IAN BREMMER, President
CLIFF KUPCHAN, Chairman
1 Bad seeds
2 US-China
3 Cyber gloves off
4 European populism
5 The US at home
6 Innovation winter7 Coalition of the unwilling
8 Mexico
9 Ukraine
10 Nigeria
BrexitRed herrings-*

Overview

IAN BREMMER, President
CLIFF KUPCHAN, Chairman

The geopolitical environment is the most dangerous it’s been in decades ... and at a moment
when the global economy is faring well. Markets are increasingly volatile but resilient, taking hits
but mostly bouncing back. What’s wrong with this picture?
Nothing … yet. Geopolitical cycles are slow-moving. It takes a long time to build a geopolitical order; governments change course through the workings of complex institutions, coalition politics,
election cycles, and checks and balances. Multilateral institutions take decades to build, and theygain momentum slowly. Norms and values need to develop, to become accepted, and to shape
institutions and societies over time. Once in place, they’re sticky. And so, barring bad luck (read:a sudden unforeseen crisis), it takes years, even decades to knock down a geopolitical order. That
process of erosion is underway around the world today.
Sure, 2019 could turn out to be the year the world falls apart. Tail risks created by bad actors
inflicting damage that then create an escalatory cycle are higher than they’ve been at any point
since we launched Eurasia Group in 1998. A Russian cyberattack gets out of control. Iran andSaudi Arabia (or Israel) trigger a Middle East war. The Chinese and Americans get into a trade warthat causes a deep recession, they blame one another, and retaliation spills into the kinetic space.
There are other risks of similar scale. But for now, all of these remain low-likelihood events.
More likely, and despite increasingly worrisome headlines, 2019 is poised to be a reasonably goodyear. Even, dare we say it, not a particularly politically risky year. But we’re setting ourselves up
for trouble down the road. Big trouble. And that’s our top risk.

Top Risks 2019

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Bad seeds
The geopolitical dangers taking shape around the world will bear fruitin the years to come. This is the greatest impact of the G-Zero: The
world’s decision-makers are so consumed with addressing (or failingto address) the daily crises that arise from a world without leadershipthat they’re allowing a broad array of future risks to germinate, withserious consequences for our collective midterm future.

The overwhelming majority of geopolitical dynamics thatmatter are now headed in the wrong direction
Consider the trajectories of all the current geopolitical dynamics that matter. Start
with the big ones. The strength of political institutions in the US and other advanced industrial economies. The transatlantic relationship. US-China. The state of
the EU. NATO. The G20. The G7. The WTO. Russia and the Kremlin. Russia and its
neighbors. Regional power politics in the Middle East. Or in Asia, for that matter.
Every single one of these is trending negatively. Every single one. And most in a waythat hasn’t been in evidence since World War II. Indeed, the overwhelming majorityof geopolitical developments that matter, the wide array of issues that we follow at
Eurasia Group—more than 90% of them—are now headed in the wrong direction.

Top Risks 2019

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These relationships and institutions won’t collapse
tomorrow, but the risks plaguing them are landmines.
That’s especially important because they’re all pieces of the international architecture, some of themfoundational. Eventually, people are going to get hurt.
Think climate change, but in the geopolitical sphere.
Let’s take a closer look at several of these bad seeds.

An overwhelming majority of Americans don’t trust
Congress. The political parties have grown further
apart, and the political center has disappeared—nearly half of all Democrats and Republicans now reportthey “hate” the other side. Social media has further
undermined people’s trust in what’s true, and there’s
no clear message from government on how large information technology companies should be regulated.
Meanwhile, Trump has weaponized the divisions
between his supporters and those who oppose him,transforming governing institutions into political
battlegrounds, weakening the long-term functionalityof a representative democracy, and persuading a larger percentage of citizens that the system is “rigged”
against them. If Trump is defeated in 2020, the trend
will slow. But American liberal democracy and accompanying values aren’t what they were. No one can put
humpty dumpty back together again.

a – US political institutions
It’s not urgent. President Donald Trump has been
notably constrained by US institutions—the judiciaryslapping limits on his immigration policies, bureaucrats slow-rolling regulatory changes, and Congress
focused on incremental approaches to change rather
than passing legislation that generates sudden, dramatic upheaval. Not to mention preventing Trumpfrom taking any measures to impede special counsel
Robert Mueller’s investigation. Indeed, after two yearsof the Trump administration, the most important domestic takeaways are how resilient US political institutions have proven and how effectively they’ve limited
Trump’s intended actions.
But damage is being done to the legitimacy of democratic institutions in the world’s largest economy. The
list of examples is long. Trump publicly contradicts
high-confidence estimates of US intelligence agencies.
He claims choices made by lead actors at the JusticeDepartment and the FBI are politically motivated. He
insists the judiciary is biased against him and thatjournalists are enemies of the people.

Top Risks 2019b – Europe
It’s not urgent. The ongoing Brexit debacle has madeclear that nobody benefits from an exit. That, in turn,has forced euroskeptic parties like the National Rally(France’s rebranded National Front) and the League(Italy’s former Northern League; why do these far-rightparties keep changing their names?) to shift gears.
But nearly every current trend in Europe weakens thebroader European convergence project. Obviously,
without the Brits, Europe isn’t what it was. With Chancellor Angela Merkel in succession mode, neither isGermany. With President Emmanuel Macron at 23%

