by Kaisa Stucke, CFA

Nigeria will hold its presidential election on March 28, following a six-week postponement due to heavy fighting in the northern region of the country.  The election promises to be a close one between the incumbent, Goodluck Jonathan, and a former military leader, Muhammadu Buhari.  Jonathan represents the Christian, southern region of Nigeria, while Buhari represents the Muslim, northern region.

In the past, Nigeria has alternated between electing presidents from the north and south.  The likely outcome from the upcoming election suggests that this pattern will not hold in the future.  Consequently, the risk of civil unrest would increase.

Once hailed as one of the most promising emerging markets, Nigeria’s social stability, economics and democratic process have been challenged by insurgent fighting and the weak energy markets.  The recent oil price collapse has had an outsized effect on Nigeria’s economy as more than 70% of the country’s revenues are derived from oil.  As oil prices have collapsed, so has the local currency.

Aside from the economic problems, the country is also fighting the radical Islamic insurgency Boko Haram.  The group has grown in size and danger since we last wrote about it.  It has evolved from staging stand-alone terrorist attacks and kidnappings to holding meaningful territory under its control in northern Nigeria.  The current government’s lack of attention to the fighting and its inability to defeat the group has caused a lack of confidence in the government in general.  Recently, however, the incumbent president has intensified the military’s involvement ahead of the election and the fight against Boko Haram has been somewhat succesful.

This week, we will look at the upcoming Nigerian presidential election and how the persistent threat of the Boko Haram terrorist movement has complicated the democratic process.  In turn, we will look back at the 2011 presidential election and analyze how the election facilitated the rapid spread of Boko Haram.  Exacerbating matters further, the country suffers from a deepening divide between the Christian south and the Islamic north, which we will discuss in detail in this report.  As always we will conclude with market ramifications.

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by Kaisa Stucke, CFA

The country of Yemen is slowly dissolving in the midst of an ongoing civil war.  The Houthi movement has aggressively secured territories in the north, including taking over the capital city of Sana, while al-Qaeda has widened its activities in the south.

At the end of January, Yemeni President Abd Rabbuh Mansur Hadi and his prime minister, Khaled Baha, were forced to step down after the presidential palace had been under insurgent Shiite Houthi fire for several days.  Since then, the president has tried to resume his duties, but the leader of the Houthis has also claimed the presidency.  Currently, there is no acting president, the parliament has been dissolved and it seems that military loyalties are fractured between tribal leaders.  In this environment, it is unclear who is in control of the country.

Outside powers are watching these developments closely.  Yemen’s wealthy neighbor and U.S. ally, Saudi Arabia, would like to see the Houthi insurgency stopped as the group is widely viewed as a proxy for Iran.  Saudi Arabia does not want to see Iran spread its sphere of influence.

At the same time, the U.S. has been a partner to Yemen in fighting al-Qaeda in the Arabian Peninsula, but the fall of its government has left the U.S. without a formal partner.  A partnership of convenience with the Houthis seems like the most practical approach for the U.S.  However, this approach, in addition to the possibility of a U.S.-Iran nuclear deal, would make the Saudis nervous and unsure about the direction of American foreign policy in the region.

The single, unified country of Yemen is unlikely to survive in the current environment of fragmented political power.  In fact, looking at Yemen’s long-term history, existing as a unified country is an anomaly.  It is likely that the country would return to its natural divided state, becoming a Sunni South Yemen and a Shiite North Yemen.

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by Bill O’Grady

This report is an update to a similarly titled piece published in 2013 (see WGR, 10/7/2013, Détente with Iran?).  The primary impetus for this update comes from a recent article by Michael Doran outlining President Obama’s “secret” Iran strategy, but similar themes have also been offered by other strategists.

In this report, we will delve further into what appears to be an evolving policy change by the U.S. with Iran, and discuss the basic goals of the U.S. and Iran.  With this background, we will examine America’s alternatives to achieving our aims in the region.  A full examination of U.S. difficulties in making a historic change in policy with Iran will follow.  From there, we will discuss the recent pattern of policy in the region and how it supports the notion that improving relations with Iran is probably the reason for this pattern.  As always, we will conclude with market ramifications.

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by Bill O’Grady

After the Syriza party won 149 of the 300 seats in the Jan. 24^th Greek elections, European markets have been roiled by worries over another crisis developing.  The party has engaged in some provocative behaviors; its leader and Greece’s new prime minister, Alexis Tsipras, decided that his first official visit would be to a monument that honored Greek citizens who suffered a mass execution at the hands of the Nazis.  That symbolism wasn’t lost on anyone.  Tsipras, and his new finance minister, Yanis Varoufakis, have indicated that they have no interest in fulfilling the bailout requirements of the European Central Bank (ECB), the European Union (EU) and the International Monetary Fund (IMF), the “troika” that has managed the bailout for Greece.

