Streetwise Professor

August 14, 2014

10-4, хороший товарищ

Filed under: Military,Politics,Russia — The Professor @ 6:59 pm

Russia is known for remaking American TV shows, notably Married, With Children. Now it is doing a very bad remake of the 1978 Sam Peckinpah movie, Convoy. This time as a reality show.

An alleged “humanitarian” convoy of 270-odd white semis has been bouncing around southwestern Russia, bound for Luhansk and Donetsk. Cargo? Unknown, for certain. Route? Unknown, for certain: so far it has been serpentine, and interrupted by numerous stops. Ukraine demanded that it travel through Karkiv, via border posts it controls, but the convoy has apparently now split with one part headed for a border post controlled by Russians. The drivers and other personnel? Unknown; they claim to be “volunteers”, but some suspect they are Russian paratroopers.

The Russians confidently announced that this has all been done in coordination with the International Committee of the Red Cross, but the ICRC just says that it has been in discussions with Ukraine and Russia about it, and that it is ignorant of crucial details. Ukraine demands that the trucks be unloaded at the border, the cargo loaded into Red Cross vehicles driven by Red Cross. Russia refuses. It demands its way on the highway.

No one has a clue as to what Putin’s game is here. There is only one thing for certain: it is not what it purports to be, a legitimate relief effort. If it were, Putin would have let the Red Cross handle it from the get go, and limited Russian participation to the provision of supplies and perhaps vehicles and fuel. But although Russia has claimed Red Cross approval, it is pretty clear that it has grossly exaggerated this. Sadly, in classic useful idiot fashion, the ICRC has not called bullshit on Putin, limiting its response to mewling tweets like:

We have made initial contact with the #Russia-led aid convoy, Rostov region, #Ukraine. Many practical details are still to be clarified.

Respect for the #RedCross emblem is essential for us to assist and protect those worst affected by the armed conflict in eastern #Ukraine.

Amid the media storm, we stress that aid delivery into east #Ukraine should not be politicized. Our priority remains helping people in need.

So what is the game? So many possibilities. A propaganda exercise, and one that would actually be enhanced if Ukraine stopped the entry of the convoy into the Donbas: however, given the way Putin is viewed throughout the world, the only people that the propaganda would fool would be Russians and Putin’s fellow travelers on the fringe left and fringe right in the US and Europe. Along the same lines, but more sinisterly, a setup for a false flag operation in which the convoy would be attacked by Russian or rebel forces, masquerading as Ukrainians, to provide a pretext for an invasion. A way of smuggling weapons, ammunition, and reinforcements to the beleaguered rebels. All of the above.

To add to the chaos, three reporters observed a column of Russian APVs moving into Ukraine.

The whole episode reminds me of a Three Card Monte game. A lot of jabber, a lot of motion, a lot of misdirection, all intended to hide the real object. Which raises the question: where is the Black Queen?

All of this is very ominous. Adding to the sense of peril is Putin’s benign speech in Yalta, Crimea today. It is being interpreted as an attempt at conciliation, a step back. That interpretation works to Putin’s benefit, by getting those in Europe and the US, who are desperately hoping to avoid a confrontation and who are looking for any sign of hope, to drop their guard. At which time he will pounce. (A classic judo ploy, btw.)

Convoy was atypical of Peckinpah’s oeuvre. He specialized in graphic violence, heavily spattered with technicolor blood. Many of his characters were psychopathic antiheroes. Sadly, I think that only Peckinpah could do justice with what is likely to unfold in the Donbas, and the psychopath who will be responsible for it.

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August 11, 2014

That Was Fast: Both the Price Controls and the “Speculative” Response

Filed under: Economics,Politics,Russia — The Professor @ 7:31 pm

In my post on the Russian food import ban, I predicted that Russia would impose price controls. And wouldn’t you know, on Saturday, only a few days after the ban was announced, Reuters reported that the government was “negotiating” price control agreements with domestic producers:

Russia may negotiate a price control agreement with domestic food producers to prevent speculative price hikes that would affect inflation after it banned half its agricultural imports from the West, the agriculture ministry said late on Friday.

Russia banned meat, fish, dairy, fruit and vegetables imports from the United States, the European Union’s 28 member states, non-EU member Norway, Canada, and Australia on Thursday in retaliation against sanctions over the Ukraine crisis.

Agriculture Minister Nikolai Fyodorov has acknowledged the ban would cause a short-term spike in inflation, but said he saw no danger in the medium or long term as Russia started to look elsewhere for substitute imports.

The ministry, referring to a meeting with food sector unions, said: “Participants at the meeting discussed the possibility of signing with producers and agricultural products processors an agreement on … price policy, to prevent any speculative rises in prices for agricultural products.”

You know how voluntary these “negotiations” are. And yeah, it’s a problem with “speculation.” No. It’s a problem with supply and demand. Speculation is just the messenger that delivers the bad news. Moreover, the speculation that is going on now (more on that below) is as much about the coming price controls as much as it is about the import ban itself.

