Streetwise Professor

September 25, 2017

Whoops, They Did It Again! After the German Election, the Establishment is 0-for-3.

Filed under: Energy,Politics,Russia — The Professor @ 11:36 am

I am experiencing considerable–what’s that word? oh yes!, schadenfreude–at the German election results. Although Angela Merkel’s party received the largest share of the vote, the results were a shocking setback for her. The CDU/CSU won the largest share of the vote, but this share was the lowest since WWII and represented a double-digit drop from the 2013 vote. Further, the CSU’s leader is mooting a split from the CDU. Merkel is almost certain to have to craft a coalition including three other parties–including the Greens–and this will be time consuming and constrain her power even once the coalition is in place. But the biggest setback at all was due to the stunning surge of Alternative for Deutschland (AfD), the nationalist (and typically referred to as “far right”) party, which not only surpassed the 5 percent hurdle for parliamentary representation, but garnered 13 percent of the vote.

On Friday, Merkel was lionized. Now she is a greatly diminished figure. So much for the New Leader of the Western World, the Tamer of Trump, the Vanquisher of Populism.

And it’s not like this should be surprising. This is at least the third major replay of the movie–first Brexit, then Trump, now Merkel/AfD. Like the Remainers and the Democrats, Merkel condescended to the broad strain of popular (and populist) unease at her policies, most notably her immigration policy. Indeed, she and the rest of “elite” German (and indeed, Western) opinion could barely contain their disdain, and indeed revulsion, at any of the hoi polloi who dared question the wisdom of admitting a million plus immigrants from Muslim countries, or who expressed so much as concern at the criminality (especially sex crimes) and terrorism risk associated with the immigration wave: such people were the German version of The Deplorables. To the contrary: Merkel et al used this criticism as an opportunity to engage in a spasm of virtue signalling, not to say moralistic onanism. Those who agreed with them were morally elevated: those who disagreed, or even questioned, were knuckle dragging crypto–or not so crypto–fascists.

And as in the UK and the US, the knuckle draggers had the vote–and used it to take their revenge.

It is hard to discern from biased media coverage just what AfD really is. Perhaps David Goldman (AKA Spengler) is right that it is “an America-hating ethnic nationalist monster crawling with Nazi nostalgia.” I seriously doubt, however, that most of those who voted for it fit that description. But in some ways the party’s alleged ugliness, and the scorn and derision heaped on it by Merkel and the establishment, were a feature and not a bug to those looking to express opposition to the establishment’s policies. In a parliamentary system, voting for a fringe party is a way of sending a message, and what better way to send a message to Angela et al than by voting for a party that makes them recoil in horror because of its often extreme views? The only way to snap them out of their virtue signaling and self-pleasuring reveries is a 2×4 upside the head: voting for an AfD that elite opinion considered beyond the pale did just that. For that purpose, the more reprehensible the party, the better.

Such a smack may be necessary, but it may not prove sufficient. For what the post-Brexit and post-Trump reactions of the elite demonstrate is that they are incapable of reconsideration or self-examination or self-doubt. They are so convinced of their own superiority (especially moral superiority) that they tend to double down on the derision and condescension. Thus, electoral shocks tend to be merely the first battle in a protracted and increasingly hysterical war between the soi disant elite and those they believe it is their right to rule. We see that in the US today, with no respites even on the Sabbath, as the current frenzy over the NFL demonstrates.

My schadenfreude is only increased by the fact that Germany lapped France  as the most annoying country in Europe some time ago. German annoyingness was the product of two currents, one of which is longstanding, the other more recent. The longstanding current is that of various German national neuroses, most notably the need to cope with the awesome responsibility for the greatest catastrophes of the 20th century, the two World Wars, and in particular the crimes committed in the second of these. To prove that they are different now, the Germans have long held themselves out as morally superior judges of everyone else. Notable examples include virulent German criticism of Israel (especially useful because if Israelis are no better than Nazis, the moral valence of the Holocaust is diminished) and of the US in Vietnam, and latterly Iraq. German criticism of lazy southern Europeans is a somewhat less egregious, but nonetheless notable, example of this tendency. Virtue signaling is a natural pastime.

The second current is Germany’s economic ascendance, especially in the context of the EU. Germany emerged from the Financial Crisis as the dominant economy in Europe, by far. Its main rival within the EU, France, fared not nearly so well, and this combined with British exit has left Germany preeminent in the EU. And they have not been shy to exercise this dominance–nor should they have been expected to, given the aforementioned belief in their moral superiority. Germany–with Merkel in the lead–has been the biggest force pushing for MOAR Europe, because in their current circumstances, More Europe means More German Power.

Of particular relevance in light of the election results, one of the most appalling manifestations of this has been Germany’s insistence on imposing its open borders policy on other countries, especially in eastern Europe (notably Poland). For its part, the Polish government knows how to hit Germany where it hurts (in its swollen sense of superiority) by threatening to demand trillions in reparations for WWII. (The issue of WWII illustrates Churchill’s aphorism about the Germans being either “at your throat or at your feet” very well. It is interesting to note how the Germans have been at times groveling to the Russians in recognizing their depredations in Russia during WWII, but have not behaved similarly to Poland, even though German crimes there were probably greater, and Polish responsibility for the war far less than Russia’s.)

German energy policy is another example. The Germans have been intent on forcing Nordstream I and now II on Europe because it benefits Germany, even though it leaves eastern Europe in the Russian energy thrall. Related to this is the schizophrenic German policy on Russia. On the one hand it has insisted on maintaining sanctions on Russia for Ukraine, but on the other hand it freaked out when the US tightened sanctions on Russia because this undermined German attempts to secure gas supplies from the Russians.  The Germans insist on sending a signal–as long as they don’t have to pay a price.

So even if–or especially if–AfD is as bad as Spengler says, its shockingly strong performance yesterday will have major political effects outside of the borders of Germany. It has proven that Merkel has feet of clay. It will lead to a protracted negotiation over a coalition that in the end will leave Merkel diminished and constrained. It will probably spark a vicious political battle in Germany over immigration and Europe that will derail Germany’s attempt at world domination by other means.

