Streetwise Professor

December 7, 2014

The Hamster Wheel Metaphor Makes It to Moscow

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

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

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

hamster_wheel_moscow_times

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December 6, 2014

Hit the Road, State Street

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

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

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

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

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

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

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

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

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

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

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

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

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

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December 5, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Drip. Drip. Drip.

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

Drip. Drip. Drip.

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

Drip. Drip. Drip.

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

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

Russian_10y_yield_141205

And Putin has no clue as what to do.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Methinks Putin wants to appropriate that title.

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December 4, 2014

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

I could go on. And on. And on.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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November 27, 2014

Transparency Incoherent. Gazprom & Rosneft Paragons of Anti-Corruption? Ha!

Filed under: Economics,Energy,Politics,Russia — The Professor @ 11:54 am

The Soviet Constitution was full of guarantees of individual rights and democratic political processes. But of course it was honored far more in the violent breach than the promise.

This comes to mind when reading Transparency International’s most recent rankings, which put Rosneft above ExxonMobil and Gazprom on a par with Chevron. The main reason for the Russian companies’ high ranking is their formal, written anti-corruption rules.

This is so farcical that I am tempted to demand transparency from TI: How much money did you get from the Russians?

If you want to understand Gazprom’s transparency and the complete disconnect between its formal anti-corruption policy and its corrupt deeds, this Reuters report is a must read. It details how Gazprom entered into completely opaque deals with Ukrainian oligarch Dmitry Firtash. In these deals, Gazprom sold to Firtash entities at very low prices, and Firtash then sold at huge markups to Ukrainian companies:

According to Russian customs documents detailing the trades, Gazprom sold more than 20 billion cubic meters of gas well below market prices to Firtash over the past four years – about four times more than the Russian government has publicly acknowledged. The price Firtash paid was so low, Reuters calculates, that companies he controlled made more than $3 billion on the arrangement.

There is a huge omission in the Reuters report: it doesn’t trace where the money went. Gazprom did not do this because it was inordinately fond of Dmitry Firtash. The $3 billion was certainly split between Firtash, and people connected to Gazprom. (One wonders if the initials of the person getting the biggest cut are VVP.)

This isn’t a slam on Reuters: I am sure that they tried to follow the money, but it proved impossible in the utterly dark world of Cypriot, Russian, and Ukrainian companies. Which demonstrates just how farcical the TI report is.

It’s not like no one knew that there were murky dealings between Gazprom and Firtash, even though Reuters has provided valuable detail. Enough was known to conclude that Gazprom’s formal anti-corruption policy was the corporate equivalent of the Soviet Constitution. Fine sounding words on paper bearing no relationship to reality whatsoever.

Update. Jake Barnes points out in the comments some other things that show how risible this list is. It ranks ENI number one: Italy is notorious for corruption at all levels, and for further confirmation see Nick’s comment about investigating corruption in Italy. Also, TI ranks Petrobras above Exxon, Shell, and Chevron. You know Petrobras. It’s the company that is eyes deep in a corruption scandal that threatens to blow up the entire Brazilian political class.

Siemens is also high on the list. Siemens paid the highest Foreign Corrupt Practices Act fine in history, and has been enmeshed in what has been called A World Wide Web of Corruption Just Google “Siemens corruption” and you’ll have hours of reading fun! It is involved in corruption in Brazil. And of course it is deeply enmeshed in Russia. Take that into account whenever you hear German execs, and especially Siemen’s execs, whinging about sanctions against Russia.

Which makes this truly hilarious. Siemens runs the International Anti-Corruption Academy:

Project Summary

The International Anti-Corruption Academy (IACA) is an international centre of excellence for a new and holistic approach to fighting corruption.

This, plus the TI report, makes it clear that hypocrisy and corruption go hand-in-hand.

The bottom line is quite clear: the Transparency International rankings are an utter travesty that bear no relationship to reality.

 

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November 26, 2014

Obama: Preferring Micromanaging Failure to Delegating for Success

Filed under: History,Military,Politics — The Professor @ 9:41 pm

In a sign of the impending apocalypse, I am sorry to see Chuck Hagel depart as Secretary of Defense, because what it says about the prospects for combat operations in the Middle East, and military matters generally. I have been harshly critical of the man as being completely overmatched by the demands of the job. Alas, he was too competent and too assertive for Obama.

