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Geopolitical thoughts 2016: Watch Turkey; Russia upgrades Peru; Chile to prevail over Bolivia; Poland

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By Christian Takushi MA UZH, 5 Jan 2016 – Switzerland.

We focus on events that could affect the Americas and the US election outcome. Over the New Year transition there was important action in the USA, Russia, Poland, China, Chile-Peru-Bolivia, Brazil, Iran-Saudi Arabia etc. Quite a few governments took advantage of the quiet festive days to take some bold policy moves. You don’t want to miss them.

While all media is focused on the deterioration of the Middle East around Iran, something we have warned of before, we should wisely look for important moves elsewhere. Decision makers and investors are overlooking important moves in Latin America by Russia that aim at taking advantage of economic and political shifts, but also lack of US leadership.

How I see the latest geopolitical & economic changes in relation to our current Outlook

The latest events and policy moves are overall in line with our outlook. While Western media is almost obsessed with Iran-Syria-Saudi Arabia, I believe we should take a step back – the real problem will come after Saudi Arabia gets mid-range ballistic missiles (from Pakistan) to defend herself from Iran or to preemptively strike Iran. Saudi Arabia can choose between accepting the Iranian supremacy in the region or a military conflict with mid & long range missiles. Since the USA and the EU promised the Iran Deal would only foster peace, neither CNN nor BBC are openly reporting the ongoing procurement of nuclear warheads by both Teheran and Ryad. Teheran no longer has to build its own warheads, it can simply buy them with the freed-up hard currency and lifted sanctions. The Middle East has been catapulted into a “long-haul” crisis with possibly devastating outcomes that could reach Europe, so we should pace ourselves and resist the media onslaught on it. 

the USA and the Americas could be a source of uncertainty and risk in 2016. We think many observers are missing recent policy moves in Latin America. This wouldn’t be important if this wasn’t an election year in the USA, when Hispanics are expected to hold the swing vote, like never before. And when security tops the agenda for Americans. US leadership was already under pressure in Latin America. With only four key nations to rely upon, the Pacific Alliance of Mexico, Chile, Peru and Colombia. But Russia’s recent timely moves make the US election campaign more complex, and Britain a factor of uncertainty not only in Europe but also Latam, this year.

The US economy was the robust anchor and source of stability for the Word Economy since 2010, but not with unpredictable elections due this year, US elections could take uncertain turns in the coming months. Even Mrs. Clinton, long thought to be the uncontested Democratic leader, is being seriously challenged by Mr. Bernie Sanders. An open race now. Mr. Sanders is winning millions of Democratic backers with an uncompromisingly liberal political & economic agenda that could shake Wall Street and big shareholders to the core. Sanders would be the biggest upset for the business establishment. Unfortunately, investors have long tolerated and benefitted from a system that may now be reaching its political tipping point. Meanwhile few are still laughing at Mr. Trump; the more the media and the GOP attack him, the more people seem to want to elect someone that can stand up to the media & Washington establishment.

The current US administration and the State Department are also raising the potential risks: In a time of rising tensions, threats and war, they are sending a very troubling signal to America’s enemies: “The USA is disengaged”. In fact only 1 of 10 US Aircraft Carrier Groups is currently on patrol. Only 1 in 9 amphibious groups (Marine Expeditionary Groups) is on patrol. The key deterring tool to project power and respect globally is on home ports. China, Iran, Turkey, North Korea … and affiliated groups are emboldened by the current US disengagement, lack of leadership and perceived soft strategy on IS. Just hours before the Paris attacks President Obama declared “IS is contained”. Even after the Paris attacks of November Mrs Clinton said on a public debate Libia was a successful showcase of US Foreign Intervention. Few will agree now that removing a regime and creating a power vacuum thrusted Libia and other Middle East countries into prosperity and peace. Washington’s single focus on IS is also a major risk factor for the world: Believing IS is the only Islamic threat the West faces, the US administration is partnering and working together with all sorts of Islamic militias since 2012 (which we now deem “moderate”) on the ground to do the fighting for us. Even Arab soldiers confess it is impossible to distinguish between so-called moderate and radical Islamists. Many are mobile and join different groups. The USA are arming and training them. Lethal hardware and combat experience that those Islamic fighters and affiliated terror groups may turn on the West later on.

Finally, the moral decline among US political & business elites of recent years along the growing income gap between the beneficiaries and losers from excessive QE policies only exacerbate the risks of 2016 elections bearing surprises for the world economy and markets. The chart below shows how during the Democrat’s leadership the US GDP per capita grew, but American households saw their incomes decline (thus, net-net they feel poorer since 1999). But if the economy is doing well, who got that economic rent? GDP is increasingly misleading. Economists and political leaders should instead focus on Median Incomes and Net-Wealth per capita. They have their issues, but cannot be easily manipulated as GDP.

