These are STRATFOR's disconcerting predictions for the third-quarter of 2016

The Brexit referendum, and the fallout from it, will be among the most heavily scrutinized themes of the next quarter. And though it may have been the most visible confirmation of the European Union's disintegration, it was May 1, 2004, that sowed the seeds of London's departure.

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On that day, a day that came to be known, perhaps ironically, as the "Day of Welcomes," the bloc admitted 10 countries — the Czech Republic, Hungary, Latvia, Lithuania, Estonia, Poland, Slovakia, Slovenia, Malta and Cyprus — into its ranks. It epitomized an era of unprecedented EU expansion and honored the promise of prosperity that sold the European project to so many countries that were all too eager to buy it, particularly those that for decades had been bridled by the Soviet Union.

european union flag brexit
A man carries a EU flag, after Britain voted to leave the European Union, outside Downing Street in London, Britain June 24, 2016. Neil Hall/Reuters

The European Union now had 10 more members, each with its own set of policy priorities, national identity, rules of law, economic irregularities and methods of regulating them. Their accession created differences that simply could not be reconciled, for no country can be expected to subordinate its own well-being to another's.

Twelve years later, the United Kingdom — a country unique not for its inclusion in the Continental bloc but for the tepidness with which it joined — voted to leave the European Union altogether. It was always clear that it would be among the first EU members to leave, even if it was unclear precisely when it would choose to do so. But leave it will, and the next three months will be messy as the United Kingdom sorts itself out and as a general air of uncertainty impairs the British economy and the European Union at large.

The United Kingdom's departure is Germany's nightmare. Members from every corner of the Continental bloc will submit proposals on how to re-engineer the European Union according to their respective interests. Southern European countries will increase spending and push for deeper financial integration to nurse their structural wounds. Poland and Hungary will lead an eastern bloc of countries trying to repatriate their rights from Brussels.

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Germany will try to focus its proposals on the uncontroversial aspects of integration, such as security and job creation, to at least give the impression that the union is still in fact a union, but the government in Berlin will be pressured to place tighter limits on financial assistance to the European Union's more profligate members. As divisions deepen and economic panic rises, the Netherlands will gradually nudge Germany away from France and the southern belt.

Russian President Vladimir Putin attends a news conference after a meeting with Italian Prime Minister Matteo Renzi at the St. Petersburg International Economic Forum 2016 (SPIEF 2016) in St. Petersburg, Russia, June 17, 2016.   REUTERS/Grigory Dukor
Russian President Putin attends news conference in St. Petersburg Thomson Reuters

Russia is one of the few countries that can take delight in Europe's fragmentation. After all, Moscow can more effectively ease the financial pressure against it, advance economic deals and limit Western encroachment on its periphery when Europe is divided and distracted. Russia always meant to leverage its involvement in Syria to strengthen its negotiating position with the United States. This quarter, Moscow will actually have some success in coaxing Washington into a dialogue as the United States tries to clear obstacles in its fight in Syria against Islamic State.

The White House will use the common threat of the Islamic State to keep Russia engaged on tactical matters, but it will resist making bigger concessions. (In any case, there is only so much the Kremlin can get out of the White House in an election year.) The United States, moreover, will be counting on a recent reconciliation between Turkey and Russia to deconflict the battlefield, something that will end up giving Turkey more breathing room to hedge against Kurdish expansion in northern Syria.

No major shift in energy markets can be expected this quarter. Iranian oil production will rise more slowly than it did for the first six months of the year, and while some members of the Gulf Cooperation Council could modestly increase output in months of high summer demand, the Saudi-led bloc is still waiting out a gradual market correction with US production in decline. Nigerian oil production will also remain volatile as the government struggles to tame militancy in the oil-rich Niger Delta region.

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Xi Jinping
Chinese President Xi Jinping raises his glass for a toast during his talk before lunch at SkyCity Grand Hotel on November 21, 2014 in Auckland, New Zealand. Photo by Greg Bowker - Pool/Getty Images

In the meantime, the markets will continue to be volatile as the world comes to grips with the Brexit. The appreciation of the yen and dollar will apply downward pressure on the yuan, but Beijing still has the means to manage the rate of decline. Its efforts to reduce industrial overcapacity in China will be limited as local governments hold out for central government promises of readjustment aid. China's economic situation may be stagnant, but its political situation is more animated, and the power struggle that underlies it will be something to watch in the third quarter.

There are, however, some signs of encouragement coming from Latin America. In Colombia, the government will proceed to the demobilization phase of its agreement with the Revolutionary Armed Forces of Colombia, and in doing so, will stabilize the country. Brazil will conclude its impeachment saga this quarter and move ahead with austerity measures to rein in spending.

Economic forces, meanwhile, are pushing Brazil and Argentina to at least start discussing the easing of trade constraints on Mercosur, South America's free trade bloc. But talks will remain in the rhetorical stage for the next few months as Brazil tries to tie up the impeachment process and as Argentina tries to balance structural reform with social stability. Having Venezuela, which is beset by so many problems and already a polarizing member, chair the bloc will not help things either.

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The Impact of the British Referendum

Nigel Farage, the leader of the United Kingdom Independence Party, attends a plenary session at the European Parliament on the outcome of the "Brexit" in Brussels, Belgium, June 28, 2016. REUTERS/Eric Vidal
Farage, the leader of the UKIP, attends a plenary session at the European Parliament on the outcome of the "Brexit" in Brussels. Thomson Reuters

During the third quarter, the European Union will deal with the consequences of the British referendum on EU membership.

The victory of the "leave" camp and Prime Minister David Cameron's decision to resign have triggered a political crisis in the country, with the ruling Conservative Party and the opposition Labour Party struggling with internal disputes.

The United Kingdom will not start formal negotiations to disconnect from the European Union this quarter because a new prime minister will have to be selected first. This will delay the process of Britain's withdrawal from the European Union by a few months but will do little to ease the economic and political consequences of the referendum.

The United Kingdom will gradually move to accept the result and focus on how to effectively negotiate an exit. Officially, the European Union will continue to refuse to start negotiations until London formally announces its decision to leave. But informal contacts between British officials and their European counterparts will start once a government is in place in the United Kingdom.

Brussels will give London time to appoint a new government but will stand firm in its demand that preserving access to the common market also means allowing the free movement of EU workers.

The uncertainty generated by the Brexit will continue to produce volatility in the British economy and, to a lesser extent, hurt the economies on the Continent. Effects on the bloc could include rising bond yields for countries in the eurozone periphery, delayed decisions on spending and investing in the European Union's main economies, and depreciations of the euro and Eastern European currencies. 

The United Kingdom's territorial integrity will also be debated, but the government in Scotland probably will not make any drastic unilateral moves this quarter. The Scottish government will try to negotiate with Brussels over ways to remain connected with the bloc. But Scottish authorities will wait for the political situation in London to become clear before making any definite moves. The announcement of an independence referendum this quarter is unlikely.

The British situation will also test the stability of the French-German alliance. In the third quarter, Paris and Berlin will make proposals to strengthen the European Union. Considering that both countries will hold elections in 2017, those proposals will probably focus on areas where an agreement is possible instead of issues such as the functioning of the eurozone.

These will include EU-wide initiatives on issues such as security and terrorism, protection of the bloc's external borders, and migration as well as employment and economic growth. Even if there is room for agreement in these areas, implementation will not happen this quarter.

Those proposals on less controversial issues will not stop other EU members from putting forth their own ideas on how to reshape the union. Nor will it stop the political debate in some countries about whether to hold referendums on aspects of their memberships in the bloc. Different regions in the European Union will put forth different proposals on how to prevent the bloc's disintegration, but those ideas will come from fundamentally opposing directions.

For example, countries in Southern Europe, led by Italy, will push for more EU spending on social policies and more flexibility on fiscal targets for member states. Northern countries, led by Germany, will oppose these moves. Countries such as Poland and Hungary, on the other hand, will push to give a greater role to national parliaments in decision-making. Most EU members oppose changing the Lisbon treaty, so that will not be on the table.

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Political Volatility in the Eurozone

French President Francois Hollande delivers a speech during the annual reception in honour of the French Armed Forces, at the Defence Ministry in Paris, France, July 13, 2016 on the eve of the French national day military parade on Bastille Day .   REUTERS/Stephane De Sakutin/Pool
French President Francois Hollande delivers a speech during the annual reception in honour of the French Armed Forces, at the Defence Ministry in Paris Thomson Reuters

Some of the largest eurozone members will see a quarter of political volatility, with social tensions over labor reforms in France, financial and political uncertainty in Italy, a long process of forming a government in Spain and political divisions in the German government.

In France, the government's authority will continue to erode, and social unrest will remain strong. Despite popular protests, the French government is likely to pass labor reform legislation. But this will probably be the last significant policy introduced by President Francois Hollande, as the controversial reform will leave his Socialist Party weak and divided.

The Elysee is likely to announce some reductions in taxes and increases in public spending in a bid to regain popularity, but right-leaning opposition parties are likely to retain popularity. Influenced by the events in the United Kingdom, French politicians will seek to position themselves for the 2017 presidential election by promising various referendums on EU-related issues.

In Germany, the ruling center-right/center-left grand coalition will also be under domestic pressure. Regional elections in Berlin and Mecklenburg-Vorpommern in September will probably result in growing support for emergent opposition parties on both ends of the political spectrum, such as the progressive Greens and the right-wing Alternative for Germany.

With Germany's ruling coalition pulled in different directions as elections draw closer, Berlin will find it increasingly difficult to fill its role as the European Union's political center of gravity.

In Italy, the government of Prime Minister Matteo Renzi will try to regain the political initiative after the poor performance of the ruling Democratic Party in municipal elections in June and before a key referendum on constitutional reforms in October. The main opposition parties, including the anti-system Five Star Movement and the anti-immigration Northern League, will campaign against the reforms. To win back popular support, Renzi will promise lower taxes and higher public spending.

