as Iraq -- for once are making Moscow a valuable ally for Washington, and Russian President Vladimir Putin is not hesitating to seize and profit from the opportunity.

The main geopolitical event for Russia, and one of the major global developments for the third quarter, is Moscow's apparent decision to sell out Iran and quietly sell out Iraq. Moscow is likely to undermine its own development deal for Iran's Bushehr nuclear power plant. Compounding this, it has built up its military presence in the Caspian Sea, after establishing bilateral deals with Kazakhstan and Azerbaijan over the division of the sea's resources. Russia has transferred several ships from its Black and Baltic Sea fleets to the Caspian, is building a new missile boat that should sail this quarter and already has shifted an anti-ship missile base from the Baltic coast to the Russian Caspian coast. Growing tensions between Moscow and Tehran cannot long be suppressed, and once they break open, Iran's encirclement will be complete.

If ever there was a time to solidify Russia's economic integration with the West, this is it, and the coming quarter will be all about cooperation and integration. Russia has signed on with Western development of Caspian and Central Asian resources, choosing to have a piece of a big pie instead of keeping a dry, crusty, little pie all to itself. Moscow will maintain a firmly pro-Western course, but the question at home will be whether the rewards are commensurate with what is being surrendered.

Washington has committed $20 billion for Russian disarmament, but not much of that will make it beyond U.S. contractors and a few Russian officials. Foreign direct investment in Russia has almost doubled so far this year, but it is concentrated in a few big oil and gas companies, which are controlled by a few powerful businessmen. There is little trickle-down throughout the economy. Overall, investment in Russia remains low compared to that in countries like China -- and compared to the magnitude of the country's need.

Russia is progressing toward entry into the World Trade Organization, but this is a mixed blessing. Its outdated and inefficient industries would not easily survive the onslaught of global competition. Russia also is slated for full membership in the G-8, for what little that is worth in terms of real political influence.

Moscow also is preparing to sell out Abkhazia, in the interest of tying the Russian oil export grid into that of Georgia. This move may backfire, since most of the Abkhaz population has acquired Russian passports and Moscow may find itself host to a hundred thousand or so irritable, unemployed immigrants in the future.

All of these compromises and sacrifices will raise the hackles of Russian nationalists though they remain weak and co-opted. The Kremlin's failure to push reform far enough to ensure distribution of the fruits of these compromises will draw opposition from oligarchs and liberal reformists. Putin's opposition remains weak, disorganized and conflicted. However, so long as Putin serves U.S. interests, Washington will not support liberals against him.

Latin America

Economic turmoil in Latin America, compounded by the departure of disinterested or risk-averse foreign investors, has polarized the region's politics. Colombians elected hard-line presidential candidate Alvaro Uribe Velez to resolve an escalating war between leftist rebels, government forces and right-wing paramilitaries. Venezuela is torn between here-again-gone-again populist President Hugo Chavez and multiple, competing would-be coup plotters in business and the military. Brazil is flirting with a potential, new leftist president, and nobody seems to want the responsibility of governing Argentina -- a task that ultimately could fall to the military.

It is a mark of shifting global priorities that Latin America is becoming as much a political and economic backwater as sub-Saharan Africa. The region daily sinks deeper into isolation and introversion, beginning a trend that could set it back 20 years. As a whole, Latin America is peripheral to current U.S. political and economic interests. Although the United States has an interest in the power struggle in oil-rich Venezuela, it is taking a hands-off approach for now. In Colombia, where the United States would be much more involved if not for Sept. 11, Washington is urging Bogota to do more to fight its own war. And Washington deems neither Argentina nor Brazil, where foreign investors are cutting their losses, important enough for an emergency, no-questions-asked bailout.

Latin America's economic growth will be sluggish to stagnant in the third quarter, due to worsening crises in Argentina, Brazil, Colombia and Venezuela. For different reasons, political instability and social turmoil will rise in these countries. The Argentine crisis has had a limited contagion effect on the much-smaller economies of Uruguay and Paraguay, but there is little risk in the third quarter of a regional spillover that could result in a string of forced debt restructurings. Nevertheless, investor worries about the near-term stability of large economies like Argentina and Brazil will be felt by the entire region in terms of declining capital inflows, weaker currencies, higher interest rates and slower economic growth.