The “negotiated” price controls are not a new innovation in Russia. The government did the same thing in 2007*. It is revealing of the nature of the regime, though. Communists would have imposed controls by fiat. A more corporatist regime, with fascist overtones, “negotiates” with corporations to achieve its objectives.

The Russians-and some commenters here-claim that alternative supplies will mitigate the effect of the ban on prices. There will be some response in the medium term, including finding alternative sources of supply as global trade flows adjust. Firms that now sell to Russia will sell to other markets, and some of the sellers in those markets will shift their supplies to Russia. But this process takes time, and what’s more, the fact that this pattern of trade flows isn’t in place now, means that it is costlier than the existing pattern. So even after the adjustment process is completed, food costs in Russia will be higher. This is especially likely to be the case for dairy and vegetables.

The time-limited nature of the ban, to the extent that market participants believe that it will indeed be lifted in a year, will limit the supply response. Suppliers must make investments to adjust flows, where investments include things like identifying new suppliers, negotiating agreements, and other transactions costs, as well as investments in plant, equipment, and people. Time limiting the ban reduces the return on these investments, reducing the amount of investment. Moreover, the uncertainty surrounding the ban, which is reinforced by its self-damaging nature, which raises questions about the rationality of the Russian government, as well as the inherent volatility of the Ukrainian criss. also tends to suppress investment. Why invest now? Why not wait and see what Putin does and how the situation develops?

All this means that the cost increases are likely to persist.

In the face of higher costs, price controls will lead to shortages, and declines in quality. In addition to reducing output, Russian producers, especially those selling value-added, more extensively processed or packaged goods, can respond to the combination of costs and controls by reducing quality, by using lower quality inputs, adding fillers, utilizing flimsier packaging, selling past sell by date goods, taking less care and expense in preserving perishable goods, and in a thousand other ways. It is impossible for the government to negotiate or enforce arrangements that eliminate these sorts of stealth price increases.

Russians-speculators!-apparently know what is coming. They are starting to party like it’s 1989. Shelves in some stores are emptying. The imposition of controls, negotiated or not, will mean that they will not be refilled, or that they will be stocked with inferior products.

Putin will have to crank up that propaganda machine, and quick.

*Post 134. Hard to believe. Well over 2500 posts as of today.

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August 10, 2014

The Obama Fram Oil Filter Foreign Policy: We’re Paying Later, and a Lot More

Filed under: History,Military,Politics — The Professor @ 5:02 pm

Confronted by a looming humanitarian catastrophe at Mt. Sinjar, Obama finally ordered airstrikes against ISIS/ISIL, and also mounted a campaign to provide desperately needed supplies to the Yazidis who fled to the mountain before the ISIS onslaught.

This initial set of strikes seems to have a very limited objective: they can best be described as a limited tank plinking campaign intended to halt the ISIS attack on the Kurds around Erbil. The US is using F/A-18s from the  George Bush (CVN77), deployed in ones-eys and twos-eys to take out an artillery piece here, and a vehicle there. It will give the Kurds some breathing room, and permit them to make limited counterattacks.  But as of yet, it appears that the airstrikes are not intended to deliver a body blow to ISIS. The objectives appear to be narrowly tactical, rather than operational.

Given the nature of ISIS, the humanitarian crisis was inevitable, and eminently predictable. Indeed, ISIS is a rolling bacchanal of head chopping, crucifixion, mass execution, and rape. Wherever this scourge lands, a humanitarian crisis follows.

Obama infamously labeled ISIS the “junior varsity” in a January interview. I wonder if he still considers that description operative, or regrets that he made it. I note that in contrast to Obama’s disparaging remark, only Friday a “senior administration official” said that in its recent attacks, ISIS has demonstrated “tremendous military proficiency.” Either ISIS has navigated a very steep learning curve, or Obama was spewing garbage  7 months ago. Not hard to figure out which is true, especially if you were paying attention to ISIS in Syria and Iraq last year and early this year.

Obama’s attitude, and his preternatural predisposition to avoid any involvement in Iraq, led him to stand aloof when ISIS scored major breakthroughs in Iraq two months ago, and threatened to capture Baghdad. The inaction then, and in the interim, laid the foundation for what is transpiring outside Erbil today. Obama’s consistent Fram Oil Filter foreign policy procrastination (“you can pay me now, or you can pay me later”) only deferred the necessity of military action, and allowed ISIS to become stronger in the meantime.

Obama’s rationale for letting ISIS run amok is a pedantic one. He is (in some ways understandably) frustrated at the inability of Iraq to form a more inclusive government, and at the dysfunctional Maliki government, and refuses to be “Maliki’s artillery”. That is, he is withholding US military action against ISIS in order to force a change of government in Baghdad. Apparently only when Sunnis and Shiites and Kurds hold hands and sing Kumbaya will Obama relent.