Austerity has severely harmed Greece’s economy, cutting its GDP by 26% from the pre-crisis peak.  The unemployment rate is 26% and youth unemployment is over 50%.  The election of Syriza is a reaction against the economic depression that Greece has endured as Syriza ran on an anti-austerity platform.

Of course, one nation’s austerity is another nation’s reform.  The German position, which has become the establishment position in Europe, is that excessive Greek fiscal spending and borrowing is responsible for the problems in Greece.  This excessive spending and borrowing is seen as leading to rampant corruption, gold-plated salaries and benefits for government employees and economic inefficiency.  Only reforms, or austerity, can bring Greece any hope of recovery.

The Greek and anti-establishment position is that Germany is the cause of not just Greece’s economic collapse, but the economic crisis in the Eurozone periphery.

In this report, we are going to use game theory to describe the situation between Greece and the EU/Germany/ECB.  This method shows how misunderstandings can develop and how catastrophic mistakes are made. Using this structure, we will outline the positions and perceptions of both sides and describe how this situation could lead to another crisis.  As always, we will finish with market ramifications.

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by Bill O’Grady

Since last summer, oil prices have suffered a precipitous decline.  The weakness is mostly due to supply and demand factors; however, because oil is a market with an active cartel, the decision by the cartel leader, Saudi Arabia, to allow prices to decline is also a key factor in price weakness.

This isn’t the first time the kingdom has fostered a price breakdown.  There were two other episodes in which the Saudis led oil prices lower.  In 1986 and 1998, the kingdom boosted production and allowed prices to decline in a bid to maintain its market share.

In this report, we will focus solely on the geopolitics of the 1986 event.  The analysis will begin with the basic economics of oil and cartels.  From there, we will detail the history of the kingdom’s decision to abandon OPEC’s price targets in 1986 and the geopolitical fallout that emerged in the coming years.  We will compare and contrast the 1986 situation to the present situation.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

On New Year’s Eve, King Abdullah of Saudi Arabia was hospitalized with pneumonia.  According to reports, he is taking visitors and will probably survive this illness.  On the other hand, the king is at least 90 years old and is becoming increasingly frail.

In light of his advanced age and declining health, an analysis of royal succession in Saudi Arabia is in order.  This process is becoming increasingly uncertain.  Unlike many European royal families, Saudi successions are not based on primogeniture; instead of passing from the king to his eldest son, it passes to a brother.  Due to the advancing age of the second generation of princes, this process is becoming increasingly problematic.

We will begin this report with a history of Saudi kings.  Following this history is an examination of the current Saudi succession, focusing on the Crown Prince and who remains as potential kings among the “second generation” of the Saudi Royal Family.  In this context, we will analyze the challenges facing the kingdom and how the succession issue will likely complicate the manner in which these issues are resolved.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

In our 2015 Geopolitical Outlook, one of the risks we discussed was the rise of populism.  In this week’s report, we will focus on European populism.  The recent attack on the employees of Charlie Hebdo in France makes this a timely topic.

In this report, we will define populism, examine why populism has developed in the West, note the particular characteristics of European populism and identify the effects it could have on general geopolitics in the future.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

On Wednesday, December 17, 2014, President Obama surprised the country by announcing a prisoner exchange and negotiations to begin establishing diplomatic relations with Cuba.  Given that the Eisenhower administration broke off diplomatic relations with Cuba in January 1961, even considering resuming relations is a major change in policy.  In this report, we will discuss the importance of Cuba to the geopolitics of the U.S and offer a short history of the island along with a summation of the lessons of that history.  We will analyze the limits of the current thaw and why this attempt at rapprochement is occurring now.  As always, we will conclude with potential market ramifications.

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by Bill O’Grady

As is our custom, we close out the current year with our outlook for the next one.  This report is less a series of predictions as it is a list of potential geopolitical issues that we believe will dominate the international situation in the upcoming year.  It is not designed to be exhaustive; instead, it focuses on the “big picture” conditions that we believe will affect policy and markets going forward.  They are listed in order of importance.

Issue #1: America’s Strategic Drift

Issue #2: The Collapse in Oil Prices

Issue #3: The Rise of the Populists

Issue #4: Taiwan

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