Brexit-induced volatility in financial markets will continue to hurt Italian banks, increasing the probability of government intervention. Italy will seek authorization from Brussels to provide state support for its banks, but Germany is likely to oppose such a move. Should pressure on Italian banks become too strong, Rome and Brussels will reach a compromise.

In Spain, the country's main political parties will spend the first part of the quarter negotiating the formation of a government after the fragmented parliament produced in June 26 elections. Once a government is formed, the next administration will announce increases in public spending and cuts in taxes, regardless of the EU Commission's recent threat to sanction Madrid.

The fiscal situation in countries such as Spain and Portugal will create another source of friction between north and south in Europe. Southern countries will press for more flexible fiscal targets, while northern countries will push for sanctions against those that fail to meet commitments.

Countries in Southern Europe will avoid sanctions, or receive only symbolic punishment, in exchange for promising to introduce reforms in the future. This will lead only to more north-south frictions.

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Europe's East-West Divide Continues

Viktor Orban
Hungarian Prime Minister Viktor Orban speaks during his state-of-the-nation speech in Budapest, Hungary, May 29, 2015. REUTERS/Bernadett Szabo

The next three months will also see the continuation of Europe's east-west divide, as countries in Central and Eastern Europe continue to resist Brussels' influence and introduce measures that alienate their western neighbors.

For countries in the region, Brexit removes a significant counterweight to the French-German influence on the bloc and a defender of the interests of the nations that are outside the eurozone. In the coming months, countries in Central and Eastern Europe will become the loudest defenders of national sovereignty in the European Union.

In Hungary, the government of Prime Minister Viktor Orban will proceed with plans to hold a referendum in October on a proposal by the European Commission to distribute asylum seekers across the Continent. The authorities in Brussels will criticize the referendum, but the government in Budapest will use that to consolidate its domestic popularity. 

Poland will remain committed to its membership in NATO, request a greater allied presence in Eastern Europe and defend a tough stance on Russia.

At the same time, the government in Warsaw will continue to introduce measures that will cause concern in the West. During the quarter, for example, Warsaw will start collecting a tax on retailers, a sector dominated by foreign companies, and pass a plan to convert foreign-denominated loans into zlotys.

The final version of the conversion plan will be less costly for banks than the original proposals, but it will still force banks, most of which are controlled by foreign firms, to face losses. The Polish economy will see strong growth this year, but those moves will progressively erode business confidence and weaken the Polish economy.

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The Migration Crisis Abates

Turkish President Tayyip Erdogan makes a speech during an iftar event in Ankara, Turkey, June 29, 2016.  Yasin Bulbul/Presidential Palace/Handout via REUTERS
Turkish President Erdogan makes a speech during an iftar event in Ankara Thomson Reuters

Since the agreement between the European Union and Turkey designed to stem migrant flows into Europe entered into force in late March, emigration from Turkey has fallen significantly.

The drop can be attributed not only to cooperation between Turkish and European authorities to stop migrants from reaching Greece but also to the perception among asylum seekers that reaching Northern Europe has become more difficult because of stronger border controls along the main migration routes.

The agreement should largely hold during the quarter, but its continuity will be under constant pressure. Relations between Turkey and the European Union will remain tense. Brussels desires to preserve the accord but wants Ankara to meet all the necessary criteria to be granted visa liberalization for its citizens.

The Turkish government also wants to maintain the deal but is unwilling to submit on issues such as EU-requested changes in terrorism legislation. In addition, recent decisions by Greek appeals committees to prevent deportations of asylum seekers to Turkey could encourage more people to try to reach Greece. In the meantime, border controls along the Balkan migration route will remain in place, as will border controls in the main migrant destinations in Northern Europe.

With the situation relatively stable on the Aegean Sea, most of the migration activity will come on the central Mediterranean route, which connects northern Africa with southern Italy. As weather conditions improve this quarter, more migrants will arrive in Italy.

Overall, the number of people reaching Italy will remain much lower than the numbers that flooded Greece during the peak of the crisis last year. The government in Rome will continue to press for a unified approach to the issue.

The European Union is likely to make progress on plans to provide financial assistance to migrants' countries of origin to discourage emigration, and proposals to strengthen EU coastal and border-control forces are likely to be approved during the quarter.

At the same time, Italy's neighbors will reintroduce border controls if they feel that the Italian government is not doing enough to keep the migrants in its territory.

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Russia's Standoff Continues

Russia's President Vladimir Putin reacts during his joint press conference with Finland's President Sauli Niinisto (not pictured) at Kultaranta summer residence in Naantali, Finland July 1, 2016. Lehtikuva/Jussi Nukari/via REUTERS
Russia's President Putin reacts during his joint press conference with Finland's President Niinisto at Kultaranta summer residence in Naantali Thomson Reuters

This quarter, Russia and the West will remain locked in an intractable standoff. Now that the European Union is set to extend sanctions, Moscow does not see a reason to compromise for now. As Europe begins discussions to ease sanctions later in the year, however, Russia's view could change.

The European Union's internal focus on managing Brexit, though likely an enduring trend, will probably make issues such as the Ukraine crisis, Nagorno-Karabakh and perhaps even Russia sanctions lower priorities for the European Union in the short term. Russia could take advantage of the divisions between EU members, but Moscow will be careful not to act too aggressively. Instead, it will focus on winning the support of Russia-friendly member states.

Russia will continue its active military involvement in the Syrian conflict this quarter, prioritizing air support to loyalist forces, particularly in Aleppo. As fighting heats up near the Syrian capital, refugee flows could increase, exacerbating Europe's migrant problem.

Moscow will keep pushing for increased coordination with the United States, but the harder it tries to engage the United States in a more substantive dialogue, the more acrimonious the relationship between Washington and Moscow will become.

In Syria and elsewhere, cooperation between Moscow and Ankara depends on Washington's involvement. Although Turkey has laid the groundwork to resume negotiations with Russia on the Syrian crisis, Moscow will be cautious in allowing Ankara into the country and reluctant to give up its relationship with the Kurdish People's Protection Units.

Members of the Kurdish YPG

This quarter, Russia and Turkey will also rekindle talks in other areas, including trade and tourism. As Moscow looks to revive plans for energy infrastructure in the Black Sea, Russia will renew negotiations with Turkey over natural gas.

Tensions between Russia and the West will continue beyond the NATO summit, which took place in Warsaw, July 8-9. During the summit, NATO confirmed its plans to station four battalion task groups on a rotational basis in the Baltic states and Poland. These countries will also ramp up their own efforts at military modernization, focusing on air defense.

NATO also continued discussions on Black Sea deployments. Considering the issue concerns many member states, they eased tonnage restrictions on the Black Sea that the Montreux Convention imposed. In addition, NATO announced measures to strengthen cooperation — albeit far short of a membership action plan — with Georgia and Ukraine.

Russia, in turn, will focus on its military position in the Western Military District and in border areas such as Kaliningrad, Belarus and Crimea. Over the long term, Moscow will stick with its current strategy, prioritizing its strategic nuclear forces in response to U.S. ballistic missile defense initiatives, transitioning its forces in the Western Military District to prepare for large-scale conventional war and strengthening its Black Sea Fleet.

As Russia and NATO scale up their military operations, nuclear arms treaties such as the Intermediate-Range Nuclear Forces Treaty and New START will come under mounting pressure.

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Investing in the East

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China's President Xi Jinping (L) and his Russian counterpart Vladimir Putin inspect the honor guard as they attend a ceremony to open the Chinese-Russian joint naval drills in Shanghai May 20, 2014. Reuters/Alexei Druzhinin/RIA Novosti/Kremlin

In the third quarter, Russia will maintain its emphasis on East Asia. Russia will hold its Eastern Economic Forum in September, intended to attract investment, partnerships and technology from the East, particularly China, South Korea and Japan.

During the recent St. Petersburg International Economic Forum, Russia initiated several deals with these countries, and the Eastern Economic Forum will offer an opportunity to finalize many of them. In September, moreover, Russian President Vladimir Putin plans to visit Japan.

Both countries are interested in increasing investment agreements, and they are also once again negotiating a formal peace treaty that includes the exchange of an island. But in light of the upcoming elections, Russia will be careful in presenting the talks to the public to avoid nationalist backlash over the loss of territory. 

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Fostering Growth and Quashing Unrest

Vladimir Putin
Vladimir Putin gestures as he speaks during a meeting with journalists after a live broadcast nationwide call-in in Moscow, Russia, April 14, 2016. REUTERS/Maxim Shemetov

Though Russia's recession is no longer deepening, its economic crisis wears on. To combat stagnation and encourage growth, the Central Bank of Russia will implement a string of measures, increasing budgetary spending and cutting interest rates and salaries. The ruble's value is stabilizing, which means that one of the main drivers of inflation is letting up.

Before the end of the year, the government hopes to reduce inflation, which climbed to 15 percent at the start of 2016, to under 6 percent, a goal that may prove unattainable. Nevertheless, falling inflation will be enough to pacify the public, especially as the Kremlin eases its monetary policy and the economy begins its slow recovery.

During the third quarter, one of the most pressing economic challenges that the government will face is drafting the final versions of the 2016 budget, due in October. Finance Ministry and central bank officials will struggle over a string of budgetary items, namely how much to devote to the 2016-17 anti-crisis plan and how to fund it — through Reserve Fund withdrawals or international borrowing.

The future of wide-ranging regional, public and corporate subsidies will also be up for debate. Finally, the Finance Ministry will proceed with privatizing Alrosa and Bashneft. Meanwhile, unless he gets an advantageous offer from China, India or another global power, Rosneft chief Igor Sechin will continue to resist plans to privatize a large portion of his company by year's end.

In the Kremlin and beyond, the Russian people will become more divided over how to address the country's economic and foreign policies. The Russian public will continue to bear the brunt of the economic slump, giving rise to more protests across the country.

With the approach of parliamentary elections in September, the government worries that economic protests could grow and turn political, as they did in response to allegations of election fraud in 2011 and 2012. This time, the ruling United Russia party will not blatantly manipulate the elections.