In the meantime, vast swathes of Iraq are getting a new government. An ISIS government that rules by terror and very credibly threatens genocide. Obama’s pickiness about what he considers to be acceptable Iraqi government has given ISIS an open field to consolidate its hold over the regions that it has conquered, and to push for further conquests.

To the surprise of the administration, that push has been directed at the Kurds instead of Baghdad. The Kurdish Peshmerga, though possessing a reputation for being far more stalwart fighters than the Iraqi Army rabble that disintegrated on contact with ISIS, was sent reeling. It is uncertain whether this indicates that the Peshmerga was overrated, or underarmed. It is certainly the case that it is outgunned by ISIS, so the latter is a reasonable inference.

The outgunning of the Kurds is also the result of a conscious administration decision. The Kurds have been pleading for arms and ammunition, but the administration has demurred. The reason is rather astounding, especially in light of Obama’s stated refusal to aid the Iraqi central government. In refusing to help the Kurds, Obama has deferred to the sensitivities of the very Maliki government that he despises: he does not want to appear to be advancing Kurdish independence, which would outrage Baghdad.

So on the one hand, Obama doesn’t want to help the Iraqi central government fight ISIS because he thinks that government is dysfunctional and must change fundamentally, and in particular must become more inclusive, before it deserve US backing. On the other hand, Obama doesn’t want to help the Kurds fight ISIS because he thinks that would enable the Kurds to break free of the said same dysfunctional central government.

The only way to square these decisions is to conclude that Obama didn’t want to help to fight ISIS, period.

But now his hand has been forced by the prospect of the slaughter of 50,000 Yazidis. I suspect that Obama will only exert enough force to prevent that, and stabilize the situation in the north of Iraq. He will not deal ISIS a blow sufficiently stunning to permit the Iraqi Army, or the Kurds, or both, to defeat the head chopping lunatics. This will provide yet another illustration of the adage (attributed to Macauley and James Arbothnot Fisher) that moderation in war is imbecility.

Obama has repeatedly refused to pay anything now in Iraq. As a result, many have paid a big price later. A price measured in severed heads, mass graves, and systematic rape.

The most realistic alternative right now is to be the Kurds’ artillery, and pound ISIS from the air in a serious way, while providing the arms, intelligence, and logistic support that will permit the Kurds to attack them on the ground. In so doing, Obama will be rebuking himself for his past words and actions (or, more accurately, inactions) in Iraq. And that may be the biggest obstacle to his doing the right thing.

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August 7, 2014

The Great Patriotic Diet

Filed under: History,Military,Politics,Russia — The Professor @ 7:49 pm

In retaliation for US and EU sanctions, Russia is banning the importation of large categories of food products from each: food imports from the US are pretty much banned altogether.

These sanctions are aimed at an industry that is politically powerful far beyond its numbers. Chicken farmers in the US will squawk at the loss of about 1 percent of their revenues, and European dairy producers will bellow in anger. But the economic impact on the affected countries will be trivial. The US exports about $300 million in chicken to Russia (down substantially from a few years ago), which is essentially rounding error in US GDP. European net food exports to Russia are about 12 billion euros, or less than .1 percent of the EU’s 13 trillion Euro economy.

The impact on Russia’s people will be substantially greater. Russia imports about 35 percent of its food, about half of that from Europe and the US. Higher value, non-staples are disproportionately affected. This will lead to an appreciable increase in the cost of food, which represents a very large fraction of Russian household budgets. Whereas US consumers spend about 6.5 percent of their total expenditures on food, in Russia the figure is about 32 percent. A rise in food prices hits hard. A 10 percent increase, which is not unrealistic, cuts Russian living standards about 3 percent.

Putin ordered the government to find ways to increase food production, because, you know, that ukases always work as the Tsar intends. Russian food output will no doubt rise in response to higher prices, but in the short run the elasticity of supply is likely to be very low, especially for vegetables and dairy. Anyways, this increased output will only mitigate the price increases. If Russian firms/farms could produce more at current prices, they’d be doing so.

I predict that since increased Russian domestic production will have little effect on prices, Putin will soon resort to the tried-and-false nostrum of price controls, just like Russia did when food price inflation spiked in 2007. This will lead to lines and empty shelves, so Russians can party like it’s 1989: to those nostalgic for the USSR, be careful what you ask for. I note that Russia also adopted price controls, to disastrous effect, in WWI. Putin is idealizing Russia’s role in that war of late, and employs WWI reenactors to lead subversion campaigns in Ukraine, so maybe he’ll think it’s a great idea to reenact the price controls too.

Some have suggested that the higher food prices (or shortages that result from attempts to control prices) will dent Putin’s popularity. However, it is sufficiently high (approaching 90 percent) that it can take a few dents. Moreover, you know that there will be a propaganda campaign to stymie any discontent. No doubt this campaign will blame the west, and the US in particular, proclaiming that the import ban is necessary to show that Russia cannot be dictated to by its enemies: Russian attitudes towards the west have hardened substantially post-Crimea, and such a message will resonate.

