The 10 crises you aren’t expecting but should be (Part 1)

By Ian Bremmer

The speed of global economic contraction seems to be abating, but the scale of the recession is exacerbating pre-existing political frictions in dozens of countries (and, in some cases, creating new ones) as governments face heightened risk of upheaval. Hundreds of millions of people around the world are now much more likely than they were six months ago to lose their jobs, homes, savings, and the state-provided subsidies and services that protect their purchasing power. Government officials of various stripes are moving to limit the damage, but some are in much better position than others to pull this off.

This is why we’ve entered a period in which fat tails — the low-likelihood, high-impact risks that occur more often than we think — will pose increased dangers for markets. The greatest of these dangers are in developing countries, those places where middle classes are less entrenched and existing political institutions are more vulnerable. In today’s volatile economic environment, these risks represent serious discontinuities to existing policy environments and are near-term: all scenarios considered are for the next 12 to 18 months.

Riffing off my new book, The Fat Tail, written with my friend and Eurasia Group colleague Preston Keat, and with the hope of helping to foster a better understanding of the broader impact of the global recession, I want to lay out the top 10 fat tails. They’re listed in decreasing order of importance — determined by combining their potential magnitude on markets, their relative imminence, and the likelihood that they’ll occur.

Each of these scenarios remains unlikely. But in each case, the impact of the global economic meltdown on a particular state’s real economy has dramatically increased the likelihood of a fat tail occurring … from 2 percent or 3 percent six months ago to 10 percent to 20 percent (and 30 percent in the case of Pakistan).

Here are the first five. The next five will follow. 

1. Pakistan’s military retakes control

There’s an increased likelihood in coming months that the global economic crisis will overwhelm Pakistan’s political leadership. Even before the economic crisis added to the government’s problems, Pakistan faced political turmoil, power shortages, high inflation, rising unemployment, and a deteriorating security situation, all the while militants carried out increasingly brazen attacks throughout the country. Since the recession hit, the government’s access to capital has evaporated. The Pakistan People’s Party (PPP)-led government now faces the need for deeply unpopular fiscal and economic policies that will further empower its political enemies and weaken its hold on power.

Under this fat tail scenario, the opposition Pakistan Muslim League-Nawaz uses the economic crisis to mobilize demonstrations that pit police and protesters in heated conflict. Militants continue to spread their influence beyond the tribal areas and northwest frontier province, and tensions come to a boil. As in the 1990s, the military intervenes, ousting President Asif Ali Zardari and the PPP-led government and establishing a caretaker regime that it can control.

This scenario would have serious implications for the United States, India, and Afghanistan — and for foreign investors. Despite calls for caution from the Obama administration, the Democratic-led Congress would denounce the move and might well halt badly needed aid to the country. The Indian government would keep a military-dominated regime at arms length, as would Afghanistan, where the influence of the Taliban — and exported terrorism — would grow. In the near term, the Pakistani military would re-establish civil order. But over the longer term, the ongoing battle to restore democracy in Pakistan would again bring potentially deadly tensions to a head.

2. Ukraine turns to Russia

There’s an increased risk in coming months that economic crisis will force Ukraine to turn to Russia — and away from the European union and other western institutions — for financial help. Under this scenario, political rivalries among Prime Minister Yulia Tymoshenko, President Viktor Yushchenko, and opposition leader Viktor Yanukovych lead to a failure to implement IMF loan terms, delaying the IMF’s release of significant portions of the agreed $16.4 billion loan. Tymoshenko’s government then finds itself unable to help struggling companies and banks or to handle the fallout from rising unemployment and falling wages. As public anger spills into the streets, Tymoshenko turns to Moscow for emergency loans. Russia demands tough political and economic concessions that give the Kremlin greater leverage within Ukraine’s economy and domestic politics — and leaves Ukraine more dependent than ever on Russian gas exports.

