Streetwise Professor

December 15, 2014

Ruble Rocket to Russia

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:55 pm

What a wild day. The Ruble weakened dramatically from the open this morning (15 December), falling about 2.5 percent. Then the Russian Central Bank intervened, spending a rumored $1 billion to prop up the currency. This caused about an 86 pip rally, but this lasted for mere moments, and then the Ruble rocketed lower, reaching 64.24 by the end of the day. That’s down a mere 10.22 percent boys and girls. (The weird thing about currencies quoted like the Ruble is that up is down.)

Here’s the ugly picture. You can see the little bitty (and very temporary) impact of the intervention at a little after 8am.

Screen Shot 2014-12-15 at 7.26.48 PM

In other words, the RCB blew $1 billion for a blip. A billion here, a billion there, and you’re talking real money. In so doing, the RCB gifted those evil speculators whom Vlad inveighed against about $65 million in a few short hours. Merry Christmas!

Ominously, this decline was not a response to a similar decline in the price of oil. Although oil ended down on the day, it was rallying on news from Libya at the time that the Ruble was plunging. What precipitated it? One leading candidate is Friday’s announcement that Ru626b in Rosneft bonds could be used as collateral at the RCB: this approval came much more rapidly than normal. Thus, in effect, the RCB was lending rubles to Rosneft, using bond investors as cutouts. Rosneft felt obliged to issue a press release saying that “not a single ruble, raised within the bond issue, will be used to buy foreign currencies.” Note the weasel phrase: obviously rubles are fungible, so the loan frees up other rubles for Rosneft to sell. Meaning that this smacks of an RCB bailout of Rosneft. This is bad enough, but it could also foreshadow similar actions for other beleaguered Russian companies.

Then, in the very early hours of the 16th, Moscow time, the RCB announced a whopping 650 basis point increase in the interest rate, from 10.5 percent to 17 percent.

The initial effect has been to bring the Ruble back under 60. There is reason to doubt that this will last. First, previous rate increases-though not as big as this-had only a temporary effect on the relentless decline in the currency. Moreover, the rate rise will be highly contractionary, and a weakening economy will put downward pressure on the Ruble. Further, people draw inferences from central bank actions: perhaps the RCB is signaling a very serious fundamental weakness or an impending bank run or its belief that many Russian corporates will be dumping rubles to raise dollars and Euros; any of these signals would mean that its intervention could have the perverse effect of fueling a further decline. In addition, the rate rise does nothing to eliminate the need of Russian firms to obtain dollars to repay maturing debts.

Even if the rate intervention works in the sense of stabilizing, or even reversing, the collapse in the currency, this will come at a cost. As I noted, the effect of the rate rise will be highly contractionary. The government had already been predicting a recession. That is now a certainty, and it is likely to be a severe one. Especially if oil continues doing the limbo.

The RCB action reminds me of a fox chewing off its snared leg. The best of some very bad options.

The situation is obviously volatile, with many things going on (including pronounced weakening in other emerging market currencies and stock markets as well as the oil situation). Moreover, it will no doubt engender a political response, which will feed back onto the markets. How it will affect the increasingly paranoid Putin is hard to know. A climbdown (if credible) in Ukraine would do wonders for the Ruble, but methinks Putin is more likely to double down than climb down.

One prediction is safe: the next days will be memorable. Deserving of some memorable music: Rocket to Russia, by the Ramones.

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December 13, 2014

Khodorkovsky As a Russian Cincinnatus? Cynical Machiavellian is More Likely.

Filed under: History,Politics,Russia — The Professor @ 7:41 pm

It has been almost exactly a year since Putin pardoned Mikhail Khodorkovsky. The ex-oligarch now lives an exile existence in Zurich. Of late, he has been much more vocal in expressing his views on Putin and Russia’s future.

Take for example this piece from Bloomberg that appeared yesterday. Khodorkovsky muses about Putin’s situation, given the oil price and sanctions-induced economic straits Russia finds itself in. He openly suggests that a coup is a real possibility:

“Putin has far less room to maneuver financially, which creates difficulties for him, and as a result the cost of any mistakes he may make could be critical,” Khodorkovsky, 51, said in an interview in Zurich, dressed casually in a sweater, jeans and sneakers. “For Putin, even $120 a barrel for oil is a problem because, with his system of rule, he can’t survive without the revenue from raw materials growing every year.”

. . . .

There’s at least a 50 percent chance that Putin won’t last the next decade, according to the former tycoon, who pins his hope on a coup by the Russian leader’s inner circle because in his view elections won’t bring about any transfer of power.

“I believe that the problem for Putin will come from within his own entourage,” he told Bloomberg yesterday. “For my country, it would be better if things happened this way than through clashes on the streets, as a palace coup would spill less blood.”

Knowing Khodorkovsky’s background, it is plausible that he is playing a Machiavellian game here, ostensibly pontificating about possible outcomes, but really intending to bring about that outcome, and using his words to advance that objective.

One interpretation is that he is waging psychological warfare against Putin. Note his remark regarding Putin’s entourage. He is stoking Putin’s paranoia and attempting to start a clan war, and believe me, especially where Khodorkovsky is concerned, Putin is paranoid: his reactions to Khodorkovsky can only be described as Pavlovian, and don’t think for a nanosecond that Khodorkovsky doesn’t know that.