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approval, facing a state of national emergency andhis domestic and European-integrationist reforms
a dead letter, there’s a limit to what can be expectedfrom France. Now consider the governments—in Italy
and much of eastern Europe—controlled by those whowant to assert more national sovereignty to claw backpower from Brussels. Add a more divided European
parliament after May elections (please see Top Risk#4), and Europe is headed toward (at best) a more
fragmented future or (at worst) a long, slow unwind.
Presuming no immediate unforeseen emergencies,
European governments can handle shocks more easily
when there’s decent economic growth and money tospend. But when belts must be tightened, fights become crises. The reason many in the UK voted to leave
the EU is that they recognized it wasn’t fit for purpose
over the long term. On that count, they look to be right.

ability to pursue its interests. That means alliances
are eroding and will continue to do so. Transatlantic
relations are in the roughest shape given challenges
on both sides of the Atlantic; in particular, US-German and US-French relations are deteriorating. That
undercuts NATO and the broader international order.
Trump’s skeptical view of alliances could well spreadnext to bases and activity in the Middle East.
Asia is least affected. Both Trump and the political establishment remain committed to the region, in largepart because of China’s rise. The US-Japan allianceremains strong. But even here, watch South Korea,
where Trump would prefer to reduce the US militarypresence, while continuing to create uncertainty on
trade. Trump’s doubts about alliances create opportunities for Chinese leader Xi Jinping, Russian President
Vladimir Putin, populists in Europe, and others happy
to exploit frustration with Washington. This trend willslow if Trump fails to win a second term as president,
but the move toward a more modest conception ofAmerican power and a weaker set of alliances beganwell before Trump arrived.

c – The system of global alliances
It’s not urgent. The US remains a critical ally for mostof the world’s developed nations. And it isn’t goinghome this year.
But US alliances everywhere are weakening. Trump
has said it’s not America’s job to police the world andother nations must pay for their own security. Trump’s
views on trade are decidedly unilateral. And the US
has stepped well back from promoting common values; indeed, it’s hard for the US to agree what American values are. On all three fronts, the Trump administration sees alliances as corsets that restrict the US’s

Top Risks 2019d – Populism/nationalism
It’s not urgent. Aggrieved and disenfranchised populations remain minorities in most developed countries,
with less ability to force change than the elites in
power. The political “swamp” resists being drained,
and most governments continue to allocate resourcesmuch as they have over the past several decades.

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But these trends are becoming more toxic, especiallygiven the growing disintermediation of labor from
capital. The “fourth industrial revolution” is appropriately named for its beneficiaries—it promises more
growth and more efficiency. But for those whose jobs
are lost to automation and don’t have the educationand training to find new employment that demands
new skill sets, it’s a post-industrial revolution. They’ll
end up part of an expanding group who believe theirpolitical systems can’t meet their needs.
These polarizing trends now being politically exploited across the advanced industrial world and in pockets of wealthier emerging markets are likely to intensify and spread over the coming decade, weakening
governments and delegitimizing political leaders as aconsequence. Along with the US-China conflict, this is
the risk that will be most frighteningly intensified by
the next global economic downturn. We don’t want a
repeat of the 1930s.

Top Risks 2019***
There are others we could add to this list. Xi’s successin consolidating so much power in China is a “badseed” because it makes decision-making in (what willsoon be) the world’s largest economy less predictable
and a smooth future leadership transition much morechallenging. The fight among regional powers for dominance in the Middle East is set to pose a much larger
challenge over time, especially given the reduced valueof their oil exports for the global economy. Decentralization of control over dangerous technologies—particularly malware, drones, and biological weaponry—isanother. Add the continued inadequate and poorly coordinated political response to climate change. Thoseare far more bad seeds than we’ve ever seen geopolitically. We’re not looking forward to the harvest.

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US-China
The truce that Trump and Xi struck at the G20 meeting in Buenos
Aires last month put a temporary halt to the path of tariff escalation
the US and China had embarked on. Yet we remain concerned about
the world’s most important bilateral relationship. We’re not confident
the trade and economic disagreements will be resolved anytime soon.
And something more fundamental has broken in the relationshipbetween Washington and Beijing that can’t be put back together,regardless of what happens to their economic ties.
On trade, it remains to be seen whether last month’s truce can be turned into alonger-term peace. We’re skeptical. The official timeline for negotiations is short(though Trump is likely to extend it). The issue to be resolved is the fundamental
nature of China’s economic system—something Beijing is unlikely to compromise
on. That makes a comprehensive deal hard to reach, an effort to “paper over” differences hard to sustain.

At issue is thefundamental
nature of China’s
economic
system—something it
is unlikely tocompromise on

Further, a deal on tariffs wouldn’t end economic friction between the US and China. US economic grievances are bipartisan and therefore harder to resolve regardless of next steps. US and Chinese supply chains and technology cooperation willcontinue to fragment even if tariff threats recede.

Top Risks 2019

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The Trump administration is determined to force US
companies to reduce their reliance on inputs from
China and to limit the transfer of intellectual property,
particularly in high-tech sectors and those related tonational security. The US will continue to use non-tariff barriers as a key tool in this push, including investment restrictions, export controls, financial sanctions,and criminal indictments. China will reciprocate with
its own non-tariff measures—from its cybersecurity
laws to antitrust decisions. Moves on both sides will
disrupt firms and broader industries, increasing costs
and decreasing collaboration.

possible. That’s changed, especially in Washington.
The US political establishment believes engagementwith Beijing is no longer working, and it’s embracing
an openly confrontational approach. Beijing is lessready to take the gloves off—partly because it feels
China is not ready to challenge the US—but risingnationalist sentiment makes it unlikely that Beijing
will ignore US provocations. Structural competitionand dangers will shape the relationship—in the technology, economic, and security arenas. Tensions willgrow regardless of what happens on the trade issues
currently making headlines.

Perhaps more importantly, even if the US and China canresolve their trade tensions, and even if they can keep
the economic competition civil, the limited trust that
underpins the US-China relationship appears to be gone.

