Streetwise Professor

Folks are all atwitter about Russia’s tentative plans to sell off stakes in state companies, including Rosneft, in order to raise money to plug its budget deficit.

A few brief comments.

First, I’ll believe it when it happens.  This is something being pushed by Kudrin on fiscal grounds, but it no doubt rubs many powerful people the wrong way.  Outside investors, minority or no, can be troublesome because they have an interest in knowing where their money is spent.

Second, since protections for minority investors are so weak in Russia, it is very hard for these pesky folks to see where their money is going, and to do anything about it when they find out it’s going somewhere it shouldn’t.  So caveat emptor.  Or, as I wrote in one of the very first SWP posts, a fool and his money . . .

Third, the case of Hermitage Capital and William Browder and Sergei Magnitsky should be a cautionary tale about the risks of being a portfolio investor who dares to point out self-dealing and corrupt practices in Russian corporations.  So if you invest, keep your mouth shut: you’re just along for the ride.  Sound like fun?

Fourth, strategic investment in Russian companies isn’t all that appetizing either.  The most recent example of this ConocoPhillips’ decision to sell its stake in Lukoil, an ostensibly private Russian oil company. CP invested in the expectation of doing joint projects with Lukoil in Russia, but that didn’t pan out, apparently due to government intransigence:

ConocoPhillips’ investment into Lukoil avoided a similar breakdown, but it didn’t lead to any new projects or any significant influence in the Russian company’s board room.

“I think all sides were disappointed,” said Ron Smith, head of Europe, Middle East and Africa research at brokerage Chevreux. “It worked well in theory, but just didn’t turn out quite as rosy as they had figured.”

“It’s a major hurdle for foreign companies putting new money to work in Russia,” Smith said. “The real problem is that the Russian government doesn’t see the need for foreign companies to work in [exploration and production] anymore.”

Hardly a story to encourage the return of foreign direct investment, which Russia desperately needs.

Fifth, selling off minority stakes is not privatization in any meaningful sense.  Control does not pass into private hands: private money passes into state hands.  Big difference.

Sixth, it’s not a one way street. The  cage match between Deripaska and Potanin over Norilsk Nickel (which Deripaska says he will “fight to the death“–here’s hoping this is one time Oleg tells the truth!) could lead to the government to take a stake in the company to put an end to the fighting, which is destroying value.  Deripaska gadfly John Helmer (who claims that he was the target of a Rusal assassination plot) unwraps the mystery inside the riddle inside the enigma by reading Bloomberg backwards, and claims that Deripaska will be the one without the chair when the music stops.  Which goes to show that “privatization” in Russia is not a permanent condition.  What the government giveth, the government taketh away.

In sum, if you’re thinking of investing in this simulacrum of privatization, on the outside chance it comes to pass: to learn more about Russian state-business relations, you’re probably best advised to re-watch The Godfather movies.

The Russian military replaced its two year conscription term with a single year term in order to combat the brutalization of new recruits by more experienced soldiers, a practice called dedovshchina.  This “fix,” apparently, has made things worse, not better:

The number of conscripts who suffer physical abuse at the hands of their colleagues in the Russian armed forces has grown significantly in 2010, the Vedomosti daily said on Tuesday.

Hazing – the physical and psychological torture of younger conscripts by their elders – has long been a problem in Russia and has its roots in the Soviet era.

During January-May 2010, 1,167 draftees were subjected to hazing, an increase of 150% during the same period in 2009, the paper said.

This is consistent with what I wrote a couple weeks back, namely, that hazing within a structured hierarchy is likely to be less intense than hazing within a near anarchic situation in which soldiers are struggling for the right to haze.

As I noted before, playing with the length of service will not eliminate hazing as long as survival of the fittest rules the barracks, rather than the officers or competent and experienced NCOs.  But changing conscription terms only requires the passage of a law.  Reforming an entire culture, including a generation of officers comfortable with the status quo, is a much harder task.  A task, methinks, that is beyond the capability of Russia to perform–and one that the officer corps apparently has little interest in performing regardless.

The visitors’ center at the Waterloo Battlefield plays clips from the 1970 Sergey Bondarchuk film, Waterloo.  The museum gift shop has DVDs of the movie in French, Dutch, German, and some other languages, but not English.  But I saw an English copy on Amazon (with Chinese subtitles!), so I bought it and watched it over the weekend (subtitles off).  I’d seen the movie as a 10 year old when it first came out: I haven’t seen it since.  It was cheesy in spots, and Rod Steiger was over the top as Napoleon, but the battle scenes were pretty amazing even 40 years after they were filmed.

