Streetwise Professor

July 22, 2014

The Sesquicentennial of the Most Compelling-and Perhaps Most Important-Battle of the Civil War

Filed under: Civil War,History,Military,Politics — The Professor @ 8:14 pm

Today is the 150th anniversary of what I consider to be the most compelling battle of the Civil War: the Battle of Atlanta.

I find it compelling because it was a true soldier’s battle that demonstrated the unmatched martial virtues of the combatants, especially those in the Union Army of the Tennessee.

It was a soldiers battle because it was not fought according to any plan. There was a plan, and a rather impressive one on paper, but one that did not even make it to the point of first contact with the enemy. Instead, Confederate General John Bell Hood’s plan dissolved before a shot was fired due to the confusion of a night march, the fatigue of soldiers who had been engaged in combat for virtually every day of the previous two-and-a-half months, and wooded terrain crossed by watercourses and millponds.

Hood desired to reprise Jackson’s flank attack at Chancellorsville, a mere 14.5 months prior. But whereas Jackson attacked in depth, with three divisions one behind the other, Hood’s four attacking divisions were were strung out in a long, scraggly line scattered across several miles of Georgia scrub pine forest. Due to the trials of the march, the forbidding terrain, and the need to make haste, Hood’s divisions (commanded by Bate, Walker, Cleburne, and Maney) attacked mainly as brigades operating on their own hook, only tenuously connected with each other, if connected at all.

That said, they caught McPherson’s Army of the Tennessee in a very vulnerable spot. They were assailed from the direct flank (like Jackson had done to O.O. Howard’s hapless XIth Corps at Chancellorsville) and from the rear and front. Most Civil War armies would have fled when hit in force from flank and rear. But in one of the most sublime displays of soldiership in any war, Grant’s old army did not panic. Indeed, with little direction from any officer above brigade or division level, its soldiers reacted to the situation with aplomb. When attacked from the rear, they faced to the rear and beat off the attack. When attacked from the flank, they refused their lines and repelled it.

Some units, particularly those in the XVIIth Corps, were attacked sequentially from the flank, rear, and front. Resolutely, they responded to each threat. When attacked from the rear, they jumped to the front of their earthworks and beat off the assault, sometimes hand-to-hand. In one of the fights, Colonel Belknap of the 15th Iowa reached over the ramparts to grab Colonel Lampley of the 45th Alabama, wrestled him over the earthworks, and made him prisoner. Lampley had been screaming at his men for not following him. Belknap berated him: “Look at your men! They are all dead! What are you cursing them for?” (To demonstrate that martial prowess does not imply moral virtue, Belknap went on to become a corrupt Secretary of War under Grant. He resigned before being impeached for peculation in the matter of Indian trading posts.)

After being attacked in the rear, when attacked from their (previous) front (i.e., from the direction of Atlanta), the XVII Corps men cooly jumped to the proper side of their works, and easily drove off the attack.

When the Confederates assaulted from the flank, they withdrew stubbornly, fighting first from one side of the trenches, then the other, until they eventually formed on Bald Hill.

There the climax of the battle occurred. In ferocious assaults that continued into the dusk and then into the dark, the Rebels tried time and again to drive the Federals from their redoubt and trenches on the hill. But every time, the Illinoisans, Ohioans, Iowans, and Wisconsin men drove them back.

I am not aware of better fighting on any battlefield of the Civil War, or indeed of any other conflict.

Although the conflict around Bald Hill (sadly leveled by the construction of I-20 in the ’50s) is the most stirring part of the battle, the conflict is better known for the action around the Troup Hurt House. The Union counterattack that drove the Confederates from their lodgment in the Federal lines near that mansion is memorialized in the Cyclorama which is still on display in Walker Park in Atlanta. This was indeed an inspiring action that again demonstrated the sterling qualities of the soldiers in each army, but in my view pales in comparison with what occurred to the south on Bald Hill.

Throughout the battle, Confederates attacked ferociously, and the Union troops responded bravely and cooly, even when caught in the most exposed and dangerous positions. I defy anyone to identify a battle in which such a large number of troops (on the order of 30,000) responded as marvelously as did the troops of the XVth, XVIth, and XVIIth Corps of the Army of the Tennessee.

For the most part, they did this on their own initiative, and the initiative of company, regimental, brigade, and sometimes division officers. Their army commander, John B. McPherson, was shot dead early in the engagement. His replacement, John “Black Jack” Logan, provided inspirational leadership, but his tactical role was modest at best. The XVIIth Corps commander, Frank Blair, was far to the rear (which led many to question his courage).

Soldiers fought. Soldiers extemporized. Soldiers won.

Such individual initiative has been the hallmark of American soldiers since 1775. The Army of the Tennessee boys were recalcitrant soldiers in the traditional sense, resentful of discipline, and disdainful of spit and polish. But could they fight! They never lost a battle.

The Army of Northern Virginia is usually considered the exemplar of American armies in the Civil War, and it was indeed a marvel. But man for man, officer for officer, it could not compare to the Army of the Tennessee, especially at its July, 1864 apogee.

I have a personal connection to that Army. My great-grandmother’s brother, John Hatfield, fought in the 46th Ohio Veteran Volunteer Infantry. This unit was in Walcutt’s brigade of the 4th Division (Harrow’s) of the XVth Corps (formerly commanded by Sherman, then by Logan). It performed the signal service of defending the Union flank and rear against the attack of Smith’s Texas Brigade of Cleburne’s division. (John’s brother, Eli, had his arm shattered at the shoulder by a Minie ball at the Battle of Dallas on 28 May, 1864. My great-grandmother, who died when I was 4, talked of “Uncle Eli with the dead arm.” Medical records in the archives reveal that Eli was shot too close to the shoulder to permit amputation, so the surgeon removed all the shattered bone in his arm from the shoulder to the elbow. Ever after, the arm hung limp at his side.)

