The Gorilla or the Monkeys

When attempting to forecast the coming quarter, we look for the center of gravity -- the one key variable driving all others. And this quarter, it is difficult to ignore the 800-pound gorilla of variables, Iraq. In fact, as the third quarter came to a close, the U.S. campaign to launch an attack against Iraq was such an overwhelming force on the political landscape that the forecast seemed a foregone conclusion.

That is what has us worried. The forecast seems too clear: The United States will spend the quarter strong-arming friends and foes, moving troops and ignoring all else as it builds toward a full-scale attack late this quarter or early in 2003. But as an analyst, when your gaze is locked on the 800-pound gorilla, the little monkey can come up and kick you where it hurts.

Two substantial variables threaten to derail the U.S. administration's plans for Iraq: The first is al Qaeda; the second is the state of the U.S. and global economy.

Iraq

Iraq was the focal point of international relations in the third quarter, and it will continue to be a major factor to the end of the year, regardless of whether a U.S. attack proceeds.

The question is, why? Why is Washington pursuing this war? And why is it doing so at this time, when the drive toward Iraq diverts political capital and military resources away from the war with al Qaeda?

Before we can evaluate the likelihood of war with Iraq in the context of other policy demands, we need to step back briefly and examine Washington's motive for confronting Iraq and, from that, determine the priority Iraq holds among other U.S. policy interests.

First, the Bush administration is not driving toward Baghdad for its stated reasons. Iraq certainly has attempted to procure or manufacture weapons of mass destruction. However, the secular Baathist regime of Saddam Hussein is antithetical to the Wahhabi fundamentalism of Osama bin Laden's al Qaeda. Hussein's top priority is regime survival; bin Laden's top priority is Islamic revolution. Hussein seeks WMD as a deterrent against attack from Iran or the United States. Bin Laden seeks WMD as tactical munitions for use in driving the United States from the Middle East. As a result, there is little chance Hussein would transfer WMD to al Qaeda, unless, as is becoming the case, the United States threatened his very survival.

As for the peripheral issues the Bush administration raised in justifying an attack on Iraq -- Baghdad's treatment of minorities or its U.N. sanctions-busting -- these are simply not worth upending U.S. relations across the Middle East and beyond, particularly given the need for support in the war against al Qaeda.

Second, contrary to the view of die-hard cynics out there, it is not for oil security. Oil is a fungible commodity; its price is set by global supply and demand. And the current distribution and political and economic priorities of major suppliers make an effective embargo nearly impossible. Iraq briefly tried to cut off oil supplies earlier this year, but its effort quickly fell flat. There is currently no threat that existing regimes will cut supply. The oil will flow.

On the other hand, if the United States were to attempt to seize Iraq's oil fields and exploit them over the long term, it would do irreparable harm to its relations in the region. Those who argue that Washington wants nothing more than to seize Islam's patrimony and dominate the world's economic blood flow would be proven right. Cooperation from U.S. allies -- from Moscow to Paris to Kuala Lumpur -- quickly would crumble, and Islamic militants would receive a tremendous boost in sympathy and recruitment throughout the Middle East. Export routes through close U.S. allies Jordan, Israel and Turkey are inadequate and insecure, and the Gulf quickly would become a shooting gallery for tankers.

Seizing Iraq's oil fields therefore would do little to guarantee a steady flow of oil, since that flow is not threatened now -- but it would be if Washington was seen to be making an imperialist grab for Iraq's fields.

Third, this is not a vendetta for the elder George Bush. Again, we must look at Iraq in the context of other priorities, and a war is simply too expensive to be a Christmas present from U.S. President George W. Bush to his dad.

Fourth, there is a possibility that the campaign against Iraq simply reflects an administration fumbling for ideas in the face of the overwhelming complexity of the struggle with al Qaeda. We noted in our third-quarter forecast that "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." Critical targets in the war on al Qaeda are largely off limits, due to political or tactical concerns, so perhaps the administration embraced Iraq as a familiar venue in which to secure a quick victory and generate some momentum. This is getting closer to the U.S. motive, but there is more substance than frustration in Washington's campaign.

Fifth, another partial aspect of the U.S. motive is the noise generated by the Iraq campaign. The kind of covert war that needs to be fought against al Qaeda does not show much in the way of progress. The losses are visible with every new attack, but the victories often are not revealed. For better or worse, a war on Iraq focuses public attention and shows progress. The question is, does this effort to shift attention substantially to hinder the prosecution of the concurrent covert war?

