Streetwise Professor

December 15, 2014

Ruble Rocket to Russia

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:55 pm

What a wild day. The Ruble weakened dramatically from the open this morning (15 December), falling about 2.5 percent. Then the Russian Central Bank intervened, spending a rumored $1 billion to prop up the currency. This caused about an 86 pip rally, but this lasted for mere moments, and then the Ruble rocketed lower, reaching 64.24 by the end of the day. That’s down a mere 10.22 percent boys and girls. (The weird thing about currencies quoted like the Ruble is that up is down.)

Here’s the ugly picture. You can see the little bitty (and very temporary) impact of the intervention at a little after 8am.

Screen Shot 2014-12-15 at 7.26.48 PM

In other words, the RCB blew $1 billion for a blip. A billion here, a billion there, and you’re talking real money. In so doing, the RCB gifted those evil speculators whom Vlad inveighed against about $65 million in a few short hours. Merry Christmas!

Ominously, this decline was not a response to a similar decline in the price of oil. Although oil ended down on the day, it was rallying on news from Libya at the time that the Ruble was plunging. What precipitated it? One leading candidate is Friday’s announcement that Ru626b in Rosneft bonds could be used as collateral at the RCB: this approval came much more rapidly than normal. Thus, in effect, the RCB was lending rubles to Rosneft, using bond investors as cutouts. Rosneft felt obliged to issue a press release saying that “not a single ruble, raised within the bond issue, will be used to buy foreign currencies.” Note the weasel phrase: obviously rubles are fungible, so the loan frees up other rubles for Rosneft to sell. Meaning that this smacks of an RCB bailout of Rosneft. This is bad enough, but it could also foreshadow similar actions for other beleaguered Russian companies.

Then, in the very early hours of the 16th, Moscow time, the RCB announced a whopping 650 basis point increase in the interest rate, from 10.5 percent to 17 percent.

The initial effect has been to bring the Ruble back under 60. There is reason to doubt that this will last. First, previous rate increases-though not as big as this-had only a temporary effect on the relentless decline in the currency. Moreover, the rate rise will be highly contractionary, and a weakening economy will put downward pressure on the Ruble. Further, people draw inferences from central bank actions: perhaps the RCB is signaling a very serious fundamental weakness or an impending bank run or its belief that many Russian corporates will be dumping rubles to raise dollars and Euros; any of these signals would mean that its intervention could have the perverse effect of fueling a further decline. In addition, the rate rise does nothing to eliminate the need of Russian firms to obtain dollars to repay maturing debts.

Even if the rate intervention works in the sense of stabilizing, or even reversing, the collapse in the currency, this will come at a cost. As I noted, the effect of the rate rise will be highly contractionary. The government had already been predicting a recession. That is now a certainty, and it is likely to be a severe one. Especially if oil continues doing the limbo.

The RCB action reminds me of a fox chewing off its snared leg. The best of some very bad options.

The situation is obviously volatile, with many things going on (including pronounced weakening in other emerging market currencies and stock markets as well as the oil situation). Moreover, it will no doubt engender a political response, which will feed back onto the markets. How it will affect the increasingly paranoid Putin is hard to know. A climbdown (if credible) in Ukraine would do wonders for the Ruble, but methinks Putin is more likely to double down than climb down.

One prediction is safe: the next days will be memorable. Deserving of some memorable music: Rocket to Russia, by the Ramones.

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December 13, 2014

Khodorkovsky As a Russian Cincinnatus? Cynical Machiavellian is More Likely.

Filed under: History,Politics,Russia — The Professor @ 7:41 pm

It has been almost exactly a year since Putin pardoned Mikhail Khodorkovsky. The ex-oligarch now lives an exile existence in Zurich. Of late, he has been much more vocal in expressing his views on Putin and Russia’s future.

