But, contrary to the self-indulgent myth, appearances are not reality. The reality is that Iraq is not synonymous with the war, and the U.S.-jihadist war is not the most important thing going on in the world.

In 2006, the Russians began aggressively transforming the face of Eurasia, moving to reclaim the sphere of influence they lost in the 1990s. And China started to deal with its severe financial problems -- chiefly, by avoiding the consequences. It let the economy roar ahead, failing to bring it under control -- and thereby buying time while it increased the power of the Communist Party and the security apparatus, making sure that whatever fallout there is will not endanger the regime. In 2007, Russia and China certainly will rank as least as high in importance as the U.S. conflicts in the Muslim world. Indeed, these developments will force the United States to reconsider just how many resources it can afford to devote to the jihadist war when faced with an increasingly dangerous world filled with great powers, if not superpowers.

The year 2006 ended with U.S. President George W. Bush trying to recoup in Iraq. With the Iranians blocking the emergence of a coalition government in Baghdad, it became clear that the Iranians expected the United States to fail in Iraq. Indeed, following the U.S. elections in November, most reasonable people expected the United States to begin withdrawing forces. If that were the case, the United States would have no ability to influence events in Iraq. Bush chose to confound expectations by actually increasing the number of troops. The term "surge" is a misnomer. Still, it was not what was expected, and Bush's hope is that this strategy will cause all parties to the war to reconsider their comfortable assumptions about the United States in Iraq.

In 2007, we will see whether the strategy succeeds. The fact is that the United States cannot simply withdraw forces from Iraq, as that would leave Iran the dominant power in the region. That is an unacceptable outcome for the United States, and for Saudi Arabia and other Persian Gulf states. However, an increase of about 20,000 troops will not provide the resources needed for a military solution. At the same time, the Iranians are risking much too. If they overplay their hand, they know that the United States has both resources and limits. The United States is blocking Iranian ambitions as much as Iran is blocking American ambitions. As 2007 unfolds, this will open new possibilities for political arrangements. We would not be surprised to see some moves, however tentative, toward a political settlement in 2007. This war will not end in victory for anyone. That is the basis of all negotiations.

This will raise the broader question of al Qaeda. The situation in Afghanistan has deteriorated dramatically. As we have always argued, the Taliban retreated from the cities, but they never were defeated. Now they are back. The Soviets failed to defeat the Afghans with 300,000 troops and an endless supply of ruthlessness. The United States and its allies will not succeed with a small fraction of that number. The war against jihadists has now spread to Somalia and elsewhere. Iraq is not the whole of the war by any means, and in 2007 we expect to be hearing a great deal more about problems -- military and otherwise -- in the rest of the Muslim world, from the Atlantic to the Pacific.

Meanwhile, the weakness of the Bush administration clearly is not ending. Bush seems to be acting decisively, until one considers how small his room for maneuver actually is. These things happen periodically in the United States. Presidents Nixon, Johnson, Truman -- all ended their years in office unable to wield power. The United States always recovers from this. Nevertheless, such cycles in the presidency create opportunities for other powers to act. Whenever the world's leading power moves toward political paralysis, others become much more aggressive. We see this and will continue to see this in places from Venezuela to Asia. But the most important actions will be taken by the great powers, Russia and China.

Russia has clearly reasserted itself. The state is now the center of both Russian society and economy. Russia now clearly intends to return to being the center around which all former Soviet states revolve. Moscow has discovered, not surprisingly, that energy and other natural resources provide it with a tremendous lever in the region. That, plus the ubiquitous Russian intelligence service, allows the Russians to shape the region. At the moment, given U.S. preoccupations, the response of the Americans to the Russian resurgence has not been substantial. The Russians would not be deterred anyway; for them, this is a matter of fundamental national interests. But they also need not be concerned: The United States has neither the appetite nor bandwidth for resistance.

We expect the Russians to continue to step up their regional assertiveness through the coming year. We already have seen crises all around the Russian periphery, and we expect to see more. At a certain point, the Russian desire to dominate the former Soviet sphere will clash substantially with U.S. and other interests, including those of the Chinese. The Russians are not foolhardy, but they are feeling their strength. The way business is conducted in Russia has changed dramatically in the last couple of years: Who you do business with and how you do it has changed. Now, those changes will be extended to the region. The Russians do not intend to exclude Western economic interests from their sphere, but they do intend to make certain that those economic interests behave in ways that suit Russian national interest.

The Russians will not be solely concerned with what they call their near abroad. They are masters of leverage, and they know the United States is bogged down in Iraq and the Muslim world. They have made it clear to the Americans that it cannot be assumed that Russia will simply support the U.S. position on international issues. Moscow's position on Iran and Syria has been unacceptable to the United States. But then, Washington's position on Ukraine and Georgia has been unacceptable to the Russians. The Russians will continue to exacerbate problems for the United States in the Muslim world. They want to limit American power, and they will use such means to do so.

The Chinese are looking inward primarily. Their problem is internal, with a huge overhanging portfolio of nonperforming and troubled loans. A conservative estimate is that bad loans in China equal about 40 percent of gross domestic product. A more reasonable estimate is about 60 percent. These numbers closely resemble those of Japan in 1990 and tower over those of South Korea or Taiwan in 1996. The Chinese have huge currency reserves -- but then so did Japan, South Korea and Taiwan. Those reserves historically have not stabilized Asian banking systems when the consequences of undisciplined lending come home to roost. Chinese enterprises have used exports -- as did Japan and South Korea and Taiwan -- to maintain cash flow to pay loans. But surging profitless exports merely exacerbates the problem. The Chinese government tried to stop the runaway train in 2006; it failed to do so. Westerners have again confused high growth rates with economic health, as they did with Japan and East Asia. But where rates of return on capital are extremely low or even negative, high growth rates are a symptom of disease.

China's financial system already has changed dramatically from the way it was a few years ago. Internal lending and financing patterns have shifted, and foreign direct investment -- excluding money being recycled by the Chinese -- has declined substantially. Many deals that were launched with high expectations five years ago are facing substantial problems or failure. But the most important changes in China can be seen in their politics. The Communist Party chief in Shanghai and hundreds of his allies have been arrested for corruption. Incidents of resistance to land seizures have increased, bringing with them violence and arrests. The Party has reasserted itself as the master of the state, and the Chinese security services have increased their intrusiveness and vigilance. In China, putting off the reckoning as long as possible and controlling the social and political consequences as efficiently as possible are the orders of the day. Beijing is trying to regain control of the economy -- but it is more likely to do so through political power than through economic processes.

