Streetwise Professor

The fecklessness of the Obama administration’s approach to Russia beggars description.  Suffice it to say that the more earnestly Kerry implores the Russians to facilitate some less messy (not neat, just less messy) transition in Syria, the more abusively Putin and Lavrov behave.  The Moscow “spy” fiasco is part of that.  So are many other things-which I’ll discuss in a bit.

Kerry and Obama should wear “kick [or something more vulgar] me, Vlad” pinned to their backsides.  Hell, maybe they already do.  That would be consistent with the evidence, because Putin and Lavrov are kicking hard, kicking fast, and kicking often.

Look.  The Russians are doubling down on supporting Assad.  They are deploying large pieces of their ramshackle navy to the eastern Med.  (Including tugboats!  There must be tugboats! And I mean plural!) There is one reason and one reason only to do this: to make it virtually impossible for the US to use naval assets to do anything in Syria, including enforcement of a no-fly zone, or more drastic measures.  It is a tripwire.  The extensiveness of the deployment, given Russian naval capabilities, is such that even the blind should see that the Russians are making a major commitment to Assad.

What’s worse, in addition to sending Syria advanced S-300 and Pantir AA missiles, the Russians are supplying Syria with advanced Yakhot supersonic anti-ship missiles.  The Yakhot is a capable system.  The US has been aware of it for some time and presumably has many countermeasures in place, but they do represent a substantial increase in Syria’s capability and will dramatically increase the difficulties of any carrier operations in the eastern Med.

The Pentagon went ballistic at the news. Even Hagel bestirred himself to criticize the move.

But that’s what gets us to what’s worst: the State Department response.  According to Foggy Bottom, there’s no problem because these are not “new sales”:

Jennifer Psaki, a State Department spokeswoman, said Russia had disclosed the sale of the Yakhont missiles in 2011, and she added that U.S. and Russian diplomats were still planning the Geneva conference next month.

FFS.  That’s exactly the Russian line.  Exactly.  Gee, Jennifer, great job you got there, being Sergei Lavrov’s parrot.

I am sure the Navy (and the Israeli Navy) is so pleased that they will only be targeted by previously contracted for weapons, not new sales.  And John “Reporting for Duty” Kerry isn’t the one who will be painted by the Yakhot’s terminal guidance system.  Maybe he should think about those who could be, rather than sucking up to Sergei.

And all this BS about “defensive weapons” is just that.  They provide Assad a shield behind which he can slaughter the opposition with substantially less fear of any intervention.

And insofar as the sanctity of contracts is concerned.  First, since when have contracts ever meant jack to the Russians?  Second, to give an example of how this can be done, just look at how the US stiffed Pakistan for years over F-16 sales.  Where there’s a will, there’s a way.  Russia isn’t delivering weapons because their compelled to: they’re delivering weapons because they want to.  (Uhm, and how would the Syrians enforce a breach, anyways?)

Meanwhile, Kerry and the Brits and the UN are nattering on about some meeting in Geneva between the contending forces in Syria.  Yeah, like meetings in Geneva ever accomplish squat where existential and brutal civil wars are involved.

The Russians are making it very clear they are doubling down on Assad, and will defend his regime to the last.  Their deeds speak volumes.

I’m not advocating or even supporting US action in Syria.  Obama frittered away that opportunity a long time ago.  When wars get to the eating the eating your enemy’s hearts stage (and this by the “moderates” no less), the situation is pretty much beyond salvage, even by Russian tugs.

But it’s best to recognize what Russia is up to here, and state that forthrightly.  Make it plain who is ultimately responsible for the horror that is occurring in Syria.  Chasing after Putin and Lavrov like some pitiful suitor, and regurgitating the Russian party line in a way that undercuts our own military’s serious concerns, is just nauseating.  It’s worse than that.  It’s craven.  Cosmically craven.  And Putin will note that, and act accordingly in other things that matter.

I’m sure you’ve read all about the bizarre “spy” scandal in which a US State Department employee attached to the embassy in Moscow was arrested for espionage and thrown out of the country.