The movie was an expensive collaboration between the Soviet Bondarchuk and the Italian producer Dino De Laurentiis.  The battle scenes are immense and elaborate.  And the interesting thing is that 15,000-odd Soviet infantrymen were the combatants on film, and that Cossacks were among the 2,000 cavalrymen.  The Soviets reengineered the landscape at the shooting site in Ukraine, building replicas of buildings like Hougoumont and Le Haye Sainte, constructing hills, planting fields as they were at Waterloo. and installing an elaborate underground irrigation system to create the mud that was an important feature of the Waterloo battlefield and battle.  At the time, it was a hugely expensive movie, and would have been more so if it had been filmed anywhere but the USSR.

So if Russians playing Frenchmen lose a big battle, who gets credit for the win?

Watching Waterloo motivated me to revisit Amazon, where I bought another Bondarchuk epic with a reputation for its elaborate battle scenes, War & Peace.  With English subtitles, which will be on.

Every once in awhile there are stories that capture a major difference in mindset between Russia and the US (or the West, generally).  This is one of those stories:

Russian Prime Minister Vladimir Putin says he has met the Russian agents recently deported from the US – and claimed they were living “tough lives” and had been “betrayed”.

. . . .

ked whether he had sung karaoke with them, Mr Putin said: “We did, but not with a karaoke box. We sang to live music and we sang ‘Where the Motherland Begins’ and other such songs.”

The song became hugely popular after it featured in a 1960s film about a Russian spy working in Nazi Germany.

I can’t imagine a western president or prime minister doing such a thing.  Cordell Hull’s statement that “gentlemen don’t read other gentlemen’s mail” was an extreme, but for the most part American, and most western European statesmen view espionage as something of a necessary evil, and certainly consider those who practice it as rather unsavory.  A karaoke party with spies is almost beyond imagining.

But, it goes to prove the accuracy of LR’s characterization of Putin as a “proud KGB spy.”

The song they sang is also very, very revealing.  It is of the Soviet era.  Moreover, the implicit equation of spying in the US with spying in Nazi German speaks volumes about the attitudes of the Russian security services–and those in government that are just spies seconded to other posts.

Finally, this is choice:

Mr Putin went on to say that the spy swap with the US had come about as a result of “betrayal”.

“Traitors always end badly. They finish up as drunks, addicts, on the street,” he said.

And when asked by reporters if Moscow was planning to take revenge, he said it was incorrect to ask about it.

“It cannot be solved at a press conference. They live by their own laws, and all special services are well aware of these laws,” he said.

Drunks?  Nah, that would be too easy.  The last two paragraphs are rather ominous.  Don’t ask, don’t tell.  Don’t believe in bonhomie between leaders at press conferences (at least I presume he’s referring to Obama-Medvedev conviviality).  I get the definite “payback is a bitch but we don’t talk about it” and “resets only go so far” feel.

The definitive attribution of the capture to betrayal is also very interesting.  I don’t know whether to believe it–it could be easier to blame something like this on betrayal than to an error in the SVR or the effectiveness of US counterintelligence–but knowing Putin it suggests that drunkeness and addiction may be the last thing some people have to worry about.

I have written from time to time about the practice of dedovshchina in the Russian army.  When Russian conscripts served two years, the second year soldiers–the “grandfathers” or dedys–brutally hazed the first year soldiers.  The violence was sickening, often resulting in horrific injuries and deaths, and leading many recruits to commit suicide.

In an attempt to eliminate the practice, the Russian military replaced the two year service term with a single year stint.  But to no avail.  For dedovshchina lives, in an arguably more twisted form.  In the old two year system, there was a natural progression from oppressed to oppressor.  In the new one year system, evidently, there is a Darwinian struggle to determine who gets to be “elephants”–the soldiers that brutalize the others.  There is arguably more violence in the current system than the old one: it is more anarchic.

No amount of rejiggering the terms of service will cure this cancer.  At root, the problem is attributable to the abdication of the responsibility of Russian officers, and the lack of a professional cadre of NCOs.  The Russian army is notoriously over-officered.  Just what do these people do?  The isolation from the enlisted men, the failure to exercise any control over the barracks, fosters a sort of Lord of the Flies environment.  Until that changes, all that adjusting enlistment terms will do is alter the process by which the elephants evolve; it will not render them extinct.  But the likelihood of that happening seems remote, at best, as it does not appear to be even a subject of discussion, let alone action.

There’s sick, and there’s Russian sick.  (H/T Renee).  Some marketing genius thought it would be great for a parasail business at a private resort at Golubitskaya in the Krasnodar Region on the Sea of Azov  to strap a donkey to a parasail and give it a ride.  For 30 minutes.  No.  Seriously.

According to the paper, Taman, the donkey flew so high that children on the beach cried and asked their parents: ‘Why did they tie a doggy to a parachute?’

Its editor, Elena Iovleva, said: ‘The donkey landed in an atrocious manner.

‘It was dragged several metres along the water, after which the animal was pulled out half-alive onto the shore.’