If the coup comes to pass, Khodorkovsky can ride in as the white knight. He is plainly volunteering for the role:

In a scenario that Khodorkovsky acknowledges isn’t more than an outside possibility, this could open the chance for him to come back to Russia to head a transitional government that would steer the country for two-to-three years before stepping down after a free and democratic vote.

How generous and public spirited of him. Of course, in Russian history “transitional governments” tend to be transitions between one autocracy and another. Further, I understand completely time inconsistency and (non-)credible promises: it’s likely that two-to-three years would turn into twenty-or-thirty. At the end of the second or third year, one can imagine the excuses: “My work is not finished. The enemies of the people are still there and will return if I leave.” I cannot see him as a Russian Cincinnatus.

In other words, when predicting the future (a reprise of 1917) he is saying what he wants to come to pass. He is trying to hurry that along, and the economic crisis (or impending economic crisis) is an opportunity for him. The old Russian revolutionary idea of “the worse, the better” could well apply here.*

Like Putin, Khodorkovsky is an opportunist. He perceives that current events have created that opportunity. (I think it is likely that his conversion to becoming an advocate for corporate transparency and western-style governance was also opportunistic, rather than a Road to Jerusalem conversion: he realized that was the way to make Yukos attractive to a western supermaj0r buyer/investor.)

All that said, I believe-and wrote here often-that Khodorkovsky’s prosecution was a travesty of justice. Indeed, he was persecuted rather than prosecuted. His experience from 2003-2013 demonstrates the arbitrariness and evil of the Russian system under Putin.

But Khodorkovsky was not an angel. No man could have risen to where he did, and amassed the fortune that he did, in the Russia of 1990s without being utterly ruthless and without scruple. What probably set Khodorkovsky apart was that he is also incredibly intelligent. He is also very charismatic. I know two people who worked with him closely who are in awe of him. He clearly had a mesmeric influence on them. Putin’s palpable fear of the man also speaks volumes about his intelligence and personal magnetism. Ruthlessness married to charisma married to intelligence is a very dangerous combination.

Even if Khodorkovsky’s currently expressed sentiments are sincere, and he is not speaking out as part of a scheme to become Russia’s savior, if his scenario comes to pass it is highly doubtful that his lofty principles would survive a few months in power. A post-coup or post-revolutionary Russia would have no real institutions to check him. He would be surrounded by enemies. Russian politics has always been highly personalized and a-institutional. Every force would press him towards autocracy, personalized rule, and a cult of personality.

So as much as I sympathize with what he suffered, and as much as I would welcome the fall of Putinism, I don’t trust Khodorkovsky, nor do I think he is the man to lead Russia to the promised land, or even to its border. (And remember Moses never entered Canaan.) Indeed, I can readily see him using his martyrdom as a way of advancing his personal ambitions, and believe that many are blind to that possibility.

(Some of those who work for his foundation, and presumably believe in his agenda, are also passionate defenders of Urkaine against Putin’s predations. How can they be blind to his indifference to Ukraine?)

Perhaps I am wrong. Perhaps Khordorkovsky is not attempting to influence events in Moscow from Lenin’s old neighborhood in Zurich. Perhaps he is just commenting as an intensely interested bystander to historic events.

If that’s so, he’s delusional. The idea that he would be welcomed as a leader who could achieve national reconciliation in the aftermath of a coup (let alone a revolution) is farcical. He is widely reviled in Russia. It would be interesting to see who is more hated: Gorbachev or Khodorkovsky. He is viewed as one of the pirates of the 1990s, indeed as the most dangerous of the lot. I would wager more people than not believe he got his just desserts in Chita (and elsewhere) after 2003. His only role could be as a behind-the-scenes wire puller.

What’s more, Khodorkovsky is delusional in his appeals to Russian liberals, and his appeals to the west to support Russian liberals. There are hardly any Russian liberals left in Russia. Maybe a few hipsters in Moscow and St. Petersburg, and a few pathetic hangers on here and there. Indeed, Russian liberals are widely despised, and inextricably linked with the traumas of the 1990s. They are viewed as thieves themselves, or accessories to theft-including Khodorkovsky’s.  Navalny’s nationalist rhetoric has a far greater resonance than Khodorkovsky’s liberal language.

Reading some things he has said recently also make me wonder about his connection with reality. Notably this:

Is there hope of being able to effectively deal with this threat? There is, and it stems from the very nature of the Russian bureaucracy, which is generally rational and apolitical. There are many people in the Russian establishment who are sober-minded, think rationally and, on the whole, are oriented towards European values. But today these people are being forced to submit to a political will that has been formulated by a criminally corrupt minority whose only goal is to hold on to power.

Russian bureaucrats are “rational and apolitical”? Who knew? Venal and corrupt is more like it, and quite comfortable operating in an arbitrary autocratic system. After all, the Party of Crooks and Thieves is first and foremost the party of the bureaucratic nomenklatura. “Sober-minded”? That is risible, both figuratively and literally. And as for their “on the whole [being] oriented towards European values”, I don’t think I’ve read anything so absurd in some time. The Russian bureaucracy is Muscovite to the core.