Source: Department of Commerce, The Wall Street Journal

Source: Department of Commerce, The Wall Street Journal

Keep in mind the Economy: we have a Global Manufacturing Recession, but Military Rearmament should provide support down the road. Looking at how Energy and Emergy abundance have historically impacted the US economy, I am expecting the massive increase in Oil and Gas production in the USA to have a significant positive impact on the US Economy long term. As this shall converge with the dramatic deterioration in China and Europe driven by Demographics (sharp rise in the Old Dependency Ratios to squeeze discretionary consumption), it could allow the US economy to sail away again from Europe and Asia as it did after WW2. As we have said before, Beijing’s promise of a massive jump in Private Consumer Spending is a three-old myth that will disappoint many. In a nutshell, the serious crises of our time will be a great opportunity – for those who are prepared for them – to benefit from a future possible economic expansion led by the USA and the Southern Hemisphere.

Looking further ahead: What could derail the USA is a domestic large-scale crisis or natural catastrophe (Martial Law). The USA may also be underestimating the rapid military advances in Russia and China. While we closely monitor Russia’s nuclear capability thanks to START II, China could launch a Nuclear First Strike on the USA since Q4 2015. China’s spectacular nuclear program is utterly unchecked and has been fed by US strategic failures (transfer of technology, manufacturing capacities, supply side cluster risk etc). The idea that US-China Trade will keep China always from attacking the USA is a solid base-scenario, but one that is being pushed too far in recent years. Especially as China has only roughly 9 years to overtake the USA peacefully. China along Iran and Turkey have big ambitions of hegemony and an unchecked growth in nationalistic fervor. The USA is increasingly there where China, Iran and Turkey would like to have the USA strategically. The USA has embraced them, and in return lost the unconditional support of most former key allies.

I really encourage decision-makers all over the world to listen carefully to all US presidential candidates in 2015 and now during the primaries: one of these men and women will lead the most powerful nation in the future. We need to pay close attention now, before the campaign heats up. If we wait, we’ll let media shape our view and we may be deceived. We live in an age of systematic disinformation by all sides. In the heated stage of a campaign, candidates often say whatever it takes to win swing voters and succeed.

This is the current global assessment and of course the outlook could change if factors shift. Therefor we keep monitoring the trends and the actors.

1) The Shia-Sunni conflict flares up, but the religious sectarian rift is flanked by strong economic & geopolitical interests

To say we are dealing with sectarian violence in the Middle East could be seen as “misinformation”. The fact is that over four decades Teheran has consistently threatened to wipe out Israel and Sunni-Arab states.  Arab states are struggling for their survival. As I have maintained way before July 2015, President Obama will support Iran and shield Teheran from tough sanctions in order to further his Grand Vision for the Middle East and the Muslim world. A vision that encompasses economic and geopolitical – especially religious – elements.  To make the Muslim world stronger again, President Obama has rightly understood the need for strong economic power and religious leadership. The former can only be delivered today by Turkey and in the future by Iran. The latter can only be delivered by Iran, because Iran has already successfully spread her fundamentalist interpretations of the Muslim religion across the masses in the Middle East and Africa despite the bitter opposition by Sunni-Arab states. According to many Arab intellectuals, Iran has successfully “islamized” the Muslim world, and President Obama’s choice for Iran to provide the ideological religious leadership in a future Islamic World (State of Caliphate) is understandable. President Obama understands the need for stability and therefor he has chosen Turkey to be the Sunni counterweight to Iran under US leadership. After all, Iranian Gas or Oil may have to flow through Turkey to reach Europe in the future – this is NATO’s back-up energy source. It gives Obama’s dream a head-start because Turkey is already the most powerful Muslim economy in the Middle East and it will take Iran at least 10 to 15 years before it can challenge Turkey. President Obama has downgraded the US allies in the Middle East: the Sunni–Arab allies and Israel. At the same time Obama has successfully courted and won over Iran, the former key ally of Russia in the region. As a result old alliances no longer mean much and everyone is approaching everybody else. Even Russia approached Israel before intervening in Syria. This “everyone for himself” reflects the unprecedented distrust among nations and it has added tremendous uncertainty to the “post-Cold War” World. Japan also felt “downgraded” by the USA after it embraced China. Now that an emboldened China is posing threats to US hegemony, the US is seeking closer cooperation with Japan again. But Tokyo no longer wants to rely 100% on the USA. Japan is rearming herself at a fast pace and nationalism is rampant. Seoul witnessed the downgrading of Japan by the USA during the past decade – formerly ferociously opposed to Japan and resolutely aligned with the USA, South Korea is now hedging herself and seeking bilateral military cooperation with Japan in case the USA should downgrade it. Although Western media is portraying Saudi Arabia as overreacting. Ryad’s fears are taken very seriously outside the West.

