The global economy will contract in the second quarter and COVID-19 will hold the attention of the globe. The second quarter will adjust the rate at which a number of our annual trends progress, many of which will slow down or be on hold as governments scramble to adapt to a post-COVID reality. For instance, we will see fragile governments in Europe and the Middle East survive past their original expiration dates as they temporarily come together to weather the crisis. The U.S.-China trade battle will be put on the back burner as certain requirements are waived or delayed — but the systemic differences, especially in technological development, will not disappear or be forgotten. COVID-19 will also accelerate the pace of other trends discussed in our annual forecast. The pandemic plus an ongoing price war between Saudi Arabia and Russia will cause a number of oil-producing nations to struggle mightily during the quarter. We will also see certain countries emerge from the COVID-19 crisis and try to start to take advantage of the fallout beginning in the second quarter. For instance, despite COVID-19 outbreaks of their own, Asian countries other than China will try to take advantage of companies looking to diversify supply chains in the wake of the recent upheaval. In short, most of our annual trends hold, but COVID-19 has shifted the timeline of many.
Economic Recovery Prospects Replaced by High Probability of Recession
The world economy will likely experience an overall decline in Q2, and earlier forecasts of a slight pickup in 2020 growth are no longer plausible as a result of the COVID-19 pandemic. Rather, the global economy will experience significantly lower growth and possibly a recession in 2020 that could last into 2021. Raw data on China suggests a sharp decline in Q1 growth, and even though China may recover from the virus outbreak before other countries, a lack of demand elsewhere in the world will inhibit renewed growth at least through Q2. Large-scale modeling of the economic impact of COVID-19 shows the world on the edge of recession even if the virus abates quickly, with the potential for up to a 10 percent decline in global GDP if COVID-19 unfolds along the lines of the 1918-1919 influenza pandemic.
The outlook for recovery depends on the speed and scope of government policy responses to support household and business incomes and of central banks to limit financial disruptions. There are, and will continue to be, however, long-lasting retrenchments in consumption and investment and financial pressure on businesses. Those could lead to wider layoffs and a slowdown in economic activity that could accelerate into a deeper, longer-lasting economic contraction than now envisioned. How quickly and effective governments and central banks are in responding to the possibility of that doom-loop effect will determine the economic outlook for the rest of 2020 and 2021.
OPEC+ Production Cuts Will Have Little Practical Effect
The breakup of the OPEC+ production agreement will be in full focus during Q2 as both Saudi Arabia and Russia ramp up oil production and try to secure market share while demand plummets due to COVID-19. This will have major ramifications for oil-producing countries as oil prices may remain below $35 per barrel for the much of the first half of the quarter — only rising as expensive production elsewhere is shut in. Saudi Arabia and Russia are unlikely to reach another production agreement this quarter, but by the middle of the summer, Saudi Arabia will probably begin to realize that its production strategy is self-defeating on price dynamics and pull back on its own with a smaller coalition of producers, like its GCC allies.
A Push for Final Trade Deals Before U.S. Elections
At least to start the second quarter, the U.S. push to finalize more trade deals with trading partners will be on hold as diplomatic meetings and negotiations are frozen as a result of the coronavirus pandemic. Once the spread begins to subside, the United States will re-accelerate talks with the United Kingdom, European Union and other countries as part of efforts to spur economic recovery. U.S. President Donald Trump will still want to finalize more trade agreements ahead of November elections — but that timetable may no longer be practical if talks do not resume prior to the end of Q2.
Despite a Deal With China, the Trade Offensive Continues
With the COVID-19 outbreak affecting the U.S. and global economy, the U.S. trade offensive through the use of tariffs is likely to take a pause in Q2 and the United States is likely to remain lenient on China hitting import targets. If China fails to meet some of the initial targets on increased imports from the United States, then instead of hitting China with tariffs immediately, the United States will demand that China make up the difference in the second half of 2020. In addition, the United States is unlikely to move forward with tariffs on EU vehicles. But this does not mean trade disputes and protectionism will not be a major issue in Q2. Countries are likely to put increased restrictions on the exports of scarce medical equipment and supplies as countries attempt to protect their populations. Moreover, restrictions on commerce that are not tariff-related, including travel bans and the closure of borders, will be far more damaging to global economies than tariffs this quarter.
