IAN BREMMER, President
CLIFF KUPCHAN, Chairman
1 China loves a vacuum
2 Accidents
3 Global tech cold war
4 Mexico
5 US-Iran relations
6 The erosion of institutions
7 Protectionism 2.0
8 United Kingdom
9 Identity politics in southern Asia
10 Africa’s security
Red herrings*

Overview
IAN BREMMER, President
CLIFF KUPCHAN, Chairman
Let’s be honest: 2018 doesn’t feel good. Yes, markets are soaring and the economy isn’t bad, but citizens are divided. Governments aren’t doing much governing. And the global order is unraveling.
The scale of the world’s political challenges is daunting. Liberal democracies have less legitimacy
than at any time since World War II, and most of their structural problems don’t appear fixable.
Today’s strongest leaders show little interest in civil society or common values.
In the 20 years since we started Eurasia Group, the global environment has had its ups anddowns. But if we had to pick one year for a big unexpected crisis—the geopolitical equivalent of
the 2008 financial meltdown—it feels like 2018. Sorry.

Geopolitical depression
Last year, we wrote that the world was entering a period of geopolitical recession. After nearly adecade of a slowly destabilizing G-Zero framework, the election of Donald Trump as US president
has accelerated the descent into a Hobbesian state of international politics. The world is now
closer to geopolitical depression than to a reversion to past stability.
“America First” and the policies that flow from it have eroded the US-led order and its guardrails,
while no other country or set of countries stands ready or interested in rebuilding it … significantly increasing global risk. We now see more clearly a world without leadership.
The challenges posed by Trump’s approach to international affairs are the product of his unilateralist agenda and retrenchment, creating confusion for allies and rivals alike. What does the US
stand for? What does the Trump administration hope to achieve? Is Trump a revolutionary or apragmatist? Is the belligerent tone of some of his speeches and most of his tweets just an expression of his negotiating style or might he really take actions that push the US and others to thebrink of war? Is “Make America Great Again” policy or political performance art?
The decline of US influence in the world will accelerate in 2018. The mix of soft power and economic and political liberalism faces a crisis of credibility. With little sense of strategic direction
from the Trump White House, US global power, used too aggressively by George W. Bush, then
too timidly by Barack Obama, is sputtering to a stall.
Concerns about the prospects of a geopolitical depression form the backdrop for our top ten
risks this year.

Top Risks 2018 | 2 January 2018

eurasia group | 3

China loves a vacuum
The 19th Party Congress marked a turning point in China’s
contemporary history, and the speech President Xi Jinping gave
there will eventually be recognized as the most geopoliticallynoteworthy event since Mikhail Gorbachev formally dissolved
the Soviet Union. Until last year, China had avoided talk of global
leadership. Its diplomatic rhetoric was seldom ideological, let alone
evangelical, but in 2017, Beijing publicly shifted its official strategy.
China is no longer biding its time. Xi has now consolidated enoughdomestic power to redefine China’s external environment and
set new rules within it. He benefits from lucky timing: Trump hasrenounced the US commitment to Washington-led multilateralism
and generated much uncertainty about the future US role in Asia,
creating a power vacuum that China can now begin to fill.
For decades, many in the West have assumed that the emergence of a Chinese
middle class would force China’s leaders to liberalize the country’s politics in orderto survive. Instead, China’s political model, despite its domestic challenges, is now
perceived as stronger than it has ever been—and at a moment when the US political model is weakened. Today, in terms of the legitimacy of government in theeyes of its citizens, the US may be in at least as great a need of structural political
reform as China. It’s a shocking statement; all the more for its obviousness once
you think about it. It’s also one we’ve not once heard uttered in Washington, fromeither side of the aisle. Combine that with the strongest Chinese president since
Mao Zedong and one of the weakest US presidents in modern history, and you end
up with a moment of global reordering.
This means China is setting international standards with less resistance than everbefore. It’s true in three different areas (and is notably not true in a fourth):

China’s politicalmodel is now
perceived asstronger than it
has ever been—
and at a time
when the US
political model is
weakened

Trade and investment. No country today has developed as effective a global tradeand investment strategy as Beijing. China is writing checks and creating a global

Top Risks 2018 | 2 January 2018

eurasia group | 4

architecture while others are thinking locally or bilaterally. This model generates both interest and imitators,
with governments across Asia, Africa, the Middle East,and even Latin America tacking more toward Beijing’s
policy preferences because the direct transactional
consequences have become much more impactful.

Who said China lacked soft power?

Technology. China and the US are leading the charge
on investment in new technology—in artificial intelligence (AI), in particular. For the US, leadership comesfrom the private sector. In China, it comes from thestate, which aligns with the country’s most powerfulcompanies and institutions, and works to ensure thepopulation is more in tune with what the state wants.
That’s a powerful stabilizing force for the authoritarian and state capitalist Chinese government. Other
governments will find the model compelling, especially those most worried about potential social unrest
within their borders. And China’s economic clout willalign tech sectors within smaller nations with Chinese
standards and firms.

29

Values. The only political value that China exports isthe principle of non-interference in other countries’
affairs. That’s attractive for governments that areused to Western demands for political and economic
reform in exchange for financial help. With the advent of Trump’s “America First” foreign policy andthe many distractions for Europe’s leaders, there isno counter to China’s non-values-driven approach tocommerce and diplomacy.
But not: Security. The Chinese model doesn’t become
more attractive on the national security front, as
China remains at best a regional power (while the US
vastly outspends it), and has not been a key player inthe war against terrorism.
The dangers are three-fold. First, the global businessenvironment will have to adapt to a whole new set ofrules, standards, and practices pushed by China anddiverging regulatory environments that will raise thecost of doing business. This won’t be limited to theChinese domestic market (itself increasingly criticalto the global economy); it will likewise extend to
an expanding group of countries around the world
where Chinese economic and, relatedly, politicalinfluence are becoming dominant.