It is particularly inspiring to me at times like to consider the heroism of men like John and Eli Hatfield; their fellows in Sherman’s army; and even their foes in Hood’s Army of Tennessee. Some redeeming things came out of the carnage of the red clay hills of Georgia 150 summers ago, and these things were not sullied by craven politicians: indeed, it redeemed many of the errors and sins of the political class of 1860s America. That battle sealed the fate of Atlanta (though 6 weeks of grueling combat were to come before the city fell), which in turn sealed the fate of the Confederacy, for the fall of Atlanta secured Lincoln’s re-election, and thus the ultimate victory of the Union. And of course, that victory extinguished slavery in the United States. To have participated in such a thing is a credit to any man.

Would that today, we living Americans could be worthy of those who bled and died on a scorching day in the red clay of central Georgia, 150 years ago.

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Obama Laying Groundwork Through Leaks of Charging Putin With the Geopolitical Equivalent of 3d Degree Manslaughter

Filed under: History,Military,Politics,Russia — The Professor @ 6:49 pm

There were disturbing, but not surprising, signs today that the Obama administration is backing away from holding Putin & Russia to account in any serious way for the MH17 Massacre.

First, Obama had a call with Dutch PM Rutte while on AF1 on his way to (wait for it!) a West Coast fundraising junket. (You are shocked, I’m sure.) He said that he was “concerned” about continued Russian infiltration of weapons into Ukraine. Not gravely concerned. Not deeply concerned. That is soooo last week. Just, “Concerned”. Prediction: Next week it will be “meh.”

Second, the AP ran this very disturbing article, which describes a briefing by anonymous “Senior U.S. intelligence officials.” They bend over backwards to minimize Russia’s-and Putin’s-culpability:

But the officials said they did not know who fired the missile or whether any Russian operatives were present at the missile launch. They were not certain that the missile crew was trained in Russia, although they described a stepped-up campaign in recent weeks by Russia to arm and train the rebels, which they say has continued even after the downing of the commercial jetliner.

In terms of who fired the missile, “we don’t know a name, we don’t know a rank and we’re not even 100 percent sure of a nationality,” one official said, adding at another point, “There is not going to be a Perry Mason moment here.”

White House deputy national security adviser Ben Rhodes said the U.S. was still working to determine whether the missile launch had a “direct link” to Russia, including whether there were Russians on the ground during the attack and the degree to which Russians may have trained the separatists to launch such a strike.

“We do think President Putin and the Russian government bears responsibility for the support they provided to these separatists, the arms they provided to these separatists, the training they provided as well and the general unstable environment in eastern Ukraine,” Rhodes said in an interview with CNN.

Note the emphasis on stating what we (allegedly) don’t know, not on what we do. Note the use of the word “direct” in discussing the linkage to Russia. Classical defense attorney tactics in creating reasonable doubt about the truth of a top charge, like capital murder.

High level intelligence officials brief the press anonymously for two reasons: (1) to kneecap the administration in opposition to policies they dislike, or (2) to prepare the ground for future administration announcements or actions. The fact that the statements of the anonymous officials dovetail with what Rhodes says, (1) is highly unlikely. The fact that multiple officials are saying this further undermines possibility (1). So (2) it is.

Briefings like this do not occur by accident. They are planned. They have a purpose. And here the purpose is to shape expectations, and to lay the groundwork for Obama (and the Euros) to  move on from the horrid, ugly scenes in Donetsk and back away from any confrontation with Putin.

I therefore predict that within a very short interval, we shall see Obama sally forth, and deliver an indictment of Putin for the geopolitical equivalent of Third Degree Manslaughter: “causing the death of another person either through criminal negligence or through the commission of an unlawful act not amounting to a felony.”

Obama-with the Euros nodding furiously in agreement-will accuse Putin of negligently creating the conditions that led to the deaths of 298 innocent people, but no more. Since this is a mere misdemeanor, no harsh penalty will be demanded. Putin will be sentenced to a period of isolation from the international community, not to exceed six months. Which Vlad will probably consider this a vacation, given how much he loathes pretty much every European “leader,” not to mention Obama.

Note: this is not even a plea bargain. Putin will have to make no allocution. It is a preemptive surrender by the prosecutor.

I predict this result primarily because I believe Obama and the Euros have zero appetite to confront Putin. They can live with the low-level warfare in eastern Ukraine. (Not so low-level for the Ukrainians, of course, who have a much harder time living with it: indeed, they often die with it. But they should look out for themselves, because Obama, Merkel, Hollande, et al are casting them in the role of Czechoslovakia in a gala production of Munich!) Conversely, they blanch at the prospect of going eyeball to eyeball with Putin, even with economic weapons alone.

Of course the Panic! in the Kremlin Disco gang interpret the AP interview as “an unforced error.” A mistake that mis-states administration policy. They are invested in the belief that a steely Obama will force Putin to capitulate in panic.

Deluded fools. Denial ain’t a river in Egypt. I understand Obama and the Euros. More importantly, Putin understands Obama and the Euros. They will run to form. Meaning that they will run.

I do not write this with joy, to the contrary.

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July 21, 2014

The Dogs of Accounting Have to Hound Putin, Not the Average Oligarch With Dirty Money

Filed under: Economics,Politics,Russia — The Professor @ 6:48 pm

An idea to combat Putin and Russia that is gaining traction is to go after dirty Russian money in places like Londongrad and New York and Switzerland. Superficially it is an attractive idea, but upon further analysis it will be ineffectual, and perhaps counterproductive.

I say this as an early recommender of asymmetric financial warfare against Russia. In the immediate aftermath of the invasion of Georgia almost 6 years ago, I wrote that the US should “cry havoc and let slip the accountants of war.” But I recommended pointing the forensic accountants directly at Putin and his chief henchmen. Now, that would include Sechin, Ivanov, Yakunin, and the like.