The Competition for Tech Supremacy Rages on
In our annual forecast, we laid out that despite the phase one trade deal between the United States and China, the United States will continue to increase its pressure on Chinese technology companies through new restrictions. This process will continue, albeit at a slower rate in Q2 due to the United States prioritizing other issues related to COVID-19. In addition, we laid out that Europe, China and the United States will take more steps to support their respective technology sectors, and this trend remains on track. During the COVID-19 crisis, each of the three will seek to provide a safety net for strategic sectors so that their most important tech companies survive the crisis.
The Iranian-U.S. Escalation Will Stop Short of Outright Conflict
Tensions between the United States and Iran will remain high in Q2, but the two will stop short of outright conflict. The first quarter of 2020 has highlighted the continued potential for escalation — particularly over flashpoint issues like Iran's nuclear program and militias in Iraq — but as they deal with the COVID-19 crisis, both countries will seek to avoid major escalations that could result in direct conflict. Iran's progress with its nuclear program and the looming October 2020 expiration of the U.N. arms embargo on Iran will, however, keep the United States focused on its maximum pressure campaign — and potentially on raising the issue at the Security Council, bypassing JCPOA procedures.
Asia-Pacific
The Asia-Pacific is home to more people than any other region. Centered on the western rim of the Pacific Ocean, this region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast. Several of these countries, most notably China, experienced rapid economic growth in the second half of the 20th century, giving the region a new sense of global economic relevance that continues today. That relevance, however, depends largely on China, a power in transition whose rise is testing the network of U.S. alliances that have long dominated the region. How effectively Beijing manages its transition will shape the regional balance of power in the decades to come.Read Synopsis
Centered on the western rim of the Pacific Ocean, the Asia-Pacific region includes the easternmost countries of continental Asia as well as the archipelagos that punctuate the coast.
Key Trends for the Quarter
COVID-19 in Asia-Pacific
The sustained COVID-19 outbreak in the Asia-Pacific region will leave regional economies reeling, exacerbating underlying political and economic difficulties. South Korea's already beleaguered export-oriented economy will suffer setbacks due to domestic disruptions and slowdowns in key markets. In spite of stimulus spending and general approval of the prime minister's management of the outbreak, the slowdown will challenge the progressive government's standing in April legislative elections, which could threaten the president's outreach to North Korea and jeopardize his continued confrontational stance toward Tokyo. In Japan, the spreading economic effects of the outbreak will sap already anemic growth, giving rise to a potential recession, particularly given the delay of the Tokyo Summer Olympics and the central bank's meager tools to spur growth. This setback will put the ruling Liberal Democratic Party on the defense with the opposition, and delay its constitutional reform and snap election plans. In Thailand, the massive headwinds for both export and tourism sectors will put the tenure of the military-aligned government in question, risking political tumult in the country unseen since 2014.
COVID-19 Will Create Flexibility Amid the Trade War
In keeping with our annual forecast, the U.S.-China phase one trade deal has held, leaving the door open for continued negotiations and disputes over the implementation of this initial agreement. Throughout the second quarter, the phase one trade agreement will remain in place, but the COVID-19 outbreak will jeopardize China's ability to follow through on key agreed-to purchases — and likely on the U.S. ability to deliver the purchases. The White House will, however, remain flexible in order to maintain the deal and avoid further blows to U.S. growth ahead of November elections. In the event of a sustained U.S. COVID-19 outbreak, Washington may even opt to selectively drop tariffs on medical imports, some consumer products and intermediate goods used in virus-impacted sectors (although whether this truly increases key medical supplies will depend on the degree to which China imposes limits or restrictions on various items, which is likely to vary substantially.)
Having emerged from its own COVID-19 outbreak, China will pivot to boosting its economy by directing state resources towards stimulating growth with monetary policy measures and supports for key industry and investment. A rapid "V-shaped" recovery is unlikely, however, given the deep hit to early year growth due to its domestic epidemic and future challenges to its export-oriented economy as the virus spreads internationally. China's second-quarter growth faces further risks in the form of potential secondary domestic outbreaks due to reinfection from abroad.
Hong Kong Tensions Rise Even as COVID-19 Dampens Unrest
In Hong Kong, the outbreak of COVID-19 suppressed first-quarter protest turnout even as activists integrated the outbreak into their list of grievances against Beijing. Throughout the second quarter, political tensions inside the city will gradually increase as battle lines ahead of September legislative council elections harden. Continued upticks in COVID-19 cases, however, will continue to dampen enthusiasm for demonstrations around major protest-related anniversaries in late March, April and June. With thousands of protesters in jail and awaiting trial, any demonstrations that do take place in the second quarter are likely to remain smaller and less violent on a whole compared to the second quarter of 2019.