Take for example this piece from Bloomberg that appeared yesterday. Khodorkovsky muses about Putin’s situation, given the oil price and sanctions-induced economic straits Russia finds itself in. He openly suggests that a coup is a real possibility:

“Putin has far less room to maneuver financially, which creates difficulties for him, and as a result the cost of any mistakes he may make could be critical,” Khodorkovsky, 51, said in an interview in Zurich, dressed casually in a sweater, jeans and sneakers. “For Putin, even $120 a barrel for oil is a problem because, with his system of rule, he can’t survive without the revenue from raw materials growing every year.”

. . . .

There’s at least a 50 percent chance that Putin won’t last the next decade, according to the former tycoon, who pins his hope on a coup by the Russian leader’s inner circle because in his view elections won’t bring about any transfer of power.

“I believe that the problem for Putin will come from within his own entourage,” he told Bloomberg yesterday. “For my country, it would be better if things happened this way than through clashes on the streets, as a palace coup would spill less blood.”

Knowing Khodorkovsky’s background, it is plausible that he is playing a Machiavellian game here, ostensibly pontificating about possible outcomes, but really intending to bring about that outcome, and using his words to advance that objective.

One interpretation is that he is waging psychological warfare against Putin. Note his remark regarding Putin’s entourage. He is stoking Putin’s paranoia and attempting to start a clan war, and believe me, especially where Khodorkovsky is concerned, Putin is paranoid: his reactions to Khodorkovsky can only be described as Pavlovian, and don’t think for a nanosecond that Khodorkovsky doesn’t know that.

If the coup comes to pass, Khodorkovsky can ride in as the white knight. He is plainly volunteering for the role:

In a scenario that Khodorkovsky acknowledges isn’t more than an outside possibility, this could open the chance for him to come back to Russia to head a transitional government that would steer the country for two-to-three years before stepping down after a free and democratic vote.

How generous and public spirited of him. Of course, in Russian history “transitional governments” tend to be transitions between one autocracy and another. Further, I understand completely time inconsistency and (non-)credible promises: it’s likely that two-to-three years would turn into twenty-or-thirty. At the end of the second or third year, one can imagine the excuses: “My work is not finished. The enemies of the people are still there and will return if I leave.” I cannot see him as a Russian Cincinnatus.

In other words, when predicting the future (a reprise of 1917) he is saying what he wants to come to pass. He is trying to hurry that along, and the economic crisis (or impending economic crisis) is an opportunity for him. The old Russian revolutionary idea of “the worse, the better” could well apply here.*

Like Putin, Khodorkovsky is an opportunist. He perceives that current events have created that opportunity. (I think it is likely that his conversion to becoming an advocate for corporate transparency and western-style governance was also opportunistic, rather than a Road to Jerusalem conversion: he realized that was the way to make Yukos attractive to a western supermaj0r buyer/investor.)

All that said, I believe-and wrote here often-that Khodorkovsky’s prosecution was a travesty of justice. Indeed, he was persecuted rather than prosecuted. His experience from 2003-2013 demonstrates the arbitrariness and evil of the Russian system under Putin.

But Khodorkovsky was not an angel. No man could have risen to where he did, and amassed the fortune that he did, in the Russia of 1990s without being utterly ruthless and without scruple. What probably set Khodorkovsky apart was that he is also incredibly intelligent. He is also very charismatic. I know two people who worked with him closely who are in awe of him. He clearly had a mesmeric influence on them. Putin’s palpable fear of the man also speaks volumes about his intelligence and personal magnetism. Ruthlessness married to charisma married to intelligence is a very dangerous combination.

Even if Khodorkovsky’s currently expressed sentiments are sincere, and he is not speaking out as part of a scheme to become Russia’s savior, if his scenario comes to pass it is highly doubtful that his lofty principles would survive a few months in power. A post-coup or post-revolutionary Russia would have no real institutions to check him. He would be surrounded by enemies. Russian politics has always been highly personalized and a-institutional. Every force would press him towards autocracy, personalized rule, and a cult of personality.

