Streetwise Professor

July 20, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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July 18, 2014

Sanctions: Pinprick or Sledgehammer Blow, With Little In Between

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

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July 17, 2014

What Would It Take For Obama to Cancel a Fundraiser?

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

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

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

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

Second: “looks like”? “May be”?

Go out on a limb there, Barry.

Words fail. Truly.

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

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

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

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

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

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

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The KAL Moment of the New Cold War

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

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

This is an unspeakable crime. Unspeakable.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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July 13, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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July 6, 2014

Putin: Waging Not War, Not Peace in Ukraine.

Filed under: History,Military,Politics,Russia — The Professor @ 7:24 pm

The military and diplomatic situations in Ukraine are fluid and highly uncertain.

Under pressure from the Ukrainian army’s “Anti-Terrorist Operation” (“ATO”),  ”separatists” in Slavyansk decamped suddenly for the city of Donetsk. Their shadowy commander, Girkin, offered another plea for Russian assistance, which has not been forthcoming-in the form of an outright invasion, anyways. The Ukrainian army is advancing elsewhere in the Donbas.

One would have thought that the fleeing rebels would have been extremely vulnerable to air attack, but most reports indicate that they made it to Donetsk largely unhindered. (I did see one Tweet that purports to show rebel vehicles that had been destroyed on the road, but one must be cautious about the veracity of Tweets, and even the Ukrainian government reports that the separatists are regrouping in Donetsk and does not claim to have mauled the rebels in their retreat.) This suggests (a) that the separatists left in a hurry,  (b) poor intelligence and reconnaissance by the Ukrainians, or (c) Ukrainian fear of MANPADS that have brought down several of their aircraft: the retreating column would have been vulnerable to air attack while on the run.

The priority for Ukraine should be to secure the border and to cut off the rebels from Russian logistical support. Deprived of supplies, arms, and reinforcements, the separatist force will surrender, disintegrate, or just fade away.

This puts Putin on the horns of a dilemma. He is already being blasted for abandoning the Russophone/Russophile forces. But overt intervention risks a more robust Western response, and the prospect of a military quagmire.

Of these, the military problem is more acute. Russia’s military still has (conscripted) feet of clay, and the invasion and occupation of a large territory is almost certainly beyond its capability.

What’s more, every signal emanating from the West is equivocal at best.

Multi-party talks last week saw Germany and France putting pressure on Ukraine to make concessions. The talks were held in Berlin, but Munich would have been a more appropriate setting for the appeasement and pressuring the victim of aggression that was on display:

Germany’s Foreign Affairs Minister, Frank-Walter Steinmeier, convened this meeting as an emergency response to Ukraine’s June 30 resumption of military operations against Russia’s proxy forces on Ukraine’s territory. Those forces had inflicted serious losses on Ukraine during the ten days’ ceasefire that Ukraine had unilaterally adhered to. Berlin had nudged Kyiv into that unilateral ceasefire (see EDM, June 21 through June 30).

Recognizing that the pro-Russia forces breached the ceasefire massively, Germany now seeks to establish a bilateral ceasefire and follow-up negotiations between the Ukrainian government and the pro-Russia secessionists, in a framework that includes Russia while excluding the West. These elements form the basis of a Russo-German consensus regarding Ukraine.

The “Joint Declaration by the Foreign Ministers of Germany, France, Russia, and Ukraine” (www.auswaertiges-amt.de, July 2) “stress[es] the necessity of a sustainable ceasefire to be agreed upon swiftly and observed by all concerned…Ministers agree to take all necessary measures and use their influence on the concerned parties with a view to achieving this goal.”

That implies: a) an unconditional ceasefire, thereby throwing out Ukrainian President Petro Poroshenko’s June 20 peace plan, in which ceasefire is conditional upon disarmament of pro-Russia forces (in return for amnesty) and/or the evacuation of those forces from Ukraine to Russia; b) treating the “parties” (Ukrainian government and Russia’s armed proxies) on an equal footing by the Berlin document; c) Russia is asked to control its protégés in the field more tightly, in return for Germany and other West-European governments pressing Ukraine into giving up its right to self-defense.