The incident is stunning even for a country where animal cruelty is widespread and came as a shock to the locals, Miss Iovleva said.

Kudos to those humane individuals who rescued the poor beast from drowning.  But there is this tidbit:

‘The donkey screamed and children cried,’ Krasnodar regional police spokeswoman Larisa Tuchkova told the AFP news agency.

‘No-one had the brains to call police.’

Was it lack of brains, or just a testament to the fact that expecting anything constructive from the police is foolish?

Update.  Thinking about this story reminds me of de Custine’s accounts of the cruelty to animals he witnessed on his journey across Russia.

It’s no secret that I despise Tom Friedman.  So perhaps it will surprise you to learn that I actually agree with something he wrote.  Discussing the Russian spy flap after returning from vacation (H/T S/O via rtyb–never thought I’d write that), he says:

Everything the Russians should want from us — the true source of our strength — doesn’t require a sleeper cell to penetrate. All it requires is a tourist guide to Washington, D.C., which you can buy for under $10. Most of it’s in the National Archives: the Bill of Rights, the Constitution and the Declaration of Independence. And the rest is in our culture and can be found everywhere from Silicon Valley to Route 128 near Boston. It is a commitment to individual freedom, free markets, rule of law, great research universities and a culture that celebrates immigrants and innovators. [Emphasis added.]

Now if the Russians start to find all that and take it home, then we’d have to start taking them more seriously as competitors. But there is little indication of that. Indeed, as Leon Aron, director of Russian studies at the American Enterprise Institute, noted in a recent essay, President Dmitri Medvedev of Russia just announced plans to build an “Innovation City” in Skolkovo, outside Moscow. This “technopolis” is planned as a free-enterprise zone to attract the world’s best talent.

There is just one problem, notes Aron: “Importing ideas and technology from the West has been a key element in Russia’s ‘modernizations’ since at least Peter the Great in the early 18th century. … But Russia has tightly controlled what it imported: Machines and engineers, yes. A spirit of free inquiry, a commitment to innovation free from bureaucratic ‘guidance’ and, most important, encouragement of brave, even brash, entrepreneurs who can be confident they will own the results of their work — most certainly no. Peter and his successors sought to produce fruit without cultivating the roots. … Only a man or woman free from fear and overseers can build a Silicon Valley. And such men and women are harder and harder to come by in Russia today. … Disgusted and scared by the lawlessness and rampant corruption. … Russian entrepreneurs are investing very little in their country beyond their immediate production needs.”

Agreed.

Now that I’ve given Friedman an attaboy, I will proceed to take many times that number away.

For Friedman’s main objective in this column is not to point out Russia’s structural economic problems.  Instead, it is to take a left-handed slap at the US.  (Of course, since Friedman has two left hands, what other kind of slap could there be?)

In his telling, Russia vs. US is a battle of washed up has beens: it is like “one of those senior tennis tournaments — John McEnroe against Jimmy Connors, long after their primes — or maybe a rematch between Floyd Patterson and Sonny Liston in their 60s. You almost want to avert your eyes.”

No, Friedman would be proud if we were being spied on by Finnish schoolteachers, Singaporean bureaucrats, Hong Kong securities regulators, or South Korean bandwidth investors (what is it with liberals and their bandwidth fetish?), because they’re all the best in the world and the US is a lackluster failure in these areas.

Earth to Friedman: lack of Finns is not the problem in US schools.  That is attributable directly to a group of individuals whom, I am sure, are among his biggest boosters.  And Hong Kong securities regulators?  Is he serious?  (Cf., Rusal, IPO of.)

But the fact that the US isn’t best in everything is neither here nor there.  (The Finns suck at basketball.  So?)

No, what is amazing is Friedman’s colossal inconsistency.  He nearly wets himself  when he writes about China.  He aches with envy at the Chinese ability to dispense with niceties like due process, property rights, division of powers, etc., so that they can act as enlightened despots, bringing a Green prosperity using Red methods.

But here Friedman says that what makes the US thrive is: “a commitment to individual freedom, free markets, rule of law, great research universities and a culture that celebrates immigrants and innovators.”  None of which are present in China, and the lack of some of which on other occasions Friedman has identified as the reasons why China will be the dominant power in the coming century.

Well, which is it?

But wait, it gets better!  The Chinese spy on us like crazy.  So, by the Friedman You Judge Somebody On the Basis of Who Spies on Them Theory, we must be really great!  After all, if the Wave of the Future spies on us, we must be soooo special, right?

Make up your mind, son.

Consistency, it appears, is not the strong suit of New York Times columnists: another of my bêtes noir, Krugman, gets a glorious smacking for his head-spinning flip-flops here.

So why does anyone take these people seriously?