And as much as the western establishments will wail, these are good things. In fact, the wailing is probably the best indication of that which one could imagine.

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September 22, 2017

The Mueller Investigation: One Part Abuse, One Part Absurdity. There is No Third Part.

Filed under: Politics,Russia — The Professor @ 7:32 pm

The Mueller “investigation” of “collusion with Russia” is one part abuse, one part absurdity. There is no third part.

One aspect of the abuse is well summarized by my friend Tom Kirkendall and others quoted in this article:

“Here is a United States citizen where the FBI is coming in, picking his lock, and raiding his home in the early morning, over what? It doesn’t matter which side you’re on. It’s just crazy. We’re not the Soviet Union. It’s appalling,” said Kirkendall, who has worked on cases involving one of the special counsel’s key investigators, Andrew Weissmann.

As Tom noted to me, apparently the irony of using KGB tactics to investigate rumored Russian intelligence involvement in the US election is lost on Mueller and his thugs. The presence of serial prosecutorial abuser Andrew Weissmann is also quite revealing about Mueller’s attitude.

Another aspect of the abuse is the continued and repeated leaking from the investigation, and about Manafort in particular. The leaked information was obtained either by search warrant in a criminal investigation, or a FISA warrant in an intelligence investigation: it is criminal to release either.

All of this is clearly intended to intimidate Manafort into cooperation against Trump. In this effort, they are apparently ranging far afield from anything remotely related to the 2016 election. One (leaked) story is that they are looking into Manafort’s activities dating back 11 years. That might have more relevance to the 2008 election involving current Swamp darling John McCain–Manafort’s partner Rick Davis was McCain’s 2008 National Campaign Manager–than it does 2016’s.

No leaks yet as to whether Mueller is investigating contacts between Manafort and Agamemnon during the Trojan War. Which would be about as relevant to the things he is pursuing now.

Another leak is that–gasp!–Manafort offered to brief Oleg Deripaska about the campaign. I checked my thesaurus. “Brief” and “collude” or “conspire” are NOT synonyms. Furthermore, this is an example of how dishonest and misleading leaks can be. In court they make you swear to tell the whole truth, because partial revelations can be as misleading and deceptive as an outright lie. How many other people from what other nations did Manafort offer to brief? What did these briefings involve? Just revealing a single communication about a possible Russia contact (without even confirming that any briefing actually occurred) is highly manipulative, and presents a distorted picture of what actually occurred.

It is telling that Manafort has demanded that ALL of the material collected about him be released. He no doubt knows that the Deripaska connection would appear trivial when put into the context of the entirety of his activities.

I wonder if they have the measure of their man, however. After all, the whole reason Manafort has come under suspicion is his history of dealings in Ukraine, and on the side of Russia-friendly politicians there. These people are not boy scouts. They are capable of far worse things than no-knock raids. Someone like Manafort who is used to dealing with the likes of Yanukovych and Ukrainian oligarchs cannot be easily intimidated. I’m not saying he’ll go all G. Gordon Liddy, but he’s not likely to collapse into a puddle of tears begging for Mueller’s mercy either.

One last thing about this: the massive leaks give Manafort a colorable claim that he cannot receive a fair trial anywhere in the US due to the highly prejudicial pre-trial (and even pre-indictment) publicity. Mueller et al have to know this, but are willing to leak prejudicially anyways, meaning they don’t give a damn about Manafort qua Manafort. But Manafort (and his attorneys) know this too–which might lead him to resist the pressure.

As for absurdity, it is widely reported that a major focus of Mueller’s investigation is the alleged purchase by Russians (which of the 145 million odd citizens of the Russian Federation has not been revealed) of a piddling sum of ads on Facebook. What connection this has to the collusion allegations that started this whole effort in motion has not been disclosed. But even if there is some remote connection, this is farcical.

The purchase price of the ads was between $50,000 and $100,000. (I have seen both numbers quoted.) To put things in perspective, Hillary spent $400 freaking million on ads. (And every dollar was wasted–hahahaha!) So even assuming the high number, the FB ads represented .025 percent of Hillary’s ad buy: Hillary was spending more per business hour than the entire FB ad buy. This does not count the massive free publicity via the mainstream media, which was highly partisan: that would have cost many billions to buy. Nor does it count pro-Hillary Facebook and Twitter (and for all I know, Instagram) material that was churned out during 2016.

Given that Mueller has hired 14 high-powered lawyers, who always come with a train of support staff, I would not be surprised if he spends more in a day investigating the Great Facebook Conspiracy than the conspirators spent on the ads in the first place.

All of which shows beyond cavil that any putative Russian ad buy on Facebook was about as relevant to the outcome of the election as what Putin had for breakfast on election day. Or put differently, if it did have any impact on the election, every campaign manager and consultant is an idiot and a wastrel for spending vast sums on conventional media buys when spending the campaign budget for a hotly contested school board race on Facebook ads would be sufficient to propel their candidates to the highest offices in the land.

Both the abuse and the absurdity demonstrate the depravity of the independent counsel statute, and the grave disservice that Rod Rosenstein and Jeff Sessions did not just to Trump but to the nation, by appointing Mueller, and in particular, appointing him with a license to look into anything remotely related to Russia. Prosecutorial power must be restrained, or it will be abused: not may be–will be. (This is especially true with US prosecutors.) The most important constraint is that they be limited to prosecuting a specific allegation of criminality. Indeed, given the stakes and the huge ramifications for the operation of the US government, special prosecutors should be particularly constrained. Instead, we are in a situation where this special prosecutor is apparently free of any limitation, and is free to roam at will as a hybrid of Inspector Javert and Frankenstein’s Monster.

The only silver lining in this dark cloud is that the fact that Mueller is chasing chimeras likely means that there is nothing to the collusion allegations that were the reason for his appointment.

