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Eurasia Group publishes Top Risks for 2014


06 January 2014

#1 is "America's troubled alliances" - Washington's second-tier allies will begin to shift their international orientation

NEW YORK, 6 JANUARY -- Eurasia Group President Ian Bremmer and Head of Research David Gordon are pleased to announce this year's Top Risks report, which identifies the most challenging political and geopolitical stress points for global investors and market participants in 2014, as well as a few red herrings-issues that, despite media attention, are unlikely to pose a significant threat or instability in the coming year. 

Topping the list is America's troubled relationship with a number of key allies. "The US is not in decline. There is, however, a notable decline in US foreign policy," according to Bremmer and Gordon. 

Following is a summary of all ten Top Risks for 2014. For the complete report, please click here.

Bremmer and Gordon will host an on-the-record conference call at 11:00 EST/16:00 GMT to discuss the risks and take questions. Dial-in information is below.

1 - America's troubled alliances: The US's closest allies-Israel, Britain, and Japan-have few options when it comes to security partnerships. That's not the case for many of its other allies, countries such as Germany, France, Turkey, Saudi Arabia, and Brazil. To avoid too close an alignment with the US, governments in these countries will begin to shift their international orientation-with implications for companies and investors doing business within their borders. 

2 - Diverging markets: Voters in six of the largest emerging markets-Brazil, Colombia, India, Indonesia, South Africa, and Turkey-will go to the polls in 2014 at a time when emerging markets face a new cycle of economic pressures. Slowing growth and rising demands from newly enfranchised middle classes are creating heightened uncertainty, and as recent protests in Brazil, Turkey, Colombia, and Russia have shown, frustrated public expectations can quickly find expression in the streets.

3 - The new China: The country's leaders have initiated the most far-reaching reforms in two decades. But the Communist Party will face formidable political tests given the increasingly hard-to-control information environment and backlash from those who stand to lose from economic rebalancing. Missteps could undermine reform and the leadership itself.

4 - Iran: The continued progress of Iran's nuclear program, the crippling effect of sanctions on its economy, and the electoral victory of Hassan Rouhani in last June's presidential election have dramatically increased the possibility that Iran and the West will reach a comprehensive negotiated settlement. (Eurasia Group assigns a 60% probability.) However, there will be risks along the way, and if the deal falls apart, the chances of military action will rise. 

5 - Petrostates: The unconventional energy revolution has had important geopolitical implications, but disruption events have offset much of the effect of volume growth, limiting the impact on producers. In 2014, this will change, with an acceleration of spare capacity growth, bearish price pressures, and stiffer competition among producers.

6 - Strategic data: The growing role of the state in the marketplace is shifting the internet and its governance from a bottom-up, open source sector to a top-down, strategic sector. The internet will further fragment in 2014, national champions will become more dominant actors in data-driven sectors in many of the world's largest economies, and costs of doing business will escalate, particularly as cyber-security becomes a bigger vulnerability.

7 - Al Qaeda 2.0: Turmoil in the Arab world has brought a resurgence of Sunni extremism and the Al Qaeda brand, and the Syrian conflict has become a powerful magnet for jihadist recruitment. The US remains safer than in the aftermath of 9/11. But as jihadism "goes local," governments and Western interests across the Middle East and North Africa are at far greater risk.

8 - The Middle East's expanding unrest: The region, in turmoil for three years, has yet to hit bottom. In 2014, political violence will continue to cross the border from Syria into neighboring countries, especially Iraq. Saudi Arabia's anxiety over Iran's influence in Iraq will be reinforced by Riyadh's fear of Baghdad's rise as a major oil exporter. And Egypt's military rulers lack the resources to create jobs or institutional capacity to reform its economy and facilitate investment. 

9 - The capricious Kremlin: President Vladimir Putin remains the single most powerful individual in the world, but two worrying trends are converging in Russia: His popularity has slipped significantly, and after a decade of mounting expectations, the economy is stagnating. This makes Russia under Putin, a leader unusually capable of getting big things done quickly, far less predictable-at home and abroad.

10 - Turkey: Among emerging markets, Turkey is especially vulnerable in 2014. The country faces spillover effects from the Syrian civil war, a reemergence of the Kurdish insurgency, and worsening corruption scandals. As Prime Minister Recep Tayyip Erdogan's room to maneuver diminishes, his paranoid and aggressive behavior threatens to further undermine market and investor confidence. 
In addition to these Top Risks, the Red Herrings for 2014 include:

US domestic politics: Despite the surge in petty partisan politics in 2013, economic recovery is gaining steam. The Ryan-Murray deal takes budget issues off the agenda until 2015, and Washington will be, if not much more productive, at least more predictable this year. 

Europe: The ongoing commitment of the European Central Bank and German Chancellor Angela Merkel to use "any measures necessary" to defend the euro puts an effective floor under Europe's finances in 2014. Anti-European parties are gaining traction politically, but they will not challenge for power this year.

Syria: The civil war rages on, but key players are moving on. For the West, the Iranian nuclear negotiations have displaced the issue of Syria's conflict, and for Al Qaeda, Iraq is increasingly seen as a more strategic target. Although the civil war will persist, violence could subside in 2014 as rebels begin to accept that no international support is coming and cut deals with the military.

* * *
? North Korea: We haven't identified North Korea as a risk or a herring this year because it's so hard to know what's really going on inside that country. We can say that some form of direct provocation from Pyongyang is likely in 2014, but the growing alignment among major powers (including China) will help limit the risk that a conflict progresses beyond anyone's control. 
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