Indeed, these statements (and most of the rest of the speech in which they are found) are so ridiculous that it must be that Khodorkovsky recognizes they are, and hence is willing to say anything to achieve some purpose. The goo-goo nature of his specific recommendations (e.g., the promotion of cultural and educational exchanges between Russia and Europe) only reinforce that impression.

In sum, I view Khodorkovsky in the role of the serpent. Putin is a malign force, but there is too much in Khodorkovsky’s past and character to have any faith that he will fundamentally change Russia.

The fundamental problem is that Putin is far more symptom than cause. He is the current personal manifestation of a national culture and political system and tradition. It is hard to imagine any way of leaping the chasm from personalized, autocratic governance to a system built on strong institutions and the rule of law. The fundamental paradox is that no man-Khodorkovskyor anyone else-is likely to be able to do that.

In other words, we don’t have a Putin problem: we have a Russia problem. We are likely to have it for, well, pretty much forever.  And Mikhail Khodorkovsky is not the man to solve that problem, even if he is sincere in his statements that he wants to.

*This phrase is often attributed to Lenin, but is more likely traceable to Nikolay Chernyshevsky. It was used by Plekhanov in a newspaper article in July, 1917 that Lenin responded to.

 

 

 

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December 11, 2014

The Height of Absurdity: The Operation of the Government Hinges on Blanche Lincoln’s Brainchild

Filed under: Commodities,Derivatives,Economics,Financial crisis,Politics,Regulation — The Professor @ 9:20 pm

There’s a whole lotta stupid in Frankendodd. A whole lot. The SEF Mandate is at the top of the list, but the “Swaps Pushout” isn’t far behind.

The Pushout was the brainchild of ex-Arkansas Senator Blanche Lincoln. (NB: I understand the risks of using “brain” in the same sentence as “Blanche Lincoln”.) Blanche, she of the historic 21 point annihilation in the 2010 midterms.

In brief, the Pushout required federally insured banks to move-“push out”-some swaps dealing activities to separate subsidiaries that do not have access to federal deposit insurance. This does not apply to all swaps, mind you. Not even to the bulk of them (interest rate swaps, many CDS). But just to commodity derivatives (other than gold), equity derivatives, and un-cleared CDS.

I took particular interest in this because-again-it slammed commodity derivatives. It was one of several provisions (position limits being another prominent example) that explicitly targeted commodities. Apparently the belief is that commodity derivatives are uniquely risky and subject to abuse, which is just untrue.

Consider a dealer making a market in a commodity index swap. That swap is easily hedged in the futures markets. Ditto with a NYMEX lookalike gas or oil swap. Yes, maybe an unhedged commodity swap is riskier than your typical unhedged IRS, but so what? That’s not the way dealers typically trade (they typically run matched books, or nearly matched books), and capital requirements and other regulations mean that riskier positions incur additional costs that mitigate the incentive to take on excessive risks.

So commodity derivatives (or equity derivatives) don’t create exceptional risks that justify exceptional treatment. What’s more, creating stand-alone affiliates to handle this business entails additional costs. More people. Duplication of infrastructure. Additional capital. There are also scope economies (deriving in particular from capital efficiencies that arise from greater netting opportunities that arise from holding multiple, relatively uncorrelated, positions in a single book). Sacrificing those scope economies will lead to fewer commodity swaps dealers, which in turn makes hedging costlier and the market for these swaps less competitive.

In other words, like many parts of Frankendodd, the Pushout was all pain, no gain. And the pain, mind you, will be suffered not so much by the dealer banks, but by the firms in the real economy that use commodity derivatives to hedge their price risks.

That said, it never seemed to be that big a deal, given the relatively small scale of commodity derivatives and equity derivatives in comparison to IRS and other trades that banks were allowed to keep on the books of insured entities. Small beer compared to the rest of the havoc wreaked by the rampaging Frankendodd Monster.

But this obscure provision could be the one that brings on yet another government shutdown. The most hardcore lefties in the Senate (e.g., Elizabeth Warren) and the House (e.g., Maxine Waters) have drawn a line in the sand over the part of the “Cromnibus Bill” that would repeal the Pushout. If passed, “Cromnibus” would fund the government (except DHS) for the next year, thereby avoiding another shutdown.

But claiming that eliminating the Pushout would be an unconscionable capitulation to Wall Street, the lefties are going to the barricades, and threatening to bring DC to a grinding halt rather than let the Pushout bite the dust. This is not about substance, but symbolism. It is also about a defeated party carrying out a rearguard action on ground where its most rabid partisans can rally.

You cannot make up this stuff. Blanche Lincoln’s populist hobby horse, a desperate effort by a doomed politician, could be the pretext for yet another unproductive partisan confrontation that has virtually nothing to do with the more serious issues associated with funding the government for the next year. (If the Pushout hadn’t passed, would Lincoln have lost by 25 points or 15, rather than 21?) (I note that Gary Gensler worked very closely with Lincoln on Frankendodd: “During drafting sessions, Gensler sometimes sat at the table reserved for staff, advising its Democratic chairwoman, Blanche Lincoln of Arkansas.”)

