Streetwise Professor

September 30, 2015

Let Putin Find Out the Hard Way

Filed under: Military,Politics,Russia — The Professor @ 1:13 pm

I have no need to demonstrate my anti-Putin bona fides, but I just roll my eyes at the hysterical response to his intervention in Syria, and today’s launch of Russian bombing operations.  There is much shrieking about the fact that the Russians say they are bombing Isis, but in fact launched a raid on Homs where Isis was not present.

The Russian response is, basically: “Hey, they all look alike to us.” There is much truth to that.

This is not that complicated:

  1. Russia is intervening to save Assad from imminent defeat, and to protect its ports in Syria.
  2. Isis is not the most immediate threat to either Assad or the Russian facilities.
  3. Therefore, Russia will focus on non-Isis targets, while claiming to be fighting Isis.

This is really not that much different than the Turks using Isis as a pretext to attack their real enemy, the PKK.

Yes, this campaign will help Assad, and Assad is an evil bastard. But the Islamists that are dominating the anti-Assad forces are evil bastards too. Many are Al Qaeda offshoots, and others are indistinguishable from Al Qaeda in their ideology and agenda. Or from Isis, for that matter. They are Sunni supremacist Islamists. And wouldn’t you know, we are fighting Sunni supremacist Islamists around the world, and have been for going on 15 years.

There are no good guys in Syria. Stop pretending there are: there is considerable reason to doubt there ever were. And any differences between Isis and the non-Isis Islamists the Russians are bombing are trivial. They do all pretty much look (and act) alike. And what’s more, pretty much everyone in the West looks the same to them: they all think your head would look just splendid mounted on a spike in the front yard.

And yes, Assad’s forces will slaughter his foes if they win. But Assad’s foes will slaughter Assad’s supporters if they win. Syria is a charnel house being fought over by demons.  There is a symmetry of evil.

It is particularly rich that those who are shrieking about Russian involvement say that it will radicalize Sunnis.

Um, where are these people been? Since like 700AD, let alone since 2001 or 2011? Radicalization is a done deal, and the most that the Russians can do is gild that lily.

Moreover, I actually find myself agreeing with some in the administration here. If you truly believe that Syria is a pointless slaughter that we should avoid at all costs (and I believe that is the case today), why would you oppose Putin jumping in? The administration believes (rightly) that we have no current military options that would generate results that even remotely justify the costs: the military realities are exactly the same for Putin. Yes, he will likely secure a rump Syria with its shambolic Russian port facilities (which is more than we could gain). But his airpower is going to be no more decisive than ours, and he is putting himself at risk of getting sucked in more deeply in ways that will cost him blood and treasure that he can’t afford.

As I said before: don’t interrupt an enemy while he is making a mistake.

As for the US, Russian involvement is leading some to advocate getting more heavily involved ourselves. Another military adage is: don’t reinforce failure. Failure is the charitable way of describing US policy in Syria. Don’t reinforce it. Let it go. It’s past our ability to save, or even palliate. It’s done. Both sides.

Let Putin find out the hard way.

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September 19, 2015

Putin Has Made His Sandbox. Let Him Play In It.

Filed under: History,Military,Politics,Russia — The Professor @ 3:04 pm

In my humble opinion, too many people are way overthinking what Putin is doing in Syria. It seems pretty straightforward. A long-time Soviet and Russian client was on the verge of collapse: the loss of Idlib earlier this month, after a long battle which ground inexorably against Assad, represented a major blow. Syria is Russia’s only outpost in the Middle East, and is also important to Iran, with which Russia cooperates because they share a common enemy: the US. Absent Russian intervention, Assad’s destruction appeared imminent.

Meaning that this is more of a rearguard action, defending the rump of the Syrian state, than an offensive thrust. And it is a reaction to events, not a part of some grand geopolitical strategy.

Some get this.

Donbas is a precedent. Direct Russian military intervention only occurred last August when it seemed that the Ukrainian army was on the verge of crushing the rebels. Once the situation stabilized, Putin seemed-and still seems-to be willing to accept a stalemate.

As for the military effect, the major resources committed appear to be aircraft, and ground units to protect them and their bases. The US campaign against ISIS shows that air power alone is unlikely to be decisive. The Russians have Assad’s army to work with, but it is battered and demoralized after four years of war, and even with air support is unlikely to be capable of sustained offensive action. It is probably on a par with the Iraqi army in terms of combat effectiveness (and may be worse), and past months have shown that even with US (and some Iraqi) air support, the Iraqi army can’t wage offensive warfare. I seriously doubt the Syrian army can either, even with additional Russian air support. Thus, the most likely outcome of the Russian intervention is to stave off Assad’s defeat and perpetuate the stalemate.