The initial story put forth by the administration was that this was planned, something that had been under discussion for some time. Which is patently bologna, given that the administration had no one waiting in the wings to stop into Hagel’s position: a planned transition would be much smoother than this, where the leading candidates are at pains to make clear that they have no interest. (More on this below. Compare this mess to the process of Holder’s resignation and the quick naming of a successor.)

In fact, the real reasons for Hagel’s axing are plainly obvious. He had questioned the coherence of the administration strategy in Syria. He has made statements about the dangers posed by ISIS that patently contradicted Obama’s “JV” characterization and the president’s desired softly-softly approach in Iraq and Syria. He agreed with the uniformed military and imposed a quarantine on service personnel returning from Ebola-stricken reasons. Brought into to oversee substantial budget cuts, he began to support the Pentagon’s position that the military was becoming dangerously underfunded.

In other words, he showed some spine, and pushed back against Obama and his coterie in the White House and the NSC in particular.

I am also quite sure that there is a near insurrection under way at the Pentagon, due to deep differences over the conduct of the campaign against ISIS and funding of the military. Obama wants to reassert control over the building.

Obama has now blown through three SecDefs. Two of those-Gates and Panetta-have blasted Obama for his micromanagement exercised through the White House/NSC staff. Hagel was supposedly similarly frustrated.

And indeed, the very limited nature of the campaign in Iraq and Syria provides compelling evidence of that. No serious military person would carry out this campaign in this way. There are no ground troops  to identify targets and call in air strikes. The number of sorties is laughably small, a small fraction of those mounted even during the relatively limited Serbian operation, let alone in Gulf Wars I and II. Hell, the shambolic Syrian air force is mounting more strikes than the US. (I have seen suggestions that the low number of strikes reflects the fact that the US military is overstretched. If this is true, the budgetary constraints have created a true crisis when a war ravaged Syrian military can operate at a more intense tempo.)

Obama has allegedly expressed frustration that the military has not come up with “creative solutions” to the challenges in Iraq and Syria. He has prevented them from implementing the techniques developed through long experience which have been deployed with great success ever since the campaigns in Europe in WWII, and which were perfected since the mid-1980s’ AirLand Battle concept was introduced. Apparently Obama cannot accept that military realities cannot be wished away to satisfy his personal opposition to the deployment of robust force, and particularly to the deployment of any combat personnel on the ground.

The miserly approach  to the application of force in Iraq and Syria is epitomized by what is occurring in the crucial city of Ramadi. It is a strategic location in Anbar, and ISIS, which already controlled about half of it, has launched an attack to capture the rest. Its assault has reached the government center. The town is at serious risk of falling.

Any ISIS concentration provides  the perfect opportunity to employ air power: this is what has happened at Kobani. But even though the US is only launching 20 or so strikes a day in theater, it can’t spare anything for Ramadi: it launched a single attack on a checkpoint on the outskirts of town while the center was under a serious assault. The embattled Iraqis are begging for air support, but it’s not forthcoming:

“The governorate building has been nearly cut off,” said a Baghdad security official in direct contact with the operations command for Anbar, the province where Ramadi lies. The official said that Islamic State forces had cut roads to the Iraqi Army’s 8th Division base to the west and the road to Habaniyya airbase to the east. The official spoke on the condition of anonymity because he was not authorized to talk to reporters.

. . . .

Local security forces and tribesmen initially succeeded in resisting the Islamic State’s newest advance, but commanders on the ground say a lack of continuous air support and reinforcements has made it impossible to hold that territory.

Ahmed Mishan al Dulaimi, a Ramadi police lieutenant, said that coalition airstrikes had been critical to stopping the Islamic State’s initial assault but that the strikes had stopped. “We were told (the aircraft) were occupied” with other fronts.

“If the coalition doesn’t continue targeting the nests of Daash, everything that we’re doing now will just be in vain,” he said, using an Arabic term for the Islamic State.

For the want of a nail.

And now the Pentagon is leaderless. Ominously, the two leading candidates, Senator Jack Reed and former Undersecretary of Defense Michèle Flournoy have withdrawn their names from consideration.

And is there any wonder? It is plain that Obama is hostile to and suspicious of the Pentagon. It is equally plain that those sentiments are repaid with interest. Who wants to be in the middle of that?