A more rational, strategic explanation exists for Washington's continued political and military buildup toward war with Iraq. In the wake of the Sept. 11 attacks, the United States was faced with a target set of countries that it could not, or could not afford, to strike. It couldn't hit al Qaeda's financial backers in Riyadh and Jeddah, since Saudi Arabia is central both to oil price stability and to a broader regional and global campaign against al Qaeda. The United States could not attack Pakistan, as it needed Pakistani bases for actions against Afghanistan. It could not attack militant al Qaeda sympathizers in Indonesia, due to the sheer geographic and demographic magnitude of the operation.

Most important, Washington had difficulty uprooting al Qaeda's cells globally, as erstwhile allies hesitated or set terms for their cooperation against it. In a global war against a small, unconventional enemy deployed on the territory of friend and foe alike, the United States needs cooperation in intelligence-gathering and policing. It needs reliable allies.

And so, for lack of clear targets and reliable allies, Washington decided to outflank the al Qaeda dilemma and go with U.S. strengths. In attacking a familiar, conventional, state target -- the second after Afghanistan -- it would redefine the terms of the U.S. war on al Qaeda. It would force regional allies to reassess the importance of their cooperation with the United States. If multilateralism was merely used to hamstring the U.S. war on al Qaeda, Washington would demonstrate its somewhat less subtle, unilateral alternative.

But the quick and easy outflanking maneuver has bogged down. In perhaps the most important development of the year, Iraq has become the ultimate test of unilateral versus multilateral, of coercion versus cooperation, in both U.S. domestic and international politics. U.S. allies have struggled to contain Washington's war plans, and the Bush administration has countered with efforts to divide and bribe or coerce its allies. This is a test of the strength of the remaining great powers to individually affect U.S. policy, and of the capability of regional groupings such as Europe or the Islamic world to cooperate long enough to thwart U.S. plans. It is a test of the United States' ability to go it alone and bring a regional conflict to a definitive conclusion for all to see.

In many ways, this is a poor test, from all perspectives. Those arguing for multilateral consensus and action cannot but accept that Hussein has spent a decade making a mockery of this approach. On the other hand, Washington has a hard time making a reasonable case for attacking Iraq, and Iraq is not an easy country to attack without at least some cooperative allies. Thus, both sides continue to creep forward inexorably toward war with Iraq -- in a kind of slow-motion policy train wreck.

Equipment and command organizations are deploying to the region, frontloading the buildup to allow a much faster deployment of actual troops to the region than occurred in Desert Shield. The number of mobilized reservists and National Guard troops continue to drop, but changes in military organization in the decade since Desert Storm should require less of these for rounding out regular army units. Moreover, Washington appears to be planning a much smaller ground operation than last time, due in part to deployment constraints imposed by Iraq's neighbors.

The Bush administration's main hope is for an internal evolution in Iraq that obviates the need for war. This is part of the justification for loudly banging the drums of war. If that doesn't happen, U.S. military action continues to appear on schedule for early in the first quarter of next year. Though it appeared the administration had briefly tried to move the attack date up into this quarter, fluctuating allied support has hindered an accelerated timetable.

Here's the problem. All of this assumes that calamitous events do not shift policy priorities in the interim -- that al Qaeda does not retake the initiative with massive or multiple attacks, or that a regional economic meltdown in Latin America or Asia does not generate a broader economic panic. We see the gorilla, but what are the monkeys up to?

Al Qaeda

A year after U.S. bombs routed it from its Afghan strongholds, al Qaeda is ready to retake the initiative in its war with the United States. In fact, an al Qaeda offensive apparently is now in its early stages, with attacks already attempted or carried out in Afghanistan, Pakistan, the Philippines, Kuwait, Yemen, Indonesia and Saudi Arabia. These attacks are beginning to define the al Qaeda that emerged from the rubble of Afghanistan and the type of war it will wage.

Al Qaeda apparently has completed the cycle of scatter, assess, restructure, plan and action that began with the U.S. attack on Afghanistan.

Scatter: Al Qaeda's first priority was survival, which was accomplished through dispersal and concealment. They ran and hid.

