Top risks 2015

1 THE POLITICS OF EUROPE
2 RUSSIA
3 THE EFFECTS OF CHINA SLOWDOWN
4 WEAPONIZATION OF FINANCE
5 ISIS, BEYOND IRAQ AND SYRIA
6 WEAK INCUMBENTS
7 THE RISE OF STRATEGIC SECTORS
8 SAUDI ARABIA VS IRAN
9 TAIWAN/CHINA
10 TURKEY
* RED HERRINGS
IAN BREMMER
PRESIDENT
CLIFF KUPCHAN
CHAIRMAN

EURASIA GROUP | TOP RISKS 2015 | 1
OVERVIEW
GEOPOLITICS IS BACK. AS 2015 BEGINS,
POLITICAL CONFLICT AMONG THE WORLD’S
GREAT POWERS IS IN PLAY MORE THAN AT ANY
TIME SINCE THE END OF THE COLD WAR.
US relations with Russia are fully broken. China is charting its own course.The ties that
bind Europe are fraying on multiple fronts. Others—Gulf Arabs, Brazil, India—are hedging
their plans and alliances in reaction to increasing geopolitical uncertainty.
Ultimately these realignments will reshape the world order, but for now their impacts, while
noteworthy, are more regional than global. China’s rise still matters less than the headlines
imply. Yes, it’s the leading trade partner for more than 100 nations, but China’s political,
security, and economic influence remains underdeveloped. It will grow quickly, but we’re
not there yet. Crises in the Middle East have produced a world with more refugees than at
any time since the Second World War, though with muted implications elsewhere, espe-
cially given the newly limited relationship between Middle East turmoil and energy markets.
Russian revisionism is a direct threat to swathes of Europe, much less so farther afield.
And most of Europe has far too much keeping them busy at home.
For now, the bigger change is in the United States, and it is both accelerating those
realignments among the powers and elevating geopolitical risk around the globe. There’s
a view that America is withdrawing from the rest of the world, and that withdrawal is giving
rise to much more conflict. That’s the wrong way to look at it. Instead, it is America’s grow-
ing unilateralism that is having geopolitical impact. The United States in recent years has
more often acted just like any other country: sometimes proactive, sometimes belatedly
reactive, and sometimes indifferent—but with much greater impact. This is an evolution
from America the global policeman, leading NATO, providing collective security across
multiple alliances, and powering a transatlantic relationship that underpins global “rules of
the road” while battling enemies of those rules when necessary. That historical consistency
(not without its hiccups) has fallen off.
There’s a paradox here. The new unilateralism is hardly caused by America’s leader stomp-
ing around the world. Rather, it’s America projecting power through an arsenal of disparate
mechanisms that allow it more easily to act alone, and with less direct impact at home. The
extensive use of drones to skirt conventional warfare. The employment of state-of-the-art
surveillance for US advantage. And an important shift in policy: the use of coercive economic
diplomacy to pursue American interests with less regard for allies. To this point, the US and
Europe have worked closely together on sanctions and other punitive measures against
both Iran and Russia. But we don’t expect that unity to hold in 2015 as Europe begins to
feel more economically vulnerable and US politicians, those in power and those preparing
for 2016 elections, take a tougher approach. All of which creates a backlash that will roil
international politics.
2015 will see more geopolitical challenges than 2014. In part, that’s because the costs to the
United States of risk aversion will remain low, though the impacts will be felt keenly elsewhere.
A more robust American recovery surely helps. But so does the reality that the United States
is a far cleaner “dirty shirt” geopolitically than it ever was economically. In most cases, this
calls for patience, not panic, as cans are kicked further down the road—as we expect with
deliberations on climate change, growing tensions in Asia, and probably nuclear negotiations
with Iran. But American unilateralism is stoking dangerous trends: Russia is lashing out, the
Middle East is fragmenting, Islamic radicalism is expanding, and Europe faces challenges on
all of these fronts. I’m very far from a pessimist, but for the first time since starting the firm in
1998, I’m starting to feel a serious undercurrent of geopolitical foreboding.
TOP RISKS:
1 THE POLITICS OF EUROPE
2 RUSSIA
3 THE EFFECTS OF CHINA
SLOWDOWN
4 WEAPONIZATION OF FINANCE
5 ISIS, BEYOND IRAQ AND SYRIA
6 WEAK INCUMBENTS
7 THE RISE OF STRATEGIC SECTORS
9 TAIWAN/CHINA
10 TURKEY
* RED HERRINGS
5 JANUARY 2015
IAN BREMMER
PRESIDENT
CLIFF KUPCHAN
CHAIRMAN

1
EURASIA GROUP | TOP RISKS 2015 | 25 JANUARY 2015
THE POLITICS OF EUROPE
At the grass roots, it’s a surge of public anger across Europe. While there’s a level of social
instability attached to that, the immediate problem is a range of political movements that
are developing momentum. Some are far left; others are far right. All are euroskeptic, and
all are challenging establishment parties that have lost political legitimacy. Their rise has
been dramatic, shows little sign of slowing, and will become politically meaningful in 2015.
In particular, Syriza is likely to win snap elections in Greece and join a governing coalition,
and Podemos could actually win in Spain’s general elections at the end of the year.
More broadly, this populist surge requires a move by the establishment parties toward more
euroskeptic positions to ensure they remain in power. This trend is clear both in Europe’s
periphery and its core. In France, the rising popularity of the National Front (FN) means the
Union for a Popular Movement will have to tack to the right to improve its chances of re-
gaining power in 2017. In the UK, a challenge from the UK Independence Party has moved
Prime Minister David Cameron toward a much tougher line on immigration and toward
support for an in/out referendum on EU membership in order to win national elections in
May. Even in Germany, the rise of the Alternatives for Germany party has limited Chancellor
Angela Merkel’s ability to support deeper European integration and Eurozone stabilization.
Friction among EU states is worsening. The best case for Europe would be Germany,
France, and the UK working together to provide leadership. But that’s far less likely in this
environment; France can’t temper German insistence on austerity over stimulus because
France won’t meet its deficit targets—and because President Francois Hollande’s unpop-
ularity (ratings have dipped as low as 13%, the lowest number for any French president
ever!) is only encouraging the FN. The Brits are likely to remain disengaged given their own
unresolved questions of EU membership. And new, more populist, peripheral governments
EUROPE’S ECONOMICS ARE IN SUBSTANTIALLY
BETTER SHAPE THAN AT THE HEIGHT OF THE
EUROZONE CRISIS. BUT THE POLITICS IS NOW
MUCH WORSE. THAT’S TRUE ON THREE LEVELS:
BOTTOM-UP, INTRA-EU, AND OUTSIDE-IN.
Activists’ masks representing German Chancellor Angela Merkel and French President Francois Hollande
FRICTION AMONG EU
STATES IS WORSENING