This week maps are circulating that simply divide the Middle East in Sunni or Shia camp, I believe that doesn’t tell the full story. Screen Shot 2015-07-28 at 2.14.08 PM

Note on chart: Analysts say Saudi Arabia is stepping up support for Islamic State and other proxies, but Turkey’s logistical role remains paramount. Turkey is concerned about its own security and is focused foremost on fighting Kurdish forces and to some extent containing Islamic State, where possible. The State Department has its hands tied versus Turkey and Iran (due to strategic deals with them supporting Obama’s Grand Strategy), thus it cannot effectively reign in on Turkish or Iranian aggressive/unilateral moves. 

Sunni Arab intellectuals have long deemed Iran’s ideology as too radical and dangerous (Hizbollah, Hamas etc along other Iran-backed terror groups), but faced with the growing islamization or radicalization of their Muslim populations, several Sunni-Arab states have embraced radical ideologies of their own (Islamic state etc) to contain the growing influence of Iran. When the masses could freely vote in Gaza they gave the terror group Hamas a sweeping victory. When Egyptians could vote freely, they elected the Moslem Brotherhood into power. Once in power those groups persecuted or executed opponents. That is why secular or moderate Arab leaders are so afraid of Western policies to bring democracy to the Middle East. In Spring of 2011, during the Arab Spring, I sternly warned of the terrible consequences of Western intervention – a rush by the West to destroy Arab regimes and bring democracy to the region (nation-building). The only beneficiary would be Iran and Turkey. Arab states should develop at their own pace.

Four years on, our biggest fear for the Middle East came true: President Obama pushed through a Deal with Iran. One that – at best – only delays Iran’s nuclear weapon development, but guarantees Iran’s full access to hard currency to finance (1) the military build-up, (2) the further upgrading of her ballistic missile systems, (3) aligned Shia and Sunni terror groups, and last but not least (4) the purchase of nuclear warheads to mount them on her advanced ballistic missiles. Thus, Iran does no longer have to develop her own bomb. Worse of all, because the prestige of Washington depends on Iran’s adherence to this deal, it gives unprecedented leverage to Iran and makes it almost impossible for the USA to impose any sanctions for Iranian breaches. “If you sanction me, the deal and partnership is over”. Thus the US State Department could become the biggest protector of Iran – it already is shielding Iran from sanctions that were due on Dec 30 2015 by the Treasury. A very risky strategy, as former US high ranking generals warned of before they were replaced by President Obama.  As I wrote in July 2015, notwithstanding the ulterior motives of U.S. President Barack H. Obama, this US-Iran Deal sets the Middle East on course for at least two wars. President Obama toured Arab nations promising emphatically “we will sanction Iran if they breach existing agreements”. Arab leaders knew in June 2015 that they had been significantly downgraded and replaced by Iran. The confirmation came 6 months later: The Atomic Agency gave the USA solid proof that Iran had violated existing agreements and developed and hidden ballistic missiles with extended reach. Under pressure to impose the expected sanctions, the US Treasury announced them for Dec 30th 2015. But The US State Department intervened and shielded Iran from the US Treasury sanctions. Sanctions were called off. The damage is done.  The current Obama administration and the State Department have a grand vision in mind, but they have maneuvered the USA into a corner. If it applies sanctions, Iran can walk away from the Nuclear Deal, amounting to an utter disaster for the White House. To win Iran the USA lost Israel and Arab nations as unconditional allies plus thrusted the region into more chaos. The Obama-Kerry strategy could work long term and it could yield a powerful united Muslim World with a fast growing economy. But the risks along the way are manifold. Iran has now the utmost leverage. Western media portrayed during 2014-2015 Washington as cautiously negotiating with Iran, but during that time President Obama had ordered the US military to partner with Iran on the ground. Long before the US-Iran deal was sealed, the US military was already supporting Iran-backed Islamic militias as they fought Saudi-backed Islamic militias. According to President Obama the Iran-backed militias are moderate, but all independent Arab specialists on the ground find there can be no distinction. They all commit cruelties and breach against the Geneva convention. The Islamic militias backed by the USA and Turkey that downed the Russian jet and machine-gunned the pilots, behaved in ways similar to Jihaddiists and broke the Geneva convention by killing parachuting pilots in distress and demanding to burn them.

For a long time I suggested you to watch Iran, now that all media is obsessed with it, I suggest that you watch Turkey. Turkey has strategic agreements with basically every power on earth and may not wait until Iran becomes the most powerful economy in the region. Ankara has a grand caliphate vision of her own and it may take advantage of the Iran-Saudi conflict to seize the leadership. Turkey could unite both Shia and Sunni to challenge or attack Israel. It has been the only power ever capable to effectively unite them before.  The Turks captured Jerusalem and gave it to the Muslim world in 1517. The 500th anniversary of that victory is approaching soon and this time Turkish leaders are considering the smart dual strategy of “War vs Peace Treaty”, cornering Israel into a treaty under Turkish sponsoring. A deal over Jerusalem would seal Turkish rise to power in the Muslim world, just as it did 498 years ago. Remember the mindset in the Orient is circular, not linear as in the West. Thus, for Near Eastern leaders 2017 is a “rendez-vous with destiny”.

