Introduction
STRATFOR remains focused on the Iran situation. The December demonstrations ended with a victory for the Ahmadinejad faction. The demonstrations were shorter than the June demonstrations; no one from the business community or labor unions joined the demonstrators. The security forces remained loyal to the government and reacted violently and effectively. A wave of arrests followed and almost all of the clergy that had indicated support for the Rafsanjani faction ran for cover.
The Iranians charged, before the demonstrations, that more than 80 nongovernmental organizations (NGOs) that supported agitation inside Iran were funded by foreign intelligence agencies — either U.S. or British. That announcement allowed Tehran to position the supporters of the demonstrators, particularly former Iranian President Rafsanjani, as in the pay of foreign intelligence services. The thousands who were arrested are in pretty big trouble. On the whole, we tend to agree with the Iranian view that there was a concerted destabilization campaign underway. For example, the major reformist website was hosted in Arizona. There was very little reporting from Iran — we had some of the few sources there. The reporting was mostly done from Beirut and continued to represent the demonstrations as a significant challenge to the regime.
Last week, the discussion in Washington shifted from an uprising against the regime to the possibility that elements of the Iranian military might be interested in working with the United States. Essentially, this is writing off the fantasy of Rafsanjani as a liberal friend of the West, to another fantasy of a split within the Iranian military. What it represents is the Obama administration desperately looking for a strategy that doesn’t involve capitulation and doesn’t involve war.
The Iranians signaled their options with incursion into Iraqi oil fields and the release of a British hostage, whom it turns out was held in Iran. The decision to release him came with full knowledge that he would reveal that he was in Iran. The Iranians are signaling that they retain capabilities in Iraq and are prepared to use them. This makes investing in Iraqi oil fields at the moment extremely risky. Until the Iranian crisis clarifies itself and the Iraqi political situation settles down as well, we are extremely cautious on Iraq. Apart from its own problems, the Iranian situation represents a real danger there.
Apart from Iraq and Iran, attention should be paid to Afghanistan and Yemen. It is now clear that Yemen has become the main source of al Qaeda threats — bearing in mind that this is not the 9/11 al Qaeda, but a successor group. President Obama is committed to an Afghan surge to defeat al Qaeda, and now al Qaeda turns up in Yemen. Yemen already has U.S. covert capabilities deployed, both civilian and military. But the question is going to come up as to why Obama is deploying to Afghanistan when the threat is emanating from Yemen.
Israel has made it clear that it regards February as the decisive month for sanctions. It has done so in multiple, very public forums and from all spectrum of the coalition. Bibi Netanyahu tried to get Tsipi Livni of the Kadima faction to join in a grand coalition, indicating to us that he is trying batten down the hatches politically. Kadima declined but this is largely bargaining. Netanyahu will do what he wants to anyway, but his trying to build a coalition of all parties to share responsibility is telling.
Obama is clearly not ready to move in either direction on Iran, but he is returning to Washington to grapple with the airline security system and that means grappling with the terror threat. All of these things are connected and his political enemies will try to pin him down on Iran as well. Obama is continuing to lose room for maneuvers, but he has truly impressed us with his ability to postpone decisions that we would have thought he would have to face months ago. It is, at the moment, the most striking characteristic of the global system: Obama buys time, whether he needs it or not. Not a bad strategy, assuming there is a purpose behind it.
China
China made it through the global recession of 2008-2009 by dramatically boosting government spending and infusing large amounts of credit into the economy. A reinvigoration of stimulus policies will greet the new year.
After the inauguration of the Central Asian Natural Gas Pipeline in mid-December, China will see rising levels of natural gas imports from Turkmenistan to Uzbekistan to Kazakhstan and into China's Shaan-Jing pipeline and West-East pipeline to Shanghai. The Central Asian Natural Gas Pipeline's gas flows are set to rise to 13 billion cubic meters (about 16 percent of China's natural gas consumption). This comes at a fortuitous time for some Chinese cities that have experienced natural gas shortages in 2009 due to high demand amid the early onset of cold weather, though the country's pipeline infrastructure will limit the reach of the new Turkmen supplies.
While China boosts its natural gas imports, it is also exploring and developing domestic natural gas production. By the end of January, French company Total is expected to sign a deal with China National Petroleum Corporation (CNPC) to help develop the South Sulige field in China's Ordos Basin (the second largest Chinese field with recoverable reserves, estimated at 2.9 trillion cubic meters). The deal comes on the heels of several major Chinese agreements with French companies in late December, namely in the aviation and nuclear power sectors.