This new competition means areas of discord will become more escalatory in 2019. Neither side wants a direct military confrontation, but there is a greater chancethat an accident—such as a collision in the South China
Sea—becomes a full-blown foreign-policy crisis. The twocountries in the past have successfully navigated several
such near-crises, including the collision between a US
spy plane and a Chinese fighter in 2001. Doing so again
would be much harder in today’s climate.

Beijing and Washington have always viewed one
another with suspicion. But until a few months ago,
both shared a common understanding that it wasin both their interests to at least try to keep theirrelationship as amicable as possible for as long as

The many layers of US-China tensions

Capitalism with Chinese characteristics
Rules-based system
Global governance
Belt and Road
Ideology
Indo-Pacific strategy

Tech

Post-war order

Quantum computing
Digital silk roadGreat
Firewall

5G

Semiconductors

ICT supply chains
Artificial intelligence/automation

Alliances

Trade deficit

CFIUS

Nine-dash line

Freedom of navigation operations

North Korea

Joint venture
requirements

Trade

Globalleadership

Subsidies

Market accessSouth China Sea

TaiwanSecurityIP theft
Tariffs

Source: Eurasia GroupTop Risks 2019

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FANCY BEARGOTHIC PANDA

REAPER

Cyber gloves off
This year marks a decade since the US and Israel destroyed
portions of Iran’s covert nuclear weapons program using a computerworm known as Stuxnet, ushering in the modern era of cyberconflict. Ten years on, hackers have grown more sophisticated,societies have become heavily dependent on digital services, andefforts to agree on basic rules of the road for cyber conflict havegone nowhere. It’s a mess.

For the first time, the US will attempt to establish
deterrence by projecting its cyber power in more
assertive ways
Cyber deterrence is hard. The source of an attack and lines between state and nonstate actors are blurred in cyberspace. That makes it difficult to be sure whom to retaliate against, and attackers know that. Also, there is still a lack of clear red lines in many
areas, meaning attackers can often get away with their misdeeds if they avoid clear
no-gos (such as critical infrastructure). Finally, cyber weapons become obsolete fast,
and access to targets comes and goes. It’s tempting to use a capability when you can,making the idea of Cold War-style peaceful stockpiling of weaponry less likely.

Top Risks 2019

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Major recent data breaches

BRITISH AIRWAYS 380K

Number of users affected

FACEBOOK 3 million
GOOGLE+ 500K

UBER 57 million

TICKETMASTER UK 400K

UNDER ARMOUR
150 million

MARRIOTT 500 million
FEDEX BONGO 119K
DIXON CARPHONE
10 million

Source: CFR, Eurasia GroupSo, if cyber deterrence has never come close to actually working, what’s new?
This year is a turning point. For the first time, theUS will be undertaking a serious effort to establish
real deterrence by projecting its cyber power inmuch more assertive ways. Not only will this showof strength fail to create an effective system of global
deterrence, but it could backfire.
The US is changing its tone—and the doctrine of action and reaction—to become far more aggressive inthe cyber world than it’s been in the past. After taking
a cautious approach while former president Barack
Obama was in office, the US is now leaning heavily toward greater offensive action in cyberspace, including
by freeing the Department of Defense’s Cyber Command to unleash preemptive strikes. It’s even considering giving private-sector actors leeway to “hackback” when attacked.
In an ideal world, this show of teeth would lead foreign actors to keep their arsenals in check and create
a new security equilibrium in which perceptions of US
cyber dominance would discourage attacks. That’s notgoing to work—for two reasons.
First, like traditional deterrence, cyber deterrence
works best against states. But many of the world’s most

Top Risks 2019

destructive cyber actors are non-state actors who haveless to lose from taking their chances on offense. We’reparticularly worried that the stolen National Security
Agency tools that powered the 2017 NotPetya attacks arebeing updated for current software systems and havebeen incorporated into sophisticated cyber operations.
Non-state actors’ temptation to use them against criticalinfrastructure or corporate networks before systems are
upgraded will increase in 2019.
Second, even governments won’t back down inreaction to Trump’s assertive cyber policy. In the
US-Russia rivalry, it’s unclear which nation controls
escalation dominance—the ability of one side todominate a conflict as it grows more serious—and
whether classic deterrence would work. For weakerstates such as Iran or North Korea, there’s also an
asymmetry of power in the use of cyber weaponsthat makes them too tempting not to use. Several of
the world’s most aggressive cyber powers have little
to lose in the event of retaliation, given their low
level of connectedness (think North Korea). And
for China, the stakes are too high to allow the US
sole use of a weapon that works. All of this leads toa scary prospect: The Trump administration thinks
it’s strengthening deterrence (and therefore peace)by deploying its arsenal, but the odds are greaterthat this show of force leads nations to “see andraise” the US’s bet.

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European populism
When Macron beat Marine Le Pen in France’s 2017 presidential
election, some argued that the populist tide that had swept Europe
since the onset of the Greek debt crisis in 2009 could be receding.
We were skeptical of that interpretation, and 2019 will show that
populists and protest movements are stronger than ever.
The EU will hold parliamentary elections in May, and euroskeptics of the left andright will win more seats than ever before. The previous election, in 2014, took placeshortly after the Eurozone crisis, when countries were still going from bailout tobailout. Now, the official message is that Europe is stronger. But the coming victories
for parties from outside the European mainstream will be harder to square with apositive story.
The decline of some of the main parties that sit in the European Parliament’s threemainstream blocs opens an opportunity for right-wing euroskeptics to become
an imposing force in the parliament—perhaps the second-largest group. Together
with populists on the far left, they won’t reach a majority but will find it easier toblock initiatives when the smaller majority of pro-Europeans can’t agree. Then, thefour populist member-state governments—Italy, Austria, Poland, and Hungary—will all want to make sure they are appropriately represented by a commissionerof their ideological ilk, bringing euroskeptics closer to the commission’s real decision-making power. In short, this year euroskeptics will hold more influence than