There is much gnashing of teeth and rending of garments in Washington and Europe, but since they haven’t done anything in the past four years and had no plans of doing anything serious going forward, this reaction is decidedly overwrought.

The administration persists in its pathetic insistence that Assad must go. Today Kerry repeated this demand, but said Assad’s departure doesn’t have to happen on day one or month one. What about century one? That seems feasible.

The US wants to negotiate Assad’s departure, and somehow thinks it can enlist Russia in this effort. That is utterly delusional, especially now that Russia has upped its commitment to Assad. It is also delusional because by making it clear that the US will not do anything serious to combat Assad (especially since that would anger its new BFF, Iran). Our negotiation leverage is therefore bupkis. Therefore, it is better for Kerry and Obama to keep quiet, and let the world think that they are neutered losers, rather than speak up and remove all doubt.

The biggest loser in this is Israel. Iran cares about Syria primarily because it is its bridge to Hezbollah. Israel has periodically launched air attacks in Syria to prevent the movement of advanced weapons (especially anti-aircraft missiles) to Hezbollah in Lebanon. The Russian presence complicates Israel’s problem greatly. But of course, this is probably a feature not a bug from Obama’s perspective.

The puzzle is Turkey. Turkey wants to see Assad’s destruction, and is perfectly fine with replacing him with Islamist radicals. Russian intervention reduces the odds of Assad’s defeat, and this is a defeat for Turkey. I have no idea how someone as erratic  as Erdogan will respond. One response will likely be greater covert support for the jihadists fighting Assad.

In sum, Putin’s actions in Syria will perpetuate a grim status quo, rather than cause a dramatic change in the strategic situation in the Middle East.  What happens going forward depends in large part on developments on the ground. If the current level of intervention is insufficient to slow the crumbling of the Assad regime, how much further will Putin be willing to go? His resources are constrained. As I wrote earlier, he faces daunting logistic difficulties in mounting a bigger intervention.

Regardless, we (in the US) are cast in the role of spectators: as Anthony Cordesman notes (perhaps stating the obvious), at present the US has no realistic military options in Syria. Obama made that choice four years ago, and reiterated his choice in 2013. Putin is now making his choice, and will have to live with the consequences: his options are no more palatable that the US’s (though he does have a coherent objective, which the US does not have and never had). We should leave him to it.

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September 14, 2015

You May Not Be Interested In a Clash of Civilizations, But A Clash of Civilizations Is Interested In You

Filed under: China,History,Politics,Russia — The Professor @ 6:25 pm

Cast your eyes around the world, and they are likely to land on a scene of conflict and chaos. In the Middle East, obviously, from pillar (Libya) to post (the Persian Gulf). In the center of Eurasia (Ukraine). In the South China Sea and the DMZ. The world situation has not been this fraught since the 1930s.

If you are like me, you crave an explanation. You could do far worse than start with Samuel Huntington’s Clash of Civilizations. Huntington’s article and subsequent book of the same title unleashed a storm of furious criticism when it came out in 1993. But standing 22 years later, Huntington looks prescient, and many of his critics look like utter fools.

The best evidence of this is to look at the antagonists in the most important cockpits of conflicts.

Start with Ukraine. Putin has explicitly invoked the idea of “a Russian world” and has justified his actions in Ukraine and elsewhere as a legitimate defense of Russian people, language, and culture from the assaults of his enemies, especially in the West. Putin and other Russians tirelessly invoke contrasts between Russian civilization and European civilization in particular.

Putin and Russians generally think they are in a Clash of Civilizations.

Next consider China. China’s leadership too views China as a great civilization that was oppressed by others (Westerners, Japanese), and which is now assuming its proper place in the world. They express a clear cultural-civilizational-chauvinism. If anything, the Chinese people are even more aggressively chauvinistic than their leaders.

The Chinese leadership and people think they are in a Clash of Civilizations.

And of course, there is Islam. That Islam believes that it is in a civilizational war with just about everybody, but in particular the West, needs no explication. Yes, there is an intramural civil war within Islam, between Sunnis and Shia, but (a) this is complicated by a civilizational clash between Arab and Persian, and (b) this conflict is in no small part a battle over who will lead the clash of Islam with the infidels.

