Bloomberg: The World Hot Spots You’ve Never Heard of That Could Ruin 2015

17/12/2014

By Gregory Viscusi and Nicole Gaouette

The Spratlys. Narva. Fezzan.

These places risk becoming household names in 2015. Can’t locate them on a map? Well, a lot of people couldn’t have found Donetsk in Ukraine or Raqqa in Syria as 2014 got under way.

As experts debate potential nasty surprises in 2015, certain scenarios keep coming up: a naval incident between China and one of its neighbors over a series of sparsely inhabited islands. A renewed push by Islamic rebels in Libya’s lawless south into West Africa. An implosion in North Korea.

Other possibilities include a Russian push into the Baltic countries, a third Palestinian intifada, an Israeli strike against Iran and a continued fall in oil prices that destabilizes countries from Russia to Venezuela.

“You can never predict the next crisis, but you can see some regions that are spring loaded,” said Michael Clarke, director general of the Royal United Services Institute, a research group, in London. “You don’t know where the mouse will pop up, but you know where the traps are set.”

Few analysts predicted that a disavowed trade pact between the Ukraine and the European Union would turn into the tensest standoff with Russia since the end of the Cold War. And the strength of Islamic State was underestimated in many corners of the world before its successful onslaught into Iraq.

“Geopolitical risk is going to be very prevalent next year: None of the conflicts from this year, whether it’s the Ukraine, Middle East or disputes between China and Japan, have been reconciled,” said Russ Koesterich, chief investment strategist at New York-based BlackRock Inc. “These frozen conflicts will be with us for some time and they’ll keep cropping up the way they did in 2014.”

Crashing Currencies

Unrest could also arise via planned elections from Israel to Greece to the U.K., where extremist parties threaten to disrupt the established groupings. Falling oil prices already pushed Russia’s ruble down 52 percent this year and Venezuela’s bolivar has fallen about 65 percent on the black market. Swaps traders are overwhelmingly betting that Venezuela will default.

“It would be hard to pick a December in memory when we were concerned about so many risks,” said Barry Pavel, director of the Brent Scowcroft Center on International Security at the Atlantic Council, a Washington policy group.

In no part of the world are more militaries facing each other than in the seas off China, through which much of the world’s trade transits.

China disputes the sovereignty of the East China Sea with Japan and Korea. Using a map first published in the 1940s, China also claims about 90 percent of the South China Sea, including the Spratlys and the Paracel Islands. Taiwan, Vietnam, the Philippines, Malaysia and Brunei all have competing claims.

Rig Riots

It’s more than talk. In May, China placed an oil rig in waters claimed by Vietnam, near the disputed Paracels in the South China Sea. That triggered anti-China riots that killed two, prompting foreign-owned factories to shut production and Chinese workers to flee. Vietnam said Chinese ships sent to protect the rig were ramming Vietnamese fishing boats, charges rejected by China.

China eventually removed the rig in July, a month earlier than scheduled, saying the drilling was done. Then in October, it completed an airport upgrading on Woody Island, one of the Paracels.

“China’s aggressive maritime claims could degenerate badly,” said Philippe Moreau-Defarges of the French Institute of International Relations in Paris. “China is determined to expand its maritime domain and there’s always the risk that some incident with a warship from Japan, Vietnam, or the Philippines escalates out of control.”

Exceptional Zone

Chinese President Xi Jinping’s goal is to create a “zone of exceptionalism” under which the established rules-based order would be replaced by acceptance of China’s interests and authority, said Andrew Erickson, an associate professor in the strategic research department at the U.S. Naval War College in Newport, Rhode Island.

The rival maritime claims are exacerbated by rising nationalistic rhetoric in Japan. Prime Minister Shinzo Abe angered Korea and China with his December 2013 visit to the Yasukuni shrine -- the first by a sitting prime minister since 2006 -- where several war criminals are memorialized.

“We see risks coming from tensions between China and Japan,” said Claudia Panseri, a global equity strategist at SG Private Banking in Paris. “Nobody is speaking about this, but if Chinese companies stop importing products from Japan even all the quantitative-easing injection of money from the central bank could have a short life span.”

Crises from previous years haven’t finished running their course. Donetsk and much of eastern Ukraine remain under control of Russian separatists after the country effectively split over whether to tie its future to the EU or with President Vladimir Putin’s Russia.

Baltic Pressure

“Ukraine may not get any worse, but the risk is that Russia starts to put pressure on other countries, either NATO countries on the Baltic or central Asian countries that have doubts about the Eurasian Economic Union,” said Stefano Silvestri, president of the Rome-based Institute of International Affairs.

North Atlantic Treaty Organization Secretary General Jens Stoltenberg said Dec. 2 that NATO jets had intercepted 400 Russian warplanes this year at the edges of the alliance’s airspace. Estonia, Latvia, Moldova, and Kazakhstan all have regions with large Russian ethnic minorities, such as Narva in Estonia.

“I think Putin is going to keep pressing forward, looking for advantages and looking for opportunities to try to split Europe back up in many ways,” said the Atlantic Council’s Pavel.