Insofar as the British are concerned, Cameron gave a deadline of June 30 for Russia to bring the separatists into line. That deadline has passed, with not a peep from the UK. And the US is no better. On June 26, Kerry told Russia to disarm the separatists “within hours.” That is now more than 240 hours ago. And the US has done nothing. Not even the usual Kerry bluster followed by Obama inaction. Just. Nothing.

Yes, there are stories that Merkel is losing patience, and taking a “harder stance.” Maybe in the sense that pasta cooked for 15 minutes is harder than pasta cooked for 20. But it’s still limp. And you know that in the face of  intense whinging by big German businesses like that quoted in the linked FT story, and the even more intense opposition of the Putin understanders (especially in the SDP) she’ll find a pressing reason to do nothing, to find some hint of a “de-escalation” (ugh) by Putin. The fact that Nato just announced that it will not admit new members out of fear of offending Russia will only strengthen Putin’s conviction that the West not confront him in Ukraine even if he continues, or even increases, his support for the rebellion.

This all makes the current situation highly unpredictable. The military momentum has shifted decisively in favor of the Ukrainian government. Even though its military is a shambolic Sovok relic, it still overawes the rebels. Unless the rebels are reinforced, or the Russian military invades, the rebellion will eventually be crushed (or suffocated). This would be a stinging defeat for Putin.

Putin’s military instrument is superior to Ukraine’s, but only in the sense of being somewhat less shambolic. Moreover, its mission in Ukraine would be more challenging than what the Ukrainians are attempting. Moreover, the West might stir to do something that seriously hurts Russia if Putin escalates, and particularly if he invades. But there is substantial uncertainty about what the Western response would be, and it has been sufficiently pusillanimous heretofore that Putin could reasonably conclude that he could intervene more robustly without triggering a serious response.

My best guess is that due to the frailties of his military, and the risk of serious sanctions, Putin will not go all in and invade. He can achieve his basic objectives by maintaining a frozen conflict in eastern Ukraine. As long as the Ukrainian government does not achieve a decisive victory, and as long as the rebels remain a force-in-being that occupy some major cities, Ukraine will be deprived a victory and will be hamstrung in its ability to reform and integrate more closely with Europe.

This means that it is imperative that Putin prevent the Ukrainians from sealing the border, and that he maintain a corridor to Donetsk and wherever else the separatists dig in. Maybe he will achieve this through the oxymoronic “peacekeeper” gambit employed previously in Abkhazia, South Ossetia, and Transnistria. Maybe he will employ artillery and air power, and justify this by claiming it is a response to a Ukrainian incursion into Russia. I don’t know, exactly. But in my view, Putin will try to modulate the violence. Just enough to keep a frozen conflict alive, but not so much as to compel the Euros and US to take actions that would hurt Russia seriously. Unfortunately, the obvious reluctance of Merkel, Obama, and Cameron, not to mention Hollande, to do anything serious gives Putin  considerable latitude.

If Ukraine does move robustly to seal the border things will come to a head quickly. No doubt the Euros will put pressure on Ukraine not to do that (and Obama will vote “present”-or maybe even “not present”). If this pressure prevails, the conflict will continue to simmer. If the Ukrainians buck the pressure, it will be Putin’s move. I doubt he will back down. I doubt that he will double down. He will instead strive for some middling way that will keep the rebellion alive but not provoke a serious confrontation with the West.

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July 1, 2014

Energetic Bear. Conspicuous Silence.

Filed under: Military,Politics,Russia — The Professor @ 3:47 pm

In news that should shock no one, Russian hackers have unleashed a Stuxnet-like virus against American and European energy companies. One of the security firms that discovered the intrusion has labeled it “Energetic Bear”. Energetic because it involves energy. Bear because it involves Russia. The Russian link is based on time stamps and the presence of Cyrillic in the code. Moreover, the sophistication of the software strongly suggests (Russian) state involvement.

Though most of the attacks appear to be designed to collect information about the industrial control systems used by these energy companies, that is cold comfort: careful attackers collect intelligence to identify vulnerabilities before mounting an attack. This is also a way of sending a message: You are vulnerable. You mess with us, we can mess with you.

The news of the Russian hack was announced by Kaspersky, the famous cybersecurity firm.

Just kidding. I’m such a card. This revelation came from 2 US firms. Kaspersky has been as quiet as a mouse. A dead mouse.

Which is always the way when there is a Russian hack. When there is an American operation, e.g., Stuxnet, Kaspersky trumpets it for all the world to hear.