Moreover, it is abundantly clear that even though his micromanagement has been widely criticized, and that the results of this micromanagement have been nearly catastrophic, Obama is intent on maintaining a tight control over military operations and the budget, exercised through such lightweights as Ben Rhodes and Susan Rice: there are more munchkins in the White House (and the NSC) than there were in Oz. Hagel’s firing shows that Obama will brook no dissent. Only a cipher would be willing to work under these conditions. It is a sobering thought that Hagel wasn’t enough of a cipher to satisfy Obama.

The decline in talent at the upper echelons in an aging, lame duck administration is inevitable: Obama’s management of the Pentagon makes that decline even more pronounced. To think that we will pine for the likes of Chuck Hagel. My God.

Obama clearly prefers micromanaging failure to delegating for success. But perhaps that’s not fair. Perhaps Obama believes that letting the military devise and implement a plan that would have a realistic chance of defeating ISIS will lead to other consequences that he considers worse than the current fiasco. I shudder at the thought.

 

 

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November 23, 2014

Obama’s FOF Foreign Policy

Filed under: Energy,Military,Politics — The Professor @ 12:36 pm

The Marines have a saying: “No better friend. No worse enemy.” Obama is hell-bent on reversing that formulation.

One leg of his foreign policy could be dubbed FOF: F’ Our Friends. I’ve discussed one example of that recently: Obama’s inveterate opposition to the Keystone XL pipeline, and his fact free defense of his indefensible position. In adhering to this position, Obama is giving Canada the back of his hand.

The Australian reports of another example. Obama spurned the advice of the US ambassador to Australia, and delivered a truculent speech that directly attacked the Australian government’s climate change policies:

The US embassy, under the leadership of ambassador John Berry, advised the President, through his senior staff, not to couch his climate change comments in a way that would be seen as disobliging to the Abbott government, sources have revealed.

When The Weekend Australian put this information to the US embassy, a spokesman said: “As is the case with all presidential speeches, President Obama’s remarks at the University of Queensland in Brisbane were prepared by the White House.”

It is normal practice when the US President makes an overseas visit that the ambassador in the country he is visiting is consulted about the contents of major speeches. It is unusual, though not unprecedented, for an embassy’s advice to be ignored.

The Obama speech in Brisbane was added to the President’s program at the last minute. During his extensive talks with Tony Abbott in Beijing at APEC, Mr Obama did not make any mention of a desire to make a speech, or of any of the contentious climate change content of the speech.

Only in Naypyidaw, in Myanmar, immediately prior to the leaders travelling to Brisbane for the G20 summit, did the US party demand that the President make a speech and that it be to an audience of young people. At the speech, the President did not ­acknowledge the presence of Governor-General Peter Cosgrove.

Despite repeated Australian requests, White House officials refused to provide a text of the speech to their Australian hosts in advance, and did not provide a summary of what would be contained in the speech.

Mr Obama’s repeated references to the climate change debate in Australia, his accusation that Australia was an inefficient user of energy and his repeated references to the Great Barrier Reef, which has figured heavily in the climate change debate, have led observers to conclude that the speech was a deliberate swipe at the Abbott government.

Historians of the US-Australia relationship are unable to nominate a case of a visiting president making such a hostile speech for the host government.

That’s our Barry. Always the gracious guest, always making history.  (If you can’t access the article through the previous link, you should be able to get there from here.)

Canada and Australia have been stalwart allies for years. Both are fighting beside the US against ISIS and Afghanistan. The Australians fought with us in Viet Nam. Of course both made huge contributions in WWII, especially once their sizes are considered. Both are highly responsible and constructive nations. To a considerable degree, they share a common heritage with us, and a common belief in liberty and representative government.

Maybe it’s something about the Anglosphere. Obama’s animus against the UK (which has also fought shoulder-to-shoulder with America in Afghanistan, Iraq, Kuwait and now against ISIS) is well-known.

And for what is Obama slagging our allies? A farcical war on CO2.

While the FOF campaign is in full swing, Obama continues his Ahab-like pursuit of a deal with a nation that has been assiduously killing Americans for 25 years.

That’s Obama’s America. No worse friend. No better enemy. Two years cannot pass quickly enough.

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November 21, 2014

Swatting the Gold Bugs

Filed under: Economics,Military,Politics,Russia — The Professor @ 8:41 pm

There are idiots. There are morons. Then there are gold bugs. It would be a full time job fighting their insanity, and doing so is like kicking a manure pile: it raises a stink and a cloud of flies. But sometimes it just has to be done.