Roiling Markets

With much of Europe still limping out of the euro crisis, a worsening of the Ukraine situation “is the event that could roil the global markets most,” said Paul Christopher, chief international investment strategist at Wells Fargo Advisors LLC.

The Russia/Ukraine situation was seen as by far the biggest geopolitical risk for 2015, according to 84 economists who participated in a Bloomberg News survey taken last week. Fifty-one chose it as the top risk. The second, with 14 top selections, was the Middle East/Islamic State category.

For oil producers such as Russia, Iran and Nigeria, falling prices may prompt governments into unorthodox measures to bolster economies or retain public support. Benchmark prices in New York are down about 44 percent this year to about $57 a barrel. Iran needs oil at $143 a barrel to keep its budget balanced, according to data compiled by Bloomberg. The figure for Russia this year is $100, Finance Minister Anton Siluanov said last month, adding that it will fall to $90 in 2015.

Oil Fallout

“The key thing we’ll be looking at is the fallout from lower oil prices,” said Geoffrey Pazzanese, a New York-based fund manager at Federated Investors Inc. “If you have a destabilized Russia perhaps the only way they’ll find they can deflect a really bad domestic economy is to raise the heat on the conflict in Ukraine, to raise nationalism to stay in political favor.”

Oil price declines also won’t help Nigeria, already struggling to contain the Boko Haram Islamist movement. Africa’s largest crude producer is particularly vulnerable right now, said Peter Pham, director of the Africa Center at the Atlantic Council, a Washington policy group.

“Boko Haram is running circles around the neighborhood and Nigeria and the neighboring powers aren’t up to fighting it,” Pham said. “We may see greater areas of Africa’s largest economy, its most populous state, falling into the hands of a terrorist group.”

From Fezzan

Elsewhere in Africa, the southern rim of the Sahara may produce an unpleasant surprise. After France rushed troops to Mali in January 2013 to repel an offensive by Islamic radical militias, many of the militants regrouped in Libya’s lawless Fezzan region. From there, they threaten the entire region, and possibly Europe.

“Southern Libya is the principal security risk our two countries face,” French Prime Minister Manuel Valls said at a press conference with Algerian Prime Minister Abdelmalek Sellal Dec. 4 in Paris.

Islamic State, which burst out of its base in Raqqa to overrun much of Iraq in the summer of 2014, has been stunted by an air campaign by the U.S. and its allies. That hasn’t dulled its ambitions to spread its self-proclaimed caliphate, nor its destabilizing impact. An estimated 3,000 Western Europeans have fought in its ranks, heightening the risk of terror attacks when they return home.

Refugees Arrive

One of the most fragile countries in the Middle East is Lebanon, whose government combines Shias, Sunnis and Christians. That equilibrium is under threat now that Lebanese are participating on all sides of the Syrian conflict and an inflow of Syrian refugees make up a quarter of Lebanon’s population.

“The stability of Lebanon will be in play,” said Magnus Ranstorp, Research Director at the Swedish National Defense College in Stockholm who follows radical Islamic movements. “If Lebanon unfolds and descends into civil war, it may set off Israel and Hezbollah.”

Israel itself is threatened by its own divisions, while Palestinian public opinion is at boiling point over the lack of progress on ending Israel’s occupation of the West Bank. Prime Minister Benjamin Netanyahu has fired ministers who were most amenable to a settlement with the Palestinians and called new elections for March.

‘Political Dysfunctionality’

Israel has “a level of political dysfunctionality we haven’t seen in some time,” said Casimir Yost, a professor at Georgetown University’s School of Foreign Service in Washington and former member of the National Intelligence Council. “They have fissures within the Jewish population, to say nothing of the fissures between the Palestinians and Israelis. If we’re not there, we’re close to the end of a two-state possibility.”

Amid the gloom, there are chances for some good news in 2015. Iran could end a three-decade stand-off with the U.S. by reaching an accord over its nuclear program. “I think there is a deal to be done,” said RUSI’s Clarke. “Both sides have the motive.” And China and Russia’s leaders are probably good enough chess players to know when to step back from confrontations on their borders.

“The Chinese really tend to move incrementally and they’re going to move even more slowly than is their custom because they don’t need a foreign distraction with their hands already full with the economy,” said Wells Fargo’s Christopher.

And Islamic State’s extreme violence could be its undoing, as happened with its precursors in Iraq.

European Elections

The potential sparks are exacerbated by the weakness of Western powers, with intervention fatigue in the U.S. and economic frailty in Europe. A party opposed to British membership in the EU is due to make inroads in elections that must be held by the end of 2015, and a Greek party that wants to rewrite the country’s debt agreements could win elections likely in Europe’s most indebted and recession-scarred country.

The U.S.’s ability to confront global risks would be hampered if the 2016 presidential campaign, which gathers steam next year, “panders to the growing public fatigue with the country’s global responsibilities,” said Mathew Burrows, Director of the Strategic Foresight Initiative at the Atlantic Council. “Wild cards abound in such an increasingly disorderly world.”

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