One other thing. The names of the SCANA producers targeted have not been revealed. But note that Siemens, the most vocal corporate supporter of Russia in Germany and the most vehement opponent to sanctions, is one of the world leaders in SCANA systems. So it is almost certain that Siemens has been a target of Energetic Bear. But Siemens has been as silent as Kaspersky.

The silences are far more revealing than the story itself.

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Putin’s Tell on What He Really Fears: Let’s Take the Hint and Make His Nightmares Reality

Filed under: Economics,Military,Politics,Regulation — The Professor @ 2:58 pm

Vladimir Putin played his favorite game today: divide and conquer. He weighed in on the $9 billion US fine of French bank BNP Paribas for its flagrant and repeated violations of US sanctions on Sudan and Iran. He took a typically narcissistic view: according to Vova, the US offered to relent on its prosecution of BNPP if France terminated its sales of Mistral attack ships to Russia:

“We know about the pressure which our U.S. partners are applying on France not to supply the Mistrals to Russia,” Putin told Russian diplomats in Moscow today. “And we even know they hinted that if the French don’t deliver the Mistrals, they would quietly get rid of the sanctions against the bank, or at least minimize them,” he said without naming BNP Paribas.

He knows this how, exactly? Electronic surveillance? (Don’t tell Angela!) A leak from the French?

Certainly Putin is trying to stir trouble between the US and France, and exploiting the French anger at the US penalties. (To which I say: the anger should be directed at the mangers of BNP Paribas, especially the offenders in its Geneva commodity finance operation who violated sanctions against malign regimes with malice aforethought.)

But the chronology is way off. The US prosecution of BNP began long before Ukraine exploded. Years before. The USDOJ was particularly furious at the French bank’s flagrant attempts to conceal its sanctions busting: the bank eliminated identifying information from the transactions in order to evade detection, a sure sign of a specific intent to commit a violation. This fury was well-stoked long before Putin’s adventurism in Ukraine/Crimea. What’s more, US prosecutors operate very independently, and those involved in the BNP case would be outraged at attempts to interfere in their case against the French by a White House playing geopolitical games, especially given the years and blood, sweat, and tears involved in the prosecution. Prosecutors do not take orders from on high, especially in big cases like this.

This is likely another example of Putin projection. This is how Putin would have instructed his prosecutors to act, and they would have implemented his instructions without question: he just presumes that the same would happen in the US. But the US is very different in that regard. Indeed, I would wager that if the White House did attempt to interfere in this way, the prosecutors would have leaked.

Of course Putin has another agenda here. He realizes that the biggest threat he faces is US sanctions that would be enforced (via the financial provisions of the Patriot Act) by prosecuting any sanctions violator who deals in dollars just as the US has prosecuted BNP. By emphasizing the existential legal threat that European banks would face under a sanctions regime, Putin is attempting to fuel opposition to sanctions: since Obama has made it plain that he will not proceed with sanctions without European support, by fomenting European opposition he can counter the US. To the Europeans (and probably American banks too), the easiest way to avoid severe punishments for sanctions violations is to have no sanctions at all. Which is what Putin wants.

In other words, Putin’s mischievous comment on the BNP Paribas case is a tell. He is revealing what he really fears.  So let’s take the hint, and make his nightmares reality.

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June 27, 2014

Have Some Fun At Vlad’s Expense

Filed under: History,Military,Politics,Russia — The Professor @ 9:09 pm

Given the dreary news emanating from about everywhere, a little levity is needed. And what better way to enjoy a Friday than to exult in Putin’s embarrassment.

Putin went to a rather flamboyantly decorated room to watch the launch of Russia’s new rocket, the Angara. And he sat and watched. And sat and watched. And sat and watched. And nothing happened.

Due to a technical problem, the launch had to be scrubbed.

Some obviously scared military officials reported the bad news to him. (One hopes they planned ahead and wore their Depends!) Then Putin went off on them, saying something like “Yeah-it didn’t work.” (Echoes of his response to a question about the Kursk: “It sank.” I think the “it didn’t work” line was sarcastic. Sort of “no shit Sherlock. Tell me something I can’t see with my own effing eyes.”) He is obviously furious.