Assess: By late spring 2002, signals traffic from al Qaeda began to pick up. At first, this appeared to be the kind of distracting noise al Qaeda normally put out before an attack, but it was too early for the group to be ready to launch major attacks. Instead, the communications likely were an effort to assess the degree to which its global network had been compromised by U.S. and coalition intelligence operations.

Restructure: Following a period of assessment, reports began to surface through sources close to al Qaeda that the main organization -- al Qaeda Prime, if you will -- was beginning to devolve planning and operational control to mid-level leaders, in essence breaking up and dispersing into a number of mini-al Qaedas. Reports in the wake of the Oct. 12 blast in Bali suggest they also sent individual liaisons to help sympathetic organizations plan and carry out additional operations.

Plan and Action: We noted in our third-quarter forecast that breaking down al Qaeda into smaller, autonomous groups "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."

The recent string of attacks has borne this out, with mixed results. In Yemen, it appears that militants attacked the wrong tanker on Oct. 6, hitting a French ship carrying Iranian oil to Malaysia instead of a U.S. tanker bringing oil to the States. Possible attempted attacks in Jeddah -- including a car rammed into the U.S. Consulate General and the attempted hijacking of a Jeddah-bound flight from Sudan -- failed to produce any substantial effect. But the attack in Bali was, from al Qaeda's perspective, a major success.

With its new structure -- local, autonomous cells carrying out low- to moderate-grade attacks -- al Qaeda is beginning to recover the initiative, with an increased tempo of operations. The change has generated some strategic confusion for the organization as well as some tactical failures, but it is a step forward in the plan to act as a vanguard, inspiring a host of sympathetic cells. It is not yet enough to shift Washington's focus from Iraq, but that could change after a few more Balis.

This new al Qaeda model does raise a number of questions, however.

Is this the definitive new structure of al Qaeda, or a step on the way to it? Al Qaeda may well be using these smaller groups as a means of taking quick action while it continues to rebuild its central command and international financial, logistical and communications networks.

What is left of al Qaeda Prime, and what role can and does it still play? Is it merely an inspirational body, or does it provide tasking, coordination or material support to these local groups? This is important in that it determines the true autonomy of local groups. If al Qaeda Prime does little more than inspire or task other groups, then destroying its remaining members or infrastructure will not stop the war. But if it continues to play an integral role in coordinating or supporting attacks, then it continues to be an important target.

While fragmenting may allow for a quick spurt of attacks, will al Qaeda be able to maintain a meaningful tempo of operations and a strategic momentum using only local, autonomous cells? The advantage of local groups is that they allow flexibility. They can adjust quickly to the resources and obstacles in their areas in order to strike quickly. The trouble with local groups is that they are driven by local resources and obstacles and are therefore unreliable.

Will a multitude of attacks have the same impact as the magnitude of a few big attacks, such as the embassy bombings in Africa or Sept. 11? The destruction of the World Trade Center shut down U.S. financial markets and air travel. It completely upended U.S. foreign policy priorities. Bali hurts, but not enough to stop Washington from pursuing the war on Iraq. If al Qaeda is to rely on multiple, small attacks in its war with the United States, then it will have to pick the targets carefully to get maximum impact from minimum resources. This returns us to the previous question about what role al Qaeda Prime continues to play.

Will we see a doctrinal shift in al Qaeda toward focusing on economic targets, particularly oil? And does the new al Qaeda have the structure and resources to substantially impact oil prices through violence? This may be the key to a new campaign of multiple attacks. Al Qaeda will need to identify and focus its attacks on key nodes in the global economy if it is to have an impact comparable to that of Sept. 11.

The targets at al Qaeda's disposal are those within the oil infrastructure of the Middle East -- the arteries of the global economy. In his earliest fatwas, bin Laden ruled against attacking Islam's patrimony, its oil wealth. But attacking energy infrastructure outside the region will not be enough. The farther al Qaeda goes from the pumping stations of the Gulf, the more targets it has to hit to stop the same amount of oil. Better to hit the loading pier than the hundred tankers that use it.

The Oct. 6 attack on the French tanker in Yemen still fit theoretically within the fatwa's directives. The oil was en route to the customer; therefore, it was the customer's oil. If al Qaeda now is forced to make do with smaller cells staging smaller attacks, it no longer can afford to avoid oil targets in the Gulf.