COVID-19 Dampens North Korea's Appetite for Escalation
As we said in our annual forecast, the U.S.-North Korea dynamic did not devolve into an outright confrontation between the two sides in spite of North Korea's walking away from talks. The second quarter will see North Korea's economy still reeling from COVID-19's impacts on trade and from a possible (although publicly denied) domestic spread of the virus, limiting Pyongyang's appetite and capacity for escalation — although it will continue to keep its threats alive with testing.
With COVID-19 dampening North Korea's appetite for escalation, the country will focus on sanctions relief even as it continues low-level testing to keep its threats alive.
The global pandemic will amplify North Korea's arguments on the world stage in favor of sanctions and humanitarian relief, and China's advocacy for such a path. North Korea may push the envelope with testing if U.S. President Donald Trump's political fortunes wane ahead of November elections and if South Korean President Moon Jae In loses key legislative elections and hard-line conservatives take prominence.
Taiwanese Election Results Irritate the Mainland
Taiwan's early 2020 presidential and legislative elections saw a decisive victory for the Democratic Progressive Party, marginalizing pro-Beijing voices in the country. While this has raised Beijing's ire and jeopardized its long-term unification goals, increasing tensions, these will likely play out more actively later in 2020 when COVID-19 is less dire in the region.
Key Dates to Watch
April 3: The one-year anniversary of Hong Kong Chief Executive Carrie Lam's formal introduction of a controversial extradition bill that fueled major protests.
April 15: South Korea will hold legislative elections.
April 15: North Korea will celebrate the Day of the Sun, marking founder Kim Il Sung's birthday.
April-May: China may hold its National People's Congress and the Chinese People's Political Consultative Conference, the "Two Sessions" delayed from early March due to the COVID-19 outbreak.
April: Thailand may hold provincial elections around this time.
May 18: Malaysia's parliament will convene, creating an opportunity to vote out the new ruling coalition.
Some of these events could be postponed or held virtually because of the coronavirus crisis.
FORECASTS
Middle East and North Africa
The Middle East and North Africa is the world's crossroads. It encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between. The story of the region, as is so often the case of places stuck between foreign players, is the story of trade, exchange and conflict. The traditional powers of the region are Turkey and Iran — Saudi Arabia and Egypt are the current Arab powers — and their competition for influence over the region's weaker states makes the Middle East and North Africa an arena of violence and instability.Read Synopsis
The Middle East and North Africa encompasses the Arabian Peninsula, the mountains of Iran, the plains of Turkey, the deserts of the Levant, the lands north of the Sahara and all coasts in between.
Key Trends for the Quarter
Low Oil Prices and Fragile Oil Producers
Low energy prices will negatively impact already-shaky economies throughout the oil and gas-dependent Middle East and North Africa. Some of the most oil-and gas-rich Gulf Arab states in the Gulf Cooperation Council (GCC) — including the United Arab Emirates, Qatar and Kuwait — will be able to preserve most social spending and thus stave off most negative political repercussions in the quarter by relying on a combination of delaying capital-intensive investments, producing and exporting more oil and gas where possible, and taking out external debt if necessary. With an unusually active parliament and approaching elections, Kuwait could see its election timeline adjusted because of opposition dissatisfaction with how the government is handling lower energy revenues. The Gulf Arab states with less energy and financial reserves per capita, including Oman and Bahrain and even Saudi Arabia, will be forced to adjust spending on social programs faster than their wealthier neighbors. But this still won't be enough to generate any substantial social unrest in these still wealthy and politically stable kingdoms.
Outside the GCC and North Africa, the biggest immediate economic and political impact will be in Iraq, which is exceptionally dependent on energy exports for government revenue and suffers from political instability. Iraq's budget deficit will balloon quickly, forcing Baghdad to cut social and government spending, even as anti-government protests are likely to continue as seasonal resource shortages intensify. The fear of the spread of COVID-19 will hamper some protest activity throughout the quarter, but the negative economic impact of the COVID-19 will ultimately drive more economically motivated unrest in Iraq once the worst of the outbreak has subsided.