Top Risks 2018 | 2 January 2018

China is now substantially more popular than the US in
key Middle Eastern and Latin American countries
These countries view China more favorably than they
do the US (difference shown in percentage points)





 


36
20
15

13
12
10
6
5
2

Source: Pew Research Center

Second, there will be pushback against China’s further
expansion that polarizes Asia by pitting China on the
one hand against the US and its regional allies on theother. Asia’s largest and most developed countries—
Japan, India, Australia, and to a lesser extent South
Korea—will see Xi’s agenda as a threat to their democratic-capitalist model. This dynamic could lead to a
lot more friction in the South China Sea, over North
Korea, and in US-Chinese trade relations.
Lastly, Xi’s growing assertiveness risks negative effects
at home and creates a long-term threat to the Chinesemodel. He is taking a risk by tightening the party’s control of the country’s private sector, by inserting party
controls at the top of private Chinese companies as well
as Chinese subsidiaries of foreign multinationals. The
risks to corporate decision-making and asset valuations
are clear, and they could affect the long-term economic
trajectory of both China and its imitators.
Still, since 2008, we’ve seen a gradual erosion in global
perceptions of the attractiveness of Western liberal
democracies. There is now a viable alternative. For
most of the West, China is not an appealing substitute.
But for most everybody else, it is a plausible alternative. And with Xi ready and willing to offer that alternative and extend China’s influence, that’s the world’s
biggest risk this year.

eurasia group | 5

Accidents
There’s been no major geopolitical crisis since 9/11, and none
created by governments since the Cuban Missile Crisis. But it’s
impossible to ignore the risk of such a crisis today, because there
are too many places where a misstep or misjudgment could provoke
serious international conflict. This comes against a less resilientinternational backdrop.
We aren’t on the brink of World War III. But absent a global security underwriter,
and with a proliferation of subnational and non-state actors capable of destabilizing
action, the world is a more dangerous place. The likelihood of geopolitical accidents
has risen significantly, a trend that will continue. At some point, we’re likely to have a
mistake that leads to a confrontation. A few worth thinking about for 2018:
Cyberattacks. The risk of a major cyberattack has risen at a time when international mistrust and the erosion of common norms, standards, and architecture
has made it more difficult to coordinate responses to attacks when they occur.
That makes the risk of overreaction high, even when reaction is warranted. The
threat comes both from states (Russia, China, North Korea) and non-state actors(such as Anonymous); the capacity to wreak havoc is rapidly growing, especiallygiven security vulnerabilities and high-level leaks from within the US National
Security Agency. The prospect today of an economy-shaking cyberattack is real—
be it via the destruction of a critical piece of infrastructure or through forced
transparency that cripples the credibility of a leading corporation, bank, or marketplace; or even a takedown of the internet itself (several states have reportedlyprobed the resilience of the internet’s backbone infrastructure). If an actor goes
after these targets, we’re in uncharted territory. Of all the unexpected geopolitical “accidents” listed here, cyber deserves to be at the top of the list.

The likelihoodof geopoliticalaccidents
has risen
significantly, a
trend that willcontinue

North Korea. The world’s most obvious risk of geopolitical accident. An unsatisfactory (and eroding) status quo remains the most likely outcome in 2018. Everyone knows that the US has only unpalatable military options. The North Koreansaren’t suicidal; further North Korean missile tests are likely, but a direct strike on

Top Risks 2018 | 2 January 2018

eurasia group | 6

Syria: Too small for three powers
The number of close
calls and near-missconfrontations between
the US, Russia, Iran, andSyria has grown at an
alarming—andunderappreciated—rate

TURKEYAl Tabqah

US airstrikes versus
Iran/Syrian forces

18 JuneDeir Az Zor

16 September
15 November
16 November

7 April

Homs

US versus Syria
in the air

SYRIA

LEBANON
Al-Tanf

18 May6 June8 JuneAirstrikes near
US/Russian force

IRAQ
US versus
Russia in the air

Source: Eurasia Groupan adversary is nearly inconceivable. Yet, rocket tests
over Japanese territory are intrinsically dangerous
and could provoke an escalatory response. So too the
expanded military exercises and overflight by theNorth Koreans, Americans, and allies within easyshooting range of one another. Elevated tensions
combined with less trust/coordination among all actors means that mistakes, when they occur, are more
likely to ignite a conflagration. The possibility of war,
which would risk severe damage to a key US ally andimpact global supply chains, remains unlikely. But
it’s much more thinkable today than it has ever been.

Mueller details the conclusions of his investigation,
they will focus on Trump campaign (and possibly
Trump’s personal) connections with the Kremlin’s inner circle. Trump opponents will demand a hardline
policy response, one Congress will likely support,
but which Trump won’t approve. Plenty of Kremlin
dirty laundry will be aired. Putin might be tempted
to respond—perhaps through a data dump attack that
includes prominent Republicans among its targets.
Putin and Trump aside, US-Russia relations are openly hostile. And once the Mueller investigation concludes, they’ll have reason to deteriorate further.

Syria. The war in Syria will continue to wind down in
2018, but there will still be plenty of destructive hardware in the field carried by actors in close proximity who
don’t like or trust one another. Russian and US bombers regularly fly into each other’s demarcation zones,
and strikes in the wrong place could kill US or Russian
troops. US soldiers are embedded with Kurdish forces
around Raqqa and other areas east of the Euphrates, andthey could become a target for Russia and Iran. It’s the
Washington-Tehran relationship that’s most dangerous
in Syria. Trump wants Iran out of the country.