The reason I started to write about Russia years ago was that it represented to me a real world dystopia that showed what could happen in the absence of a rule of law, and protections of individual rights: writing about a place where these things did not exist was (to me) an effective way of demonstrating their importance where they do exist. But in the 11 odd years since I started blogging about Russia, the United States has been converging to it from above, and the pace of convergence has quickened in recent years. It is sickly ironic that one of the most disturbing illustrations of this convergence is a special counsel investigation ostensibly motivated by grave concerns about Russian interference in American politics. Pace Pogo, we have met the enemy, and he is us: we are doing a damn good job at becoming Russia all by ourselves, thank you very much.

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September 19, 2017

Motivated Seller

Filed under: Economics,Energy,Politics,Russia — The Professor @ 8:18 pm

I conjectured that Qatar’s sale of half of its Rosneft stake reflected at least in part the dramatic change in the emirate’s circumstances between December (when it initially bought in) and September (when it sold off), specifically the cold war with Saudi Arabia, the UAE, and the rest of the Gulf Cooperation Council (oxymoron alert!) that broke out over the summer. This conflict has put substantial financial strains on Qatar, which would suggest it bailed on Rosneft (at what price???) to raise cash and reduce risk.

This story from Bloomberg is consistent with that: private depositors have been fleeing Qatar’s banks, and the state is stepping in, putting about $11 billion into these banks. Liquidating investments like the Rosneft stake is one way of raising that cash, and reducing debt. (This raises the possibility that if the crisis drags on, Qatar may sell the rest of its 4.7 percent share of Rosneft.) That is, Qatar could have been a very motivated seller–war clouds can do that to a country. And if it was a motivated seller, CEFC probably obtained its position at a good price, perhaps even a fire sale price. That’s not evident from the reported terms of the transaction, which means that there are side deals.

One other thing about the Qatar-GCC standoff. There are reports that Trump kept the cold war from going hot:

Saudi Arabia and the United Arab Emirates considered military action in the early stages of their ongoing dispute with Qatar before Donald Trump called leaders of both countries and warned them to back off, according to two people familiar with the U.S. president’s discussions.

The Saudis and U.A.E. were looking at ways to remove the Qatari regime, which they accused of sponsoring terrorism and cozying up to Iran, according to the people, who asked not to be identified because the discussions were confidential. Trump told Saudi and U.A.E. leaders that any military action would trigger a crisis across the Middle East that would only benefit the Iranians, one of the people said.

Donald Trump, peacemaker. Not that he’ll get credit. Note that early on, Trump’s pro-Saudi message clashed with Tillerson’s more neutral approach. This story suggests that Trump’s private and public positions may have been different, and that he was really on board with Tillerson all along. Alternatively, Trump initially tweeted his gut reaction, but Tillerson and others quickly persuaded him to moderate his course. Either way, the outcome conflicts with the prevailing narrative about Trump.

 

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State Firms Are Running From Private Banks in Russia: Are Putin’s Hands On or Off?

Filed under: Economics,Politics,Russia — The Professor @ 7:59 pm

Russia’s private banks  are in pretty dire shape. The biggest one, Otkritie, was bailed out. Others have been designated as systemically important (i.e., TBTF), reflecting their size and their marginal financial condition. Further, the FT reports that some private banks are undergoing a run of sorts. Interestingly, the run is being led by state corporations, which are withdrawing billions (of dollars, not rubles)–one unidentified state corporation is leading the way. Such withdrawals sounded the death knell of Otkrite, and are jeopardizing other big private lenders.

In the conventional view of Russia as a centrally directed “vertical of power,” such potentially destabilizing moves by state entities would not take place without Putin’s acquiescence. Indeed, in this view, such moves would most likely occur at his direction.

If that is the case here, one is led to wonder about the motivation given (a) the potential for sparking a banking crisis in Russia, and (b) the cost to the central bank/government of dealing with such a banking crisis: the central bank lent Otkrite about $12 billion over the summer. Certainly, the large state banks (VTB, Sberbank, Gazprombank) would appreciate a reduction in competition for funding, although they are evidently not the only immediate beneficiaries: private bank Promsvyazbank has experienced a surge in deposits from state companies. The inflow to Promsvyazbank followed its designation as a systemically important bank, which may have convinced the state firms that their deposits are effectively backed by the RCB.

So under the power vertical view, this could be perceived as a boon to state banks who may see more deposits from state firms and less competition for funding. It could also reflect bleak choices facing the government and central bank: the weakness of the private banks means that they need to shrink their balance sheets, and the withdrawals by state firms are a way of forcing that outcome. But whence the funds to pay off the fleeing depositors? Asset sales?: fire sales could cause contagion that damages other banks, including the state banks. The central bank?: that would mean that this could be a first step to bailouts and eventual liquidation (or dramatic shrinkage) of the private banking sector.

The alternative explanation is that the state firms are acting on their own hook, and in their own interest, without direction from the top, or without receiving permission despite the potentially systemically risky implications of these moves. In some ways, that would be even more intriguing, as it would suggest a serious degradation of the degree of central control in Russia–or that such control has been overstated all along.

A shaky banking sector will test the RCB, and the government. How it plays out–a relatively orderly wind-down of wobbly lenders directed from the center, or an uncoordinated sauve qui peut by big depositors–will say a lot about the state of the Russian economy, the Russian financial system, and crucially, the true nature of the Putin system. Is the Kremlin orchestrating this behind the scenes, or is it taking place without Putin’s directing hand? Inquiring minds want to know!

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September 16, 2017

The Rosneft Farce Gets More Farcical

Filed under: Energy,Politics,Russia — The Professor @ 11:39 am

A Reuters piece today provides even more evidence of the farcical nature of the Rosneft “privatization.” Specifically, it reports that (a) the CEFC deal was heavily leveraged, and (b) more importantly, a good part of the leverage was from a Russian bank (VTB). The remainder of the debt was provided by the Chinese Development Bank.

Remember Putin’s original injunction to Sechin: the deal should be a real privatization, without participation by Russian banks, and western investors must participate. Remember the triumphant statements of Putin and Sechin at the time of the original deal, and when he awarded Medals of Friendship to two of the big players in the deal: to hear them tell it, the participation of a major western bank, Intensa, was a validation of the legitimacy of the transaction, and an endorsement of Rosneft and Russia as a place to invest.