will work to unwind the pension reforms, fiscal balances, and other hard-fought pieces of
legislation that the Eurozone crisis made possible. This year, conflicts over fiscal balances
between and among Brussels, Berlin, Paris, Rome, and a host of other European capitals
will make America’s Democrats and Republicans look like one big happy family.
The external political environment is more challenging, as well. The Russia crisis is set to
escalate, and worries over potential security incidents between Europe and the Russian
military—far higher than at any point between China and its Asian neighbors—leave Eu-
rope in no condition to handle the resulting economic consequences. Terrorist threats from
Islamist militants are much greater than in any region outside the Middle East, given the
number of European citizens fighting in Iraq and Syria, and the size of Muslim communities
inside these countries. Perhaps most importantly, the transatlantic relationship is deterio-
rating. American unilateralism is a challenge for Europe on most every level. Washington
has more interest in punishing Moscow and less interest in safeguarding Europe’s eco-
nomic wellbeing. Spying and the use of drones are poisoning European public attitudes
toward Washington. The US-Britain relationship is closer on these issues, but relations be-
tween Americans and Germans—far more important for Europe’s future—are further apart.
European leaders, therefore, must manage domestic dissent, squabbling among govern-
ments, and external threats. We’ll see bigger headline crises in a geopolitically tumultuous
2015. Europe will bear the cost of most of them. And so, this year, the politics of Europe is
our top risk.
Chancellor
Merkel
Podemos UKIP 5SM SYRIZA
5%
41%
2010 Domestic
Approval
2.1%3.1%
0%
Podemos UKIP 5SM SYRIZA
27%
19%
16%
22%
68%
2014 Domestic
Approval
ANTI-EU POPULISM: ONLY GERMANS ARE
HAPPY WITH EUROPE’S STATUS QUO
2010 ANTI-EU PARTIES 2015 ANTI-EU PARTIES
DOMESTIC DISSENT,
SQUABBLING AMONG
GOVERNMENTS, AND
EXTERNAL THREATS

RUSSIA2
The conflict with the West over Ukraine has crystallized a newly aggressive and explicitly
anti-Western Russian foreign policy. Western sanctions, a sagging oil price, economic
stagnation, and the ruble’s plunge are weakening Russia economically and financially,
though not driving it to the point of crisis. A Kremlin that feels antagonized and isolated
but not substantially constrained is a dangerous prospect. An aggressively revisionist yet
increasingly weak Russia will be a volatile actor on the global stage in 2015, posing a top
risk to Western governments and businesses throughout the year.
Having whipped up nationalist sentiment about perceived Western threats to Russia’s se-
curity and way of life, President Vladimir Putin can’t back down on Ukraine, and he won’t.
Moscow will continue to arm separatist rebels in the Donbas, with the aim of creating a
“frozen conflict.” As a result, both violence and existing Western sanctions will persist in
2015, and there’s a real risk of Russian escalation and additional sanctions this year.
Europe and the United States will increasingly treat Russia as a pariah state. Putin will both
relish and resent that treatment. Acrimony with the West will deepen, and there are several
potential areas of risk.
First, there is the strong possibility of a larger Russian-linked cyber-attack on a major
Western financial or government institution. Cyber-warfare is an area of (post)modern con-
flict in which Russia is long on expertise and short on qualms. Even a limited direct attack
on a Western institution would provoke a serious escalation in tensions.
LAST YEAR, WE HIGHLIGHTED RUSSIA AS ONE OF
THE TOP RISKS TO GLOBAL SECURITY—THAT WAS
BEFORE MOSCOW CARRIED OUT THE MOST BRA-
ZEN REDRAWING OF EUROPEAN BORDERS SINCE
WORLD WAR II, AND THEN FELL INTO A SEVERE
CURRENCY CRISIS.
A depiction of Russian President Vladimir Putin
PUTIN CAN’T BACK
DOWN ON UKRAINE,
AND HE WON’T