Iran Continues to Try to Weather the Storm
Already burdened by U.S. sanctions, the Iranian economy will face even more severe economic pressure in the quarter as COVID-19 continues hammering it, ultimately increasing the likelihood of yet more economically motivated protests once the worst of the outbreak has passed toward the end of the second quarter and the beginning of the third quarter. With Iranian public life ground to a halt, the decline in consumption will likely help keep inflation from growing even higher, but non-oil revenue will decrease and unemployment is likely to creep higher.
The political impact of the steep economic pressure will mostly fall during the quarter on the moderate government of President Hassan Rouhani. The coronavirus outbreak will delay political life in the quarter, including the second round of legislative elections and the seating of a new, more conservative parliament. Delaying a new parliament will create some cover for the Rouhani government from political scrutiny and legislative battles over its perceived domestic policy failings. Domestic dissatisfaction with how the Iranian government is handling COVID-19 will meanwhile spark simmering social unrest once the worst of the outbreak has subsided.
Libya's Conflict Persists
Conflict will endure, as both sides of the Libyan civil war remain deeply entrenched and far from a meaningful political solution. Limited Turkish deployments that began in January will continue in the quarter, prolonging the conflict and increasing the risk of sparking a humanitarian disaster, especially if Turkey carries out airstrikes. Turkey is unlikely to ease off supporting the Tripoli-based government in Libya in the near term. The conflict helps Turkey compete against regional rivals like Egypt and the United Arab Emirates, which support the opposing side in the Libyan conflict. It also gives Turkey a valuable ally in Libya in Ankara's fight over disputed maritime territory in the eastern Mediterranean oil and gas rush.
Khalifa Hifter will use his territorial and political power over the divided country's oil sector to extract economic and political concessions during any negotiations this quarter. Some Westerners, particularly France, will be willing to countenance divided Libyan institutions in order to see a resumption of Libyan oil exports. But a resumption of exports would only happen if Libya's main factions can agree on how to spend oil revenue and if the eastern tribes shift their positions on Turkish involvement in the conflict. And if exports resume, they would add to the current international oil glut, putting additional downward pressure on already-low oil prices. Meanwhile, Libya's economy will come under increasing strains due to its limited access to refined petroleum, reducing support for Hifter and so undermining his ability to steer the country's oil exports.
Saudi Arabia Adjusts to Oil at $30 a Barrel
Lower oil prices will reduce Saudi economic growth; significantly curtail government spending, especially on capital-heavy new investments; increase the 2020 budget deficit; and force the government to delay the implementation of new social spending programs in the quarter. This continues the trend laid out in our annual forecast of Saudi Arabia seeing low oil prices undercutting its overall economic reform effort through the year. But this will not be enough to shake Crown Prince Mohammed bin Salman's formidable and consolidated political power, allowing him to remain a major factor in the kingdom's policymaking. The crown prince's role as key economic decision-maker will be clear as the kingdom prepares to host the G-20 in Q4.
Iran and the U.S.
Iran will continue to inch away from the restrictions in the JCPOA nuclear deal, even while the European Union uses the timeframe triggered by the deal's dispute mechanism to delay its breakup, drawing further away from the hard-line U.S. position on the deal after the mutual pressure campaign reached its highest levels of conflict in the first quarter. In theaters like Iraq, Iran will continue directing attacks on U.S. targets via its allied militia forces as part of its effort to drive home to Washington the cost of its continued sanctions-heavy maximum pressure campaign.
Turkey and the EU
A cease-fire between Russia and Turkey over Idlib province and global fears over COVID-19 will slow the flow of refugees from Turkey into Europe, but because of better weather as the seasons change and the tacit encouragement of Ankara as it tries to negotiate a new migrant deal with the European Union, many migrants will still try. Unlike in 2015, they will encounter a European Union determined to protect its land and sea borders. Some symbolic relocations of migrants are possible (especially for children or sick asylum seekers), but the European Union will not introduce a Continent-wide program to absorb large numbers of migrants. The European Union will be willing to offer new funds to Turkey and to keep offering new financial incentives, but will not give significant concessions to Turkey in regards to visas or a customs union.
Algeria's Newly Consolidated Government
The likelihood of stubbornly low energy prices in the quarter will negatively impact the new Algerian government's ability to make good on its social spending promises. In light of its hefty dependence on oil and gas revenue, Algiers will be forced to issue a revised budget incorporating austerity measures, which will stoke the very anti-government unrest the government sought to snuff out in 2020.