The West may harvest what it is currently sowing: we are laying the ground for future terror attacks against the West and within the West.

Under public pressure to fight and defeat ISIS (ISIL, DAESH) the US administration and the EU are partnering with all sorts of terror- groups and terror-sponsoring nations to fight ISIS on the ground for us. There is a brutal war between Iran-backed Islamic militias and Saudi-backed Islamic militias. Since the West began to side with Iran, it has been under attack by ISIS – a foe of Teheran. The Islamic terror groups and militias that are fighting ISIS, are fighting them because of deeply seated religious & sectarian hatred, not because they care about human rights. Our media is showing all atrocities by ISIS it can get, atrocities by all other terror groups are not being aired.  They don’t fit to the narrative that the only threat to civilization is ISIS. The only significant non-Islamic group consistently fighting ISIS on the ground is the Kurdish militia, which Turkey (NATO) has been bombing.

Why Europe should be concerned? Ballistic missiles can now reach Europe

Immediately after the Obama-Kerry deal with Iran became inevitable, Saudi Arabia approached one nuclear power after the other to secure protection or aid. The Saudi King asked Premier Netanyahu to bomb the Iranian installations for their common good. After Israel declined and Russia showed no interest to worsen the impasse with the West, Saudi Arabia approached Pakistan. Despite US pressure Pakistan has yielded – no wonder, it is a Sunni brother state and Pakistan was only able to develop her advanced Nuclear Program thanks to strong Saudi financing and support. Unlike the West, Sunni Arab states know Teheran may try to annihilate them as soon as it has the means to do so, therefor we should not rule out that Arab states may launch a preemptive Nuclear First Strike at Iran in the future. In case of a nuclear exchange it is likely both sides may launch ballistic missiles on West European cities. We should not blame President Obama for this scenario, it was coming soon or later. The problem is that we may witness it in our time.

This is the current assessment and of course the outlook could change if factors shift. Therefor we are constantly monitoring the situation.

2) Russia takes advantage of Obama’s zeal over Cuba to take initiative in South America before US elections: Upgrades Peru. Chile could prevail in The Hague Court vs Bolivia. 

( There is a shift in Russia’s geopolitical strategy in the Americas. Barring a few isolated recent growth stories like Paraguay, the only successful & sustainable key economies in Latin America are the ones of the Pacific Alliance )

After roughly three years of “intelligence failures”, Russia continues to seize the initiative and is opening a new frontier. It is stepping up its foreign policy in Latin America and declared Russian interests in Bolivia and Peru of strategic importance to Moscow. An indirect way to de facto upgrade Peru to a strategic military ally without provoking the USA. Mr. Putin went even as far to threaten Chile and Britain of a strong Russian preemptive action if Chile dares to put Russian interests at risk, i.e. pressure Bolivia (in their border conflict) or Peru.  Moscow has not only upgraded Peru’s Air Force, it has indicated that it will send new generation tanks and new generation antimissile steel to Peru to strengthen Moscow’s new strategic ally in South America. Moscow has shifted: After supporting ailing and weak Socialist states for decades, it now has won support of a fast growing open market economy. Peru buys military equipment from Russia and other sources for decades, but it has focused more and more on Russia for its Air Force (FAP). Moscow’s trust is so big, that it is transferring sensitive technology and allowing Peru’s military to manufacture and do maintenance on site for Russian equipment. 

Source: U.S. Air Force. Two U.S. F-16 Falcons in a joint flight with a FAP MIG29. FAP: Fuerza Aerea del Peru.

Source: U.S. Air Force. Two U.S. F-16 Falcons in a joint flight with a FAP MIG29. FAP: Fuerza Aerea del Peru.

Background to Russia‘s move: Although Peru is part of the US-friendly Pacific Alliance and a long-time ally of the USA, Russia has de facto upgraded Peru to “strategic ally” status right before general elections in both Peru and the USA. Given Peru’s role-model economy in Latin America, Moscow has struck a smart strategic move. Rather then upgrading a Socialist Latin nation famous for antagonizing the USA verbally (like Venezuela, Ecuador, Brazil, Argentina or Bolivia), it has upgraded an open market-economy with a good relationship with the USA. Both the USA and Russia now treat Peru as important ally – the USA politically and economically, Russia militarily. But, this move should not be overestimated: China, Japan, South Korea, the USA and Russia all consider Peru a key partner. In the past, the USA and Russia – albeit separately – have gained “intelligence” from Peru’s special role and joint exercises. Lima’s steady and balanced geopolitical course between the USA and Russia, has deemed it a reliable partner. Peru owns increasingly advanced Russian military assets like MIG 29’s but maintains good relations with the USA as a reliable partner of the U.S. Southern Command. Peru’s FAP pilots have conducted exercises with US pilots underscoring their mutual trust. We believe that US pilots gain valuable assessment of the Russian MIG capabilities, just as Peruvian pilots’ benefit from exposure to US F-16’s. Analysts pay too much attention to joint exercises; the Russians don’t need them, they have a deeper relationship with Peruvian fighter pilots. This exposure to US and Russian pilots (instructors) serves several purposes: among them awareness & deterrence, Chile’s Air Force uses F-16’s and Russia benefits from an advanced client (FAP) that is aware of the capabilities of a chief rival for Russia in the Latin American Defense Market: the F-16. It may also be valuable for Russia to potentially supply Argentina as it faces the dual challenge of the potential future presence of a British aircraft carrier off the Falklands and Chilean F-16’s.