Top Risks 2019

Right-wing
populists havethe opportunity
to become an
imposing force
in the European
Parliamenteurasia group | 11

ever before in parliament, the commission, and—byvirtue of their control of some governments—theEuropean Council.
This unprecedented influence will undermine Europe’s
ability to function. The presence of euroskeptics within
the ranks of the European Commission will underminethat body’s cohesiveness and its ability to manage theEU’s day-to-day affairs, as well as the clarity of its message among the European public, investors, and thewider world. The historically collegial institution will
become a battleground. Then, with populists in theparliament and the council as well, it will be harder
to build consensus on key policy issues, including mi-

gration, trade, and the rule of law. Also, internal disagreements will disrupt the EU’s ability to quickly react
to crises. If Italy were to face an economic meltdown,
or if Europe were hit with a shock from its eastern or
southern borders, the presence of populists in Brussels
would hamper the EU’s ability to come to the rescue.
The current commission led by President Jean-Claude
Juncker believed it represented the EU’s last chance torepair its compact with voters. The new body that will
be formed later in 2019 will be in crisis before it evengets to work. This year will be the one when populists
gain real power on Europe’s largest stage, eroding the
EU from within.

Populists will gain seats in European Parliament
Projected makeup 2019*

Pro-Europeans

63%

37%
72%
79%

Populists

28%

European Parliament since 2014
*Calculated with reallocated seat numbers following the UK’s departure
Source: pollofpolls.eu, Eurasia GroupTop Risks 2019

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The US at homeThis will be a chaotic year for US domestic politics. While the odds
of Trump being impeached and removed from office remain low,
political volatility will be exceptionally high.
With a Democratic majority in the House of Representatives, the president faces
adversarial congressional oversight for the first time. Democrats will use theircontrol of House committees and subpoena power to force the release of Trump’s
tax returns, investigate his financial dealings and those of his family, and dig into
conflict-of-interest allegations at several cabinet agencies.
Trump will return fire, further straining relations between the executive, on the
one hand, and the courts, Congress, and media on the other. The president’s
November spat with Chief Justice John Roberts over “Obama judges” foreshadows a firefight between Trump and the courts. He’ll launch full-throated attacks
on Democratic committee chairs. US institutions—especially the courts—are toostrong for the president to effectively muscle, but that won’t always be so clear attimes this year, as he looks for ways to go after those who threaten him, his business, and his family. In addition, a defensive Trump will try to shift focus abroad.
He’s averse to military intervention, so a “wag-the-dog” type war isn’t likely. But
rhetorical and twitter fury are, and markets will be rattled accordingly.

Top Risks 2019

US institutions
are too strong
for the president
to effectively
muscle, but that
won’t be so clear
at times this year

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There’s a real risk that articles of impeachment will
move forward. Both investigatory routes—congressional oversight and Mueller’s probe—could lead to
Trump’s impeachment by the Democratic Party-controlled House. Articles advanced by the House Judiciary Committee would likely include multiple instancesof obstruction of justice, violations of the emoluments
clause, and potentially, evidence of collusion with
Russia during the 2016 election.

ers from similar actions in the past, but that restraint
will be sorely tested if members of his family becometargets. We believe the Supreme Court would meet any
resulting challenge to the separation of powers, but
that’s not guaranteed.

Even if Trump is impeached by the House, it’s implausible the Senate would convict him with the necessary
two-thirds supermajority, particularly since Republicans added to their majority in the 2018 midterms. In
addition, when articles of impeachment were draftedin the past (against former presidents Richard Nixon
and Bill Clinton), markets proved resilient. That said,
there are reasons to be concerned.

Also, though they’ve been limited in the past, market
effects from the impeachment process are difficult
to predict. There’s a “Trump bounce” in the US market that is supporting stock prices; investors wouldgrow jittery at even the possibility of this president’s
political demise. And if the news came during a pronounced slowdown in the US economy, we could be
looking at many months of market instability. Any
impeachment process would grind the policy process
to a halt, diminishing the already slim chances ofCongress making progress on infrastructure spendingor immigration reform.

Though Trump’s removal from office is hard to imagine, a constitutional crisis that arises following legal
action against his businesses or that place his family
in jeopardy is not impossible. Trump’s response tosuch a threat would be to hit back at those who threaten core interests. He’s been constrained by his advis-

There’s a final tail risk. The US could face a renewedbout of street violence like that which plagued manyof the nation’s cities during the 1960s and 1970s.
American society is already deeply polarized, and thepolitical vitriol and institutional conflict that’s likely tooccur this year could boil over.

What is haunting Trump?

REELECTION

TRADE WARTAX RETURNSIMPEACHMENT

THE WALLTRUMP
TOWERSWITCH HUNTMONEYLAUNDERINGTHE MEDIA

DEEP STATE

Source: Eurasia GroupTop Risks 2019

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Innovation winterA “global tech cold war” was Top Risk #3 last year. Over the courseof 2018, technology competition grew extremely political. This is theyear investors and markets will start paying the price. We’re heading
for a global innovation winter—a politically driven reduction in thefinancial and human capital available to drive the next generationof emerging technologies. The shortfall will have importantconsequences.
Three political drivers are behind this global technological mayhem: Security concerns are leading states to reduce their exposure to foreign suppliers in areas critical to national security; privacy concerns are leading governments to more tightly
regulate how their citizens’ data can be used; and economic concerns are leading
countries to put up barriers to protect their emerging tech champions against established market leaders from abroad.

