The Political Flashpoints to Watch in 2019
(Bloomberg) -- The world is changing fast and 2019 promises to be another bewildering and chaotic year. The rise of China in the East and populists in the West means that, by mid-2018, economies run by mainstream democratic parties accounted for just a third of the combined gross domestic product of the Group of 20 nations, down from 83 percent in 2007, according to Bloomberg Economics. And that was before the election of two more populist presidents, Andres Manuel Lopez Obrador in Mexico and Jair Bolsonaro in Brazil.
“In 20 years I haven’t operated in an environment like this, ever, because there were always safe havens before. Countries we thought easy to predict are becoming harder to read now,” says Claire Simpson, global claims director at Willis Tower Watson Plc, a global risk advisory and insurance company.
Whether this upheaval is due to a technological revolution, income inequality, a clash of civilizations or Western arrogance (choose your poison), the trend is set to continue. In 2019, a number of these transitions from the post-Cold War era have the potential to come to a head, each carrying “worst case” risks. To help navigate them, we’ve compiled a calendar of some of the key moments to watch, organized by topic. Happy New Year.
A New Arms Race
On Dec. 4, Donald Trump gave Russia 60 days to comply with the Intermediate-range Nuclear Forces Treaty or see Washington trigger a six-month notice period to end its commitments not to produce land-based missiles and launchers that have a range of 500 kilometers (310 miles) to 5,500 kilometers. The clock runs out at the end of February. The 1987 treaty was negotiated between the U.S. and then-Soviet Union to dismantle thousands of middle-range nuclear missiles in Europe. Shorter trajectories made them hard to respond to and therefore destabilizing. That remains true today, but non-signatory China wasn’t covered and now has a large arsenal of them. Russia says it hasn’t breached the treaty’s terms.
► Worst case: The U.S. exits and Russia points previously banned missiles at its Western neighbors, supercharging an arms race in high-tech weapons already underway, and tossing a political grenade into NATO, as the U.S. and eastern and western European members divide over whether to respond in kind.
► Risk of INF treaty collapse: High
► Risk of new nuclear arms race in Europe: Medium
A 2018 survey for Willis Towers Watson found that its larger clients suffered most losses in Russia, often as a result of sanctions. So Russia gets its own category. The Kremlin may have given up on cultivating Trump, after he canceled two meetings with President Vladimir Putin toward the end of the year. Russia’s meddling in foreign elections, and its efforts to extend influence in the Balkans and former Soviet republics look set to continue, with further U.S. sanctions in response. A summit in Washington, previously floated for 2019, appears to be in jeopardy, though the two could potentially meet at the next G-20 summit in Japan in June.
Trump's sudden decisions to pull U.S. troops out of Syria and Afghanistan -- longstanding Russian demands -- and the coming departure of Defense Secretary and Russia hawk James Mattis won praise from the Kremlin, but officials there remain skeptical a genuine detente is possible.
► Worst case: U.S.-Russian relations descend into open hostility, affecting arms control and areas where they had until now been able to cooperate.
► Risk: High
The 90-day tariff truce that Trump and President Xi Jinping agreed at the recent G-20 expires at the end of February. If they fail, U.S. tariffs would rise on a $200 billion tranche of imports from China. The whipsaw on the S&P 500, as events repeatedly boosted and then undermined belief in the truce, show the stakes.
► Worst case: A full-fledged trade war that expands into an open struggle for strategic dominance by the end of the year, undermining growth and security around the globe.
► Risk: High
Also by February, the U.S. Commerce Department is due to rule on whether automobile imports constitute a national security threat, a designation that would let the U.S. slap higher tariffs on imports of cars without technically breaching World Trade Organization rules. European, and in particular German car manufacturers have most to lose. U.S. trade talks with Japan could take place any time from January, with more scope for a deal than with the EU. The Japan G-20 summit could be tense as a result.