This might not be highly critical for development and intel gathering for both the USA and Russia, but it is important for the growing Defense Market of Emerging Latin Economies, on which both super powers are betting on. More importantly for Peru, it allows the Andean nation to build positive relations to relevant world powers (USA, China and Russia; along subsidiary partners such as South Korea, Brazil, Israel and Japan). This could be vital for Peru – deemed one of the emerging powers until 2030 along other economies like the Philippines – since it will need to develop an advanced geopolitical strategy as it grows in stature and responsibilities. having said that, Peru is far away from having achieved this. Most of its strategic thinking is around the Andean region and the Pacific Alliance and it still relies on traditional treaties.

A Russian MIG-29 Fighter Jet in a powerful vertical take off.

Source: RT, Russian Air Force: MIG-29 Fighter Jet in a powerful vertical take off.

Russia’s timing couldn’t be better: Peru has recently expressed that Chile & Bolivia should resolve their dispute peacefully, but also expressed understanding for Bolivia’s frustration. Something that understandably angered Chile. Russia has upgraded Peru to strategic partner status right before general elections in both Peru and the USA. Some would say Russia was simply “talking”, but to dismiss any such idea, Russia is committing to transfer sensitive technology. New technologies and on-site support for Peru’s logistical helicopters and Tank Armies along Peru’s superb fighter jets could tip the balance in any possible future conflict along the rugged Pacific desert. The combination of a long desert between the Pacific Ocean and the high Andes mountain range poses unique challenges to the armies of Chile, Peru and Bolivia. Quantities are here less critical than adaptability and performance in extreme conditions. Retooled Russian & Chinese tanks face superb Leopard tanks, while MIG29s face F-16s. Analysts overly focus on that, but any possible future conflict is likely to be a Blitz-war decided by the challenging conditions for logistics: Mi-171Sh’s and Bell-412’s may well decide it.

The fact that Peru is being courted by China, Brazil (Atlantic-Pacific corridor), Argentina (business & military), USA and Russia is not new, as it is seen in South America as one of the most radical pro-market economies; one that has grown Median Incomes 6-fold over the past 25 years. According to our research, Peru has still 20 years of a positive demographic tailwind, one of the best demographic-macroeconomic conditions in Latin America until 2030. Colombia also has a demographic tailwind. But Chile’s demographics have seen their best years already and will only deteriorate over the next decade, rendering Chile less politically stable. Thus, Russia’s geo-strategic move in Latin America is smart in several ways.  Russia is not only challenging the USA in the Middle East, but also in the American Hemisphere. Following Obama’s doctrine (embrace your enemy’s allies: Iran, Cuba etc), Russia is trying to embrace key US partners. Peru’s decision to upgrade her Air Force with last generation MIG 29’s – turning down Washington’s offer for top F-16’s and Argentina‘s signal to intensify military cooperation with Israel, China and Russia, complicates US-British Foreign & Economic Policy. The last two U.S. administrations relied heavily on Chile as pace-setter for its relations with South America, but that nation’s recent political and economic concerns have been augmented by renewed distrust in key Latin nations. The renewal of tensions between Britain and Argentina over the Falklands (Malvinas) has allowed Argentina and Bolivia to remind the continent of Chile’s support for Britain and Peru’s support for Argentina during the Falklands war. Washington had hoped to address Latin America in 2017, but Moscow has seized the moment and is using the growing tensions between Chile and Bolivia to bring in Peru and Argentina into the theater, without going too far as to destabilize their own balanced Foreign Policy and US relations. Moscow would like to make sure Washington doesn’t win over Argentina, now that it wants to normalize relations with the IMF. Buenos Aires is keeping ambiguity high versus Israel, China and Russia though.  Obama’s Foreign Policy is ending in “everyone for himself” in his last year in office. Since Mrs. Clinton would like to continue Obama’s Foreign Policy (seen as ambiguous by many former staunch US allies), Putin’s latest move, plays into the hands of Conservative candidates promising a stronger focus on US security and more leadership in Latin America.