Instead, it will hold elections earlier than originally scheduled and work with other mainstream parties to flood the electoral system with options. Organizers of previous protests will be detained or sidelined as the vote approaches, and Putin will test out his new National Guard and increase the Federal Security Service presence across the country to crack down on demonstrations.

As much as the Kremlin needs United Russia though to keep its majority in parliament, it must also keep protests to a minimum to validate Putin's fourth run for the presidency in 2018.

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Some Progress for Ukraine

Ukrainian and EU flags fly in front of the Presidential Administration in Kiev, Ukraine, April 7, 2016. REUTERS/Valentyn Ogirenko
Ukrainian and EU flags fly in front of the Presidential Administration in Kiev Thomson Reuters

After a major government shake-up brought Prime Minister Volodymyr Groysman to power last quarter,Ukraine's political situation will likely steady in the third quarter. Political stability will facilitate further reforms, enabling Ukraine to access the International Monetary Fund assistance package that has been stalled since the beginning of the year. This will give Kiev much-needed financial reprieve. 

Even so, Kiev will face challenges in other areas, most notably in eastern Ukraine. Since the European Union has decided to extend its sanctions on Russia for another six months, Moscow has less incentive to make any immediate security concessions in the Ukraine conflict.

Consequently, clashes between Moscow-backed separatists and Ukrainian security forces will stay at a simmer and could escalate, though major offensives or land grabs are unlikely. In September and October, the breakaway republics of Donetsk and Luhansk are scheduled to hold primaries for local elections.

Kiev, however, will not recognize the votes, which will showcase the failure to implement the Minsk protocols. Nevertheless, Russia and the West will continue their negotiations over Ukraine's future, but they are unlikely to reach any breakthroughs this quarter.

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Eastern Europe

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NATO military training at Ādaži Military Base in Latvia NATO

Estonia, Latvia, Lithuania and Poland will each receive a deployment of additional NATO troops on a rotational basis in September. Though Belarus will further pursue its campaign for economic integration with the West, NATO buildups in the Baltic states and Poland will push Minsk toward deeper military cooperation with Moscow.

In Moldova, pro-Russian and pro-EU groups will hold competing rallies ahead of the country's October presidential election — the first direct vote since 1996.

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Caucasus

pro-russian
A dog walks near members of pro-Russian self-defence units who take part in a festive procession marking the first anniversary of the Crimean treaty signing in Sevastopol, March 18, 2015. Reuters

Political activity and strife within the ruling Georgian Dream party will intensify in Georgia as parliamentary elections, slated for early October, draw near. Pro-Russian forces will become more active in the country, but they will not be enough to undermine Georgia's focus on the West.

The dispute between Armenia and Azerbaijan over Nagorno-Karabakh will remain contentious this quarter, though major military escalations like that of the previous quarter are unlikely. The two countries will maintain their regular diplomatic meetings, as Russia — as the most influential external power and mediator in the standoff — tries to keep the conflict manageable.

Turkey and the United States will also be involved in the negotiations, though Moscow's fraught relationships with Washington and Ankara will impede any meaningful political progress over the dispute.

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Central Asia

Kazakhstan’s President Nursultan Nazarbayev waves to audience as he attends celebrations to mark Kazakhstan People's Unity Day in Almaty, Kazakhstan, May 1, 2016.  REUTERS/Shamil Zhumatov
Kazakhstan’s President Nursultan Nazarbayev waves to audience as he attends celebrations to mark Kazakhstan People's Unity Day in Almaty, Kazakhstan Thomson Reuters

In Central Asia, low oil prices, falling remittances and growing unemployment will prolong economic problems, fomenting unrest and political instability. Kazakhstan will be particularly vulnerable as its economy languishes and the government tries to contain growing dissent in the country, especially in its energy-producing western regions.

The threat of militant spillover along the Afghan border with Central Asia will be a persistent concern for Tajikistan, Uzbekistan and Turkmenistan, prompting Russia, the United States and China to boost their respective security partnerships in the region.

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The Syrian War Intensifies

A man carries an injured girl after an airstrike on Aleppo's rebel held Kadi Askar area, Syria July 8, 2016. REUTERS/Abdalrhman Ismail
A man carries an injured girl after an airstrike on Aleppo's rebel held Kadi Askar area Thomson Reuters

The Syrian civil war will continue to be a defining feature of the Middle East during the third quarter, stitching together the trends of Turkey's rising ambitions, the struggle between the Gulf Cooperation Council (GCC) and Iran over the regional balance of power, the European immigration crisis, and the standoff between Russia and the West.

The United States' focus this quarter will be to enlist more coalition support in the fight against the Islamic State. Russia has tried to edge its way into this U.S.-led fight in Syria in hopes of forcing the White House into a negotiation on broader issues, mainly relief on sanctions over Russia's actions in eastern Ukraine.

Now that Russia has given in to Washington's request that it re-engage with Turkey to minimize the potential for clashes on the battlefield, the United States is reciprocating with a proposal to coordinate U.S.-Russia efforts in Syria. By potentially agreeing to jointly bomb jihadist targets and designating no-bombing zones, the United States is aiming to remove the ambiguity in the rebel landscape that Russia relies on to justify expanding its bombing to moderate rebel factions backed by the United States.

It will be easier said than done, especially considering how deeply embedded jihadist groups such as Jabhat al-Nusra are in the rebel landscape. Russia will cooperate enough to keep the United States in dialogue but will use the threat of escalating loyalist operations and bombing U.S.-backed rebels to reinforce its demands with Washington.

At the same time, three battlefronts will develop in the crucial Aleppo province. In southern Aleppo, Islamist rebel group Jaish al-Fatah will continue its operation to drive opposing forces, mostly led by the Islamic Revolutionary Guard Corps (IRGC), from the area.

While the international community continues cease-fire efforts for Aleppo city and the surrounding area, combatants in the area will seek to bolster their positions ahead of any possible talks. Meanwhile, in northern Aleppo province, the Islamic State will continue losing territory as multi-ethnic Syrian Democratic Forces, rebels and loyalists take advantage of its weakness in the area.

Turkey will stay alert to advances by the Syrian Democratic Forces, which includes Kurdish fighters, across its border and will work through the United States and its rebel proxies to limit the Kurdish People's Protection Units' territorial expansion and influence in northern Aleppo.

The Turkish government hopes these efforts will diminish the security threat Kurdish forces pose to the country, especially as it continues its campaign against Kurdistan Workers' Party insurgents in its southeastern provinces and northern Iraq.

The United States will try to draw in more support overall from its Sunni allies in the coalition, including Turkey, Saudi Arabia, the United Arab Emirates, Qatar and Jordan, to reinforce the air campaign against the Islamic State in Syria, augment rebel training and in some cases, deepen the involvement of special operations forces on the ground.

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Turkey Prioritizes Security

Police officers patrol at Turkey's largest airport, Istanbul Ataturk, following a blast, June 29, 2016. REUTERS/Osman Orsal
Police officers patrol at Turkey's largest airport, Istanbul Ataturk Thomson Reuters

Ankara is determined to contain Kurdish expansion in northern Syria and to mitigate the terrorist threat posed by the Islamic State. Turkey's attempt to get its military more involved in northern Syria has been hindered significantly by Russia so far this year. Consequently, Ankara — with U.S. nudging — reconciled with Moscow in the second quarter.

Turkey will now try to steer its dialogue with Russia toward an understanding that gives Turkey more room on the battlefield to reinforce its rebel proxies. Russia will withhold its full cooperation as leverage over Turkey, but it could reopen negotiations on natural gas discounts to reinvigorate financing and planning for TurkStream, the pipeline project that would carry gas from Russia to Turkey via the Black Sea.

An escalation in Aleppo province could increase the flow of refugees out of Syria, straining the Turkey-EU agreement to control migrant traffic headed for Europe. Turkey will uphold the agreement but will use the added pressure to push the European Union to give on visa liberalization and to reduce EU interference in Turkey's internal security measures.

A Turkish flag hangs on the walls of the Turkish city of Sur

The Europeans will be the ones to concede on their demands for Turkey to ease counterterrorism measures rather than Turkey aligning with EU expectations.

Financial uncertainty over the Brexit will create volatility for the Turkish lira. Persistent security threats will also drag down Turkey's tourism revenues. The large number of North Caucasus and Central Asian militants — who were responsible for the June 28 attack on Istanbul's Ataturk Airport — making their way into the Islamic State theater to threaten Turkey will drive Ankara toward tighter security and intelligence cooperation with Russia and former Soviet states.

Ankara will also be wary of other countries funneling problematic jihadists out of the country to mitigate their own security problems.

The government of President Recep Tayyip Erdogan will push the central bank to continue cutting interest rates to encourage economic growth. The government, now with a new prime minister who is supportive of Erdogan's plan to reform the constitution to strengthen the presidency, will use this quarter to draft its proposal for a new constitution. A vote in parliament to table an actual referendum will not come until later, however.

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Deepening Power Struggles in Iran

Iran army parade
Iranian army soldiers march during the annual army day military parade on April 17, 2008 in Tehran, Iran. Majid/Getty Images

Iran will make incremental progress on opening up its petroleum sector to foreign investors under its revamped Iran Petroleum Contract framework. Final agreements may not be signed until after the quarter. The companies expected to participate will be the large European oil exploration and production companies such as Eni, Royal Dutch/Shell and Total, but there will also be interest from Russian and Asian companies.

Iran's post-sanctions growth in oil production is likely to taper off over the second half of the year, once most of the energy fields that it shut down during sanctions have been brought back online. Substantial new production will not occur until new investment arrives.

Still, Iran's production will continue to grow this quarter, albeit at a slower pace than the roughly 700,000-barrels-per-day increase that Iran has experienced since its nuclear deal with the West was implemented.

Politically, preparations for the presidential race in 2017 will begin in earnest this quarter. Attention on IRGC Maj. Gen. Qassem Soleimani, speaker Ali Larijani, former President Mahmoud Ahmadinejad and other potential challengers to President Hassan Rouhani will build as hard-line conservatives try to portray the incumbent as the squanderer of economic investment opportunities.