The jihadis and the mullahs and vast numbers of Muslims generally believe they are in a Clash of Civilizations.

Who doesn’t believe it? The skeptics and doubters reside mainly in one civilization: the Western.

Indeed, Huntington’s harshest critics resided (and reside) in the West. They are, in the main, progressives, which, like top quarks, come in left-handed (mainly those who self-identify as progressives) and right-handed (e.g., neocons as epitomized by Francis Fukuyama) varieties. Despite their differences in specific policies, they share a dialectical view that history progresses in one direction, and that it is relentlessly moving to a final state, and that in the end, humanity as a whole will converge to this state. The left progs’ final state is socialist/statist: the right progs’ final state is liberal and democratic.

Obama is clearly a progressive, so understood. His most consistent trope in responding to conflict, with Putin or the Islamists, is to say that history will leave them behind; that they are swimming against the tide of history. Obama said this to Putin about Ukraine: he just said it about Syria: he has said it about Isis. His policy towards Iran is predicated on the belief that once Iran is readmitted in into the community of nations, it will become a Normal Country, and discard its Islamist civilizational mission.

So part of the failure of many of those in the West to believe in the Clash of Civilizations is rooted in a worldview that such conflicts are an atavism that will disappear as the world converges to-progresses to-some homogenous end state in which all existing differences are dissolved.

But that’s not the only part. Another part is a paradox of Western civilization. The West’s distinguishing characteristics include skepticism, criticism and doubt. That very skepticism, criticism and doubt have led many (especially on the left, but also many on the right) to conclude that Western civilization is flawed, corrupt, defective, and certainly not superior to any other civilization, and hence not worth fighting for. Thus, the self-criticism that defines Western civilization prevents many in it from fighting for it. In this respect too, Obama is an exemplar.

A big part of the reason the past few years have seen a waxing of the Clash is precisely that the leader of the leader of Western civilization has declined to fight for it, due to a rather strange combination of fatalism (history will progress and nations will converge due to fundamental historical forces) and a belief that its civilization has no right to assert itself, because of its inherent flaws. This is in contrast to the American role post-1945, which self-confidently (on the whole, with exceptions like post-Vietnam) believed in the superiority of Western (and specifically American) civilization, and exerted its power (economic, social, cultural, and often military) to create and maintain a rough order even at the fault lines of civilizational conflict (notably the Middle East, but also between Europe and Russia, and between China and the rest of Asia).

So one way to understand the mess that the world is in now is to take Huntington’s idea of enduring antagonisms and frictions between competing and incompatible civilizations, and add the retreat of the one power that largely kept those antagonisms and frictions under control.

We are arguably in the midst of a new world war, though one that is fortunately, for now anyways, not as cataclysmic as the two that preceded it. But it is a different type of world war not only because of its lower intensity, but because it is not a war between two dominant blocs. Instead, it is a multipolar war with at least four major civilizations jostling at various points around the globe. This multipolarity makes the struggle less predictable, and far more confusing. It will only become more so unless the West, and in particular the US, realizes the nature of the ongoing conflict, and reengages accordingly.

A phrase often attributed to Trotsky (probably wrongly) seems apt here: “You may not be interested in war, but war is interested in you.” Rephrased: you may not be interested in a Clash of Civilizations, but a Clash of Civilizations is interested in you. If we don’t awaken to that reality, we are destined to be the losers in that clash.

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September 12, 2015

Let Vlad Have His Victory, and Hope He Pays Dearly For It

Filed under: History,Military,Politics,Russia — The Professor @ 7:07 pm

The last few days have seen a frenzy of outrage at Russia’s reinforcement of Assad in Syria, including the deployment of naval infantry at some bases in the country. As someone with a solid nine years of writing to establish my anti-Putin cred, I can still say that I don’t see what the fuss is about.

Russia has long propped up Assad. This latest activity is a continuation of that policy, and is driven by Assad’s deteriorating position. Since Assad is going down, Putin feels compelled to step up.

The intervention is limited. The very fact that naval infantry is involved indicates its limited nature. Dismissing Michael Weiss’s hyperventilating about these being Putin’s “Dirty War Forces”, and focusing on military realities, Russian naval infantry has little combat power, and very little offensive capability. It can seize and defend ports and airfields, and carry out some commando-type direct action operations. And that’s about it. A low-endurance, low-firepower, light force not suited for grinding ground combat in a large theater like Syria. It is there to defend ports and airfields that will be used for resupply and perhaps to intensify the air campaign against the anti-Assad forces.