Russia’s limitations: Argentina‘s dire economic conditions mean it may have to settle for a cheaper solution for its degraded Air Force (FAA). While Israel and Russia offer fighter jets with multiply tested combat capabilities, Argentina may have to settle down for a Pakistan-China made Chengdu version of the JF-17. Although a decent aircraft it is only the backbone of Pakistan’s Air Force. This is fine for deterrence, long range and conventional engagements. In case of war against a sophisticated enemy work-horses like the F-15 or SU-30 earn every bit of their fame for their reliability under many different battle conditions and on different terrains. All this means China may be entering an important Latin American Military Market. In case of conflict the Pakistani-Chinese aircraft may prove effective only during the first week of combat. Intense maintenance, parts delivery and re-tooling are key in any extended military theatre. A major support base is needed – a mistake the Argentinian Air Force already did once before the Falklands War (Guerra de las Malvinas).

Peru’s balancing act with world powers along its traditional secrecy is yielding good results, but it is a delicate balance nonetheless. The world has become more geopolitically complex in recent years as half of all Global Geopolitical and Macro trends overlap at aggregate and meta levels. Levels of cross-disciplinary complexity few specialists can deal with, even if aware of it. As Peru rises in stature and its trading partners, technology and military suppliers increasingly span the globe (USA, China, Russia, South Korea, France, Israel etc) competing with one another, Peru would be well-advised to upgrade and to some extent integrate (or connect at the very least) its Security, Monetary, Foreign and Trade policies. Those ministries have able officials, but barely anybody connecting them to reflect and anticipate the way global trends and national interests are overlapping globally. As a result it is likely that Peru will lack strategic foresight and independent intelligence analysis in the era of targeted disinformation. As in most Latin nations, the drive is to administer or exercise power – a weakness of most hierarchies in those economies. Attracting, developing and retaining strategic thinkers and strategic advisers is a stretch for many still. Strengths and weaknesses of nations are often two sides of the same coin. This is the main reason I am concerned for Peru. Its geo-strategic understanding is still pretty national-regional and it still thinks in terms of “Treaties”. Seeking comfort and security in the “Pacific Alliance” exposes the strategic weakness of Peru and most other rising Latin powers. An error only Chile seems to be avoiding – and their realism pays off. The Pacific Alliance can be specially Colombia’s or Peru’s doom; eventually sacrificed on the altar of reality. It is naive to think that one has the unconditional support of another nation, because it has signed a piece of paper. The Pacific Alliance can take its members to yet higher levels of economic success, but to force integration among nations that have barely any inner-trade is as flawed as to begin the European Integration Process with a monetary union.

Latin nations love to speak of themselves as a “band of brothers”, despite the crude opposite history. The support of other nations is indeed conditional to their self-interest, which can also suddenly change. There is this passionate brotherhood today, but tomorrow hostilities and emotions can escalate. Latin Americans – carried away by their common language – keep overrating their brotherhood and love for one another. Chile, the most advanced nation in the region, knows its closest ally in times of war and the threat of war, has been Britain. Argentina received no military support from any of its neighbors during the Falkland’s war. And Peru naively expected Argentina to be a loyal ally, just because Peru was the only Latin American nation to support Argentina during her war with Britain. Most of Latin America is still one way or the other captive to a fatalistic romantic idea of brotherhood and revolutionary Socialism. A kind of political-economic curse that hangs over the continent and is not banned yet.

A more steady and realistic albeit friendly attitude is still waiting to arrive in Latam – here Chile gets the highest score in Latin America. Followed probably by pragmatic Uruguay among the small-sized nations. In this post-“Cold War” global transition period, every nation is ultimately on its own. Treaties and pacts have to be clearly defined and limited. They are temporary tools and possibly two-edged swords. After all. every single nation is trying to survive and compete. Take Israel as an example; it can no longer fully rely on US support, so it has to talk to even Russia and Turkey again; furthermore it has to develop capabilities for scenarios in which it has to stand alone. Unless Peru develops a proper comprehensive Global Geostrategy, it will increasingly see more risks than benefits from maturing as a regional power.