For Westerners, the question on China is, when will it crash? For the Chinese, the question is, how do you save the Party apparatus in the face of enormous economic and social stress? It should be recalled that Japan did not just fall apart one day. It experienced an enormous growth surge, followed by a managed decline of growth in which the pain was distributed economically. For China, the problem is the failure to slow growth. This failure has told the leadership that they need to increase the power of the state, and of the Party over the state. In a hundred ways, that is happening.

At the same time, China is becoming more insecure about its geopolitical position. Issues ranging from trade disputes to Taiwan are being exacerbated by the insecurity that clearly is being felt by Beijing. The regime sees the United States as a threat to its security over the long term, and is taking steps to assert itself against the United States. China's lasers hit U.S. satellites last year as a demonstration of prowess, and a Chinese submarine penetrated the perimeter of a U.S. carrier battle group. China is not about to undertake military adventures in 2007, but it also is not prepared to be a passive onlooker in the Pacific. There will be more friction.

The United States, Russia and China are the active great powers. The Europeans and Japan remain largely passive and reactive. They will not be shaping the global environment in 2007. Latin America will churn and shift, but there is no decisive event coming there. Africa remains what it has been. Thus, 2007 will be a year for great powers -- and for that matter, for those who would challenge great powers, particularly the United States.

Middle East: Pivoting on Developments Between Washington and Tehran

Our 2006 forecast said that the United States would succeed in creating a political solution in Baghdad that would allow for a drawdown in the Sunni insurgency and the implementation of a U.S. exit strategy from Iraq. For much of the year, this forecast held true: In June 2006, Abu Musab al-Zarqawi was killed in an airstrike followed by the complete formation of the Iraqi government and an announcement by the United States that it would reduce its force in Iraq by two brigades. Al-Zarqawi's death signaled a commitment from the Sunni bloc to the political process, and it was then up to the Shiite bloc to reciprocate.

However, we made a critical error in reading Iran's intentions at this point. The Iranians saw an opportunity to use their militant and political assets in Iraq to delay a political resolution through a major escalation in Sunni-Shiite sectarian violence. As a result, the United States was buried deeper in Iraq, and Iran was able to strengthen its negotiating position substantially. The Iranian strategy involved activating Hezbollah, which manifested in the summer war between Hezbollah and Israel that left Israel politically and militarily paralyzed. Contrary to our prediction that the general trend for the Middle East would be toward political accommodation, the region witnessed a number of flare-ups that were largely attributed to the Iranian calculus in consolidating its gains in Iraq.

We were correct, however, in forecasting that the Iranian nuclear issue would make its way to the U.N. Security Council, but no substantive punitive measures would be taken against Iran. In the Israeli-Palestinian arena, we correctly forecast that Hamas would emerge as a major player on the Palestinian political scene in the wake of the parliamentary elections in January, and that this would lead to major internal upheaval within the Palestinian territories. However, despite the gains it made in the elections, Hamas was unable to assume control of the security forces as we anticipated. We were right in saying that the Kadima Party in Israel would win the March elections and a center-left coalition would emerge, but would not be able to make significant headway toward unilateral disengagement from the Palestinian territories.

We also anticipated that Syrian President Bashar al Assad would be able to keep his regime intact despite the blowback incurred from the assassination of former Lebanese Prime Minister Rafik al-Hariri, and that fledgling militant Islamist movements in Lebanon would make their presence known in the Levant, but would not be able to ignite sustainable insurgencies. Regarding the al Qaeda movement, we accurately said the group would further devolve into local insurgencies, though the group did not end up losing its grip on Iraq as we anticipated.

The U.S.-Iranian standoff over the fate of Iraq will have a profound impact on the course of geopolitical events in 2007. After the 2003 U.S. invasion of Iraq, Iran seized the opportunity to assert itself as the regional kingmaker while the United States became increasingly paralyzed in Iraq. The United States now finds itself at a critical juncture: It no longer can afford to stay the course in Iraq and dedicate U.S. troops to an unattainable mission of securing the country solely through military force. As advocated by the Baker-Hamilton report, the time has come for the United States and Iran to stop giving each other the silent treatment and work toward a comprehensive settlement for Iraq.

But the United States is still far from its desired negotiating position, and thus will continue to shy away from the Baker-Hamilton report's recommendations until it can level the playing field against Iran. Before Washington moves forward on the diplomatic front, it will need to disprove the perception that the United States has been permanently marginalized in Iraq and ultimately will have to withdraw its forces -- something that would leave Iran to pick up the pieces and project Shiite influence into the heart of the Arab world. This perception of marginalization is what has driven heightening Sunni concerns that United States no longer will be the security guarantor against an empowered Shiite bloc, led by Iran.

To shatter these expectations and demonstrate that the United States is still very much in the game, U.S. President George W. Bush announced Jan. 10 a strategy to "surge" U.S. troops in Iraq. The increase will total 21,500 troops, with a peak of 17,500 in Baghdad and another 4,000 in Anbar province. Ultimately, this looks unlikely even to bring the total level of U.S. forces to their peak strength of 160,000 -- the number of troops that were in Iraq in November and December 2005, in the buildup to the general elections Dec. 15. It is likely to be accompanied by a shift in tactics to focus more specifically on counterinsurgency operations.

The forces will certainly be useful -- assisting with security inside Baghdad and leaving units that would otherwise be shifted to the capital available to confront issues in their respective areas of responsibility. However, in and of itself, this new deployment will be insufficient to turn the tide in Iraq. Operation Together Forward -- the failed attempt after Abu Musab al-Zarqawi's death to use a small surge in troop levels in Baghdad to impose security there -- is a case in point. Together Forward was essentially the U.S. military's last, best effort to secure Baghdad with the existing force structure.

Baghdad remains the key. Without stability there, there can be no Iraqi state. But the proposed surge of 21,500 troops -- without a new, concerted diplomatic effort -- is unlikely to succeed in effecting a political resolution in Baghdad.