Going after oligarchs and minigarchs in Belgravia or other similarly fashionable enclaves would certainly discomfit them, but would hardly cause VVP to lose a minute’s sleep, let alone to tame his aggressive ways. Only to the extent that these individuals are straw buyers for Putin would threatening their assets with confiscation for having been acquired illicitly bother the Russian president in the slightest.

Indeed, going after Russians with large investments overseas could actually redound to Putin’s benefit. The ability to spirit their wealth out of the country is the main protection that rich Russian have against Vlad’s predations. He has been campaigning for “on shoring” of Russian wealth squirreled away abroad: he has a variety of reasons to do so. A vigorous investigation of foreign investments and holdings of Russians would help spur the very on shoring that Putin wants (for others, I mean). I can just see him saying: “Come to Vova!” This would be a self-inflicted wound.

Pressuring Putin requires going after his money, and that of his closest cronies, not the wealth of the Abramoviches or Deripaskas. That said, this is a daunting task, given the labyrinth of shell companies and straw buyers that no doubt connects Putin et al to property, investments, and accounts. Indeed, it is likely the case that there is no document with Putin’s name on it: a verbal agreement, backed by the very credible threat of a serious health or legal problem in the event of breach, may suffice. Or if such a document exists, it is in Putin’s safe. (With all the appropriate stamps, of course: it’s not official without stamps!) These documents would say something like “I, Gennady Timchencko, hold in trust for Vladimir Vladimirovich Putin 40 percent of the shares in Gunvor.” Or, “I, Arkady Rotenberg, do pledge to pay to Vladimir V. Putin 20 percent of the gross revenues from state contracts or contracts with OAO Gazprom paid to my companies.” (Putin would probably prefer dividends to ownership per se.)

Thus, attacking Putin’s wealth will be a challenge, and one that no doubt requires the active involvement of US and other intelligence agencies. Moreover, given that definitive ownership would no doubt be difficult to establish, no doubt the US would have to lean on financial institutions which it has strong, but not definitive proof, are the repositories of Putin’s billions, in order to put those monies at risk.

But that’s where investigative efforts should be directed. Harassing even the most obscene, obnoxious oligarch with the dirtiest money in London or the south of France won’t affect Putin’s  policy in Ukraine or anywhere else in the slightest. It might be psychologically satisfying to do this, but it will be ineffectual at best, and counterproductive at worst.

 

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I’m Battling Confirmation Bias, But Obama and the Euros Make It Damned Hard

Filed under: Economics,History,Military,Politics,Russia — The Professor @ 10:45 am

Last night I said to bet on form, and that Putin would be doing so. And indeed, it seems that everyone is reverting to form.

The Euros are talking tough and angry, but when it comes to actually doing something, pretty much nothing. As is their wont, they are squabbling over how to divide the costs. No major country will agree to sanctions that require it to bear a greater burden than other EU members. So the response is, as usual, driven to the least common denominator. Cameron proposes that future arms sales to Russia be stopped: but that conveniently lets the French proceed with the Mistral sale. Other proposals involve adding a few more names to the lists of sanctioned individuals, but no companies, and certainly no level 3 sanctions.

Perhaps taking a cue from the Europeans, to whom he has largely deferred, Obama spoke this morning and just hit the replay button. Russia risks becoming more isolated. Unless Russia acts to de-escalate, “the costs for Russia’s behavior will only continue to increase.” Yadda, yadda, yadda. A remake ofGroundhog Day, with Obama threatening costs and isolation replacing “I Got You Babe” in the soundtrack.

Check out that last phrase. Note the passive voice. Very telling. Just who, pray tell, is going to impose these costs, and how? God? Santa Claus? More seriously: The “international community”? The “community of nations”? What is the US going to do? What are you going to do, Barry?

There is no way this pablum is going to induce panic in the Kremlin. Quite the reverse. Doesn’t Obama realize that repetitions of vacuous statements unaccompanied by serious action only embolden Putin, and are exactly why we are where we are?

That question was completely rhetorical.

The only people who would panic when hearing such empty statements directed at them are those more timorous and craven than those uttering them. If such people exist.

Another disturbing fact that strongly suggests that Obama is shying away from any robust action. His statement focused disproportionately on access to the crime scene, rather than who carried out the crime itself. Although Obama has hinted at Russian culpability in the past, this statement made no connection between Russia and the shootdown. He just made a brief remark about getting the facts out there and holding people accountable.

Look. The public record makes the guilty party obvious for all to see. Obama, with access to US intelligence sources, certainly knows far more. The fact that he continues to be reticent is damning. Five days after KAL007, Reagan had given a national address from the Oval Office (not a quickie on the WH lawn), laid out in detail the case for Soviet guilt, and played tapes of intercepted Soviet communications. We are five days out, and if anything, Obama is being less forthcoming about US information on Russian responsibility.

The crime scene issue is pretty much done with now, anyways. Moreover, it is relatively easy for Putin to make pleasant noises on this issue, now that his thugs have be in control of the place for 5 days.

Further on the panic meme, this article from Bloomberg has gotten huge play. It claims that the Russian economic elite is horrified by Putin’s course in Ukraine. Maybe they are, but the article just quotes some think tank guy who claims that’s what the business class is thinking.

And it’s not as if it matters. Even if they are horrified, will they challenge Putin? Their silence-not a single one was quoted-speaks volumes. If these individuals united in opposition, perhaps they could threaten Putin. But they show no signs of doing so, and some basic game theory says they almost certainly will not. They face a coordination problem. Who will go first in opposition, and lose everything with virtual certainty?: better to stick with Putin, and take a big hit to one’s wealth but be left with something. Including one’s freedom (and maybe one’s life). Everyone  will play Alfonse and Gaston, letting the other guy go first. Trying to conspire secretly is extremely dangerous, given the inability to trust anyone and the omnipresent surveillance and informants.