So as much as I sympathize with what he suffered, and as much as I would welcome the fall of Putinism, I don’t trust Khodorkovsky, nor do I think he is the man to lead Russia to the promised land, or even to its border. (And remember Moses never entered Canaan.) Indeed, I can readily see him using his martyrdom as a way of advancing his personal ambitions, and believe that many are blind to that possibility.

(Some of those who work for his foundation, and presumably believe in his agenda, are also passionate defenders of Urkaine against Putin’s predations. How can they be blind to his indifference to Ukraine?)

Perhaps I am wrong. Perhaps Khordorkovsky is not attempting to influence events in Moscow from Lenin’s old neighborhood in Zurich. Perhaps he is just commenting as an intensely interested bystander to historic events.

If that’s so, he’s delusional. The idea that he would be welcomed as a leader who could achieve national reconciliation in the aftermath of a coup (let alone a revolution) is farcical. He is widely reviled in Russia. It would be interesting to see who is more hated: Gorbachev or Khodorkovsky. He is viewed as one of the pirates of the 1990s, indeed as the most dangerous of the lot. I would wager more people than not believe he got his just desserts in Chita (and elsewhere) after 2003. His only role could be as a behind-the-scenes wire puller.

What’s more, Khodorkovsky is delusional in his appeals to Russian liberals, and his appeals to the west to support Russian liberals. There are hardly any Russian liberals left in Russia. Maybe a few hipsters in Moscow and St. Petersburg, and a few pathetic hangers on here and there. Indeed, Russian liberals are widely despised, and inextricably linked with the traumas of the 1990s. They are viewed as thieves themselves, or accessories to theft-including Khodorkovsky’s.  Navalny’s nationalist rhetoric has a far greater resonance than Khodorkovsky’s liberal language.

Reading some things he has said recently also make me wonder about his connection with reality. Notably this:

Is there hope of being able to effectively deal with this threat? There is, and it stems from the very nature of the Russian bureaucracy, which is generally rational and apolitical. There are many people in the Russian establishment who are sober-minded, think rationally and, on the whole, are oriented towards European values. But today these people are being forced to submit to a political will that has been formulated by a criminally corrupt minority whose only goal is to hold on to power.

Russian bureaucrats are “rational and apolitical”? Who knew? Venal and corrupt is more like it, and quite comfortable operating in an arbitrary autocratic system. After all, the Party of Crooks and Thieves is first and foremost the party of the bureaucratic nomenklatura. “Sober-minded”? That is risible, both figuratively and literally. And as for their “on the whole [being] oriented towards European values”, I don’t think I’ve read anything so absurd in some time. The Russian bureaucracy is Muscovite to the core.

Indeed, these statements (and most of the rest of the speech in which they are found) are so ridiculous that it must be that Khodorkovsky recognizes they are, and hence is willing to say anything to achieve some purpose. The goo-goo nature of his specific recommendations (e.g., the promotion of cultural and educational exchanges between Russia and Europe) only reinforce that impression.

In sum, I view Khodorkovsky in the role of the serpent. Putin is a malign force, but there is too much in Khodorkovsky’s past and character to have any faith that he will fundamentally change Russia.

The fundamental problem is that Putin is far more symptom than cause. He is the current personal manifestation of a national culture and political system and tradition. It is hard to imagine any way of leaping the chasm from personalized, autocratic governance to a system built on strong institutions and the rule of law. The fundamental paradox is that no man-Khodorkovskyor anyone else-is likely to be able to do that.

In other words, we don’t have a Putin problem: we have a Russia problem. We are likely to have it for, well, pretty much forever.  And Mikhail Khodorkovsky is not the man to solve that problem, even if he is sincere in his statements that he wants to.

*This phrase is often attributed to Lenin, but is more likely traceable to Nikolay Chernyshevsky. It was used by Plekhanov in a newspaper article in July, 1917 that Lenin responded to.