Second, Russian saber-rattling along—and above—NATO’s borders will intensify. Russia’s
aim is to test NATO’s mettle and response capabilities, rather than to court open conflict
or try to carve out separatist enclaves in Europe. Nonetheless, investors and policymakers
will still get jittery about Moscow’s intentions. And of course, with Russian aircraft buzzing
NATO more frequently, the prospects of lethal miscalculation will rise.
Third, keep an eye on Moldova, which is set to deepen its EU integration in 2015. While
this small former Soviet republic carries none of the strategic or cultural significance for
Russians that Ukraine does, the Kremlin views the entire former Soviet sphere as its ex-
clusive zone of influence. The pro-Russian “frozen conflict” state of Transnistria, nominally
part of Moldova, gives the Kremlin a formidable lever of influence to undermine Moldovan
security. For Europe, Moldova is economically irrelevant, but given the precedent set by
Ukraine, Brussels will have to respond to any Russian attempts to block Chisinau’s west-
ward progress.
Fourth, Russia will deepen its efforts to undo aspects of the US-led global security and fi-
nancial orders. Moscow will probably withdraw from a major arms control treaty, and if Iran
talks fail, Russia could well lead the charge to break the sanctions regime against Tehran.
Russia will also accelerate its economic and strategic reorientation toward China, though it
will be the much weaker partner in that relationship. We’ve not quite arrived at a Rus-
sia-China axis: Whereas China has misgivings about the current global order, Beijing still
prioritizes a good relationship with the United States, while Russia increasingly prioritizes
a bad one. Nevertheless, Moscow-Beijing cooperation on security and financial structures
that circumvent US-led institutions will significantly deepen, marking the most important
geopolitical development in 2015.
In sum, Russia is a power whose geopolitical ambitions are rising precisely at the moment
that its economic fortunes are declining. Throw into the mix a headstrong and wildly popu-
lar president with a penchant for bold and occasionally reckless shows of defiance on the
world stage, and Russia is one of the top risks for 2015.
NovSeptJulyMayMarchJan
2014
NovSeptJulyMayMarchJan
2013
NovSeptJulyMay
2012
Source: Levada
60%
65%
70%
75%
80%
85%
90%
NovSepJulMayMarJan
2014
NovSepJulMayMarJan
2013
NovSepJulMay
2012
PUTIN APPROVAL RATINGS
May 7, 2012:
Vladimir Putin sworn
in as president
(again…)
67%
approval
80%
approval
85%
approval
March 1, 2014:
Russian troops
seize Crimea
7 May 2012:
Vladimir Putin sworn
in as president (again…)
67%
APPROVAL
1 March 2014:
Russian troops
seize Crimea
80%
APPROVAL
88%
APPROVAL
RUSSIA WILL TARGET THE
US-LED SECURITY AND
FINANCIAL ORDERS

THE EFFECTS OF CHINA SLOWDOWN3
He has launched policies long overdue to rebalance the economy, pushing ahead on im-
proving air quality, pursuing a series of measures aimed at making state-owned enterprises
more efficient, and spearheading a massive anticorruption campaign within the Communist
Party. Xi’s the big winner geopolitically and geo-economically from the West’s face-off with
Russia, and his internal economic focus ensures that China’s regional policy is more bal-
anced, rather than focused on escalation with Japan, India, or in Southeast Asia.
That said, the biggest political windfall for Xi comes from the dramatic decline in oil prices.
His priority efforts to reduce resource and capital intensity growth, implement new energy
and environmental policies, limit debt for state-owned enterprises and local governments,
and roll back overproduction in heavy manufacturing can all be enacted with less danger
of political pushback because of the softening effect of lower energy costs. Xi wants a
dramatic economic rebalancing without serious political risk; he’s bought himself another
18–24 months of stability. This will result in stable yet slower growth for China, particularly
in the commodity-intensive sectors.
So where’s the risk? In all those countries with economies that rely on commodity exports
to China. Petrostates are used to wild swings in demand and price. But commodity
producers that have profited from steadily expanding Chinese demand have been riding a
one-way bet for decades. Now China is changing direction. A number of economies must
learn to cope with a new reality.
In Brazil, a slowdown in China—the country’s largest trade partner—comes as a partic-
ularly unwelcome development as President Dilma Rousseff struggles with a stagnant
economy. Beginning her second term with substantial political liabilities, Rousseff will now
have to cut spending and raise taxes to compensate for the revenue shortfall. As the
WE’RE QUITE OPTIMISTIC ABOUT CHINA THIS
COMING YEAR. PRESIDENT XI JINPING HAS CON-
SOLIDATED AN EXTRAORDINARY AMOUNT OF
POWER SINCE ASCENDING TO THE PRESIDENCY.
An investor at a brokerage house in Haikou, Hainan
CHINA IS CHANGING
DIRECTION, AND OTHERS
MUST LEARN TO COPE

commodity slump drags down growth and drives the real’s depreciation, Brazil’s president
will become more unpopular and politically weaker, making it harder for her to deliver on
macroeconomic and fiscal reform.
Australia’s dependence on Chinese trade and investment, and China’s huge appetite
for Australian iron ore and coal, leaves the country dangerously exposed. Prime Minister
Tony Abbott’s government will move to mitigate the impact of slower Chinese growth by
boosting infrastructure spending and promoting exports through trade agreements. How-
ever, budget targets will be difficult to meet as growth slows, commodity prices remain
depressed, and the lack of a majority in the senate limits the government’s ability to pass
planned spending cuts. The Abbott government’s popularity, already tied with Labor at
37%, will likely continue to fall.
Indonesia faces challenges from declining commodity prices as a result of reduced
Chinese demand, given that 65% of Indonesian exports are commodity-related. Slower
growth will, in turn, limit President Joko Widodo’s ability to improve governance and stabi-
lize the economy, which is otherwise one of the more promising reform stories among the
emerging markets.
The greatest pressure may well be in politically unstable Thailand. There, a slump in
commodity prices driven by weaker demand in China (Thailand’s top export destination)
will dampen economic growth prospects that, in turn, will undermine the ruling junta’s
legitimacy, increasing pressure to return the country to democracy. This will weaken the
military government’s commitment to maintaining control of the budget, as rubber farmers
from southern Thailand, the military’s traditional allies, lobby to offset their low market
prices with new subsidies. Authorities will also be under pressure to help rice farmers in
the north, whose subsidies were clawed back following the coup.
0
2
4
6
8
10
Sept ‘14
Sept ‘13
HeilongjiangLiaoningHebei
GDP GROWTH RATE IN CHINA’S MAJOR INDUSTRIAL HUBS
Source: China’s National Bureau of Statistics
Percent
8.5
6.2 6.2
5.2
8.7 8.4
COMMODITY PRODUCERS
HAVE BEEN RIDING A
ONE-WAY CHINA BET
FOR DECADES