Key Dates to Watch
April 16: April deadline for Benny Gantz to form a government in Israel.
April 4-10: Umrah pilgrimage season in Saudi Arabia, but visas are likely to be canceled due to COVID-19.
April 23-May 23: Ramadan
May 24: Prime Minister Benjamin Netanyahu's corruption trial planned to begin after a delay due to COVID-19 concerns.
June: Egypt's major Damietta LNG plant plans to resume operations.
Some of these events could be postponed or held virtually because of the coronavirus crisis.
Europe
To the west of Eurasia lays Europe, a region predisposed to division. It is surrounded on nearly all sides by islands and peninsulas that make it difficult for Europe to cohere. The northern half of the continent, moreover, sits on a plain whose short, meandering rivers tend to empower countries without forcing them to work with others. The southern half is situated on more mountainous terrain that has historically impeded the creation of strong, unified economies. As a result, Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.Read Synopsis
Europe is a continent riven by pockets of distinct cultures whose differences are all too often irreconcilable.
Key Trends for the Quarter
The EU Reacts to Coronavirus
National governments and EU institutions will try to mitigate the negative economic impact of the coronavirus crisis through stimulus measures. But with consumption, production, investment and trade severely weakened by the outbreak, it will be a quarter of economic pain for households and businesses in the Continent.
The main supranational EU institutions will focus on the economic impact of the coronavirus crisis in Europe, distracting them from other policy initiatives.
The European Commission's pledge to be more flexible in the enforcement of EU rules on debt and deficit will lead to governments spending and borrowing more, but the Continent's economy will be weak in the second quarter because of the lingering negative impact of the virus on consumption, investment and exports. And while the European Central Bank has made cheap loans available for banks and increased the purchase of sovereign and corporate bonds, the impact on the real economy will also be modest as economic activity continues to suffer from quarantine measures.
The German Economy
In line with our annual forecast, the members of Germany’s coalition government kept their uncomfortable alliance in place during the first quarter. In the second quarter, we expect the fallout from the coronavirus crisis to dominate Berlin's political and economic decisions. As the German economy slows down precipitously, coalition partners will put their differences over fiscal policy aside and will implement stimulus measures to mitigate the economic disruptions as much as possible. Fear of a general election in the middle of a pandemic and internal issues within the members of the coalition will keep the German government in place during the second quarter, even if it will remain fragile.
The Italian Crisis
The coronavirus outbreak had two effects on Italy during the first quarter. It led to a significant increase in public spending and tax cuts, and it put the government's political crisis on pause. During the second quarter, the Italian economy will remain very weak and companies and households will struggle to get back on their feet. Rome will take advantage of the softer EU approach to fiscal rules and continue to pump money into the economy and to help households and companies in distress. But this will create deficit and debt problems in the long run. The political disputes that put the government on the brink of collapse at the beginning of the year will return as soon as the worst part of the coronavirus outbreak is over later in the year.
U.K.-EU Negotiations
The United Kingdom left the European Union in January and negotiations over a trade deal began in March as we forecast in our annual. Negotiations will continue during the entire second quarter, and while there will be bilateral frictions over issues like regulatory alignment, fishing rights and financial services, we do not expect London or Brussels to walk away from the talks. The European Union and the United Kingdom will not reach a trade deal in the quarter, but while the coronavirus crisis could disrupt the negotiation calendar, the talks will continue into the third quarter. The negative impact of the coronavirus outbreak on the economies of the European Union and the United Kingdom will increase pressure on London and Brussels to reach a compromise, increasing the likelihood of a deal later in the year.
Key Dates to Watch
April 6-8: Third round of trade negotiations between the European Union and the United Kingdom.
April 27-30: Fourth round of trade negotiations between the European Union and the United Kingdom.
May 10: First round of presidential elections in Poland.
May 13-16: Fifth round of trade negotiations between the European Union and the United Kingdom.
June 18-19: European Council to discuss Brexit and the status of the EU economy.
June 30: Deadline for the United Kingdom to decide whether to extend its membership in the single market beyond Dec. 31.
Some of these events could be postponed or held virtually because of the coronavirus crisis.
