Streetwise Professor

July 24, 2016

A Remedial Lesson in Internet Research for Michael McFaul

Filed under: Politics,Russia — The Professor @ 7:21 pm

I responded to a typically smarmy Tweet from ex-US ambassador to Russia Michael McFaul (@mcfaul), and this started a set-to that is so amusing that I have to share it.

Don’t bother looking for the conversation. You can see my half, but the brave Sir Robin McFaul deleted his Tweets. Gutless. But understandable, given how he fared. But (as the conversation demonstrates) Mr. McFaul is not exactly Internet savvy, and he didn’t count on the wonders of screencaps. So like a bad burrito, Mike, this conversation is going to come back up. Enjoy.

The smarmy Tweet was McFaul’s contribution to the attempt to distract attention from the DNC leak. He said (I can’t show it b/c he deleted it and since it is what I replied to it doesn’t show up in my Notifications) something to the effect that he hopes that our intelligence services are investigating Russian involvement in an attempt to influence the US election. Crucially, he said that he hoped that they would inform us of the outcome soon.

I replied:

Screen Shot 2016-07-24 at 7.42.01 PM

He responded (smarmily):

Screen Shot 2016-07-24 at 6.02.48 PM

I replied:

Screen Shot 2016-07-24 at 7.44.04 PM

His retort:

Screen Shot 2016-07-24 at 6.02.39 PM

Me:

Screen Shot 2016-07-24 at 7.46.34 PM

But then McFaul lost interest in substance, and resorted to the ad hominem fallacy that has become so prominent in the Clintonoid response to embarrassing facts. Don’t argue the facts, raise questions about the person with the temerity to bring those facts to light.

Screen Shot 2016-07-24 at 6.02.29 PM

“We professors.” LOL.

Screen Shot 2016-07-24 at 7.49.47 PM

Here’s where it gets hilarious. He couldn’t figure it out!

Screen Shot 2016-07-24 at 6.02.06 PM

Screen Shot 2016-07-24 at 10.15.32 PM

Screen Shot 2016-07-24 at 7.51.55 PM

Try it at home! I bet you can do it. I bet your three year old can do it. Maybe if you have a really smart cat.

Then he gets nasty and personal:

Screen Shot 2016-07-24 at 6.02.16 PM

“I’m guessing the avatar isn’t you too?” Too funny! What was his first clue?

Screen Shot 2016-07-24 at 8.01.45 PM

Screen Shot 2016-07-24 at 7.55.34 PM

Finally, 20 minutes later–I kid you not!–he figures it out:

Screen Shot 2016-07-24 at 7.54.25 PM

Don’t like me telling you to stick it, Mike? You got off easy. Try talking that smack to my face and see how it works out for you. And as for your “we at Stanford” snark: not impressed. More ad hominem, appeal to authority fallacies.

Screen Shot 2016-07-24 at 7.58.24 PM

As a service to other Internet challenged geniuses who are dying to know my super-secret identity in two clicks, here is a step-by-step instruction.

First, click on the link to my blog in my Twitter bio:

Screen Shot 2016-07-24 at 6.49.55 PM

Second, click on the “bio” link in the upper right hand corner:

Screen Shot 2016-07-24 at 6.50.28 PM

And voila! You learn–I hope you are sitting down–that I am Craig Pirrong. Who knew?

Screen Shot 2016-07-24 at 6.51.00 PM

Behold, ladies and gentlemen, the point man of US Russian policy 2012-2014.* Hillary, of course, was the architect of US Russian policy from 2009-2013. Should we be surprised what a total clusterfail it was?

Seriously, it is beyond rich that Hillary and McFaul and others who were involved in US foreign policy during that era shriek about how awful Putin and the Russians are today. They enabled it. Yes, Putin et al are who they are, but incompetent and feckless US policy–and policymakers–bear a large share of the blame for the dysfunctional state of US-Russia relations, and for emboldening Putin.

This is also exactly why I think people are nuts to conclude that Putin wants Trump in the White House. He has to be licking his chops at the prospect of a Hillary presidency. After all, who else than this would he want leading his primary adversary?:

Hillary_reset

A picture is worth 1000 words. Need I say more?

* More humor. The mainstream media drooled all over McFaul because of his use of Twitter. So techie of him! Oh, and by the way, his main accomplishment on Twitter as an ambassador was to provide the world with a stream of entertaining Russian Tweets trolling his idiocy.

 

 

Print Friendly

June 22, 2016

Sometimes Hooligans are Just Hooligans

Filed under: Politics,Russia,Sports — The Professor @ 8:12 pm

The UEFA Euro 2016 has seen the usual hooliganism. What would soccer–football, excuse me–be without it? (Isn’t it interesting how the “beautiful game” routinely sparks violence while a game denigrated for violence–American football–seldom does?)

Nothing new about that. What makes Euro 2016 somewhat unique is the focus on Russian hooligans, and the attribution of malign political motives to them, and most importantly, direction from the very top.

The English mixed it up with the Russians in Marseille, and got the worst of it. The English press was whinging about the unfairness of it all. Apparently, as opposed to being fat, drunken louts like proper English hooligans, the Russians were hard, sober toughs. That’s not cricket!

Englishman Tim Newman–whom I’m honored comments periodically here–was having none of it:

You’ve got to love the British press:

England fan fighting for his life and dozens more injured as English fans and Russian thugs clash at Euro 2016 in Marseille

The English were fans.  The Russians were thugs.  Presumably no Englishman in Marseille last night displayed thuggish behaviour, and no Russian showed the slightest interest in football.

. . . .

But what I never heard, in all my time in Phuket or indeed ever in my life, was a story told to me by non-Brit complaining of getting into a fight with another non-Brit.  For whatever reason, Frenchmen don’t seem to end up fighting Spaniards in beach resorts and Germans somehow manage to rub along all right with Italians on holiday without kicking the shit out of one another.  The common element in all the fighting in beach resorts across the world, particularly the Mediterranean, is the presence of young Brits.  Little surprise then that the only trouble seen thus far at the Euro 2016 tournament features the same demographic.