WEAPONIZATION OF FINANCE4
For the Obama administration (and indeed, many of its critics), “boots on the ground” is
a 20th-century concept. The American public has had enough of wars and occupations.
But on core security issues, the United States still wants significant influence over global
outcomes. That means less reliance on traditional elements of America’s security advan-
tage—its nuclear weapons arsenals, its carrier groups, or other conventional assets. And
more reliance on the dollar, which is now actually more strongly imbalanced in America’s
favor than it was before the financial crisis. Access to the US marketplace and US banks,
and Washington’s ability and willingness to use them, are becoming more important as
instruments of foreign and security policy. There is no better example of this trend than the
weaponization of finance—the systematic use of carrots (access to capital markets) and
sticks (varied types of sanctions) as tools of coercive diplomacy.
The United States is expanding its ability to track the financial transactions of government
leaders of concern, as well as their state and private sector allies, in order to close their
access to capital and property. It is pressuring others who engage in business with these
individuals to cut them off. Most obvious is the steady escalation of sanctions against
Russia and other perceived rogue states. Less obvious are large-scale measures against
financial institutions (mostly European banks) that help finance international entities under
THE UNITED STATES REMAINS THE WORLD’S ONLY
SUPERPOWER, BUT WASHINGTON IS NOW USING
ITS INFLUENCE IN IMPORTANT NEW WAYS. AFTER
WORLD WAR II, AMERICAN DOMINANCE WAS ES-
TABLISHED BY THE FORGING OF US-LED ALLIANC-
ES SUCH AS NATO AND MULTILATERAL INSTITU-
TIONS SUCH AS THE IMF AND THE WORLD BANK
THAT ENSHRINED US-AUTHORED RULES AND
STANDARDS.
An engraving plate for a US dollar bill
EXPECT MORE FINANCIAL
CARROTS AND STICKS

US sanction. In the background looms the ultimate threat: that the United States will finan-
cially isolate rogue states by severing their access to capital and the infrastructure used to
clear payments. Risks of miscalculation and unintended consequences are high, because
use of these tools is new and Washington is learning how they work by trial and error.
Of critical importance, the weaponization of finance is a tool that can be used with minimal
cooperation from other governments. The most important near-term challenge is the
damage inflicted on transatlantic relations. Europe will become more frustrated with an
American unilateralism that Europe (and European banks) must pay for. Also, the US
could well slap new sanctions on Russia and/or Iran, eliciting a backlash in 2015. Over the
longer term, though, others will diversify away from reliance on the dollar and US-domi-
nated institutions, particularly in East Asia, where China has the muscle and the motive to
create its own institutions, and where there is less dollar-denominated debt to complicate
the process. The Asia infrastructure investment bank, the BRICS bank, and the Silk Route
Maritime and Overland initiatives are all steps in that direction. These projects, combined
with Beijing’s determination to broaden and deepen commercial and investment relations
across the region, will eventually undermine Washington’s ability to use these tools to lean
on financially weak states.
And a fat tail concern for 2015, also related to the rise of strategic sectors: Governments
targeted by sanctions will increasingly treat companies that comply with them as instru-
ments of American power. This will expose these firms to heightened risks of retaliation—
from regulatory harassment to contract discrimination to cyber-attacks. The US financial
sector is particularly vulnerable on this count.
U.S. % of the
Global GDP
22%
% of Global Trade Finance
Conducted in $USD:
81%
THE ALMIGHTY DOLLAR
Source: Swift via Bloomberg
THOSE TARGETED BY
SANCTIONS WILL TREAT
COMPANIES THAT COMPLY
AS INSTRUMENTS OF
US POWER

ISIS, BEYOND IRAQ AND SYRIA5
It will grow organically by setting up new units in Yemen, Jordan, and Saudi Arabia, and it
will inspire many jihadist organizations to join its ranks. Ansar Bayt al Maqdas in Egypt and
Islamists in the Libyan city of Derna have already pledged allegiance to ISIS leader Abu
Bakr al Baghdadi.
ISIS has emerged as the main representative of militant Islam, both as a direct result of its
military successes in Iraq and Syria and the weakening of moderate Islamist parties across
the region. Its decision to split from Al Qaeda is a manifestation of the return of jihadist
ideology to the Middle East away from former bases in Afghanistan and Pakistan. Mod-
erate Islamist movements, such as the Muslim Brotherhood in Egypt, which embraced
both Islamic ideals and the existing political structures, have lost ground. The decades-old
competition between these two ideological camps will continue, but for now, radical jihad-
ist Islam is on the rise.
The US-led campaign against ISIS will erode the group’s conventional military capabili-
ties. The United States, potent Shia militias, Kurdish peshmerga forces, the Iraqi army,
and Sunni tribal forces will contain the Islamic State’s power over the next year, though
they are unlikely to score a definitive victory or regain control over the rebellious Sunni
heartland. This resilience will inspire ultra-conservative Muslims to sympathize with the
organization and join its ranks.
This new echelon of jihadist Arab and international leaders will expand its operations
beyond Iraq and Syria. ISIS has to show successes in order to continue to attract fresh
recruits, and it will likely lash out in new ways. In particular, it will try to punish Sunni states
that have joined the US coalition.
IN 2015, ISIS FACES SETBACKS IN ITS CORE BAS-
ES IN IRAQ AND SYRIA, BUT ITS MILITARY POWER
REMAINS SIGNIFICANT, AND ITS IDEOLOGICAL
REACH WILL SPREAD THROUGHOUT THE MIDDLE
EAST AND NORTH AFRICA
Fighters hold an ISIS flag, pulled down after taking control of Saadiya
ISIS WILL LASH OUT IN
NEW WAYS