Terrorism. Conventional terrorist attacks continue tobe far more likely, and dangerous, in the Middle East,
North Africa, and South/Southeast Asia than in thedeveloped world. But the end of the caliphate in Iraq
and Syria has pushed many foreign fighters back totheir homelands, creating increased risk in Europe,and the online sophistication of the Islamic State has
facilitated more copycat attacks. A catastrophic attackin the US remains unlikely. But if one were to occur,
the result would be greater division inside the US andoverreaction by a deeply embattled Trump looking fora distraction from his political struggles and itchingfor a fight. The impact would be economically damaging immigration and security policies, and a consequent hit to the strength of US civil society. Even in
Europe, more such attacks would continue to facilitate
greater populism and more moves by establishment
parties to embrace increasingly extreme policies.

Russia. Trump also wants a better relationship with
President Vladimir Putin. But constrained by themost far-reaching presidential investigation since
Watergate, a Republican-led Congress, an antagonistic media, and many within his own administration,
he can’t have one. When Special Counsel Robert

Top Risks 2018 | 2 January 2018

eurasia group | 7

Global tech cold war
The pace of exciting technological breakthroughs is quickening. In
recent years, the communications revolution empowered individuals
by giving them unprecedented access to information and byboosting cross-border collaboration. Today, the big topic is data
and, increasingly, the AI revolution, which empowers hierarchicalorganizations to control and sift that information. But this latest wave
of innovation is taking place at a time of broader tensions within theinternet and technology spaces that will play an important role for
global markets in 2018.
Long term, the convergence of AI, big data, and ultra-fast networks is the gamechanger. It’s an unprecedented social experiment: getting smartphones into thehands of every young person with economic potential, allowing them to interact
with the world, and seeing what happens as they grow up. This will become amuch bigger deal over time. As our cars, homes, factories, and public infrastructure begin to generate mountains of data, and as connectivity morphs into augmented reality, a new generation of humans will be “on the grid” around the clock,with important implications for society and geopolitics. But until we get there, it’s
the world’s biggest fight over economic power.
Here are the key fault lines in 2018:

Achieving
dominancein emerging
technologies is
the world’s mostimportant battle
for economic
power

A race for breakthrough technology is underway between the US and China.
Both countries’ tech giants are speeding to master AI and supercomputing among
other highly investment-intensive, next-generation technologies. The winner could
well dominate the coming decades, both economically and geopolitically. Dividing
lines are growing sharper: The US still has the best talent, but Beijing is training
many more technologists. China will continue to plow money into its homegrown
research and hardware sectors, while the US struggles with less control over its
private-sector top performers than Beijing. The race is a tight one.

Top Risks 2018 | 2 January 2018

eurasia group | 8

Global tech cold war by the numbers
US vs CHINA

AmazonTencent

Facebook

Alibaba

GoogleBaidu

569 483
522 440

246 773

Internet users (millions)

143 202

250K 340K

Of world's 500 most powerfulsupercomputers (2017)

Operational robots(est 2017)

474

82

Major tech companies(market cap, $ billion)

US tech firms operate globally, withlimited consideration for US
government priorities, except on
regulatory issues within their sectors

75 8
Top AI startups

112
Billion

5.5
Trillion

Mobile payments(volume in 2016)

Beijing exerts major influence overtech sector via national policies andplans, and companies must operatewith national goals in mind

Tech sector relationshipto government

Source: World Bank, Top500, IFR/World Robotics 2017, iResearch, CB Insights, Forrester Research, Eurasia GroupA struggle for market dominance will continue torage in third-party countries and regions that will haveto decide whose products and standards to embrace.
Think Africa, India, Brazil, and even Europe. China
and the US are engaged in a global competition to be
the lead technology supplier for their various international partners. This fight plays out in three areas:
civilian infrastructure (from fiber-optic cabling tocloud storage), in consumer goods (putting next generation smartphones in every hand), and in government
procurement and security equipment. The latter is ofutmost importance, as—just like the traditional arms
deals of yesteryear—a linkup between two governments
on cybersecurity creates long-lasting technical dependencies that translate into strong political ties. Traditionally, China has benefited from distrust felt toward
the US following the Edward Snowden revelations, aswell as from cheaper prices, while quality was its weak
spot. But today these paradigms are being called into
question as China’s products become ever-better justas Europeans and others begin to question the security
challenges of doing tech business with Beijing.
Fragmentation of the tech commons is the last
major effect of this global tech cold war. China’s 700

Top Risks 2018 | 2 January 2018

million-plus internet users remain behind the Great
Firewall. China, Russia, and other countries that wanta tight grip on information flows are implementing
tough cybersecurity laws and considering erecting
barriers to the flow of data across borders as they
move to reduce their dependence on the Western
hardware and software that underpins their own cyberspace. The US is also taking a harder line on foreign investment in US tech firms, partly in response
to China’s rise, partly in response to fears over cybersecurity threats, while a data privacy-obsessed Europe
keeps a wary eye on US electronic surveillance.
Fragmentation creates market risks as state-promoted
and private-sector corporations begin to function as
quasi-monopolies in their respective spheres of influence. Markets become less competitive and, therefore,
less efficient. Perhaps most importantly—and immediately—security erodes too. It’s harder to guard against
global viruses with domestic antivirus companies orto innovate in the absence of international partnerships. None of this will stop the march toward a new
economic and political order reshaped by technology,
but it will make it much messier.

eurasia group | 9

MexicoMexico will have a tough year. Indeed, 2018 will be a defining
moment for the country’s longer-term outlook, which will dependon the outcome of NAFTA renegotiation and the country’s 1 July
presidential election. Both carry significant market risks.
First, NAFTA. A successful renegotiation in 2018 is still possible. It’s far from certain
Trump would act on his threat to initiate withdrawal from the deal; even if he does,
this would be a ploy to enhance US leverage in future negotiations rather than an
attempt to destroy the agreement. Unfortunately, that’s where the good news stops.
Renegotiation of the 23-year-old deal started last August and dominated the second
half of the year, with scant results. Increasingly protectionist US proposals haveslowed negotiations. Canada, the US, and Mexico share the goal of reaching a deal torevamp the agreement by the end of March, before the presidential campaign begins
in Mexico. But successful renegotiation depends on the US softening its stance; Mexico and Canada have few incentives to compromise with the Trump administration,
as they know the US business community firmly opposes NAFTA withdrawal.