The annual iron ore pricing negotiations will also require energy and attention from China's many powerful steel companies and the China Iron and Steel Association (CISA). Iron ore prices are traditionally set through knock-down, drag-out negotiations that last from November to May. In 2009, China sought to take advantage of the recession and the low global demand for steel by offering a lowball bid. The plan failed and Chinese firms were forced to buy on the spot market for the rest of 2009, increasing costs and supply risks. Hence, in 2010, China will temper its approach and hopes to conclude the negotiations quickly in January. However, the major iron producers (namely Rio Tinto and BHP Billiton) have the upper hand, as China cannot stem its rapidly rising demand for iron ore.
January will also see developments in foreign trade. The free trade agreement (FTA) between China and the Association of Southeast Asian Nations (ASEAN) will become operational on Jan. 1, 2010, with the final components of the FTA taking effect, including eliminating more tariffs and opening investment flows. The month will also see the beginning of formal negotiations for a China-Taiwan trade deal as relations across the Taiwan Strait improve. Finally, January will see World Trade Organization spats continue, especially with the United States. The WTO will create a dispute-settlement body to deal with China's complaints about the Obama administration's September 2009 decision to slap a 35 percent tariff on Chinese-made tires. Due to the fact that China agreed to U.S. stipulation Section 421 as part of its accession to the WTO, there is little the WTO can do.Meanwhile, other disputes will continue.
South Korea
New labor regulations were approved Jan. 1, allowing multiple labor unions to be represented at a single company starting in July 2011and banning firms from paying wages to full-time union officials beginning in July 2010. Although South Korea avoided large-scale strikes threatened by labor unions over the move to implement the laws,there are still disagreements between government and labor, and business-sector representatives have also warned that the laws will harm labor-business relations and weaken the Korean economy. The government will likely implement the laws anyway, but will allow delays in enforcement and use it to force business and labor back to the negotiating table to come up with a deal that significantly weakens labor's ability to carry out massive cross-sector strikes, which continue to undermine foreign investor sentiments.
Thailand
There are rumors that the Red Shirts plan another rally around Jan. 10. Recent rumors have turned out to be exaggerations -- or the Red Shirts have been unable to draw the large crowds they intended.
Eurasia
Russia
Russian President Dmitri Medvedev is set to sign into law reforms that will include the privatization of thousands of state-owned companies as well as a more foreign-investment-friendly legal environment for its energy industry. Russia's antitrust agency head, Igor Artemyev, has stated that Russia will hold public discussions and seek the opinion of foreign companies as well as Russian and foreign investors before the government passes these laws. The signing is thus anticipated to happen in mid- to late January. There has been a lot of movement in terms of opening the energy sector to foreign investment, with major Western energy firms such as Eon, Eni, Total, GDF and Chevron lined up to make deals and follow through with asset swap agreements as the Russian legal atmosphere crystallizes.
Russia, Belarus and Kazakhstan
Another highly anticipated event that is set to formally launch on Jan. 1 is a customs union between Russia, Belarus and Kazakhstan that aims to integrate the countries economically and create a joint tariff system. Though it will officially go into effect on the first day of the new year, there actually will be several phases that it will go through and details that are unclear (even to the parties involved) will be hashed out, first by July 1 and then by Jan. 1, 2011. While the customs union remains enigmatic, the fundamental purpose is for Russia to consolidate its economic influence (and subsequent political influence) in these countries, and Belarus and Kazakhstan will adjust to Russia's tariff model, rather than the other way around.
Poland
Russian-Polish negotiations to secure natural gas imports for 2010 failed to reach a conclusion in December, which means Warsaw will attempt to ink the deal in January. Time is against Poland, although a mild 2009 winter and ample natural gas reserves allow Warsaw to continue negotiations into 2010. The early draft of the agreement would see Polish imports of Russian natural gas rise to 10.27 billion cubic meters (bcm) a year through 2037 from the current 7 bcm, and would see EuRoPol Gaz -- a joint Russian-Polish private-sector venture that operates the Polish section of the Yamal pipeline -- restructured to a 50-50 ownership between Gazprom and Polish state-owned PGNiG. But they are running into the private interests of Bartimpex, which does not want to lose its 4 percent stake in EuRoPol Gaz and is putting up roadblocks on the deal. Ultimately, the gas deal will involve a marked increase of Russian natural gas exports to Poland, which will allow us to judge the temperature between the two countries as Russia puts into effect the Nord Stream pipeline, which is designed to circumvent Ukraine, Belarus and Poland on its way to Germany.