The campaign is likely to idealize Russian capacity for sacrifice, particularly for the Motherland. There will be allusions to the Great Patriotic War, when Russians sacrificed to battle evil invaders from the west who were intent on subjugating Russia.

Putin will call for the Great Patriotic Diet, in other words. And sad to say, this will probably work.

No matter how successful the propaganda campaign is, the import ban will be just another burden on the already sputtering Russian economy. It was sputtering before Crimea and sanctions, but the post-Crimea sanctions have made it wheeze all that much more.

One symptom of this is the government’s announcement that it was diverting contributions to private pension plans in 2015 to plug holes in the state pension system: it had already done so for 2014. One state official took to Facebook to decry the move. He was promptly fired.

Oil prices have bailed out Putin before, but oil prices have weakened a bit lately, so that is putting additional pressure on Russia, and particularly on the budget. One of Putin’s old gambits is to stir up trouble in the ME to keep up oil prices. Maybe he’ll try that now, but it’s hard to imagine how much more trouble there can be there (the place is in chaos from Libya to Israel/Gaza to Syria to Iraq).

There is widespread speculation on what Putin will do next in Ukraine. The Ukrainian army is slowly but surely grinding down the Russian proxies in Donbas, pushing them into pockets in Donetsk and Lugansk, where they will be cut off from supplies and reinforcements if the circles are closed. Thus, the reasoning goes, Putin has a choice between humiliating defeat there, or going all in with an invasion.

I have my doubts that he will invade. The troops massed at the border, 20,000 or so, are probably sufficient to deal with the still shambolic Ukrainian forces in Donbas, but logistical difficulties would make a further penetration difficult, and an occupation would likely turn into the Donbas Ulcer. Further, an outright invasion would likely trigger truly punitive sanctions.

In short, although outright defeat of his proxies would be humiliating, an invasion of Ukraine, even if capped by a victory in Donbas, would be a disaster that could not be justified on any cost-benefit basis. Pace Pyrrhus: “One more such victory, and we shall be undone.” Or pace Dryden: “Even victors by victories are undone.”

But humiliation and invasion are not the only two alternatives open to Putin. He could attempt to turn Donbas into a bleeding ulcer for Ukraine, by mounting a guerrilla campaign/low intensity insurgency, dressed up as a people’s revolt against the oppressive fascists. This will be sufficient to maintain a (frozen) conflict that would distract Ukraine, impede the formation of a stable state and government, make it unacceptable as a candidate for Nato, and cause the EU to treat it at arms length. Such a campaign would exploit Putin’s best military asset, spetsnaz units, that specialize at this kind of warfare. It would be less provocative to the west: if the US and EU can largely acquiesce to what Putin is doing in Donbas now, it would put up with a low intensity guerrilla campaign

Meaning that the standoff between the west and Russia is likely to persist for some time. Meaning further that Russians better get used to the Great Patriotic Diet, because they’ll be on it for a while.

Update. It’s rather amusing that Medvedev made the announcement of the food import ban. If it turns out to be unpopular despite the likely propaganda campaign, it will be blamed on sorry old Medvedev. That’s his job: scapegoat in waiting.

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August 4, 2014

I Try To Catalog His Inanities, But It’s Hard to Keep Up

Filed under: History,Military,Politics,Russia — The Professor @ 8:47 pm

In his press conference last week, Obama responded to a question about whether the US would provide lethal assistance for Ukraine:

Well, keep in mind, the issue at this point is not the Ukrainian capacity to outfight separatists. They are better armed than the separatists. The issue is how do we prevent bloodshed in eastern Ukraine. We’re trying to avoid that. And the main tool that we have to influence Russian behavior at this point is the impact that it’s having on its economy.

Where to begin?

First, the “separatists” are pretty well-armed, so it’s not so clear that the Ukrainian military has a decisive advantage. A stalemate produced by conflict between two roughly matched forces would lead to a greater effusion of blood.

Second, a major reason to bolster the Ukrainian military is to deter Russia from invading, or from increasing the strength of the “separatist” forces. Bolstering the Ukrainian military would realistically achieve these outcomes. And both, by the way, would reduce and prevent bloodshed in Ukraine.

Third, giving the Ukrainian military a more decisive advantage over the separatists would speed its victory, which would be perhaps the best way to reduce and prevent bloodshed in Ukraine.

Fourth, why rely on a single “tool” to “influence Russian behavior” (i.e., economic sanctions) when other tools are available? Multiple tools, especially complementary ones like military, diplomatic, and economic measures, are usually far more effective when used in combination, rather than one at a time.

Fifth, it’s a little late in the day to “avoid” bloodshed in eastern Ukraine. The war is well and truly underway.

There might be good reasons for not providing lethal assistance to Ukraine (and intelligence as well). As is his wont, however, Obama didn’t provide them. His justification for this policy-which is part of a pattern, as witnessed by the refusal to provide ammunition and arms to the Kurds desperately fighting ISIS-is beyond inane.