The targets will in the main not be Isis. Other jihadi groups pose a more serious threat to Assad, and that is who he (and the Russians) will focus on. Indeed, by complicating air operations, Russian presence will impede the US campaign (such as it is) against Isis.

The main reason for the outrage at the Russian action is that it aids Assad, and Assad is a very bad man.

Yes, he is. And the time to do something about him is long past. Four years past. Three years at the low end. But Obama and the rest of the west harrumphed and said that Assad must go, but did nothing. Red lines were drawn, and trespassed, with no consequence. Since then, the war in Syria has descended into an apocalyptic battle between Assad and a mind-numbing array of psychotic, murderous jihadi groups: Assad’s enemies are very, very bad men too. (Even if Assad’s overthrow had been engineered in 2011 or early 2012, it is doubtful that any good would have come with it, given Obama’s and Europe’s neuralgia to securing the peace in the aftermath of the toppling of a dictator. See, for instance, Libya.)

Now it is too late to do anything to stem the holocaust. Regardless of who “wins”, the aftermath will be a bacchanal of sectarian slaughter.  And since stalemate is the most likely outcome, no one will win, and a bacchanal of grinding slaughter will occur anyways.

When questioned about Russia’s intervention, Obama recycled one of his tiresome memes, this one in the Putin-is-swimming-against-the-tide-of-history vein. He said the Russian effort is doomed to failure. This meme is quite convenient in that it relieves him of  any responsibility to do anything: history will take care of it! Given that at this time there is nothing that can really be done to prevent Syria’s descent into the abyss, and based on form, whatever Obama does is likely to make it worse, this is probably a good thing.

That aside, the issue becomes how do you define failure? With sufficient commitment of resources, Putin can likely ensure that Assad can maintain a rump state on the Syrian coast, and provide Putin a foothold in the Middle East. That’s enough for Putin.

As for vanquishing jihadi groups, let alone Isis, Putin couldn’t care less. Putin can realistically achieve his ambitions, and if he does, it is unlikely to have any material impact on US interests.  The effort is not doomed to failure, understood from Putin’s perspective, and the US should be rather indifferent to whether it succeeds or not.

Indeed, since Russian involvement is unlikely to have any effect on the magnitude of the Syrian catastrophe, but will be a drain on already strained Russian resources, it could well be a plus for the US. Why should we care if Putin perpetuates his Syrian ulcer? Indeed, a cynical realpolitik type would probably conclude that we should stand aside and let an already struggling Putin throw his scarce resources into a battle where stalemate is the best that can be achieved. As Napoleon said: “Don’t interrupt your enemy when he is making a mistake.” A Putin stuck in a Syrian quagmire is less able to make mischief elsewhere.

Seriously, if perpetuating Assad’s rule over a wrecked Syria is victory, what would defeat look like? If that’s how Putin wants to fritter away his limited capabilities, so be it. It won’t make the carnage in Syria any worse, and doesn’t injure US interests. Let Vlad have his victory, and hope he pays dearly for it.


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September 7, 2015

Putin May Flirt With OPEC, But He’ll Never Put Out

Filed under: Commodities,Economics,Energy,Russia — The Professor @ 6:57 pm

Ambrose Evans-Pritchard reports on the remarks about potential cooperation between Russia and OPEC uttered by that tease, Arkady Dvorkovich:

Riyadh has made it clear that it will not cut output to shore up prices unless non-OPEC producers share of the burden. This essentially means Russia, the world’s biggest producer.

Mr Dvorkovich, the head of Russia’s economic and energy strategy, said his country was in constant talks with OPEC in order to bring about a “more rational policy” but was coy on whether the Kremlin would break the impasse and strike a deal with the Saudis.

“Our consultations do not imply directly that we are going to see any coordinated action. Perhaps ‘yes’, perhaps ‘no’, most likely ‘no’,” he said, speaking at the Ambrosetti forum of world policy-makers on Lake Como. “We are sending signals to each other.”

Russia insists that it cannot switch off output as easily as the Saudis, given the harsh weather in the Siberian fields, a claim dismissed by OPEC as a negotiating ploy.