Products
become more
expensive if you
can’t sourcefrom the mostcost-effective
suppliers

The most immediate source of trouble is the US-China relationship. Tensions will
inhibit synergies, to put it mildly, between US and Chinese policies that have been
key to developing advanced technologies. Tariffs are already forcing US firms toshift portions of their supply chains out of China—to Southeast Asia, Latin America, and in some cases back to the US. The decoupling will accelerate as politicaland financial pressures drive more US production, including potentially complex
final assembly, to politically safer markets.

Top Risks 2019

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The countries are parting ways. Equally important,
US efforts to increase scrutiny of Chinese STEM students and workers, and to limit or reject their US visa
terms and applications, will reduce the flow of creative talent into the US. Likewise, it will limit the flow
back to China of engineers and entrepreneurs with
US experience. This trend will disrupt the innovation
talent pipeline, with unforeseen ripple effects in key
technology sectors.
The problem goes beyond US-China relations. The
EU and Japan are likely to follow the US in imposing
new restrictions. Then there’s the “tech-lash”: Digital
regulation is mushrooming around the world as governments—facing a public backlash over privacy andconcerned about foreign influence operations waged
over social media—slap taxes on Big Tech and restrict
the flow of sensitive information across borders.
Brazil, India, and even California have all adopted orare considering legislation that draws on, or in somecases goes beyond, Europe’s tough data protection
rules. Data localization is already firmly entrenched in
Russia and China, though for different reasons. Heavy
regulation impairs collaboration and innovation.
This US-China technology divorce will create specific problems for companies and markets, which willdrain capital from the sector. As US-China tensions
persist, firms will have to spend money to relocate
assembly lines and warehouses to countries that don’t

have the same base of highly skilled labor and finely
tuned logistics that have been built up in China overdecades. And this is all happening as countries aroundthe world speed toward the rollout of next-generation
5G data networks, a project that will take more thana decade and be one of the most expensive technology buildouts ever. But a major push by the US andlike-minded countries to exclude Chinese 5G equipment-makers from their next-generation networks
means the process will be more expensive and takelonger than it might have. The Chinese government,
meanwhile, will require that major Belt and Road
investment recipients use Chinese 5G suppliers to the
exclusion of others. 5G starts rolling out next year; thepolitical fight will start now.
More broadly, products become more expensive if you
can’t source from the most cost-effective suppliers;
profits shrink if you can’t sell users’ data to advertisers; costs increase if you can’t transfer data across borders and you have to hire more content moderatorsand lawyers; and dynamism suffers if you can’t hire
the best people because of the name of the country on
their passports.
Markets may recognize these trends in isolation, butthey’re underestimating how they will come together
to cast a pall over global innovation—and call into
question lofty tech industry share prices—in 2019.

iPhone is poster boy for the tech globalization now under threat
Camera: Sony Japan
Glass screen: Corning US

Flash memory: Toshiba Japan
Flash memory: Samsung South Korea

Camera: Qualcomm US

Chips for 3G/4G/LTE networking: Qualcomm US
Gyroscope: STMicroelectronics Switzerland
Accelerometer: Bosch Sensortech Germany
Compass: AKM Semiconductor Japan

Touch-screen controller: Broadcom US

LCD screen: Sharp JapanLCD screen: LG South Korea

Wi-Fi chip: Murata US
Battery: Samsung South Korea
Battery: Sunwoda Electronic China
Audio chips: Cirrus Logic US

A-series processor: TSMC Taiwan
Touch ID: TSMC

Touch ID: Xintec Taiwan

Source: Eurasia GroupTop Risks 2019

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Coalition of the unwilling
The US once led a Washington consensus, a collection of countries
committed to a US-led global order and the institutions it was built
upon. This order has been eroding for a couple of decades now, atrend that became more obvious with the 2016 election of Trump,whose “America First” campaign message proclaimed his view that
the US should no longer play a leadership role. Many of Trump’s
critics call this strategy “America Alone.”

These are all leaders who challenge institutions
and the consensus they represent ... their ranks
are growing

But after two years, Trump has collected some international fellow-travelers—acoalition of world leaders unwilling to uphold the global liberal order, with someeven bent on bringing it down. These leaders form a motley crew, but they haveimportant things in common with Trump. Some are authentic nationalists who
used a playbook similar to Trump’s to win an election—for example, Italy’s Matteo
Salvini and Brazil’s Jair Bolsonaro. (Depending on what happens to Theresa May,
her successor as UK prime minister might belong in this group.) Others have their

Top Risks 2019

eurasia group | 17

own grievances against the existing global order andfind a tactical embrace of Trump useful: Russia’s Putin, Turkey’s Recep Erdogan, and even North Korea’s
Kim Jong-un.
Finally, a couple find US support important enoughto their own survival that they must ally with Trump,whatever their personal instincts: Saudi Arabia’s Mohammed bin Salman and Israel’s Bibi Netanyahu.
These are all leaders who challenge institutions andthe consensus they represent. The group includes
international spoilers and revisionists, and their ranks
are growing.
Call them the “coalition of the unwilling,” because
they won’t form an actual alliance—nationalists don’tsalute a common flag. But for Trump’s impact onforeign policy, which is significantly greater than ondomestic policy, this group of fellow malcontents canact as a force multiplier. That poses a number of risks.
In the aggregate, this coalition will speed the erosion of
the international system. Putin and Salvini have become more mainstream, and greater acceptance boosts
their revisionist goals. All these men are unpredictable,
which makes geopolitics and investing riskier. Mohammed bin Salman isolated Qatar, disrupted relations with
Canada, and—in the opinion of US intelligence—ordered the killing of a prominent critic. All were bolts
from the blue. Putin’s penchant for the unexpected isalso well-documented. And members of this “coalition”
all have outsized egos. That means that the need to feed
the political base—not the greater good—will play outsized roles in their decision-making.
Cumulatively, these leaders will have an increasingly
disruptive effect on the international order.

