The Most Important Political Risks to Keep Track of in 2012

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With the fate of the Eurozone, North Korea, and other governments in question, will the new year prove as politically momentous as 2011? 

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Now an annual tradition, Eurasia Group unveiled its top ten political risks for 2012, a year that is already anticipated to be highly political. Like last year, in which the top risk was both a shift of, and challenge to, global institutions embodied in the concept of the "G-Zero," this year also identifies the #1 risk as global in nature. To wit: 

As we begin 2012, political risks dominate global headlines in a way we've not experienced in decades. Everywhere you look in today's global economy, concerns over insular, gridlocked, or fractured politics affecting markets stare back at you. Continuation of the politically driven crisis in the eurozone appears virtually guaranteed. There is profound instability across the Middle East. Grassroots opposition to entrenched governments is spreading to countries such as Russia and Kazakhstan that were thought more insulated. Nuclear powers North Korea and Pakistan (and soon Iran?) face unprecedented internal political pressure.

Paradoxically, political risk has become so fashionable that its effects are now frequently overstated. Those 2012 political handovers in countries totaling some 50% of the world's GDP? They're not such a big deal this year, whether the democratic elections in the United States and France or managed authoritarian transitions in China and Russia. Moreover, serious challenges to national decision-makers doesn't mean that governments are all poised to buckle under pressure. The eurozone isn't heading toward fragmentation (one of the most consistently over-exagerated risks out there). The American economy is more resilient than many believe. And a Chinese hard landing? Not if Beijing can help it--and it can--in 2012.  

So the big challenge, for risk analysts and for corporate decision-makers and investors, is in carefully weighing the risks in a world of ever-increasing information, data, and commentary (much of it noise). Our top risks of 2012 are meant to provide you with tools, signposts, and our best judgments on where all these stories are heading--and on how some stories that you're not reading about elsewhere might prove more important than people think.

The most important macro theme for 2012: The world's key political decision-makers will be focused heavily on questions of domestic economic stability at the expense of international security concerns at a moment when politics is having unprecedented impact on the global economy. This conflation of global politics and markets defines the formal end of the 9/11 era, a moment when decision-makers sought to isolate globalization from international security concerns. The end of the 9/11 era is our top risk for 2012.

While the Eurozone and North Korea make the top five, less discussed issues like Venezuelan election volatility and rising populism in South Africa also make the list. Though these concerns are not incessantly splashed across headlines, the possibility of these scenarios materializing could shake investor confidence. And interestingly, this year's "red herrings" eschew the conventional wisdom on the inherent uncertainty that accompanies a year filled with political transitions from Paris to Beijing: 

2012 political transitions

In addition to elections this year in Mexico, Venezuela, Kenya, Taiwan and (maybe) Egypt, 2012 will see political transitions in the US, China, Russia, and France, countries that together represent about nearly half of global GDP and four-fifths of the UN security council. Yet there is surprising little at stake here for geopolitics and the global economy. Whatever risks come with these outcomes will arrive in 2013 or beyond.

The two biggest transitions--in America and China--will go smoothly. Governance in the United States is constrained mainly by structural factors--an entrenched and powerful private-sector lobby and a system that forces two parties to jostle for majority hold of a Congress that neither can fully control. Despite the rhetoric and the punditry, the presidential candidates still veer toward the center in two-party, executive-led America (that's somewhat less true in Congress). And, of course, there's no actual impact until 2013. In addition, for the rest of the world, there is less to the foreign policy differences in this race than the rhetoric might lead you to believe, at least when it comes to Republican candidates (Romney) with a genuine chance to win.

In China, the regime's greatest political success has been the institutionalization of what is essentially a term-limits system for its entire senior leadership, making transitions, the Achilles heel of authoritarian regimes, much less challenging. In 2012, China will have a new slate of next generation leaders, and without a single strong, charismatic force capable of dominating the policymaking process.

It's rule by consensus. We're long past the days of Deng Xiaoping or Zhu Rongji, and it will take a year minimum for that new group to come together and start implementing a new strategic plan, which itself will represent only an incremental change from what we've seen for the past five years. It's big headlines, not much impact.

In Russia, despite unprecedented popular protests in recent months, there's not going to be a lot of suspense on election night as Vladimir Putin retakes the presidential reins. Despite the impressive crowds of recent days, there is no Arab Spring on the horizon in Moscow. Kremlin-sponsored opposition parties will take considerable wind from the sails of Russia's demonstrators. President Dmitry Medvedev may well be left by the wayside, but that's not going to affect Russian governance. For 2012, Putin will spend money and co-opt elites to ensure that everything goes as close to Kremlin plan as possible. There's room for a little embarrassment, a rogue uncle turning up at the party, getting drunk, and embarrassing his family. But the holidays go on, and so does Russia. Not much to see here.

In France, Sarkozy looks weak, no question. At this point, it's tempting to call the election for François Hollande. That could very well change, but the candidates' positions on the issue that matters most for markets--the fate of the eurozone--are quite similar.  

As many are surely preoccupied with Mitt, Ron, and Rick in Iowa over the next few days, each one of them will have to deal with Jinping, Nicolas, Vladimir, and Jong-Un between now and November. 

The full report can be read here. 
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Damien Ma is a fellow at the Paulson Institute, where he focuses on investment and policy programs, and on the Institute's research and think-tank activities. Previously, he was a lead China analyst at Eurasia Group, a political risk research and advisory firm.

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