In Russia, everything seems to be an excuse to drink.  I’m happy!: I’ll drink!  I’m sad: I’ll drink.  I’m cold: I’ll drink.  And now, in the midst of a heat wave, the game is: I’m hot!  I’ll drink.

And the consequences are appalling:

Dozens of Russians, unduly fond of their national tipple, are drowning daily as they stream to water to escape the record-setting scorching heat, a senior emergencies ministry official said on Wednesday.

Vodka-drinking groups — some with small children — can be seen at lakes and ponds in and around the Russian capital where the current three-week heatwave may set a new all-time record of 37 Celsius (98.6 Fahrenheit) this weekend.

“Russia’s Emergencies Ministry is very worried by the current situation. In the last day alone, 49 people drowned (in Russia), including two children, Vadim Seryogin, a department head at the ministry, told a news conference.

Forty-nine in a day.  By contrast, in the US, a country with double the population, averages about 74 drowning deaths per week. (It would be interesting to learn whether Russia’s already astronomical vehicular death rate has spiked to.)

Some of the stories are especially gruesome, like the 6 children who died in the Sea of Azov while their summer camp counselors were stupefying rather than supervising.

I appreciate that the heat–in the mid-90s F–is very difficult for people to deal with.  I split time between Houston and St. Louis, which are beastly in the summertime: forecast highs for Houston are mid-90s through the entire week.  But natives are used to it, and more importantly, air conditioning is ubiquitous.  In Russia, in contrast, people aren’t used to it, and air conditioning is a rumor: I almost suffocated in a Moscow hotel room in late-August when the temperature was merely in the 80s F. I can imagine that it is nearly intolerable under current conditions.

But even given that, this spate of drownings is dumbfounding.  In the US, heat waves in inner city areas (where AC is less common) lead kids to play in the hydrants, and go swimming more frequently.  There are more drownings, but the rate and the delta of the rate is nothing by comparison with what is being reported in Russia.

And the difference can, apparently, be distilled down to one thing: spirits. Which is pretty amazing, because I never considered getting sh*t faced to be all that refreshing.

Yesterday I wrote about the feckless response of the world generally, and the UN in particular, to the North Korean sinking of a South Korean naval vessel.  Well, based on an article I read today in Foreign Policy, I conclude that “feckless” is too feckless a word to describe the UN’s response:

Fast forward to today, when the United Nations released a presidential statement which not only does not specify any consequences for the Kim Jong Il regime, but doesn’t even conclude that North Korea was responsible for the attack in the first place.

The statement acknowledges that the South Korean investigation, which included broad international participation, blamed North Korea, and then “takes note of the responses from other relevant parties, including from the DPRK, which has stated that it had nothing to do with the incident.”

“Therefore, the Security Council condemns the attack which led to the sinking of the Cheonan,” the statement reads.

Go out on a limb there, guys.  I guess this was just sort of the immaculate explosion, or something.

The NoKos, who usually squeal like stuck pigs at even the most oblique criticism, had nothing to squeal about here.  They were quite smugly satisfied, thank you:

North Korea’s representative to the U.N., Sin Son Ho, called the statement a “great diplomatic victory.”

Why this result?  Chinese and Russian refusal to permit any criticism of North Korea, let alone any action against Kim Jung Il:

The South Korean official pointed at Russia and China as being responsible for the weakness of the statement.

“Definitely there has been a tough negotiation, especially to persuade the PRC and Russia, and this is result,” the official said, ”All the other countries except [China and Russia] strongly supported putting pressure on them.”

The US, which at least said something semi-tough at the outset, has has gone full Stanley (“The Boneless Wonder,” in Churchill’s stinging description) Baldwin mode:

“I think right now we’re just allowing North Korea to absorb the international community’s response to its actions,” State Department spokesman Mark Toner said Friday.

Oh, they’re absorbing it all right.  And they’re absorbing it in Terhan, and many other unsavory places.  The lesson they absorb is that there is no price to be paid for the most flagrant acts of aggression.  And when something is free, people buy a lot of it.

This New York Times article presents another example, as if another is needed, of the defining characteristic of the Russian legal system.  Namely, that it is primarily a means by which the power/security structures prey on those whose property they want, or crush those with the temerity to challenge them.  Or, as the article says:

“There are laws in Russia, but the security services are beyond any laws,” said one of Ms. Kazakova’s lawyers, Dmitri Dmitriyev. “They act with total impunity. They can undertake special inquiries, collect information on people, violate fundamental human rights, put people in prison, keep them there as long as they want, manipulate judges and manipulate prosecutors. This case is just a demonstration of all this.”

The entire article is worth a read, but the parts about judges are particularly informative–and dispiriting.

A US judge once wrote that no man’s life, liberty, or property is safe while the legislature is in session.  In Russia, no person’s life, liberty, or property is safe while the FSB (and pretty much any other state security apparatus) is in action.  Which is always.