Everything about the story is risible.  The wigs. The map.  The Boy Scout compass (I had one like that decades ago.  Maybe we don’t trust Glonass!) The cash: umm, wouldn’t wire transfers to offshore bank accounts be more reliable and safer?  The location: why meet in Moscow, and not overseas?  Most notably letter detailing fiendish American plot to bribe Soviet . . . I mean Russian intelligence officer.  Yeah, you’re going to spell all that out in plain text?  Heck, the Hardy Boys would have known to use invisible ink.  And code.

No, this was theater.  My guess is that the FSB compromised Mr. Fogle, the alleged spy in some way.  My initial guess was a honey trap, but it may well be something seedier, like cruising.

Under either of those scenarios,  the FSB would have had considerable control over the timing of the big announcement.  No doubt Fogle was under surveillance, and if he was doing something compromise-able, the Russians had the ability to choose when to compromise him.  They also had the ability to do it quietly, or in the way they did it: an over the top spy spoof, that was deliberately absurd.

By choosing to compromise him now, and in such an outlandish way, the Russians were sending a message: indeed, the outlandishness was part of the message.  Pushback over our criticism of their handling of Tsarnaev?: they made a big deal that the FSB agent Fogle was allegedly recruiting was an anti-terrorism specialist from the North Caucasus.  Something related to Syria, Kerry’s visit, etc.?: Trying to embarrass the US during a period of time the US is trying to pressure and cajole Russia into dumping Assad?  Dunno.

Whatever it is, the real story is hiding behind a wig.  Almost quite literally.  But I’m pretty damn sure Fogle or the CIA weren’t the ones who bought it.

The news coming out of Boston that will have the greatest ramifications for American politics in the near-to-medium term is the revelation that the FBI interviewed Tamerlan Tsarnaev at the behest of the Russian government in 2011.   (Originally, reports did not mention a specific country, even though anyone who can add 2 and 2 could figure it out: who did they think they were fooling?)  Add this to the fact that Tamerlan spent about 6 months in Russian-including time in Dagestan, which is currently the most restive and violent part of the Russian Caucasus-and one question comes to mind: What did the FBI miss?

On the fringes, the answer would be: “Nothing. They knew all along and wanted it to happen.  Hell, they made it happen.”  Claims of a “false flag” attack began almost from the moment of the bombing.  The Tsarnaevs’ parents’ statements can only feed these suspicions:

“My son would never do this,” Tsarnaeva said. “He was controlled by the FBI for three to five years, they knew what my son was doing, they knew what actions, on what sites on the Internet he was going,” she said. “So how could this happen? They were controlling every step of his.”

. . . .

Tsarnaeva, whose younger son Dzhokar, 19, was captured after an almost 24-hour manhunt that shut down Boston and surrounding cities, said she had been interviewed by Federal Bureau of Investigation agents about Tamerlan, who had described him as an “extremist leader.”

The brothers’ father, Anzor, also denied his sons’ involvement in the Boston attacks in an interview with Russian state channel Rossiya 24 in Makhachkala, saying they couldn’t “hurt a fly.”

Anzor, in an interview with The Wall Street Journal, said he was present when the FBI interviewed Tamerlan in Cambridge. He said they visited for what they called “prevention” activities. “They said: We know what sites you are on, we know where you are calling, we know everything about you. Everything,” he said as cited in the interview.

From such seeds will grow a New Trutherism.  (Ironically, it appears that Tamerlan was a 911 Truther.)

From the non-fringe, the FBI’s failure to identify Tamerlan as a risk will spark accusations of political motives and political correctness (“the Obama administration is soft on Islamist terror”) from the right.  Those who use “never attribute to malice which can be explained by incompetence” as an operating principle will argue that the FBI (and American law enforcement generally) works off an outdated and flawed model of the modern terrorist threat: that it is fighting the last war.

There is something in the linked Bloomberg article that supports this view:

U.S. intelligence agencies reviewing international communications and other terrorism intelligence found no signs that the suspected bombers were members of, or inspired by, any foreign terror group, said a U.S. official who asked not to be identified because those matters are classified.

In other words, the focus of the investigation was on connections to foreign terrorist organizations.  But what about self-starting, volunteerist terrorists motivated by Islamist rhetoric, propaganda and preaching?  It’s not like this risk was unknown in 2011, or in 2012 when Tamerlan went to Dagestan.  Major Hasan, the Fort Hood killer, is a classic example.  The (failed) Times Square bomber is another.