The motley crew

Source: Eurasia GroupTop Risks 2019

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MexicoDomestic risk factors loom large. The country’s new president,
Andres Manuel Lopez Obrador, begins his term with a degree ofpower and control over the political system not seen in Mexico
since the early 1990s. His Morena party has comfortable majorities
in both houses of congress, and together with allies, it could reformthe constitution at will.
This was always going to be a complicated presidency for markets, and recent
actions by the new president have confirmed our expectations, which leaned morebearish than consensus. Lopez Obrador believes that many of Mexico’s problems
today are a function of the structural reforms implemented since the 1980s. These
include an opening of the economy, orthodox macroeconomic policies, privatizations, and deregulation. For Lopez Obrador, making Mexico great again is to take itback to the 1960s and 1970s.

For Lopez
Obrador, making
Mexico great
again means totake it back to
the 1960s and1970sDuring his first year, Lopez Obrador will focus on launching his ambitious social andinfrastructure programs, at the expense of Mexico’s fiscal position. Though he has
vowed to be fiscally prudent, he’s unlikely to find the resources to finance his projects. He will prioritize this spending anyway, because he sees it as critical to solving
many of the country’s problems—including poverty, security, and immigration.

Top Risks 2019

eurasia group | 19

The operating environment for firms in the energy
sector will become more challenging. Lopez Obrador has historically opposed the energy opening andprivate investment, particularly in the upstream segment, and has nominated a team with highly nationalistic views. While a full reversal of the energy reform
is unlikely, policy will become more restrictive, andthere will be an effort to boost the role of state-owned
companies. All of this will have a negative impact on
production and further worsen the fiscal picture.
More generally, policy will become less predictable,
more interventionist, and of lower quality—with negative effects for markets. Lopez Obrador will centralize decision-making in his own hands, and the rolesof secretaries and advisers will be limited. As wasclear with the cancellation of the Mexico City airport
project, he will make decisions based on his personal beliefs and preferences, with moderate advisers
having limited influence. Lopez Obrador’s Morena

party will also be a source of continual demands andinitiatives that will make life difficult for investors. If
the US-Mexico-Canada Agreement isn’t ratified by the
US Congress (though we expect it will be), risks will beeven higher.
Finally, security will be one of the new president’s
main challenges, and he lacks a clear strategy to deal
with this worsening problem. He will probably continue to rely on the military, coupled with reforms
such as amnesty for some drug-related offenses andthe legalization of certain drugs. But that’s unlikely
to improve an increasingly dire situation; 2018 was
the most violent year on record, and 2019 could easily
break that standard yet again.
Until now, Mexico had been in a different political andeconomic cycle than the rest of Latin America, and ina lower category of political risk. This year, it will look
more like its southern neighbors.

24 Nov
Proposal to eliminate
private pension funds

Lopez Obrador driving volatility

8 Nov
Interventionist banking
commissions initiative
introduced in congress

10-year Mexican vs US yield spread

6.5
6.0

1 Jul
Lopez Obrador
wins election

17 AugLopez Obrador
announcesdetails on
airportconsultation

25 OctDecision to cancel
airport project announced

1 Dec
Lopez Orbrador’sinaugration

3 Dec
Airport bonds
buyback tenderannounced

5.5
5.0
4.5
June
2018

July

AugustSeptember

OctoberNovember

December

PAN

PRI

New composition of congress
LOWER HOUSE
Morena and allies (65%)

SENATE
Morena and allies (59%)

MorenaPT PES PVEM PRD MC

Other

Source: Congress, Bloomberg, Eurasia GroupTop Risks 2019

eurasia group | 20

Ukraine
Contrary to common perception, Putin isn’t always on the lookout
for the next country to invade, and he isn’t aiming to start a new
war in 2019.
But then there’s Ukraine. November’s clash in the Kerch Strait wasa taste of coming tensions. Putin continues to see Ukraine as vitalto Russia’s sphere of influence. Their shared historic, political, andcultural links have undergirded Russia’s actions since long before
the 2013-2014 Maidan revolution. Putin believes that Russia shouldhave a decisive say in Ukraine’s future.
Against that backdrop, 2019 will be an important year in Ukraine. Presidential
elections will take place in March, and parliamentary elections in the fall. Russianinterference, to support or undermine particular candidates, is a certainty. There’s
not much chance of a pro-Russia president or parliament. But the Kremlin will
want to weaken candidates it deems a threat and ensure that advocates for Russianpolitical and business interests have momentum.

Putin believes
Russia shouldhave a decisive
say in Ukraine’s
futureThere are tense and festering issues between Russia and Ukraine, and they’ll beenmeshed in election dynamics and become more problematic in 2019. Neither
government will back down from its position on access to the Sea of Azov andKerch Strait; additional incidents are likely this year. The status of the separatist

Top Risks 2019

eurasia group | 21

territories will remain unresolved, and sporadic violence will continue. A major spike in fighting is unlikely, as that would lead to tougher sanctions against
Russia. But given all the dry wood, serious flare-ups
are possible.
And there’s the growing split between the Orthodox churches in Russia and Ukraine. The Eastern
Orthodox church leadership will formally grant the
Ukrainian church independence from the patriarch
in Moscow in January. There will be disputes overchurch property and divisions among communities.
Related violence is a possibility.
Additional US and EU sanctions are likely over perceived Russian interference in the Ukrainian elections
and further tensions in the Sea of Azov. The moves willprobably entail designating additional Russian individ-

uals and entities for sanctions. If fighting flares in andaround the separatist territories, severe measures arelikely—probably not sovereign debt sanctions, but bigname oligarchs and their businesses would be at risk.
Finally, Ukrainian domestic policy will be in play thisyear. The presidential and parliamentary elections arelikely to yield a reformist, pro-West government, but
one that is weak in the eyes of voters, who are distrustful of the political class and upset over continued fighting and slow reforms. Martial law ended right before
New Year’s and is probably done. Absent a clear andpresent threat, any attempt to bring it back that delays
the March presidential election would touch off a political crisis. The IMF program will move forward, helping
Ukraine meet its external debt obligations, but reforms
will stall at the height of the election campaigns.
Ukraine should muddle through, but it won’t be pretty.

