Six things to keep you awake at night

NEW YORK – When it comes to the global economy, the road back from hell is laced with geopolitical IEDs. Of late, the world has received a crash course (excuse the pun) in the chaos that financial charlatans can unleash on us all. Restoring order and stability to the global economy has been job one for President Obama, and everyone from Hugo Chavez to the House Financial Services Committee to my tailor in New Jersey seems to have an opinion on how he’s doing.

Even if the worst is now be behind us, it is worth remembering that geopolitical dangers, too, could send the world’s economies tumbling back toward the abyss. Here is a quick ranking of six raging global crises which could set the world’s hopes for recovery back. Any one of them, if mishandled by world leaders, could shatter the relative stability that has returned to global economics and ensure the recession goes on well into 2010.

First risk: Iraq’s relapse

At stake: American influence, U.S. fiscal health, oil prices, Mideast stability.

At the top of my list is the nearly forgotten conflict still raging in Saddam Hussein’s former fiefdom. The successful withdrawal of most American troops to barracks and the relative calm which has prevailed for nearly a year now threatens to lull the world into a sense of false progress. But, while the “surge” of American forces in 2007 and the U.S. military’s brilliant “Anbar strategy” of buying the loyalties of Iraq’s Sunni tribes has done wonders for security inside the country, the difficult decisions consistently get kicked down the road, such as:

  • No deal spelling out the right Kurds, Sunni, and Shia regions will have to central government oil revenues is in place.
  • Security, even though improved, continues to be fragile enough to discourage foreign energy firms from bidding on contracts, as the government’s effort to sell concessions in late June showed.
  • The radical Shia cleric Muqtada al-Sadr still has not shown his hand, preferring to await America’s departure before he makes his (Iranian-backed) move. With U.S. forces now due to dwindle below 50,000 by the end of 2010, the insurgency likely prefers to lay low now and fight another day.

All this is hardly cause for optimism, and a severe downturn in Iraq would cause an oil price spike that would impair any global recovery. The U.S., meanwhile, embroiled in Afghanistan, stripped of allies and exhausted after years of war, would have few good options, suffer another blow to its global prestige, and further damage to its national deficit as this expensive war drags on.

Risk 2: Mexico drug violence

At stake: Oil prices, refugee flows, NAFTA, U.S. economic stability.

A story receiving more attention in the American media than Iraq these days is the horrific drug-related violence across the northern states of Mexico, where Felipe Calderon has deployed the national army to combat two thriving drug cartels, which have compromised the national police beyond redemption.

The tales of carnage are horrific, to be sure: 30 people were killed in a 48 hour period last week in Cuidad Juarez alone, a city located directly across the Rio Grande from El Paso, Texas. So far, the impact on the United States and beyond has been minimal. But there also isn’t much sign that the army is winning, either, and that raises a disturbing question: What if Calderon loses?

The CIA’s worst nightmare during the Cold War (outside of an administration which forced transparency on it, of course) was the radicalization or collapse of Mexico. The template then was communism, but narco-capitalism doesn’t look much better.

The prospect of a wholesale collapse that sends millions upon millions of Mexican refugees fleeing across the northern border so far seems remote. But Mexico’s army has its own problems with corruption, and a sizable number of Mexicans regard Calderon’s razor thin 2006 electoral victory over a leftist rival as illegitimate. With Mexico’s economy reeling and the traditional safety valve of illegal immigration to America dwindling, the potential for serious trouble exists.

Meanwhile, Mexico ranks with Saudi Arabia and Canada as the three suppliers of oil the United States could not do without. Should things come unglued there and Pemex shut down even temporarily, the shock on oil markets could be profound, again, sending its waves throughout the global economy. Domestically in the U.S., any trouble involving Mexico invariably will cause a bipartisan demand for more security on the southern border and possibly demands for Obama to revisit his campaign promise to “renegotiate NAFTA.”

Risk 3: Russian nationalism

At stake: European recovery, natural gas prices, pipeline politics, Iranian containment.