Of course, those statements were lies when made: Russian banks guaranteed at least Glencore’s debt, so even if they did not provide any funding, they did bear the risk, which is what really matters. Further, the unaccounted for difference between the alleged purchase price and the funds provided by Intesa, Glencore, and QIA also makes it quite possible that Russian banks even chipped in some funding. (VTB was likely one. Gazprombank is another.) And don’t forget that VTB provided bridge financing until Russia cadged Intesa into the deal.

But now the falsity of the original narrative, and original plan, is laid bare. There is not a western entity in sight, unless you count Glencore and its piddling .5 percent stake–which is more than compensated for by generous off take deals and a seat on the Rosneft board. The deal was clearly structured–almost to the kopek–to make Intesa whole, and allow it to flee snowy Russia for sunnier Mediterranean climes (with its CEO Carlo Messina getting a cool Medal of Friendship as a pre-parting gift). A major Russian bank ends up exposed to Rosneft by stepping into Intesa’s place, along with a Chinese state bank. Not a private western investor or lender in sight.

So yes. The Rosneft deal indeed speaks volumes about the company, and about Russia as a place to invest. And what it says is exactly the opposite of the message that Putin trumpeted in December 2016, and again in April (when the friendship medals were awarded).

Think about it. Russia cannot entice private investors to buy into an oil company with access to some of the greatest oil properties in the world. How damning is that?

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September 9, 2017

The Rosneft “Privatization”: The Farce Continues

Filed under: China,Commodities,Energy,Politics,Russia — The Professor @ 3:32 pm

The Rosneft deal involving Qatar and Glencore, announced with such fanfare in December, and commemorated with Putin awarding medals a few months later, has been undone. A Chinese conglomerate, CEFC (not exactly a giant name in the energy business) has agreed to invest $9.1 billion. As a result, Qatar’s stake will fall by more than half to less than five percent. Glencore, which notionally owned half of the nearly 20 percent stake sold in December, but which went to great pains to point out that it was at risk to the tune of a mere $300 million, will retain only .5 percent of Rosneft. The Italian bank which funded the deal, Intesa, will be paid off and exit the transaction. And as Ivan Tkachaev notes in RBC, it also lets the heretofore unknown Russian banks who provided guarantees to Glencore (and perhaps provided some funding too, given the gap between the price of the deal and the contributions by Intesa, QIA, and Glencore) to eliminate their exposure to Rosneft. (Exposure that Rosneft/Sechin/Putin never admitted, and which was allegedly not supposed to exist in this “privatization.”)

Like the original transaction, this one raises many, many questions. And like the original transaction, no doubt few (if any) of these questions will be answered.

The most notable issue is that the transaction clearly was not done at a market price. The amount invested exactly pays off the Intesa loan, plus about $100 million to cover costs and fees: it would be miraculous if a market-price deal exactly paid off existing loans. Thus, the deal was clearly done to save Intesa from its predicament, which was quite dire given that it could not syndicate the loan, and its association with the deal put the banking some sanctions-related binds.

Further, the deal is a boon to Qatar, which is embroiled in a standoff with the Saudis and the rest of the GCC, and which has suffered some economic difficulties as a result. The deal helps its balance sheet, which was under pressure due to the economic conflict. Further, Qatar needs all the friends it can get right now, and being a major investor in Rosneft did not help its relations with the US.

Not only was the deal not at a market price, it is highly likely that the Chinese overpaid. The price was at a 16 percent premium to the average of Rosneft’s stock price over the previous month. It is extremely rare to pay a premium, let alone that big a premium, for a minority passive stake–especially in a country where minority investors are routinely raped. (And Sechin is a multiple offender in this regard.) Indeed, most such deals are done at a discount, not a premium.

Note that the original deal was at a discount, and Putin explicitly acknowledged it was at a 5 percent discount. He claimed it was the “minimum discount,” but it was a discount nonetheless.

The Chinese are not notorious for overpaying. Thus, it is almost certain that there is some side deal that makes the Chinese whole. Or better than whole. The side deals could be in the form of cash payments from Rosneft (or maybe even Qatar), but I consider this the least likely. Instead, CEFC could obtain oil at preferential prices from Rosneft, or provide financial services to the Russian company at above market prices.

Ivan also reminds me that just days before the CEFC purchase, Rosneft and the Chinese company announced a “Strategic Cooperation Agreement and a contract for the supply of Russian crude oil at the 9th BRICS summit.” Rosneft describes the oil contract thus:

Rosneft and CEFC signed a contract for the supply of Russian crude oil, opening up new opportunities for the strategic partnership. This contract will lead to an increase in direct supplies of crude oil to the strategic Chinese market and ensure a guaranteed cost-efficient export channel for the Company’s crude sales.

Price is not mentioned, but this could provide a mechanism that would allow Rosneft to compensate CEFC for any overpayment on the purchase price of the stake. (Recall that Russia obtained funding for an oil pipeline to China by contracting to deliver oil at discounted prices.)

Again, we will likely never know the details, but there has to be more to this deal than meets the eye.

Here is how the investor describes its business:

In recent years, CEFC China has been accelerating its strategic transformation, focusing on building an international investment bank and an investment group specialized in energy industry and financial services, which has helped boost the Company’s sustained rapid development. The Company has under it two group companies at management level, 7 level-one subsidiaries as investment platforms and an A-share listed company, with a workforce of nearly 30,000.

Underpinned by its European oil and gas terminals, CEFC China secures its position by obtaining upstream oil and gas equities and interests, building professional teams of finance and independent traders and providing financial support with a full range of licenses. The profits in the financial and logistics sectors are driven by its energy operations and financial services. In addition, CEFC China has set up its second headquarters in the Czech Republic to conduct international banking businesses and investment, and acquired controlling shares in banks and shares in important financial groups with its investment focusing on airline, aircraft manufacturing, special steel and food, in order to facilitate international cooperation in production capacity.