The NAFTA
debate andthe country’s
presidential
election are likely
to overlap andamplify the risks
each presents

If there is no deal or if Trump initiates a withdrawal process, this would not mark theend of NAFTA, but it would put an end to negotiations. Canada and Mexico would,
at least initially, walk away, creating uncertainty over billions of dollars of economic
activity in the world’s most prosperous region. Though the pain would be shared, theMexican economy and those who invest in it would suffer disproportionately, given
the country’s deep reliance on trade with the US.
The NAFTA debate and the country’s presidential election are likely to overlap andamplify the risks each presents. Once the presidential campaign starts in March,
it will become very hard for government negotiators to agree to meaningful compromises without seeming to bow to the US “hegemonic neighbor.” In addition, thecampaign’s frontrunner is Andres Manuel Lopez Obrador, known as AMLO, whooffers anti-US rhetoric and a statist economic policy platform.

Top Risks 2018 | 2 January 2018

eurasia group | 10

Investors are used to positive outcomes in Mexican politics; Lopez Obrador could change that

Pesos per dollar
15

Start ofpresidential
campaign

14
13
12
11

Start ofpresidential
campaign

Electionday

Start ofpresidential
campaign

Electionday

Election
day

10
9
Jan

Mar

May

Jul

Sep

Jan

Mar

May

Jul

Sep

Jan

Mar

May

Jul

Sep

2000 elections

2006 elections

2012 elections

PRI loses for first timein history

Lopez Obrador loses after
leading during entire race

Pena Nieto defeats Lopez Obrador,
but external shocks (Eurozone
crisis) still add volatility

Source: Banxico

Voter anger at government is running high, thanks tohigh-profile corruption cases, a deterioration of the
security situation, and sluggish economic growth.
Public demand for change favors AMLO, and though
the ruling Institutional Revolutionary Party (PRI)
candidate, Finance Minister Jose Antonio Meade,appeals to independent voters, his association with
unpopular President Enrique Pena Nieto will be aburden on his candidacy.

Top Risks 2018 | 2 January 2018

Lopez Obrador is not as radical as some rivals portray
him, but he represents a fundamental break with theinvestor-friendly economic model implemented in
Mexico since the 1980s, particularly for the recently
enacted opening of the energy sector to private foreign investors. Fiscal constraints and a lack of congressional majorities would limit what he can achieve,
but an AMLO presidency, particularly if NAFTA’s future remains uncertain, would bring significant market risk to Mexico.

eurasia group | 11

US-Iran relations
Trump has it in for Iran; rightly or wrongly, he sees the country as
the root of much evil in the world. In 2018, US-Iran relations will bea source of broad geopolitical and market risk. The nuclear deal,
known as the Joint Comprehensive Plan of Action (JCPOA), willprobably survive 2018, but there’s a substantial chance that it won’t,
pushing the region into a period of real crisis.
The US plans to implement a holistic strategy to combat Iran’s regional influenceand its nuclear ambitions. That means strong support for Saudi Arabia and more
active US efforts to contain Iran in Syria, Iraq, Lebanon, and Yemen. The US will
also more frequently sanction Iran for ballistic missile tests, perceived support
for terrorism, and human rights violations. And Trump’s public support for ongoing protests in Iran will further spike tensions.
Iran will push back, including by harassing US naval vessels, a gambit that canlead to deadly and escalatory action. Proxy conflict could kill embedded Iranianor US troops. Saudi Arabia and its risk-acceptant crown prince could perceive US
support as a green light to go after Iran, creating the danger of overreach. Tense
Iran-Saudi relations will carry the risk of mutual cyberattacks and pose challenges for investors who seek to invest in both countries.

If the nuclear
agreement fails,
the world willenter a new
and dangerous
dynamic

That’s bad enough, but worse is what happens if the nuclear agreement collapses.
At this juncture, the deal will probably survive by a hair. Trump’s shock-and-awe
rhetoric surrounding his 13 October decertification will probably mellow as his
bottom-line policy emerges. The EU and its member states will resist Trump’s
main demands to “fix” the deal. Iran receives major financial benefits from thedeal and will work to keep it intact.
All that said, the nuclear agreement could well fail in 2018. Iran’s withdrawal fromthe deal is the most likely path to failure. This outcome would not happen quickly,
as Iran would blame Washington and try to keep the European nations on its side.

Top Risks 2018 | 2 January 2018

eurasia group | 12

US-Iran: A game of chicken
1 FEBRUARY
National Security Adviser Michael
Flynn announces that President
Donald Trump's administration is

19 MAY

President Hassan Rouhani is re-electedwith 57% of the vote, defeating Ebrahim Raisi“officially putting Iran on notice”

17 JULY

following a ballistic missile test

Trump issues second

certification

18 APRIL

Trump issues firstcertification of the Irannuclear deal

13 OCTOBER

Trump declines to certify
the accord, arguing that thelimits on Iran’s program are not“appropriate and proportionate”
to sanctions relief. Rouhani says
Trump’s address is full of“baseless accusations”

21 MAYIn Riyadh, Trump declares that Iran has“fueled the fires of sectarian conflict
and terror” for decades and calls on “allnations of conscience” to isolate Iran

Source: Eurasia Group

But Tehran agreed to the deal for financial reasons,to spur its economy and create jobs. A new executive
order that unilaterally alters the deal, new US sanctions, and newly hostile US rhetoric would all poison
Iran’s investment climate, scaring off FDI. Iran’s elite,
as 2018 unfolds, could decide under pressure fromhardliners that the deal is no longer in their interest.
Tehran would have a shot at winning the blame game,especially if the US has taken steps in material breachof the agreement.

acquiesce to a US demand to significantly reduce
their imports. If Iran offers both buyers a significant discount, about 300,000 barrels per day would
probably come off the market. Iran would ramp up
its nuclear program. It would at least break the seals
on its advanced centrifuges currently in storage andbegin large-scale experimentation and production
on more-advanced models. The threat of US and/orIsraeli strikes would again hang over the region andboost oil prices.