There were battles involving other nationalities pretty much everywhere matches were played. It’s what those oh-so-civilized Euros do.

It may well be true that the Russians were fitter, better trained, and more organized, and kicked ass as a result. It may well also be true that members of the Russian security forces and veterans of the Donbas were among the Ultras. But to claim that this is part of “Putin’s special war” is beyond idiotic.

One of the main pieces of “evidence” that have been trotted out to suggest official complicity are the Tweets of Duma deputy speaker Igor Lebedev: “I don’t see anything bad in the fans fighting. On the contrary, well done guys. Keep it up!” and “I don’t understand those politicians and bureaucrats who are now denouncing our fans. We need to defend them, and they’ll come home and we’ll sort it out.”

Deputy Speaker of the Duma. Sounds pretty official and important, right? Except that (a) the Duma is merely a Potemkin legislature, and (b) people like Lebedev (who is a member of Zhirinovsky’s party) are in the Duma precisely to provide an outlet for the nationalist loons: better to have them inside the Duma where they can be watched and controlled and do no harm, than out on the streets making trouble.

It’s actually embarrassing to cite someone like Lebedev as a barometer of official Kremlin (i.e., Putin) policy. It’s a case of those who are talking don’t know, and those who know aren’t talking.

And really, you have to pick a narrative. Those pushing the story that  Russian soccer hooligans are conducting special warfare in Europe also  portray Putin as a mastermind playing chess, and dominating ineffectual and overmatched European and American leadership. But these claims are almost impossible to reconcile.

At the very time that Europe is vacillating about maintaining sanctions against Russia, and there are deep divisions within Europe about whether to confront Russia more forcefully (moves that German FM Steinmeier called “saber rattling”), the soccer hooligans are an irritant in the Russian-European relationship. No, Putin is not about be all warm and fuzzy, but he has no reason to engage in provocations that alienate the German and French governments, but which produce no tactical or strategic benefit.

In the realm of sport in particular, this couldn’t come at a worse time. Russia’s reputation is already at rock bottom due to the doping scandal which has resulted in the banning of Russian track and field athletes from the Olympics, and could conceivably result in the barring of Russian participation from Rio altogether. Hardly an opportune time to cast Russian sportsmanship in an even worse light.

It would be incredibly short sighted and unproductive for Putin stoke soccer violence. What could he gain? Nothing that I can see. However, it is easy to see what it costs him: it increases the likelihood that sanctions will endure, and provides an argument for those advocating a more muscular approach to Russia.

Yes. Maybe Putin is that short-sighted and capable of cutting his nose to spite his face. But if that’s the case, he’s the antithesis of a strategic genius. He would be nothing more than a mouth-breathing numb-nuts like Lebedev.

Conversely, if  you choose the “Putin is a chess master” narrative, the Russian soccer thuggery suggests that the vaunted power vertical is not all encompassing, and that Putin does not exercise the complete control that is often attributed to him–perhaps not even over the security services. (His reorganization of those services supports this interpretation: why reorganize something that is completely at his beck and call?)

My take on all of this is that there are indeed a lot of obnoxious, violent Russians–just like there are a lot of obnoxious, violent Euros from any nation you care to name. Soccer hooliganism has become a Euro tradition, and the Russians are joining in: chalk it up to their integration into Europe! But as for broader political implications, if Russian soccer hooligans have official sanction, Putin isn’t very clever: indeed, he would have all the strategic acumen of the criminals in Fargo. And if they don’t have official sanction, Putin isn’t as omnipotent within Russia as he is widely portrayed.

Sometimes hooligans are just hooligans. Putin no doubt finds that hooligans have their political uses, but stirring trouble in Europe at such a fraught time isn’t one of them.

Print Friendly

April 10, 2016

What Happens in Panama Doesn’t Stay in Panama, Apparently

Filed under: Politics,Russia — The Professor @ 9:01 am

The media has been aflutter during the last week over the Panama Papers. Much of the excitement has focused on Putin’s presence-or lack thereof, actually-in the Biggest Leak Ever.

My reaction: BFD.

Insofar as what about Russia is actually in the leak: can you honestly say that it provided you with any new information? Hardly. Offshoring of dirty Russian money has been a thing since the USSR collapsed. Before, actually. Putin has actually made an issue of it. To the extent that the leak reveals anything, it shows the hypocrisy and political nature of Putin’s anti-offshoring drive. The politically favored can still do this, although with the knowledge that the Sword of Damocles hangs over their heads. If favor turns into disfavor, the offshoring can be used to destroy them.

At most, the leaks regarding Russia provide some interesting information as to how the offshoring works in practice. But this mere detail which provides no new insight on the nature of the Russian system.

The hypocrisy is also evident in China, where family members of anti-corruption crusader CCP General Secretary Xi Jinxing have been disclosed to have offshore shell corporations. But again, the hypocrisy should not be a surprise. As has been the case with autocrats since time immemorial, Xi’s anti-corruption drive has been more of a means of extending his power and control, than an idealistic effort to clean up China’s government and economy.

Insofar as Putin is concerned personally, why would anyone expect his name to be on any document detailing ownership of anything? Do you think he’s that stupid?

For all the hyperventilating by Bill Browder and others of Putin’s alleged massive fortune (which Browder puts at $200 billion), a little common sense is sufficient to discount these stories. Actually formally/legally owning things provides little benefit to Putin, but poses risks. It is all downside, with no upside.

If evidence of such a massive fortune was uncovered, it would be an embarrassment, or worse, for Putin: his very pretense of being a servant of the people who earns a very modest salary demonstrates that he believes that being revealed definitively as a plutocrat (rather than merely an autocrat) would be dangerous for him politically.