In 2015, therefore, the risk to Sunni states will rise. Saudi Arabia’s Wahhabism provides
ISIS with ample room to recruit in a conservative population, pockets of which would be
sympathetic to its objectives. ISIS could attack Western expats in the kingdom, harming
the business climate. ISIS could likewise target the United Arab Emirates; violence against
Westerners or the local population in the emirates would pierce the image of financial
safe haven that underlies these states’ prosperity. ISIS will aim to pressure the Hashem-
ite leadership in Jordan to demonstrate that no Muslim alliance with the US can provide
security or stability. Violence against Westerners in Jordan would both hurt the tourism
industry and undermine the investment climate. In Egypt, Ansar Beit al Maqdis is likely to
target Westerners, undermining Egypt’s slowly recovering tourism sector. Finally, in Yemen,
we expect the control of Shia Houthis over the capital Sanaa and large parts of Yemeni
territory to further stoke sectarian tensions. ISIS’s sectarian ideology will become more
appealing, and some Al Qaeda followers would defect to join the group.
Sparsely populated areas
Kurds
Syrian regime control
Populous Sunni areas
Shia
Source: Eurasia Group, The Gulf/2000 Project
TURKEY
SAUDI
ARABIA
JORDAN
IRAN
MediterraneanSea
Persian
G
ulf
Damascus
SYRIA
IRAQ
Deir al-Zour
Aleppo Hassakeh
Kobane
Raqqa
Khusham
Baghdad
Amerli
Kirkuk
Irbil
Falluja
Mosul Dam
area
Qaim
Baiji
Mount Sinjar
ETHNO-SECTARIAN MAP*
Source: BBC
*These maps are general illustrations based on Eurasia Group analysis
ISIS Control
TURKEY
SAUDI
ARABIA
JORDAN
IRAN
MediterraneanSea
Persian
G
ulf
Baghdad
SYRIA
IRAQ
Falluja
Qaim
Amerli
Baiji
Kirkuk
Irbil
Mosul Dam
area
Mount Sinjar
Hassakeh
Kobane
Raqqa
Khusham
Deir al-Zour
Aleppo
Damascus
AREAS UNDER ISIS CONTROL*
THE NATURAL LIMITS OF ISIS EXPANSION
ISIS, a Sunni extremist group, will struggle to advance beyond Sunni strongholds
THE RISK TO SUNNI
STATES WILL RISE

6 WEAK INCUMBENTS
With the important exceptions of India and Indonesia, the wave of emerging market
elections in 2014 saw incumbents win underwhelming victories. Sluggish growth and
mounting popular demands were not enough to displace ruling party candidates in Brazil,
Colombia, South Africa, and Turkey, and are unlikely to do so in Nigeria in 2015. But they
did reduce incumbent support, producing risk-averse governments with weak mandates
to tackle economic reforms or respond to external shocks (including oil market volatility
and higher US interest rates) in the year ahead. While the newly elected government in
India (and to a lesser extent Indonesia) will benefit from a honeymoon period and political
distance from past failures, repeat-term governments will be more constrained.
In Brazil, Rousseff barely won reelection in a highly polarized political environment. Led by
new Finance Minister Joaquim Levy, Rousseff’s more constructive cabinet will make credible
fiscal adjustments to try to ward off another sovereign downgrade and will press for fiscal
reforms and an opening of the oil sector. However, Rousseff’s mounting political liabilities—
including reduced popular and legislative support, the Petrobras corruption scandal, and a
more demanding middle class—will limit room for a broader fiscal adjustment or structural
economic reforms, leading to a lower growth trajectory and greater social instability.
South Africa’s “slow burn” will continue in 2015 behind the weak leadership of President Ja-
cob Zuma and persistent factionalism among the ruling African National Congress’s (ANC’s)
trade union allies, driving tepid responses to external economic challenges while exacer-
bating the country’s domestic problems, including labor instability. At best, macroeconomic
policy will counter pressure on the rand and help avoid credit downgrades, and there will be
some improvements in local governance. But structural reforms to labor markets or troubled
parastatals remain unlikely, undermining implementation of the National Development Plan.
Meanwhile, in Nigeria, President Goodluck Jonathan is likely to secure reelection on 14
February. Yet during his second term, he will face a more aggressive opposition and polar-
ized political environment, making reforms and fiscal policy adjustments more difficult as
lower oil revenues limit the government’s options.
POLITICAL RISK STEMMING FROM WEAK INCUM-
BENTS WHO RECENTLY WON REELECTION WILL
WEIGH ON KEY MARKETS IN 2015.
Brazil’s President Dilma Rousseff with Vice President Michel Temer
2014 SAW INCUMBENTS
WIN UNDERWHELMING
VICTORIES

In Turkey, former prime minister Recep Tayyip Erdogan’s victory in the August 2014 presi-
dential election will reduce government stability and coherent policymaking in 2015. Erdogan
and new Prime Minister Ahmet Davutoglu will cooperate to maximize the ruling Justice and
Development Party’s (AKP’s) performance in April’s parliamentary elections. In the process,
they will stall the Kurdish peace process, helping the AKP score points with its nationalist
base but increasing the risk of violent protests by Kurds. The leaders will also pressure the
central bank to cut interest rates, risking higher inflation. After the elections, the two leaders
will compete for executive power, undermining the policymaking process, while efforts to re-
move political opponents from influential government positions will paralyze the civil service.
And Colombia’s President Juan Manuel Santos will maintain a friendly stance toward the
private sector and probably sign a peace deal with the Revolutionary Armed Forces of
Colombia. But his administration will struggle to enact more favorable regulations for the
extractives sector owing to social opposition, while lagging oil production and dim pros-
pects for fiscal reform bode ill for financing any peace deal.
The weakness of so many incumbents in important emerging market states will weigh on
both global growth and political stability in 2015.
REPEAT-TERM
GOVERNMENTS WILL
BE CONSTRAINED
JACOB ZUMA – 77%
South Africa: 2009
RECEP TAYYIP ERDOGAN – 71%
Turkey: 2011
PAST APPROVAL RATING
CURRENT APPROVAL RATING
DILMA ROUSSEFF – 79%
Brazil: post-2010 peak
JUAN MANUEL SANTOS – 82%
Colombia: post-2010 peak
*The most comparable figure available that matches 2009 data
Sources: Ibope, Ipsos, Metropoll
DILMA ROUSSEFF – 56%
Brazil: 2014
RECEP TAYYIP ERDOGAN – 51%
Turkey: 2014
JACOB ZUMA – 46%
South Africa: 2013*
JUAN MANUEL SANTOS – 43%
Colombia: 2014