Tymoshenko’s talks with Moscow fuel a backlash by supporters in western Ukraine, the section of the country most mistrustful of Moscow. President Yushchenko, sensing an opportunity to score points at her expense, orders an investigation. This sets off a new round of political infighting that further complicates cooperation with the IMF. The resulting turmoil leaves investors wondering about the reliability of their Ukrainian business partners — and complicates the IMF’s ability to help. To satisfy Russian demands and address the immediate crisis, Tymoshenko’s government turns away from talks on a free trade agreement with the EU. Investor-friendly reforms stall, and prospects for an all-out balkanization of Ukraine along west/southeast ethno-cultural, religious, and linguistic lines grow.

3. Russia’s palace coup

This scenario implies that the Russian government faces low global commodity prices throughout 2009 as the country’s domestic economy contracts more sharply than expected. Beginning in the one-company towns in the Urals and Siberia, large-scale protests triggered by lost jobs, lost wages, a weak ruble, and bank failures spread to Moscow and St. Petersburg. The boldest and best-connected of the hard-line "security vertical" (the siloviki) lead nationalists, communists, and garden-variety political opportunists in a bid to oust liberal officials, from finance minister Alexei Kudrin to President Dmitry Medvedev.

Prime Minister Putin decides to ride this populist wave and replaces western- and market-friendly technocrats with siloviki-sponsored placeholders. Putin completes the purge with calls for presidential and Duma elections, reclaims the presidency, and implements siloviki-inspired hard-line economic and foreign policies.

Russian politics takes a much more authoritarian turn, the state exercises much greater control of key economic sectors, and foreign policy becomes more belligerent and less predictable — with worrisome implications for Ukraine and Georgia, as well as American and European policymakers. On the economic front, capital flight intensifies, investment falls, and the equity market collapses. The government reintroduces formal capital controls with a wave of partial nationalizations of at-risk companies. The Kremlin’s historic conflict with Russia’s regional elites reappears, particularly in the most resource-rich parts of the country.

4. Mexico’s corruption crisis

In Mexico, corruption is uncovered involving a senior cabinet minister or a member of the president’s inner circle taking bribes from drug traffickers. The resulting scandal discredits President Felipe Calderon’s hard-line stance against organized crime, igniting intense public criticism and presenting the opposition Institutional Revolutionary Party (PRI) and Democratic Revolution Party (PRD) with a rare political opportunity. Both parties call for the president’s head. Opposition governors and mayors join their party leaders, partly to divert attention from their own failure to reduce narco-trafficking violence and to protect living standards during the economic downturn. To deflect criticism, they organize large-scale street protests in state capitals and in Mexico City. Against a backdrop of deteriorating economic conditions and declining standards of living, the resulting political firestorm forces Calderon’s resignation.

Popular confidence in the federal government sinks to an all-time low, undermining the ability of Calderon’s successor to get anything done. The new president, appointed by lawmakers during a joint congressional session, is less market-friendly than his predecessor, stalling progress on structural economic reforms. Over the longer term, the resurgence of the PRI undermines the strategy of aggressive action against organized crime.

5. Nigeria’s federation disintegrates

The fat tail here involves the disintegration of Nigeria’s fragile democracy. President Umaru Yar’Adua’s illnesses force him from office. The succession process stokes tensions, as northern Muslim governors demand that Vice President Goodluck Jonathan, a southerner and Christian from the Niger delta region, be denied the presidency. As the global recession adds to budgetary strains, several of the delta’s ethnic militias unite to shut in more than 500,000 barrels per day, cutting Nigeria’s production, which accounts for about 8 percent of U.S. supply, in half. The military moves into the area in huge numbers, deepening the conflict in the oil-rich region.

Fights between northern Muslims and southern Christians take on lives of their own, and a steep drop in the oil revenue that holds the country together breaks Nigeria into ethnic enclaves. Northern Muslim states adopt Sharia law and oil-producing southern states move to secede. The break-up of Nigeria then generates regional security crises, as tens of thousands of refugees flee the country, upsetting the ethnic balance in neighboring countries.