► Worst case: The U.S. raises tariffs on auto imports, triggering a full-fledged trade war with Europe. The G-20, made impotent by rising nationalism, loses relevance.
► Risk: High
To close out the year, unless the U.S. stops blocking appointments to the appellate body of the WTO in Geneva, the trade body will on Dec. 10 lose the minimum three judge quorum needed to issue rulings.
► Worst case: The world loses its dispute resolution mechanism for trade disputes.
► Risk: High
U.S. pressure on Iran will build, after Trump withdrew from the 2015 nuclear deal and, in November, reimposed so-called secondary sanctions on companies from other countries that breach U.S. sanctions. The strategy, backed by Israel, Saudi Arabia and the UAE, is to squeeze Iran out of Yemen, Syria, Lebanon and Iraq, and back to the nuclear negotiating table. So far the effort has had both limited cost and success, but with sanctions taking full effect, 2019 could be an eventful year. With so many flashpoints, the potential for escalation is clear. (Click here for the International Crisis Group’s interactive map of trigger areas).
► Worst case: Iran restarts nuclear fuel production, prompting a rapid escalation. Pressured, Tehran tries to block the Strait of Hormuz, where it has naval exercises scheduled for August and through which 30 percent of the world’s crude oil supply passes every day.
► Risk: Medium
North Korea would have topped any list of global security threats at the start of 2018, but the June summit between Trump and Kim Jong Un defused an escalatory spiral of threats and ballistic missile tests. Things remain calm, but Kim shows no sign of genuinely dismantling his nuclear or missile programs, and likely used the détente to stockpile nuclear material and improve his weapons systems. Kim says the arrogance of U.S. demands is to blame for the lack of progress. Trump has said he wants another meeting, in January or February. Annual U.S.-South Korean military exercises usually take place in March and August.
► Worst case: A summit bust-up that leads to a renewed cycle of escalation.
► Risk: Low
The low level conflict in Eastern Ukraine returned to the headlines in November, when Russian special forces rammed, fired on and seized three Ukrainian naval vessels making their way into the Sea of Azov. Russia had been restricting commercial shipping to Ukrainian commercial ports in the sea for months before. The rhetorical fireworks between Kiev and Moscow are unlikely to die down before Ukrainian presidential elections on March 31.
► Worst case: Political instability and an incident that escalates to a rekindled Russian-Ukrainian war.
► Risk: Medium
Afghanistan is due to hold presidential elections on April 20. The U.S., anxious to find an exit from a war that in 2019 will be in its 18th year, is raising the pace of peace talks with Islamist insurgents from the Taliban movement that ruled the country at the time of the 9/11 attacks on the U.S., in 2001. Washington is also pressuring Pakistan, the Taliban's backer, to cooperate. Trump's plan to cut the U.S. troop presence in half, if it happens, could further undermine the government and its weak army, emboldening the Taliban to take an even tougher line.
► Worst case: The war intensifies and the government loses more ground as the Taliban pushes its advantage amid the U.S. pullout.
► Risk: High
The war in Syria looks certain to continue for an eighth year with the planned U.S. military withdrawal strengthening President Bashar al-Assad plus his Russian and Iranian backers. Turkey put off its planned offensive against ethnic Kurdish fighters who control much of northeast Syria after Trump's surprise announcement of his plan to pull out of the country, but has vowed to defeat the erstwhile U.S. allies. Trump's move could also open the way for Iran to expand its presence in Syria, sparking more intense skirmishes with Israel. Russia may call time on a truce in which it agreed not to attack Idlib, the last major territory held by rebel groups fighting the Assad regime. The truce is designed to give Turkey time to clear jihadists and heavy weaponry from the area.
► Worst case: The war escalates into a wider conflict among regional powers, driving more refugees to fragile states such as Jordan and Lebanon, as well as to Turkey.