However, there is a key psychological element to this strategy. The United States will spend the coming months taking an aggressive stance against Iranian operations in Iraq, including additional raids on Iranian diplomatic offices and arrests of Iranian officials in the country who are suspected of orchestrating attacks against U.S. and Iraqi forces. The U.S. military will be posturing to dispel the Iranian perception that the battleground will remain within Iraq's borders. The United States could also step up covert efforts to ramp up the militant activities of Iran's indigenous separatist groups, such as the Ahvazi Arabs in the oil-rich province of Khuzestan in western Iran. Coinciding with U.S. moves, Israel will accelerate its own psychological warfare campaign, using a variety of leaks and denials to heavily publicize Israeli military plans to strike Iranian nuclear sites. By upping the ante against Iran, the United States is placing a critical bet that the Iranians will reconsider their Iraq strategy and come to the negotiating table rather than risk a serious miscalculation.

To go along with the troop surge, the United States will focus on rearranging the Iraqi Cabinet to try to create a stronger, more functional government in Baghdad. This will involve sidelining allies of Shiite rebel leader Muqtada al-Sadr and bringing in a stronger Sunni presence, which will undoubtedly be a complicated and messy affair. Iraqi Prime Minister Nouri al-Maliki also could resign in as little as four months, triggering a struggle for power and a substantial flare-up in intra-Shiite frictions over his replacement. By the year's end, Iraq's largest and most influential Shiite party, the Supreme Council of Islamic Revolution in Iraq, might be better able to solidify its position in the government.

Iraq is unlikely to split up into federal zones in the coming year, but neither will it behave as a coherent state entity. Violence will escalate on all sides: Shiite, Sunni, jihadist and even Kurdish, with the Sunni-Kurdish fault line in northern Iraq becoming active toward the end of the year, as the Kirkuk referendum issue approaches.

For its part, Iran has been keen to bring the Americans to the negotiating table on its terms. It wields the ability, through militants, to manipulate the security situation in Iraq and thus to keep an effective government from taking power in Baghdad, but it lacks the means to impose a government of its own creation there. Tehran will focus this year on increasing the political and military costs of the United States remaining in Iraq -- by lending more support to militants there, including Shiite gunmen and segments of the Sunni insurgency -- but ultimately, given the limitations and uncertainties on both sides, it is possible that a political settlement of sorts, however weak and tenuous, will be forged in 2007.

Iran will also use this year to push its nuclear agenda forward. The U.N. Security Council will be unable to pressure Tehran into curtailing its nuclear program. Iran will use the U.S. distraction in Iraq to move closer to its objective of becoming a full-fledged nuclear power, which will in turn strengthen Tehran's bargaining position on Iraq and expand its influence in the region.

The United States and Israel are militarily occupied by Iraq and Hezbollah, respectively. The logic behind Iran's strategy is to use this window of opportunity to advance its nuclear program to the point where a nuclear Iran will have to be accepted as part of any deal the United States wants on Iraq.

All the pieces might appear to be falling into place for Iran, but a major shake-up in the Iranian regime is likely to happen this year, and it could upset Iran's calculus in dealing with the United States on Iraq. Iranian Supreme Leader Ayatollah Ali Khamenei is terminally ill with cancer and could die this year. His death will send a shockwave through the Iranian public, which will come to doubt the Iranian government's ability to navigate the country through this critical period. There will not, however, be a complete breakdown of the Iranian political system. There are mechanisms in place to ensure the leadership transition goes relatively smoothly.

While his health further deteriorates, Khamenei will likely position former Iranian President Ali Akbar Hashemi Rafsanjani to lead the country. Rafsanjani is believed to be committed to Khamenei's vision for Iraq and the ascendance of a nuclear-powered Iran, but he also is known for his pragmatic leanings and ability to negotiate more easily with the United States. Rumors are also circulating that Iranian President Mahmoud Ahmadinejad's days could also be numbered, and that Khamenei will make the arrangements this year to remove the firebrand president from his post. Khamenei's health will likely dictate whether Rafsanjani receives the position as supreme leader or president before the end of the year.

The United States will keep a close eye on any potential shake-ups in Tehran to decide how to proceed in devising a diplomatic strategy. The questions surrounding the Iranian leadership will ensure that 2007 will largely be a waiting game over the fate of Iraq.

Israel will make a big show of the perception that its patience is rapidly wearing thin as Iran's nuclear ambitions develop into reality. Israel's focus for this year will be on pulling itself back together militarily and politically following its defeat in the 2006 summer war against Hezbollah. Israel is still unlikely to follow through with threats to launch pre-emptive strikes against Iranian nuclear facilities this year. Doing so unilaterally would only further compromise the U.S. position in Iraq once Iran unleashes its militant proxies in the region. Instead, Israel's focus will turn toward Hezbollah. Iran made it clear during the summer war that it will use Hezbollah as a lever in negotiations over Iraq. Israel badly wishes to eliminate this lever, particularly since Israel has a pressing need to create conditions under which it could launch a pre-emptive strike against Iranian nuclear sites. Israel's strategy to contain Iran's nuclear ambitions begins with the crippling of Hezbollah's militant arm. This rationale likely factored into Israel's decision to go forth with a full-scale incursion into Lebanon this past summer, though the results surely defied Israel's expectations.

Israel is likely to revisit its objective of crushing Hezbollah in the summer of 2007, and has already begun to justify a coming military escalation in Lebanon through public declarations that Hezbollah and/or Syria will be the one to instigate the conflict. Who ends up igniting the war is unimportant. The big question for this year will be whether Israel can develop the capability to root out Hezbollah forces in their strongholds in the Bekaa Valley. A good deal of restructuring will have to take place first, beginning with former Israeli Prime Minister Ehud Barak's return to the political scene.

Israel could move indirectly to destabilize Hezbollah in Lebanon ahead of a military confrontation. Hezbollah is currently brimming with confidence, but it also must be careful to preserve its legitimacy. By provoking sectarian violence in Lebanon, Israel could pit Hezbollah fighters against fellow Lebanese, which would wear down Hezbollah's military forces and tarnish its reputation as a nationalist movement, making the organization more vulnerable to an Israeli onslaught. The Israeli Mossad could also be engaged in attempts this year to eliminate elements of Hezbollah's core leadership to further destabilize the party.