Hardly a major oil player, and certainly not a strategic investor that brings to Rosneft any technical expertise or access to upstream resources outside Russia. It’s just a supplier of cash. And as such, and as one that is providing cash to help previous Rosneft investors/lenders get out of a sticky wicket, you can be sure that it got a pretty good deal. Thus, like so many Russian transactions, the interesting action is not that which takes place in plain sight, but that which takes place behind many screens and curtains.

Although Sechin now boasts that Chinese investors are always the ones he wanted, that’s not what he–and notably Putin–said in December and January. Then they were saying how the participation of a noted western company–Glencore–put a stamp of legitimacy on the deal, and showed that Russia was an attractive place for western companies to invest.

Well, Glencore never really invested anything substantial in the first place: if there was any doubt back in December and January that this was a Potemkin privatization involving western companies, there should be no doubt now. And of course, Glencore comes out a huge winner in this. The company earned a lot of goodwill from Putin and Sechin for saving them from the embarrassing situation that they faced in 2016, with a privatization deadline looming and no investors in sight. More tangibly, Glencore obtained–and retains after this deal–a lucrative concession to market Rosneft barrels. It took on very little risk in the first place, and has very little risk now. Glasenberg received a seat on the Rosneft board, and apparently retains it, even though Glencore’s equity stake is now trivial. And Ivan gets to keep that totally cool Order of Friendship medal.

But he better not fall in with the “wrong crowd,” like previous recipient Rex Tillerson, whom Putin is now very sore at! But since I doubt Ivan has any prospect or interest in becoming a diplomat, that’s probably not going to happen. Ivan knows a good deal when he sees one. And this deal was very, very good for him and Glencore.

For Rosneft and Russia, I’m guessing not so much.

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August 9, 2017

How Do You Eat a Norkupine?

Filed under: Military,Politics,Russia — The Professor @ 7:23 pm

North Korea represents one of the most daunting challenges imaginable. Although the North Korean military has aged and obsolete equipment, and would lose in an all out war, it could inflict massive casualties on whomever it fought. Further, it has the Sampson option: with massive conventional and chemical artillery forces in range of Seoul, before it was consumed in the inevitable retaliatory strike, North Korea could kill tens of thousands, perhaps hundreds of thousands, of South Koreans.

North Korea has also amassed a cache of nuclear weapons, estimated to number about 60. These weapons alone, without a reliable delivery mechanism, pose little threat to the US. The Norks are also working diligently on their missile forces, and have recently achieved several apparently successful tests of ICBMs. Nukes alone are little threat. Missiles alone are little threat. Put them together, and you have a real threat.

It is this convergence between missile and nuke technology that has brought this crisis to a head. The window to prevent this threat from becoming reality is closing rapidly with every successful North Korean test. But how to deal with the threat without wreaking vast destruction on the Korean Peninsula? No easy answers.

Kim Jung Un clearly sees nukes as the best guarantor of his survival, and that of his regime. But somehow guaranteeing regime survival is unlikely to induce him to give up these weapons. First, he is unlikely to find any guarantee credible: paranoids seldom do. Second, no one, least of all the US, is likely to consider any Un promise to disarm to be credible: “unpromise” is about the most accurate way you could characterize it. Further, if KJU believes that nukes make him immune from attack, he will believe that his freedom of action is much greater with nukes than without them: he can be far more aggressive and disruptive secure in the knowledge that his nuke missiles deter any retaliation.

So what to do? In the medium to long term, continued development of more robust missile defenses will mitigate the threat he poses. But in the short term, the only real leverage is economic, and (a) that is limited, and (b) it depends crucially on Chinese cooperation (and to some degree Russian).

But the Chinese actually enjoy US discomfiture: this gives them little incentive to cooperate. China will act only if it perceives that there will be a serious price to be paid if it doesn’t.

Since the earliest days of the administration Trump has been deploying every carrot and stick to get the Chinese to cooperate. Relenting on threats to deal aggressively with trade, currency and intellectual property issues. Threatening secondary sanctions against Chinese companies and banks who keep North Korea afloat–and relenting on those threats when the Chinese cooperate.

But greatest risk that China faces would be a war on the Korean Peninsula. It would receive the most fallout–figuratively, but likely literally too. A collapsed regime on its border is a Chinese nightmare, as would the resulting storm of refugees, not to mention a substantial risk of nuclear fallout–and perhaps even a Korean launch of a nuclear missile against China.

So China is unwilling to play a constructive role unless it believes that the US may indeed attack the Norks.

It is against this background that one must view Trump administration actions, from direct presidential threats to repeated flyovers of US nuclear capable bombers to today’s statement by SecDef Mattis, which effectively reprises his famous threat to Iraqi tribal leaders (though unfortunately absent the profanity): “I come in peace. I didn’t bring artillery. But I’m pleading with you, with tears in my eyes: If you fuck with me, I’ll kill you all.”

Yes, these messages are ostensibly directed at KJU, the administration is definitely CC’ng Xi and the Chinese leadership.

This strategy does appear to have paid off: China voted in favor of  Security Counsel resolution imposing the most punitive sanctions on North Korea yet adopted. Chinese compliance on the ground remains to be proven, but it’s a start.

And there’s the dilemma. There are seldom ever purely diplomatic solutions: all negotiations depend crucially on threat points, and in international relations military force is a powerful threat point. This is especially true with North Korea, which as a pariah nation is relatively immune to other conventional blandishments. And this is also true here because the party with the most leverage, China, is likely to be most responsive to the risk of military conflict.

It is therefore hard to imagine any approach to North Korea that does not involve the threat of military force, including threats in terms that North Korea is usually the one using, rather than hearing used against them. Trump personally, and most of his top personnel, including Mattis and McMaster, have been doing just that.

This has elicited a horrified reaction among the establishment–whose opinions, I might add, deserve even less weight than usual given that they have proven singularly inept at dealing with North Korea over the past quarter century. From ex-Obama people (notably the execrable James Clapper), to senior Senators like Feinstein and McCain(!), we are told that Trump’s rhetoric is dangerous (“unhelpful”, in McCain’s case), that we can accept a nuclear North Korea, and that dialogue with North Korea is the only alternative.