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As the World Burns

Filed under: History,Military,Politics,Russia — The Professor @ 3:08 pm

Before departing on his I’ll Golf While the World Burns Vacation and Birthday Party, Obama gave an interview for The Economist. It is beyond belief.

Here is what jumped out at me (from a Reuters article summarizing the interview):

President Barack Obama dismissed Russia as a nation that “doesn’t make anything” . . .

Obama downplayed Moscow’s role in the world, dismissing President Vladimir Putin as a leader causing short-term trouble for political gain that will hurt Russia in the long term.

“I do think it’s important to keep perspective. Russia doesn’t make anything,” Obama said in the interview.

“Immigrants aren’t rushing to Moscow in search of opportunity. The life expectancy of the Russian male is around 60 years old. The population is shrinking,” he said.

Obama told Putin last week that he believes Russia violated the 1988 Intermediate Range Nuclear Forces treaty designed to eliminate ground-launched cruise missiles.

Speaking of Russia’s “regional challenges,” Obama said in the interview: “We have to make sure that they don’t escalate where suddenly nuclear weapons are back in the discussion of foreign policy.”

Of all the Obama idiocies, this has to rank near the top.

Of course, some are cheering the fact that he dissed Putin and Russia. Big. Fucking. Deal.

Those who cheering are missing the import of his remarks. This is Obama’s way of saying that Russia doesn’t matter, and hence its depredations can be ignored. In the long sweep of history, it is doomed to oblivion. So why worry? Ukraine? Temporary issue. This too shall pass.

To quote Keynes: In the long run, we are all dead. Or in the short-to-medium run, if you are Ukrainian (and maybe Lithuanian, Estonian, Georgian, etc.)

I would note that the Mongols, Huns, Vandals, Goths, etc., etc., etc., didn’t make anything either. Aggressive powers are heavy on the destruction, not the production. Their inability to make is one reason why some peoples and nations strive to take. That is exactly why they have to be stopped.

What’s more, “making stuff” is certainly a source of power, it is neither necessary nor sufficient. Putin has proven masterful at exploiting Russia’s pumped and mined, rather than manufactured, wealth to exercise power and influence.* Indeed, Russia’s energy wealth is the primary weapon that Putin has used to intimidate the Europeans into impotence: note that the last round of sanctions, allegedly so harsh, excluded gas, and Gazprom remains untouched. Russia, for all its alleged economic primitiveness, has been far more successful at exercising power using energy than Germany has with all its manufacturing prowess.

By condescendingly criticizing Putin’s short-termism, and apparent failure to understand Russia’s interests as well as he does, Obama overlooks the fact that a short-sighted leader can wreak tremendous carnage in pursuit of those allegedly short-destructive goals.

By dismissing Russia’s importance, and leaving the fate of every bordering country to It Will All Work Out in the End When Russia Collapses, Obama is basically washing his hands of the region.

If Obama’s diagnosis is correct, and Russia is really an aggressive but weak power, his prescription is all wrong. A weak power can be stopped by the application of power by an immeasurably stronger one, before it runs amok. But Obama just wants to stand back, and let nature-or history, actually-take its course.

But it gets worse. Note Obama’s remarks on the nuclear issue. In not so many words (because in using so many words before regarding Syria, he created a huge mess), he drew a red line: as long as Putin doesn’t “escalate where suddenly nuclear weapons are back in the discussion of foreign policy”, it’s OK! More of a green light, than a red line, actually.

So just don’t use nukes, Vlad, and you are good.

Putin will read this interview, and will then rub his hands with glee. Obama clearly expressed his extreme unwillingness to confront Putin in any meaningful way, and by saying implicitly that escalation short of the threatened use of nuclear weapons will draw no US response, Putin has every incentive to escalate.

This frivolity, this egg-head approach to foreign policy that focuses on long run trends while ignoring short run imperatives and the nature of our adversary, is exactly why the world burns.

*I would also take issue with the implication that mining and oil and gas production are somehow technologically backwards and less economically productive than manufacturing. Jed Clampett to the contrary, oil does not just flow from the ground. Nickel and gold are not lying around for the taking. Both require tremendous applications of technology and capital.

I wonder if Obama will denigrate Canada as a country that “doesn’t make anything”?

Never mind. It would be quite in character.

 

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August 2, 2014

Getting the Message, Edward?

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

Putin is effing with Edward Snowden. Snowden’s one year of asylum ended on July 31, and he applied in mid-July for another year. As yet, he has heard nothing, except that he will be permitted to stay while his fate is decided.

Putin is most likely sending Snowden a message.

What is the message? That he is in Russia at Putin’s whim and sufferance. That he had better do as he is told, and not get any ideas. That he is owned.

Note that the Russians doubtlessly are deeply suspicious of Snowden, and likely despise him. To give an idea of what they think of those who turn their backs on their own country to assist Russia, consider what it is doing to Ukrainian soldiers captured in Crimea who decided to join the Russian military. Their Russian military records bear the notation: “Prone to treason.”