Recently it was reported that Russia has been buying gold at a furious rate. Gold now represents almost 11 percent of the country’s reserves.

The gold bugs buzzed in glee. To them, it represented another nail in the coffin of the doomed dollar, and Putin was an economic genius making a decisive move in his war against the US. And of course, Zero Hedge peddled this line (by posting an article by a bug site):

Russia’s central bank Governor Elvira Nabiullina told the lower house of parliament about the significant Russian gold purchases. She is an economist, head of the Central Bank of Russia and was Vladimir Putin’s economic adviser between May 2012 to June 2013.

This announcement is unusual and to our knowledge has not happened before. The announcement by the Russian central bank governor was likely coordinated with Putin and the Kremlin and designed to signal how Russia views their gold reserves as a potential geopolitical and indeed financial and currency war weapon.

(The comments are priceless.)

Here’s another, from July:

Reserve Currencies In History – Dollar’s Demise Cometh

Central banks continue to be buyers of gold at these attractive price levels. As sanctions, economic war and currency wars intensify we expect Russian and Russian ally buying of gold reserves and selling of dollars to intensify. Aggressive buying of gold and particularly silver by Russia will likely lead to defaults on the COMEX gold and silver futures exchanges and potentially an international monetary crisis.

See important guide to Currency Wars here Currency Wars: Bye, Bye Petrodollar – Buy, Buy Gold

The truth, of course, is much different. This is actually another symptom of Russian economic desperation, rather than a diabolically brilliant blow against the dollar:

Russia’s central bank has been forced to step up its gold buying this year to absorb domestic production that Western sanctions are making it hard for miners to sell abroad, and to boost liquidity in its foreign reserves, sources said.

Most Russian gold mine production is sold to domestic commercial banks, such as Sberbank or VTB, which can then sell the metal on to either the central bank or to foreign banks.

This year, sources say, foreign banks are holding off buying Russian gold after Western powers implemented sanctions against the country over the Ukraine crisis.

The central bank has therefore had no choice but take domestic mine production that cannot be sold to foreign banks, two sources said, and has bought most of the metal that commercial banks had available.

. . . .

While the sanctions do not expressly prohibit them from buying gold, Western banks are cautious over any business done with their Russian counterparts, sources said.

What’s more, the Russian CB can pay for the domestically-produced gold with rubles. It’s the only way it can really bolster reserves without selling rubles for dollars or euros.

Thus, rather than a blow against sanctions, it is yet another action forced on the Russians by them.

It’s also interesting to note that gold hasn’t been a great investment for the Russians. Gold purchase data is available on a quarterly basis. Assuming that Russia purchased gold in a quarter at the average price during those three months, based on IMF data and the current spot price of gold, I estimate that Russia has lost well over $1 billion on the gold purchased since 2009.

Speaking of Russia’s reserves, this piece by Anders Aslund is well worth reading. When he breaks down the numbers, Russia’s vaunted reserves look much less impressive. In particular, Anders points out that the National Wealth Fund and the Reserve Fund are not under control of the Central Bank, and committed to supporting pensions and the federal budget. Moreover, sharks like Sechin are already laying claim to big pieces of it. Further, Russia’s large external corporate debt cannot be refinanced due to sanctions, and payment commitments over the near to medium term will rapidly draw down the remaining reserves, and the current account surplus will fall substantially due to lower oil prices.  

One last gold item. ISIS are gold bugs. They have announced the creation of a currency, based on circulating gold, silver, and copper coins. They really believe the gold bug stuff. They are aficionados of ZH and currency warrior James Rickards (whose mug pops up everywhere, including on mainstream media websites like WaPo, in advertisements for his buy gold, buy a bunker, for the end is nigh book).

I was particularly amused by this:

 The gold and silver purchases are strange enough, he said. “But what is striking is how elements of the organization have seized power transmission cables and other copper components,” Obeidi said. The fighters are burning the insulation off the cables and harvesting the copper [to fashion into coins], he said.

So they’ll have metallic coins but no electricity. Which may be OK with them, given how much they want to live a 7th century lifestyle.