AmericasThe Americas stretch from the Arctic Circle in Canada to the southern tip of Chile. This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world — an ascendance aided in part by bringing Mexico and Canada into its sphere of influence. Farther south, the nations of South America are like islands, separated by vast spaces of impenetrable mountains, rivers and jungles. Try though these countries may to integrate more closely, deeper ties such as those that characterize North America will prove elusive.Read Synopsis
This geographically, culturally and politically diverse region is home to the United States, a nation whose geography helped it become the foremost economic and military power in the world
Key Trends for the Quarter
Debt Takes Argentina to the Economic Brink
Argentina's economic meltdown will continue, taking it to the brink of a debt default. It will miss a self-imposed deadline of March 31 to complete a comprehensive debt restructuring, and will not present an initial proposal to bondholders until April at the earliest. Given global shutdowns from COVID-19, progress is unlikely, although it is unclear if credit rating agencies will declare a formal default. The government declared its intention to restructure $69 billion in foreign jurisdiction bonds in March, including bonds issued during the previous default in 2005. The IMF agrees Argentina's debt is unsustainable, but the country has yet to formulate a credible economic program and a supporting debt restructuring plan. Global effects of COVID-19 are adversely affecting Argentina's exports, and with Argentina implementing a full quarantine, the economic slowdown will only continue in the second quarter.
U.S.-Mexican Cooperation Continues
As expected in our annual forecast, Mexico and the United States have continued to cooperate over containing migration from Central America. There is little reason to expect this to change, as the flow of migrants to the U.S. border has returned to pre-2019 levels. Meanwhile, even prior to the outbreak of the coronavirus, Mexico was amid a recession. Although the United States and Mexico will try to maintain trade flows through the border, the collapse in U.S. consumption will likely plunge Mexico into a deeper recession in Q2, weighing heavily on Mexican President Andres Manuel Lopez Obrador's popularity as the Mexican economy continues to struggle and his controversial economic policies continue to show limited results.
Venezuela's Ever-Imminent Demise Remains on the Horizon
The collapse in oil prices will intensify economic pressures that could eventually see the ouster of Venezuelan President Nicolas Maduro amid the ongoing U.S. sanctions campaign. But Maduro will be able to remain in power in the second quarter as there has been little sign that he has lost the support of key security forces. Consequently, the United States will continue to increase sanctions on Venezuela and its increasingly indispensable economic lifeline, Russia's Rosneft.
Political Unrest in South America
The COVID-19 outbreak's impact on Chinese and worldwide resource demand will worsen Chile's economic outlook given that copper exports account for half of Chile's total exports, and given that half of that copper goes to China for industrial and construction applications. Although the virus outbreak may deter unrest, economic woes will exacerbate the country's political turmoil during the second quarter as protesters continue to mobilize around constitutional reform to keep the issue alive ahead of the now-delayed constitutional referendum likely in the fourth quarter.
In Ecuador, low oil prices will hit a key source of government revenue and may challenge the country's ability to secure the credit needed to sustain social spending or meet debt payment obligations. This could provide an opening for the opposition and indigenous protesters to once again challenge the government.
Key Dates to Watch
April: Argentine government to make a debt restructuring offer to private bondholders.
Due to the global efforts to contain the spread of COVID-19, most high profile events and summits have been canceled.
Eurasia
Eurasia is the world’s most expansive region. It connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia. Forming the borders of this massive tract of land are the Northern European Plain, the Carpathian Mountains, the Southern Caucasus Mountains, the Tien Shan Mountains and Siberia. At the heart of Eurasia is Russia, a country that throughout history has tried, to varying degrees of success, to extend its influence to Eurasia’s farthest reaches — a strategy meant to insulate it from outside powers. But this strategy necessarily creates conflict throughout Russia’s borderlands, putting Eurasia a near constant state of instability.Read Synopsis
Eurasia connects the East to the West, forming a land bridge that borders Europe, the Asia-Pacific, the Middle East and South Asia.
Key Trends for the Quarter
Russia Struggles to Salvage Its Economy
Russia's efforts to manage internal pressure will come to focus even more on efforts to sustain its economic performance in light of the challenges raised by the global COVID-19 outbreak and low oil prices. Moscow will stick with its plans for social spending and other projects meant to appease the Russian population, albeit at the expense of its reserves. For this quarter, the approach will be sustainable regardless of how oil prices evolve. This will carry Russia toward a popular vote on constitutional amendments once the COVID-19 crisis subsides, which Moscow hopes will increase long-term stability by postponing the need for a transition to a new leader, potentially by 12 more years.