Cromnibus raises very serious issues. The Swaps Pushout isn’t one of them. But rather than joining the debate on the real issues, or conceding their thumping at the polls, demagogic progs are screaming Swaps Pushout or Fight.

What a travesty.

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December 10, 2014

Judo Pays, Even When the Torrent of Rents Turns Into a Trickle

Filed under: Energy,Politics,Russia — The Professor @ 8:33 pm

As the capo di tutti capi of the natural state that is Russia, Putin’s primary responsibility is to distribute rents in order to secure political support. This is a relatively easy task when oil prices are high and the money is cascading in. Things are somewhat more challenging when the torrent turns into a trickle, as now.

Those closer to the tsar get taken care of: those less favored have to get by on scraps. Putin’s judo buddies-Gennady Timchenko and the Rotenbergs-are the closest to him, and they are continuing to live off of state largesse:

Having grown rich on government contracts during the boom in Putin’s Russia, friends of the president are benefiting anew as times grow tough. Lucrative orders keep rolling in for the favored few even as western sanctions and a collapse in oil prices push the economy to the brink.

The development has polarized Russia’s oligarchy and pitted Putin’s small circle against less well-connected rivals in a battle for money and privilege.

Companies linked to Rotenberg and another Putin confidant, Gennady Timchenko — both targeted by U.S. sanctions for their ties to the president — are landing a growing amount of state contracts. Together, they have won at least 309 billion rubles of work since U.S. sanctions were imposed in March, filings show. That figure — which works out to about $8.1 billion at the average exchange rate over the period — is 12 percent more than they received in all of 2013.

A Rotenberg-affiliated company is also about to secure a 228-billion-ruble order to build a bridge to Crimea, which Russia annexed in March, according to a high-ranking government official, who spoke on the condition of anonymity because the contract hasn’t been officially awarded.

Since the judo gang (and Sechin too) is getting a bigger slice of a shrinking pie, others are becoming resentful:

Executives who are used to prospering from government ties complain privately they are being elbowed aside. One Russian billionaire said Rotenberg and Timchenko have all but cornered the market in government contracts. He spoke on the condition of anonymity to avoid jeopardizing his companies’ chances of winning business.

The question is whether this discontent will coalesce into a an opposition that can challenge Putin’s rule. At present, I think that is not much of a threat, because if Putin is saving all the carrots for his friends, he keeps a tight grip on the knout to bash anyone who might dare to oppose him. The fate of Vladimir Yevtushenkov and Bashneft serves to concentrate the mind of anyone thinking of challenging Putin, and coordinating opposition from several grasping, suspicious, and short sighted oligarchs is extraordinarily difficult.

So the Putin system will wheeze along, making some enormously wealthy, and letting the devil take the rest.

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Regulators, Finally Getting a Clue

Filed under: Economics,Financial crisis,Politics,Regulation — The Professor @ 8:07 pm

Global regulators are concerned, and apparently mystified, by the evaporation of liquidity in bond and stock markets:

Global financial regulators worry that banks are scaling back costly market making functions and that this could leave investors stranded, as well as squeezing funds to drive economic recovery, a senior official said on Tuesday.

. . . .

David Wright, secretary general of the International Organization of Securities Commissions (IOSCO), which groups market regulators like the U.S. Securities and Exchange Commission and Germany’s Bafin, said it was an issue that was being looked at.

“We have seen a ‘Houdini’ disappearance of market makers in general,” Wright added. “First of all we have got to establish the facts, look at the markets … and see if this is a big problem … It’s a new frontier-type issue. I think it’s partly caused by some regulation, but we need to know.”

Partly caused by regulation? What was your first clue, Mr. Wright?

Between the impending Volcker Rule and more stringent capital rules and limitations on off-exchange dealing in stocks, regulators have piled restriction on restriction on market making activities. And they are shocked that liquidity is drying up?

Reminds me of a guy standing with a gasoline can and a blowtorch, and wondering just how his house caught on fire.

The article focuses on Europe, but it’s an issue in the US too. And Canada:

The Bank of Canada warned that investors in the nation’s corporate bond market may be underestimating the difficulty of selling the securities in a market downturn, putting them at risk of greater losses.

Rising holdings of corporate bonds in mutual and exchange-traded funds could exacerbate price swings if the funds are forced to sell in a rout, the central bank said in its semi-annual Financial System Review. Some market participants also “believe” dealers are reducing market-making activity, or acting as the middleman between trades, which may make it harder to unwind large positions, the bank said.

“A potential deterioration of liquidity in Canadian corporate bond markets may not be fully priced in,” according to the report. “Market trends suggest that more sizable price swings might be observed in the future than previously, should investors seek to simultaneously unwind large positions.”

In the aftermath of the post-crisis regulatory bacchanalia, the regulators are finally coming to recognize the unintended consequences of their actions. They are starting to see-sometimes rather dimly, pace Mr. Wright-that regulations intended to make the system less risky are creating new risks.

I’ve used the analogy of the Sorcerer’s Apprentice before. It’s as relevant now, as it ever was.