The more Iran opens up economically, the more the power struggle will intensify among Iran's leaders. The IRGC will seek to protect its business interests and steer a more aggressive foreign policy in the region against Iran's Sunni adversaries in the GCC, led by Saudi Arabia.

Iranian internal security forces will be focused on containing a rise in militant activity throughout the country. This includes Kurdish groups in the northwest, Ahwazi Arabs in the southwest and Balochi separatists in the southeast near Pakistan, as well as jihadist plots in the heartland. Militant activity will remain at a manageable level, but Tehran will be on guard nevertheless for meddling by Sunni powers as regional competition intensifies.

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The Gulf Cooperation Council Sees Some Relief

saudi oil pumping gas
An employee fills a container with diesel at a gas station in Riyadh December 19, 2012 Fahad Shadeed/Reuters

Saudi Arabia and its GCC allies will continue to wait out a correction in the oil markets. The organization's combined oil production is likely to rise moderately to reach summer air conditioning and other electricity demands, but a sustained market-sharing grab reminiscent of the first quarter of 2015 is unlikely.

This quarter will provide some relief to GCC economies thanks to a gradual rebound in oil prices, in turn allowing for some megaproject construction to resume. GCC countries will continue to draw down foreign exchange reserves to maintain their peg to the dollar (or in Kuwait's case, a peg to a basket of several currencies).

Saudi Arabia and Oman will likely issue sovereign bonds, or government debt securities, to raise capital during the third quarter to protect their reserves from declining further as the overall oil price slump continues. After all, Qatar and the United Arab Emirates issued sovereign bonds during the second quarter, and Riyadh and Muscat hope to capitalize on the same success in stabilizing their reserves.

In Saudi Arabia, efforts to diversify the economy in line with its Vision 2030 reform package are underway. The strategy outlined in a massive plan unveiled in June will soon begin to convert into tactical directives by ministries. Still, the largest burden throughout the quarter will fall on private companies.

They will be taking stock of their assets in preparation for potentially destabilizing initiatives by the end of the year that aim to replace foreign workers who fulfill duties in many important economic sectors with Saudi citizens. Workers' disputes and layoffs in the most vulnerable industries — construction and oil and natural gas — will persist.

The Saudis are also trying to pre-empt growing social and security vulnerabilities in the GCC. Saudi Arabia will gradually curtail the influence of the religious establishment in the kingdom to ease its own social pressures but will be limited because of its need for the religious scholars' support in co-opting Saudi radicals and preventing a rise in jihadist activity.

Riyadh will support Bahrain's crackdown on its Shiite opposition, which began during major protests against the Sunni government in 2011, standing by to reinforce Bahraini security if needed. Bahrain will be unable to stamp out unrest completely. Iran, meanwhile, will use its connections to Shiite communities in Bahrain and Saudi Arabia's Eastern Province to try to stoke tensions, short as its covert arm in the Arabian Peninsula is.

Negotiations over a settlement in Yemen will resume in Kuwait. The Houthis, the insurgency movement fighting government troops loyal to Yemeni President Abd Rabboh Mansour Hadi backed by Saudi-led coalition security forces, are more likely to make concessions at this point of the conflict and dialogue.

Though a partial settlement could be reached in the third quarter, the battlefields in the central regions of Marib, Shabwa and Taiz will remain violent, regardless of what deals negotiators make.

The United Arab Emirates will slowly disengage from offensive operations, having largely expelled militant groups from southern Yemeni population centers. But it will continue security operations there to avoid a resurgence of al Qaeda forces.

Even so, with less at stake in northern Yemen — the area Saudi Arabia is chiefly concerned with, so near to its southern border — UAE forces will probably avoid direct involvement in the ground operations moving on the capital, Sanaa.

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Iraq's Approach to Mosul and Beyond

mosul iraq us airstrikes
Smoke rises after airstrikes from the U.S.-led coalition against Islamic State militants in a village east of Mosul, Iraq, May 29, 2016. Reuters/Azad Lashkari

Iraqi forces made considerable gains against the Islamic State in Anbar province in the last quarter. Earlier in the year they took Ramadi, and they recently seized Fallujah. In the next quarter, Iraqi forces will continue offensive operations in the province but will shift their attention northward to Mosul.

The Iraqis will not be ready to attack Mosul directly this year but will launch preparatory operations this quarter. Serious friction on the battlefield among the anti-Islamic State coalition is a distinct possibility: An array of Iraqi army, Kurdish peshmerga, Turkish-backed rebels and Iranian-backed Shiite militias will be involved.

The focus on operations against the Islamic State will prevent the dissolution of Prime Minister Haider al-Abadi's government this quarter. Still, political unrest will remain high. Shiite leader Muqtada al-Sadr will likely renew his efforts to pressure Baghdad into implementing reforms to create a more transparent, less corrupt government, simultaneously using the crisis to expand his own political base.

Meanwhile, Iraq's Cabinet has approved the reforms needed to secure $5.4 billion in loans over the next three years from the International Monetary Fund. (The IMF has  approved the dispersal of $634 million of these funds.)

In Iraqi Kurdistan, the political partnership of the Patriotic Union of Kurdistan (PUK) and the Gorran party will force the Kurdistan Democratic Party (KDP) to re-engage with it in the Kurdistan Regional Government parliament. The KDP will try to dissolve the PUK-Gorran alliance by striking its own deal with the PUK, but those attempts will fail.

The PUK and Gorran will continue to pressure President Massoud Barzani to step down. But Barzani can still use the Islamic State security crisis, the financial crisis due to low oil prices, and the distraction of a Kurdish referendum on becoming an autonomous region to postpone elections.

All of this political polarization will feed into renewed competition between Iran, which supports the PUK and its resistance to Turkish influence in the area, and Turkey, which supports the KDP.

Arbil and Baghdad, still months behind on payments to oil companies, will continue struggling to pay them back this quarter, prolonging their overall financial straits.

Moreover, Arbil and Baghdad will not come to an agreement over Iraq's State Organization for Marketing of Oil marketing KRG-produced oil. Negotiations between Arbil and Tehran on an alternative oil pipeline agreement will continue, however, potentially straining relations between Iran and Turkey further.

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Egypt Prepares for Unrest

Egypt's President Abdel Fattah al-Sisi   in Cairo, April 23, 2015. REUTERS/Amr Abdallah Dalsh
Egypt's President Sisi speaks during a news conference with Greek President Pavlopoulos in Cairo Thomson Reuters

Despite weakening popular support and more visible signs of decline in the Egyptian economy, President Abdel Fattah al-Sisi, military leaders and Cairo's security forces will be able to manage opposition protests this quarter, even as protests over the deal to transfer two Red Sea islands to Saudi Arabia are expected to grow.

Because the Egyptian government and the court system prize internal stability, it is likely that the Supreme Administrative Court's findings will support the claim that the islands have always been Saudi territory. The parliament will then have the final say on the issue, and because it consists of mainly al-Sisi political supporters, it will likely vote in favor of the deal.

Public protests, driven by the belief that Egypt ultimately exerts sovereign control over the islands, will be inevitable but contained. Even in the more unlikely event that the islands deal falls through and al-Sisi drops the transfer in deference to state institutions, Saudi Arabia will continue providing financial support to ensure that al-Sisi and the military council remain in power to manage Egypt's security and financial challenges.

Egyptian special forces stand guard

Egypt was already wary of Turkey over Ankara's support for the Islamist party the Muslim Brotherhood. Now Egypt will also have to worry about Turkey's increasing influence in Gaza as Ankara begins shipping aid to the territory this quarter, following a thawing of diplomatic ties with Israel.

Turkey will expand ties with Palestinian groups that have traditionally looked to Cairo for mediation with Israel. The Israeli-Turkish normalization will push forward a dialogue on a subsea pipeline from Israel to Turkey through Cypriot waters.

For these talks to go anywhere, however, obstacles in Israel's regulatory environment and in Turkey's negotiations between Greek and Turkish Cyprus will have to be cleared up.

Egypt will fast-track the Zohr natural gas field discovery, deflating potential demand for Israeli natural gas that Egypt could consume. Instead, including Turkey will be an important factor for Israel to realize its full ambitions to become a significant natural gas exporter.

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Jordan's Islamists Band Together

A Jordanian soldier carries a Syrian refugee child to help him board a Jordanian army vehicle with his family after they crossed into Jordanian territory, in Al Ruqban border area, near the northeastern Jordanian border with Syria, and Iraq, near the town of Ruwaished, 240 km (149 miles) east of Amman September 10, 2015. Picture taken September 10, 2015. REUTERS/Muhammad Hamed
A Jordanian soldier carries a Syrian refugee child to help him board a Jordanian army vehicle Thomson Reuters

Preparations for Jordanian parliamentary elections on Sept. 20 will unfold over the quarter. From the Zamzam-Muslim Brotherhood Society alliance will emerge an Islamist party advocating the reordering of Jordan's government more in accordance with conservative mores of Islam.

The alliance may join forces with the Islamic Action Front, which recently announced its intention to run in the elections, breaking a six-year boycott, or it may run alongside it in a separate Islamist party.

The Muslim Brotherhood alliances will frustrate the Jordanian government's efforts to divide Islamists, though the end of the Muslim Brotherhood's electoral boycott will add legitimacy to the fall elections. And despite recent terrorist attacks along Jordan's borders, the country's relative stability will continue.

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Enduring Fractures in Libya

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A member of the Libyan army's Thunderbolt Brigade flies the Libyan flag as the army prepares for deployment in Benghazi, November 8, 2013. REUTERS/Esam Omran Al-Fetori

Al-Bunyan al-Marsoos, which comprises various militias from Misrata, Libya, will continue consolidating its control over the former Islamic State stronghold of Sirte. It will force Islamic State fighters to adjust their tactics and operate more as a terrorist group or insurgency instead of attempting to control and administer territory in central Libya.