For his part, our favorite mullet man, Igor Sechin, says that Russia is different than OPEC countries, and cannot play along:

“The Russian oil industry is private, with a high number of foreign shareholders,” Mr Sechin told an audience at the FT Commodities Retreat in Singapore. BP owns 20 per cent of Rosneft, the Russian state-backed oil company, which is majority owned by the Kremlin.

“The Russian government cannot administer the oil industry like an Opec country can,” he said, adding that Russia would also face technical difficulties in shutting production in regions such as Siberia, where extremely cold winters could cause wells to fracture if they were closed.

Although I agree there are real difficulties in shutting down Siberian production, the remarks about Russia’s inability to administer the oil industry is a crock. Suppress the giggle reflex about foreign shareholders, and remember that Russia levies export taxes on crude (and products) that can be used to “administer” the market. If Putin desired to reduce foreign sales of Russian oil in an effort to support price (perhaps in coordination with the Saudis or Opec), he could readily do so by increasing the export tax. Russian exports would decline, the world price would rise, and the Russian domestic crude price would fall. (Russian refining capacity would constrain how much oil can be diverted from exports to domestic use.) Thus, the Russian government undoubtedly has the policy tools to cooperate with OPEC to support the world price.

But truth be told, Russia doesn’t trust OPEC to adhere to production cuts, and OPEC doesn’t trust Russia to adhere to export cuts. OPEC has heard Sechin and Putin whisper sweet nothings in its ear before (in 2009, particularly) and have learned that flirting or no, Putin doesn’t put out.

In other news of unrequited love, there have been numerous stories of late about Russian disappointment about the failure of its dreams of a romance with China. Most notably, Putin returned empty handed from his recent trip to Beijing to witness China’s commemoration of the end of WWII. Most notably, Gazprom failed to secure financing for a gas pipeline into western China, it announced that its deal to ship gas to the east was delayed, and Timchenko (a target of US sanctions) failed to secure Chinese funding for the Yamal project. (Which may be a good thing, as it would be bringing LNG into a glutted market . . . which could explain Chinese reluctance.)

Putin was deluded if he thought that he could pivot to China and get a good deal after the US and Europe imposed sanctions. The Chinese realized that he was turning to them primarily out of weakness, and tough bargainers that they are, it was inevitable that they would exploit his weakness: the alternatives for Putin were a deal on very unfavorable terms, or no deals at all.

Market developments have only intensified Putin’s predicament. The decline in oil prices has increased his financial desperation. Moreover the fact that the decline in oil prices is due primarily to a slowdown in China’s economy means that the Chinese have less need for Russian resources, and less capital to invest: China has to focus on dealing with its own pressing problems, and helping Russia is not a priority. Putin was already deeply exposed to China risk through the resource price channel, and sanctions and his pivot only increased that exposure through an investment channel. Now that risk has crystalized, and Putin is doubly effed.

Just like Glencore, the subject of my previous post, Russia and Opec are at the mercy of China. Russo-Opec cooperation isn’t going to happen. It is devil take the hindmost among oil producers, and the individual incentive for all of them is to produce up to capacity. Price will mainly affect future investments in capacity, not utilization of existing capacity. In the near to medium term, before depletion and lower investment in the US reduce supplies, price will be demand driven, and primarily China demand driven at the margin. Russia and Putin are along for the ride, and can’t do a damn thing about it.

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September 5, 2015

Amateurs Talk Tactics. Professionals Talk Logistics. And Idiots Talk BS.

Filed under: Military,Politics,Russia — The Professor @ 5:46 pm

The last couple of days have seen a frenzy of excitement about the possibility of an imminent Russian intervention in Syria. The hive buzzed very loudly when the Pentagon said it had seen reports of increased Russian activity in Syria. This means only that they read the linked article and other stories appearing in places like Ynet, not that they are providing confirmation based on US intelligence.

Yet, connecting a few dots, the journalist behind the story claims to have discovered a heretofore unknown Rembrandt.


I have no doubt that Russia has an interest in propping up Assad. That it has, and may be reinforcing, regime protection, intelligence, and advisory elements on the ground in Syria. That perhaps even a few Russian pilots are reprising the role of their “Honcho” forebears in the Korean War. But as for a major Russian ground intervention in Syria, not even Putin is that crazy. An expedition to Syria would make the Soviet Afghanistan adventure look like Napoleonic or Alexandrine genius.

Put aside for a moment the bloodletting the Russians would put themselves in for. Let’s just look at the logistics, and remember that while amateurs talk tactics, professionals talk logistics.