 

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December 8, 2014

VVP: Not Getting His Kicks On Brent $66

Filed under: Economics,Energy,Music,Politics,Punk,Russia — The Professor @ 9:19 pm

Brent traded with a 66 handle for most of today. I am sure that Putin was not getting his kicks on Brent 66.

But no worries. It didn’t stay there long: it’s now trading at a 65 handle.

Going down, down, down, in a ring of fire.

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December 7, 2014

The Hamster Wheel Metaphor Makes It to Moscow

Filed under: Politics,Russia — The Professor @ 4:25 pm

I’ve been using the “hamster wheel from hell” to refer to Putin’s Russia for almost exactly 5 years: the first post that used the phrase was from 8 December, 2009.

The “Putin’s Russia” cartoonist at the Moscow Times has picked up on the theme.

hamster_wheel_moscow_times

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December 6, 2014

Hit the Road, State Street

Filed under: Clearing,Derivatives,Economics,Financial crisis,Politics,Regulation — The Professor @ 11:51 pm

Following the lead of Bank of New York, State Street announced that it is exiting the swaps clearing business:

State Street (STT) Corp. is closing down its swaps business after clients said new regulations steered them away for using the products.

The bank will shutter its U.S. business for clearing swaps early next year and will shelve plans to start a similar operation in Europe, Anne McNally, a spokeswoman for the Boston-based company, said in an e-mail statement today.

State Street will instead focus on trading other types of derivatives, particularly more traditional exchange-traded futures, that have not been subject to broad new regulations imposed since the 2008 financial crisis.

“Due to market and regulatory factors, our clients have largely evolved their investment strategies towards the use of futures and away from” over-the-counter derivatives, McNally said in the statement.

From even before Frankendodd was passed, I predicted that the swap clearing firm business would be highly concentrated and dominated by the major dealers who had dominated the OTC market. Indeed, I argued that the regulatory overhead created by Frankendodd would actually tend to increase scale economies and make the clearing services business more concentrated and connected.

But Gensler, with the vocal support of BNY, State Street, and Ken Griffen of Citadel-and also MF Global-argued that there was a clearing cabal of dealer firms that was was creating unnecessary barriers to entry into clearing. BNY and State Street claimed that the dealers were forcing ICE Clear to require members to have excessively large amounts of capital, an this prevented them from becoming clearing members. Tear down those walls, and doughty entrants like BNY and State Street and Newedge and others would make the clearing business far more competitive.

This view was channeled in a NY Times story written by Louise Story almost exactly four years ago: I criticized Story’s story pretty harshly. Reflecting this view, the CFTC rules substantially eased the capital requirements and other requirements to become clearing members. Gensler, BNY, STT, etc., thought that this would lead to a much less concentrated, much more competitive clearing business.

But this was to misunderstand the economics of clearing, clearing firm scale and scope economies, and how the complicated regulatory structure CFTC put in place exacerbated these scale economies. Even futures clearing (which is substantially simpler than swaps clearing) has become much more concentrated over the years. Only the truly huge can survive.

BNY and State Street tried, and failed. They couldn’t overcome their inadequate scale even though they could offer complementary collateral management and custodial services. They were just too small.

State Street announced that it was going to focus on futures clearing, but even here it faces problems. It just lost its biggest customer (Pimco). Moreover, there are scope economies between futures clearing and swap clearing. State Street will be at a disadvantage relative to say Goldman, which can offer customers who trade both swaps and futures one stop shopping for clearing services at lower cost because of these scope economies.

So much for clearing mandates making the financial markets less concentrated and less interconnected: instead we (predictably and predicted) have a derivatives marketplace dominated by a small number of CCPs each dominated by a small number of large bank clearing members who are members of all major CCPs, which makes entire world clearing space concentrated and highly interconnected. That anybody thought the post-crisis regulations would reduce concentration and interconnections in swaps markets is illuminating. It demonstrates that those primarily responsible for implementing Frankendodd didn’t really understand the economics of what they were attempting to regulate, and as a result, they didn’t really know what they were doing.  They thought they were striking a blow against too big to fail and a collusive dealer oligopoly. They were wrong, and State Street’s abandonment of its swaps clearing effort is just further proof of how wrong they were.

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December 5, 2014

More on Putin’s Potemkin Village of an Annual Presidential Address

Filed under: Economics,Politics,Russia — The Professor @ 8:08 pm

Putin’s LSD flashback of a presidential speech continues to attract comment, most of it critical, bemused, or shocked. (Maybe the deviously clever CIA has drugged him!)

His remarks about the holiness of Crimea have sparked the most commentary. A common reaction is that it was a misstep, not because it was delusional, but because it affirmed Ukraine’s claim over Crimea because the sainted Vladimir the Great* was Grand Prince of Kiev:

“Prince Vladimir was Kievan, not Muscovite, and this probably only underlines the right of Kiev and not Moscow to Crimea,” Andrei Zubov, a Russian historian and political scientist, said in an interview.

This is a serious error, because it presumes that Putin believes that the Ukrainian government in Kiev is legitimate, and that Ukraine is an independent nation. He has made it abundantly clear that he believes nothing of the kind. He believes the exact opposite, in fact.