And what does he gain by having his name on some legal papers documenting ownership of vast amounts of wealth? Absolutely nothing. In this current role, he has practical ownership of pretty much everything in Russia. That is, if you view ownership as a bundle of rights to use assets, Putin has ownership, regardless of whether his name is on pieces of paper or not. If he wants use of this asset or that, who is going to deny his request? Further, there are myriad ways that he can use the power of the Russian state to direct wealth to those he favors (e.g., through massively corrupt contracting practices for projects like Sochi, or through Gazprom), who in turn direct some of that to people or purposes that Putin requests. And all of this can be done with Putin not having formal legal ownership of anything.

Furthermore, Putin realizes that formal ownership would not secure him a quiet retirement of opulent luxury. His informal ownership rights exist only so long as he is in power, and as soon as he is out of power any formal ownership rights over vast assets would be too tempting a target for his successor to resist. He could never enjoy the benefits of such wealth when out of power, and doesn’t need it when in it. So what’s the point?

So I would put a different spin on it: the very absence of Putin’s name in the Panama Papers is exactly what is informative. It reveals that he is not leaving power in a vertical posture, of his own volition, because when he does, his practical ownership rights evaporate with his power. This also makes it plain why he is doing things to secure domestic control in advance of the 2017 Duma election and the 2018 presidential “contest”. The creation of a National Guard under his personal control, for instance.

As to speculation regarding who leaked and why: meh. These parlor games bore me, and are essentially forms of ad hominem argument that have no bearing on the truth or falsity of the information.

The claims by Russian authorities (including Putin personally) and Julian Assange (who first praised the leak then turned on it) that it is a CIA/State Department/Soros plot to undermine Putin and Russia are implausible. If anything, the leak was very helpful to Putin. By far the biggest casualty of the leak has been Ukrainian president Poroshenko, who was revealed to have been negotiating moving his assets overseas at the same time his army was being slaughtered in the Donbas. The already divided and shaky Ukrainian polity has become even more so as a result of the revelations, and this redounds to Putin’s benefit. Most of the other casualties have been western democratic politicians, notably David Cameron. In other words, if this was a CIA/State Department plot, it was an epic miscalculation.

Following this cui bono logic, others have swung to the opposite extreme. Most notably, Brooking’s Clifford Gaddy mooted that since Putin has benefited, this may be a Russian operation. I agree that despite the initial frenzy Putin has been a beneficiary, but believe that it is far more likely that it is just another episode in his recent streak of good luck.

As for the ethics of the leak, and how the material has been handled, the entire episode points out the ambiguities and dilemmas of this means of holding public officials and private individuals accountable. Unlike Wikileaks, the entire set of material is under control of a set of journalists and publications, and is not open for search by the public. This creates the potential for manipulative select disclosure. This is problematic, and this very possibility also creates a narrative that can be used to discredit the entire project. But since innocent private individuals’ information is also in the database, open access would impose huge collateral damage. The choice is binary (selective disclosure controlled by a group of self-selected gatekeepers who may have an agenda, or open access), and the severe downsides to either alternative call into question the utility of leaking as a means of revealing (and perhaps punishing) misconduct by government officials, or private individuals.

It also shows the costs of privacy and transparency, which highlights a fault line in the current debate. In that debate, Privacy and Transparency are both praised as ideals even though they are obviously in substantial tension. What information should be private and what should be transparent, and whose information should be private, whose information should be transparent, and who should make these choices are extremely difficult questions. Even if one can identify the ideal boundaries in the abstract, respecting them in practice is devilish hard. The Panama Papers case reveals that in spades.

 

 

 

Print Friendly

March 15, 2016

A Prudent Gambler Cashes in His Chips

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

Putin has disconcerted many with his abrupt and unexpected announcement that Russia would be removing its “main forces” from Syria. Just what this means is unknown, for he also made plain that it would maintain its main bases there, an air station in Latakia Province, and the shambolic Tartus naval facility. What residual capability will remain is unclear, and it must be noted that planes that fly out today can fly back at some future date, which distinguishes this from the US withdrawal from Iraq.

I consider it somewhat amusing that those who shrieked loudest about Putin getting into Syria are now shrieking loudest about his getting out. I guess they are upset that he will not be so stupid as to get bogged down in a pointless and bloody war that does not advance his strategic objectives.

As someone (surprisingly to some) who was not fussed about Putin getting into Syria, I’m equally indifferent as to his departure. Having no emotional or ideological investment, it is of interest mainly as an opportunity to evaluate his strategies, and his prudence in executing them.

The most obvious explanation is that the risk-reward trade-off no longer favors Russian involvement. On the reward side, Putin has achieved his main objective, and staved off Assad’s destruction. Putin may well prefer that Assad (and Iran) not win decisively: a stalemate may (cynically) advance Russian interests by continuing to make Assad dependent on Russia, and preventing Iran from getting too big for its britches.

The direct costs of this intervention, though not large when compared to American expenditures in the ISIS campaign (let alone what was spent in Iraq and Afghanistan) are nonetheless material given Russia’s straitened economic circumstances. It is not just a choice between guns and butter. Russia has already announced a sizable cut in military procurement, so there is an element of a choice between expending weapons and buying new ones. Putin clearly believes that new weapons will give him leverage in the future, so he is husbanding his limited resources for that purpose, rather than spending a few millions daily to continue high tempo operations in Syria.

On the risk side, pushing the campaign to the point where Assad is on the verge of decisive victory would increase greatly the probability of an open confrontation with Turkey. This would pose large military risks (and costs) even viewed narrowly, and would also result in a highly unpredictable situation with Nato, the US, and the EU. The upsides in such a situation are hard to see, but the downsides are clear and large. Then there are the normal risks attendant to any military operation, including the risk of some strategically irrelevant but spectacular and embarrassing terrorist operation targeted at the Russians. Furthermore, continuing the campaign aggravates relations with the Saudis, which creates economic complications by infusing a geopolitical calculus into delicate negotiations over oil output (which is a first order economic issue to Putin).