So even if the business elite is horrified, and indeed panicked, this means exactly squat politically.

One last thing about playing to form. The Russian Ministry of Defense gave its X-Files versions of the causes of the destruction of MH17. The only thing that surprised me is that they did not blame HAARP, for which they have blamed crop failures, earthquakes, and the loss of a space probe. Maybe they’re holding that one in reserve, just in case the other stuff doesn’t pan out.

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July 20, 2014

There’s No Panic! in the Kremlin Disco Because Putin Has Weighed His Foes and Found Them Wanting

Filed under: Economics,History,Military,Politics,Russia — The Professor @ 9:17 pm

As the evidence of Russian guilt for the MH17 massacre mounts and becomes irrefutable, there is widespread conjecture that Putin has been backed into a corner, and that he and the siloviki may be in a state of panic. Color me skeptical. I don’t sense any panic! in the Kremlin disco.

Of course the massacre creates huge complications for Putin. But he will not even begin to panic until he is confronted with something far more threatening than has come out of western capitals in days since the atrocity.

Yes, there have been expressions of outrage. This outrage has been intensified by the desecration carried out by Putin’s thugs on the ground. But outrage is easy. Action is hard.

Here, the signs are much more encouraging to Putin. Merkel made it plain that she still thought it was essential to maintain good relations with Russia, and did not say anything serious about an increase in sanctions. France and Italy have been almost completely silent. Even the nation that suffered worst-the Netherlands-was still willing to give Putin “one last chance.”

Obama and Cameron may actually be playing the role of B’rer Fox to Putin’s B’rer Rabbit. Obama said the US will not provide arms to Ukraine, and again stated-as if this was necessary-US troops would not be deployed. Moreover, he called for an immediate cease fire in eastern Ukraine.

Well guess what. Putin is adamantly opposed to western arms flowing to Ukraine, and is also calling for a cease fire. Precisely because this would buy time and breathing space for his increasingly beleaguered creatures in Donetsk and Luhansk, and precisely because he knows that the obligations under any cease fire would be enforced asymmetrically, with Ukraine being under much more pressure from the west to conform than  the Russian proxy forces would be.

Meaning that Putin might throw Obama just like he did in Syria with regards to chemical weapons. By agreeing to what Obama has demanded, and which Germany and other Euros have demanded-a cease fire-Putin can defuse the pressure for now, and use the respite to bolster the battered rebels, and to give them time to continue to fortify the territories they hold. So by demanding a cease fire, Obama (and other western leaders) are throwing B’rer Rabbit Putin right into the briar patch.

Cameron demanded that Russia guarantee access to the site where MH17 landed. Putin could well grab at this too, and say that the only way he can do that is if Russian “peacekeepers” move in. This is another thing he’s wanted to do. (There are many pictures of armor in Russia with peacekeeping insignia painted on them.) Again into the briar patch.

But the main thing that Putin needs to do is to stall for time. He is no doubt calculating that previous spasms of outrage have dissipated rapidly, especially when corporate champions in Europe ramp up the pressure on their governments, and that this one will too. He has heard the “last chance” mantra before, and his experience is that each last chance is followed by another one. He knows that the Euros have no stomach for a confrontation, even one conducted purely with economic weapons, and that Obama has only little more appetite.

Even while the bodies remain unburied, Europe is divided over intensifying sanctions. Those divisions will only increase as time passes. And you may rest assured that Putin’s connections and agents of influence in the west are working overtime to exploit those divisions, and stoke the well-established tendencies in western governments to procrastinate and avoid confrontation. He saw it after Georgia. He saw it after Crimea. He has seen it repeatedly in the past 3 months over Ukraine.

Certainly Putin could have done without this. The massacre served no military purpose, and has interfered with his schemes in Ukraine. But it has not created an existential, panic-inducing threat to him or his regime. He views it as a setback, but one that he can manage with his usual mixture of double-talk, pacific gestures, and behind the scenes pressure exerted by his corporate allies in Europe and to a lesser extent the US.

The only thing that has the possibility of inducing anything approaching panic in Putin is for Obama and Merkel and the lesser lights in Europe to upset his calculations by playing against type. Impose crippling sanctions with the promise of removing them if Putin essentially capitulates on Ukraine, rather than threatening to impose more costs if he keeps it up.

That is, all the talk about a cornered, panic Putin is so much wishful thinking. It presumes that the shock of the event has caused western governments finally to see Putin as a monster who must be confronted robustly. There’s no evidence that this is the case even while emotions are running their hottest. And past experience suggests that the image of Putin as a monster can actually work to his advantage, because it makes timorous governments all the more intimidated from confronting him.

I would like to believe that the deaths of 298 innocents has not been in vain, and that their murders will resolve western leaders to do what it takes to confront Putin’s aggression. But I’m betting on form. And I am sure Putin is too.  He has weighed his foes, and found them wanting.

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July 18, 2014

Sanctions: Pinprick or Sledgehammer Blow, With Little In Between

Filed under: Commodities,Derivatives,Economics,Energy,Military,Politics,Russia — The Professor @ 11:27 pm

Before the massacre over Donetsk, the big Russia-related story was the new sanctions imposed on Wednesday. Although those sanctions were overshadowed by yesterday’s atrocity, the wanton destruction of MH17 raises the possibility that more intense sanctions will be forthcoming. Therefore, it is worthwhile to examine what the US did Wednesday to see what would be necessary to impose truly crippling costs on Russian companies and the Russian economy generally. (Forget what the Euros did. That is so embarrassing that it should be passed over in silence.)

The sanctions imposed Wednesday are very weak beer. (Here is an FAQ from the Treasury outlining them.) They were different than previous sanctions in that these were directed at companies, rather than individuals. Moreover, some of the targeted companies are on the commanding heights of the Russian economy: Rosneft, VTB, Gazprombank, and Novatek. (Notable absences: Gazprom and Sberbank.)