One historian quoted in the linked Bloomberg article indicates that Kiev is of greater significance to Russian Orthodox believers than Crimea. Exactly! Meaning that if Moscow has a sacred duty to claim Crimea, it has an even greater duty to liberate Holy Kiev from the godless Nazi American puppets.

In other words, Putin’s sanctification of Crimea has very dire implications for Kiev.

Of course the reason that Putin uses such hyperbole about Crimea is that it is all he has to show for his machinations of the last year. The price Russia has paid is high, and growing. Hence he must inflate the value of Crimea as well to make it all seem worthwhile.

The rather pathetic economic parts of the speech-which filled up almost half of it-also drew substantial criticism. Commenter Pat right points out that I did not mention one important part:

I propose using our reserves (above all, the National Welfare Fund) to implement a programme for recapitalisation of leading domestic banks, with funding to be provided under clearly specified conditions to be funnelled into the most significant projects in the real economy at affordable interest rates. Furthermore, banks will have to introduce project financing mechanisms.

The use of reserves means investing dollars and euros into “leading domestic banks,” which presumably means Sberbank and VTB, and perhaps some others.  As Pat notes, this is a stunning confession of vulnerability.

What will the banks use these dollars and euros for? They can’t fund their current forex needs due to sanctions. So presumably, the “leading banks” would use the dollars and euros received from the central bank to repay maturing forex liabilities. Thus, the forex assets on the RCB’s balance sheet (e.g., Treasury securities) would be replaced with dollar/euro loans to the banks. How are the banks going to pay these back? This may buy some time, but eventually Sberbank, VTB, and any others receiving the RCB funds will have to raise dollars and euros to pay back the loan, or the RCB will have to extend the loan, or the RCB is going to have to write down the loan in whole or in part. Given that the end of sanctions is nowhere in sight, the first alternative is unlikely. Meaning that the RCB will be replacing high quality dollar and euro assets with very risky dollar and euro assets. The likely outcome is a reduction in CB reserves.

The Central Banks is also spending money to try to prop up the Ruble (or is that the Rubble?) It intervened to stem the post-speech bloodbath on Wednesday, and supposedly spent $1 billion (on top of $700 million spent earlier in the week). It evidently intervened today as well; no reports yet on how much money it spent today.

Drip. Drip. Drip.

Of course, there are other hands out, begging for funds from the reserves. Rosneft, for interest, and other large “national champions.” Again, this would involve the RCB exchanging high quality dollar assets for the liabilities of companies of marginal credit quality, and who can exert political pressure to get favorable pricing terms, and to stall repayment later.

Drip. Drip. Drip.

And of course there are pensions and other “social obligations”.

Drip. Drip. Drip.

Is it any wonder then, why Russian CDS are trading at over 370 bp, wide of every other nation in the world except for Argentina, Venezuela, and Ukraine(!)? Great company, eh? To put things in perspective, Kazakhstan is trading at 15obp, Russia at about 370.

Russia’s government debt yields have gone stratospheric. The 10y is now trading at 11.76 percent. Russia, in other words, dreams of being Greece.

Russian_10y_yield_141205

And Putin has no clue as what to do.

Putin also praised Russian athletes, especially the victors at Sochi (no mention of the hockey team, though):

The 2014 Winter Olympics in Sochi played an enormous role in promoting a healthy lifestyle. Once again, I’d like to congratulate our Olympians on their success.

This paean also fell flat, given another news story claiming that virtually all Russian athletes dope:

 As many as 99% of Russian athletes are guilty of doping, a German TV documentary has alleged.

The programme claims that Russian officials systematically accepted payment from athletes to supply banned substances and cover up tests.

The documentary, shown by Das Erste, also implicates the International Association of Athletics Federations (IAAF) in covering up the abuse.

The Russian Athletics Federation (RAF) says the allegations are “lies”.

However, both the IAAF and the World Anti-Doping Agency (Wada) have said they will look into the claims.

The IAAF said it had “noted a number of grave allegations” and revealed that an investigation into some of the claims was “already ongoing”.

The BBC has not independently verified the documentary’s allegations and is awaiting responses from athletes targeted in the programme.

In the documentary, broadcast on Wednesday, former discus thrower Yevgeniya Pecherina claimed that “most, the majority, 99%” of athletes selected to represent Russia use banned substances.

“You can get absolutely everything,” added the 25-year-old Russian. “Everything the athlete wants.”

Pecherina is currently serving a 10-year doping ban that is due to end in 2023. She had already been handed a two-year suspension in 2011.

The entire speech, in other words, would have done Potemkin proud.

* Methinks Putin wants to appropriate that title.

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December 4, 2014

The Hamster Wheel From Hell: Putin’s Presidential Speech Edition

Filed under: Economics,History,Military,Politics,Russia — The Professor @ 7:58 pm

Putin gave his annual Presidential address today. It was the by now familiar combination of anti-American paranoia, historical fiction, hyper-nationalism, and economic idiocy.