Kerch Strait incident raises tensions in Ukraine

U K R A I N E

Areas under Russian
control

MARIUPOLBERDYANSKPortAZOV SEAR U S S I A

Source: Liveuamap

Top Risks 2019KERCH
STRAITeurasia group | 22

Nigeria
The country faces its most fiercely contested election since thetransition to democracy in 1999. One candidate is the incumbent,
Muhammadu Buhari. He is an elderly, infirm leader who lacks theenergy, creativity, or political savvy to move the needle on Nigeria’s
most intractable problems. His opponent is Atiku Abubakar,
another gerontocrat who would focus on enriching himself andhis cronies, avoiding the difficult and politically unpopular tasks
necessary for reform.

The election will be close, and a challenged
or inconclusive result is possible
Buhari is the frontrunner. A second term for him would mean the country at best
muddles through the next four years, with little progress on critical policy priorities like tax reform or a restructuring of the energy sector. Buhari would be alame duck from day one, with powerbrokers in his own party quickly shifting theirfocus to the next electoral cycle in 2023. And if Buhari’s health problems continue
or worsen, the situation will get worse. The president’s continual medical leaves
abroad impaired governance his first term. A repetition would again remove himfrom decision-making and the public eye for months at a time, leaving investors to

Top Risks 2019

eurasia group | 23

wonder who is calling the shots and whether they’requalified for the job.
A Buhari reelection also carries tail risks. A politicallyweak president, for health or other reasons, would
open the floodgates for political infighting, increasing
the chances that his ruling All Progressives Congress
implodes. That would turn a policy slowdown into paralysis. The risk of attacks on oil infrastructure would
also rise, because the absence of strong leadershipin Abuja would make it harder to negotiate with the
Niger Delta’s various militant groups.
A win for the challenger, Atiku, would create a brief,
superficial boost to the country’s image—largely because of his better health and keener intellect. But itwould also pose the risk of a return to an even more
rent-seeking governing style.
Atiku’s policy priorities are unclear and untested: He
had previously promised to deregulate the oil and gas

sector but recently pledged to reduce gasoline prices
by 50% from already below-market levels. That would
swell subsidy costs and endanger long-term debt
sustainability. He’s also unlikely to champion a tax
reform that’s critical to Nigeria’s fiscal sustainability.
Atiku would face significant infighting within his People’s Democratic Party as well, as leaders try to holdhim to his promise to serve only one term (a pledge
he’s likely to retract).
Then there’s a dangerous wildcard outcome. The election will be close, and a challenged or inconclusive
result is possible. That, in turn, could trigger a political crisis in which neither candidate has a legitimate
claim to power. If the vote is close enough to trigger
a runoff, Nigeria’s constitution requires the second
round of voting to occur within seven days of the first,
a tough timeline to meet given the complexity of organizing national elections in the country. This could
be a recipe for severe uncertainty in Africa’s mostimportant market.

Whom should I vote for?
WHAT IS THE
BIGGEST ISSUE?

Corruption

HOW SHOULD
WE FIX IT?

The economy

Raise revenue for
critical investment

HOW?
Overhaul weak
institutions

HOW SHOULDWE STIMULATEGROWTH?
Anyone can do thisBorrow for
critical investment

DOES THIS REQUIREA MORE ENERGETICLEADER?
Yes

Plug leakages
Tax reform

SORRY! TRY AGAIN
NEXT ELECTIONSORRY! TRY AGAIN
NEXT ELECTIONBUHARI
Lack of energy, oil disruptions,policy gridlock, party infighting
ahead of 2023

ATIKU
Patronage-based leadership, predatory
government, party infighting ahead of2023, limited political capital

Source: Eurasia GroupTop Risks 2019

eurasia group | 24

BrexitWhy the asterisk? Because three years after the vote, almost any Brexit outcome
remains possible. The botched leadership challenge protected the prime
minister’s rule over the Conservative Party for now but, without her lawmakers’
support, she has almost no chance of passing her unpopular withdrawal
agreement. That promises a very messy 2019.
May’s plan to secure a more palatable version of the Northern Irish backstop is doomed to fail.
The EU can offer reassurances that it also hopes to conclude a free-trade agreement in time toprevent the backstop from kicking in. But it will never soften the mechanism itself, which Ireland
regards as its insurance policy.
The prime minister may also think time is on her side. By having delayed the House of Commons
vote to January, she hopes a greater number of lawmakers will decide there is no alternative toher deal. But we now know that 117 Conservative members of parliament were willing to riska chaotic leadership race rather than accept May’s proposal—which she will barely be able toamend. It is highly unlikely that the deal the UK and EU negotiating teams have been working on
for almost two years will ever be ratified.
There are alternatives, but all of them are painful and time-consuming. Some in the Conservative
Party are becoming interested in a “Norway Plus” option, which would see the UK pick an alreadyexisting close relationship with the EU’s single market and complement it with a customs union.
May could just about manage to justify this arrangement on the grounds that it would be more
likely to command a majority thanks to the support of some Labour members of parliament,
while also delivering on the mandate from the 2016 referendum to leave the EU.
The obvious counterargument is that this would rule out most if not all of the supposed benefitsof leaving the EU in the first place: regaining regulatory flexibility, having the freedom to strikeindependent free-trade deals, and—crucially—putting a halt to the free movement of continentallabor across the UK’s borders.
That’s where the argument that the UK should just cancel Brexit and stay in the EU resurfaces.
Could May pull off a referendum? Some ministers think this would be her best way of surviving,but she has also ruled it out more vigorously than any other course of action. The Labour opposition is hedging, hinting at the possibility but still insisting it must come after an unlikely generalelection, which could only be triggered if some Conservative lawmakers vote against their own
government and in essence kick themselves out of office.
Brexit promises to keep the UK distracted in 2019. But will there actually be a Brexit? And if so,
what flavor? Your guess is as good as the prime minister’s.