Russia’s economic collapse, reliant as it was on the 2008 global oil price bubble, cannot be overestimated. The economy shrank 10 percent from June 2008 to June 2009, and its unwillingness to guarantee foreign investors a fair shake in court has sent many of them — the latest being Sweden’s IKEA — heading for the door.

 

As the country’s politics has grown more reliant on the small inner circle around Prime Minister Vladimir Putin (including his protégé, President Dmitry Medvedev), it has taken on increasingly nationalistic tones. Always present, this anti-western nationalism has proven useful for Putin (and many past leaders, Russian and Soviet alike) as a way to redirect anger at failed economic policies toward foreign scapegoats.

Last summer’s war in Georgia, while invited by overconfidence in Tbilisi, also underscored the continued value of the nationalism card to the Kremlin. So, too, has the natural gas cut offs imposed on Ukraine occasionally over the past two years, both of which won favorable terms for Russia, all while reminding the European Union of the dangers of poking the bear. (Russia supplies a large percentage of the EU’s natural gas through the same pipeline that supplies Ukraine).

Should Putin want to cause serious trouble, he could demand the return of Sevastapol, a city in Ukraine where Russia’s (former Soviet) Black Sea Fleet is based. He could increase pressure on the Baltic states, which escaped the Soviet Union in 1991. Particularly vulnerable is Latvia, with a population that is at least 40 percent ethnic Russian. He could also make good on threats to expand trade with Iran once more, or make NATO’s supply lines to the Afghanistan front very difficult.

Serious signs of deteriorating Russian-western relations will cause jitters in world markets, and the price of natural gas could skyrocket if Russia again shuts down its supplies to Ukraine. Not incidentally, Ukraine is supplied by the same pipeline that feeds the European Union. An energy crisis in Europe this winter would make it even less likely that the Eurozone economies recover in 2010, leaving one of the world’s great consumer blocs on the sidelines just as global economies struggle to re-prime their industrial engines.

Risk 4: Pakistan-Afghanistan

At stake: India’s recovery, U.S. prestige, U.S. fiscal health, NATO coherence, non-proliferation hopes.

The complex “Af-Pak” problem tops the list of most geopolitical problems, involving as it does a war between a U.S.-led western force and a Muslim insurgency (the Taliban), corrupt central governments (in both Pakistan and Afghanistan), the world’s most notorious international terrorist movement (Al Qaeda), plus a nuclear-armed Muslim state with a major historical chip on its shoulder against neighboring India.

If there is a silver lining here, it is that Pakistan and Afghanistan remain relatively disconnected from the global economy. In spite of Pakistan’s size (the U.N. ranks it sixth by population at 167 million), the primary affect it and Afghanistan have on global trade pertains to the price of heroin.

That said, there always are costs associated with military conflicts. A deepened economic crisis in Pakistan may tempt its army to move again against its civilian government, or could tempt whomever is in charge to stir up trouble in Kashmir, the disputed territory claimed by both Pakistan and its mortal enemy, India. Such a crisis (the last one resulted in a short war in 1999), would be popular at home, but could set back India’s recovery and have economic consequences the world over.

Meanwhile, the Afghan war shows no particular signs of winding down. The U.S., by elevating Afghanistan to the primary front in its war against radical Islamic terrorism, has raised the ante with regard to its own influence in the world. Failure would hurt Washington diplomatically (and, conversely, inflate China’s relative influence). It would strain traditional ties with European NATO as they sought to distance their forces from the mission. Worse, it would squander the enormous investment of national income and lives America has made in Afghanistan since 2001.

Risk 5: Israeli-Iranian clash

At stake: Energy prices, recovery of Gulf economies, U.S. influence and stability in Mideast, nonproliferation hopes.

The good news here: The brave acts of Iranian dissidents, who took to the streets to protest what they view as an election stolen by the hard-line President Mahmoud Ahmadinejad, probably has made an outright war between these two countries less likely. Israel will find it harder, now that the world has seen an alternative face of Iran’s people, to launch air strikes on facilities built beneath heavily populated cities.