The most notable thing about the speech is how much in Putins head the US is. Everything that ails Russia originates in the US. A sample:

Speaking of the sanctions, they are not just a knee-jerk reaction on behalf of the United States or its allies to our position regarding the events and the coup in Ukraine, or even the so-called Crimean Spring. I’m sure that if these events had never happened – I want to point this out specifically for you as politicians sitting in this auditorium – if none of that had ever happened, they would have come up with some other excuse to try to contain Russia’s growing capabilities, affect our country in some way, or even take advantage of it.

The policy of containment was not invented yesterday. It has been carried out against our country for many years, always, for decades, if not centuries. In short, whenever someone thinks that Russia has become too strong or independent, these tools are quickly put into use.

However, talking to Russia from a position of force is an exercise in futility, even when it was faced with domestic hardships, as in the 1990ies and early 2000ies.

We remember well how and who, almost openly, supported separatism back then and even outright terrorism in Russia, referred to murderers, whose hands were stained with blood, none other than rebels and organised high-level receptions for them. These “rebels” showed up in Chechnya again. I’m sure the local guys, the local law enforcement authorities, will take proper care of them. They are now working to eliminate another terrorist raid. Let’s support them.

Let me reiterate, we remember high-level receptions for terrorists dubbed as fighters for freedom and democracy. Back then, we realised that the more ground we give and the more excuses we make, the more our opponents become brazen and the more cynical and aggressive their demeanour becomes.

Despite our unprecedented openness back then and our willingness to cooperate in all, even the most sensitive issues, despite the fact that we considered – and all of you are aware of this and remember it – our former adversaries as close friends and even allies, the support for separatism in Russia from across the pond, including information, political and financial support and support provided by the special services – was absolutely obvious and left no doubt that they would gladly let Russia follow the Yugoslav scenario of disintegration and dismemberment. With all the tragic fallout for the people of Russia.

In Leninist terms, the US is Who, Russia is Whom.  The object, not the subject. Putin even blames the US for Chechen terrorism. The last paragraph is a great example of Putin’s historical distortions. In fact, the US was deathly afraid of a chaotic, Yugoslavia-like break up of a nation with thousands of nukes and massive stocks of chemical weapons: recall that Bush I even opposed the breakup of the USSR, let alone Russia.

The irony, of course, is that whereas Putin (and Russians generally) imagins that every American goes to bed at night and wakes every morning scheming to subjugate Russia and rob it of its riches, the truth is that 99+ percent of all Americans couldn’t care less about it. That’s a truth Putin and other Russians just can’t handle. So they construct this alternate reality in which the US is obsessed with Russia.

 

The cooperation on “the most sensitive issues” that Putin’s mentions involved mainly the Nunn-Lugar Cooperative Threat Reduction Program, which involved the US spending billions of dollars in Russia to secure nukes. Moreover, the Russian Federation assumed the USSR’s Security Council seat (with its veto), and was admitted to international organizations such as the G-8 for which it was manifestly unqualified.

Putin’s historical revisionism did not stop there. He elevated Crimea to a central-indeed holy-place in Russian history:

All of this allows us to say that Crimea, the ancient Korsun or Chersonesus, and Sevastopol have invaluable civilisational and even sacral importance for Russia, like the Temple Mount in Jerusalem for the followers of Islam and Judaism.

The equation of Crimea to the Temple Mount is, well, original. It is bizarre that Putin makes the “Temple Mount” sacral for Muslims, and puts them ahead of Jews. Yes, al Aqsa mosque is on what the Jews (with abundant historical and archeological support) claim to be the site of their Temple, but Islam’s veneration of the site has nothing to do with it being the “Temple Mount”, and indeed, there is an active campaign to deny that this was the site of the Jewish temple.

A good rule for reading the speech is to play the opposite game: take what Putin says, and interpret it the opposite way. There are far too many cases of this to cover them all, so I’ll just mention a couple of the greatest hits:

  • “We will tell the truth to people abroad, so that everyone can see the real and not distorted and false image of Russia.” (That’s what RT does, for sure!)
  • “We will actively promote business and humanitarian relations, as well as scientific, education and cultural relations.” (Tell to the “foreign agent” NGOs, the British Counsel, etc.)
  • “We will do this even if some governments attempt to create a new iron curtain around Russia.”
  • “We will never enter the path of self-isolation, xenophobia, suspicion and the search for enemies.” (My favorite, by far. Every word an inversion of the truth. This is the official Russian government translation. The New York Times quotes Putin as saying “paranoia” instead of “self-isolation, xenophobia.” Either way, pure gold.)
  • “The most important thing now is to give the people an opportunity for self-fulfilment. Freedom for development in the economic and social spheres, for public initiatives is the best possible response both to any external restrictions and to our domestic problems.” (Look at the rising flight of Russians to points west, because the opportunity for self-fulfillment in Russia is minimal.)
  • “Conscientious work, private property, the freedom of enterprise – these are the same kind of fundamental conservative values as patriotism, and respect for the history, traditions, and culture of one’s country.” (Yeah. Russia. The land of private property and free enterprise.)
  • “Finally, it’s crucial to abandon the basic principle of total, endless control.”

I could go on. And on. And on.