I will warrant that it is far more difficult to assess this risk: connection with a terrorist group is a far more telling indication of intent and capability to commit terrorist acts than is reading or echoing Islamist materials.  But apparently the latter was enough to make the FBI concerned and get Tamerlan on its radar: evidently, though, only taking the next step and affiliating with a terrorist group would have kept him there, or put him into custody.  Taking actions against such individuals is also much dicier, from a civil liberties perspective.

But such individuals are arguably now the greatest terrorist threat in the US proper.  Thus, I expect that the FBI will undergo considerable scrutiny as to how it has evolved to address the home-grown, self-starting terrorist risk, especially post-Fort Hood/Times Square.

And the FBI is inherently a politicized organization, and has been for decades.  Its failures inherently lead to questions about the responsibility of the Attorney General and the President for them.  In some respect these questions are legitimate, but they will also feed partisan attacks.

So look forward to months of highly charged debate over the FBI’s failure to identify Tamerlan Tsarnaev as a terror risk despite been warned about him, leavened with fringe-but very loud-claims that it directed him as part of a dark conspiracy against the Republic.  Every revelation about Tamerlan’s travels, his Islamist reading or statements will only add fuel to the fire: “Why didn’t the FBI connect these dots?” The self-preservation instincts of politicians and bureaucracies ensures that there will be a war of leaks between the FBI and the administration-these too will fuel the controversy.  I wouldn’t be surprised if this also reanimates the moribund interest in Benghazi.   I also wonder what kind of information the Russians will announce, leak, or make up in an attempt to use the episode to advance their interests.

Heretofore, Obama has been largely immune from blame for terror attacks-Major Hasan and Benghazi being primary examples.  Boston hits much closer to home, however, and the FBI’s longstanding knowledge of the perpetrator means this situation poses a far greater risk for him.  And like I said in an earlier post, knowledge of this might have fed Obama’s rage at the Rose Garden temper tantrum on Wednesday.

No, not “What Would Pirrong Do?” but What Will Putin Do?  in the aftermath of the revelation that the Boston Marathon murderers (and cop killers) are Chechens.  I imagine he will express a great deal of sympathy, and offer support in efforts to investigate any connections with Islamists operating in Russia, particularly Chechnya and Dagestan.  The sympathy is pretty much expected, and the support is in his interests, for a variety of reasons, including an opportunity to enlist the US in operations against his arch domestic enemy, and the ability to get a bargaining chip he can use in dealings with the US on other matters.  These efforts will be aided by the likelihood that the attacks-and in particular, their Islamist terrorist nature-will put Obama on the defensive politically.  Especially if there are subsequent revelations that dots weren’t connected.

But there will no doubt be a good deal of schadenfreude and I-told-you-so mixed in.  Putin has always mightily resented the refusal of the West generally and the US in particular (and the UK even more) to consider Russia’s wars in the Caucasus to be another front in, and the moral equivalent of, the West’s and America’s war on Al Qaeda and other Islamist terrorist movements. He will no doubt say something to the effect of: “This is what we are dealing with, and have been dealing with for years.  Now do you get it?  Don’t you dare criticize us for what we do in Chechnya and Dagestan because now you see the kind of animals we have on our doorstep.”

I think he will go further than this, and in a more cynical direction.  Specifically, he will attempt to use the Chechnyan terror threat as a justification for broader authoritarian measures in Russia, including the continued crackdowns on the opposition.  No, Navalny and (the dead) Magnitsky are not Chechen terrorists, but Putin will likely argue that a destabilizing opposition is danger in a country under threat, especially given the impending Winter Olympics on Chechnya’s doorstep.

And I know that he will use the events in Boston to redouble Russian opposition to any support for the rebels in Syria.  Putin has linked the Syrian opposition to Islamists in the Caucasus, and now those connections will resonate much more in the US.  Putin will take advantage of that, surely.

In brief, the bombing and shooting in Boston gives Putin some strategic, political, and rhetorical advantages, and you can have no doubt that he will exploit them to the maximum.

One last thing.  Putin was very outspoken in his criticism of the attacks, calling them “disgusting.”  He also made personal offers to help the US investigate.  At the time, I thought these were merely pro forma actions.  Now I wonder, at least a bit, whether they might suggest that Putin had some information-or at least a sense-that there was Chechen involvement.  I still think it most likely that he was doing the diplomatic thing, but there could be more to it than that.