This is great news. If a shambolic Iraqi military can’t destroy the Islamic State, economic mismanagement based on wacko gold bug theories might achieve that result instead. I suggest that the CIA carry out a mission to translate Rickards’ Currency Wars into Arabic, and clandestinely distribute it in ISIS-controlled lands. A very cheap, but very effective, form of subversion.

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November 20, 2014

How Do You Know That Zero Hedge is a Russian Information Operation? Here’s How

Filed under: History,Military,Politics,Russia — The Professor @ 9:41 pm

I have frequently written that Zero Hedge has the MO of a Soviet agitprop operation, that it reliably peddles Russian propaganda: my first post on this, almost exactly three years ago, noted the parallels between Zero Hedge and Russia Today.

A few days ago ZH ran a post that illustrates perfectly how it spews Russian propaganda that slanders the United States and other enemies of Russia, such as Ukraine: “Ukraine Admits Its Gold Is Gone: “There Is Almost No Gold Left In The Central Bank Vault.”

The lurid post highlights a statement by the head of Ukraine’s Central Bank, to the effect that almost all the gold in Ukraine’s official reserve is gone. It states that this is news, a stunning revelation, which confirms a story that ZH reported a few weeks after the triumph of Maidan: that soon after Yanukovych fled, the gold had been spirited out of the country in the dead of night by airplane. It closes by stating the the disappearance of the gold occurred at the time that US State Department official Victoria Nuland was in Kiev. The implication is obvious. The US stole it:

In any event, now that the disappearance of Ukraine’s gold has been confirmed, perhaps it is time to refresh the “unconfirmed” story that a little after the current Ukraine regime took power the bulk of Ukraine’s gold was taken to the United States.

Wow. Quite a tale.

And one that overlooks crucial details. Most importantly, the Ukrainian CB’s “admission” of that the vaults are empty is not news. At all. A mere few days after Yanukovych fled, Ukrainian Prime Minister Yatsenuk disclosed that the country’s gold reserves had been looted:

Speaking in parliament, Yatsenyuk said that the former government had left the country with $75bn of debts. “Over $20bn of gold reserve were embezzled. They took $37bn of loans that disappeared,” Yatsenyuk said. “Around $70bn was moved to offshore accounts from Ukraine’s financial system in the last three years,” he claimed. [Emphasis added.]

The US dispatched  FBI and Treasury investigators to assist Ukraine in an investigation.

Funny how ZH left out that history, which appeared in virtually every mainstream publication at the time, and made it seem for all the world like the Ukrainian Central Bank’s revelation hit the world like a thunderbolt, nine months after Yanukovych’s flight. That distortion of history makes it plain that the ZH story is not information, but an information operation.

Shortly after Yatsenuk disclosed the theft of the gold, stories started appearing on the web, first on a Russian website, claiming that the gold had been spirited out the country: including on ZH, which quoted the Russian web story. This obviously serves a Russian purpose: it presents a counter-narrative that blames the theft of the gold not on Yanukovych, or the Russians, but on the new Ukrainian government and the United States.

This is the classic Soviet/Russian agitprop MO that I noted 3 years ago. A story appears in an obscure publication, typically outside the US or Europe, where it has been planted by Soviet/Russian intelligence. It is then picked up by another, more widely read publication, in Europe or the West. Maybe it works its way through several additional media sources. It then gets disseminated more widely in the west, sometimes making it to prestige publications like the NYT.

In the era of the web, the information weapon needn’t make it that far. Getting into a widely-read web publication like Zero Hedge which is then linked by numerous other sources and tweeted widely ensures that the lie goes viral.

ZH is an important transmission belt moving the story from Russian propagandists/information warriors to western news consumers. It happens a lot. This is a particularly egregious example, but the transmission belt runs almost daily. ZH is as much a part of Putin’s information warfare as RT. If you follow closely enough, it’s as plain as the nose on your face.

So why does anyone take Zero Hedge seriously? And believe me, many do. Many people who should know better.

And what is the US’s counterstrategy? Marie Harf’s Twitter account. I say again: we are so screwed.

 

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November 19, 2014

Vladimir Putin, Anti-Corruption Crusader?

Filed under: Economics,Energy,Politics — The Professor @ 7:30 pm

Bloomberg reports that Putin “stunned advisors” by backing an anti-corruption campaign:

Vladimir Putin sat motionless as the minister, seizing on the Russian leader’s first major meeting with his economic team in months, itemized the challenges.