Under the sanctions, “US Persons” (which can include US subsidiaries in foreign countries) are prohibited from buying new debt from or new making loans to these companies with maturities of 90 days. (Existing loans/bonds are not affected.)  US persons are also precluded from buying “new” equity from the financial firms: they can buy new equity from Rosneft and Novatek.

Since US banks are major lenders to foreign companies, this might seem to be a major impediment to the affected companies, and indeed  Rosneft’s and Novatek’s stock prices were both down more than 5 percent on the news. But in my opinion, this reaction is more related to how the announcement raised the likelihood of more severe sanctions in the future, rather than the direct effects of these new sanctions.

That’s because although the sanctions will constrain the capital pool that Rosneft and the others can borrow from, other lenders in Europe and Asia can step into the breach. The sanctions do make it more difficult for the sanctioned companies to borrow dollars even from foreign banks, because although the sanctions do not bar foreign banks and investors from accessing the US dollar clearing system for most transactions, they could be interpreted to make it illegal to process the banned debt and equity deals:

U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the persons identified in the directives, so long as those activities do not involve transacting in, providing financing for, or otherwise dealing in prohibited transaction types identified by these directives.

Some have argued that this is a serious constraint that will effectively preclude the sanctioned companies from borrowing dollars other than on a very short-term basis. This is allegedly a big problem for Rosneft, because its export revenues are in dollars, and borrowing in other currencies would expose the company to substantial exchange rate risk.

I disagree, because there are ways around this. A company could borrow in Euros, for instance, and  sell the Euros for dollars. It could then deposit, invest, or spend the dollars just like the proceeds from dollar loans because it would have access to the dollar clearing system. Alternatively, the companies could borrow in Euros and immediately swap the Euros into dollars. This is because derivatives transactions are not included in the sanctions, and the payments on those could also be cleared. This would add some expense and complexity, but not too much.

The sanctions even permit  financial engineering that would allow US banks  effectively to provide credit for the sanctioned firms because derivatives on debt and equity of the sanctioned firms are explicitly exempted from the sanctions. For instance, a US bank could sell credit protection on Rosneft to a European bank that would increase the capacity of the European bank to extend credit to Rosneft. Syndication is one way that US banks can get credit exposure to Rosneft and reduce the amount of credit exposure that foreign banks have to incur, and even though the sanctions preclude US banks from participating in syndicates, the same allocation of credit risk could be implemented through the CDS market. This would permit foreign banks to increase their lending to the sanctioned firms to offset the decline of US direct lending. (This would still involve the need to convert foreign currency into dollars if the sanctioned borrower wanted dollars.)

Unlike real super majors (who can borrow unsecured, or secured by physical assets), Rosneft is unusually dependent on prepaid oil sales for funding, and these agreements are almost exclusively in dollars. This has led to some debate over whether the sanctions will seriously cramp Rosneft’s ability to use prepays.

There are a couple of reasons to doubt this. First, after the initial round of sanctions raised the specter of the imposition of sanctions on Rosneft, many prepay deals were re-worked to include sanctions clauses. For instance, they permit the payment currency to be switched to Euros, or to another currency in the off chance that the Europeans grow a pair and shut Rosneft out of the Euro payment system. Again, as long as access to the dollar system is not blocked altogether, those non-dollar currencies could be converted into dollars.

Second, there is some ambiguity as to whether prepays would even be covered. The sanctions specify the kinds of transactions that are covered:

The term debt includes bonds, loans, extensions of credit, loan guarantees, letters of credit, drafts, bankers acceptances, discount notes or bills, or commercial paper.

It is not obvious that prepays as usually structured would fall into any of these categories, and prepays are not specifically mentioned. A standard prepay structure is for a syndicate of banks to extend a non-recourse loan to a commodity trading firm like Glencore, Vitol, Trafigura, or BP. The trading firm uses the loan proceeds to make a prepayment for oil to Rosneft. In return, the trading firm gets an off take agreement that obligates Rosneft to deliver oil at a discounted price: the discount is effectively an interest payment.

The banks lend to the trading companies, not Rosneft. But (except for a small participation of 5-10 percent by the traders) the banks have the credit exposure. So this does not fall under any of the listed categories, except for perhaps “extension of credit.” Insofar as the trading firm is the borrower who faces the banks, it’s not clear the banks fall afoul of the sanctions even though that banks bear Rosneft’s credit risk. What about the trading firm? It’s not a US person, and a prepayment is not explicitly listed as a type of debt under the sanctions: again, this would turn on the “extensions of credit” provision. Under prepays, payment is usually with an irrevocable letter of credit, but these generally have maturities of less than 90 days, so that’s free of any sanctions problem.

So, there’s a colorable argument that prepays aren’t subject to the sanctions. But there is a colorable argument that they are. Economically they are clearly loans to Rosneft, though done via a trading firm acting as a conduit. But whether they are “debt” legally under the sanctions definition is not clear.

But especially in this regulatory environment, bank (and trading firm) tolerance for ambiguity is  pretty low. So the FUD factor kicks in: even though they could make a plausible legal argument that prepays fall outside the definition of debt under the Treasury rules, the risk of having that argument fail may be sufficient to dissuade them from doing dollar prepays. This is especially true in the post BNP Paribas world. So it is likely that future prepays may be in currencies other than the dollar, and as long as dollar clearing is open to it, Rosneft will just have to convert or swap the Euros or Sterling or Swiss Francs or whatever  into dollars if it really wants to borrow dollars. Again, an inconvenience and an added expense, but not a major hurdle.

All this means that the most recent round of sanctions are  sound and fury, signifying not very much. Indeed, by deliberately avoiding the truly devastating sanction, this round signifies a continued reluctance to hit Putin and Russia where it really hurts. Someone like Putin likely interprets this as a sign of weakness.