Smart gamblers know when to cash in their chips and go home. Putin came to the table with limited objectives, and has achieved them. He can claim victory: why risk losing these gains, when few further gains are in prospect?

Just like his going in was a lot less complicated than people made it out to be, so is his departure: he is leaving because he achieved the limited objectives he set out in October. As for the war in Syria, it will likely continue to grind on and on, in part because Putin wants it that way. His is a cynical move, but since “victory” by either side would likely result in a retaliatory bloodbath (and a war among the “victors” if Assad is toppled), as horrific as the current situation is, it is not demonstrably worse than the alternatives on offer.

Print Friendly

February 10, 2016

I[gor], Robot (Hater)

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Russia — The Professor @ 9:40 pm

Igor Sechin comes in a close second to Rogozin the Ridiculous in providing Russian comic relief. Perhaps there are others in Russia that excel them, and I am only aware of these two because they have a bigger presence in the West, but both can be relied upon for some levity–unintentional, to be sure.

Sechin no longer has the outrageous mullet to amuse, but his public utterances suffice. Today at International Petroleum Week in London are a case in point. The mood at the event was gloomy, with pretty much everyone predicting that we are in a prolonged era of low prices, and everyone had their favorite culprit. But Sechin’s scapegoat was unique: Robots! Well, “robot traders”, anyways:

He blamed ‘financial players’ and automated ‘robot’ traders for driving down the price, saying the collapse to near $30 had little to do with supply and demand.

I presume he means algo traders and HFT. Just how these “robots” trading at subsecond frequencies have mesmerized producers and consumers to behave so as to lead to relentless buildups of inventory–including a looming topping out of capacity at Cushing–is beyond my mere economist’s skills to fathom.

Maybe Igor can commiserate with US cattle producers, who blame HFT for causing excessive volatility in beef prices.

Igor also seems to misunderstand that the “US” is not analogous to Saudi Arabia as a producer (although the phrasing is ambiguous, but I interpret this to include the US in “they”):

“At the end of 2014 some Middle East producers followed the US in their desire to increase production,” Mr Sechin told London’s International Petroleum Week. “They have deliberately created this situation and they are committed to low prices.”

The US oil sector is not a unitary decision maker in the way the Saudis are. The US industry is extremely fragmented and diffuse, with dozens of producers acting independently. They are price takers, not price makers. Very different from KSA or other producers with NOCs. (Relatedly, this is why calling the US the “new swing producer” analogous to the Saudis is dumb.)

It’s also more than a little hypocritical of him to criticize others for increasing output: Russian production has been increasing steadily over this same period.

Sechin also engaged in a little wishful thinking:

He forecast prices would recover later this year as US shale output slows. “We believe that in the coming years US shale will lose its grip on the market,” he said.

Good luck with that, Igor. US shale output has proved to be far more resilient than anyone had expected. Productivity gains and lower input costs have mitigated the impact of low prices. More importantly, the shale sector has the ability to ramp up output rapidly if prices do rise, either due to a rise in demand, or an attempt by other major producers to cut output. Indeed, this is likely the real reason the Saudis resist cutting output: they know it is futile because the supply of non-OPEC output is much more elastic than it used to be. This makes the demand for the output of the major producers, notably the Saudis (and the Russians!) more elastic than it used to be. This implies that it is not in the individual interest of any major producer to cut output unilaterally.

Which brings us to the most informative and refreshingly different part of Sechin’s remarks: his discussion of the prospects of a coordinated output cut involving OPEC and Russia.

This idea has captivated traders, who chase the idea like Randy Chasing the Dragon, shooting (the price!) up every time the rumor is floated, only to watch it fly away from their grasp. Once upon a time, Igor was notorious for encouraging such notions. Not this time around:

The most powerful figure in Russia’s oil industry on Wednesday signalled his steadfast opposition to combining with Opec to reverse the crude price rout through co-ordinated cuts in production.

. . . .
“Who are we supposed to be talking to about cuts?” Mr Sechin said when asked by the Financial Times if he was considering working with Opec, the producers’ cartel, to try to shore up the oil price. “Will Saudi Arabia or Iran cut production?”

Methinks that the real story is that the Saudis have made it clear that they trust neither the Russians nor (especially) other members of OPEC to adhere to any agree upon cuts, even assuming a deal can be cut, which is highly doubtful. So Sechin is acting as if he is the one rejecting the idea, primarily because he knows that it is DOA.

Not that this will stop all those Randys from chasing the next rumor of a coordinated cut.

Which raises the questions: Is Randy a robot? Are robots programmed to buy whenever a rumor of a Russo-Saudi oil deal is announced?

Maybe Igor will enlighten us in his next public appearance. Maybe he can do it to some musical accompaniment. Might I suggest this?:

Print Friendly

February 6, 2016

Putin Plays Pyrrhus

Filed under: Music,Politics,Russia — The Professor @ 7:46 pm

The Assad regime and the Russians are on the verge of victory in northern Syria. In particular, the rebel stronghold of Aleppo is on the verge of falling.

This is not all that surprising. It demonstrates the decisive effect of airpower if–and this is crucial–it is operated in support of an even minimally competent ground force, especially one with armor. This is particularly true if the airpower is utilized ruthlessly, with little squeamishness about civilian casualties.

The few victories against ISIS–Kobane, Sinjar, and Ramadi–demonstrate the same point, as does the ineffectualness of the “allied” air attacks against ISIS in Syria and Iraq generally, because these attacks are not mounted in support of a coherent ground attack undertaken by an even moderately effective infantry and armor force.

The Syrian-Russian success also provides an interesting contrast to the Saudi fiasco in Yemen. The Saudis have bombed ruthlessly, with little military effect, because the bombing is not coupled with a credible ground campaign against the Houthis. This no doubt reflects the Saudi’s knowledge of the severe limitations of their ground forces.