Or maybe Trump just ends it. That’s less likely, but
still plausible. At any point, the president can revoke
the waivers and end sanctions relief, killing the deal.
This president will likely become more unpredictable
as the Mueller investigation unfolds. Under immensepressure at home, he could decide to spike the deal.

In a less-likely scenario, Europe, Russia, and China
agree to a “JCPOA 2.0” with Iran. Trump backs down
on implementation or decides not to apply secondary sanctions. The president declares victory for the
benefit of his base without further rupturing transatlantic ties. While the pace of foreign investment
would slow, firms already established in Iran would
stay and others would eventually join them. European and Asian importers continue purchasing Iranianoil. Iran continues to comply with the JCPOA’s nuclear limits. The geopolitical effects of this scenario
are more limited. Still, tense US-Iran relations would
spill over into regional geopolitics. And concern overa hardline turn in Trump’s sanctions policy would
cloud investor sentiment toward Iran.

If the agreement fails, we enter a new and dangerous geopolitical dynamic. Regarding sanctions relief
and Iran’s nuclear program, two scenarios are possible. In the most likely, vigorous US enforcementof secondary sanctions leads most European andJapanese companies to leave Iran. Oil importers in
Europe, South Korea, and Japan decide against purchasing Iranian oil. But China and India would not

Top Risks 2018 | 2 January 2018

eurasia group | 13

The erosion of institutions
Avoid reform of political institutions, and even the strongest of themwill weaken over time. The legitimacy of institutions depends ontheir credibility and, as Secretary of State for Environment, Food andRural Affairs Michael Gove put it in the runup to the Brexit vote, “thepeople of this country have had quite enough of experts.” Acrossthe developed world (with the notable exception of Japan), popular
trust in technocratic/bureaucratic institutions has declined steeply,
in some instances as a result of direct political interference in theirwork. And so most of the advanced industrial democracies—thosecountries on the top right side of the “J Curve” (describing therelationship between stability and openness)—are starting to edge
down to the left. This will be an important global story in 2018.

Much of the US public believes the media is“politicized,” feeding conspiracy theories andpolitical movements that previous generations
would have considered unacceptable
In the UK, there is criticism of “remainers talking the country down” by fighting over
the terms of Brexit. In the US, partisan attacks on the non-partisan Congressional
Budget Office have become commonplace. Greek courts found the former headof the statistical office guilty of insubordination and breach of duty for revealing
the true size of the country’s deficits. Ever-larger segments of the public and theirrepresentatives have lost faith in the exercise of bureaucratic functions, inviting
the political capture of more organs of the state. It’s not an accident that the phrase“deep state”—which made its debut nearly a century ago in Mustafa Kemal Ataturk’s
Turkey—has now made its way to Washington and into the president’s tweets.

Top Risks 2018 | 2 January 2018

eurasia group | 14

In the US, the legitimacy of the mainstream media
has dramatically decreased. Much of the public now
believes that reporting is habitually “politicized,”feeding the growth of conspiracy theories andpolitical movements that previous generations would
have considered unacceptable. It has also eroded
faith in the electoral process by fueling anxiety thatthe country’s democracy is “rigged.” The growthof “fake news,” fears that voting systems can beof an increasingly toxic antiestablishment sentiment isstarting to erode the legitimacy of political institutions
in established democracies.
This trend will lead to market-negative tipping points incountries where institutions are most badly damaged
and least resilient. The result is often instability (seeVenezuela) or authoritarian rule (see Turkey). Both candegrade the investment climate, particularly when aParliamentary election turnout is falling in Europe
Czech Republic
Slovakia

100%

100%

80

80

Italy

Slovenia
LatviaRomania

Italy

FrancePortugal
60

60

50

Czech Republic
Slovakia
LatviaPortugalSlovenia
France

40

40

1990

1993

1996

1999

2002

2005

2008

2011

2014

Romania

2017

Source: International Institute for Democracy and Electoral Assistancemanipulated by candidates, the gerrymandering of
districts, and rules designed to make it harder to voteare all discrediting the voting process. Lower turnout
in elections across Europe and the US demonstrates
growing public apathy. Protest votes among those who
do turn out have become more common.
We’re also seeing the broad erosion of political institutions across eastern Europe, in Spain, Turkey, Brazil,
South Africa, and other countries. The rise of populism across the developed world and, increasingly, inemerging markets, isn’t yet having a dramatic impact
on policymaking. Special interest groups remain too
powerful, the disenfranchised too weak, and chronic
problems too complex for most governments to bringabout dramatic changes in policy. But the expansion

Top Risks 2018 | 2 January 2018

president’s cronies control the economy. Weakened
institutions also heighten unpredictability in policymaking. Institutions are guardrails; strong courts andmedia lessen dependence for stability on powerful(sometimes erratic) individuals.
Lastly, institutional erosion across many countries
risks structural instability in the global system. Today’s
disgruntled middle classes in emerging markets would
have a more direct route to power, as would the developed market “left-behinds” from globalization. Absent
solutions from global leaders—which aren’t in the offing in the foreseeable future—traditional state-based
international relations will become more and moreunstable. Conflict will become more frequent, decision-making degraded, and internal chaos common.