Economic Fallout From COVID-19 Plus Oil Prices
Reverberations from the global economic crisis resulting from the COVID-19 outbreak will be a defining dynamic of the second quarter worldwide including Eurasia, where its effects will primarily be noticeable among the oil-producing economies such as Russia, Kazakhstan, Azerbaijan, Uzbekistan and Turkmenistan, where slumping global demand for oil and falling prices precipitated by the OPEC+ price war will impact revenue. Most of these oil-producing countries will face severe shortfalls, and will be forced to cut spending if they can't afford to expend reserves or increase their debt burden. Oil-producing countries with a significant refining capacity, such as Azerbaijan, may be able to reduce this burden, but will nevertheless experience negative macroeconomic effects.
Strong economic linkages in Eurasia mean that Russia's economic woes will negatively affect Central Asian states, while as a region they all face a severe test in dealing with a COVID-19 outbreak with only limited health care infrastructure.
The extent to which the Eurasian economies are tied to Russia's economic health will determine the extent to which Russia's anticipated poor performance will drag them down. As Russia's economy slows down, so will trade between it and the rest of Eurasia. Governments in Eurasia will likely be able to weather the negative impact of this regional trade fallout in the short term, but the emergence of major COVID-19 outbreaks would test this resilience. While the Eurasian states will be able to count on assistance from China, and from Russia (as long as it, too, remains largely unscathed by COVID-19), the virus will quickly overwhelm limited health care infrastructure and significantly disrupt the economies of these Eurasian states.
Belarus Seeks to Maintain Some Independence From Russian Oil
We expect Minsk and Moscow to resume oil deliveries in the second quarter as the sides resolve a dispute carried over from the first quarter, though Belarus will seek to maintain its independence from Russian oil. Even though low oil prices and potential concessions from Russia will make for very affordable oil, Belarus has made a clear shift toward diversifying its oil trade. Minsk might not necessarily stick to its self-imposed goal of purchasing no more than a third of its oil from Russia, but its imperative for political independence and the availability of affordable oil from other markets will propel its drive to lessen Russian power over Belarus through oil.
Despite the continued standoff on particular issues of trade and integration, the two countries will still want to maintain a positive relationship overall, and will eventually resume negotiations on deeper economic integration, though no meaningful outcome should be expected in this quarter. For Belarus, the desire for integration ends where it would compromise its budding trade relationships with the West. Such resistance could lead Russia to apply trade pressure to keep Belarus in line, but increasing support for Belarus from allies in Europe and the United States could significantly mitigate this. Things are unlikely to progress to this point unless an oil supply agreement is reached very early in the quarter.
Despite Trade Setbacks, Russia and China Remain Strategically Aligned
Despite their current contraction in bilateral trade, Moscow and Beijing are still intent on expanding their economic relationship. They have stood by each other during the COVID-19 emergency, and will return to prior trends as they move beyond the crisis. Russia has so far largely been spared the virus itself, but its natural gas and oil deliveries to China — where demand has collapsed during the COVID-19 crisis — have suffered a serious dent. As China seeks to restore industrial activity over the course of the second quarter, Russia will be there to pick up where they both left off. If Russia were to suffer a significant outbreak, China would likely take on a significant role in assisting Moscow's efforts at containing and mitigating the epidemic, further strengthening their relationship.
Deadlock Between Ukraine and Russia Persists
Moscow and Kyiv failed to make meaningful progress on the implementation of the Minsk Agreement to end the conflict in Eastern Ukraine during the first quarter of 2020, and the next quarter will be no different. The standoff between the countries over the timeline of implementation of certain aspects of the peace deal will not be settled even as less controversial elements of the diplomatic process, such as tactical withdrawals or prisoner exchanges, continue. Kyiv's threats to abandon the Minsk Agreement altogether or to renegotiate a new agreement are unlikely to come to pass during the second quarter, as there is still time and interest in exhausting efforts to implement the existing agreement.
Sanctions Threat to Russia Could Grow, but Their Impact Remains Limited
The same pattern of sanctions against Russian individuals or low-level entities limited in their overall economic impact will persist. Particularly amid a weak global economy, the European Union and the United States will be reluctant to enact further destabilizing measures. A resumption of work on the Nord Stream 2 pipeline during this quarter could lead to a new round of heated rhetoric on sanctions against Russia, but not if construction is postponed to next fall due to the unavailability of a suitable vessel to perform work under Danish regulations or as a result of COVID-19 disruptions. If sanctions were to reemerge, as with previous rounds, they would lack a meaningful impact, particularly when compared to the impact Russia is already suffering as a consequence of low oil prices.