Though Syria will be busy building up weapons acquisitions from its defense partners in Moscow, the Syrian regime will be careful to avoid provoking a major military conflict with Israel. In elections slated for March, Syrian President Bashar al Assad will be re-elected by a wide margin, and no opposition forces will be strong enough to challenge the al Assad regime this year. Though Syria will keep the window open for talks with the United States, it will continue with its agenda to re-consolidate influence in Lebanon, which involves political intimidation -- frequently in the form of assassinations. The Bush administration is unlikely to make any major overtures to Syria this coming year, knowing that Damascus falls well below Tehran in its ability to wield any real influence in Iraq. Syria will be emboldened through its alliance with Iran and could instigate a low-level insurgency in the Golan Heights through a shadowy group of militant actors on the regime's payroll, but will play its cards carefully for fear of inviting Israeli airstrikes on its own soil.

Lebanon will become an intense battlefield for Sunni-Shiite influence, mainly played out between the Saudis on one side and the Syrians and Iranians on the other. The expiration of Lebanon's lame-duck President Emile Lahoud's term in office will come in September and will be preceded by intense political jockeying between Lebanon's rival factions over his replacement. In the end, the next president will likely be a friend to the Syrians. Hezbollah will be able to expand its influence in the government by forcibly increasing the number of seats that it and its allies hold in the Lebanese cabinet. With veto power, Hezbollah will be able to block any major legislation that harms Syrian, Iranian or Hezbollah interests, including disarmament of Hezbollah's militant arm or any punitive measures against the Syrian regime for the February 2005 assassination of former Lebanese Prime Minister Rafik al-Hariri. While consolidating its political power, Hezbollah will intently focus on preparing for a military confrontation with Israel.

The Sunni Arab reaction to a rising Iran will intensify in the coming year. Though the Sunni Arab states are highly dependent on the United States to ensure their national security, they will make it clear that they are not going to sit idle while the United States fumbles around in Iraq. The Arab states, particularly Saudi Arabia and Egypt, will increase pressure on the Americans to act by strengthening the Sunni insurgency in Iraq and by showcasing plans to develop civilian nuclear programs to counter Iran.

The sudden departure of Saudi Ambassador to the United States Prince Turki al-Faisal brought to light rifts within the Saudi regime over how to deal with Iran's expansion at the expense of the U.S. military position in the region. Even though the kingdom has recently enacted a succession law to oversee the transfer of power, tensions over the Iraq situation could exacerbate matters. Moreover, Saudi King Abdullah has sought to bring in people from outside the royal family to fill key positions within the foreign policy establishment, which will further complicate these tensions.

Initially, King Abdullah chose advisers and strategists such as Adel al-Jubeir and Nawaf Obaid -- a new crop of young, educated Saudis selected for their expertise -- rather than members of the royal family. Although technocrats long ago replaced royal figures in the kingdom's oil and economic sector, it seems the current king plans to gradually replace royals with technocrats in the foreign policy arena. An example of this was the appointment of al-Jubeir as Riyadh's ambassador to Washington after Prince Turki abruptly resigned.

A Cabinet reshuffle could result in new oil and foreign ministers. While the Oil Ministry will continue to be managed by a technocrat, the Foreign Ministry portfolio would likely remain in the hands of the royal family. Despite disagreements within the top ruling circles on how to deal with an assertive Iran and the rise of the Shia in the region, it is unlikely that the key players within the House of Saud will allow these disagreements to lead to instability within the system -- at least not while the sons of Abdul Aziz, the founder of modern Saudi Arabia, remain firmly in control of the reins of power.

Egypt's political system has also entered a period of uncertainty, as President Hosni Mubarak -- given his advanced age and hence deteriorating health -- could either die or become incapacitated during the course of the next year. Mubarak's absence would have a destabilizing effect on the country's political system, as questions would arise over his potential successor's ability to govern as effectively. Mubarak's probable replacement will be Omar Suleiman, the country's intelligence chief. The stage will likely be set for Suleiman this year when Mubarak nominates him as vice president. The uncertainty surrounding Mubarak's fate has developed into a key issue as Cairo is under domestic and, to a lesser extent, international pressure to effect political reforms. The government could conduct a referendum on the constitution and replace the emergency laws that have been in force since 1981 as a means to sustain its hold on power and counter the rise of the Muslim Brotherhood, which is the largest opposition group in the country.

On the Israeli-Palestinian front, Hamas and Fatah will continue to struggle over how to create a power-sharing agreement in the government. As long as Hamas can continue to be bankrolled by the Iranians and the Gulf Arab states, the party can avoid making any serious concessions to Fatah in reshuffling the Cabinet. Palestinian National Authority (PNA) President Mahmoud Abbas will not resort to calling for early elections unless he can be assured that Hamas would be marginalized in the polls -- an unlikely prospect for the near future. The stalemate in the Palestinian territories will lead Hamas' leadership to make gestures with heavy caveats toward recognizing Israel, though Israel will not take the bait. The Israeli government will work to ensure that Hamas and Fatah are prevented from coming together in an agreement; while Israel is sorting out its own issues at home, it will much prefer to have the Palestinians fighting each other than focusing their attention on attacking Israel. The impasse in the territories will prevent the Israelis and the Palestinians from engaging in any serious final-status negotiations this year.

Turkey will have presidential elections in May and parliamentary elections in November. Barring a major domestic crisis, the military is unlikely to force early parliamentary elections to prevent the ruling Islamist-grounded Justice and Development Party (AKP) from gaining the presidency, though the AKP could see its parliamentary majority weaken. Turkey's continued resistance to the European Union's demands on Cyprus will ensure that EU accession talks will remain stalled this year. Turkey's withering EU aspirations will lead the country to turn its attention more toward its Arab backyard, where Iraq's worsening situation becomes a direct concern for Ankara. Turkey will do its best to prevent U.S. forces from redeploying to northern Iraq. For Turkey, a built-up U.S. military presence in northern Iraq would be an obstacle to Turkish interests in containing Iraq's Kurdish faction. As the United States makes shifts to its Iraq strategy throughout the year, Turkey will warn Iraq's Kurdish faction not to make any bold moves to consolidate its autonomy and lay claim to the oil-rich city of Kirkuk.