Harder, but not impossible: After all, the man who has claimed the victory is the very same who denies the Holocaust and has pledged to wipe Israel from the map. As Iran continues to defy international efforts to prevent it from developing nuclear weapons, calculation may turn to desperation in Israel.

If this happens, Russia and the United States will bear primary responsibility. Russia because it has genuine influence on Iran economically, and has acted as Tehran’s protector in efforts to tighten U.N. sanctions, as well as its chief engineer on nuclear matters. The U.S. deserves blame, too, for the squandered years during which Washington refused to talk to the Iranian regime. This created a situation where, today, talks about talks are necessary before any real negotiations can possibly begin. Meanwhile, Iran’s centrifuges spin away.

Should Israel finally choose a military move — attempting to destroy or at least retard Iran’s nuclear progress through air strikes — the results will be very different from the “surgical strike” carried out by Israel against Iraq in 1982, or the Anglo-American bombardments of Saddam’s program in the 1990s. Iran, remember, has cards to play. It can make enormous trouble in Iraq through its allies there. It can close down the Strait of Hormuz, through which more than half the world’s oil passes. It can encourage Hezbollah and Hamas to mount suicide bombing campaigns.

All of these scenarios would wreak havoc in a world attempting to get back to business as usual.

Risk 6: North Korean implosion

At stake: South Korea’s stability, Chinese growth rates, East Asian recovery.

The likelihood that North Korea will collapse under the weight of its own contradictions increases with every passing year. “Dear Leader” Kim Jong-il was never truly dear to the hearts of his generals, who adored his revolutionary father, Kim Il Sung, for having staved off disaster (with Chinese help) during the Korean War.

The younger Kim, in power since his father’s death in 1993, lately shows signs of mortality (he's reportedly suffering from pancreatic cancer, though South Korea's intelligence service would not confirm that), and many believe he recently suffered a serious stroke.

Mortality dogs North Korean communism, too, which long ago failed its citizens and lately provides fewer and fewer benefits even to those in the well-armed vanguard. Most East Asian analysts today think the regime's days are numbered. The big debate is whether Kim’s gulag will collapse in a heap or go up in flames, and whether the United States or any outside power can influence the course of events.

 

Neither outcome bodes well for the world, nor can either can be ruled out. Still, a collapse that sent millions of starving North Koreans into neighboring China and South Korea certainly seems a great deal better than the (nuclear) alternative.

If this were to happen, however, the cities of northern China, and Seoul, the South Korean capital, are in for severe trauma. This is one good reason China and South Korea often seem less willing to condemn North Korea’s missile launching than Japan or the United States.

Economists have tried to “game” what a North Korean collapse would mean for the South Korean and Chinese economies, but the results seem so catastrophic that deeming the scenario “unpredictable” has been the preferred solution. (RAND’s Bruce Bennett, Paul Stares at CFR, and Michael O’Hanlon at Brookings have done some good work on this topic. John Bolton, Bush administration super-hawk on the topic, not surprisingly believes the economic consequences would be unimportant).

The consensus is that North Korea’s refugees and other problems would make the East German migration after 1989 look like child’s play. China’s north may seem like an unlikely place for refugees, but already significant numbers of North Koreans make their way across the shared border. The South, meanwhile, one of Asia’s most important economies, could see its potential growth collapse for as much as a generation as it copes with the challenges of reunification by regime collapse.

These six potential calamities may stay manageable, of course. Iraq’s fires may well have burned themselves out; Mexico’s army may prevail over the cartels; Russia could become more reasonable under economic duress; Pakistan and Afghanistan could make headway against the Taliban; and North Korea find that the last of the Kims (Kim Jong Un, a 26-year-old who studied in Switzerland and is said to be crazy about Michael Jordan) may, indeed, be like Mike.

But any of the six could flare at any moment. No matter how well the G20 nations recalibrate globalization, and whatever regulatory reshuffling institutionalizes the lessons of the latest financial debacle, the deck is still stuffed with wild cards.

More GlobalPost dispatches about the global economy and commerce:

Why we're (still) screwed

Ford bets on India

Flying the unfriendly skies