As described in the WSJ, Russia has “slashed” its official 2013 growth forecast by a third to 2.4 percent: this new figure is less than one-half of what Putin had promised during his coronation campaign. And given that the year-on-year growth figure for February was less than 1 percent, 2.4 percent looks rather optimistic: I get the sense that Russia is in the process of revising expectations (A/K/A telling the truth) slowly.  Meanwhile, Russian inflation is running at around 7 percent: that figure for March was considered a victory after the 7.30 percent figure for February.  (Bloomberg seems to live  perpetually up Putin’s rear end, and typically spins things in his favor, so read the link with a grain of salt.)

This puts Putin’s newly appointed central bank head, Elvira (Mistress of the Dark Empire?) Nabiullina, in a difficult situation of being the girl at the stagflation party.  Putin is clearly nervous about Russia’s sputtering growth. He has promised a lot, and a failure to deliver will only further complicate his increasingly fraught political situation.  He has indicated a clear preference for the Russian Central Bank to loosen in order to spur growth.  Deripaska has been outspoken in his advocacy for the bank to reduce interest rates, and I imagine that other oligarchs (particularly in steel and coal, which have reported some rather heavy losses of late) are of like mind.  But bending to oligarchic pressures would likely spark greater inflation that would hit ordinary Russians-most notably low income Russians, especially pensioners, who are Putin’s prime constituency.  The pressures on Nabiullina to loosen Russian monetary policy will be pretty intense.

So what will Putin do?  His economic options are limited, and those that he is likely to try are unlikely to improve growth but will exacerbate inflationary pressures.  Consequently, expect a political response to distract attention, most likely a further intensification of crackdowns on the opposition, and fomenting anti-US sentiment.  He is not quite yet in Hugo Chavez territory, but there are similarities.

Putin caused a minor kerfuffle when he ostentatiously order Gazprom’s Alexi Miller to re-start the Yamal 2 gas pipeline through Poland.  Except Poland says, er, we’re not interested.

There’s no viable economic case for the pipeline.  South Stream is not commercially viable.  Nord Stream is operating at 27 percent capacity.   Gazprom’s European sales are stagnant (which is charitably putting it, because they fell 10 percent in 2012), because demand in Europe is stagnant and there are new supplies from Norway.  The potential for new supplies over the longer term means that Gazprom may soon pine for mere stagnation.

No.  This is about trying to squeeze Ukraine even more: Russian and Ukraine are in negotiations over control of Ukraine’s transmission network (Gazprom demands at least 50 percent) and the two sides are battling over billions in payments for gas that Ukraine contracted for under take-or-pay deals but didn’t take.

Poland refuses to play politics:

“Poland won’t participate in these political contexts,” Mr. Tusk [Poland's prime minister] said. “For us, gas isn’t a tool to conduct politics and we very much want, in agreement with European Union laws, to keep gas issues free of politics.”

But Gazprom is Shocked! Shocked! at the very suggestion that Russia is playing politics:

Gazprom rejected any political overtones. “What politics?” said Gazprom spokesman Sergei Kuprianov, when asked to respond to Mr. Tusk’s statement. “It’s not aimed against anyone.”

And if you believe that . . .

Several stories converge to tell a single story.

1. Russian capital outflows totaled $25.8 billion in the first quarter.  Given that the government had forecast between $0 and $10 billion for the year . . . they’re revising their projection.  To $40 billion.  Who wants to quote an over-under for the next revision?
2. Russian economic growth slowed to .1 percent year-on-year in February.  In other words, barely any growth at all.
3. Putin gave an order to all state officials to close foreign bank accounts within three months, or be fired.
4. A deputy chairman of the Russian Central Bank said that Russian officials may be required to invest in domestic securities.
5. Putin is again mooting the idea of some sort of popular front, and ditching United Russia has his favored political vehicle.  United Russia, of course, being basically the bureaucrats’ political party.
6. Putin is cracking down on NGOs that have any connection with the West.