Although Chile faces several challenges domestically and regionally, we see Chile prevailing at The Hague Court vs Bolivia 

Source: Wikipedia. Terrirtories lost to Chile by Peru and Bolivia

Source: Wikipedia. Terrirtories lost to Chile by Peru and Bolivia

Temporary isolation of Chile in South America forces it to bet on Pacific Alliance: In 2014, right after the International Court of Justice in The Hague pronounced a final verdict over the Maritime conflict between Chile and Peru, granting Peru waters formerly controlled by Chile, Bolivia seized the moment. Bolivia demanded that Chile returns its land and Ocean access and it reminded the hemisphere that during the Pacific War of 1879-1883, Chile – with Britain’s help – seized the rich deserts of Peru and Bolivia. Bolivia has taken Chile to Court in the Hague as well, and has added pressure on Santiago, limiting its maneuvering room. Argentina seized the moment too and demanded from Britain it returns the Falklands (Malvinas), reminding Chile that it supported Britain in that war. Within two years Chile has gone from being a regional leader to a somewhat isolated champion. After being perceived as having lost in The Hague in 2014, Chile fears the court may ask it to grant rights to Bolivia over land it seized from it. Land that made Chile so rich. Not long ago, unfortunately, Chile’s president  responded to these converging claims by staging large scale military exercises on the borders to Peru and Bolivia. What served the local national mood, allowed military circles in Chile’s neighbors to successfully step up military spending. The Arms Race is making things worse, and Peruvian president Humala’s somewhat untimely and irresponsible mention of the “Case of Bolivia” at a recent Pacific Alliance Summit, understandably infuriated Chile. Emotions on the Pacific are running high over the past two years, but I personally see no major military escalation: both Peru and Chile are economically successful and highly interconnected with one another. Both nations feature well-performing to powerful Navy, Land and Air Forces. Because Chile and Peru are seriously prepared for war and their economies are healthy, war is unlikely. Thus, both Santiago and Lima are likely to resolve any conflict (even a military clash involving Bolivia) peacefully. They have both much to lose, that they have achieved with hard work and a steady hand over some three decades.

How the USA could get involved again with a Win-Win move & Chile to prevail in The Hague Court vs Bolivia: I’m confident the International Court of Justice in The Hague will largely preserve Chile’s territorial integrity. Although Bolivia’s claims are understandable, to return former territory lost in a war would set a dangerous precedent: opening the door for most of today’s critical borders to be contested. Many borders were settled after a lost war. Given the Justice Court in The Hague’s tendency to rule in favor of enduring peace (settlements), we should expect it to grant some kind of face-saving gesture to Bolivia to avert an escalation of tensions. Nevertheless, Chile’s territorial integrity can be expected to be preserved. Chile will be able to receive the verdict as a victory, because it can get a final decision or at least a process within which it can settle the conflict with Bolivia. Limiting any damage or cost.

The USA can and will try to stabilize the situation around Chile by supporting the advance of the Pacific Alliance. The more successful this Alliance, the less likely that Peru will give in to the requests of Bolivia and Argentina. Argentina will be inclined to focus on reestablishing relations with the IMF and seeking a peaceful resolution with Britain over the Falklands.

Conclusion: I personally believe these talks of conflict or even war in South America reflect the tough economic conditions, but also the fact that these nations have not really overcome past wounds nor aggressions. They have signed Peace Treaties, but that doesn’t mean they have dealt with their past: aggressions and short comings. It is rare in that part of the world for a government to regret past aggressions or showing understanding for a neighbor’s frustration with its loss. Some people say time heals everything – The history of mankind clearly shows that this is not the case. If nations remain poor, they are busy with feeding their citizens and making ends meet. But if they become rich while still harboring deep resentments against their neighbors, that can lead to military conflict when domestic economic stress arrives. Economic stress easily leads to geopolitical deflection.

3)  Poland defies the EU while more EU nations introduce border controls and Brexit referendum nears. Who benefits? Switzerland, Turkey and Russia

After leading the charge against Russia within the EU and NATO over the past three years, Poland is now isolated from Brussels. This will allow Russia to mend relations with the EU faster than expected.  Still, Warsaw’s recent policy reset for national media is not necessarily a step back into totalitarianism as Brussels and Western media portray it. It is rather an excessive corrective measure in a dysfunctional industry; possibly a harbinger of things to come in Europe. The media industry needs addressing, but maybe not this way. We can agree on this. But let us try to understand the real motivations, because they play in Western Europe too. For over three decades now state media across Europe has become ever more liberal, and ferociously so. The problem is that in many nations like Germany, Britain or Switzerland state media is expensive and financed by all citizens one way or the other. Thus, conservative voters are increasingly frustrated that they have to support a state media system that is dominated by a rather liberal agenda. The shier power of liberal media has produced in my humble opinion the phenomenon of Mr. Trump in the USA. Millions of Americans and people around the world that disagree or even dislike Mr. Trump, are supporting him, because he is not afraid of speaking up against the liberal agendas or the media. And Western media tears him apart, something he exploits. Some believe liberal media has reached totalitarian dimensions, so much that political leaders barely dare to speak up. During the recent Polish elections European and Polish media attacked the conservative narrative and candidates. After the decisive victory by the conservatives in general elections, the time was ripe for confrontation. As usual such adjustments are neither gentle nor appropriate. In many ways, conservative voters all across the Western Hemisphere feel that their media, even the state media they have to finance, has been hijacked. State television does no longer simply report, it increasingly serves the interests of liberal parties, entities or narratives (i.e. the U.N., Brussels etc) at the detriment of conservative or independent voices.