But again, this is utterly vacuous. Dialog with KJU has any prospect of success only if he and the Chinese believe that a failure of diplomacy could result in mushroom clouds over Pyongyang. Further, acceding to KJU’s possession of an arsenal of nuclear weapons without contemplating what he will do next is a victory of hope over experience.

It is particularly bizarre to see this obsession with jaw-jaw in North Korea juxtaposed with the frenzy directed against Trump for attempting to talk with Russia. Here McCain is by far the most bizarre of the bizarre. For at least the past 9 years (since 8/8/8, when the Russo-Georgian War began), McCain has been spoiling for a fight with Putin. In Georgia. In the Donbas. In Syria. Further, McCain has cast attempts to talk to Russia as tantamount to treason. It doesn’t take much of an imaginative leap to picture McCain as a latter-day Major Kong, taking the big one for a final ride into Russia.

So if talking to KJU, or letting Kim be Kim, is the right policy on the 38th parallel, how can confrontation with Putin be the right policy? Putin has more military (notably nuclear) capability. Putin hasn’t made blood-curdling threats against the US. Putin is clearly a far more reasonable interlocutor than the Pyongyang Playboy. If you can transact with KJU, you can transact with Putin.

This palpable irrationality and rank inconsistency is yet further evidence that anyone spouting DC conventional wisdom should be ignored. This conventional wisdom is driven by something. What it is I don’t know exactly, but I know what it isn’t: logic.

The policy choice is therefore fold (as the Feinsteins and McCains and Clappers are proposing) or raise the stakes. But folding will just embolden Kim going forward–which is something that McCain would point out if it was Putin on the other side of the table, but which he blithely ignores here. And it is hard to see how the correlation of forces would move in favor of the US if the game is continued: indeed, it is likely to go the other way as Kim hits his nuke and missile building stride. So, as dismal as it seems, raising the stakes now, with all the attendant risks, is the best of a bad choice. The fact that John McCain and the rest of the CW set don’t like it may be the best endorsement of all.

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August 5, 2017

A Brief European Tour

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:46 pm

Emmanuel Macron’s popularity has come off considerably since his victory in May. This is to be expected. He was the beneficiary of metropolitan France’s giddiness at the vanquishing of Le Pen, and the perceived slap at Trump (more on this in a bit). That intoxication has passed, and France is still France, riven as it always has been by deep political divides even among the elite.

I must confess that I may have misjudged M. Macron. I pegged him as a cipher whom Merkel would dominate. But if anything, Macron is proving to lean more towards Napoleonic ambitions, labeling himself “Jupiter” who aims to overawe the petty squabbling political nation.

Macron left some angered, and others nonplused, by his bonhomie with Trump during the president’s visit to France on Bastille Day. This actually makes perfect sense, and is the best demonstration of his intent to be his own man, rather than a Merkel flunky. As Empress Angela’s pretensions continue to swell, Macron knows that he needs a counterweight. He further knows that Merkel disdains Trump, and Trump don’t think much of her either. So the clever thing to do is to build a relationship to Trump. It signals independence. It will aggravate Angela. And it will provide Macron with some muscle in his dealings with Germany, and with the EU.

Speaking of the Germans, they are in a lather over the recently passed, and grudgingly signed, US sanctions on Russia. (Socialist) Foreign Minister Sigmar Gabriel called the sanctions “more than problematic” and accused the US of using the sanctions to advance its economic interests.

Vats good for ze goose is good for ze gander, eh, Fritz? German policy is all about advancing the interests of Germany, Inc. (or more properly, Germany AG). So spare me the sanctimony.

And as a factual matter, Sigmar is full of it. He states the US position to be “we want to drive Russian gas out of the European market so we can sell American gas.” This takes a very narrow and distorted view of the effect of sanctions on US companies, and energy companies in particular. The gains to US LNG are speculative, and would not be realized for some time. Other US firms–notably the oil majors–will suffer more with certainty, and suffer now, as a result of the new sanctions. Consequently, US energy firms fought the sanctions bill aggressively, and won some concessions.  So the idea that the sanctions effort was a Trojan Horse intended to advance US commercial interests is laughable. Congress proceeded with sanctions in spite of US economic interests, rather than because of them.

I think psychologists refer to what Herr Gabriel did there as “projection.”

One other thing about the sanctions bill. After it became law, Putin responded by ordering a reduction of 755 in staff at US diplomatic missions in Russia, and kicked the American diplomats out of some dachas. This is a good a confession of his strategic weakness. He really had no retaliatory measure available that would have really hurt the US without hurting Russia substantially more. So he was forced to resort to a purely symbolic measure. Something to think about the next time that you read about Putin the Colossus. Yes, he can be a pain, but when it comes down to it, he is playing with a very weak hand.

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July 29, 2017

Could the Dossier Prove to Be the World’s Deadliest Boomerang?

Filed under: Politics,Russia — The Professor @ 2:58 pm

I’ve long considered Bill Browder to be a dubious, dodgy character. He has always posed as the white knight who tilted against Russian oligarchic dragons in the bad old days, and who paid for his temerity in crossing the powers that be. I take a somewhat more jaundiced view.

People who ventured into Russia during that era did so because it appeared that there were huge gains to be made because everything was up for grabs. But it was not for the faint of heart or the principled investor: it was for those with few scruples. Posing as the good Boy Scout who would make money in Russia by reforming the governance of companies like Gazprom was a good shtick to present to Western investors (who could thereby participate in Russia’s primitive capitalist accumulation while believing they had bought an indulgence), and a good way to keep Western regulators from prying too deeply. But Boy Scouts in Russia circa 2000 were road kill, with a half-life of about a nanosecond. Yes, Browder (as he will be glad to tell you) eventually got squashed, but he lasted there long enough during the baddest of the bad days to require an epic suspension of disbelief to take his story at face value.