1. and 2. are symptomatic of a sputtering economy that cannot generate the growth or the capital necessary to pay for Putin’s promises, or his ambitions.  3., 4., and 5. show that Putin is at war with the bureaucracy-just like the Tsars and Commissars from the beginning of Russian history.  6. reveals Putin’s continued paranoia that NGOs are plotting some sort of Orange venture in Russia.

All suggest that Putin is increasingly beleaguered.  Life was easy when the economy was doing well.  Not so easy when it’s stagnating: given Russia’s presumptions as an emerging market, .1 percent growth is equivalent to a major recession in the US: a far cry from the 6+ percent of the mid-00s, and even the 4-5 percent which Medvedev and Putin have claimed to be expecting.  Standing still is falling back, especially when Putin has promised big increases in both social and military spending.

So where does he turn?  The predations of the bureaucracy are a drag on growth: so attack them, like the Tsars and Commissars before him.  Uhm, good luck with that.  Like cockroaches, the bureaucrats have always survived every attack against them.  Stalin imposed some discipline-but look at what was required.

But outlawing foreign accounts is one knout that he can wield that hits them where it hurts.  It also is a form of financial repression that can offset, in part anyways, the difficulties that Russia faces in attracting and retaining capital, due to its poisonous investment climate.  In essence, Putin is attempting to reassert his power over the bureaucracy and at the same time to recirculate their ill-gotten gains within Russia, rather than without, thereby offsetting the reluctance of foreign investors to risk their capital to the whims of the Russian state and its agents.

But resorting to sticks, rather than carrots (“play along and you can share in the rents”) Putin is betraying some desperation.  Moreover, although the bureaucrats may mulishly submit to the knout, they will resent Putin’s resort to coercion.  They may falsify their preferences, and promise fealty.  But they will be alienated.

This is the classic authoritarian dilemma.  A subservient but resentful class of underlings.  Coordination problems mean that few are willing to declare openly their opposition.  But this equilibrium is quite tenuous.  A shock to the system that weakens the autocrat-a natural disaster handled badly, an overreaction to an isolated act of opposition-can lead to a rapid and uncontrolled chain reaction in which those who suppressed their true feelings stop falsifying their preferences.  This is the dynamic that toppled Mubarek in weeks, and unleashed civil war in Libya.

Stability in autocracy is one equilibrium in a global coordination game: complete collapse is another.  The literature on global games predicts that the stable equilibrium is a fragile one.  A small event can lead to a “run” on the autocratic bank of power.

That’s where Putin is now.  I am not predicting that Putinism will collapse.  I am saying that the risk of such collapse is heightened.  The best evidence for this is Putin’s ratcheting up of oppressive measures, whether they be applied to bureaucrats theoretically subordinate to him, or NGOs.

Look back to posts I wrote in 2007-2008 where I emphasized the brittleness of Putinism.  Putin recognizes this.  His actions demonstrate that clearly.  A confident autocrat would not do what he is doing.

The LSE recently hosted the 6th Annual Russian Business Conference, which was well stocked with apologists and whataboutists.  Kudrin was there, and said some sensible things, especially regarding the Russian energy industry.  Others, well . . .

For instance, Presidential Commissioner for Entrepreneurs’ Rights Boris Titov.  Titov was defensive about the Magnitsky case, and cautioned the audience against generalizing from that case:

Titov admitted that the protection of business rights in Russia was a thorny issue, but asked that the situation not be dramatized.

“Such high-profile cases exist in many countries, but investors should look at the overall [investment] environment: how do the law-enforcement agencies and the prosecutor’s office operate? Is the problem of raiding being tackled or not? Conclusions must not be drawn on the basis of scandalous politicized cases that do not reflect the actual state of affairs,” remarked the ombudsman.

And just what would the “actual state of affairs” be? Just how do law enforcement agencies and the prosecutor’s office operate?  Tell us, Boris, is the problem of raiding being tackled?  Magnitsky aside, the answers to all of these questions-answers that Titov does not provide, but are well known-make it plain that “business rights” in Russia are in a parlous state indeed.

Scotsmen (based on the name) are willing to play along, if they are in the employ of a Russian bank, anyways:

Titov’s position echoes the opinion of VTB Bank’s Neil McKinnon, who points out that corruption and double standards are not the exclusive preserve of Russia. McKinnon cites some recent criminal scandals in Britain itself:

“In the UK there is a problem with corporate governance and I think… and in the City where I work. There have been a number of world-publicized cases – The London Whale, JP Morgan […] A whole host of problems.”