Many say the EU and the integration process is on course to “break apart” – we shouldn’t be so sure. The EU is under growing pressure. Border controls come on top of growing divisions between nations. The fact that voters do not support the EU, does not mean that politicians will really have to heed them. Indirect democracy has many flaws and they are increasingly showing. UKIP won 13% of votes in Britain, but got almost no representation. Most of the political establishment in Europe is sold out to an unrelenting integration process and a centralized federal government. Not even in a direct democracy like Switzerland can the strong will of the people keep politicians in Bern from dreaming of joining the EU and a future career in Brussels or Strassbourg. Our analysis shows, EU politicians have mastered the technique of forced integration by the backdoor via escalating crises in order to overwhelm the national states – see case of Portugal. Lacking a popular mandate, political leaders know that in times of crisis they get extraordinary executive powers. Thus, crises are a necessary evil for the advancement of the EU agenda, therefor I’d advise not to fret about the high level of crises in Europe. The problem is that there is potential for several additional serious crises over the 2015–2018 period. More than political leaders could deal with. Despite mounting pressure on the EU, we see the European Integration process advancing, one way or the other. Even if the EU should fall, it could soon be followed by a British-Nordic-Germanic Union of rather financially responsible nations.

Meanwhile, with more EU nations introducing border controls and using the term “quotas” – unheard of before, the position of Switzerland is no longer as isolated as it was a year ago. Mr Junker has said recently “unilateral Swiss contingents are unacceptable, but we want to co-shape them if needed”. This is a far cry from 2014, when the word contingent was demonized. But the biggest winner of all this mess is by far Turkey. Ankara’s leverage over Europe has never been this great since WW1. With the EU at the mercy of Ankara for slowing down the refugee flow, Ankara has even dared -unilaterally– to join the Saudi-led Global Muslim Military Alliance, which is aimed indirectly at Iran. Turkey – a NATO member could pull Europe into a war  in the Middle East.

4) Possible impact on the economy

Despite these crises, Europe has good chances to stabilize further in 2016. Britain and the USA will see more political uncertainty and see less growth. Russia could be the big positive surprise with a benign contraction in 2016 and +2% in the 2nd half of 2016, something that could partially compensate for China’s impact on Germany. Latin America could see a difficult 2016 with Mexico sailing safely thanks to the distance from conflicts in South America. Brazil could hit markets with a severe contraction, while Peru and Colombia may surprise positively.

There is widespread expectation for continued USD strength and parity with the Euro. Based on my independent geopolitical analysis, the growing tensions and uncertainty in Lat-Am in 1H 2016 could add to uncertainty in the American Hemispheres and weigh on the USA. While everybody talks about how Syria and North Africa are affecting Europe, no one seems to be talking how the economic implosion in Cuba, Venezuela, possibly Brazil etc along rising regional tensions could affect the USA in this election year.  Although the USA is a neutral guarantor of most peace treaties in Latam, it has been frustratingly quiet and tolerated misbehavior. I’d say, Cuba might get Obama another Nobel Prize, but the tiny nation is irrelevant for the growing Latam economy. Most of Latin America has moved beyond Cuba last decade economically and politically. As Russia enters the scene to bring order in an escalating 111 year-old border dispute in the US backyard (Chile vs Bolivia), things may turn more difficult before Q3 2016. A military confrontation cannot be ruled out either. Mr. Putin seems to know the region’s history better than Obama. In a time when many Latin nations are suffering economically, they are all deflecting strongly into old unresolved border conflicts. This complicates US election campaigns and the US-British alliance – any strong word against Russia’s Latam partners could alienate the Hispanic community in the USA. Thus, against the widespread consensus and barring a major escalation, in 2016 the USA or the US backyard could be the source of new uncertainties, while Continental Europe could stabilize or surprise positively (pose less new risks – what is known is mostly priced in). Any major or large-scale military crisis would shift the safe haven demand clearly in USD favor, because the USA is the world’s leading military power. Nevertheless, limited and conventional conflicts (contained to a region) may support following assets: Gold, Oil and Euro. 

Christian Takushi MA UZH, Macro Economist & Strategist, 5 Jan 2016 – Switzerland.

General Disclaimer: No comment should be taken or construed as an investment recommendation. Global Macro and Geopolitical Analysis are highly complex and subject to sudden changes. No analytical method is without certain disadvantages. We may change our 3-pronged outlook within less than 3-6 hours following an event or data release. Global macro analysis can be extremely time-sensitive and the first 24 hours after an event are critical for the response of a corporation or pension. Only qualified investors should make use of macro reports and treat them as an additional independent perspective. Every investor should weigh different perspectives as well as opportunities & risks before making any investment decision. What is published on our website was written a few days earlier. If you are not a qualified or professional investor, you should get professional advice before taking any investment decisions. 

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