Some commentary I read said that Putin did not mention anti-corruption efforts, but this isn’t true. He did, but very obliquely:

A huge economic reserve is lying on the surface. It is enough to look at government-financed construction projects to see this. At a recent forum of the Russian Popular Front, examples were cited of funds being invested in grandiose buildings or the construction costs of same-type – I want to emphasise this point – facilities, differing several times over, even in neighbouring regions.

I believe that it is necessary to phase in a system of a single technical contracting authority, and centralise the preparation of standard projects, construction documentation and the choice of subcontractors. This will make it possible to overcome the existing disparity in construction costs and ensure significant saving of public funds spent on capital construction projects, between 10 percent and 20 percent. This practice should be extended to all civil construction projects financed from the federal budget. I instruct the Government to submit relevant proposals.

Yesterday, the Prime Minister and I discussed this topic. Of course, there are some pitfalls here, and knowing what they are, it is important to avoid them, move with caution, implement several pilot projects in several regions and see what happens.

However, leaving the situation as it is today is no longer an option. As I said earlier, construction costs of similar facilities in neighbouring regions differ many times over. What is this?

Diversion or embezzlement of budget funds allocated for federal defence contracts should be treated as a direct threat to national security and dealt with seriously and severely, as in the suppression of the financing of terrorism. I mention this for a reason.

I don’t think there is anything to hide or gloss over here. We have just held our traditional meeting in Sochi under the leadership of the Defence Ministry, combat arms and services commanders and leading defence company designers.

On certain positions, prices double, triple or quadruple, and in one case they grew 11 times. You realise that this has nothing to do with inflation or with anything, considering that practically 100 percent of funding is provided in advance.

In other words, state construction projections and defense contracting are rife with corruption. But Vlad has it under control. He has decreed more intensive oversight of contracting. That’s never been tried before, surely, and just as surely will work like a charm.

Putin acknowledged the fraught economic situation, including the Ruble’s decline. In that fine demagogic tradition, he rounded up the usual suspects: speculators:

Today we are faced with reduced foreign exchange proceeds and, as a consequence, with a weaker national currency, the ruble. As you are aware, the Bank of Russia has switched to a “floating” exchange rate, but this does not mean that the Bank of Russia has withdrawn from controlling the exchange rate, and that the ruble may now be the object of unchecked financial speculation.

I’d like to ask the Bank of Russia and the Government to carry out tough and concerted actions to discourage the so-called speculators from playing on fluctuations of the Russian currency. In this regard, I’d like to point out that the authorities know who these speculators are. We have the proper instruments of influence, and the time is ripe to use them.

At this point, Central Bank head Nabiullina was probably looking for sharp objects to jab into her carotid artery. The “proper instruments of influence”-presumably burning reserves to buy Rubles and hiking interest rates-will dent Russia’s reserves and hammer its already reeling economy.

Hilariously, the moment Putin mentioned the Ruble, it resumed its inexorable decline, going from 52.65 before he opened his mouth to 54.45 (more than 3 percent) by the end of the trading day.

Putin recognized the inflationary impact of the Ruble’s decline, but he has a solution! Controlling prices:

Of course, a weaker ruble increases the risk of a short-term surge in inflation. It’s imperative that we protect the interests of our people, first and foremost, those with low incomes, and the Government and the regions must ensure control over the situation on the food, medicine and other basic goods markets. I’m sure this can be done without any problem, and it must be done.

Yes. It can be done “without any problem,” just like it has been since Diocletian.

Putin also mentioned capital flight, and proposed a complete amnesty to those repatriating their money, no matter how dirty it is:

Of course, it is essential to explain to the people who will make these decisions what full amnesty means. It means that if a person legalises his holdings and property in Russia, he will receive firm legal guarantees that he will not be summoned to various agencies, including law enforcement agencies, that they will not “put the squeeze” on him, that he will not be asked about the sources of his capital and methods of its acquisition, that he will not be prosecuted or face administrative liability, and that he will not be questioned by the tax service or law enforcement agencies. Let’s do this now, but only once. Everyone who wants to come to Russia should be given this opportunity.

We all understand that the sources of assets are different, that they were earned or acquired in various ways. However, I am confident that we should finally close, turn the “offshore page” in the history of our economy and our country. It is very important and necessary to do this.

Somehow I doubt that anyone who spirited any ill-gotten gains-or even honestly-gotten gains-out of Russia will put much faith in those assurances, so don’t look for the money to start flowing east anytime soon.

The last half of the speech focused on economics, and presented a laundry list of goals without anything resembling even an outline of how to achieve them. Productivity growth, diversifying the economy, import substitution, high tech exports, and on and on and on. But unless Putin gets some ruby slippers or finds a genie who grants unlimited wishes, none of this is going to happen. This part of  the speech was just another spin of Putin’s Hamster Wheel From Hell.

Nothing in the speech should be a surprise. Putin has no economic ideas, and just repeats the same nostrums year after year after year. In foreign policy, he is doubling down on truculence and confrontation. In other words, stagnation at home and aggression abroad. The foreign adventures will rest on a crumbling economic foundation. Collapse is inevitable. The only problem is that Putin can wreak much havoc and inflict much harm before the inevitable occurs.

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