“HSBC and Standard Chartered have been fined 1.9 bln dollars for money laundering. If I was to money launder, I’m walking into a maximum imprisonment of 14 years and I’m not allowed to work in the City ever. If I’m on board of HSBC or Standard Chartered, I pay a 1.9 bln dollar fine, collect my bonus and I stay in my job. I think that is a disgrace. But I think that the City elite don’t get it,” he added.

Uhm, HSBC’s money laundering, the Whale, etc., are completely off-point in this context.  It’s not an issue of the misconduct by private business: it’s an issue of private business being preyed on by the state, “law enforcement”, security services, and criminal syndicates affiliated with the above.

Another speaker bemoaned the lack of long term funding:

In addition to the stereotypes surrounding Russia, the mood of foreign investors is clouded by the lack of cheap sources of financing within the country. According to experts, growing companies in the Russian market find it hard to attract long-term funding, whereas Western financiers are willing to wait a little longer for their investments to bear fruit.

“Russia has money, but no capital,” says Alexander Galitsky, renowned entrepreneur and owner of the venture fund Almaz Capital Partners.

And why is that, Alex? Why aren’t people and institutions willing to invest long term?  This is endogenous, after all.  Could the insecurity of property rights and the risks of expropriation make investors reluctant to provide long-term finance?  Just askin’.

Are these three actually this clueless?  Or are they just gulling the gullible?

Gazprom claims that the Ukrainian proposal to import gas from Europe “smack[s] of corrupt schemes”:

Plans by Ukraine to import natural gas from the European Union “smack of fraudulent schemes,” said the chief executive of Gazprom, Russia’s largest gas producer.

“Now as regards the reverse supplies of gas from the territory of the European Union to Ukraine – we know about these plans very well, but we have suspicion that it isn’t about any reverse supplies. De facto, there would physically be no gas involved – the plan is to use Gazprom gas in a kind of virtual reverse direction,” Alexei Miller said in the “News on Saturday with Sergei Brilyov” television program.

“In other words, Gazprom gas moves into Europe and immediately turns back and goes to Ukraine,” Miller said. “It doesn’t just get pumped across,” he said, claiming that Ukraine would transmit gas provided by Gazprom to the border, where a measuring station would show that a certain amount of gas had gone to Europe, but then the gas would return to Ukraine.

“These schemes smack of fraudulent schemes of some kind,” Miller said.

On matters of fraudulent gas schemes, I defer to Gazprom.  Indeed, since Ukraine is as Sovok as Gazprom, on matters of fraud, it’s hard to choose between either on a priori grounds.

In other news, the Russian government is hardly trusting of Russian energy firms, and natural resource firms generally.  Case in point.  The Finance Ministry is opposing replacement of extraction taxes and export taxes on energy with a profits (income) tax:

Industry experts say profits-based taxation would allow companies to cut their tax base by artificially reducing their profits.

The tax authorities calculate MET based on Reuters pricing, and export duties from the Argus agency’s average price for Russian Urals blend.

“The Finance Ministry does not trust oil companies; it would not believe them should the tax be based on their profits. Mineral extraction tax based on a certain oil price, which is impossible to change,” said one industry expert.

Quantities and revenues are harder to manipulate than profits.  This is a testament to the limitations of the Russian tax system, especially  when the energy/oil industry is involved.

This story also speaks to the fiscal stresses on Russia, especially in light of the many promises that he made to get reelected:

The Finance Ministry cited guidelines set by Russian President Vladimir Putin, who before his return to the Kremlin last year promised to increase state salaries and other social spending.

“Our task is to increase the tax burden on the commodity sector,” Trunin said.

Brent and Urals Blend are currently hovering at the levels at which the Russian budget balances.  Putin cannot afford any slippage in tax collection on oil sales.

Finally, if you need further convincing that the prospects for making Russia a major financial center are delusional, consider how Rosneft is totally hosing the minority shareholders in TNK-BP.  Why? Because they can:

Prosperity Capital Management is looking to team up with fellow investors in the TNK’s traded unit, OAO TNK-BP Holding (TNBP), and seek redress after Rosneft’s plan to borrow money from the company rather than paying dividends sent the shares to a record low this week. Rosneft said its move was standard practice.