In Argentina, President Eduardo Duhalde's government likely will reach an agreement with the International Monetary Fund by the end of July that will provide enough financial assistance to allow the country to remain current on about $9 billion in debts due to multilateral agencies by year-end. By staying current on its payments, Buenos Aires has better prospects of engaging private creditors in debt-restructuring discussions. However, an IMF deal won't end the crisis.

Duhalde's government still must work with a fractious Congress to devise a viable plan to free up billions of dollars in frozen private bank deposits, restructure and re-capitalize the country's nearly bankrupt financial system and jump-start the economy. With foreign banks unlikely to inject fresh billions into their Argentine subsidiaries, Buenos Aires' only recourse may be to print more pesos. A sharp jump in peso liquidity would be hyper-inflationary and would also tend to accelerate the peso's depreciation.

Latin America's biggest economic concern in the coming quarter is also the region's biggest economy: Brazil. The real has dropped like a rock this year, including a 15 percent decline against the dollar since April, and could continue its slide as the October presidential election draws near. Meanwhile, Brasilia's debt burden is expanding. Brazil could find it difficult to roll over its short-term debt obligations, which would spook foreign investors and currency traders already concerned about the prospect of a victory by Socialist presidential candidate Luiz Inacio "Lula" da Silva in October.

In three previous tries for the presidency, da Silva was the frontrunner several months ahead of election day but lost in the final stretch. His main challenger, Jose Serra, is likely to close the gap in the third quarter as he takes advantage of his party machinery and ramps up a serious advertising campaign. In any event, Brazil's next president will have a difficult time maintaining the fiscal discipline and political alliances that shored up the eight-year government of President Fernando Henrique Cardoso. This will become more obvious to investors and political analysts in the coming months, and pressures on the currency and interest rates will persist.

Colombia's president-elect, Uribe, takes office Aug. 7 with a mandate to wage a sustained military offensive against leftist guerrillas and right-wing paramilitaries. As a condition for obtaining more assistance from the Bush administration, Uribe likely will seek congressional approval within the first 100 days of his government for a package of measures that would significantly expand his presidential powers, increase the tax bite on Colombian citizens and companies and double defense spending, which currently is about 3 percent of GDP.

Uribe currently enjoys a popular and political mandate, but that support is not cast in stone. He could encounter incremental political hindrances as he attempts to meet U.S. conditions for aid at a time when the Colombian economy is limping. Meanwhile, the rebel Revolutionary Armed Forces of Colombia and National Liberation Army will step up their attacks against economic infrastructure.

Venezuela also faces a hot summer, as the deepening economic crisis aggravates political tensions between the Chavez regime and political opponents. Chavez barely survived a short-lived military rebellion in April, and his tenuous hold on power now depends on the continued support of a badly fractured armed forces and upon the political opposition remaining disorganized and leaderless. The economy's rapid deterioration stems from a combination of lower oil prices and the Chavez regime's demonstrated inability to administrate government finances efficiently. Also, political corruption is rife at all levels of government, and private investment in activities unrelated to the energy sector has virtually stalled.

Asia

Had it not been for Sept. 11, Asia no doubt would be the focus of this quarterly forecast and those to come. The rise of China as a regional power and the collapse of Japan as an economic power dwarfed other issues -- except for a global U.S. military crusade. Therefore, Asia is something of a backwater.

Certainly, the dominant theme in Southeast Asia over the third quarter will continue to be the U.S. war against al Qaeda and the ways national governments can exploit or fall victim to Washington's campaign. In Northeast Asia, however, domestic politics will gain much more significance, with the global anti-terrorism war a mere side issue to other, more pressing problems.

Asia continues to benefit from a rebound in the U.S. economy, primarily through exports. South Korea has shown particular strength, and even Japan posted positive growth in the first quarter, though Tokyo still refuses to deal with its structural issues.