But I’d like to help out Vlad. I think I have found the culprit. Look at the gophers that appear at about the 25 second mark in this video:

Obviously Amerikan agents and saboteurs! After all, if the evil Zionists can train sharks and vultures to carry out their fiendish plots, the Americans could train gophers to carry out theirs. Because remember, according to some Russian officials, American plots were responsible for the crashes of the Sukhoi Superjet and the Phobos-Grunt space probe. The theories advanced in those cases were about as plausible as the Gopher Saboteur theory.

And I have video proof of the destructive power of American gophers!

Just ask Bill Murray about them. I’m sure the FSB is trying to get ahold of him now for advice on how to deal with them.

Even if the theory advanced does not involve rodents, I think it’s only a matter of time before there are dark mutterings about the role of the US in this.

Which will only add to the levity.

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June 26, 2014

Understand This: Germany Won’t Sanction Russian Companies, But Will Sanction American Ones

Filed under: History,Military,Politics,Russia,Uncategorized — The Professor @ 3:13 pm

Both the US and Germany are making noise about ratcheting up sanctions on Russia. Kerry told the Russians to disarm separatists “within hours” or else. That was hours ago, and nothing has happened.

Germany’s Merkel has also toughened “sanctions talk.”

Angela Merkel, German chancellor, has raised the prospect of broader economic sanctions against Russia, just two days before an EU summit at which her hardening stance against Moscow is expected to steer the diplomatic agenda.

One theory is that Merkel and Steinmeier are playing good cop, bad cop, with Angela in the role of the heavy. If Merkel is the bad cop, Putin and his clique have absolutely nothing to worry about.

Merkel has talked (relatively) tough before, but has always found some reason to back off. This time, no doubt Putin’s transparently phony call for his senate (and it is his, in the same sense that his dog is his) to repeal the authorization to invade Ukraine will give Merkel the excuse she needs to keep her finger off the sanctions trigger. That plus Putin’s typically convoluted (and contradictory) support for a ceasefire. Meanwhile, the war of subversion in Donbas goes on, transparently supported by Russia. Only those who will not see don’t understand this.

But Angela has found someone to sanction: the US, or more specifically, US telecom Verizon. German outrage over the Snowden revelations was a major reason for the decision.

Yes, there is reason for outrage here–outrage directed at Germany. Here is a nation that bends over backwards to find reasons not to sanction any Russian company. Even the pathetic sanctions  it has meted out (as part of the EU) are directed primarily at individuals, most of whom are nobodies. Talk of sanctioning Russian companies elicits howls of anger and pain from the German business community. There is constant talk of the need to “understand” the Russians, with the result being described by the French proverb “to understand all is to forgive all.” All including the anschluss in Crimea and the ongoing subversion in Ukraine. There is even a German phrase to describe this lot: Putin Verstehers. Putin understanders. Germans-and Merkel in particular-look for the slightest sign of compromise by Putin, and when they see it, they back off doing anything to penalize him, Russia, or any Russian company. Russia/Putin get the benefit of every German doubt.

But evidently the US does not get the benefit of any German doubt. So they sanction Verizon (not my favorite company, by the way) in their very narcissistic pique and outrage over US surveillance of Germany. No attempt to understand the US whatsoever, let alone an attempt to be as understanding as the Germans are with the corrupt autocrat and oligarchic thugs and espionage-crazy security service in the nation to their east.

But oh, there is a lot that the Germans need to understand about why they are a surveillance target, and not given the same deference as the Five Eyes nations. (I will let pass in silence the fact that Germany’s intelligence service the BND has long cooperated with the US.) One thing to understand: the fact that 911 hijackers made themselves at home in Germany. Another thing to understand: German politics and government has long been penetrated by Soviet, and then Russian, agents and collaborators. And yet another thing to understand: the fact that the German business community and government have clearly been suborned by Russian money. German companies (notably Siemens) have been deeply involved in corrupt dealings in Russia. And yet another thing: although it has cleaned up its act some lately, for a long time German businesses assisted Iran in its efforts to develop nuclear weapons.

In brief: Germany has earned the scrutiny that it has received from the NSA. Indeed, its continued enabling of Putin’s behavior just provides further evidence that it is an unreliable partner and uncertain ally that needs watching.

Germany only has the luxury to engage in its moral preening and biting American ankles and corrupt canoodling with the Russians because the US kept out the Russians for 45 years. And I thought the French were ingrates.

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