The devolution of al Qaeda will continue in 2007, as the movement struggles to carry out a major, successful attack outside its main theaters of operation in Iraq, Afghanistan and Pakistan. Though the jihadist forces in Iraq were largely eclipsed by Sunni-Shiite sectarian fighting in Iraq in the latter half of 2006, they are likely to receive a boost this year as the need for a robust Sunni insurgency grows among the Sunni Arab states. Iran, at the same time, has an interest in maintaining the Sunni jihadist component of the insurgency to target U.S. forces. The Egyptian node of al Qaeda will likely pull off its annual attack in the Sinai Peninsula, giving the Mubarak government another excuse to crack down on the country's Islamist opposition. Al Qaeda will try to spread into the Maghreb, the Levant and deeper into the Persian Gulf this year, though any attempted attacks are likely to fail.

East Asia: Domestic Politics Come to the Fore

This will be a political year in East Asia.

Japan's new leadership is focused on constitutional change and a test for the Liberal Democratic Party (LDP) leadership in the House of Councillors elections early in the third quarter. China's Communist Party Congress in the fourth quarter will identify the next generation of leaders, who will formally take over in 2012. South Korean presidential elections in December could see the return of the more conservative Grand National Party (GNP). Taiwan will hold legislative elections in December (ahead of a presidential election in early 2008), which will see a strong showing by the Kuomintang and the People First Party, but could stir a final burst of pro-independence activity. Even North Korea might see some political readjustments as leader Kim Jong Il considers younger cadres to replace the aging (and dying) current officials.

In Southeast Asia, Vietnam will adjust its party and government leadership in order to align with the economic changes accompanying its World Trade Organization (WTO) membership. Vietnamese parliamentary elections are slated for May, and a presidential election is scheduled for September. Thailand will be focused on the continued political and social distress from the September 2006 coup. The Philippines will readdress defense relations with the United States around the time of the legislative elections in the second quarter. Even Australia will hold parliamentary elections in the fourth quarter.

In all, with the United States still heavily focused on Iraq and Iran, and with the U.S. presidential race already in full swing, Asia will grow more introverted in 2007, as the key countries deal with domestic politics. This is a year of preparation and transition.

China

Our annual forecast for East Asia once again revolves around China. We have been pessimistic about the country for a decade, predicting financial troubles leading to social and political destabilization. We are consistently asked when this economic crisis will strike China. But that is the wrong question. It is not a matter of when financial troubles will strike; they already have. It is a matter of how they manifest, how the Chinese deal with them and whether the Chinese are capable of controlling the situation.

If China already is in the grips of an economic crisis, why is no one noticing? In part, it is because the problems are manifesting primarily in social and political reactions, not in raw economic numbers. In part, it is because China's sheer size makes it difficult to fathom economic collapse. And in part, it is because investors and observers have consistently been behind the curve on noticing negative trends in Asian economies. Look at Japan.

The Japanese economic malaise struck in the late 1980s with little fanfare, and most investors and observers did not even notice there was a problem until several years later. Early indicators, including the massive rush of Japanese capital abroad, were ignored or seen as signs of strength. But Japan went from being the next rival to the United States to being the moribund economic sluggard of East Asia. China can only hope to have such a controlled slowdown.

In our annual forecast for 2006, we said that signs of instability in the Chinese economy would manifest themselves -- and they did. International ratings agencies issued reports citing massive inefficiencies and bad debts in the banking system. Foreign direct investment (FDI) into China stagnated for the third year in a row in 2006. A closer look at the FDI numbers, however, reveals that while the total dollar amount has remained relatively steady since 2004, the percent of FDI coming from Hong Kong and the free ports, such as the Virgin Islands, has increased. That means FDI from the United States and Asia is dropping. Though it is not making headlines, an unseen hand is at work. The shine is rubbing off China, and money is slowing down.

The slowdown in new funds is affecting Beijing's ability to move money around within the country. China's economic growth has been anything but even, and the regional wealth gaps, as well as the urban-rural split, are rising significantly. These are now the focus of government officials on all levels -- and a frequent topic of discussion in the Chinese state media. An abundance of individuals, state think tanks, research institutes and government surveys are highlighting the problems, but there is a dearth of concrete solutions.

The Chinese government has been nothing if not masterful in delaying and diffusing the impact of its economic troubles. It has used tactics ranging from a massive shell game with bad debt in the banking system (passing off the problems to the asset management companies and inviting foreign banks to buy stakes in order to flesh out the equity-to-debt ratio in the major banks) to misdirection of public attention (to China's space program, the Olympic preparations and disagreements with Japan over interpretations of history).

As Beijing selectively treats the symptoms of years of inefficient "Asian-style" economic planning, it is hoping to postpone the pain indefinitely. Beijing wants neither the Japanese-style economic malaise nor the sudden crash seen in East Asia in 1997. The central government has thus far been unable to coerce or entice local and provincial leaders to accept the economic reforms, so Beijing is turning to a tried-and-true method: sacking officials. The September 2006 move against the leadership in Shanghai was just a warning shot. Chinese President Hu Jintao is reshuffling the deck at the local and provincial levels ahead of an overhaul of the top leadership at the Party Congress later in the year.

This year likely will bring a new vice president, along with several replacements on the Central Committee and Politburo. Though age will be the given reason for the replacements, the underlying issue is the centrality of not only the Party, but also Hu's leadership. He is cleaning house, removing the remnants of the Jiang Zemin regime and any opposition to his "new left" movement.

Hu plans major changes in the economy, not the least of which is recentralization. These changes will not come all at once, and will be unlikely until after the 2008 Olympics. But the groundwork is being laid now.

Autocratic control from the center over the location and target of investment and economic expansion will not be easy or painless, but Hu is tightening the core of the Party and its various security organs in order to deal with it. Beijing is looking to the example of South Korea in the 1970s (under the autocratic Park Chung Hee) or Singapore in shaping its future economic policies -- tight control from the center but relative freedom on the edges, so long as it coincides with government-set priorities. Social and political opposition will be repressed in the name of stability and strength. But this will really come in late 2008 or early 2009.