Distant from the war on al Qaeda, the four key Northeast Asian nations will remain preoccupied with internal political and social issues. China will remain primarily introverted, since its attempts to capitalize on the aftermath of Sept. 11 proved fruitless. Beijing is preparing for a leadership transition, which begins early in the fourth quarter. In the run-up to this, the voices of conflicting and competing powerbrokers increasingly will come to the fore. Debates over China's military and economic policies and the role and responsibilities of the Communist Party itself will become more apparent, but the party should close ranks near the end of the quarter.

Japan somehow manages to add all-new political crises to its already full menu. Prime Minister Junichiro Koizumi faces rising opposition to his security and economic policies -- not because the policies are opposed but because the opposition sees Koizumi and the ruling Liberal Democratic Party (LDP) as weak and wants to use this opportunity to drive the final nail in the party's coffin. While this should stew for a while in Tokyo, the eventual result will be externalization of Japan's internal struggle. Koizumi will try to shift focus away from domestic politics, by spotlighting issues like relations with China, Korea and Russia and -- more bizarrely -- attempts to entrench Tokyo in the Middle East and the India-Pakistan peace processes. Economically, deflation will continue, despite the surprising export-driven growth in the first quarter. We see no prospect for an increase in new lending or a decrease in bankruptcies.

A political battle, only minimally held in check by World Cup euphoria, is brewing in South Korea. Soon after foreign sports fans leave, the political cauldron will boil over. Already, President Kim Dae Jung's two oldest sons are in detention, and the ruling Millennium Democratic Party (MDP) is tearing itself apart over interim election losses. The real debate shaping up between the opposition, but now majority, Grand National Party and the MDP is one of core ideology -- conservative versus progressive -- in economics, politics and relations with North Korea and the United States.

From the Philippines to Indonesia and Malaysia, the U.S. war on al Qaeda is shaping and driving the actions of political leaders and their opponents. In Malaysia, the government has appropriated the issue to crack down on its opponents. In the Philippines, the war has opened a new avenue for greater military cooperation with the United States. And in Indonesia, it is stirring debate among the military and politicians -- and contributing to the polarization of the country's elite, with secular nationalists competing with Islamist nationalists.

The focus on the U.S. war is a great tool to get more money and weapons from Washington, to win tacit approval of authoritarian measures and to consolidate political gains. We expect no substantial changes in the region over the next quarter, but U.S. military and intelligence assets will continue to become entrenched gradually in the region -- particularly as their presence begins to draw fire.

Africa

We see no substantive changes in Africa in the third quarter. In the key states -- Nigeria, Sudan, Kenya, South Africa, Uganda, Angola, Algeria and Egypt -- long-running political evolutions are far from completion. Washington's interest in Africa is limited to promoting oil production along the western coast and precluding al Qaeda from establishing a base of operations. The rest of the continent -- a stomping ground for groups engaged in illicit activity and trafficking of weapons, drugs and diamonds -- might draw attention if the threads extend to al Qaeda.

Interest in oil security will draw some attention to Nigeria, where upcoming elections and the fight over energy resources will erupt in ethnic clashes, political scandals and attacks on oil infrastructure in coming months. In oil-producing Angola, the death of UNITA leader Jonas Savimbi has brought an end to the long-running war. The next three months will involve demobilization and neutralization of any remaining threats. The incorporation of UNITA fighters into national security forces will be difficult, and some are likely to return to the bush as bandits.

Tanzania, Kenya, the Horn, Sudan and the countries of North Africa are battlegrounds for the U.S. war on al Qaeda. As such, they will continue attempts to milk U.S. interest for all it's worth. The alternative, resistance, carries consequences too severe to countenance.

In Sudan, the war between the government and rebels will remain the key platform for talks between Washington and Khartoum, with intelligence-sharing continuing covertly. Washington doesn't like or trust the Islamist government but, for the foreseeable future, will continue trying to work with it.

In Kenya, where U.S. and allied intelligence and reconnaissance assets are deployed, President Daniel Arap Moi has yet to announce a date for elections due by year-end, and he is trying desperately to change the constitution to extend his stay in power. Since everyone -- even members of his ruling KANU party -- opposes such a move, the transfer of power will be ugly and chaotic. Kenya is on a downward slope, both economically and politically, and the slide is picking up speed. Yet the country's strategic value in the war on al Qaeda may draw Washington to attempt a stabilizing role in Kenyan politics.