These limitations made me laugh at the Saudi offer to deploy troops to fight ISIS in Iraq and Syria. Even overlooking the logistical impracticality of this, the Saudis would be setting themselves up for an embarrassing failure.

The Russians and Syrians actually intensified their offensive in the lead-up to the farcical “peace” talks in Geneva. No surprises here. They are in this to win decisively, not to negotiate a compromise. And there is no better way to send that message than by victory on the battlefield on the cusp of talks.

This has left the US and Europeans and Gulf Arabs sputtering in ineffectual rage. John Kerry was particularly embarrassing (nothing new here!):

“Hospitals have been hit, civilian quarters have been hit, and in some cases, after the bombing has taken place, when the workers have gone in to try to pull out the wounded, the bombers come back and they kill the people who are pulling out the wounded,” Kerry told reporters in Washington. “This has to stop. Nobody has any question about that. But it’s not going to stop just by whining about it.”

But what else is he (or anyone else) doing about it other than whine? Nothing. It would have been better for Kerry to remain silent, rather than advertise his (and The US’s) impotence.

It is also interesting to note that Kerry is damning the Russians and Syrians for bombing civilians, yet is utterly silent on the equally bad (if not worse) Saudi air campaign in Yemen.

In response to the Aleppo debacle, Turkey has closed its border with Syria. Erdogan is no doubt attempting to create (exacerbate, really) a humanitarian crisis in order to goad the US and Europe into intervening. It will never happen. The Europeans lack both the will and the means. The US has the military capability, but not the will: whatever will existed at one time (which was minimal) disappeared when intervention meant a confrontation with the Russians.

So Putin will likely get a battlefield victory. But so what? He and his Syrian creature will conquer a depopulated and devastated country. This will have little impact on the strategic balance in the region, and virtually no impact on US interests. Yes, Erdogan’s imperial and sectarian ambitions will be thwarted. Saudi and Qatari sectarian supremism will be defeated. To the extent that the US is impacted, these are actually favorable developments.

Those in the West who fulminate over Putin’s success in Syria are ironically engaged in the vacuous zero-sum thinking that drives Putin. A Putin victory is not necessarily an American defeat.

But the zero-sum thinker Putin is probably gleeful at the shrieks of distress from Kerry, the head of the UN, the Europeans, and various anti-Russian elements in the Western media. It’s all music to his ears, and also quite useful to him domestically. Another irony, that: the more that Putin’s enemies in the West screech about what is happening in Syria, the more it helps him.

Putin’s victory may be hollow, though, and his glee short-lived. He initially attempted to utilize his intervention in Syria as a way of presenting Russia as an ally of the West in the war against ISIS in order to undermine the sanctions regime, and to bring Russia in from the diplomatic cold. However, his unabashedly pro-Assad campaign, his intensifying the offensive in the run-up to the Geneva talks, the resultant humanitarian and refugee crisis, and the minimal Russian targeting of ISIS will make it impossible for the Europeans to do anything that will appear to be rewarding him. Putin’s intervention, with its demonstration of the cynicism and pointlessness of American policy, and thereby make Obama look bad, will cause our petulant president to retaliate in his passive-aggressive way, but maintaining sanctions, and pressuring the Europeans to do the same.

Putin is overplaying his hand elsewhere in Europe as well. The Russian media and government histrionics over the “Lisa” fake rape case in Germany has deeply angered Merkel who is already under siege over the migrant crisis (and especially the sexual assault crisis that has followed in its wake). Further, Putin met with Bavarian governor Horst Seehofer, Merkel’s most strident critic on immigration.  This will also anger Angela.

Putin, of all people, should realize that if you strike at the king (or queen) you better strike to kill. If Merkel survives-which is likely-she will be ill-disposed to ease sanctions, especially since Putin is ratcheting up the conflict in Donbas as well. Long surviving politicians tend to have long memories as well.

In sum. Air power can be dominant when teamed with infantry and armor. Putin will likely win a tactical victory in Syria. But the victory will be strategically barren, and possibly counterproductive, because (a) the “winner” will inherit a blasted and dysfunctional battleground, and (b) this “victory” will set back Putin’s efforts to roll back sanctions.

If anyone “wins” out of this, it is Iran. The Iranians will maintain their pipeline to Hezbollah, and deal the Saudis a stinging defeat. So Putin will succeed as the mullahs’ muscle, and in the process he will gain the satisfaction of humiliating the US (which stupidly set itself up to be humiliated), but at the cost of perpetuating Russia’s economic isolation, which is exacting a terrible toll on a country already reeling from the collapse in oil prices. That is about as Pyrrhic a victory as one could imagine.

Print Friendly

February 2, 2016

Russian “Privatization”? Only If Putin Is Desperate Indeed

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 10:11 pm

Putin held a meeting with the CEOs of seven state-owned enterprises to discuss the sale of minority stakes in their companies (a move sometimes mischaracterized as “privatization”). Putin frankly admitted that the impetus for this discussion is Russia’s dire budgetary situation. Putin caused some confusion by saying the “new owners of privatized assets must have Russian jurisdiction,” leading some to conclude that he was ruling out foreign investment. Peskov clarified the next day, saying that Russia welcomed foreign investors, but “If the question is about a foreign investor, that’s one thing. If it’s about a Russian investor, it must not be another offshore scheme.”

I consider it likely that this initiative will be stillborn, at least insofar as sales of stakes to foreigners are concerned. Putin said that the sales must not take place at “knockdown prices.” Well, in the current environment, the prices (especially for Rosneft and VTB) are likely to be very low indeed.

This is especially so since foreign investors will demand a substantial discount to compensate for expropriation risk. Savvy investors with long memories will recall that Putin justified expropriating Shell’s Sakhalin II project by saying that the terms of the Sakhalin PSA were unfair to Russia, and that Shell had exploited Russia’s economic desperation when it signed the deal at a previous time of low energy prices. Putin (or whoever succeeds him) could easily resurrect such rhetoric in the future when oil prices rebound. Further, minority shareholders in Russian enterprises–especially state enterprises–have few protections against schemes that divert assets, or which dilute their holdings.