► Risk: High
Nigeria holds elections on Feb. 16 and an intensified campaign by an Islamic State-allied faction of the jihadist Boko Haram is expected. After declaring victory, Nigeria’s military has struggled to reassert control over swathes of the country and has suffered a succession of humiliating defeats, as Boko Haram overran under-resourced military posts to seize their weapons stores. Hence, the fear of a major campaign to come.
► Worst case: Boko Haram gets a fresh wind as a demoralized Nigerian military fails to protect polling booths and civilians from attack.
► Risk: High
The opening of Ethiopia’s much delayed $4.8 billion hydroelectric dam project on the Blue Nile is now expected in late 2019. The impact of filling the dam on Egypt, downstream, has led to intense negotiations over how long this should take, with a possible range of 3-to-15 years. Too short and Egypt, which is already water poor, could lose an estimated 20 percent of its supply. Ethiopia is anxious to start generating power to defray the investment cost. At times, Egyptian leaders hinted at a military solution, but for now diplomacy rules.
► Worst case: Ethiopia stars filling the dam at a high rate with no agreement in place, triggering an Egyptian response.
► Risk: Medium
2019 has potential to become an annus horribilis for the European Union. While Italy looks to have averted for now EU fines for running an excessive deficit, the fragile coalition of two EU-skeptic populist parties in Rome is unlikely to wait long until it next takes on Brussels. A recession and early elections are possible, as they are in Spain. In December a far right party, Vox, won seats in a Spanish regional election for the first time since the death of General Franco. The stakes are high for Europe as a whole. French and German banks held more than $400 billion of Italian debt in 2018, compared with $115 billion of Greek debt at the start of that country’s debt crisis in 2010.
► Worst case: Greece on steroids, a new crisis that breaks up the euro.
► Risk: Low
Then comes Brexit. The March 29 deadline for the U.K. to leave the EU approaches with no terms yet agreed and the British parliament so divided that it’s hard to predict an outcome. Brexit is big. London is the seat of European finance and the U.K. has one of the EU’s largest economies and militaries. The Bank of England, controversially, has projected Brexit to cost anywhere from 1.5 percent to 10.5 percent of gross domestic product (currently $2.6 trillion) over five years, depending on how the U.K. leaves.
► Worst case: A bitter, disorderly Brexit without agreement on its terms that imposes heavy economic costs on both sides and damages security cooperation against common threats.
► Risk: Low, though as BoE Governor Mark Carney put it, still “uncomfortably high”
A third challenge to the EU comes from elections to the European Parliament. The May 23-26 vote is shaping up as a major test of the EU’s popularity and of the upstart nationalist and populist parties straining against it. Former Trump strategist and alt-right hero Steve Bannon has said he will co-ordinate the campaigns of nationalist parties across the bloc. Leading the charge against them? A diminished French President Emmanuel Macron and lame duck German Chancellor Angela Merkel. All of the above will feed into the always fraught selection, by late October, of the next presidents of the European Central Bank, European Commission and European Council.
► Worst case: The populists win big, gaining enough seats in parliament both to hobble the EU’s legislative process and boost prospects for nationalist victories and agendas across Europe.
► Risk of populist gains: High
The U.S. president gets his own category, too. If the last two years have been eventful, 2019 will be more so. The Mueller investigation into alleged collusion between the 2016 Trump election campaign and Russia could deliver its findings in the first part of the year. These won’t necessarily be made public, or produce any impeachable offense. Yet they will add to turmoil and distraction in a White House that, after November's midterm rout of Republicans in the House and the departure of Mattis and other key officials seen as stabilizing factors on the mercurial president, will increasingly be on the defensive with a hostile Congress spoiling for new investigations, including into Trump's finances. The political temperature will only rise through the year, as both Trump and his opponents move to campaign ahead of the presidential election in 2020.
► Worst case: Political gridlock in Washington and yet more Twitter bombs launched into sensitive foreign policy issues to draw attention away from the investigation.
► Risk: High
©2018 Bloomberg L.P.