Negotiations between the U.N.-backed Government of National Accord (GNA) and Libya's eastern and western institutions — the Central Bank of Libya, National Oil Corp. and Libyan Investment Authority — will continue throughout the quarter, but the GNA will struggle to gain legitimacy outside of Tripoli and Misrata.

The international community will continue to pressure the competing government in Tobruk, the House of Representatives, to approve a political agreement and support the GNA, but it is unlikely to do so this quarter unless there are substantial changes to the Libyan Political Agreement, which outlined the proposal for the GNA.

The potential position in the GNA of Gen. Khalifa Hifter, a divisive figure among the many factions in Libya, also remains an incendiary issue.

Hifter and his Libyan National Army will continue military operations against militant groups in Darna, Ajdabiya and Benghazi and will continue to consolidate control over the country's interior.

A Libyan soldier looks through binoculars towards an ISIS-held location.

But tension between forces aligned with the GNA and those aligned with Hifter in the areas around Ajdabiya is growing, and skirmishes between the two are likely as they move to counter Islamist and jihadist groups.

Libya may also make progress toward getting oil production back online. The political and military alliance between the GNA and the Petroleum Facilities Guard has aligned views on restarting oil production from the ports controlled by the guard along Libya's central coast.

Islamic State fighters fleeing Sirte and the damages sustained at ports and southern oil fields will complicate efforts to revive the country's energy sector, which means that substantial production increases are unlikely until after the quarter. Still, plans may be put in motion. 

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China's Only Relatively Stable Position

xi jinping
Reuters

At first glance, summer in China appears calm, but below the surface contentious political initiatives are roiling Beijing. The most significant of these is the new round of anti-corruption investigations launched by China's Central Commission for Discipline Inspection.

The investigations are part of an intensified campaign aimed at eliminating what opposition President Xi Jinping has left in government, and this round is the most overtly political yet. Rather than being aimed at the Party apparatus in targeted agencies, it focuses on individuals in government and Party agencies.

The effort will only further divide the government as various political factions fight to benefit from the corruption probes, both by exposing the wrongdoings of their rivals and by trying to fill the gaps created. Though details about the storm undoubtedly brewing in Beijing are sparse, new information will likely be leaked once the Beidaihe meeting is held sometime this summer.

China's intensifying political struggle overlays an increasingly weak, yet still relatively stable, economy. In fact, Beijing's chief goal this quarter will be to maintain stability. To that end, the government will cautiously monitor its place in the global economy in the wake of Brexit.

And though the yuan will slowly depreciate, helped by Brexit-driven appreciations of the yen and the dollar, the government will manage the rate of decline to avoid a plunge, partly by offering fiscal stimulus and cutting the reserve requirement ratio. Given that China's foreign exchange reserves will stand at $3 trillion at the beginning of the quarter, Beijing will have little trouble keeping the yuan stable.

Trade is down year-on-year, but it is likely to remain relatively stable at least through the quarter, keeping southern manufacturing provinces afloat and moderating the pace of capital outflows.

China will continue small-scale stimulus this quarter to maintain limited growth, including by investing in targeted infrastructure projects. These projects will be supported by new local government bond issuances, and banks will also increase their lending to support these investments.

This will lead to upticks in nonperforming debt, but it will not exceed what the financial system can manage. As a result of stimulus, robust investment in real estate and construction (along with reconstruction) is likely to continue at a stable, though reduced, pace.

This will ensure that the economies of the northern provinces that rely on the production of steel and other construction materials will stagnate but will not totally tank. Local governments will continue to maintain employment by supporting local-level heavy industries, which will be hesitant to implement capacity cuts in line with central and provincial targets as they wait to see if the central government will provide the readjustment aid promised earlier this year.

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Looking Beyond the Chinese Mainland

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Guang Niu/Getty Images

While China attempts to maintain stability, the countries around it will be undergoing some key changes. The potential for disruptive protests in Hong Kong will increase as new nativist parties, some of which favor full independence from China, try to rally the support they need to score seats in Hong Kong's Legislative Council in September.

Protests may be particularly disruptive depending on the mainland's attempts to strong-arm Hong Kong's government to return bookseller Lam Wing-kee. Lam has refused to return to the Chinese mainland, which he is required to do under the terms of his bail agreement, because of accusations that he was illegally held there.

He is planning more provocative rallies questioning the viability of the "one country, two systems" plan, just further incentivizing Beijing to pressure Hong Kong for his return.

China will also continue to diplomatically dissuade Taiwan from pursuing independence. Beijing is working to convince countries such as Kenya, Malaysia and Cambodia to repatriate Taiwanese fraud suspects to China.

This will keep the Taiwanese government in contact with the Chinese — on Chinese terms. Newly inaugurated Taiwanese President Tsai Ing-wen will focus on a campaign of diplomatic and economic diversification to counter the Chinese isolation campaign. Tsai will try to downplay and avoid the Okinotori territorial dispute with Japan to strengthen ties with the country.

She will also begin making the opening moves of her New Southbound Policy to deepen economic ties with member countries of the Association of Southeast Asian Nations (ASEAN). Though she and the ruling Democratic Progressive Party will not endorse the 1992 Consensus that China demands as a precondition for talks, Tsai will avoid actions and proclamations that will unduly disturb ties with China.

In the South China Sea, China will be compelled to act on an imminent ruling of the U.N. Permanent Court of Arbitration on the status of several Chinese-held islets, scheduled to take place July 12.

The ruling will almost certainly go against China. The United States, perhaps in conjunction with the Philippines, may try to uphold the ruling by conducting military operations in the vicinity of some Chinese-held islets (either in the Spratlys or Scarborough Shoal).

While China will deem the ruling illegitimate, it will see it as a challenge meriting a response, and it could use increased U.S. military activity as a pretext to declare a South China Sea air defense identification zone, which it threatened to do ahead of the Shangri-La Dialogue.

Should China choose to declare an air defense identification zone, it would likely wait until after the multinational Rim of the Pacific naval exercise, which starts in July and ends in early August.

Faced with an unfavorable ruling, China could also withdraw from the United Nations Convention on the Law of the Sea, which would be an explicit rejection of what it sees as an unfair U.S.-built international order. Such a strong reaction, however, could push countries such as Indonesia to build stronger ties with the United States.

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Japan: Abenomics and Its Shadow

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Koichi Kamoshida/Getty Images

The Japanese economy will enter the quarter under considerable economic pressure, especially caused by external factors including weak demand and rising political uncertainty in major markets such as Europe. Economic policy in Japan has continually failed to produce more than weak inflation and wage growth.

The yen will continue to face pressures to appreciate, particularly after Brexit. The currency is already being pushed up because of perceived failures of the Bank of Japan's policies as well as Japanese Prime Minister Shinzo Abe's three arrows to successfully stimulate the economy.

The strengthening of the yen relative to the currencies of major trading partners such as China and the United States will lead to higher cost pressures on Japanese exports. Further fiscal stimulus and monetary easing will probably be implemented within the quarter, most likely during the July Bank of Japan meeting, and will be dependent on the global fallout of Brexit.

The effect of monetary policies on the currency will be limited, since the Bank of Japan already owns so much of the bond market (37 percent in May). With the potential of conventional policy reaching its limits, there is likely to be increased talk within Japan's political circles of enacting more unconventional policies such as directly allocating funds to the public.

But action on such divergent policies within the quarter is unlikely as Japan waits for more clarity on the long-term effects of Brexit.

The ailing economy will play into the most significant political event in Japan during the third quarter: the upper house elections on July 10, where the Liberal Democratic Party-led ruling coalition does not have a supermajority. The opposition will seek to deny the ruling coalition the supermajority that would enable it to push for constitutional amendment.

Nonetheless, the opposition's failure to run a unified list of candidates in proportional representation districts shows that cooperation has limits. Sweeping the Liberal Democratic Party from the majority appears to be beyond the opposition's capability, especially given its unproven record of governance, and Abe will proceed with broadening the Japan Self-Defense Force's freedom of action with or without a constitutional amendment.

After upper house elections, Abe will call on the Diet to pass the second stimulus budget of the year of about $91 billion, which would take effect during the fall, in another attempt to stimulate consumption. Stimulus itself will not significantly affect the economy within the quarter, however.

While the approval of more stimulus is not beyond the grasp of the ruling coalition (with Brexit lending more urgency to the stimulus), corporate-vested interests — with which the Liberal Democratic Party has strong ties — will continue to constrain Abe's ability to push structural reform, whatever the result of the upper house elections.

In the East China Sea, Japan will face an increasingly active Chinese navy as China attempts to deter Japan from intervening too forcefully in the South China Sea. This may in turn encourage the Japan Maritime Self-Defense Force to more actively confront Chinese incursions rather than sitting behind the Japanese coast guard.

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North Korean Defense

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North Korean leader Kim Jong Un receives applause as he guides the multiple-rocket launching drill of women's sub-units under KPA Unit 851, in this undated photo released by North Korea's Korean Central News Agency (KCNA) April 24, 2014. Reuters

North Korea will slowly continue to equalize its defense and economic priorities. Most recently, the country replaced the Kim Jong Il-era National Defense Commission with a new State Affairs Commission (made up in large part of Party rather than military officials) as the highest decision-making body in the country. This effectively finalizes the return to institutionalized administration in North Korea.

Regardless of new economic policies, North Korea is unlikely to halt development of a survivable nuclear deterrent capability, and during the third quarter of 2016 the country is likely to test weapons such as the Musudan mobile intermediate-range ballistic missile, which appears to be a current testing priority. This in turn will drive steady improvement in the Japan-South Korea military relationship.

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South Korea: Headed Toward Collapse

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Water mixed with tear gas liquid is sprayed by police water canon to disperse protesters during an anti-government rally in central Seoul, South Korea, November 14, 2015. REUTERS/Kim Hong-Ji

Entering the third quarter, the South Korean economy is teetering on the edge of collapse. External forces have decreased trade demand, and domestic consumption remains sluggish as household debt is rising and incomes falling.