Given that prices are likely to be very low, if there are sales to foreigners, it will indicate (1) that Russia is desperate indeed, and (2) Putin et al consider it unlikely that sanctions will be relaxed anytime soon.

If there are sales, it is likely to be to Russian oligarchs, and in particular those with extensive holdings outside Russia. Just as Putin dragooned them into paying for Sochi and other prestige projects, he could well pressure them into overpaying for stakes in the state enterprises. This would allow him to kill two birds with one stone. It would help stanch the budgetary bleeding. It would also advance Putin’s longstanding goal of onshoring Russian capital. That would fit with the “owners must have Russian jurisdiction” remark.  And Putin has substantial leverage to get oligarchs to do his bidding–literally.

Even if partial sales take place, it will be merely a stopgap budgetary measure: it will not indicate a fundamental reconsideration of Russian economic policy.  Putin is still obviously a firm believer in the state control/state champion model, despite its manifest inefficiency. Putin prefers the control over resources that state control provides to having an efficient economy. Which is why he finds himself in his current straits.

Print Friendly

January 23, 2016

Russian Oil Hedging: A Little Late for Herpicide

Filed under: Commodities,Derivatives,Economics,Energy,Russia — The Professor @ 5:29 pm

My grandfather had a wealth of colorful expressions, most of which were the product of his Appalachian upbringing. One, however, was a little different. Whenever it was too late to do something about a particular problem, he’d say: “Well, it’s a little late for herpicide.” In context, I understood what he meant, but the exact meaning escaped me. I asked him one time, and it turns out that Herpicide was a (quack) hair loss cure in the ’30s or ’40s. The company’s add campaign pictured a cue ball-bald man with the caption: “A Little Late for Herpicide.” I guess now it would be “A Little Late for Rogaine.”

This expression came to mind when I read in the FT that “Russia considers hedging part of its oil revenues.” It would have been a good idea when the price was $100, or $90, or even $50. At $30 (or below, as happened on Wednesday and Thursday), well, it’s a little late for hedgicide. Yes, oil could indeed go lower, but hedging today would lock in prices that are low by historical levels.

Hedging would make sense for Russia, just as it does for a highly-leveraged corporate. It clearly incurs financial distress costs when prices are very low. Hedging would reduce the expected costs of financial distress.

Presumably Russia would implement a program like Mexico’s, buying large quantities of out-of-the-money puts. This would allow it to capture the upside but obtain protection on the downside. It would also avoid a problem that it might face if it sold swaps/forwards: finding a counterparty. Selling a put to Russia doesn’t involve counterparty risk. Buying swaps from them would. Although this would be a right-way risk, one could readily see Russia balking on performance if oil prices were to spike, putting a short swap position well out of the money. It would have the cash to pay: the willingness to pay, not so much. Further, although Russia’s ability to pay is closely related to oil prices, it is exposed to other risks that could impair that ability, and these risks would create credit risks for anyone buying swaps from Russia.

Buying puts does create an issue, though: this would require Russia paying a rather hefty premium upfront, at a time when it is cash-strapped. As an illustration of its financial straits, note that it is attempting to avoid having to come up with cash to stabilize troubled megabank VEB. Borrowing to pay the premium is also problematic, given its dicey creditworthiness. Russia’s CDS spread is around 370bp (which, although it has turned up as oil prices took their latest plunge, is still below post-Crimea levels, and even below the levels seen in August). Current sanctions and the prospect of the crystallization of future political risks may also make lenders reluctant to front Russia the premium money.

One interesting thing to consider is how hedging would affect Russia’s output decisions going forward. Hedging, whether by buying puts or selling swaps, would reduce its incentive to cut output in low price environments. As I’ve written before, Russia doesn’t have a strong incentive to cut output anyways because  market share, market demand elasticity, and the cost of shutting down production in Siberia make it a losing prospect (as its refusal to cut output in 2009 and in the past 18 months clearly indicate). However, whatever weak incentives Russia has to cut (in cooperation with the Saudis for instance) would be even weaker if it was hedged. If cooperation on output between OPEC and Russia has proved hard up to now, it would be harder still if Russia was hedged.

A Russian hedging program, if big enough, could affect market pricing, but not the price of oil (at least not directly*): hedging is a transfer of risk, and a big Russian hedge would affect the price of oil risks. Its hedging pressure would tend to increase market risk premia (i.e., reduce forward prices relative to expected spot prices). If done using puts, it would also tend to steepen the put-wing volatility skew and increase volatility risk premium. Adding its hedging pressure to the market would also necessitate the entry of additional speculative capital into the market in order to mitigate these effects. Sechin has criticized speculators in the past: hedging Russian oil price risk would be prohibitively expensive without them.

Although Russia has mooted the possibility, I doubt it will follow through. I would imagine that the combination of the cash cost of options and criticism within the ruling clique of locking in low prices will cause them to pass. If and when oil prices rise substantially, I predict they will forego hedging because they will convince themselves that prices won’t fall again, just as they did post-2009.

In sum, this sounds like an idea that the technocrats have advanced that will die at the hands of the siloviki, like various privatization initiatives.

* The spot price of oil depends on output and demand. Hedging affects spot prices to the extent that it affects output. One way that could happen is that if it reduced Russia’s incentive to cut output. Another way it could happen is that hedging increases Russia’s capacity to finance investments in oil production by reducing capital costs. In this case, investment would be higher and output would be higher.

In each of these scenarios hedging reduces spot oil prices in some states of the world, not because of the direct effects of forward selling, but because the hedging provides incentives to increase output. This is a good thing.

Print Friendly

January 7, 2016

Be Ready For Praying Mantis II: Other Than That, Stay the Hell Out

Filed under: History,Military,Politics,Russia — The Professor @ 9:35 pm

There is no good guy and no bad guy in the conflict between Iran and Saudi Arabia (and its GCC allies). In its essentials, it is a struggle for regional dominance between two benighted and malign powers.