But since he was booted from the country, and hounded in absentia by Russian authorities, Browder has succeeded in portraying himself as a stalwart fighter against Putin (whom he lavishly praised–back when Putin was going after other people). Browder has been the prime mover in the passage of the Magnitsky Act, which drives Putin and the Russian elite bonkers. As part of this campaign, Browder has been an adversary of Natalia Veselnitskaya, who has been hyperactive in attempting to undermine the Magnitsky Act–including meeting with Donald Trump Jr. and Jared Kushner (a meeting apparently secured by dangling the promise of dirt on Hillary). Browder has long said that Veselnitskaya is a Kremlin operative.

Hence, the Democrats were salivating at the prospect of having Browder testify. He has longtime anti-Putin cred, and could provide testimony on the link between the Kremlin and Trump Jr./Kushner’s Russian interlocutor, thereby advancing the collusion narrative.

But in their eagerness, the Democrats  overlooked another connection–one that points directly at Democrats generally and Hillary in particular. That connection being Fusion GPS, the “opposition research” firm run by the biggest bottom feeder in The Swamp: Glenn Simpson.

Whoops!

Fusion GPS is the source of the infamous Trump dossier. It was retained first by Republican parties unknown, and then by Democratic parties unknown: the firm’s MO is to work through law firm and LLC cutouts to conceal its true, ultimate client. (Yeah. That screams integrity, don’t it? “Research laundering” would be one way to describe it.)

So Fusion GPS was really tight with someone whom Browder claims is a Kremlin operative. Fusion GPS was retained to do opposition research on Trump. The dossier it compiled (and supposedly it’s a leading contender for the next Man Booker Fiction Prize) was obviously created with support from figures in Russia. The dossier was plausibly intended to hurt Trump, and presumably to help Hillary (and post-election, it was used to help Democrats in their war on Trump).

In other words: the evidence of Russian-Hillary and Russian-Democratic collusion is much stronger and far more direct than any evidence of Russian-Trump collusion. Trump Jr. and Kushner bailed on the meeting with the alleged Russian agent within minutes: Democrats and Democratic operatives have been in bed with her for months and even years.

By bringing unwanted attention to Fusion GPS, Browder became very inconvenient for the Democrats. Their soaring eagle of a witness became an albatross.

For which they have only themselves to blame. The Fusion GPS-Veselnitskaya connection has been known for a long time. The firm has made the top of Browder’s enemies list precisely because it has long targeted him as part of its contract to trash the Magnitsky Act (which involves trashing Browder): in 2016 (!) he filed a complaint with the Justice Department accusing Simpson by name, and Fusion by name, with violating the Foreign Agents Registration Act. The connection came up in coverage of the trial of a Russian company (Prevezon Holdings) which was accused of money laundering. The case settled in May, and from March through October 2016 generated a lot of publicity because Browder moved to have Prevezon’s lawyers, Baker Hostetler, removed because it had represented him in Magnitsky-related matters.

Meaning that Browder probably couldn’t care less about damaging Trump, but he sure as hell has it in for Glenn Simpson and Fusion GPS. So Browder’s testimony did a lot more damage to the Democrats than it did Trump.

The big bottom feeder has agreed to talk to Congress, but only on the condition that he not reveal who retained him. The response to that should be: “you have to be fucking kidding me!” He should be subpoenaed, and if he dummies up, jailed until he gets his mind right.

The dossier should be at the center of any investigation of Russian interference in the 2016 election, and in US politics post-election. It was definitely intended to be used by Trump’s political opponents to hurt him, and hurt him badly. It was definitely created with the help of some Russians.*

But we don’t know what Russians, and for what purpose. Paul Gregory suggests that it was an FSB operation. That is very possible, but I have no idea exactly who was behind it (and one cannot treat Russia, or even the FSB, as a single-minded entity), or how the operation was supposed to work. Was it supposed to damage Trump? Was it supposed to be so ludicrous that it would backfire on whatever US figures pushed it (which would include McCain certainly, the US intelligence community, and perhaps Hillary and the Democrats)? If so, they greatly underestimated the credulity of the American political class, especially when they want to believe. Was it just intended to sow chaos, with indifference as to who in US politics it hurt or helped? (If so–mission accomplished!)

But there is a direct line between Russia and the US presidential campaign. We know who is in the middle: Fusion GPS/Bottom Feeding Glenn. We don’t know exactly who is on the US end, but Occam’s razor says the DNC and/or the Clinton campaign, directly or by proxy (but we can guess their interest). We don’t have the slightest idea who is on the Russian side, and what’s more, we don’t have a clue about the game they were playing.

But what we do know is that this is a far more direct case of colluding with Russians to influence the US political system than anything that has been demonstrated–or even rumored–about Trump. Anyone who claims to have a genuine interest in protecting US politics should want to get to the bottom of the dossier.

And once upon a time–oh, like anytime since January but before last week–the Democrats and the Never Trump Republicans like the execrable John McCain–were treating the dossier like Revealed Truth. It was what was going to bring down Trump!

What’s the matter? Cat got your tongue now, folks?

It would be delicious irony indeed if the dossier proved to be the world’s biggest and most lethal boomerang. The very fact that it has reversed course is precisely why those who threw it now want to scurry from it.

That should not be allowed to happen. Right now only Charles Grassley appears to have an interest in pursuing it. (Grassley and the Russians–Fridman, Aven and Khan–who are suing Buzzfeed for defamation: we might learn more from that lawsuit than from the entire US journalistic and political establishments. The three Russians have every reason to embarrass anyone involved in it: the establishment, not so much.) All those harrumphing about Russian interference definitely don’t.

They don’t not just because discovering the full story threatens to undermine the anti-Trump movement. They don’t because it threatens to implicate the entire Swamp as colluders, or accessories in collusion before and/or after the fact. The Swamp wants it to go away, which is precisely why it must not.

*Well, I suppose Christopher Steele might have made up the entire thing.  But the more plausible story is that someone or someones in Russia were feeding him this stuff.

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July 23, 2017

Robert Mueller: Destroying the Village to Save It

Filed under: Politics,Russia — The Professor @ 7:01 pm

The office of Special Counsel (like its predecessor, the Special Prosecutor) is a Constitutional monstrosity, and hence must be tightly constrained in order that it not run amok, like Frankenstein’s monster.  It must be used in only the most exigent circumstances–circumstances bordering on the existential–because the potential for misuse is so grave.