Ukraine
Ukraine's highly anticipated, Jan. 17 presidential elections could significantly impact the country's energy industry as well as its social stability. While it is all but assured that the next president will be friendlier to Russian interests than President Viktor Yushchenko (who is trailing badly in the polls to front-runners Viktor Yanukovich and Yulia Timoshenko), that is not to say a succession will be smooth. Ukraine is a politically chaotic country under normal circumstances, and this reality will only be exacerbated under the electoral atmosphere. While Russia is not looking to cut off natural gas supplies as it did in January 2009, a disruption remains a possibility, given that Ukraine's energy industry is one of the most contested areas of control between the country's divided political leadership and could be targeted or manipulated by a number of players. Social unrest is a distinct possibility, as the previous election that ushered in Yushchenko under the "Orange Revolution" brought hundreds of thousands of Ukrainians to the streets. It is likely that there will be many disillusioned voters this time around as well, regardless of which candidate wins.
Latin America
Venezuela
Venezuela will continue to suffer from drought conditions through January as a result of the El Nino weather pattern. Both the drought and the underdevelopment of the country's electrical system have had a concerning impact on Venezuela. The drought has dropped the country's main hydroelectric reserves to record lows. The persistent underdevelopment of the country's electrical system has been particularly striking, with the government implementing 20 percent cuts in electricity use throughout the country.Government officials have expressed concerns that in January, the Guri hydroelectric reservoir will be depleted and more severe cutbacks will be needed.
Also in January, international investors are scheduled to make bids on revised terms for the Carabobo petroleum block. Several consortia appear to have formed to take advantage of the offering that has been revised and postponed several times in the past year. Companies interested in the opportunity include CNPC, Total, Chevron, Portuguese oil company Galp, Brazilian state-controlled energy company Petroleo Brasileiro (Petrobras), Norwegian oil company Statoil, Spanish energy company Repsol, Chinese energy company Sinopec and British companies BP and Royal Dutch Shell.
These companies remain interested in Venezuela in spite of the country’s history of nationalization, and Chevron has been positive about the new contract terms. The companies are likely betting that by scoring a contract, they will plant their flag in the ground -- they may not plan to immediately make heavy investments. The goal may well be to outlast the instability of the government of Venezuelan President Hugo Chavez and invest real resources once the situation stabilizes.
Ecuador
Ecuador plans in January to enter negotiations with companies invested in the Ecuadorian oil sector. The government intends to shift the contractual relationship it has with all external investors from production-sharing agreements to fee-based service contracts. The new rules would stipulate that investors would be reimbursed for expenses and paid a fee for output, but would have no ownership rights on oil that is produced. The companies will also be asked to give up the right to international arbitration; disputes would be settled in Ecuadorian courts. The government has set a deadline of March 2010 for signing a final deal with investors.
Peru
Peru will implement a capital gains tax in January in alignment with a law passed in December. A 5 percent tax on individuals and a 30 percent tax on companies will be imposed, according to statements by Peruvian Finance Minister Mercedes Araoz, who replaced former Finance Minister Luis Carranza in December.
Peru also plans to auction off 10 exploration lots in the Amazonian region to foreign energy investors. The auction, scheduled for 2009, is postponed to Jan. 22, 2010, as a result of the financial crisis. The tender will be offered in the wake of negotiations with Peruvian indigenous groups, which have expressed opposition to foreign investment. Although it is not clear which companies are interested in the auction, companies that bid on the 2008-2009 Peruvian auction included: Peruvian oil company Petroperu, Indian company Jindal Steel & Power and CNPC.
Argentina
Argentina expects the U.S. Securities and Exchange Commission (SEC) to approve in January a proposal to reopen expired debt negotiations with investors who refused to settle for the proffered debt renegotiation resulting from Argentina's 2001-2002 default. The proposal includes the creation of a $6.57 billion fund to guarantee bond payments through 2010. If the SEC accepts the proposal, Argentina will likely be able to settle outstanding debt claims that will facilitate the country’s access to international credit. This will make it easier for the government to finance its populist policies through borrowing, something that will likely stabilize the short-term outlook for Argentina, while putting the country’s long-term financial stability in increased danger.
Argentine farmers have threatened to launch protests as soon as January. Full-scale protests are unlikely to take flight for several months, however, as it will take some time for the new Argentine congress to get settled, and the farmers will wait to see what concessions they might get out of the legislators before launching full-scale disruptions.
Mexico
The administrative council of Mexican state-owned energy company Petroleos Mexicanos (Pemex) will meet Jan. 12 to make what is expected to be a final decision on the implementation of reforms to Pemex that were spearheaded by Mexican President Felipe Calderon and approved by the Mexican legislature in 2008. The reforms will include personnel shuffling and the potential creation of a corporate directorate of information technology. Once this decision is taken, it is unclear when the reforms will be implemented, but Pemex expects the process to take about six months.