For now, Hu simply needs to lock in his control and ensure that the leadership from the top down owes its loyalty to him and not to foreign business interests. He is doing this through purges, new guidelines for choosing local and provincial leaders and scheduled changes in the top echelons.

China faces two potential domestic security challenges in 2007: the 10th anniversary of Hong Kong's reversion to Chinese rule on July 1, and the 80th anniversary of the People's Liberation Army on Aug. 1. Both provide high-profile opportunities for domestic (and foreign-backed) opposition to stir trouble. Beijing will be watching closely to prevent or dissuade acts by pro-democracy and human rights activists, including those linked to the Falun Gong. There also are rumblings that Uighur separatists might be regrouping after a decade of near silence, with the assistance and instigation of Islamist militants in Afghanistan and Central Asia.

On the international front, Beijing will have two major issues to deal with in 2007: trade frictions with the new Democratic Congress in the United States, and rising talk of Taiwanese independence. As Taiwan nears parliamentary elections ahead of its 2008 presidential election, outgoing President Chen Shui-bian is set to increase his push for independence. Even if it is ultimately just rhetoric, Beijing cannot tolerate such actions and already is warning of tensions.

Chen sees this year as a perfect opportunity to throw a monkey wrench into Chinese politics. Beijing is desperate to keep China stable and attractive ahead of the 2008 Olympics, and Chen hopes China will be forced to exercise restraint in dealing with his political posturing. But Chen also sees his actions as a way to complicate the leadership changes in China. Hu's supporters might be "left" in their future economic plans, but they also are less interested in waving China's military might around (at least until they have the domestic situation under control). The Jiang faction Hu is ousting, however, is much more "hawkish," and debate over what to do about Taiwanese moves toward independence will add a layer of turmoil to the upcoming Communist Party Congress.

Japan and the Koreas

Elsewhere in Northeast Asia, Japan's new prime minister, Shinzo Abe, will push ahead with plans to change the constitution before the year is out. Former Prime Minister Junichiro Koizumi laid the framework; it is up to Abe to build the new Japan -- one that is structured like a "normal" country, with a military unrestricted by a defeatist constitution. Japan is looking to take a place in the world that befits its status as the second-largest economy; to do so, it must alter its constitution and restructure its Self-Defense Forces into a true military.

Tokyo will be much more active internationally, but the big battle is at home, where the ruling LDP will have to prove itself to domestic constituents in the House of Councillors elections in July. Ultimately, the LDP will win, but at home Abe and the LDP must show that the hints of economic recovery are sustainable.

Neighboring South Korea is dealing with its own political issues. The general elections in December will bring in a new president, as the current rules only allow a single term. President Roh Moo Hyun's Uri Party is fracturing and will collapse in short order, to rebuild itself under a new name and new leadership. The renamed party will seek to distance itself from Roh long before December, and with his party leaving, Roh will focus his attention on a final push for his own national initiatives -- namely, closer ties with North Korea and a restructured military that ultimately allows South Korea to reduce its dependence on the United States.

The conservative GNP appears set to win the December elections, and that will bring a shift in U.S. relations. Unlike Roh, the GNP supports a stronger line against North Korea and closer military integration with the United States. This will leave Roh scrambling in his final months to lock in defense programs more in step with his view of the future. Roh also will make a major push for a second inter-Korean summit before his term is up.

An inter-Korean summit might intrigue North Korea as well. Pyongyang already has been vocal in its attempts to impact the South Korean elections, and timing a summit for sometime in the late summer could weaken some of the support for the GNP. With North Korea's 2006 nuclear tests bringing few repercussions, relations with China growing stronger and the United States still focused on Iraq, Kim feels more secure and could push forward with a few new economic experiments.

To facilitate this, a few younger cadres could rise in the North Korean ranks, on the heels of the death of Foreign Minister Paek Nam Sun. For the past decade, Kim has relied on the support of his father's associates to maintain continuity and stability, slowly moving individuals of his own generation into power. But there is a new generation of younger elite awaiting their opportunity, and Kim can extend his reign and install potentially expendable officials to lead economic and even political experiments aimed at strengthening the nation for the future.

But before Pyongyang embarks on another round of détente with South Korea and pursues modest economic reforms, Kim might make one more statement of strength and carry out another nuclear test. This will depend on whether North Korea can convince the United States to lift economic sanctions, particularly the restrictions on North Korea's overseas banking (through which the country's elite funnel their money). If negotiations fail to bring about a shift in U.S. actions, a second test is more likely.

Southeast Asia

In Southeast Asia, Thailand takes center stage. This former bastion of economic stability (at least since recovering from the 1997 economic crisis, which was precipitated by the collapse of the baht) is going through one of its periodic upheavals. The coup leaders have not been able to quickly and aggressively gain control, and the ousted government and its allies remain strong and emboldened. Though there was a public groundswell to oust former Prime Minister Thaksin Shinawatra, this has not translated into solid support for the military-backed interim regime.

The battle lines being drawn between the Thaksin supporters and the current regime run not only through businesses and civil society, but also through the military and police forces. The first spate of violence broke out in Bangkok with the New Year's bombings. Both sides are building toward a confrontation, and though it might remain confined to the courtrooms and newspapers, the impact on Thailand's economy is already starting to show. Investor confidence in Thailand is slipping and will continue to fall until a more permanent solution can be arranged. Unless the military and the interim regime crack down swiftly on the growing opposition, stability and order might not even begin to emerge until the end of 2007.

In the Philippines, defense relations with the United States will again come to the forefront, and the lack of economic growth will color the parliamentary elections, weakening support for President Gloria Macapagal Arroyo. Though Manila believes it has finally killed the remaining founder of Abu Sayyaf, its talks with the Moro Islamic Liberation Front appear to have fallen apart, and the fighting in southern Philippines could flare up again in 2007.

The problems elsewhere in Southeast Asia will only add to the allure of Vietnam, the region's newest WTO member. Hanoi has addressed many of the problems that undermined its earlier attempts at opening economically and attracting foreign investments. With FDI stagnating in China, and places such as Thailand and the Philippines facing domestic political and social troubles, Vietnam becomes the region's darling. This will play into Vietnam's parliamentary and presidential elections, which will not be too contentious but instead will reflect the continued focus on anti-corruption and economic modernization.