Most of South Korea's economic performance is heavily tied to trade, especially with China, which buys 26 percent of South Korea's total exports. But weak Chinese import demand and low global consumption demand will continue to hurt the South Korean economy.

Thus, the country will be unable to depend on export manufacturing demand to soften the problems of growing household debt and wage stagnation.

The won will continue to weaken relative to the dollar given the unfavorable macroeconomic conditions for greater international investments — which have become even more unfavorable with Brexit. South Korea will attempt to ensure that the won remains competitive with the yuan and the yen, relative to the dollar.

To manage external pressures against the economy, the government will make use of monetary easing and a recently unveiled fiscal stimulus package of about $17 billion. The effectiveness of these measures is limited, however, by growing household debt: Any money pumped into the economy will likely be spent on debt payments rather than on consumption.

While easing and stimulus measures will help alleviate some of the debt burden on household disposable income meant for consumption, weakness in exports, domestic expenditures and global investment will constrain the South Korean government's efforts to strengthen its economy.

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Trade and Investment

asean countries
Thailand's Deputy Secretary of Ministry of Foreign Affairs Vitavas Srivihok (L-R) Vietnam's Deputy Minister of Foreign Affairs Le Hoai Trung, China's Vice Minister of Foreign Affairs Liu Zhenmin, Singapore's Permanent Secretary of Ministry of Foreign Affairs Chee Wee Kiong and Philippines' Senior Officials Meeting Leader from Department of Foreign Affairs Enrique A. Manalo join hands before the 11th ASEAN-China senior officials meeting of the Implementation of the Declaration of the Conduct of Parties in the South China Sea in Singapore April 27, 2016. Reuters/Edgar Su

During the quarter, the economies of ASEAN will cautiously monitor the global economic situation, avoiding drastic action if possible. Though severe trade impacts from Brexit are unlikely this quarter, ASEAN currencies may become more volatile because of appreciation in the yen and the dollar, which would increase the cost of financing any international debt held within ASEAN.

Managing international debt will be most difficult for Indonesia (which has $319 billion in debt) and Malaysia ($208 billion). Malaysia faces increasing domestic problems arising from its political crisis combined with high household and corporate debt; Indonesia, meanwhile, continues to focus on economic reforms while also dealing with its sizable corporate debt financed by foreign currency.

In China, new construction (along with some demolition and reconstruction of old housing units) will keep commodity demand from tanking, but near-term increases in commodity prices will be tame because of China's persistent overcapacity — or its production of much less than it is actually capable of producing.

Commodity-heavy economies such as Malaysia, Indonesia and Australia should therefore not expect a significant improvement in commodity prices. Their economies will remain constrained by the limited demand for commodities.

The quarter will be slow for trade deals, especially as Japan and the ASEAN countries wait for action in the U.S. Congress on the ratification of the Trans-Pacific Partnership, which is not expected until at least the fourth quarter of 2016.

But while there will be little activity toward the ratification of new trade deals, the race for infrastructure investment will remain vibrant. China and Japan will continue the search for infrastructure deals; Japan is planning to increase its investment into infrastructure projects from $110 billion to $200 billion.

Both China and Japan will also take advantage of opportunities in Thailand as the ruling junta seeks to inject money into the economy ahead of 2017 elections by streamlining project approvals.

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South China Sea

South China Sea
An aerial photo taken though a glass window of a Philippine military plane shows the alleged on-going land reclamation by China on mischief reef in the Spratly Islands in the South China Sea, west of Palawan, Philippines, May 11, 2015. REUTERS/Ritchie B. Tongo

China's response to the U.N. Permanent Court of Arbitration ruling on territorial rights in the South China Sea will not be the only important maritime development to occur during the quarter.

U.S. firms will explore the possibility of new arms deals with Vietnam now that the lethal arms embargo has been lifted, but maritime security assets will remain the easiest to integrate into Vietnam's logistics infrastructure at this early stage.

Finally, Indonesia, having improved the harmonization of its maritime policy across its various ministries, will continue to take a more active central role in the region. Within the quarter, it will probably start anti-terrorism patrols in the Sulu Sea under a trilateral maritime cooperation agreement among Indonesia, Malaysia and the Philippines.

Rodrigo Duterte, who was inaugurated president of the Philippines on June 30, is expected to formally sign the agreement soon. Though actual maritime activity under the deal will be limited, it does stand as an important foundational block for increased regional security cooperation.

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Thailand

Former Thai Prime Minister Thaksin Shinawatra speaks to Reuters during an interview in Singapore February 23, 2016. REUTERS/Edgar Su
Former Thai Prime Minister Thaksin Shinawatra speaks to Reuters during an interview in Singapore Thomson Reuters

If voters support the new military-drafted Thai Constitution in a referendum in August, Thaksin Shinawatra's Pheu Thai party will reluctantly accept the result in order to hasten a return to elections. If it is voted down, the risk of protest will be the highest it has been since the 2014 coup.

A rejected constitution would delay elections — still Thaksin's foremost goal, even if under a restrictive charter — indefinitely. The junta will crack down hard on any attempts to organize opposition and will try to rein in the Shinawatras by hanging ongoing legal cases over their heads, particularly those pending against Thaksin's sister, former Prime Minister Yingluck Shinawatra, and Thaksin's son.

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Myanmar

Myanmar Foreign Minister and State Counselor Aung San Suu Kyi (2nd L) arrives at Suvarnabhumi airport in Bangkok, Thailand 23 June 2016. REUTERS/Narong Sangnak/Pool
Myanmar Foreign Minister and State Counselor Aung San Suu Kyi visit Thailand Thomson Reuters

The National League for Democracy plans to open comprehensive peace talks with the country's myriad ethnic rebel groups — talks that will undoubtedly be laden with tension between the government and the military.

But with the government and military reconciling their positions on ethnic issues, the talks are unlikely to trigger significant military action to undermine the new government's standing in the quarter.

The talks will lay the groundwork for a new federal system of governance in Myanmar, but peace with the rebel groups holding territory along the Chinese border is not imminent.

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Malaysia

Malaysia's Prime Minister Najib Razak speaks at a Felda Club event in Kuala Lumpur, Malaysia, March 14, 2016.  REUTERS/Olivia Harris
Malaysia's Prime Minister Najib Razak speaks at a Felda Club event in Kuala Lumpur, Malaysia Thomson Reuters

International investigations into the Malaysia Development Berhad scandal will continue to pressure Malaysian Prime Minister Najib Razak. But with the opposition still in disarray and his opponents within the ruling United Malays National Organization largely sidelined, the embattled prime minister will survive the quarter, even if former Prime Minister Mahathir Mohamad successfully rouses mass protest against him.

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Philippines

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Philippines' President Rodrigo Duterte (R) and outgoing Armed Forces chief Lt. Gen. Glorioso Miranda ride on a vehicle during a troops' parade and review at the main military Camp Aguinaldo in Quezon city Metro Manila, Philippines, July 1, 2016. Reuters/Erik De Castro

Other countries will spend the quarter cautiously observing President Duterte's actions, having had difficulty discerning his stance on foreign affairs. China will continue to float the possibility of aid from the Asian Infrastructure Investment Bank, but large deals are unlikely given that the bank is only beginning and because Duterte still needs to settle into office during the quarter.

Taiwan will hold early discussions with Duterte on opportunities for investment in the Philippines under Tsai's New Southbound Policy.

The United States will make it an early priority to talk to Duterte and ensure that his avowed determination for the Philippines to chart its own course does not include a rollback of rotational basing under the Enhanced Defense Cooperation Agreement.

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Shortages and Inflation Threaten Venezuelan Stability

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REUTERS/Carlos Garcia Rawlins

Venezuela enters the third quarter facing deepening economic and social crises with fewer and fewer funds. Meanwhile, the administration of President Nicolas Maduro will do its best to hang on to power amid calls for a referendum on a presidential recall.

Some officials who see Maduro as the best guarantor of their interests — which include avoiding extradition to the United States and protecting their assets and power — remain loyal to him for now.

But the opposition will continue to press for a referendum to be held this year so that an election for Maduro's successor can take place. The United States will probably keep encouraging dialogue between Maduro's government and his opponents to reduce political conflict in Venezuela. Maduro has the means to drag out talks and deflect pressure from the opposition for the next three months.

In the wake of the Brexit, a strengthened dollar will likely keep oil prices low, restricting Venezuela's already limited ability to boost imports amid its downturn. As a result, food shortages and skyrocketing inflation will continue.

The economy's downward slide could, in turn, spur widespread social unrest. If instability gets drastically more violent and spreads, opposition parties and dissidents in the ruling United Socialist Party of Venezuela will press harder for the president to resign or submit to a recall referendum.

Venezuelans face serious food shortages.

Lower revenues for state-owned energy firm Petroleos de Venezuela will raise the risk of Venezuela defaulting on its foreign debts early in the fourth quarter. (Some $5 billion in debt payments are due in October and November.)

The government will continue to scale back its imports in an effort to pay these bills, but the strategy could could aggravate food shortages. This could, in turn, fuel more public unrest, which would widen the splits within the ruling PSUV and weaken Maduro's position.

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Colombia Demobilizes Its Biggest Insurgency

Colombia FARC attack soldiers
Colombian soldiers carry the corpse of a comrade killed after a rebel attack in La Esperanza village, April 15, 2015. Colombian President Juan Manuel Santos ordered the resumption of bombing raids against FARC rebels after an attack he blamed on the group killed 10 soldiers. Jaime Saldarriaga/Reuters

Now that the Colombian government has reached a firm cease-fire with the Revolutionary Armed Forces of Colombia (FARC), Bogota's attention will turn toward solidifying and implementing a permanent peace deal. To that end, the FARC will likely begin demobilizing over the next few months, a process that will require the militants to gather at a predetermined location to surrender their weapons.