Key Dates to Watch
May 1: A ban on foreigners entering Russia to stem the spread of COVID-19 due to end unless extended.
Note: Due to the global efforts to contain the spread of COVID-19, most high profile events and summits have been canceled.
South Asia
Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders. The Himalayan Mountains form the northern border of South Asia, whose two main rivers, the Indus and the Ganges, support the region’s great population centers. India is the region’s dominant country, home to the world’s fastest growing economy. But its rivalry with neighboring Pakistan, a fellow nuclear power and growing consumer market, has made South Asia one of the world’s most dangerous nuclear flashpoints. The region is also a testament to how militancy and militarism can undermine the regional integration needed to unleash higher economic growth.Read Synopsis
Everything that informs geopolitics can be found in South Asia: challenging demographics, geographic diversity, and contentious, ill-defined borders.
Key Trends for the Quarter
A Bleak Economic Outlook
Reinvigorating economic growth remains India's key priority in 2020, but India's economic outlook is not good for Q2 given underlying weaknesses and the continuing impact of COVID-19. India's economy struggled in the first quarter, marked by slow growth and the state takeover of YesBank, one of the country's largest lenders in March. Private and government consumption have been the main drivers of growth, but both are faltering and India faces the prospect of a structural change to slow growth.
Throughout the second quarter, the government of Prime Minister Narendra Modi will further embrace Hindu nationalist policies, raising the risk of secondary implications including rising communal tensions, political unrest, as well as diplomatic spats that could escalate into economic disputes.
The labor force participation rate is declining, as is the contribution of investment to GDP. Moreover, the banking and financial sector is under stress, restricting credit to the private sector. India's economy is likely to be further hampered in Q2 by the COVID-19 pandemic. This will prompt the government of Prime Minister Narendra Modi to further embrace Hindu nationalist policies and become more interventionist in the economy. The embrace of these policies will raise the risk of communal tensions, political unrest and diplomatic spats. These could escalate into economic disputes, given India's previous use of reducing exports against countries that criticized its policies.
Indian Foreign Policy Continues to Respond to China
India will continue to advance its infrastructure projects while emphasizing security cooperation with countries like Sri Lanka, even if India cannot and will not replace the value of China's Belt and Road Initiative for South Asian economies. China and Pakistan launched the second phase of the China-Pakistan Economic Corridor in January, an example of the enduring importance of Chinese investment in South Asia. And even though COVID-19 poses a serious threat to Chinese and global economic stability, it also presents a diplomatic opportunity to China to reach out to neighbors like Pakistan and India that are likely to struggle with COVID-19.
Little Progress in Afghanistan
Inter-Afghan talks will progress slowly, and breakthroughs are unlikely in the quarter. The United States and the Taliban signed a landmark agreement in Doha, Qatar, on Feb. 29, paving the way for inter-Afghan talks and a full withdrawal of U.S. troops in 14 months. The United States will continue its gradual withdrawal, which will weaken the Afghan government's negotiating position as the Taliban continues to apply pressure through nationwide violence. The Islamic State will also seek to expand its presence throughout the quarter.
Global COVID-19 Distraction Could Permit an Escalation in Kashmir
The spread of COVID-19 in Pakistan and India could lead to potential flare-ups in violence in Kashmir during the next quarter. Perceptions of reduced scrutiny by the international community may lead to a continuation, and possibly to the escalation, of such behavior by militant groups operating in the disputed territory. The governments of Pakistan and India will want to avoid an escalation as both struggle to respond to COVID-19, but nonstate actors could still ramp up attacks. Significant attacks by militant groups in the border region could trigger retaliation by India against Pakistan.
Key Dates to Watch
April: The Taliban is expected to launch its annual spring offensive in Afghanistan.
April: World Buddhist Conference will be held in Sindh province.
April 4: Pakistani ban on all international flights to and from the country due to COVID-19 until April 4 due to end.
April 14: India's travel restrictions, which included a ban on foreign travelers from entering the country due to COVID-19, are set to be lifted.
April 19: Bangladesh slated to host the D-8 summit of D-8 countries (Bangladesh, Egypt, Indonesia, Iran, Malaysia, Nigeria, Pakistan, Turkey).
June: Next phase of elections to India's upper parliament.
Some of these events could be postponed or held virtually because of the coronavirus crisis.
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