 

 

 

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December 10, 2014

Judo Pays, Even When the Torrent of Rents Turns Into a Trickle

Filed under: Energy,Politics,Russia — The Professor @ 8:33 pm

As the capo di tutti capi of the natural state that is Russia, Putin’s primary responsibility is to distribute rents in order to secure political support. This is a relatively easy task when oil prices are high and the money is cascading in. Things are somewhat more challenging when the torrent turns into a trickle, as now.

Those closer to the tsar get taken care of: those less favored have to get by on scraps. Putin’s judo buddies-Gennady Timchenko and the Rotenbergs-are the closest to him, and they are continuing to live off of state largesse:

Having grown rich on government contracts during the boom in Putin’s Russia, friends of the president are benefiting anew as times grow tough. Lucrative orders keep rolling in for the favored few even as western sanctions and a collapse in oil prices push the economy to the brink.

The development has polarized Russia’s oligarchy and pitted Putin’s small circle against less well-connected rivals in a battle for money and privilege.

Companies linked to Rotenberg and another Putin confidant, Gennady Timchenko — both targeted by U.S. sanctions for their ties to the president — are landing a growing amount of state contracts. Together, they have won at least 309 billion rubles of work since U.S. sanctions were imposed in March, filings show. That figure — which works out to about $8.1 billion at the average exchange rate over the period — is 12 percent more than they received in all of 2013.

A Rotenberg-affiliated company is also about to secure a 228-billion-ruble order to build a bridge to Crimea, which Russia annexed in March, according to a high-ranking government official, who spoke on the condition of anonymity because the contract hasn’t been officially awarded.

Since the judo gang (and Sechin too) is getting a bigger slice of a shrinking pie, others are becoming resentful:

Executives who are used to prospering from government ties complain privately they are being elbowed aside. One Russian billionaire said Rotenberg and Timchenko have all but cornered the market in government contracts. He spoke on the condition of anonymity to avoid jeopardizing his companies’ chances of winning business.

The question is whether this discontent will coalesce into a an opposition that can challenge Putin’s rule. At present, I think that is not much of a threat, because if Putin is saving all the carrots for his friends, he keeps a tight grip on the knout to bash anyone who might dare to oppose him. The fate of Vladimir Yevtushenkov and Bashneft serves to concentrate the mind of anyone thinking of challenging Putin, and coordinating opposition from several grasping, suspicious, and short sighted oligarchs is extraordinarily difficult.

So the Putin system will wheeze along, making some enormously wealthy, and letting the devil take the rest.

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December 8, 2014

VVP: Not Getting His Kicks On Brent $66

Filed under: Economics,Energy,Music,Politics,Punk,Russia — The Professor @ 9:19 pm

Brent traded with a 66 handle for most of today. I am sure that Putin was not getting his kicks on Brent 66.

But no worries. It didn’t stay there long: it’s now trading at a 65 handle.

Going down, down, down, in a ring of fire.

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December 7, 2014

The Hamster Wheel Metaphor Makes It to Moscow

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

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

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

hamster_wheel_moscow_times

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December 5, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Drip. Drip. Drip.

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

Drip. Drip. Drip.

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

Drip. Drip. Drip.

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

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

Russian_10y_yield_141205

And Putin has no clue as what to do.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

* Methinks Putin wants to appropriate that title.

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December 4, 2014

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

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

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

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

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

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

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

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

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

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

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

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

 

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

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

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

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

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

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

I could go on. And on. And on.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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November 27, 2014

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

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

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

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

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

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

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

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

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

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

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

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

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

Project Summary

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

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

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

 

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November 21, 2014

Swatting the Gold Bugs

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

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

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

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

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

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

(The comments are priceless.)

Here’s another, from July:

Reserve Currencies In History – Dollar’s Demise Cometh

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

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

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

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

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

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

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

. . . .

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

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

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

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

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

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

I was particularly amused by this:

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

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

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

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November 20, 2014

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

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

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

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

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

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

Wow. Quite a tale.

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

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

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

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

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

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

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

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

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

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

 

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