Finally, why is al Qaeda ramping up its campaign before the United States invades Iraq? Some sources close to al Qaeda reported that the group was holding its fire until the U.S. attack began, at which point it would exploit popular Arab opposition to the attacks by being the only Islamic entity striking back. Perhaps this remains the intent of al Qaeda Prime, but its newfound reliance on affiliated organizations reduces its ability to coordinate the timing of attacks.

The answers to some of these questions will become apparent only as the quarter progresses, yet they hold the potential to impact U.S. plans for Iraq, leaving us with a very tentative forecast for the quarter. Will this monkey kick? What about the economy?

Economy

Though economic considerations currently are not a major part of Washington's calculus on Iraq, a severe shock to the global economy could change that. The economic question for the quarter, then, is whether such a shock is possible and where might it erupt.

That question must be seen in the context of the global economy, which is at best anemic and could turn downright fragile. With uncertainty over Iraq, al Qaeda and the stock market undermining business investment and consumer confidence, the U.S. recovery is struggling to gain momentum. Though a "war-fears premium" on global crude is cutting into growth, its effects are marginal, and the United States should climb slowly out of the current malaise without another recession.

The same factors are at work in Europe and Asia, but prospects for these regions are more troubling. Both regions depend more than the United States does on oil imports, making them more sensitive to high oil prices. For Europe, this means inflation and no interest rate cuts; for Asia, higher production costs for manufactured exports. Also, because both regions export heavily to the United States, their economies are tied to U.S. economic performance. The weak U.S. recovery thus has postponed their own comebacks.

Excluding Japan, Asia's prospects last quarter looked quite a bit better than Europe's, but that too has changed. First, a 10-day port lockout along the U.S. West Coast took a bite out of Asian exports and disrupted the delicate flow of trans-Pacific commerce. The knock-on effects will continue to be felt for weeks, exacerbating slack demand for Asian goods in Europe and the United States.

Second, fears of new terrorist strikes in Southeast Asia threaten to cut deeply into the key tourism industry and will dampen foreign investment. After several fairly good months earlier this year, Singapore, Taiwan, Indonesia and Thailand are among those at risk of falling into recession in the fourth quarter. New terrorist strikes also could begin dragging down currencies and could make the region more vulnerable to some sort of economic shock -- but from where?

The most likely source of shock is Brazil, which is poised to crumble under the weight of its $355 billion debt. Fearing that Luiz Inacio "Lula" da Silva will become the next president, international lenders have punished Brazil's bonds and currency this year, raising borrowing costs and threatening the country's solvency.

Da Silva probably will win the Oct. 27 runoff, making some deft early leadership and a strong display of international support necessary if Brazil is to escape an Argentina-style default. The president-elect will find it necessary to reassure financial markets -- both with public statements and the nomination of his economic team -- that he will respect the country's debt obligations. Meanwhile, the IMF will stand ready to provide Brazil with even more liquidity, and Washington might even state its own strong support of Brasilia's economic plans.

If da Silva is unable to reassure international markets -- or the Bush administration is too distracted to pay heed to Brazil's looming dilemma -- then foreign funds that Brasilia needs to roll over its immediate debt obligations will dry up, and reserves will shrink to the point that the government has little choice but to default.

The financial collapse of the Western Hemisphere's second-largest economy would throw the rest of Latin America into almost immediate recession and rock emerging markets from Asia to Russia. Asia, given its current fragility and its history, could get hit the hardest.

It is impossible to predict how far or how fast a financial flu would spread. Contagion likely would be quicker but shallower than that from the 1997-98 Asian financial crisis. Asia and other emerging markets have less hot money now than they did then, and many countries are better positioned to respond. But more experience with crisis also means investors will be quick to take pre-emptive action and pull their money out of Asia -- heightening the risk of another deep recession there.

The United States would not be immune either. A full-blown financial crisis could tip the psychological balance and sink the U.S. economy into a double-dip recession. Exports to major trading partners, including Mexico and parts of Asia and Europe, also would drop sharply.

With the economy on the ropes, the Bush administration might have a difficult time making the case for an attack on Iraq. At the very least, it would have to start including the economy in its calculations.

Some U.S. officials may argue that a quick and decisive victory in Iraq might be just the tonic that a sickly economy needs: It would boost spending, do away with much of the current uncertainty and -- after a quick price spike -- send oil prices back down below $20 per barrel.