THE RISE OF STRATEGIC SECTORS7
Instead, government influence is expanding, focused more on political stability than on
economic growth. In strategic economic sectors, those the state considers important for
political stability and the interests of the political elite, as well as alliances with national and
local governments, are critical for success. This is boosting the prospects of companies
that operate in harmony with their political goals and punishing those that don’t.
We see this trend in emerging markets, where the state already plays a more significant
role in the economy. That’s the case for different sectors in different countries. For exam-
ple, in Turkey’s media sector, a previously open business environment has turned more
strategic as the government has become particularly sensitive about anything that could
facilitate state criticism. So too across a sweep of sectors in Russia, where pressure will
increasingly be applied to any company perceived to be American. (McDonalds was hit
particularly hard in 2014 because it’s perceived to be an iconic American, rather than a
global, brand.) Many European companies can also expect a hard time in Russia, as the
Russian government responds to EU sanctions by favoring Asian and emerging mar-
ket-based companies. In India, the retail and pharmaceutical sectors will remain politically
sensitive, particularly in rural areas where foreign products are less welcome. In the ex-
IN 2015, SUCCESS AND FAILURE FOR BUSINESS
WILL DEPEND INCREASINGLY ON GOVERNMENTS.
FOR DECADES, THE PERCEPTION WAS THAT
MULTINATIONAL COMPANIES WERE DEVELOPING
GREATER AUTONOMY FROM POLICYMAKERS,
BOTH IN THEIR HOME GOVERNMENTS AND IN THE
COUNTRIES WHERE THEY OPERATE, ERODING
STATE AUTHORITY TO REGULATE THE FLOW OF
GOODS AND SERVICES AROUND THE WORLD.
The Kremlin as reflected in a window of a McDonald’s restaurant
GOVERNMENT INFLUENCE
IN ECONOMIES IS
EXPANDING

tractive sectors across Southeast Asia and sub-Saharan Africa, cozy relationships among
key players and the state’s desire to steer revenue toward social spending will keep many
governments involved as critical economic players.
This trend is by far most important in China, where despite efforts to make state-owned
companies more competitive and efficient, their interests will still earn plenty of protec-
tion. The government wants to attract more capital, but not at the expense of the state
capitalist model. Couple that with vigorous cyber-attack capacity and no independent
judiciary (and therefore little regard for intellectual property) and we expect a growing num-
ber of sectors where it will be more difficult for Western multinationals to compete. That’s
perhaps most true in sectors critical for innovation in the marketplace, those that traffic
in consumer behavior and big data, an area the Chinese government intends to control.
The picture in China may improve as the leadership becomes more confident in its ability
to enact reforms that open the market, but we aren’t close to that tipping point. For 2015,
this is a growing challenge.
A second challenge comes from rogue states, who can quickly redefine a sector as stra-
tegic, even if only to punish or intimidate a single company. North Korea’s ability to launch
sophisticated cyber-attacks against Sony has made entertainment companies of all kinds
think carefully about any North Korea-related content. (That Sony is a Japanese-head-
quartered company probably didn’t help its cause.) This was the biggest win North Korea
has had in years, but it’s an even more concerning prospect when applied to wealthier
and more technologically advanced rogues. Russia’s cyber capabilities against Western
multinationals are vastly better developed, and Moscow has a history of using debilitating
attacks against the financial institutions of governments it wants to intimidate—Georgia
and Estonia have both been in the crosshairs in the past decade. Firms and governments
can’t count on Kremlin restraint or its fear of retaliation when Putin already believes that
American policy is designed to force regime change in his country.
And third is the growth of strategic sectors in the United States. Far from being ideolog-
ically interventionist in the private sector, US national security priorities have nonetheless
expanded the military industrial complex to include a wide swath of technology, telecom-
munications, and financial companies. Their cooperation with US security agencies is
required to facilitate the tracking of potential threats to the United States—their location,
communications, and access to funds. In many cases, companies are prohibited from
disclosing their cooperation with the US government. Other governments, both allies and
adversaries, have objected. In many countries, American companies suspected of infor-
mation-sharing and other forms of close cooperation with the US federal government are
seen as threats to national security, leaving these firms with higher barriers to market entry
and a tougher regulatory environment. Dynamic American companies such as Amazon,
Apple, Facebook, Google, and their successors will experience challenges doing business
not only in China but in any country in which data, information, and media content are
considered politically sensitive.
THIS TREND IS MOST
IMPORTANT IN CHINA

The relationship will be especially volatile this year because: 1) there will be an unprecedent-
ed number of theaters of proxy conflict; 2) domestic politics in both countries will enhance
conflict; and 3) the evolution of diplomacy on Iran’s nuclear program, regardless of the
outcome, will provoke more strife between Riyadh and Tehran.
The list of arenas where the two countries either support opposing proxies or hold opposing
policies is longer than ever. The newest hotspot is Yemen, where the Houthis—who follow
the Zaidi branch of Shia Islam, and whom the Saudis battled in 2009—recently captured
most of Sanaa (the capital) and now have great influence over the government. The Saudis
accuse Iran of supporting the Houthis with arms and money.
Tehran and Riyadh will have very different approaches toward Iraq’s Prime Minister Haidar al
Abadi. The Saudis will press for maximum inclusion of Sunnis in Iraq’s government. Iran will
advocate continued Shia dominance, and increasingly support Shia militias and their fight
with the Islamic State. In Syria, the Saudis and Iranians will hold diametrically opposed views
on the future of President Bashar al Assad, and the violent standoff between their proxies will
continue. In Lebanon and Bahrain, the Saudis and Iranians will back opposite sides in tense
and unstable political environments.
The Saudis are formally preparing to combat the Iranian threat on a multilateral basis, pres-
suring Qatar back into the Gulf Cooperation Council (GCC) fold and obtaining GCC agree-
ment to form a joint naval force and counterterror police unit. Direct conflict between Tehran
and Riyadh is unlikely, though the increased intensity of proxy wars will further destabilize the
region throughout 2015.
SAUDI-IRAN TENSIONS WILL SPIKE DURING 2015,
WORSENING THE SUNNI-SHIA SECTARIAN RIFT
ACROSS THE REGION.
The front lines near Aleppo, Syria
DOMESTIC POLITICS IN
BOTH COUNTRIES WILL FUEL
CONFLICT BETWEEN THEM