eurasia group | 15

Protectionism 2.0
Thanks to populist pressure, the spread of state capitalism, andthe ongoing geopolitical recession, protectionism is making acomeback. The rise of antiestablishment movements in developed
markets has forced (in some cases, enabled) policymakers to
shift toward a more mercantilist approach to global economic
competition and to look as if they’re doing something about lost
jobs. Walls are going up.
At the international level, growing Chinese assertiveness—particularly in buying
up strategic foreign assets—has created concern that intellectual property transfers are taking place at a pace and scale that demands a political response. That all
this is happening in the context of today’s G-Zero world and the general retreat of
US leadership means that no one leader has proved willing and able to ensure thatnew rules of the game are written to manage these fast-paced transformations.
Together, these trends create Protectionism 2.0, with its barriers in both the “old”
and “new” economies. Governments aren’t just trying to protect comparativeadvantages in traditional sectors such as agriculture, metals, chemicals, and machinery out of concern for lost jobs or domestic economic interests. They’re alsointervening in the digital economy and innovation-intensive industries, with theprimary goal of preserving intellectual property and related technologies as critical components of national competitiveness.

Governments
are intervening
in the digital
economy andinnovationintensive
industries topreserve IP
and related
technologies

The new barriers are also less visible. Instead of traditional measures such asimport tariffs and quotas, today’s tools of choice include “behind-the-border” measures such as bailouts, subsidies, and “buy local” requirements designed to bolster
domestic companies and industries. These measures don’t necessarily circumvent
WTO commitments; they rely on a collective inability to update and strengthen
existing global trade rules.

Top Risks 2018 | 2 January 2018

eurasia group | 16

Governments are erecting two tiers of barriers
Number of measures implemented
Trade defense
Import tariff
State aid
Trade financePublic procurement
localization
Other localization
requirement

This trend will create new trade risks for 2018. First,
new rules are being written for the global economy
without any overseer or shared norms, so checks andbalances against a surge in protectionism are lacking.

Export taxes or restriction
Non-tariff barrier
Investment measure
Export incentive(other than trade finance)
0

300

600

900

1,200

1,500

Classic measures

Nov 2008 to Jan 2015

Since Jan 2015

2.0 measures

Nov 2008 to Jan 2015

Since Jan 2015

GrowthClassic measures

38%

The new form of protectionism generates more acrimony because it is often targeted at political adversaries. In short, it matters where the trade and investment comes from. The origin and regulation of FDI isincreasingly politicized, as states grow anxious about
foreign control of domestic champions and sensitivetechnologies. Suspicion is greatest between Europe/
the US and China/Russia.

32%

Source: Global Trade Alert

Top Risks 2018 | 2 January 2018

2.0 measures

62%

68%

Second, because this new protectionism will coexist
with a continuing push for regional free trade agreements, the global regulatory environment will become
more complex and contradictory. Companies and investors will have to manage more complicated supply
chains and navigate more restrictions to data flows andother barely discernable or invisible barriers. The costof doing business will rise, and supply chains will beless reliable. Consumers will bear the brunt of losses.
Finally, while economic protectionism may seem likea benign means of international competition, thepolitical resentment it will create among major powers
risks spilling over into other areas of diplomacy. Protectionism 2.0 will eventually inflict greater geopolitical damage than those who practice it expect.

eurasia group | 17

United Kingdom
2017 may not have been fun for the UK; 2018 will be worse.
The country’s troubles will come from both acrimonious Brexit
negotiations and difficult domestic politics.
On Brexit, December’s deal to move Article 50 negotiations fromdivorce issues to those concerning future relations won’t lead tosmooth sailing for Prime Minister Theresa May. The issues that must
now be negotiated are too complex and the politics too divisive.
Northern Ireland will provide a major headache. Although last year’s deal commits
the UK to avoid creating a hard border between Northern Ireland and the Republicof Ireland, the means of evading this problem remain unclear. Some type of border
will have to exist after the UK leaves the EU, even if limited regulatory alignment
between the Irish parties is agreed. But any special deal for Northern Ireland
would set a dangerous precedent, as other regions in the UK would want the samething. This will be one of the trickiest issues to resolve, especially under the current political configurations in London and Dublin.

The prime minister could lose her job overher management of the Brexit process
There’s more. Negotiations over the money the UK will have to pay the EU are far
from over. Any final amount will be paid only if the UK likes what it gets on trade,and that’s a tough conversation. As “nothing is agreed until everything is agreed,”
the fragile deal reached late last year could unravel. Negotiating transitional arrangements for the UK to avoid WTO tariffs in March 2019 won’t be easy either.
On the question of British leadership, May will probably retain the premiership in
2018, but her management of the Brexit process could cost her the job. There are two

Top Risks 2018 | 2 January 2018

eurasia group | 18

possible scenarios if she goes—both market negative.
In the more benign, May would be replaced by a more
hardline Tory figure through a sort of palace coup. This
would significantly complicate Article 50 negotiations.
The more negative scenario is a new election that leads
to Labour Party leader Jeremy Corbyn replacing May.
This would hurt both Article 50 negotiations and domestic economic policy.
The likelihood of each scenario will depend on May’sability to outline an end-state relationship with the EU
and navigate Article 50 negotiations. To do this, shewill have to more clearly define what her government
wants: remaining economically close to Europe andsubservient to some of its rules, or prioritizing its
independence, irrespective of the economic risks thatbrings. The cabinet is divided. If May prioritizes economics, her right would move to oust her, and a hardliner would probably replace her. If she prioritizes
sovereignty, pro-European Tories and the opposition
could veto the deal she brings home when parliament
votes on Article 50 this autumn. The government
wouldn’t survive such a loss—and Corbyn would probably win an early general election.

