First, the issue everyone is talking about — a developing rapprochement between U.S. and Iran. We’ve long said that Iran and the U.S. would eventually come to an agreement, but the timeline that both sides have set is ambitious with a number of potential pitfalls that will need to be watched closely. This quarter, both the Iranian and U.S. presidents will be negotiating with their publics as much as they are negotiating with each other through multilateral talks and backchannels. This is especially true for Iranian President Hasan Rouhani, who has a limited mandate to deliver concessions — particularly on energy-related sanctions — from a U.S. president that faces his own political limitations in unilaterally repealing these measures.
Saudi Arabia and Israel, both extremely nervous at the prospect of a potential U.S.-Iranian settlement, will do their best to try to derail the negotiation and cast uncertainty toward the Iranian charm offensive, but it won’t be enough to sabotage the dialogue between the U.S. and Iran.
Russia, also not interested in seeing the U.S. and Iran make up, will keep the U.S. dependent on Moscow’s cooperation to keep a negotiation on Syria alive. The negotiation to eliminate Syria’s chemical weapons stockpiles, impose a ceasefire and negotiate a power-sharing agreement in Damascus will run into hurdles this quarter, but Moscow will try to exploit a U.S. need to sustain the Syria negotiation so that it can keep attention away from other issues brewing in the Russian periphery and at home.
While trying to tend to its growing economic troubles at home, Russia will be engaged in a standoff abroad with the EU over the political and economic integration of former Soviet states, particularly Ukraine. The Ukrainian government will end up balancing any movement with the European Union with energy concessions to Russia.
Germany will meanwhile sit out that fight, focusing instead on the rest of the continent, where a debate has been revived over reforms to further integrate eurozone members. The Europeans will avoid any big, contentious decisions this quarter over issues like the banking union while trying to play up marginal improvements in growth. We maintain, though, that critically high unemployment levels has the potential to produce both worsening social conditions and a consumer debt crisis in the longer run that will erode the perception that the crisis is abating.
Economic tensions will continue to persist in the rest of the world, especially developing economies that will get a slight reprieve from currency fluctuations caused by U.S. Fed policy this quarter, but can only afford shallow reforms to compensate for the vulnerabilities exposed last quarter when capital flowed back to dollar-denominated markets. China’s leadership will announce a set of ambitious reforms to rebalance the economy, but do not expect much substantial action to occur within the quarter. The party leadership is spelling out its vision for the country in the long run. Beijing cannot afford decisive action on structural reforms without accepting a rise in unrest, and thus China’s economic competitiveness continues to erode.
Fourth Quarter Forecast Preview is republished with permission of Stratfor.