However, a quick and decisive victory is not necessarily assured. If the United States were to get bogged down in Iraq, oil prices could skyrocket and uncertainty could turn to outright pessimism, especially if a simultaneous global crisis were under way. A drawn-out war also would increase the chances of Israel being drawn in, which would destabilize the entire Middle East and send oil prices through the roof.

If the global economy were truly in crisis, Washington could decide to abort the war altogether. Such a massive and embarrassing about-face is unlikely for the Bush administration, but nevertheless it could be an option to consider.

There is a final economic worry, and this ties back in with al Qaeda. Various statements attributed to al Qaeda recently have hinted that the organization could shift its focus to economic targets, specifically energy assets. Though a scenario in which al Qaeda could substantially disrupt global oil supplies is difficult to imagine, it is not unthinkable. The one-two punch of a major al Qaeda strike that simultaneously sent the economy reeling could turn the monkey into a gorilla.

Middle East

Most of the governments in the Islamic Middle East will spend the next three months preparing for what appears to be an inevitable U.S. war against Iraq. Arab states will not be able to coalesce in opposition to a war if Washington truly wants one; too many can be bought off. Instead, the most vulnerable regimes -- Jordan, Saudi Arabia and Iran -- will move to divide and conquer nascent or deeply rooted oppositions and to purge or neutralize key leaders.

In Saudi Arabia, this will take the form of a carrot-and-stick approach, with the government offering economic incentives to win back the disgruntled, wealthy elite.

In Iran, hard-line conservatives view the potential U.S. military campaign as both an opportunity and a blessing that will allow them to tamp down internal opposition in the name of national security. They also will seek allies among the Shia population in southern Iraq who might influence the next Iraqi government.

In Jordan, the Hashemite monarchy will rely on warm economic ties with the United States to buy off opponents. The government also will try to demonstrate greater involvement in pushing for negotiations between Israelis and Palestinians.

If the world's attention remains on Iraq, Israeli leaders will try to exploit the situation by further weakening the Palestinian Authority and to expand Israel's control over the West Bank and the Gaza Strip. Meanwhile, the Labor Party will be looking for any opportunity to challenge Prime Minister Ariel Sharon's firm grip on power.

Egypt will be absorbed by internal matters, with President Hosni Mubarak occasionally stepping into regional political issues. Domestically, Cairo will seek to exploit a U.S.-Iraq war to its own economic advantage, using rents from traffic through the Suez Canal to reinvest in development. The government also will try to keep a tight rein on the Muslim Brotherhood, which doubtless would use an Iraqi war as a platform for challenging the Mubarak regime.

Syria will try to keep its distance, only occasionally joining the chorus of Arab opposition to a U.S. campaign against Iraq. Behind the scenes, however, Damascus likely will cut a deal with Washington and then move to purge or contain internal groups that might oppose that position.

The tiny Gulf states, including Kuwait, will focus their energies on extracting as many benefits as possible from Washington in the ramp-up to war.

Meanwhile, all of the Middle Eastern states will keep an eye out for threats from al Qaeda and other radical groups intent on stirring up unrest or attacking leaders or key infrastructure. Most will do silent crackdowns on suspected cells and rely on shared intelligence from the United States and neighbors.

For its part, al Qaeda certainly will seek to exploit U.S.-Iraq hostilities, though it remains impossible to predict where or how the group might strike.

Europe

Though European leaders continue to push for a diplomatic settlement with Iraq, they appear to have accepted the inevitability of a U.S.-led military campaign. The European Union has not presented a unified front of opposition to Washington's war plans or even a common policy approach. So long as U.S. action is accompanied by an authorizing U.N. resolution, European governments will aid Washington with over-flight agreements, use of bases and perhaps limited logistical and military support. Concrete military assistance may come from the newer NATO members such as the Czech Republic and Poland -- or prospective members like Bulgaria and Romania -- that are keen to prove their military value to the United States. Spain and Italy also will prove strong supporters, and France probably will be less openly critical than history might suggest, mainly because of its economic interests in Iraq.

Even without a new U.N. resolution, Europe will not oppose the campaign in any meaningful way. The United States needs unfettered use of its military bases in Germany to stage a major attack, but that should not be a problem: The political value of Chancellor Gerhard Schroeder's hard line against Washington has diminished greatly now. Even though Schroeder cannot distance himself completely from his harsh campaign rhetoric, he will not restrict U.S. access to bases in Germany. And Schroeder likely will have a U.N. resolution to fall back on for political cover.