  • Operations outside of bases would require the deployment of thousands, and perhaps tens of thousands, of troops just to defend the lines of communications of those operating at the pointy end of the spear.
  • A major expeditionary effort would require massive supply, and the Russians would have to operate at the end of a very long logistical tether.
  • The most direct supply line would run through the Bosporus and Dardanelles, that is, through Turkish waters. Turkey is Assad’s inveterate enemy. Would you run an operation which would require you to place your logistic jugular under your ally’s mortal enemy’s knife?
  • The alternative, through the Baltic, North Sea, Atlantic, and Mediterranean, is very long, and also requires passage through narrow straits.
  • Russia’s navy is craptastic. It has extremely little sealift capability, and use of civilian vessels is problematic. This is what you need to support overseas expeditions. Russia has nothing even close.
  • Port capacity in Syria is limited, and it would be extremely vulnerable to sabotage and direct attack from the myriad anti-Assad forces. Again, large numbers of men and materiel would be required just to defend the ports. Tartus has four piers (and then only if floating piers are operational), and it can only handle four medium-sized ships: it is too small to handle even a Russian frigate or destroyer. You can’t support major ground operations through that soda straw.

Then there are other considerations, such as:

  • Russia is already militarily committed in Donbas, and has precious little additional capacity to deploy in Syria.
  • Russia has never, ever, engaged in a major overseas expedition, analogous to what the US has done routinely for the past 75 years. Syria is not Donbas, Abkhazia, or Transnistria.
  • The Russian economy is already in dire straits, and cannot afford to commit to a bleeding ulcer campaign in a peripheral region.
  • Another well-known military adage is: Don’t reinforce failure. Assad is failing.

Other than that, it makes total sense for Russia to go large in Syria to bail out a tottering client. Total sense!

The US should actually hope that Putin is this stupid. But he’s not.

To put things in perspective, one of the things that got the hive buzzing was the transit of a couple of Ropucha class amphibious ships, each with a cargo capacity of a whopping 450 tons (8-10 tanks), and an Alligator class gator, with a cargo capacity of 1000 tons. Hardly enough to support a major operation, which requires capabilities such as this. (And by the way, I saw Russian amphibious ships-sides streaked with rust-transiting the Bosporus on my visits to Istanbul in 2013 and 2014. This is like a shuttle run.)

And let’s consider the source, shall we? The story is being flogged by Michael Weiss. Based in large part on geolocators operating in mom’s basement, Weiss has predicted six out of the last zero times that Putin has mounted an invasion of Ukraine. (Full disclosure: I thought Putin was likely to invade last fall. I was wrong. I confess to having little confidence in my ability to predict his next steps there. But Weiss never betrays any contrition at his previous failed predictions.)

And the other things I could tell you, relating to Weiss’s The Interpreter’s mysterious funding (including its relationship with Khodorkovsky), and its use of anonymous sources and unverifiable sources that it translates. And there are some other things that are even more bizarre. But you’ll have to take my word for it.

So yes, Russia will provide materiel support to Assad. It will do what it can to facilitate Iranian and Hezbollah resources flowing to Syria. But a major intervention? We should be so lucky.


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August 18, 2015

Vladimir Putin: At Sea in More Ways Than One

Filed under: Energy,Politics,Russia — The Professor @ 7:12 pm

Putin went for a dive in a submersible of the Crimean coast today. He was apparently in search of the Russian economy, and the ruble, but the sub couldn’t quite make it that far down.

As people get older, they tend to repeat the same behavior even after it has become self-parodying: they run out of new ideas and cling to old ones that used to work. This is especially true for people who are at a loss for what to do, because they are presented with insoluble problems.

Vladimir Putin is a perfect illustration of this. Even though his acts of derring do have become the target of world-wide satire, did the submarine thing again. (I thought he would actually go to Kherson, and claim to stumble a cross a relic of Vladimir the Great, but he went with the glass bottom boat again.) Perhaps smarting from previous criticism of his scuba dive in which he claimed to have found a (planted) amphora, today he asserted that the sea bottom was strewn with them.

Putin is at sea in more ways than one. He faces a dire economic situation. His old standby-various energy powerplays-has been undermined by declining demand growth and the development of new supplies. He is in a quagmire in Donbas. He has no idea how to address any of these problems, and indeed, everything he tries seems to turn out badly.

So he goes to the well one more time, and looks even more delusional than usual. It’s the kind of thing that people who are out of ideas do.