The theater of the conflict is Iraq and Syria. Iran has some advantages, most notably, it is allied with the government of Syria (now supported by Russia), and for sectarian and geographical reasons has advantages in Iraq. In Syria, Saudi Arabia and its allies must resort to funding and arming the opposition. Its options in Iraq are more limited, but it is likely objectively pro-ISIS.

Neither Iran nor Saudi Arabia can pose a conventional military threat to the other. Iran’s air force is a collection of museum pieces (F-4s, F-14s and F-5s!) seized from the Shah and kept together with bubble gum an duct tape, and some Russian aircraft gifted to them by a desperate Saddam 25 years ago. Iran’s ground forces have no power projection capability. Its units have struggled in Syria and Iraq, and were noted during the Iran-Iraq war mainly for their ability to absorb appalling casualties. Iran’s navy also lacks any power projection capability. Logistics would also render impossible any Iranian attack on KSA.

Saudi Arabia has a very well-equipped air force, with 70 F-15E strike aircraft, 86 F-15C and D air superiority fighters, 72 Eurofighter Typhoon multirole aircraft, and 80 Tornado ground attack planes. This is more than adequate to defend KSA against anything that Iran could throw against it on air, sea, and land. But KSA’s ground forces are, like most Arab armies, woefully ineffective, and mainly intended for regime protection. The Saudis are bogged down in neighboring Yemen, and could not hope to project any force into Iraq, let alone Iran.

Even if Iran develops a nuclear weapon, it will have little effect on the balance of power. The Saudis will almost certainly obtain one as well, and a nuclear weapon is more of a regime protection weapon than an instrument of power projection.

Iran’s main weapon is subversion, but this is difficult to employ against a police state like KSA. Indeed, the execution of Nimr Nimr that precipitated the latest crisis was no doubt a signal to Iran that the Saudis were willing to use extreme measures to crush any uprising in the Shia population in the eastern provinces. Also look at the brutal crackdown in Bahrain to see how the KSA and its allies deal with Iran-fomented Shia internal dissent.

So there will be an intensified shadow war between KSA and Iran, fought mainly in Syria and Iraq. Things have intensified now because the Iran deal and the Russian intervention in Syria disturbed the previous equilibrium in the region: this was one of the main reasons the Iran deal, and the administration’s subsequently fecklessness in responding to Iranian provocations, was so ill-advised. The most likely outcome is an intensified struggle resulting in a renewed stalemate.

In terms of oil, the most likely outcome is that the Saudis will figure that Iran suffers from lower oil prices more than they do, so they will not cut output. The Iranians have every incentive to produce as much as they can.

There are loud calls from some quarters that we intervene on behalf of our Saudi “allies.” With allies like this, we need no enemies, given lavish Saudi support for Islamism (and terrorist groups) around the world: indeed, I consider the Iranians’ in-your-face chants of “Death to America” more palatable than the Saudis’ two-faced duplicity. The relationship between the US and KSA is transactional, at best, and is unfortunately suborned by Saudi money which greases far too many palms in DC and Europe.

Stalemate is probably a good outcome from the US perspective. Getting in the middle means we will get it from both sides.

Our main interest is continued flow of oil through the Persian/Arab Gulf. A policy similar to that adopted by the Reagan Administration during the Iran-Iraq War, which largely took a hands-off approach to the conflict on the ground, and focused on assuring the free navigation of the Gulf, is a prudent one. If either side tries to escalate by attacking shipping or laying mines, like during the Tanker War, the US can intervene and smack them down as it did in Operation Praying Mantis.

We have no interest in a civilizational and sectarian war, and probably couldn’t intervene effectively even if we decided to. Neither country is capable of achieving a decisive victory over the other. The main stakes are who gets to rule (albeit indirectly) over a ruined Syria and a dysfunctional Iraq. So limit our involvement to keeping the oil flowing and deterring and preventing terrorist spillover. And definitely don’t take the side of Wahhabi freaks, or think that they are allies worthy of the name.

Print Friendly

January 2, 2016

Fools Rush in Where Angels Fear to Tread: Avoiding the Islamic Civil War Is Prudence, Not Isolationism

Filed under: History,Politics,Russia — The Professor @ 7:43 pm

The combination dumpster fire, shit show, and clusterfuck AKA the Middle East got even more disastrous today when the Saudis beheaded a prominent Shia cleric (along with 46 Sunni radicals). The reaction from Iran was immediate: the Saudi embassy was sacked by outraged Shia.

And the reaction from certain quarters in the US was almost as swift: the usual (neocon) suspects in the US (e.g., Max Boot) immediately swung into action, shrieking loudly about the Iranian violation of the sanctity of the Saudi embassy (I wonder what really goes on there, besides, you know, slavery and stuff) but saying nary a word about the morals or justice or reasonableness of going medieval on Nimr al Nimr.

It is beyond bizarre that certain quarters of the right are so obsessed with Iran that they are willing to go all in with the Saudis and the other oil ticks of the GCC. How can they be blind to the facts that (a) the most direct terrorist threats that we face are all Sunni, and specifically Wahhabi-influenced, (b) these threats receive material and ideological support from Saudi Arabia, and (c) the Saudis have spent billions propagating their hateful creed, including supporting the very mosques in the US and Europe where terrorists are radicalized and recruit?

I stipulate that Iran under the Mullahs is dangerous. I further stipulate that Assad is evil. I further stipulate that Putin is a malign force.

It does not follow, however, that their enemies–the Wahhabi Sunni extremists–are good guys, or that following the enemy-of-my-enemy strategy is even remotely wise.

This is particularly true in the case of Syria, which is a proxy war between the Saudis and the other oil ticks (and the Sunni Turks) and the Iranians. Opposing Assad means throwing in on the side of the very same types of jihadis that are trying to kill us in Paris, Brussels, and San Bernardino. Empowering them today is a recipe for disaster tomorrow.