This does carry an important caveat: If the global economy were shaken by something along the lines of a Brazilian debt default, then the ensuing crisis could give continental Europe new impetus to form an anti-war coalition, arguing that the economic risks inherent in an attack on Iraq are simply too great.

European leaders do have cause for concern, since the regional economy will remain stagnant this quarter. Sluggish fundamentals will cause some to continue to argue for a stimulatory interest rate cut, but the likelihood of a war-induced oil price spike could keep the inflation-fearing governors of the European Central Bank from pulling the trigger. Instead, governments in Italy, France and Germany will take matters into their own hands through supply-side tax cuts and fiscal spending -- sounding the death-knell for the over-restrictive Stability and Growth Pact, at least in its current form. A less restrictive budgetary regime will drive down the euro against the dollar over the next quarter, making European exports cheaper and giving the economy some momentum, but also hurting investment.

There is no quick fix to Europe's economic struggles, and the Eurozone will end the year with disappointing growth figures, higher inflation and predictions of sluggish GDP growth for 2003. Like most of the rest of the globe, Europe will fashion a slow and unsteady recovery that is heavily dependent on outside factors.

That will not keep EU applicant states from charging headlong into the club, however. With a strong push from its pro-expansion, Danish president, the EU should overcome the final stumbling block and reach at least the framework of an agreement on agricultural subsidies in the fourth quarter. Those contentious negotiations will absorb much of Europe's energy, and longer-term issues over the unsustainability of the Common Agricultural Policy probably will not be resolved. But an agreement should be enough to keep the EU on schedule to accept 10 new members in 2004.

Russia

For Russia, the next three months will be the calm before the storm. President Vladimir Putin has expended a great deal of political capital on improving relations with the West, proving adept at smothering any meaningful political opposition within the country. His personal popularity has insulated him from public disaffection with his foreign policy stance.

Putin has weathered the exclusion of Russia's Afghan proxies and the Northern Alliance in the new Afghan government, U.S. forces' entry into Central Asia, news that U.S. troops are training the Georgian military and closures of the Lourdes signals intelligence base and Cam Ranh Bay naval base. All of that has left him having only to balance the various power groups within Russia -- the security services, the Yeltsin-era "Family" and the St. Petersburg clan -- against each other.

But with plans for a U.S.-led attack on Iraq in the offing, this will begin to change in the fourth quarter. All the bones Putin has tossed Washington so far made sense from the viewpoint of a president eager to reduce his country's exposure to risk and shrink budget expenditures.

Iraq is different. Russian firms are the dominant players in the Iraqi oil industry, and Baghdad still owes Moscow $7 billion in Soviet-era debt. In short, everything that Putin has given up until now had a political price but was pretty cheap from a dollar perspective. Giving up Iraq, however, would affect Russia's bottom line directly. Moscow's demand to Washington will be simple: Guarantee our Iraqi holdings.

Internally, Russia's social and economic deterioration will continue at its current inexorable pace. To distract the public from internal crisis, Putin will play a military card against Georgia. Moscow and Washington probably have or will forge an "Iraq-for-Georgia" deal, giving the Kremlin a quiet green light for cross-border raids. However, these will achieve little: Washington will not allow Russia to do anything against Georgian President Eduard Shevardnadze, and attacks by Chechen and international militants will continue unabated in Chechnya and elsewhere.

Ukraine will be another key area to watch in the fourth quarter. Although President Leonid Kuchma may not resign before the end of the year, pressure for his ouster is growing. The Ukrainian opposition, ranging from leftist to pro-U.S. parties, is united but too weak by itself to throw Kuchma out of office. However, pressure from the United States -- which has accused the government of selling arms to Iraq -- and Europe will help, and Putin will keep his silence. Ultimately, Kuchma could be replaced by pro-Western Sergei Yuschenko and his liberal party, which turned out the best performance in last spring's parliamentary elections. Sometime next year, the geopolitical map of Europe could again be redrawn in Washington's favor.

Latin America

In this region, the top issues are economic and political stability.

Latin American and Caribbean economies will remain sluggish during the fourth quarter, with full-year growth for 2002 averaging between 1 percent and 1.5 percent. Factors combining to depress growth include low prices for most international commodities, a weak global economic recovery, increased trade protectionism by the United States and European Union, and a steep drop in foreign direct investment (FDI).