Last summer Putin made derogatory remarks about the fates of those who defected to the USSR. He specifically sneered at their disloyalty.

So Putin-and the rest of the Russian security establishment-have no respect for Snowden. They are using him. And they are sending him a message that they are using him, so that he understands perfectly his place.

Some have wondered whether Putin is considering using Ed as a bargaining chip with the US. I consider this far-fetched, because he could easily revoke asylum at any time. Moreover, there are many reasons for the Russians to keep Snowden, even if they have already squeezed him dry.

First, reputation: turning over Snowden would make others less likely to defect to Russia with information. (Though it must be noted that many of those who make this choice are sufficiently narcissistic to believe that they are immune to the fates that have befallen others, and others who do so are desperate or corruptible.)

Second, the Russians do not want the Americans to know for certain what Snowden has taken, and what the Russians know.

Third, the Russians do not want the Americans to learn anything from Snowden about how he was handled by the FSB, from the meeting at the Russian consulate in Hong Kong to his final destination in Moscow. Or from perhaps before. If Snowden was a Russian asset before he fled to Hong Kong, he will certainly never leave Moscow.

No doubt Putin will let Snowden twist in the wind for a while. Just to make sure the that message sinks in. Then he will grant another year’s asylum. Probably without the fanfare that accompanied  last year’s announcement. And the process will repeat itself again next year, with even less attention than this year. And the year after that. Until Snowden sinks into obscurity, and likely despair. And someday, Putin will probably prove a prophet, about this, anyways:

“How is he going to build his life? In effect, he condemned himself to a rather difficult life. I do not have the faintest idea about what he will do next,” Putin said.

 

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August 1, 2014

The Real Reason Adidas Opposes Sanctions: It Can’t Afford to Lose the Gopnik Market

Filed under: Economics,Politics,Russia — The Professor @ 4:27 pm

Adidas stock got pounded earlier this week, following a drastic cut in its revenue and profit forecasts.

The company blamed many factors, including Russia:

Adidas also said it was scaling back investment in Russia, where it runs more than 1,000 stores, due to a fall in the rouble since the start of the Ukraine crisis and increasing risks to consumer sentiment and spending there.

“Current tensions in the region point to higher risks to the short-term profitability contribution from Russia/CIS,” it said, adding it would significantly reduce its store opening plan for 2014 and 2015 and increase the number of store closures.

Adidas had said as recently as last month it had not seen any impact on its business in Russia – beyond the translation effect of the weaker rouble.

The gopniks need to buy more track suits! Sanctions may destroy the gopnik market! Now we know why Adidas has been pressing Angela to go easy on Putin.

This brings to mind a hilarious incident from the spring, when Russian Communist Party head Gennady Zyuganov shocked Russian sensibilities by wearing an Adidas track suit while laying flowers on Stalin’s grave:

Russian Communist Party leader Gennady Zyuganov caused a stir on the Russian blogosphere for laying flowers at the grave of Soviet dictator Josef Stalin while wearing an Adidas tracksuit jacket.

A Twitter user who registered under the name “Josef Stalin” quipped: “Zyuganov showed up in an Adidas tracksuit top, a white shirt and dress shoes. [I'd have had him] shot for this outfit!”

Zyuganov made the dress code blunder on Sunday at a ceremony on Red Square to mark the 92nd anniversary of the establishment of the pioneers, a Soviet-era Communist youth organization.

But the best part was Zyuganov’s excuse:

He told the Russian News Service radio station that he wore it because “nobody makes good tracksuits yet in our country.” He did not specify why he had to wear a tracksuit jacket at all, but perhaps it was its red color that made the Communist leader warm to the garb.

His gaffe may have caught people’s attention because Adidas goods symbolized capitalist swank for many Soviet people under the Communist regime.

Yeah. Capitalist swank. That’s why the Russian equivalent of chavs wear them.

Rest assured. Zyuganov swears he has no promotional contract with Adidas. It was purely a fashion statement.

If Russia can’t make a good track suit, then good luck with that self-reliance that Putin, Lavrov, Medvedev and Rogozin the Ridiculous are promising in high tech goods, military equipment and finance in the aftermath of the sanctions. I’m sure it will all work out swell.

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July 30, 2014

Is Angela Really Frau Ribbentrop? I Doubt It, But We Spy Just to Make Sure

Filed under: History,Military,Politics,Russia — The Professor @ 7:31 pm

This story from the Independent has gone viral, and for understandable reasons: it claims that Germany and Russia are negotiating a scurrilous deal behind Ukraine’s back.

More controversially, if Ms Merkel’s deal were to be acceptable to the Russians, the international community would need to recognise Crimea’s independence and its annexation by Russia, a move that some members of the United Nations might find difficult to stomach.

Sources close to the secret negotiations claim that the first part of the stabilisation plan requires Russia to withdraw its financial and military support for the various pro-separatist groups operating in eastern Ukraine. As part of any such agreement, the region would be allowed some devolved powers.