Though some progress on this issue will be made in the third quarter, the demobilization process will probably drag out for the remainder of the year. Alongside it, the government will take the necessary legal steps to set up a national vote on the peace deal. If the accord is approved, it will become law, giving the rebels an additional incentive to permanently stand down.

Once the FARC starts to demobilize, the most significant security threats left in Colombia will be the smaller National Liberation Army (ELN) and criminal groups, the largest of which is Clan Usuga.

Bogota will continue to target both, though it is possible that the ELN will agree to open peace talks of its own in the third quarter. Negotiations would largely depend, however, on whether the ELN acquiesces to certain government demands, including the release of hostages.

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Brazil Wraps up Its Impeachment Process

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Brazil's President Dilma Rousseff speaks at a joint news conference with European Council President Herman Van Rompuy and EU Commission President Jose Manuel Barroso (unseen) during an EU-Brazil summit in Brussels February 24, 2014. Francois Lenoir/Reuters

The lengthy political drama surrounding former Brazilian President Dilma Rousseff will draw to a close over the next few months. During the third quarter, the Brazilian Senate will hold hearings to determine Rousseff's fate; the decision of whether to impeach her must be made by November. Should the Senate choose to proceed with the impeachment process, it could extend into the final quarter of the year.

Meanwhile, Brazil's interim president, Michel Temer, is embroiled in his own legal scandal. Temer faces allegations that he illegally tapped into the funds of state-owned energy firm Petroleo Brasileiro, though the charges appear unlikely to lead to a formal case in the near future that could threaten his position. Legally, the president may be shielded from prosecution for any crimes committed prior to his term.

As Brazilian officials continue to deal with the political fallout of the Petrobras affair, they will also start implementing tough austerity measures, including a proposed cap on government spending.

In the long term, approval for reducing mandated expenditures in certain areas of Brazil's budget, including education and health care, would give future administrations more room to rein in runaway spending.

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Argentina Struggles With Austerity

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Mauricio Macri, presidential candidate of the Cambiemos (Let's Change) coalition, celebrates with his wife Juliana Awada (behind, in white) after the presidential election in Buenos Aires, Argentina, November 22, 2015. Reuters

Argentina will continue to implement austerity measures as well in the third quarter. President Mauricio Macri's government will stick to its current path, trimming government spending through budget cuts and layoffs in the public sector.

Macri, however, will be limited in just how far he can scale back expenditures since measures such as bigger hikes in electricity or natural gas prices could carry steep political costs. With the country's 2017 midterm elections in mind, the president will try to avoid moves that could incite more protests or undermine his support among voters.

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Mexican Politicians Gear up for an Election

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Mexico's President Enrique Pena Nieto wipes sweat from his brow during a signing ceremony among the Pacific Alliance at the Climate Change Conference in Lima, Peru. Juan Karita/AP

In Mexico, potential candidates will vie for their parties' nominations ahead of the 2018 presidential vote. Discussions are also likely to continue between the conservative National Action Party and the leftist Party of the Democratic Revolution, which intend to seal an alliance and make a joint bid for the presidency.

The ruling Institutional Revolutionary Party, having suffered a setback in June's state elections, will also hold internal talks to select a presidential candidate. Because the election is still nearly two years away, though, any alliances or candidates to emerge in the coming months will be subject to change.

In the meantime, Mexico will probably continue to experience lower export growth than it has seen in several years. The decline in exports can be explained in part by slowing growth in U.S. demand for some high-value Mexican products, such as automobiles, as well as by low oil prices.

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Panama's Newly Expanded Canal Opens for Business

Panama Canal
Panama Canal

The expansion of the Panama Canal was completed on June 26, and the project will doubtless make waves in global trade. Larger vessels can now transit the canal, and some ports on the U.S. East Coast and in the Caribbean are building or modifying infrastructure to receive them.

These adjustments will enable the Panama Canal to compete with other trade routes. That said, the largest cargo vessels still will not be able to pass through the canal, which will somewhat limit the amount of trade that shifts to it.

In the long term, the impact of a wider and deeper Panama Canal will also be constrained by external factors, including the slowing of trade worldwide.

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Amending Mercosur

Argentina's President Mauricio Macri attends a session of the Summit of Heads of State of MERCOSUR and Associated States and 49th Meeting of the Common Market Council in Luque, Paraguay, December 21, 2015. REUTERS/Jorge Adorno
Argentina's President Macri attends a session of the Summit of Heads of State of MERCOSUR and Associated States and 49th Meeting of the Common Market Council in Luque Thomson Reuters

The Brazilian and Argentine governments have recently said they were unhappy with the policies of the Common Market of the South (Mercosur) that limit among its members free trade options. Current Mercosur regulations prohibit individual members from negotiating free trade agreements with outside parties, something that, according to Brazil and Argentina, constrains foreign trade in a period of slowed economic growth.

Brasilia and Buenos Aires will lobby for the regulation's amendment accordingly, but it will be a long arduous process thanks in part to Mercosur's institutional inertia and to its members' domestic constraints.

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In India, Tax Reform Will Dominate 'Monsoon Session'

India Bharatiya Janata Party
AP

New Delhi will probably bring an amendment to the Goods and Services Tax Bill to a vote in the upper house of parliament during the late July to mid-August Monsoon Session of parliament.

If passed, this would create a single tax regime for all India. Amending the bill is the first step in a lengthy legislative process toward implementing the overall tax reform, which is intended to improve tax collection, promote consumption and boost economic growth.

The opposition Indian National Congress party, the largest voting bloc in the upper house, has so far blocked the bill. Congress' opposition to the measure stems from the ruling Bharatiya Janata Party's (BJP) refusal to agree to three amendments.

These amendments would cap the tax rate at 18 percent, create a dispute resolution mechanism for resolving tax disputes that empowers the states and impose a 1 percent interstate tax.

Rather than agree to the Congress party's demands, Finance Minister Arun Jaitley has sought to woo regional parties away from Congress' coalition using incentives such as offering states tax reimbursements for up to five years of lost tax revenue.

Its overtures have won support from across the political spectrum, including ideological rivals on the left such as West Bengal's All India Trinamool Congress and Uttar Pradesh's Samajwadi Party.

As a result, the BJP is better positioned than ever to marshall the two-thirds of parliament it needs to win passage of the amendment. Even so, the Congress party might be able to thwart passage by causing disruptions in the chamber, such as shouting and sit-ins.

By leaving Congress few allies on the issue beyond the All India Anna Dravida Munnetra Kazhagam (AIADMK) party, which represents the southern state of Tamil Nadu, the BJP has limited its ability to block the bill.

Indian monetary policy probably will remain steady in the new quarter even though Reserve Bank of India Gov. Raghuram Rajan — who will chair the bank's August policy meeting — is stepping down in September.

With the implementation of land, labor, and tax reforms unlikely this quarter, the government will turn to monetary policy to boost growth, meaning it probably will choose a successor to Rajan willing to contemplate deeper rate cuts.

As the name of India's summer session implies, the annual monsoon typically arrives during the third quarter. If this year does see rains that are heavier than normal, a more abundant October harvest can be expected. Either way, the country's 5.76 percent inflation rate will not be affected this quarter.

In the wake of the United Kingdom's referendum on leaving the European Union, India expects rising compliance costs for the more than 800 Indian-owned firms in the United Kingdom.

These companies now will have to ensure regulatory compliance in both the United Kingdom and the European Union. The Brexit will also compel India to negotiate a free trade agreement with the United Kingdom separate from the one it is currently negotiating with the European Union. It also has implications for India's IT service exports, one-sixth of which go to the United Kingdom.

At 7.6 percent, India's growth rate is the fastest among the world's major economies. Recently released government data, however, shows jobs growing at the slowest pace since 2009, suggesting India's growth is capital intensive rather than labor intensive.

Indian Prime Minister Narendra Modi's recent decision to relax foreign direct investment requirements across the insurance, aviation, retail, and defense sectors is a bid to promote job growth. The executive measures Modi used to relax those requirements will expire, however, unless parliament approves them, something he hopes will happen during the Monsoon Session.

This quarter will likely see an uptick in consumption, since New Delhi approved a 23 percent pay increase for 10 million federal employees and pensioners.

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Conflict and Cooperation on the Afghan-Pakistani Border

Peshawar Pakistan Army School
An army soldier stands in the Army Public School, which was attacked by Taliban gunmen, in Peshawar, December 17, 2014. REUTERS/Zohra Bensemra

The Pakistani military will continue the last phase of anti-militant Operation Zarb-e-Azb in the northwestern region of North Waziristan, prompting militants to launch sporadic retaliatory attacks against soft targets throughout Pakistan.

Meanwhile, Afghan-Pakistani ties will continue to be strained as Islamabad forges ahead to secure the shared 1,370-mile (2,204-kilometer) border by installing checkpoints and continuing work on a trench along its entire length roughly four meters deep and four meters wide.

By securing its western border, Pakistan can demonstrate its leverage over landlocked Afghanistan, which relies on supply routes crossing through Pakistan. NATO will maintain a presence in Afghanistan through 2020. The Taliban insurgency will sustain its vigor throughout the fighting season, ensuring that a steady stream of Afghan migration into Europe continues.

In response to Pakistan's border security moves, Afghanistan will enhance its cooperation with India on building the Chabahar Port in Iran to diversify its trade routes. Kabul, which also fears Pakistan could deport Afghan refugees, will work to ensure relations with Islamabad do not worsen ahead of talks at the United Nations in July to discuss the future of Afghan refugees in Pakistan.

For its part, Washington will work to improve its strained relationship with Islamabad to help jump-start peace talks with the Taliban suspended by Pakistan in the aftermath of the U.S. attack that killed Taliban leader Mullah Mansour in Pakistan. Indo-Pakistani ties will remain weak but stable as both nations jockey to gain entrance into the Nuclear Suppliers Group

Fallout from the Panama Papers scandal will continue in Pakistan. Since the opposition cannot even agree on how to proceed with an investigation, it is unlikely that Prime Minister Nawaz Sharif will be forced to resign this quarter.