Brexit: 2018 won’t be any easierFirst quarter

28-29 June

October-March 2019

European Council
EU prepares legal text of withdrawal
agreement; scopes future framework; and begins
negotiations with UK on transition

Start of Article 50 voting process

18-19 October

European Council

April-October
22-23 March

European Council








EU–UK negotiations
on parameters of theend-state







12-14 December

European Council














Theresa May’s 2018 survival prospects

55% May survives

30% May is replaced

15% Early elections

Top Risks 2018 | 2 January 2018

eurasia group | 19

Identity politics in southern Asia
Identity politics in Europe and the US has taken center stage inrecent years, and we’ll see more evidence of a similar phenomenon
in Southeast Asia and on the Indian sub-continent in 2018. This trend
threatens the future of these increasingly prosperous regions, creating
unexpected challenges for economic planners and foreign investors.
Identity politics in southern Asia comes in several forms: Islamism,
aversion toward Chinese and other minorities, and an intensifying
Indian nationalism.
Islamism in parts of Southeast Asia fuels local forms of populism, most prominently in Indonesia and Malaysia. In Indonesia, fears that the country’s majority
Muslim population are victims of economic and political injustice empower Islamist groups, working in parallel with other opponents of President Joko Widodo(Jokowi), to exploit this resentment for political gain. Identity politics will continue
to shape the Indonesian political landscape as the country heads toward the 2019presidential election. Political Islam is also becoming more prominent in Malaysia,
where Prime Minister Najib Razak continues to court the Muslim Malay vote to winreelection later this year.
There is also growing anti-Chinese and anti-minority sentiment across the region.
Resentment of the ethnic Chinese, who hold a disproportionate share of several
countries’ wealth, has long been an issue in Indonesia. But these sentiments havemade a strong recent comeback, most notably during the successful activist-led
campaign to defeat and imprison the ethnic Chinese former governor of Jakarta.
Elsewhere in Southeast Asia, the persecution of Myanmar’s minority Muslim Rohingya, not formally recognized as citizens by Myanmar’s government, has triggered the worst humanitarian crisis the region has seen in decades.

A belief that
Muslims are
victims of
economic andpolitical injusticeempowers
Islamist groups
in Indonesia

In India, after the secularism, socialism, and engagement with Muslim-majority
countries that were cornerstones of the Congress party’s vision for the country,
Prime Minister Narendra Modi and the ruling Bharatiya Janata Party (BJP) will

Top Risks 2018 | 2 January 2018

eurasia group | 20

Economic implications of rising Muslim
populism
Fiscalspending

Foreigninvestment

Goods

Growing political focus on inequality
will lead to greater spending that could
heighten fiscal pressures

Greater uncertainty for foreign investors
with mounting social tension and rising
Muslim populism reinforcing nationalist
sentiment (especially in the natural
resources sector)
Mandatory halal labeling, due to takeeffect in October 2019, will affect a rangeof sectors, including food and beverage,
pharmaceuticals, and cosmetics; it willalter the competitive landscape and could
be used as a non-trade barrier to benefit
domestic producers

Source: Eurasia Grouptry to use Hindu nationalist rhetoric and policies to
win and retain support from Indians angry over the“appeasement” of Muslim and other minority groups.
Even agnostic or moderate Hindus question the decades-old Congress model, making the BJP’s opposing vision palatable to them. Hinduism (or Hindutva)
will increasingly form the basis on which the BJP
seeks to unite a majority of Indians.
Islamism, anti-Chinese and anti-minority sentiments, and ever-fiercer Indian nationalism create
risks for the region’s business environment. Secular

Top Risks 2018 | 2 January 2018

democracy in Indonesia will prove resilient, but populist pressures and the Islamization of politics will
undermine the legitimacy of the country’s democratic institutions and governance, and they will weaken
the country’s rule of law.
On the fiscal side, Jokowi is likely to address inequality by engaging in social welfare spending that, while
beneficial to Indonesians, will hurt the country’s macroeconomic balance. On regulatory issues, mandatory
Halal labeling will take effect in 2019, affecting products sold in sectors including food and beverage, pharmaceuticals, and cosmetics. This will increase regulatory costs for corporates. Rising Muslim populism also
reinforces economic nationalism and protectionism.
The Islamization of politics has also made it harder topass tougher anti-terror laws, and Islamic populism
creates a more conducive environment for Islamic State
fighters returning from the Middle East to spread theirideology and find recruits, increasing the risk of attacks
in the region. Heightened social tensions also makewealthy ethnic Chinese business owners less likely torepatriate money they have long held in offshore locations such as Singapore, negatively impacting Indonesian and Malaysian attempts to raise tax revenue.
In India, the danger is that Modi’s use of nationalism
to consolidate his support ahead of the 2019 election
could give cover to radicalized elements of society thatwant to target Muslims and lower caste Hindus, leading to risks of localized instability.

eurasia group | 21

Africa’s security
The “Africa Rising” narrative remains appealing, but this year will facea new challenge. The continent’s core countries (Cote d’Ivoire, Nigeria,
Kenya, and Ethiopia, among others) have recently demonstrated
robust investment climates, and they’ve been generally sealed offfrom the troubles of the “periphery” (Mali, South Sudan, Somalia, etc.).
But in 2018, negative spillover from Africa’s unstable periphery will
increasingly spoil the continent’s success stories.
The threat lies in security risks: militancy and terrorism. The dangers posed by Al
Shabaab in East Africa and Al Qaeda in West Africa are not new, but they’re set tointensify. Despite losing territory in 2017, Al Shabaab is still carrying out successful one-off surprise attacks and will look to more international targets in 2018. The
Islamic State is likely to increase activity in West Africa and expand into East Africa
as it is pushed from traditional strongholds in the Middle East.