The biggest takeover in Russian history strengthens the state’s hold over oil and gas production, the source of half its budget revenue. The government is trying to turn Moscow into a global financial hub to attract investors and shift the economy away from resource dependence.

“The whole country’s reputation will suffer if a big company like Rosneft can behave like this,” Prosperity CEO Mattias Westman, who helps oversee about $4 billion in Russian assets, said by phone from Texas. “We will be talking to other investors and communicating directly with Rosneft on this.”

TNK-BP Holding fell the most since trading began on the Micex, retreating 26 percent to a record low on March 26. The biggest previous one-day decline came in October when Igor Sechin, Rosneft’s chief executive officer, warned that the company may end TNK-BP’s dividend policy and had no plans to buy them out.

This is classic short-termism.  Although legally permissible, the refusal to buy out the minority interests in TNK-BP, and the draining of its cash makes it abundantly clear to foreign investors that they can expect the worst.  Hardly calculated to make Russia a serious contender as an international financial center, even if its climate were indistinguishable from Cyprus’s or the BVI.

This also illustrates Rosneft’s limitations.  It is the biggest publicly traded oil company in the world by production, but is straining every nerve to finance its acquisition of TNK-BP.  A real supermajor would not face such difficulties, or find it necessary to engage in prepay transactions with oil trading firms or China to raise the funds for the acquisition.  Which is why the long-term consequences of hammering minority shareholders are rather irrelevant to Rosneft, and to Russia.  The financial pressures of the present are all important.  The future will just have to take care of itself.  Whether it will is highly uncertain, and outside of Russia’s control.  It depends on many contingencies, which likely accounts for the obvious nervousness at Gazprom, Rosneft, and the MiFi.

In the immediate aftermath of the abortive deposit levy in Cyprus, I confessed being unsure as to why Russian stocks took a bigger hit than about stocks in any other country, including those in the EU where the precedent of expropriating insured depositors would seem to be most salient.

Upon reflection, the most likely explanation is that Cyprus’s financial straits would impede the utility of the country as a tax haven for Russian companies.

Although European and US stocks have rebounded, Russian stocks haven’t.  This got me thinking about the implications of the recent deal for Russian companies.

Capital controls appear to be the key.  If Russian corporates can get their money into Cyprus, receive the favorable tax treatment, and then get it out again, boomerang-like, they are OK.  Conversely, if Cyprus becomes a roach motel, where money goes in but can’t get out, that would really put a tax crimp on Russian corporates.

There have been wildly conflicting claims about the prospects for capital controls in Cyprus.  This seemingly official announcement only adds to my puzzlement:

Capital controls imposed to avert a run on banks in Cyprus after a painful EU rescue plan will be “loose” but will apply to all banks on the island, the Central Bank governor said on Tuesday.

“We aim for some restrictions which, in the words of the president, will be loose,” Cyprus Central Bank governor Panicos Demetriades said. He said the measure would apply to all banks based on the island.

Demetriades said the restrictions would be “temporary” but would not say how long they would last.

“Temporary” I sort of get.  Though I think of the withholding tax, which was a “temporary” wartime measure adopted in 1942.  Better yet, the “temporary” tax on telephone services, adopted to fund . . . the SpanAm War in 1898.  Still on your bill today, folks.

The “loose” part is a mystery.  WTF does that mean, exactly?

My interpretation: Cyprus wants to ensure that Russian companies can continue to boomerang money through the country.  If capital controls are “tight”, Cyprus becomes a roach motel, and Russian money will not check in knowing it wouldn’t be able to check out.

My question: what say the Germans about this?  I sense that the back-and-forth over capital controls is just part of the battle between the Germans and the Russians, in which the Cypriots want to support the Russian side.  I suspect the Germans will consider “loose” to be unacceptable. Meaning that there will be more conflict to come.

The anti-Russian implications of the German hard line on Cyprus are striking, and hard to understand completely, given the fact that Germany has taken a relatively pro-Russian line in Nato.  But perhaps there’s something deeper going on here.  Maybe something personal.  I wonder if Putin regrets setting his dog loose on Merkel-a notorious caninophobe.  Could caninophobia have led to Russophobia?