At the same time, the Ukrainian President would agree not to apply to join Nato. In return, President Putin would not seek to block or interfere with the Ukraine’s new trade relations with the European Union under a pact signed a few weeks ago.

Second, the Ukraine would be offered a new long-term agreement with Russia’s Gazprom, the giant gas supplier, for future gas supplies and pricing. At present, there is no gas deal in place; Ukraine’s gas supplies are running low and are likely to run out before this winter, which would spell economic and social ruin for the country.

As part of the deal, Russia would compensate Ukraine with a billion-dollar financial package for the loss of the rent it used to pay for stationing its fleets in the Crimea and at the port of Sevastopol on the Black Sea until Crimea voted for independence in March.

However, these attempts by Ms Merkel to act as a broker between President Putin and the Ukraine’s President, Petro Poroshenko, were put on the back-burner following the shooting down of the MH17 plane in eastern Ukraine.

But insiders who are party to the discussions said yesterday that the “German peace plan is still on the table and the only deal around. Negotiations have stalled because of the MH17 disaster but they are expected to restart once the investigation has taken place.”

Pretty explosive stuff. So explosive, in fact, I have a difficult time accepting that the story is anywhere near true, at least insofar as the implication that this is Merkel’s plan is concerned.

If it was true, and Merkel were indeed negotiating a deal along these lines, she would indeed deserve the Frau Ribbentrop epithet that has been hurled at her, especially after her chumminess with Putin in Rio.

There are so many issues here.

First, it is not Germany’s place to negotiate a deal that binds Ukraine, even as a broker that intends to present the deal to Ukraine for its approval later. That would rightly be seen as a stab in the back. Germany’s imprimatur on such a deal-and the fact that it negotiated the deal would inevitably lead people to conclude that Germany vouches for it-would be perceived by Ukraine as a betrayal and abandonment, and an exertion of tremendous pressure to capitulate by a country that it had counted on to be a supporter.

Second, no Ukrainian government could possibly accept these terms. So Merkel is either delusional to think that they would, or she is setting up the Ukrainians to take the blame for rejecting a chance at “peace”, thereby allowing her to wash her hands of the situation and let Putin do as he will. Delusional or Machiavellian manipulator. Quite the choice.

Third, the recognition of Russia’s theft of Crimea, even if compensated by thirty pieces of silver in exchange for lost rent on Sevastapol, would completely undermine a fundamental principle of the modern international order, namely that the border of no state should be changed by force. For a country like Germany, which portrays itself as a Rechtsstaat on international as well as domestic matters, this would be an amazing and despicable action. The precedent would be very ominous indeed. It is hard to imagine anything more threatening to peace and stability as such an endorsement of revanchism, irredentism, and the dominance of might over right.

Fourth, the US and UK, and perhaps other countries, would in no way countenance such an outcome, in part because of the dangerous precedent it would set.

Fifth, Ukraine is looking to free itself from abject dependence on Russian gas, rather than to cement that dependence into the distant future.

These considerations are so grave that I cannot believe that Germany would be doing what the Independent alleges.

So what is the real story here?

The Independent is owned by Alexander Lebedev, an ex-KGB officer and ex-billionaire. He has had a fraught relationship with Putin. He co-owns, along with Gorbachev, the opposition paper Novaya Gazeta. On the surface he is not an obvious Putin shill, and may be an opponent: maybe he ran the story to torpedo a deal that Putin wants. But he could be under pressure. Or he could be wanting to curry favor in Moscow, and thinks this would help him do so. So maybe the story has its roots in the murky world of Putin and rich Russians.

The story paints Merkel in a very bad light: maybe it has been leaked (and slanted) by one of her foes, domestic or foreign. Or maybe someone thinks that she will have to distance herself from the allegations of treachery by becoming more stern in her stance against Putin.

Or maybe this has been planted by the Russians. It could be their statement of the terms they are willing to offer, and to accept. Perhaps Putin even presented it to Merkel, and maybe more than once. Perhaps Merkel rejected it, or she presented a counterproposal and continues to talk, which could be twisted by the Russians to suggest that she has endorsed the basics of the proposal.

I don’t know. But I do know one thing. It is precisely this sort of story, and the possibility that it has its roots in the truth, that makes it imperative that the United States collect intelligence on Germany, German leaders, and German dealings with foreign governments-especially governments like Russia’s. This is exactly why we spy, and why large and important countries that endeavor to exercise their sovereign right to craft and implement an independent foreign policy, are legitimate targets of spying. Germany pursues its interests, and in that pursuit, it might seriously damage American interests. Thus, it is in our vital national interest to know what Germany is up to.*

That’s the price you pay when you want to be an independent actor on the world stage, so Germans from Angela on down can spare us their outraged protests at American espionage.

* Which suggests yet another explanation for the Independent story. Namely, the source is US (or UK, or Ukrainian, or . . . even German) intelligence, which is leaking it to torpedo a perfidious Merkel deal.