Just how far the anti-Iran cabal is willing to go is illustrated by their deification of Zarhan Alloush, whose extreme Sunni-sectarian background (he openly advocated a genocide of the Alawites in Syria) has been whitewashed in order to transform him into some martyred potential interlocutor of peace.

Insane.

There is a civil war in Islam. Indeed, there are multiple civil wars. Sunni vs. Shia. But even within the Islamist Sunni “community” there are deep divisions and vicious, brutal fights.

Intervening in a civil war, especially one between extreme sectarians with mindsets completely alien to our own–and indeed, actively hostile to our own–is a recipe for disaster.

But those who counsel staying out–such as Ted Cruz–are pilloried as “isolationists.” Rushing in where angels fear to tread is not isolationism. It’s prudence.

Cruz in fact was-and is-an ardent foe of the Iran deal. So he’s not dew-eyed about the mullahs, or an isolationist. But he’s smart enough to realize that you have to pick your battles, and even if you don’t like Iran (which he doesn’t), that doesn’t mean you have to fight their proxy in Syria.

Indeed, one of the reasons that the Iran deal was a disaster was precisely that it stoked the conflict between Iran and the Saudis. This was predictable, and predicted: well over a year ago I argued that one of the reasons the deal was a bad idea is that it would intensify the conflict in the Gulf specifically, and the Muslim civil war generally, because the Saudis would feel the need to take matters into their own hands and fight Iran before Iran became too strong. We are seeing that happen right before our eyes.

What’s particularly maddening about the interventionist crowd is that they have no specific strategy. This is epitomized by this Garry Kasparov article. Kasparov waxes eloquent about American exceptionalism, and our need to do something:

But the Iraq War was a rebuke to bad planning and lousy implementation, not a refutation of the idea that America can be an essential force for good in the world. America must do better, not do nothing.

OK. I’ll stipulate that doing nothing is not good. But it’s a long way from saying “do something!” to specifying just what that something is, and showing that it will make things better, not worse. After all, in this very paragraph Kasparov admits that we are capable of “bad planning and lousy implementation”: what’s to say we won’t have a repeat? Vacuous generalities about spreading democracy and freedom are exactly what gets us into trouble.

It is particularly irritating that Kasparov invokes Reagan’s name (as many neocons do, though he didn’t care for them, and the feeling was quite mutual). Reagan indeed engaged in soaring rhetoric about freedom and democracy. But he had a concrete strategy that he developed over years and implemented methodically when in office. The new interventionists have the rhetoric. The strategy, not so much.

Further, the situation Reagan faced–a Cold War with a military peer and ideological rival–is completely different than the one we currently face in the Middle East. There are no one size fits all solutions, and anyone who claims to know how Reagan would respond to these completely different circumstances is just full of it. That’s unknown and unknowable.

Perhaps as a chess player, Kasparov is used to there being  black pieces, and white pieces. But in the Middle East, there is no such clean divide. It is just different shades of anti-western and anti-modern sectarians looking to extirpate their enemies–who include us, by the way. Democracy and freedom are on no one’s agenda there, and we shouldn’t pretend otherwise. We made that mistake in Iraq: why repeat it again.

I am not a huge fan of Kissinger, James Baker, and Brent Scowcroft, but on these issues they have a more measured understanding of the realities. They recognize the importance of idealistic goals, but temper that with a recognition that realistic means are needed to achieve them.

Scowcroft:

Scowcroft does not believe that the promotion of American-style democracy abroad is a sufficiently good reason to use force. “I thought we ought to make it our duty to help make the world friendlier for the growth of liberal regimes,” he said. “You encourage democracy over time, with assistance, and aid, the traditional way. Not how the neocons do it.”

(The whole piece is worth reading.)

Kissinger and Baker:

Like most Americans, we believe that the United States should always support democracy and human rights politically, economically and diplomatically, just as we championed freedom for the captive peoples of the Soviet empire during the Cold War. Our values impel us to alleviate human suffering. But as a general principle, our country should do so militarily only when a national interest is also at stake. Such an approach could properly be labeled “pragmatic idealism.”

. . .

Sixth, and most important, the United States must develop a firm and differentiated understanding of its vital national interests. Not every upheaval in the region has the same origin or remedy. The Arab Spring has the potential to become a great opportunity for the people of the region and the world. Over time, fostering democracy may provide an alternative to Islamic extremism; it may also, in the short term, empower some of its supporters. We need to develop a realistic concept of what is achievable and in what time frame.

The last point is a jab at the End of History strain of neoconservatism, which is universalist and believes that everyone wants to be like us, and that the world is inevitably destined to be like us, as the result of some progressive, Hegelian process.

No and no.

Insofar as Syria in particular is concerned. Our national interest there is limited, and the cost of doing anything is prohibitive. Putin’s intervention there is not a bug, but a feature: if he is a fool who rushes in, we should take grim satisfaction, not engage in hysterical reactions like Kasparov (and Max Boot and Michael Weiss). (Relatedly, Boot slandered Cruz, tweeting that he has affection for Assad. This is scurrilous: not wanting to fight him does not imply affection, especially since those whom Assad is fighting are Islamic extremists.)

In sum, the isolationism charge is a canard when hurled at people who don’t want to get deeper into Syria, and who don’t want to take sides between medieval combatants in a sectarian civil war. Saying that the Iranians are bad is not sufficient to justify intervening on the side of their Wahhabi foes–who are just as bad, and are in fact more directly involved in attacking the US and the West than are the Iranians.

To paraphrase Kissinger again (specifically, his remarks about the Iran-Iraq War): we should hope that they both lose. In the meantime, we should look for ways of shielding ourself from the fallout. Jumping into the fray is not the way to do that.

 

Print Friendly

Next Page »

Powered by WordPress