Sharif's delaying tactic is apparently working, so we can expect more of the same from the ruling Pakistan Muslim League (Nawaz). Islamabad will continue to try to distract the public from the issue by pointing to the government's successes in combatting terrorism and in attracting foreign investment for development projects related to the China-Pakistan-Economic-Corridor.

Afghanistan's National Unity Government led by President Ashraf Ghani and Chief Executive Abdullah Abdullah is due to implement electoral reforms in the coming months. A string of challenges including a gridlocked parliament suggest Kabul will not achieve its objectives this quarter, thereby threatening to delay parliamentary and district council elections scheduled for Oct. 15.

A loya jirga in September to debate a constitutional amendment aimed at converting Abdullah's role into that of a prime minister is unlikely despite an agreement between Ghani and Ashraf to hold one. The National Unity Government is also likely to extend its term through the end of the quarter even as rivals challenge its legitimacy.

Attacks in Bangladesh Will Continue

bangladesh attack
People help an unidentified injured person after a group of gunmen attacked a restaurant popular with foreigners in a diplomatic zone of the Bangladeshi capital Dhaka, Bangladesh, Friday, July 1, 2016. Associated Press

Despite Bangladeshi Prime Minister Sheikh Hasina's launch of a nationwide crackdown resulting in 18,000 arrests, her boldest effort at stamping out militancy, sporadic attacks will persist. Hasina will blame her political rivals, the Bangladesh Nationalist Party and the Jamaat-e-Islami, for the attacks,using them as a pretext to marginalize them.

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Leadership Transition Pending in Angola

Angola's President Jose Eduardo dos Santos shows off his inked finger to photographers after casting his vote during national elections in the capital Luanda, August 31, 2012. REUTERS/Siphiwe Sibeko
Angola's President Jose Eduardo dos Santos shows off his inked finger to photographers after casting his vote during national elections in the capital Luanda Thomson Reuters

The Popular Movement for the Liberation of Angola (MPLA) has spent the past several months preparing for its Aug. 17-20 party congress. The stakes are higher than usual at this congress because President Jose Eduardo dos Santos, who has held office since 1979, has said he plans to retire from "active" politics in 2018.

The new MPLA leadership list may reveal a successor for dos Santos, enabling us to assess the direction of the party and of the country. The candidate to take overwhen dos Santos decides to retire as president, party head or both will probably be a veteran party official with economic and defense experience. He will also likely have a mastery of the complex system of patronage that defines the MPLA-run system.

The country is also on the cusp of another significant change as state oil company Sonangol is set to begin a restructuring ordered by dos Santos in the upcoming quarter. The changes will give the president greater power over the company in the form of a new board overseeing the company that will report directly to his office.

Dos Santos has already installed his daughter, Isabel dos Santos, to head the company (her official role is non-executive administrator and president of the board of directors).

Her appointment will ensure the overhaul is thorough. Having her at the helm of what is arguably Angola's most powerful entity could also help the president ensure a smoother transition to his preferred candidate to be the next president.

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Nigeria Faces Pressure on Multiple Fronts

Muhammadu Buhari (C), presidential candidate Nigeria
Muhammadu Buhari (C) Reuters/Afolabi Sotunde

Though Nigerian President Muhammadu Buhari recently marked a year in office, the country's tough financial and security situation gave him little reason to celebrate. The slow recovery of oil prices has stymied growth, while official unemployment and inflation have risen.

The economic picture is unlikely to brighten significantly in the next quarter, and the country might even dip into recession. The floating (and subsequent sharp devaluation) of its currency, the naira, will help stop reserves from dropping sharply. But it has made the currency volatile, helping to increase inflation. If the currency continues to decline and inflation continues to rise, labor unrest could break out.

Meanwhile, attacks on oil and natural gas infrastructure in the Niger Delta region have contributed to declining oil production. A group calling itself the Niger Delta Avengers has been behind almost all of the sabotage.

Nigeria has few military options to address the attacks because of the scale of oil and gas infrastructure combined with limitations on military resources and difficult terrain. So the federal government has reached out to the militants and stakeholders in the Niger Delta, offering talks in search of a negotiated solution.

But talks will prove difficult, too. The federal government will struggle to satisfy the region's myriad stakeholders.

These actors include figures from the Movement for the Emancipation of the Niger Delta (a militant group that eventually came to terms with the federal government in the late 2000s), a new generation of militants, and local leaders possibly seeking to redress their drop in political fortunes since Goodluck Jonathan left the presidency.

But between the state of the economy and needs elsewhere in the country, Abuja may not have much to offer the Niger Delta region. In light of this, we predict militancy in the Niger Delta will continue to fester. Attacks on oil and gas infrastructure will continue at some rate as government efforts to find a solution drag on, causing Nigeria's oil production to remain volatile.

While militancy persists in the delta region, northeastern Nigeria has seen a decline in Boko Haram's conventional capabilities, even though the group continues to make bombs and recruit suicide bombers.

Infighting among militants plus an increasing tempo of operations by the Nigerian and neighboring governments against it have driven the radical Islamist group to shift tactics. In a move reminiscent of the longtime Central African militant group the Lord's Resistance Army, smaller bands of Boko Haram adherents have taken to raiding smaller towns for food and other provisions. This dynamic is likely to continue.

In the regulatory sphere, Nigeria's economic difficulties and institutional weaknesses have hampered efforts at reform. Despite Buhari's best intentions to reform the oil industry, for example, upstream reform has lagged, though some progress has been made in downstream reform.

Investment in the petroleum sector has tapered off in part because of fears of how the Petroleum Industry Bill currently before the Nigerian Senate would adjust royalty payouts. The matter will remain a major challenge for the Buhari administration in the months ahead.

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Municipal Elections in South Africa

Jacob Zuma
President Jacob Zuma answers questions at Parliament in Cape Town, March 17, 2016. REUTERS/Mike Hutchings

Municipal elections in South Africa are slated for Aug. 3. Held every five years, the elections will occur in districts and municipalities in all nine provinces. While local elections rarely merit scrutiny, the races will provide a picture of the health of the African National Congress (ANC), which has governed South Africa since the end of apartheid. Public dissatisfaction has simmered as key economic indicators, including unemployment and production in multiple sectors, continue to disappoint.

The Brexit could pile on South Africa's economic woes given the country's economic ties to the United Kingdom and the rand's recent volatility. South African GDP contracted 1.2 percent in the first quarter of 2016 compared with the previous quarter, and the chances are good that the economy will enter recession before the end of the year. With commodity prices and drought conditions unlikely to improve any time soon, the ANC's ability to improve matters before the elections is limited.

The ruling party may well lose in some urban centers, including Port Elizabeth and Pretoria, to the Democratic Alliance. It probably also will lose support to the nationalist-Marxist Economic Freedom Fighters.

A poor showing will increase calls to remove President Jacob Zuma from the party leadership before his presidential term ends in 2019. Meanwhile, the ANC may choose to increase handouts (such as subsidized housing, water and jobs) to shore up its support among the impoverished majority going forward, especially if the Economic Freedom Fighters continue to make inroads into this prized constituency. By contrast, any losses to the Democratic Alliance will be mostly symbolic, given the ANC's proven ability to mobilize massive numbers of voters.

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Presidential Elections in Gabon and Zambia

Gabon's President Ali Bongo Ondimba addresses attendees during the 70th session of the United Nations General Assembly at the U.N. headquarters in New York, September 28, 2015.  REUTERS/Eduardo Munoz
Gabon's President Ali Bongo Ondimba addresses the 70th session of the United Nations General Assembly at the U.N. headquarters in New York Thomson Reuters

Low global energy prices have limited economic growth in Gabon with a presidential election set for Aug. 28. This has translated into public dissatisfaction with the ruling Gabonese Democratic Party and the country's president, Ali-Ben Bongo Ondimba.

Bongo struggled to win the presidency after the death of his father, longtime Gabonese ruler Omar Bongo, in 2009; credible claims of voter fraud were raised against Bongo in the aftermath of the election.

Given the economic headwinds Gabon faces, minor protests could break out after the election among partisans of the losing side. The lack of unified opposition means Bongo is likely to win given the advantage of incumbency and the resources the ruling party will bring to bear.

In Zambia, incumbent President Edgar Lungu will struggle for re-election Aug. 11. In office since just January 2015, he has had little time to build his support network. Unlike Bongo, Lungu lacks a powerful and entrenched political machine.

But as in Gabon, commodities-dependent Zambia is struggling economically. The slump in global copper prices has led to unemployment and other difficulties in the country's Copperbelt province. Severe drought has also afflicted the country.

The election pits Lungu against Hakainde Hichilema, who lost to Lungu by fewer than 28,000 votes (or just under 1.7 percent of total votes cast) in the 2015 by-election held after the death of longtime President Michael Sata.

Since then, Hichilema has worked to broaden his coalition, meaning Lungu may not garner as much support as he did before. Regardless of who wins, Zambia will still face economic difficulties as copper prices remain relatively low and efforts to diversify its economy falter.

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Terrorism in West Africa

West Africa
A map of West Africa Wikimedia Commons

Transnational terrorist groups operating in the Sahel and Greater West Africa have struck several soft targets in urban centers in recent months, particularly hotels and other locations frequented by Westerners.

An uptick in attacks against U.N. convoys and peacekeepers in Mali has also been noted. The countries most at risk are Mali, Niger, Burkina Faso and, to a lesser extent, Senegal and Chad.

There are three reasons we expect attacks on soft targets to continue: They are relatively easy for terrorist groups to execute, they bolster support for the extremists' cause, and they demonstrate the relevance of groups such as al Qaeda in the Islamic Maghreb at a time when international attention is focused on the Islamic State.

While radical Islamist groups may try to carry out attacks on a much larger scale, the sort of smaller, soft target attacks seen lately will remain more common. This is because bigger attacks have a higher rate of failure, and security at important sites across the region has been strengthened since the spate of attacks. West African states are unlikely to face existential threats from these transnational groups.

Read the original article on STRATFOR. Copyright 2016.
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