 

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July 29, 2014

‘Tis But a Scratch

Filed under: Economics,History,Politics,Russia — The Professor @ 9:10 pm

I owe the Euros an apology. It turns out that they did implement most of the sanctions recommended in the “non-paper.” So it proved to be more than an orphan straw man.

That said, upon further consideration, there is less here than could have been hoped for. Indeed, these sanctions will impose little real damage on Russia.

There are three major pieces of the new European sanctions. First, Europeans (including foreign subsidiaries and branches of non-EU banks) are prohibited from buying new equity or debt with maturity of greater than 90 days from Russian banks with more than 50 percent state ownership. Second, there is a ban on the sale of oil technology and equipment. Third, there is an arms sales ban.

The US has implemented similar measures, with one peculiar exception: Sberbank is not included in the US sanctions, though it is in the European sanctions.

The bank sanctions are getting the most attention, but they are hardly devastating. I only had enough time today to look at the international borrowings of Sberbank, VTB, and VEB. Sberbank’s foreign debt borrowings total only about 4 percent of its total liabilities, and only a small fraction of those mature in the next year. Therefore, the sanctions put no immediate pressure on Sberbank, especially since it still can borrow from US persons. VTB’s foreign debt with maturities in 2014 and 2015 is no more than 6 percent of its total liabilities: I can’t be more precise because its financial statements only report broad maturity categories. VEB’s total Eurobond issues are about 8 percent of its liabilities: again, only a fraction of these are due in the next year or so.

Loss of this funding would be something of a strain, but the sums involved could readily be replaced by drawing on Russian foreign reserves and borrowing from non-EU and non-US banks.

What’s more, a little financial engineering permits these institutions to circumvent the effect of the sanctions. It seems that they can still enter into derivatives trades: derivatives are explicitly excluded from US sanctions. Since under the sanctions the banks can still borrow with 90 day maturities, they can create a synthetic long term loan with a fixed interest rate by borrowing for 90 days on a rolling basis, and enter into receive floating-pay fix swaps. Yes, there still is some risk here: if sanctions are extended to prevent even short term borrowings, the banks following this strategy would have a short swap position and no offsetting floating rate borrowings.

In brief, the sanctioned banks aren’t heavily dependent on European or US debt markets for their funding; the Russian government has the resources to cover this funding gap; and there is a somewhat riskier alternative (borrow short-term and hedge via swaps). Thus, although it would be unfair to say that the financial sanctions merely damage a few capillaries, it is definitely the case that they don’t come anywhere close to striking at Russia’s financial jugular. They are annoyance, and no more.

It is also important to note that the European sanctions do not target Rosneft. So the Russian oil company still has access to European (and Asian) debt and equity markets. As I noted before, this significantly cushions the blow on the Russian firm.

Insofar as the weapons ban is considered, it is largely symbolic because Russia builds most of its own weaponry. Predictably, existing deals are exempted. Meaning that France can continue with its sales of Mistral assault ships.

A bigger threat to the second Mistral sale is yesterday’s arbitration verdict in the Yukos litigation. If Russia doesn’t pay the $50 billion by January-a metaphysical certainty-the winning claimants can move to seize non-diplomatic Russian government assets in countries that are signatories to the New York Arbitration Convention. Conceivably the claimants could attempt to seize the second Mistral-the Vladivostok, ominously slated for service in the Med and Black Seas-while it is still in France. But no doubt the Russians and French could circumvent this by transferring ownership only after the ship had sailed to Russia. (As an aside, the main effect of the arbitration verdict will be to ensure employment of large number of lawyers for years, because the Russians will fight every attempt to enforce the award by seizing government assets abroad tooth and nail. It is a welcome verdict, but its immediate financial impact on Russia will be pretty much nil.)

The sanctions on oil equipment will have little impact in the near term, and since the European sanctions are time limited, their effect will be diminished even further.

In sum, the new sanctions are far beyond what had been imposed before, but they are still not that damaging to Russia. Putin can legitimately say “’tis but a scratch,” and not in the Black Knight, Monty Python, I’m not going to admit I’m wounded sense.

The United States in particular still has the power to leave Putin financially limbless and bleeding, pitifully claiming his invincibility. But that would require hacking away with a real banking broadsword: cutting off Russian access to dollar markets altogether. But there is no appetite to do this in the west: the Europeans had to screw up their courage to the sticking place to implement even these limited sanctions. And Obama has little appetite for this either: his sanction announcement today was delivered in a listless, phone-it-in fashion, before he ran off to fly to Kansas City for some silly event involving meeting people who had written him letters. He is obviously not engaged in this at all.

The Europeans and Obama believe that they are engaged in a nuanced strategy of graduated escalation that will convince Putin that continued attempts to subvert Ukraine through force will eventually result in Russia incurring unbearable financial costs, and that this will deter him from going further.

Ask the shades of LBJ and McNamara about how hardened dictators interpret graduated escalation. They interpret it as a signal of weakness, not resolve. If anything, it urges them to go further. I would anticipate that this will be true today, with Putin.

 

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