What would the devastating sanction that was deliberately avoided be? Cutting off altogether access to the dollar clearing system. Recall that the just-imposed sanctions say “U.S. financial institutions may continue to maintain correspondent accounts and process U.S. dollar-clearing transactions for the persons identified in the directives.” Change that to “U.S. financial institutions are prohibited from maintaining correspondent accounts and processing U.S. dollar-clearing transactions for the persons identified in the directives” and it would be a whole new ballgame. This would mean that the sanctioned companies could not receive, spend, deposit, or invest a dollar. (Well, they could if they could find a bank insane enough to be the next BNP Paribas. Good luck with that.)

I discussed how this would work in a post in March, and the Banker’s Umbrella provided a very readable and definitive discussion about that time. Basically, every dollar transaction, even one handled by a foreign bank, involves a correspondent account at a US bank. Cut off access to those accounts, and the sanctioned company can’t touch a dollar.

This would close off the various workarounds I discussed above. The sanctioned companies would have to restructure their operations and financing pretty dramatically. This would be particularly challenging for Rosneft, given that the currency of choice in oil transactions is the USD. This would be like the sanctions that have been imposed on Iran and on Sudan.

This would represent the only truly powerful sanction. And that’s one of the issues. Anything short of cutting off all access to the dollar market is at most an irritant to the sanctioned companies. Cutting off all access imposes a major cost. There’s not much in between. It’s a choice between a pinprick and a sledgehammer blow, with little in-between.

But if a Rubicon hasn’t been crossed now, with the murder of 298 people and continued battles in places like Luhansk waged by Russian-armed rebels, it’s hard to imagine it will ever be. If Putin and Russia are going to pay a real price for their wanton conduct, the sledgehammer is the only choice.

 

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July 17, 2014

What Would It Take For Obama to Cancel a Fundraiser?

Filed under: History,Military,Politics,Russia — The Professor @ 7:53 pm

To further the last sentence of my last post: I am not sanguine about those who hold office in the US and Europe to rise to the challenge that Putin has laid before the world.

Obama, certainly, was less than Churchillian or Reaganesque in his first response to the crime over Donetsk. Sayeth Barry: “It looks like it may be a terrible tragedy.”

First: it was not a tragedy. It was an atrocity.

Second: “looks like”? “May be”?

Go out on a limb there, Barry.

Words fail. Truly.

With that box checked, Barry went on to tell some jokes. And give a banal speech about infrastructure or some such. Then he jetted off to a fundraiser. Or maybe it was (according to CBS News) a “political meeting”, as if that makes it all better.

I have a serious question. I mean it. I ask this in all seriousness: Just what would it take for Obama to cancel a fundraiser? Anything short of Armageddon? For we have yet to see any atrocity sufficiently horrific (Benghazi, Donetsk, the chaos on the Rio Grand) sufficient to deflect Barry from his appointed rounds of feeding red meat to the partisan faithful, and raking in their dough.

I guess we can be grateful that he did not give a shoutout to Joe Medicine Crow. So there’s that. He’s growing in the job.

Some have praised him for being “no drama Obama.” I have a different take. I view his behavior in response to atrocity as revealing a  lack of affect that is deeply disturbing.

Regardless of the psychological roots for his behavior, it is all too clear that Obama is not up to the challenge that Putin poses, because of a lack of ability, a lack of interest, or more likely, both. Narcissist that he is, the only thing that is likely to engage him is if he believes that Putin has insulted or slighted him. But I doubt that even that is sufficient to rouse him to actions appropriate to the circumstances.

There are pros and cons of both parliamentary systems, and the US system. One of the disadvantages of the US system is that we are cursed to endure incompetent chief executives until their terms expire. Think of James Buchanan, dithering in the White House while Kansas bled and the nation spiraled into Civil War. In contrast, Chamberlain was ousted after the debacle in May, 1940. But we-and by that I mean the world, not just the US-have to endure Obama until 20 January, 2017. An incompetent, disengaged, lame duck holds the Office Formerly Known As Leader of the Free World. What havoc can occur in 30 months with such a man holding the highest office in the land, and the most powerful position in the world.

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The KAL Moment of the New Cold War

Filed under: History,Military,Politics,Russia,Snowden — The Professor @ 5:50 pm

I had been planning to write on the latest round of sanctions, but of course that story has been overtaken by an utterly horrific event: the shooting down, by a surface-to-air missile, of a Malaysian Air 777 flying over Donetsk.

This is an unspeakable crime. Unspeakable.

I can state with near metaphysical certainty that this was the work of Russian-supported and inspired rebels from the Donetsk People’s Republic, or perhaps even the Russian military itself. The jet was downed in the same area where two Ukrainian military planes were destroyed by SAM fire in the last couple of days. The ex-FSB (or maybe not ex-) creature Girkin (aka “Strelkov”-the recent event gives new meaning to the word “shooter”) bragged on V Kontakte about shooting down a Ukrainian transport plane today . . . and then scrubbed the site once it was revealed that a civilian airliner had been destroyed. The rebels had bragged about, and Russian state media had bragged about, the rebels possession of an SA-17 Buk SAM system-which they now deny. Ukraine released transcripts of communications between rebels, and between rebels and one of their freakazoid Cossack contacts in Russia, blaming the shootdown on Cossacks rebels stationed near the border.

I could go on, but it’s not necessary.

I would hope that this is the KAL 007 moment of the New Cold War. The KAL 007 moment of Putinism. For those old enough to remember-and my memories are extremely vivid-in the aftermath of the KAL atrocity the Soviets denied, denied, denied. Then Jeanne Kirkpatrick made a presentation at the UN Security Council that played intercepted communications between the Soviet pilots that shot down the plane and Soviet air defense commanders that made it clear beyond all possible doubt that the Soviets had shot down the plane.