Top Risks 2019

eurasia group | 25

Red herrings
A return to dictatorship in Brazil
The election of far-right politician Bolsonaro marked the first presidential defeatof the leftist Workers’ Party (PT) in twenty years and brought a (retired) army officer to power for the first time since the 1964-1985 era of military rule. But despite
Bolsonaro’s defense of authoritarian practices and his fiery rhetoric against opponents, this is not the end of Brazil’s young democracy.
The new president will not have popular support to aggressively centralize power.
He had the highest rejection rate of any elected president in recent history, he’ll
have to focus on a laundry list of demands from voters, and he’s far from controlling congress—a requirement for amending the constitution.
Brazilian institutions are more decentralized and robust than they were five decades ago, and they look particularly strong when compared to those of otheremerging-market countries. The Supreme Court has entrenched independence;state courts and prosecutors enjoy autonomy; individual governors control police
forces; and the media operates freely without strong government oversight. Brazil
is not Venezuela or even Turkey.
And, perhaps most importantly, there is no support within the armed forces fortaking power. This isn’t the 1960s, there is no “Communist threat,” and most military officers know that running the country would be more hassle than it’s worth.

Top Risks 2019

eurasia group | 26

Saudi Arabia
Mohammed bin Salman is not the most popular man
in the world these days, but 2019 will be a better year
for him, and for Saudi Arabia, than many would liketo believe. International pressure on the young crownprince will not end his bid to become king; he remains firmly in line to take power from his father. The
killing of Jamal Khashoggi will convince King Salman
to rein in his son and once again include senior members of the family in the decision-making process, but
this will act as a stabilizing factor for the country, nota direct threat to his rule.
Washington and Riyadh will work to contain tensions
in their relationship, as each needs the other for theprotection of strategic interests. The Trump administration won’t go after the crown prince. Regionally,
Iran and Saudi Arabia will spar, but each will try to
avoid any intensification of their rivalry as both focus
on growing domestic concerns. Saudi Arabia will continue to deescalate its war in Yemen and ease tensions
with Qatar to placate its Western partners.

the clock on the Trump administration. Even if thecountry does leave the deal, it will not drasticallyramp up its nuclear program. It may tinker with newcentrifuges or marginally increase its stockpile oflow enriched uranium. But it will be cautious to avoid
provoking US or Israeli military strikes. Iran will show
resolve by pursuing a tough policy in the region, but
pragmatism will limit its aggressiveness.
Most significantly, regime change is not coming to
Iran anytime soon. Most Iranians see the regime as
legitimate, if deeply flawed. The government is wellpracticed at sanctions evasion. And the security forces
are a firm backstop to any protest movement that getsout of hand.

Russia-China relations
As Beijing and Moscow face new challenges in theirrespective relationships with the US, speculation has
grown about the prospect for a formal China-Russia
alliance. Such a partnership remains unlikely.

Vision 2030 and the domestic reform agenda will facesetbacks, as international investors remain reluctant
to re-engage too quickly with the Saudi leadership.
Domestic spending will increase to ensure that domestic pressures on the regime remain under control.
However, deep pockets will help the kingdom manage
these challenges in 2019.

True, collaboration between Moscow and Beijing has
increased dramatically in recent years. Politically,both countries have an incentive to join forces on
pushing back against the US leadership. Economically,each makes an attractive partner for the other: energy
for China and external funding for Russia. Russia has
emerged as the biggest recipient of China’s Silk Road
Fund, and last year China participated in Russia’s
large military exercises for the first time.

Iran

But that’s where the love stops. Deep cultural suspicion persists between the two sides. China has little
incentive to boost a declining Russian economy. Russia has no desire to become Beijing’s raw materials
junior partner. The two share a desire to reshape theglobal order, but Beijing’s approach is far more incremental and collaborative than Moscow’s brash revisionism. And while the two countries’ militaries work
together, their geopolitical outlooks remain divergent,and they could clash down the road over competingareas of interest, particularly in Central Asia.

Iran is a serious trouble spot in 2019. Faced withsevere US sanctions, the economy will contract, inflation will rise, and the unemployment rate will increase. But the US campaign against Iran is unlikely totrigger a major crisis this year. The nuclear issue willremain on the back burner.
Iran will probably remain in the nuclear deal—andabide by its restrictions—to preserve economic ties
with Europe and oil sales to Asia, hoping to run out

Top Risks 2019

eurasia group | 27

It’s been 21 years since we started Eurasia Group, andwe’ve been through more than our share of global changes
together. Taking a moment to look back, we remindourselves of our modest beginnings, personally and as anorganization, and of how much of a privilege it is to haveyour support.
Thank you for being a part of our community. We appreciate
it and wish you only the best for 2019.
—Ian and Cliff

Brasília

London

New York

San Francisco

São Paulo

Singapore

Tokyo

Washington D.C.

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