Annual Forecast 2016

Introduction

A logical place to begin is the country that bridges Europe and Asia: Turkey. This is the year when Turkey, nervous but more politically coherent than it was last year, will likely make a military move into northern Syria while trying to enlarge its footprint in northern Iraq. Turkey will not only confront the Islamic State but will also keep Kurdish expansion in check as it raises the stakes in its confrontations with its old rivals, Russia and Iran.

The last thing Russia wants is a confrontation with Turkey, the gatekeeper to the Black and Mediterranean seas, but confrontation is something it cannot avoid. Russia risks mission creep this year as it increases its involvement on the Syrian battlefield. But the Islamic State will be only part of Moscow's focus in Syria; Russia will try to draw the United States toward a compromise that would slow a Western push into Russia's former Soviet space. The United States will be willing to negotiate on tactical issues, but it will deny Moscow the leverage it seeks by linking counterterrorism cooperation to a broader strategic discussion. The U.S. administration will work instead to shore up European allies on the front lines with Russia.

The jihadist threat will fuel Islamophobia in the West and catalyze the fragmentation of Europe. Border controls and calls for preserving national identity will dilute the EU principle of allowing free movement of people. Closed borders will create a bottleneck of migrants in the Western Balkans, a region already rife with ethnic and religious tension. But the main story in Europe for 2016 will center on France and Germany, the two pillars of the European Union. Both will be preparing for 2017 elections, and both are leaning in a more nationalist and Euroskeptic direction. Over time, Germany will become more outspoken and much less willing to compromise on matters of EU integration.

The continuation of quantitative easing and another year of low oil prices will have a palliative effect on the deeper frictions in Europe as global commodity markets continue to suffer. The addition of Iranian oil to the market in the first half of the year will offset a drop in U.S. production. Any change to Saudi Arabia's oil output would come later in the year, after Riyadh has assessed the price impact from Iran's return as well as the effect on U.S. shale producers. Any attempt by Riyadh to coordinate a drop in production with Kuwait and the United Arab Emirates would come only after this assessment. Regardless of Iran's impact, Saudi Arabia will still be prepared to take on more debt and draw down reserves to cope with low oil prices.

China will not bring about relief in commodity prices, either. Consumption growth will slacken as Beijing struggles to implement reforms amid growing dissent among the Party elite. Even as Beijing faces the threat of party factionalization, it will still have enough economic heft to offer incentives to Southeast Asian states to counterbalance a stronger U.S. security presence in the region.

Low commodity prices and rising U.S. interest rates, which affect currencies, will also spell another difficult year for much of Latin America. The threat of impeachment will hang over Brazilian President Dilma Rousseff and further sour the investment climate in Brazil in the short term. Argentina may have a new, reform-minded president, but his struggle with high inflation and foreign currency shortages means any moves to settle debt and to raise protectionist measures will be limited. In Venezuela, the end of Chavismo is near. An embattled United Socialist Party of Venezuela will eventually splinter under growing political and economic pressure, and the country risks defaulting on its foreign debt this year.

The defining events of 2016 will raise apprehension around the world, leading into what will likely be an even more tumultuous 2017 as an array of developing conflicts comes into sharper focus. The essential thing to bear in mind is just how interconnected these trends are. The U.S.-Russia standoff, surging nationalism in Europe, Turkey's reemergence and other geopolitical currents will tie in to and feed off of one another. We will keep our eyes fixed on the bigger picture in 2016, for there is a much more complex one developing in 2017.

Stratfor's Key Trends for 2016

The Islamic State

The Islamic State’s conventional capabilities and territorial control will weaken as military operations intensify in Syria and Iraq. This does not portend a reduced threat in terrorism, however. On the contrary, the Islamic State will encourage more grassroots attacks against soft targets beyond the Middle East, including in the West.

Euroskepticism

An extension of quantitative easing against a backdrop of low oil prices will enable the eurozone to buy another year of relative financial calm, but much deeper problems are brewing beneath the surface. Migrant and economic pressures will fuel nationalism and further fragment the Continent. Germany and France will move further apart in the lead-up to 2017 elections. Spending in the periphery will rise as Italy’s banking sector comes under more strain and as Greece struggles to cope with rising social unrest.

Cheap Commodities

Slackening consumption in China, a strengthening dollar and gluts in oil, metals and agricultural products means commodity prices are unlikely to see a significant recovery in 2016. The first half of the year will be particularly stressful for oil producers as Iranian crude re-enters an oversupplied market. Saudi Arabia will wait until the second half of 2016 to assess the price impact from Iran and structural damage to U.S. shale producers before deciding whether to cut output, but Riyadh is also prepared to draw down reserves and take on additional debt to weather low oil prices.

A Resurgent Turkey

2016 is the year Turkey becomes much more assertive beyond its borders. Turkey will deepen its military presence in northern Syria and Iraq and confront the Islamic State – all while curbing Kurdish expansion. A more active Turkey spells trouble for Russia, which will remain locked in a standoff with the United States as it worries about whether Turkey will draw closer to its Western military allies.

This is a summary of Stratfor's Forecast for 2016. The full report can be found here.