We certainly have the national technical means to determine who launched the weapon, and from where. We have the means to intercept communications. Satellites will have recorded exactly where the weapon was launched. Depending on the sensors we have deployed, or the Ukrainians may have deployed, we can monitor and record the radar transmissions of any air defense systems in the area. The radar signature of different systems is unique, so this would permit definitive identification of missile type as well as location.

Let’s put that all out there in the UNSC, and watch the loathsome Vitaly Churkin squirm.

But that should only be the beginning. The crucial task is to lay out information connecting the rebels to the Russian government, military, and intelligence services. Again, we no doubt have such information, even if (as is likely) that Snowden information revealed weaknesses in Russian communications security that they have closed. But I doubt that things have gone totally dark for us. What’s more, we have the means, motive, and opportunity to track movements of equipment from Russia to the Donbas.

This is the time where the NSA, CIA, DIA, and National Reconnaissance Organization demonstrate their true functions and capabilities. It’s not about snooping on Fritz’s Amazon’s purchases: it’s about uncovering Ivan’s evil acts.

Moreover, just consider the fact that the Russians would not be  so nuts as to allow a SAM battery (or even a single launcher) operate right on the border, in an area where Russian military and civilian aircraft are operating and within range, without coordinating with Russian air defense system controllers and Russian air traffic control. Hell, given what control freaks the Russians are, it’s highly likely that the Russians have to give permission for that battery to fire.

We have to lay all this out there. Put Putin on the spot. Show the world just what he has done, and what he is doing, in Ukraine. Of course, anyone who is willing to look at the facts objectively already knows, but that category excludes vast swathes of Europeans and many Americans. Maybe 295 dead, innocent Dutch, French Germans, Brits, etc., including 80 children, will be enough to get them to face reality. There are none so blind as those who will not see. Make them see, and shame them mercilessly if they still resist.

Merkel is now on the spot. France too: if it goes ahead with the Mistral sale after this, we should sink the damn things. And then text Hollande pictures of the dead babies strapped in their seats, lying bloodied in the Ukrainian dirt.

The KAL shootdown was a turning point in the Cold War. It revealed the Soviet leadership to be both evil and drastically out of touch. Their handling of the affair was utterly embarrassing. Indeed, it helped usher in the rise of Gorbachev, and had a dramatic effect on European public opinion: after having resisted, Germany approved deployment of Pershing II missiles post-KAL 007, in large part because of what it revealed about the true nature of Soviet leadership. (Think on that one, Angela. Think hard.)

We should hope that out of this horror something positive like that occurs now. Putin is doing his part, blaming the shootdown on Ukraine for failing to capitulate to the Russian proxy invasion. Russian state media has gone one better, claiming that the Ukrainians shot down the plane while they were targeting Putin’s.

In other words, this event has the potential to be like Napoleon’s assassination of the Duc d’Enghien: as Talleyrand said, “it was worse than a crime. It was a blunder.”

295 innocent people should not have died: or, to be more accurate, 295 innocent people should not have been murdered. But if their deaths hasten the demise of the criminal Putin regime, at least they will not have died in vain. It is the duty-if they understand the meaning of the word-of people like Obama and Merkel to make sure that the innocents’ sacrifice was not in vain.

Are they-are we-”highly resolved that the dead shall not have died in vain”?

I wish I were more sanguine about the answer to that question.

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July 13, 2014

If Angela Merkel is the Bad Cop, Putin Has It Made

Filed under: History,Military,Politics,Russia,Snowden — The Professor @ 8:42 pm

Germany has won the World Cup, which is somewhat annoying because they will become even more insufferable. And that is saying something given their recent behavior, especially with regards to Russia, and the spying imbroglio with the US.

Regarding Russia, it was particularly nauseating to see Merkel being quite chummy with Putin at the Cup final game. The Euros had pressured Ukrainian president Poroshenko to go as well, so that he could have a chat with Vlad. Poroshenko wisely begged off, staying home to direct the counterattack against the Russia-supported, inspired, and supplied rebellion in two eastern provinces. He no doubt realized that he would be sandbagged if he went to Rio, and for that he could have blamed it on Angela.

For despite her reputation as the bad cop in dealing with Putin (earned only by comparison with outright enablers, understanders, and collaborators like Steinmeier and Schroeder), Merkel has been putting much more pressure on the beleaguered Poroshenko than on Putin. The Euros, led by Germany, have been pushing Ukraine to negotiate directly with the freakazoid “leaders” of the “republics” of Donetsk and Luhansk. Moreover, Merkel tutted that Ukraine’s counterattack should be “proportionate.”

Well, “proportionality” is usually trotted out by the friends of those who are losing to stymie the advance of the stronger side that is winning by preventing it from exploiting its advantages. In this instance, moreover, “proportionate” would involve Ukraine sending armor across the border into Belgorod and Voronezh, and supporting separatists in Dagestan and Chechnya. BUt somehow I don’t think that’s what Angela means. I think she means that Ukraine should not fight to win, and that suits Putin just fine.

The Ukrainians are fighting a rebel force that has inflicted large casualties on it; has embedded itself in civilian areas; committed (per the UN) widespread “stomach churning” atrocities; destroyed bridges and rail lines; and deployed landmines and booby traps. Under the circumstances, Poroshenko has been restrained.

But Angela is running interference for her soccer buddy. In other ways as well. For instance, she is resisting the permanent deployment of NATO troops in new eastern European member states, like Poland and the Baltics. She brought up the NATO-Russia Founding Act in order to rationalize her position, but this has absolutely nothing to do with the deployment of conventional troops: it only discusses the deployment of nuclear weapons in former Warsaw Pact states.

Then there’s the spying issue, which contrary to usual practice, the Germans are making into a major public spectacle, culminating in its request that the head CIA official in Germany depart the country.