Indonesia might also begin to see a return of foreign economic interest. President Susilo Bambang Yudhoyono remains popular, does not face re-election until 2009 and is bringing a sense of stability to a country that has been politically and socially troubled since the fall of former President Suharto in the wake of the 1997 Asian economic crisis. The insurgency in Aceh has been quelled, East Timor relations are relatively calm and the separatism in West Papua has not gained traction. Meanwhile, Indonesia avoided a major militant attack in 2006, and security forces killed one of the top Islamist militants threatening the country. In 2007, Yudhoyono will focus on strengthening social cohesion, revitalizing Indonesia's energy sector and rebuilding Jakarta's regional relations. Japan and China could enter into some competition over economic and political relations with Indonesia in the coming year as each eyes the nation's strategic location.

In Australia, Prime Minister John Howard will head for another election victory, though his party's lead might be slipping to the opposition. But the Labor Party, under new leadership, has not managed to build a credible threat to Howard's rule. Unemployment and interest rates will be a challenge for Howard, but not enough yet to give the Labor Party an edge. On the international front, Canberra will continue expanding its role in Asia, dealing with security issues in the Pacific Island nations, strengthening defense relations with Indonesia and expanding economic and energy ties with China.

In all, East Asia in 2007 is a region focused first and foremost on domestic political issues and secondarily on regional issues. The region's economies will slow in 2007, further complicating the political bickering. This is a year for transition, retrenchment and preparation, as the region's leaders anticipate a major shift in U.S. attitudes and actions by the end of 2008, after the U.S. presidential election. Until then, Asia will look to itself, and the growing rivalry for regional dominance between China and Japan will become more defined closer to the end of the year.

Former Soviet Union: The Kremlin Gathers Strength

The trend for 2007 in the Former Soviet Union will be Russia's consolidation of control over its internal affairs. As the parliamentary and presidential elections approach, Russian President Vladimir Putin will centralize control over the country and its periphery, set himself up for a post-presidential career and install a successor who will perpetuate his policies. A significant increase in military spending, coupled with a foreign policy aimed at ensuring Russia's domination of its near abroad and control over strategic sectors of its economy, will further strengthen the Kremlin's hold on power.

Russia in 2006 followed a policy of consolidating power within its borders and in its near abroad, as we predicted in our 2006 annual forecast. Since the influx of Western influence via color revolutions over the past several years, Moscow has sought to reverse such advances and has managed to reassert its influence in some -- but not all -- of the most essential regions along its borders. While relations have improved between Russia and the key peripheral state of Ukraine since the installation of pro-Russian Ukrainian Prime Minister Viktor Yanukovich, Russia and Georgia are on increasingly worsening terms.

As we pointed out in 2006, Russia slowly began to field new weapons systems this year, prompted by strong energy revenues -- although not nearly as many types or numbers as Russian generals claim. Nevertheless, the deliberate, persistent nature of this fielding will continue in 2007. The fielding of the new Topol-M mobile land-based intercontinental ballistic missile is, at this point, simply a matter of cranking them out of the factory. The naval Bulava and its parent missile submarine, the Borei, will likely continue to encounter major setbacks, despite priority funding. Strategic aviation will continue to be another priority, as will deployable airborne regiments.

Russia has, as we predicted, continued to cooperate with Central Asian regimes on pursuing military cooperation under the auspices of regional organizations. However, contrary to our previous annual forecast, Russia has not been able to entirely evict Western military from its periphery -- the U.S. airbase at Manas, Kyrgyzstan, remains a thorn in the Russian side.

Russia's relationship with the West, particularly the United States, in 2006 was punctuated by confrontational moves. Although toward the end of the year Moscow and Washington brokered several friendly deals, the two Cold War adversaries remain at odds. We accurately forecast Moscow's strategy of perpetuating conflict far from its borders in order to distract Washington from meddling in its domain. This strategy has led to expanded Russian relations with Iran, Syria and, to a certain extent, North Korea. Likewise, our prediction that Russia would substantially increase energy prices for Western Europe panned out in 2006.

Internally, Moscow met our expectations and ramped up its centralization of control over the economic sectors it considers strategic -- energy, precious minerals and metals. The Kremlin deems it essential to run the industries that bring it the most income, even though that control sometimes defies common economic sense and even though state-controlled companies are not always proficient at exploiting assets. The money already made from these sectors allows Russia not to worry too much about the recent decline in oil prices. With its stabilization fund of windfall oil revenue and the gold and currency reserves totaling almost $400 billion, Moscow can handle a substantial drop in prices without missing a beat.

The consolidation trend will continue and increase in 2007, as Russia prepares for the Dec. 2 parliamentary elections and the presidential election March 2, 2008. Expansion of state control over the oil, natural gas, gold, diamond and metals industries will be coupled with the consolidation of political forces and a crackdown on dissent. The deaths of former Russian Federal Security Service agent Alexander Litvinenko and journalist Anna Politkovskaya have been attributed to their outspoken opposition to the Kremlin, and others could vanish from the political scene one way or another as elections draw near. Because Russia's electoral laws have been changed to favor larger and more established parties, many smaller groups will seek to coalesce into larger entities. The pro-Kremlin United Russia party is expected to take most of the seats in the parliament, thereby gaining the ability to alter the constitution, and the opposition forces remain weak and unable to unite into a viable force. The new parliament, much like the current one, will exist solely to implement the president's will.

Putin will select a successor, and the two front-runners for that position -- First Deputy Prime Minister Dmitry Medvedev and Defense Minister and Deputy Prime Minister Sergei Ivanov -- will expand their public roles in 2007. The two men have been exhibiting pragmatic foreign policy outlooks, as we indicated in our previous annual forecast. Putin will not make his choice until the last possible moment, and though he could choose another candidate, Medvedev and Ivanov are the current favorites. Putin will remain in a position of power, either by retaining the presidency with the help of the newly elected parliament or by assuming control over a strategic industry such as natural gas.