A recession is imminent, inflation is getting out of hand and the ruble and oil are in freefall, Economy Minister Alexei Ulyukayev told Putin, according to people who attended the meeting at the presidential mansion near Moscow in mid-October. Clearly, Ulyukayev concluded, sanctions need to be lifted.

At that, Putin recoiled. Do you, Alexei Valentinovich, he asked, using a patronymic, know how to do that? No, Vladimir Vladimirovich, Ulyukayev was said to reply, we were hoping you did. Putin said he didn’t know either and demanded options for surviving a decade of even more onerous sanctions, leaving the group deflated, the people said.

Days later, they presented Putin with two variants. To their surprise, he chose an initiative dubbed “economic liberalization,” aimed at easing the financial burden of corruption on all enterprises in the country, the people said. It was something they had championed for several years without gaining traction.

The policy, which Putin plans to announce during his annual address to parliament next month, calls for a crackdown on inspections and other forms of bureaucratic bullying that cost businesses tens of billions of dollars a year in bribes and kickbacks, the people said. It entails an order from the president to end predatory behavior, with prosecution being the incentive for compliance, they said.

A few comments.

First, Putin’s resignation to the persistence of sanctions means that he has no intention of backing down in Ukraine or elsewhere. No surprise there.

Second, the motives behind the anti-corruption campaign are much more equivocal than the article suggests. Although the ostensible reason for it is to ease burdens on the Russian economy, there is obviously a political dimension too. Such campaigns can be a way of asserting power over the bureaucracy, maintaining political discipline, and strengthening the vertical of power. Putin is obviously paranoid about asserting control throughout Russian society, especially now, and especially in times of economic difficulty, and maintaining a tight rein on the bureaucracy can advance that objective. “Maintaining party discipline” through draconian measures has a long history in Russia and the USSR. Does the word “purge” come to mind? And Putin has a contemporary example as well: China’s Xi is using an anti-corruption campaign to achieve dominance over the Chinese political and economic elites.

Third, this will no doubt be popular, because it is directed at the kinds of corruption that plagues Russians in their everyday lives and business. This very fact could mean that Putin’s move betrays a certain uneasiness about the durability of his popularity, currently at stratospheric levels (if polls are to be believed). This is a way of shoring up his popular flank.

Fourth, these things said, the prospects for success are rather dim. Corrupt bureaucrats and police are like cockroaches. Yes, you can squash or poison quite a few, but the species will survive and even thrive. Indeed, these campaigns paradoxically create new corruption opportunities: the enforcers can extort from the targets in exchange for turning a blind eye. Thus, any initial burst of popular enthusiasm is likely to lapse into cynicism and resignation.

Fifth, even if retail corruption is targeted, I seriously doubt that wholesale corruption at the elite level will be touched, at all, except as a weapon to destroy political enemies, or those who Putin believes have ideas about grabbing for political power, or who hold assets that more favored individuals covet.

Sixth, Putin apparently rejected a “mega-projects” alternative advanced by Timchenko. This only shows that Putin is not completely delusional. For given that he realizes that as a result of sanctions and low oil prices the Russian economy is in a precarious state, he knows that mega-projects are unaffordable. As a great illustration of that, after canceling five previous auctions, today Russia tried to auction $100 million in government debt. It ended up selling $10 million.

In other Putin news, he whined about American attempts to subdue Russia. Yeah, as if Obama is obsessed with exerting American hegemony, and as if Obama gives a damn about Russia (being in this way, any was, at one with the vast majority of Americans). Putin (and Russians) are so convinced of their importance, that they imagine that others must be too. Putin also demanded that relations be based on “respect.” Mobsters and gangstas are obsessed with respect, so Putin is only acting according to type.

Lastly, Putin’s mouthpiece Peskov demanded that  Nato give Russia a “100 percent guarantee” that the organization would not admit Ukraine. Apparently Nato’s approach to the Russian border makes the poor dears “nervous,” notwithstanding that Nato’s capability to and interest in projecting force into Russia is zero. Truth be told, other than the US, Nato’s military capability is zilch: with the exception of the (shrinking) British army and parts of the French, European Nato troops couldn’t fight their way out of a “piss-soaked paper bag” (in Patton’s graphic but timeless phrase). And perhaps someone should remind Peskov and his boss that Ukrainians had shown zero interest in joining Nato until Russia invaded. Go figure.

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