Citi Presents 14 Global Hot Spots That Have The Potential To Explode

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The European economy is deteriorating and leaders across the continent are being booted from office in favour of a new generation of politicians. Rising tensions in the Middle East and uncertainty over leadership changes in emerging markets worldwide are adding to investor concerns.Tina Fordham, Senior Global Political Analyst at Citi, is out with her mid-year outlook, presenting all of the bank’s views on all of the biggest political risks emanating from the world’s key hotspots over the remainder of this year and into 2013.

With key elections ahead, unresolved conflicts that continue to roil entire regions, and rising nationalist sentiment in major world economies, investors will want to stay abreast of developments on the international political scene.

Russia is still protesting Putin's recent rise to the presidency

The last time Russia staged protests as big as the ones over Vladimir Putin's recent re-election to the presidency, the Soviet Union collapsed.

Fordham notes that protests have continued longer than most had expected them to, writing that 'softening oil prices and plans for restrictions on free speech signal the possibility of a sustained period of tensions ahead, as Russia's newly-energised middle class may seek to continue its challenges to the regime.'

Source: Citi

France's new Socialist government is characteristic of the new Europe

Eight of the nine eurozone countries that have had elections in the last year and a half (including France) have ejected incumbents from office. And France, like others, did it on anti-austerity campaign platforms. Fordham says the impact that the success of that strategy will have on future eurozone elections is is significant.

Fordham writes that 'as pro-austerity and pro-bailout sentiment in the 'soft core' also weakens, we believe tensions between Germany and other eurozone member states could increase.'

Source: Citi

Greece could become a 'critical fragile state'

Even if Greece leaves the euro, Fordham says it would probably still be on E.U. life support as a 'critical fragile state' for a long time anyways.

Fordham cautions, 'More broadly, amid the sharp reversal of living standards, growing evidence of social dislocation, including hunger, homelessness and the risk of violent disruption in Greece is also a cause for concern.' And it could go beyond just Greece.

Source: Citi

The Netherlands has an important yet impossible-to-read election ahead

Fordham calls the upcoming Dutch elections on September 12 a 'key signpost for public sentiment in one of the eurozone's most important creditor countries,' calling the victory of an anti-austerity party 'a significant blow.'

However, due to the extremely diverse and unpredictable nature of Dutch politics, it's hard to get a read on the situation until after the election, according to Fordham.

Source: Citi

Italy's political stability is key to holding together the eurozone

Fordham calls stability in Italy 'critical,' noting that popular support for anti-establishment opposition parties is on the rise and that popular opinion of Mario Monti's government and his 'tough reform packages' is waning.

Although former Italian prime minister Silvio Berlusconi is looking to return to politics, Fordham notes that 'surveys suggest that his return to politics would not markedly affect the Right's chances for victory.' She also says the chances of early elections in November are low and that they will probably happen in the spring.

Source: Citi

Egypt is extremely divided after its first democratic election in 53 years

Egypt's first democratic election in decades pitted Mohammed Morsi, the Muslim Brotherhood candidate, against Ahmed Shafik, Hosni Mubarak's last prime minister and a high-ranking official in the Egyptian military.

Morsi was only able to win the election by the narrow margin of 52 per cent to 48 per cent. Fordham calls this a sign that 'Egypt's post-Mubarak divisions are evident, suggesting Morsi faces significant challenges in unifying the country,' saying that 'In all likelihood, both sides will continue testing the other's resolve in a continued political tug-of-war.'

Source: Citi

Libya re-elected many of Gaddafi's former officials in July elections

Fordham says that many 'key figures' in the new government in Libya that was formed after the July 9 elections are former Gaddafi officials, like Mahmoud Jibril, the opposition leader who 'was himself Gaddafi's top economic planner before becoming an early defector.'

As Libya undergoes a transition from dictatorship to democracy, its connection with the outside world given its oil producer status could help facilitate a smooth changeover, according to Fordham.

Source: Citi

Syria is a ticking timebomb right in the heart of the Middle East

Syria has descended into downright civil war and up to 19,000 civilians have been already killed. To Fordham, a collapse of the Syrian state is looking like an 'increasingly possible scenario,' and the Syrian stockpile of chemical weapons could be a game-changer for international involvement in the conflict.

Its location in the middle of a volatile region in the Middle East means there is concern for potential spillover effects into neighbouring countries like Iraq.

Source: Citi

There's a one in four chance that Israel strikes Iran before November

Israeli public support for a strike on Iran is low according to polls. However, given ideas among the Israeli leadership like the 'zone of immunity'--a point of no return where it would be too late to stop Iran from getting nuclear weapons--Fordham says 'the risk of a unilateral attack is substantial.'

Fordham writes that the chance of a strike is 'as high as 25% in our view, and could increase in the first half of 2013 if no action takes place ahead of US elections.'

Source: Citi

Saudi Arabia's political transition could mean key changes on oil policy

Venezuela's president, Hugo Chavez, may be really sick with cancer

Fordham is sceptical of the official line on the health of president Hugo Chavez, saying that the country faces elevated 'key man risk' right now with his well-being in question.

Chavez has been behind the wheel in Venezuela for 13 years, and Fordham says that the aftermath of his death would be uncertain, writing, 'It may be the case that the death of the leader before an election could trigger a postponement, opening up the possibility of a change in policy direction. It is less clear whether the death of the leader soon after the elections would be as orderly, with the more likely scenario being outcries over the fairness of the electoral process and a vying for positions among the ruling elites.'

Source: Citi

New political leadership in both North and South Korea could decrease the tension

South Korea has a big election coming up on December 19. The current government is right of centre and has taken a hard line against North Korea. However, Fordham notes it appears likely that a more centrist candidate, Park Geun-hye, will be the next president.

In North Korea, Fordham says she doesn't 'think that a North Korean form of glasnost is emerging, but it may be that the younger Kim is seeking to differentiate himself from his father,' writing that 'regardless, new leadership in Pyongyang and a potential move towards the political centre in Seoul provide scope for optimism over a reduction in tensions on the peninsula going into next year.'

Source: Citi

China is undergoing a major political transition while outside pressure increases

Hu Jintao, who has been president of China for 10 years, is set to pass the reigns to a successor next spring. While a recent Pew poll showed that 82 per cent of China is pleased with the way things are going there, Fordham notes that China faces some outside pressure.

Fordham says that 'relations with China will also figure prominently in the US presidential campaign' and that tensions in the South China Sea are on the rise because 'neighbouring Vietnam and the Philippines, in the midst of an offshore oil & gas boom, may seek to challenge China given the higher economic stakes.'

Source: Citi

The United States election results may be largely out of the candidates' hands

Fordham says that international events are substantial risks that have to be factored into predictions of the outcome of the November presidential elections in the U.S., writing that 'Obama's chances for re-election depend less on his own campaign or Mitt Romney's, than on the European policy-makers, the Chinese and the Iranians.'

Furthermore, Fordham projects that Republicans will maintain control of the House and gain control of the Senate, which will limit the chances that Congress will be 'able to overcome divisions' on the fiscal cliff.

Source: Citi

Check out Morgan Stanley's country-by-country breakdown of Europe

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