Inside both Iran and Saudi Arabia, domestic political friction will boost tensions. In the
kingdom, succession battles are underway. Erratic foreign policy behavior is possible as
contending players and groups try to demonstrate their foreign policy mettle. In Iran, much
of the elite see lower oil prices as part of a Saudi plot to undermine Iran, and hardliners
who support a tougher policy toward the kingdom have gained strength at the expense of
President Hassan Rouhani.
Finally, intensified negotiations over Iran’s nuclear program will stoke tensions. The talks
will probably fail to reach a comprehensive agreement. If Washington imposes harsh new
sanctions in response, Tehran will adopt a more aggressive regional policy, including toward
the Saudis. If the diplomatic process settles on a “long-term interim agreement,” raising
expectations for an easing of sanctions on Iran, Saudi Arabia will feel exposed and more
aggressively protect its regional turf. Even a partial agreement would heighten Saudi neu-
ralgia about American commitment to its security. If a comprehensive deal is reached, an
improbable but possible outcome, the Saudis’ worst nightmare would become reality. Saudi
leaders believe a deal would lead to a US-Iran rapprochement that will both undermine Sau-
di security and turn Iran into a rising geopolitical and economic power. In turn, the Saudis
would quickly ramp up support for its proxies to cut Iran down to size.
INTENSIFIED NUCLEAR
NEGOTIATIONS WILL
STOKE TENSIONS
US Secretary of State John Kerry with Saudi Arabia’s Foreign Minister Prince Saud al Faisal

9 TAIWAN/CHINA
Taiwan’s political class will focus overwhelmingly this year on throwing elbows at one another
ahead of the 2016 presidential election. President Ma Ying-Jeou is already a lame duck, and
we expect no progress toward an agreement with China on any form of trade liberalization.
If China decides that its economic engagement strategy with Taiwan has failed to advance
its end goal of reunification, Beijing may well take a more confrontational approach by
backtracking on already agreed trade and investment accords and by hardening its
rhetoric. The move would provoke public hostility in Taiwan and inject more anti-mainland
sentiment into the island’s politics.
These developments would spill over into US-China ties. While the Obama administration
would try to steer clear of tensions, as it did with Hong Kong in 2014, the Republican-con-
trolled Congress would pressure the administration to harden its position, which would
prove challenging for Obama to ignore (to say nothing of by then presidential candidate
Hillary Clinton). Any US comment on relations between China and Taiwan would quickly
increase resentment and mistrust between Beijing and Washington.
Beijing is well aware that a more confrontational approach will raise the chances that the
DPP and its likely presidential candidate Tsai Ying-wen win the 2016 election. But as with
Hong Kong, the Xi administration considers Taiwan a core part of domestic policy, not a
foreign policy concern, and is less willing to be patient. And Xi might well decide the DPP
will win in 2016 whatever China does and that a forceful signal of the mainland’s resolve is
useful. Taiwan is more vulnerable to such pressures than Japan or the Philippines, given
that it is not a direct treaty ally of the United States, even though the US has commitments
to ensure Taiwan’s self-defense capabilities.
RELATIONS BETWEEN CHINA AND TAIWAN WILL
DETERIORATE SHARPLY IN 2015 FOLLOWING THE
OPPOSITION DEMOCRATIC PROGRESSIVE PAR-
TY’S (DPP’S) LANDSLIDE VICTORY OVER THE RUL-
ING NATIONALIST PARTY IN NOVEMBER’S LOCAL
ELECTIONS.
Pro-democracy activists fight with pro-China activists
HOSTILITIES WOULD
IMPACT US-CHINA TIES
BEIJING MAY TAKE A
MORE CONFRONTATIONAL
APPROACH

TURKEY10
Heavy-handed rule, short-sighted political decisions, and bad foreign policy bets will all
conspire against Turkey. At home, Erdogan has used election victories in 2014 to ensure de-
cisive defeat of his political enemies (of which there are many) while remaking the country’s
political system to tighten his hold on power. Erdogan is unlikely to win the powers he wants,
forcing him to rely on soft influence instead—a recipe for more disputes with his prime minis-
ter, less policy coherence, and more political unpredictability. A diverse population is becom-
ing a divided one, as is the case in politics, business, the media, police and the military, and
the judiciary. It’s becoming increasingly dangerous to be caught on the wrong side.
On foreign policy, Erdogan has made nearly every bad bet available. Support for the Muslim
Brotherhood in Egypt blew up in his face as the military ousted its government and set up
a stable new government now hostile to Erdogan’s interests. He backed Hamas before last
year’s conflict in Gaza left Hamas isolated and the Israeli government strengthened. He aligned
with Qatar before the Saudis forced the Qataris back into line within the GCC. He got cozier
with Putin just as Russia’s government was becoming a pariah and its economy began sliding
into recession. He pushed hard for the removal of Syria’s Assad, a man whom the United
States can no longer afford to fight and who will be around to create trouble for Turkey for
many years to come. Turkey’s relations with its NATO allies have never been more troubled.
Given the instability in the region, it’s not the best time to pick the wrong friends. Refugees
are bringing more radicalism into Turkey and adding to the country’s economic hardship.
Lasting peace with the Kurds, who want political reform and for Erdogan to fight the
Islamic State, is becoming less likely. And Turkey’s troubles also contribute to the political
vacuum in the Middle East, at a time when sectarian fights and proxy wars are growing.
Turkey has too many advantages to become a disaster—a large, urbanized, well-edu-
cated, and growing population; a strong business and banking community; a competent
bureaucracy. Erdogan has an authoritarian bent, but he’s not Putin. Yet Turkey’s troubled
politics poses problems that aren’t going away.
FOR THE SECOND YEAR IN A ROW, TURKEY
MAKES OUR LIST. LOWER OIL PRICES HAVE BEEN
GOOD NEWS FOR THIS COUNTRY, BUT THAT’S
ABOUT ALL THAT’S GOING WELL.
Turkish police raided media outlets close to US-based Muslim cleric Fethullah Gulen
TURKEY HAS TOO MANY
ADVANTAGES TO BECOME
A DISASTER
ERDOGAN HAS MADE
MANY BAD BETS