The dangers of such a position are many.

First, a Special Counsel is likely to be appointed only because deeply political considerations make ordinary prosecutorial and judicial procedures unworkable. Thus, the office is always at risk of becoming intensely politicized, and the instrument of partisan warfare.

Second, even ordinary federal prosecutorial functions are often problematic because of their great power, and the lack of accountability: these problems are even more acute for a Special Prosecutor. The power to prosecute–or even investigate–is the power to destroy: remember Ray Donavan’s lament, “where do I go to get my reputation back?” But prosecutors can–and often do–misuse this power in pursuit of personal agendas including political ambition and an overweening belief in their role as righteous defenders of public integrity (which often leads them to pursue, Javert-like, campaigns against those who offend their sense of justice). This problem is exacerbated by the lack of accountability for overreach. At times even grave misconduct results in little more than a wrist-slap, creating a huge asymmetry: overreach can greatly increase the likelihood of winning a career-advancing victory, but there is very little downside from getting called on it. (Check out how prosecutors behaved in the Ted Stevens case, and how little price they paid for their egregious misconduct.)

This problem is even more acute for a Special Counsel, for which there are virtually no ex ante or ex post accountability measures. The SC is free from any real oversight from the DOJ (like ordinary prosecutors) and runs little legal jeopardy from overreaching. Besides, it’s a temporary job, so getting fired means returning to the sinecure from which one came.

All of the recent uses of this office or its predecessor–Whitewater (something in which I was conscripted into a bit role) and Scooter Libby–give ample evidence of the risks.

Given these fundamental dangers in the office of Special Counsel, if one is to be appointed, his (or her) charge should be drawn extremely narrowly. If during his investigation of that particular matter, the SC finds evidence of other misconduct that is incapable of being addressed by the normal procedures of justice in the US, the burden should be on him to demonstrate a need to expand his authority beyond the originally authorized scope.

Indeed, to mitigate incentive problems, if a SC presents such evidence, unless the new potential offense is extremely closely related to the one in the SC’s original authorization, a new SC should be appointed. This would constrain an SC’s incentive to engage in fishing expeditions with the goal of expanding his power.  By no means should the SC have the ability to determine, by himself, what falls within the scope of his charge.

The early days of the Mueller investigation are providing ample evidence of the dangers of the SC. He was appointed to deal with a matter that is the subject of the most intense partisan controversy in recent memory. His hiring of numerous attorneys who donated to the Democrats does nothing to undercut, and indeed reinforces, fears that he may be partisan. His friendship with a principal player in the controversy who has an axe to grind–Comey–is troubling, and even more so is his refusal to recuse himself from any matter involving Comey. The unending stream of prejudicial leaks also does not speak to investigative integrity, but instead suggests a fundamental unfairness, and a belief that all’s fair in this fight.

But the (leaked!) decision to expand the investigation to matters that have no bearing whatsoever on the supposed subject of the investigation–collusion between the Trump campaign and the Russians to influence the 2016 election–is the true indicator of how perverse Mueller’s inquiry has become. Apparently anything that Trump, or a Trump associate, ever did is fair game. What, exactly, do Trump’s dealings in 2008 have to do with Russian hacking of the 2016 election, or Trump’s possible complicity therein?

Absolutely nothing. Oh, no doubt Mueller will be able to play some Six Degrees–or Ten!–From Vladimir Putin game to establish a “nexus” between Trump dealings in Florida in 2008 and the 2016. But if that’s the standard, there is effectively no limit on investigation at all. And that’s exactly the problem.

Assistant AG Ron Rosenstein did Trump–and the American people–a grave injustice with his already vague and sloppy charge to Mueller. It gave the ex-FBI head plenty of room to run. But Mueller is already going far, far beyond that.

And what’s to stop him? That’s exactly the problem:  Nothing. He is really accountable to no one, so there is nothing to stop him, short of the political equivalent of a nuclear second strike by Trump, such as firing Mueller or perhaps pardoning himself. Yes, those might permit Trump to survive, but they would be catastrophic for his presidency, and for the governing of the country until 2021.

Mueller for all the world is giving an Oscar winning performance of a SC run amok. I don’t see any evidence to reject the hypothesis that he is an agent of the establishment tasked with bringing down the establishment’s bête noire, by any means necessary. There is considerable evidence that confirms that hypothesis, the expansion of the investigation most notably.

And mark well: the fact that Mueller apparently has to expand his investigation strongly indicates that he found nothing whatsoever to support the suspicions that led to his appointment. If he was hot on the trail of Trump-Russia collusion, there would be no need to climb into the Wayback Machine to look into things that bear no relationship, or at best extremely remote relationship, to what he was supposed to be investigating.

No, it looks like Mueller’s motto is “For my friends, anything: for my enemies–the law!”

Maybe I’m wrong. But here appearances are a form of reality. Unless Mueller can show credibly, and indeed, demonstrate beyond challenge, that his actions are not driven by political animus, and a desire to purge DC of an unwelcome invader, if he does take action against Trump it will rip the country apart and inflame all of the divisions that made Trump president in the first place. The 60 plus million Americans who voted for Trump, in large part because they believed that the system was run by self-serving apparatchiks and was inimical to their concerns and interests, will believe that their darkest suspicions were confirmed.

If you think the country is divided now, wait for that. If you think the country is nearly ungovernable now, wait for that.

This represents another category error by the establishment, the elite. They think that Trump qua Trump is the problem, and that if he goes away, life can return to normal for the establishment. As I’ve written since well before the election, that’s complete, utter, bollocks: Trump is a symptom of elite failure and popular alienation caused by elite failure. Destroying Trump will not make it safe for the establishment to go out again. It will intensify the conflict–and crucially, signal that any means fair or foul is acceptable.

In their Trump obsession, and in the appointment of a Special Counsel who appears eager to do their bidding, the establishment is reenacting an infamous moment from Vietnam: they are destroying the village, supposedly to save it.

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