Internal consolidation will remain closely tied to Russia's expanding control over its periphery. Moscow has had considerable success reasserting its influence in Ukraine following the March parliamentary elections and the installation of Viktor Yanukovich as prime minister. We indicated in our previous annual forecast that Russia was likely to act to install a friendly regime using the election as a key event, though we did not predict that Ukraine would return to the Russian fold to the degree it did in 2006. Following the Orange Revolution of 2004, pro-Western forces gained control under President Viktor Yushchenko, though they have not been altogether successful at actually governing Ukraine. Russia's public support of Yanukovich as a presidential candidate in 2004 was unsuccessful, but with Moscow's behind-the-scenes support, Yanukovich's Party of Regions won a plurality in 2006 and, after months of wrangling, managed to form a majority coalition in the parliament.

Since then, Ukraine has remained in deadlock, with the executive and legislative branches continuously working to undermine each other and doing little actual policymaking. Yanukovich has been more successful in this row and has undercut much of Yushchenko's authority. Yushchenko has but one chance to regain control, and it is not a good option -- to dismiss the parliament and call early elections. In order for Yushchenko to retain a vestige of power, he will need to rekindle the Orange Coalition with ambitious former ally Yulia Timoshenko, but that would mean Yushchenko would have to share the spotlight with her.

Ukraine's neighbor Belarus has experienced a significant deterioration of relations with Russia over the past year. A last-minute deal for supplies of Russian natural gas signaled an end to Russia's subsidization of President Aleksandr Lukashenko's regime.

In order to avoid becoming a complete peon of the Kremlin, Lukashenko will have to look westward for investment and support, and this option gives him at least some leeway against Moscow. Belarus has been beholden to Russia for Lukashenko's entire 13-year presidency. The country is now at least somewhat in play, but Russia still has the tools to counter Belarus' Western ambitions. The oil cut-off on Jan. 8 signaled Russia's willingness to inflict damage to its own economy in order to bring the wayward republic under control.

Tensions are set to escalate in the Caucasus, as relations between Georgia and Russia show no signs of improving, and as Armenia and Azerbaijan inch toward an escalation of the Nagorno-Karabakh conflict. As Tbilisi further extricates itself from economic ties to Moscow, the conflict over Georgia's two secessionist regions, South Ossetia and Abkhazia, will intensify. The United Nations is almost certain to grant independence to the Serbian province of Kosovo; this will prompt Russia to call for the same status for secessionist entities outside its own borders. Russia is likely to seek to increase its presence in Abkhazia and South Ossetia under the guise of peacekeeping efforts, and Georgia will respond in kind. Given the poor state of relations between Moscow and Tbilisi, the conflict is likely to escalate to something just short of outright war, perpetuating the scenario laid out in our 2006 annual forecast.

Azerbaijan has significantly increased its income from energy projects and has pledged to spend approximately $1 billion on defense in 2007, up from $700 million in 2006. Although Azerbaijan's military has been inferior to Armenia's, the spending hike could bring increased confrontation between the two over the Armenian-controlled Nagorno-Karabakh region in Azerbaijan. As with Georgia's secessionist regions, the determination of Kosovo's status will prompt an escalation in the Nagorno-Karabakh conflict. A diplomatic solution is not likely in the near future.

Russia historically has dominated Central Asia, with most of the countries -- especially regional leaders Kazakhstan and Uzbekistan -- ruled by Soviet-era cadres with allegiance to Moscow, and the others deferring to their giant neighbor anyway. At the end of 2006, Russia gained an opportunity to expand its influence further. The Dec. 21 death of Turkmenistan's president-for-life, Saparmurat Niyazov, another Soviet-era leader, has prompted Russia, China and other regional players to attempt to project greater influence in the energy-rich state. Acting Turkmen President Gurbanguly Berdimukhammedov is the certain winner of the Feb. 11 poll, but the shape of his agenda remains unclear, since not much is known about the man. While neighboring Kazakhstan and Uzbekistan will want to assure that Turkmenistan is friendly, or at least innocuous, Russia has a keen interest in maintaining control over Turkmenistan's natural gas deposits -- the fifth-largest in the world. If the new president is unwilling to cooperate with Moscow, the Kremlin will use its available tools -- ranging from political pressure to assassination -- to ensure that he will not hold office for long.

As Russia moves to solidify its presence in Central Asia via Turkmenistan, neighboring states, especially Kazakhstan and Uzbekistan, will become increasingly concerned for their own sovereignty. While Kazakhstan remains politically loyal to Moscow, it has economic partnerships -- particularly in the lucrative energy sector -- with companies from many other countries, including India, South Korea, China and the West. Should Astana grow disconcerted by Moscow's encroaching presence, the Kazakh government could seek to counterbalance Moscow and expand its relationship with Beijing via Kazakhstan's new Chinese-educated Prime Minister Karim Masimov -- and China is certainly looking to increase its influence in Central Asia.

Uzbek President Islam Karimov is also likely to be concerned for his regime as Russian influence expands. Karimov might continue giving Russia control of energy assets in order to preserve his own rule, while keeping open the option to turn to China. However, as long as the Russians do not employ heavy-handed tactics in Turkmenistan, Uzbekistan and Kazakhstan both will seek to perpetuate their existing relationships with Moscow.

Russia also has been looking to expand its influence in Africa. Closer relations are likely in 2007, as Moscow forgives African countries' Soviet-era debt and looks to increase cooperation in the mining sector. As Russia consolidates control over its own industries, expanding into Africa and other regions could be the next step toward increasing control over the world's deposits of high-value commodities. But for this to work, Moscow has to do something in Africa that it has been loathe to do at home: invest its own money. Should Russia do that, Moscow could gain a lot of assets -- and influence -- very quickly.

Russia will attempt to maintain the status quo in its relations with the United States and Europe in order to focus on domestic issues. However, Moscow will continue to cooperate with Iran, Syria, the Hamas-led Palestinian government and other regimes considered unfriendly to the United States. In these relationships, Russia profits from arms and equipment sales and derails U.S. goals in the Middle East while dividing Washington's attention. Relations with European leaders are not likely to see improvement; German Chancellor Angela Merkel will make European energy security a priority of Germany's EU presidency, and whoever is elected the next French leader will not view Russia in the same favorable light as President Jacques Chirac has.

Continued on: 2007 Annual Forecast: Time to Look Inward -- Part II