Countries targeted by militancy andterrorism are more vulnerable than they’vebeen in years, and external partners areless able to provide unified support
Target countries are more vulnerable than they’ve been in years, and external partners are less able to mount a united front of support. Local actors in “core” countries are already suffering from weakened political capacity. Kenya’s government
will focus on economic recovery after a prolonged election cycle. Nigeria enters anelection season with uncertainty over its current leader’s health. South Africa faces
internal political strife. Angola is busy with a fresh leadership transition. Mozambique is still struggling with a years-long debt scandal.
Foreign partners who have helped stabilize weak governments in the past are distracted. In the east, a preoccupied Europe has reduced its salary support for troops

Top Risks 2018 | 2 January 2018

eurasia group | 22

of the UN-mandated African Union Mission to Somalia operating in the Al Shabaab hotspot. Across theSahel, the G5 counterterrorism partnership of Chad,
Niger, Burkina Faso, Mali, and Mauritania plans tolaunch a 5,000-strong force in March 2018. But differences among France, the US, and UN officials willslow the necessary funding, leaving the region at risk,
despite an injection of financial support from Saudi
Arabia and the UAE.
The growing fragility of Africa’s top performers has
several implications. Kenya, Nigeria, Uganda, andEthiopia face increased security costs at a time when
their governments need to reduce spending. A spikein attacks would also undermine foreign investment
perceptions already shaken by the election-related
violence in Kenya, a growing social protest movementin Ethiopia, and presidential succession uncertainties
in Nigeria and Uganda.
Foreign investors may see their assets directly targeted. Tourist and energy installations will be especiallyat risk. This will put downward pressure on FDI into
the continent, leaving development reliant on limited local capital. And the pressure of security-related
refugee flows—on countries in the region and in Europe—will not abate, creating a headache for policymakers on both sides of the Mediterranean.

G5 Sahel force funding gap remains wide (€ million)€50.76

US€50.00G5 member states€8.00€129.24

Amount remaining€100.00

Saudi Arabia€50.00EU€30.00
UAE

France€5.00

The Netherlands

Note: Rough estimates based on current public pledges
Source: Eurasia GroupTop Risks 2018 | 2 January 2018

eurasia group | 23

Red herrings
Trump White House
Yes, the tax bill was a Trump and GOP triumph. In 2018, though, the reality remains that Trump is the weakest US president in decades in a system where evena strong president can’t get much done. No one can stop Trump from tweeting, but
280 characters do not equal policy. He has a razor-thin margin in a Senate with asmall number of senators of his own party that have turned against him. Divisions
are widening among Republicans in the House of Representatives. And Trump
faces the risk of a significant loss of congressional seats after midterm elections.
For 2018, he can at most follow through on a limited number of ongoing legislative
priorities and some executive orders. If there’s a major crisis (please see risk #2:
Accidents), we’re all in trouble. Barring that, this is a White House that’s headed
toward massive distraction from a Mueller investigation nearing conclusion. That
promises a year of blazing one-day headlines but almost nothing that moves theneedle on policy.

Trump tweets 25x more than he signs bills into law(20 Jan 2017 - 21 Dec 2017)

2,389 tweets
7.11 tweets per day

94 bills signed into law
0.28 bills signed per day

Source: Trump Twitter Archive, Gov Track Insider

Eurozone2018 will be another eventful year for Europe. Germany must regain its footing
after a tumultuous electoral season, Italy will face a contentious election, andPresident Emmanuel Macron’s war on vested interests won’t become any easier inFrance. But a close look at the trajectories of individual countries in the Eurozone
suggests the region looks set for another relatively constructive year after surprising observers to the upside in 2017.

Top Risks 2018 | 2 January 2018

eurasia group | 24

The German polity will pull together and recoverfrom its recent jitters—at least for the next few years.
French reforms may not be a cakewalk, but the Macron government will introduce new vocational training and reform unemployment benefits in coming
months. Italy risks coming out of its election season

with a weak coalition government or even an outrightradical euroskeptic one, but in neither case will thecountry’s economy fall apart. Nor will Italians opt toleave the Eurozone or the EU. European politics willcontinue to keep us busy in 2018, but the Eurozone
should have yet another modestly encouraging year.

Venezuela
The country is now bordering on hyperinflation, technically in default, and facing acute shortages of themost basic goods. But despite an economy in freefall,
President Nicolas Maduro heads into 2018 in a relatively comfortable position. He has consolidated control of the country’s institutions, enjoys military support, and has effectively divided and demoralized the
opposition, leaving it with no capacity to force regimechange. The 2018 presidential election will be held on
Maduro’s terms and against an opposition candidateof his choosing, even if doing so comes at the expenseof greater international isolation, a tradeoff the regime is ready to stomach.

Top Risks 2018 | 2 January 2018

The deepening economic crisis leaves social conditions fragile, with a small risk that the country’s socio-political fabric could explode sometime this year.
Yet even in such a scenario, the outcome would bepositive, because massive and sustained unrest would
likely prompt the military to finally abandon Maduro,
leading to a negotiated transition, new elections, anda constructive opposition government. Such a transition could be preceded by a short period of uncertainty, but the risk of this spiraling into a civil war or
having a more acute spillover effect across the region
would be negligible.

eurasia group | 25

It’s hard to believe, but Eurasia Group turns 20 this year.
We’re no longer teenagers (that’s more obvious with Cliff).
There’s a real political risk industry these days; who knew
when we started that it would be such a big deal? We’re
proud to be leading it.
Thank you so much for your support over all these years.
It means the world to us. Big things coming from Eurasia
Group this year. Can’t wait to share.

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