Meanwhile, political turmoil likely will intensify in countries like Argentina, Colombia and Venezuela. However, the Bush administration will be more and more absorbed with the potential U.S military offensive in Iraq and will have no time to deal with crises in the Americas. The only exception will be Colombia, where the U.S. administration has morphed a failed drug policy into a counter-insurgency strategy that is being presented by U.S. policymakers as an integral component of the global war against terrorism.

Argentina's economic crisis appears to have stabilized somewhat, but actual recovery has yet not begun. The currency has held at about 3.65 pesos to the dollar for several weeks, and bankers report that wealthier retail customers recently started making deposits again to take advantage of very high savings rates. However, the lame-duck government of President Eduardo Duhalde has not yet signed an agreement with the International Monetary Fund to roll over at least $11 billion in debts due to multilateral entities by the end of 2003. Although a so-called "maintenance agreement" likely will be signed in the fourth quarter, it will not revive investor interest in Argentina.

Buenos Aires has not yet started formal debt restructuring talks with private creditors, who were owed $142 billion as of Dec. 31, 2001, and FDI flows likely will not resume until Argentina's economic and political uncertainties clear up. Duhalde has set new general elections for March 2003, but a recent court decision could upset that timetable; the court declared unconstitutional a Duhalde decree that set Dec. 15, 2002, as the date for simultaneous internal party primaries. Nevertheless, Duhalde plans to leave office on May 25 regardless of whether elections are held. As a result, persistent political instability in Argentina will continue to affect its economic performance in the fourth quarter.

Brazil also faces a potentially stormy fourth quarter. The slide toward debt default likely will accelerate if investor doubts about the country's next government persist. With Luiz Inacio "Lula" da Silva of the socialist Workers Party (PT) likely to become the next president, bankers and investors have been accelerating efforts to reduce their exposure in Brazil. As a result, Brazil's ability to avoid a forced debt-restructuring situation could be defined before the end of 2002. With a debt load estimated at $260 billion to $350 billion, an Argentina-style default in Brazil would hammer banks in the United States and Europe, especially in Spain.

Although da Silva has campaigned to the center of Brazilian politics and has sought to reassure private investors, his election likely would trigger important shifts in Brazil's economic and foreign policies. At home, da Silva likely would seek to increase government spending on social programs and infrastructure, which implies higher tax rates and more borrowing. Internationally, da Silva is extensively on the public record as opposing a U.S.-anchored Free Trade Area of the Americas (FTAA), rejecting increased U.S. military involvement in Colombia's conflict and condemning IMF aid programs and economic policy prescriptions.

In Venezuela, rising oil prices will give the government of President Hugo Chavez more revenue in the fourth quarter, but the non-oil economy will not rebound. Venezuela's growing economic difficulties are a direct consequence of the country's political crisis, which likely will intensify this quarter as the regime seeks to consolidate its control over the armed forces, government institutions and political opposition.

Chavez repeatedly has claimed that the Bush administration supports his efforts to tighten controls over the political opposition. He may be misreading the Bush administration, but it is clear that U.S. policymakers are more concerned with guaranteeing uninterrupted oil supplies from Venezuela as Washington prepares for war against Iraq than they are with Chavez's increasingly authoritarian tactics.

In Colombia, U.S. President George W. Bush has pledged his commitment to Bogota's "Democratic Security" plan. President Alvaro Uribe Velez's plan is portrayed as a Colombian strategy, but it clearly is being developed with substantial U.S. input and direction. In essence, Uribe has proposed a long-term counter-insurgency strategy to defeat Colombia's rebels and paramilitaries and eradicate the drug trade, with still undefined but substantial U.S. economic and military support.

Although U.S. aid flows will not increase significantly in the fourth quarter, the Bush administration's expanding footprint in Colombia already is altering the dynamics of that conflict. The country's economic difficulties likely will become more visible. At the same time, armed hostilities will worsen as the Colombian army not only continues its offensive against the Revolutionary Armed Forces of Colombia (FARC) but also comes under intense pressure to launch offensives against paramilitary groups.

Asia

As in much of the rest of the world, the top issues in Asia will continue to be the war against terrorism and preparations for a U.S. showdown with Iraq. These two major Washington initiatives will have noticeable impacts on debates and actions within Asia, in areas ranging from oil prices and economic competitiveness to internal social stability and relations with the United States.