RED HERRINGS
*
ASIA NATIONALISM
A lack of global leadership—what we call the G-Zero world—has created considerable
geopolitical instability in recent years. But in Asia, leadership at the national level is now
having the opposite effect. Four of Asia’s key economies benefit from strong, charismatic,
and popular leaders (especially in contrast to their predecessors): China’s Xi, India’s Naren-
dra Modi, Japan’s Shinzo Abe, and even Indonesia’s Joko. All four are prioritizing sweep-
ing domestic economic reform that’s well overdue in their countries and, at least thus far,
are enjoying some success. Most importantly, all four are pursuing these policies without
their hands being forced by immediate crisis (unlike the American response to the financial
crisis or the European response to the Eurozone crisis). This affords them more flexibility
when challenges to their policy priorities arise, and greater likelihood of success—or at the
least, significant progress before their efforts diminish.
And so despite plenty of domestic support for nationalism in Asia, these four critical actors
have good reason to avoid foreign distractions, improve their regional economic ties, and
keep security relations in balance. We’ll surely see headlines around military confronta-
tion in the South and East China Seas, Indian assertiveness (and Chinese concern) over
Arunachal Pradesh, and talk of military buildup across the region. China’s assertiveness
won’t disappear, though it’s much more likely to remain focused on smaller states without
ties to the West, such as Vietnam. Serious tensions are a longer-term concern. For 2015
at least, there’s going to be a pragmatic restraint among Asia’s powers, and an immediate
move toward cooler heads in the event of any accidental incident.
THE ISLAMIC STATE
As noted, ISIS poses a notable threat to multiple countries in the Middle East, and its
influence will continue to expand. But the Islamic state that the group would create will
not prove viable in 2015, and it will not be able to expand the territory under its direct
control. In Syria and Iraq, ISIS grew by conquering ungoverned territory and capitalizing
on antigovernment sentiment among Sunni populations. But even in these countries, ISIS
will lose territory as the US-led coalition, Iran, Shia militias, and the Iraqi government gain
ground at ISIS’s expense. Assad will remain in power in Syria. If ISIS attempts to move
into Shia or mixed areas in Iraq, Iranian forces will probably stop them. Iraq’s government
Members of a nationalist movement raise Japanese flags; and recent gas prices
EXPECT PRAGMATIC
RESTRAINT AMONG
ASIA’S POWERS

will remain in place, and oil production will increase. In more stable Sunni states, such as
Jordan, Egypt, Saudi Arabia, and the United Arab Emirates, there are effective intelligence,
security forces, and militaries to keep ISIS from gaining a foothold. Even in Lebanon,
where the population is diverse and the state is weak, ISIS will fail to undermine the es-
tablished order as sectarian political leaders who dislike each other are still keen to avoid
severe internal strife. ISIS will not disappear and its influence will prove long-lasting. That
said, it will not replicate the stunning military successes it demonstrated in the summer of
2014 or create a state that can be sustained over time.
PETROSTATES
The sharp slide in global oil prices has led to the expectation that several authoritarian
oil-producing states are going to see both their geopolitical weight and perhaps their
internal stability shaken very rapidly in 2015. That will not be the case. First, Saudi Arabia
and its core Gulf Arab partners will likely restrain output in the first quarter to a degree that
maintains a slowing of US production growth but allows for a modest recovery in prices.
But even if the oil market “flood” scenario is allowed to play out fully, the massive cash
reserves that these producers have amassed will allow them plenty of room for maneuver
in the short term. The smaller Gulf Arab producers are in an even stronger position, with
lower budget-balancing prices and higher reserves on a per-capita basis. So too, the
ability of Russia to maintain both its policy toward Ukraine and its financial reserves, and of
the Saudis and their allies to support other authoritarian regimes such as Egypt’s and the
non-Islamist side in the Libyan conflict, will not be compromised any time soon. The one
exception is Venezuela, where social and political stability is at risk in a low oil price envi-
ronment and where there is a very real threat of near-term instability and default. In other
oil-producing countries without massive cash reserves, most notably Nigeria, Brazil, and
Colombia, politics will become more difficult and so will their ability to adjust to a shortfall
in revenue from oil production. But in none of these three will internal political or social
stability be meaningfully at risk.
MEXICO
It’s been an uphill struggle of late for President Enrique Pena Nieto. He’s had to fight off
accusations of financial impropriety involving his wife and his finance minister. Meanwhile,
the government hasn’t lived up to commitments to improve the security environment in the
ongoing drug war, and popular outrage remains over the murder of 43 college students
handed over to drug lords by a local mayor. Economic growth has been anemic. Was the
promise of Pena Nieto oversold?
We don’t think so. The only way he succeeds is through economic reform, and he still has
both the popularity and the determination to make that happen. On the domestic political front,
Pena Nieto’s weakness has mainly benefited the right-of-center National Action Party, not the
Party of the Democratic Revolution, and the former generally backs the president’s reform
agenda. Furthermore, the reforms pending this year—telecom and energy—are the most
significant for the economy. Both will have an outsized impact on productivity and competi-
tiveness, and they will attract large-scale investment from the United States—more important
wins for the Mexican president than last year’s election reform and tax reform, which had more
symbolic and incremental/long-term gains attached. Combine that with substantial support
from the economic rebound in the US, improving cross-border trade, inbound investment, and
tourism numbers, and it should be a reasonably positive year for America’s southern neighbor.
REFORMS THIS YEAR ARE
THE MOST SIGNIFICANT
FOR MEXICO’S ECONOMY

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