The Germans really need to get over themselves on this one. As I’ve written before, they have earned the scrutiny they get. Indeed, their heel-dragging on Russia warrants skepticism about them. They have often worked against the US within NATO. The rejection of Georgia and Ukraine in 2008 is one example. Libya is anotherIt has contributed to the rejuvenation of the Russian military (a tradition going back to the 1920s). It is an important country that bears watching. Not just for those reasons, but because (as I have noted before) the country is well-known to have been heavily penetrated by Soviet then Russian intelligence, and its businesses are rather notorious for their use of bribery to get international sales and contracts: this summary of Siemens’ sins over the years makes for enlightening reading. Since the US can have little confidence that Germany will advance US interests, and since the US has strong reasons to believe Germany might actually work against US interests, it is definitely in our interest to know what Germany is thinking and planning.

In other words, Germany wants it both ways, in a very adolescent way. It wants to pursue an independent policy that is often at odds with US policy and interests, but it also expects the US to treat it like a country whose interests are strongly aligned with ours. Sorry. If you want to act routinely contrary to US interests, the US is more than justified in not trusting, and verifying. And that involves espionage.

One of the things that has exercised the Germans most about the current spy scandal is that the man in question, “Marcus R,” passed documents relating to a German parliamentary investigation of the Snowden allegations. Well, that brings up another thing, doesn’t it? Snowden inflicted major damage on the US, and his collaborators (notably Appelbaum and Poitras) are living large in Berlin. A good part of the German establishment has been very supportive of Snowden. All of these things are rather hostile to the US, so what, we’re supposed to shrug and say “whatever”? Given Snowden’s current location, this also plays into the earlier-mentioned problem of German enabling of Putin and Russia. German dealings with Snowden are very much a matter of American national security.

It’s also rather annoying that the Germans are getting so exercised about American espionage, but direct no outrage whatsoever at Russian activities in the country.

The linked article says that public pressure has forced Merkel to act. With respect to the most recent spying issue, that’s not much of an excuse: the public pressure is the result of Germany’s publicizing the episode.

What’s more, Germany made claims that it had uncovered a second US spy, but that story pretty much evaporated on exposure to the sunlight. It now appears that the military officer in question was in touch with the State Department, not the CIA or any other US intelligence agency. Moreover, a search of the man’s home revealed nothing. So the Germans went off half-cocked and inflamed an already difficult situation, rather than acting in a more responsible way in an attempt to tamp down the passions. Another adolescent and self-absorbed political move.

Perhaps the only good thing to come of this is that it has united Congress and the administration on at least one thing. Both are heartily annoyed at the German teenage temper tantrum.

The bottom line for the US is that its interests and those of Germany are not closely aligned, especially on issues relating to Russia. So be it. But this is precisely why Obama’s policy of largely deferring to Europe (which de facto means largely deferring to Germany) on policy towards Russia and Ukraine is so problematic. Yes, the Germans (and Italians and Austrians etc.) will squeal. But doing things their way will embolden Putin, and that will just lay the groundwork for even bigger problems in the future. If Angela Merkel is the bad cop, Putin has it made.

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July 8, 2014

The Securities Market Structure Regulation Book Club

Filed under: Derivatives,Economics,Exchanges,Politics,Regulation — The Professor @ 4:30 pm

There was another hearing on HFT on Capitol Hill today, in the Senate. The best way to summarize it was that it reminded me of an evening at the local bookstore, with authors reading selections from their books.

Two examples suffice. Citadel’s Ken Griffin (whom I called out for talking his book on Frankendodd years ago) heavily criticized dark pools, and called for much heavier regulation of them. But he sang the praises of purchased order flow, and warned against any regulation of it.

So, go out on a limb and bet that (a) Citadel does not operate a dark pool, and (b) Citadel is one of the biggest purchasers of order flow, and you’ll be a winner!

The intellectually respectable case against dark pools and payment for order flow is the same. Both “cream skim” uninformed orders from the exchanges, leaving the exchange order flow more informed (i.e., more toxic), thereby reducing exchange liquidity by increasing adverse selection costs. I’m not saying that I agree with this case, but I do recognize that it is at least grounded in economics, and that an intellectually consistent critic of dark pools would also criticize purchased order flow.

But some people have books to sell.

The other example is Jeffrey Sprecher of ICE, which owns and operates the NYSE. Sprecher lamented the fragmentation of the equity markets, and praised the lack of fragmentation of futures markets. But he went further. He said that futures markets were competitive and not fragmented.

Tell me another one.

Yes, there is limited head-to-head competition in some futures contracts, such as WTI and Brent. But these are the exceptions, not the rule. Futures exchanges do not compete head to head in any other major contract. Execution in the equity market is far more competitive than in the futures market. Multiple equities exchanges compete vigorously, and the socialization of order flow due to RegNMS makes that competition possible. This is why the equities exchange business is low margin, and not very profitable. Futures exchanges own their order flow, and since liquidity attracts liquidity, one exchange tends to dominate trading in a particular instrument. So yes, futures markets are not fragmented, but no, they are not competitive. These things go together, regardless of what Sprecher says.  He wants to go back to the day when the NYSE was the dominant exchange and its members earned huge rents. That requires undoing a lot of what is in RegNMS.

Those were some of the gems from the witness side of the table. From the questioner side, we were treated to another display of Elizabeth Warren’s arrogant ignorance and idiocy. The scary thought is that the left views her as the next Obama who will deny Hillary and vault to the presidency. God save us.

Overall the hearing demonstrated what I’ve been saying for years. Market structure, and the regulations that drive market structure, have huge distributive effects. Everybody says that they are in favor of efficient markets, but I’m sure you’ll be shocked to learn that their definition of what is efficient happens to correspond with what benefits their firms. The nature of securities/derivatives trading creates rents. The battle over market structure is a classic rent seeking struggle. In rent seeking struggles, everybody reads out of their books. Everybody.

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