The fourth quarter will be a time of political change in Northeast Asia. In China, President Jiang Zemin caps his decade of leadership with a face-to-face meeting with U.S. President George W. Bush in Crawford, Texas, in October and a meeting with visiting Russian President Vladimir Putin in December. With the 16th Communist Party Congress in November, Jiang will begin to step back from his official positions, eventually relinquishing most of his titles as he becomes the elder statesman of the Middle Kingdom.

In South Korea, the run-up to presidential elections in December will dominate the public and political scene -- even as North Korea simultaneously accelerates economic, social and diplomatic cooperation and raises the nuclear threat anew. The election process already is tearing apart political parties and alliances as presidential candidates jockey for position, trade political favors and try to garner new support.

North Korea's new charm offensive coincided early in the quarter with a surprisingly candid declaration that the country has an ongoing nuclear program. The ultimate goal of Pyongyang's contradictory diplomatic tracts is to draw Washington into negotiations with the hermit kingdom. Pyongyang will continue to match diplomatic niceties with demonstrations that it still remains a viable threat to security in Northeast Asia -- thus emphasizing that despite Washington's preoccupation with al Qaeda and Iraq, North Korea cannot be ignored.

Japan, still struggling with its domestic economic system, will play into North Korea's plans as the government continues to focus on foreign policy initiatives ranging from North Korea and Russia to Kashmir, the Middle East and Indonesia. Tokyo also will face internal debate over just how much assistance it should give to the United States in a war against Iraq -- something that will continue to shape the evolution of Japan's Self Defense Forces.

Southeast Asia will continue to struggle with balancing internal social and economic forces against the U.S. war on al Qaeda. In places like Indonesia, domestic tensions, as well as those with Washington, were beginning to boil over as the fourth quarter dawned, and in the wake of the Bali bombing will grow only worse. Domestically, the Oct. 12 bombing is causing fractures within the government to widen. It also has awakened a new sense of purpose in Australia that will draw Canberra ever deeper into Southeast Asia's security scene.

On the economic front, the trend toward bilateral and multilateral free trade agreements and currency swap deals will continue as China, Japan, South Korea and others line up to be the economic patrons -- or masters -- of the ASEAN nations.

Elections in Pakistan and Indian-controlled Kashmir dominated South Asia early in the quarter, and tensions between Islamabad and New Delhi are winding down. For India, the lack of a clear victory in Kashmir for pro-New Delhi parties is causing the government to carefully reconsider its Kashmir policies. For Pakistan, internal politics are the dominant issue, and President Pervez Musharraf now will make his case to the West -- read Washington -- that the strong elections performance by Islamist parties has left his hands even more tied than before where cooperation with the United States is concerned. If Washington wants Pakistan's cooperation against al Qaeda, it will have to pay double.

Africa

Although many internal conflicts continue in African states, we do not expect significant change in most areas during the fourth quarter. The U.S. war on terrorism has largely marginalized the continent, but a few countries -- including Djibouti, Kenya, Nigeria, Sudan and South Africa - have gained new strategic importance.

For the next three months, these states will be negotiating the terms of their expanded ties with Washington. In Kenya, for instance, the upcoming presidential elections will be highly destabilizing, and the competing political factions may look to the United States and Britain for help.

Tensions will be high in Nigeria as well during the run-up to elections next spring. Abuja's attempt to redistribute political power and oil revenues within the country will be the key debate that shapes Nigeria's political landscape over the next three months. President Olusegun Obasanjo also will have to deal with the tricky issue of responding to an International Court of Justice ruling that awarded sovereignty of the oil-rich Bakassi Peninsula to Cameroon. The potential for conflict between over Bakassi in the fourth quarter is quite low, with both Nigeria and Cameroon seeking a diplomatic compromise over the ICJ ruling. For Obasanjo, the flies in the ointment will be regional political leaders in Bakassi and southeastern Nigerian states who oppose the ruling and who could try to stoke low-scale violence in the region as a means of pressuring Abuja.

In Sudan, the government presses on with its 19-year-old war against southern rebels, despite U.S.-backed mediation efforts. In the next three months, Khartoum will try to consolidate the advantages afforded by its new cooperation with Washington, especially in attracting FDI and limiting the rebels' war options. A reshuffling of the political deck also may be in Sudan's future as President Omar el-Bashir tries to balance Washington's needs against his own: placating the military and containing the Islamist opposition.