Terra Firma

It’s not hard to paint a negative outlook for the coming year, given the political instabilities that such a serious global economic downturn inevitably creates. But beneath the market turbulence that will dominate the headlines in coming months will be two very important structural factors: around the world, we’ll see more state intervention in the global economy and much of that intervention will be reactive and badly coordinated. In part, that’s because many policymakers driving this trend will be worrying more about local politics than about the global economy as they make key decisions. That’s why politics will drive the global economy more directly (and less efficiently) in 2009 than at any point since the end of World War II.

As detailed in the previous feature in this report, the top risk comes directly from the US Congress. Political risks have historically been far more important for market outcomes in developing states. That’s not so this year. The current financial crisis has created unprecedented opportunities for government interference in economic affairs within rich states and nowhere is that more true than in Washington. In response to the financial crisis, we can expect a broad range of financial industry legislative and regulatory changes, direct government involvement in plenty of economic enterprises and financial institutions, and fiscal policies meant to spur economic growth. The risk, of course, is that US lawmakers will draw up new rules and regulations that weigh on the free flow of finance and investment for years to come.

SOUTH ASIA

The locus of the world’s terrorism/security risks has been moving steadily eastward over the past decade – from Israel/Lebanon to Iraq/Iran and now to Afghanistan/Pakistan/India. Pakistan’s internal political, economic and security problems are creating spillover effects into Afghanistan and India; and responses from both countries (and from the US) are exacerbating Pakistan’s instability and increasing security tensions across the region.

Perhaps the biggest risk of all – a major terrorist attack inside the US – is much more likely to come from terrorists operating out of Pakistan/ Afghanistan than from anywhere else.

IRAN

2009 will be the critical year for risk in Iran. Ultimately, the US and its European allies are privately prepared to deal with a nuclear Iran. The Israeli government isn’t and is under much greater domestic pressure to block it. Given the strong possibility that Likud leader Benjamin Netanyahu will become the next Israeli prime minister, we can expect Israel to continue to take a confrontational approach toward Tehran.

Iran will hold its own presidential election in June. The country’s hardliners are increasingly unpopular on the economy, but they’re much stronger on national security and the nuclear issue. That will give them all the motivation they need to answer real or perceived Israeli threats with threats of their own – and with support for proxies in Lebanon and the Palestinian territories. We could also see Iranian moves against US warships in the Strait of Hormuz and the use of friendly Iraqi groups to stir up trouble in the south of Iraq.

RUSSIA

With the impact of the global financial crisis, politics have taken an interesting turn in Russia. Despite the continued popularity of Prime Minister Vladimir Putin and a lack of organised political opposition in the country, we’re still starting to see significant social unrest across Russia. For the first time in years, we’ve seen serious demonstrations in 30 cities, following the imposition of import duties on foreign-made used cars. We’re likely to see much more turbulence in 2009 as the economic downturn forces factories to close and workers lose their jobs. Russians have seen this kind of hardship before, but only in the context of a very different kind of economic system.

Where could this go? The Russian government is unlikely to have much tolerance for dissent. And with the highest levels of anti-Americanism (and, in many quarters, of broader xenophobia) of any significant emerging market in the world, this has the potential to make security a serious concern – and to lead to boycotts of western goods. The Obama administration is not likely to keep quiet during a crackdown in Russia. That’s part of why Russia’s relations with the US and many European countries are likely to get even worse in 2009. The Germans, who are more dependent on the Russians economically and, to some extent, politically, will play the role of wild card.

Beyond these largest risks, there are some with more regional significance that are worthy of note this year. Each of them raises important questions.

IRAQ

Can Iraq remain stable as President Obama begins to draw down US troops and as Iraq militias like Moqtada al-Sadr’s Mahdi Army come out of hiding to fill the vacuum? How will Obama juggle pressure from Congress to keep his promise on speedy troop withdrawals with those at the Pentagon who urge caution? How long can Iraqi Prime Minister Nouri al-Maliki’s government keep the peace without compromises among Iraq’s various sects and tribes on the most pressing political problems facing the country: the status of the city of Kirkuk, demands for greater local autonomy in the southern provinces and a credible law that fairly distributes oil revenues among various groups? Worst-case scenarios – including full-scale civil war, the break-up of the country, and broader regional turmoil – are unlikely for 2009. But a sharp reversal of Iraq’s fortunes, and unexpected tests for Barack Obama, are not.

MEXICO

Will Mexico’s drug wars expand into a greater risk to domestic security? Might Mexican drug cartels begin to target Americans and US assets in retaliation for US support for domestic Mexican law enforcement? Mexico has come to be known as one of Latin America’s most stable countries. An expanded conflict would put that stability to the test.

UKRAINE

Can Ukraine’s warring political elites co-operate long enough to pull Ukraine out of its economic and financial crisis? Will the country’s internal divide between pro-Western ethnic Ukrainians and pro-Moscow ethnic Russians finally inflict lasting damage on the country’s social and political unity? Ukraine’s cohesion will be tested this year as never before.

SOUTH AFRICA

What will the election of Jacob Zuma as South Africa’s next president mean for that country’s future and for South Africa’s role in the region? Will Zuma adhere to a market-and foreign-investment friendly policy path? Or will the need to appease supporters among the country’s communists and trade unionists reverse South African economic policy? Fears that Zuma will drive his country far to the left are exaggerated, but tackling South Africa’s growing list of challenges without reliable support from the communists and trade unions is impossible.

Ian Bremmer, President, Eurasia Group

Ian Bremmer is president of Eurasia Group, the world’s largest political risk consultancy. He is also a columnist for slate, a contributing editor at the National interest, and a political commentator on CNN, fox News and CNBC.