It’s also hilarious that the man who bans Dutch cheese and Dutch flowers*, and stymies the investigation of the shutdown of airliner with dozens of Dutch citizens aboard, went on his dive in a Dutch-built vessel.

I guess he didn’t trust a Russian one. Given that it’s August, that’s probably wise.

To round out the comedy, Putin communicated with Medvedev by radio. Poor Dmitry, always the sidekick who never gets to do the fun stuff.

* The Dutch flowers are allegedly infested with California thrips. Dutch flowers and American bugs! Obviously a Nato plot!


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August 12, 2015

Hey, It’s August: The Russian Economy Imitates the Kursk

Filed under: China,Economics,Energy,Politics,Russia — The Professor @ 1:37 pm

Despite happy talk from the government in recent months, Russia continues its downward economic spiral. The economy contracted by 4.6 percent in the second quarter. This is pretty appalling, given that oil prices had rebounded some. The Economics Ministry says this is “the lowest point” for Russia, but given the recent rout in oil prices, and the troubling signs coming out of Russia, this seems unduly optimistic. If anything Q3 and Q4 are likely to be worse. These therefore seem to be more realistic predictions:

“While second-quarter growth surprised on the downside, perhaps far more importantly is the fact that the outlook for the Russian economy has deteriorated so far in the third quarter,” Piotr Matys, a London-based foreign-exchange strategist at Rabobank, said by e-mail.

. . . .

“The economic prospects for the coming quarters look pretty grim,” Liza Ermolenko, an analyst at London-based Capital Economics Ltd., said by e-mail. “Industry appears to have been a major cause behind the deterioration in the second quarter, having gone from being a relative bright spot in the first quarter.”

The consensus is now that the current economic situation is more dire than 2008-2009, and that it is likely to persist far longer.

On top of this, China’s sudden devaulation of the Yuan has caused a further decline in commodity prices, with Brent now below $50/bbl. This has contributed to a further decline in the Ruble, which fell about 2 percent in the aftermath of China’s move.  The Russian currency is now around 65 to the dollar.  Russia is particularly vulnerable to an extended Chinese malaise, not to mention a hard Chinese landing.

The Russian Central Bank now faces the same conundrum that it confronted last summer and fall. It can choose between loosening monetary policy to spur the economy but would thereby spur inflation (already running at over 15 percent) and pressure the ruble even further. Or it can choose to defend the Ruble, which would hamstring the real economy, and potentially spur capital flight if the credibility of the RCB’s action is doubted. Which leg does it chew off?

Wherever Putin and his economic advisers look, the scene is bleak indeed. The situation in China is particularly ominous, because Putin had grabbed onto China like a drowning man, hoping it would rescue him from the blows raining down from sanctions and the commodity price implosion. But the Chinese devaluation, combined with a litany of other grim statistics coming out of China, suggests that if China is not drowning itself, it is struggling mightily to keep its head above water.  Russia is particularly vulnerable to an extended Chinese malaise, not to mention a hard Chinese landing. Putin counted on China’s economic support to allow him to continue his Ukrainian adventure and weather the resulting sanctions.  It’s not happening (Chinese direct investment into Russia has fallen by 25 percent), and the prospects of it happening anytime soon are diminishing daily.

Nor are the long run prospects particularly encouraging, not with Bloomberg running articles titled “Russian Workers Vie With Greece in Race for Productivity Abyss,” the upshot of which is that Russia has the lowest productivity in Europe, running at 50 percent of the European average and 30 percent below Greece. (Which makes this boast by the Russian Minister of Industry and Trade that Russia has overtaken the US in labor productivity even more hilarious.)

In brief, the Russian economy is doing an imitation of the Kursk, 15 years ago. The only difference is that Putin has yet to admit the economy has sunk.


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August 10, 2015

Destroying Seized Food: Compounding Idiocy With Lunacy

Filed under: Commodities,Economics,Politics,Russia — The Professor @ 5:59 pm

Russia cemented its well-deserved reputation for insanity by bulldozing and burning tons of food seized for violating the country’s cut-off-its-nose-to-spite-its-face import ban. This was daft, even overlooking the foolishness of the ban.

Seizing smuggled foodstuffs raises the cost of violating the ban, thereby achieving a deterrent effect. But what’s the point of destroying what was seized? Selling it would make much more sense. First, selling would actually help strengthen the ban by increasing supply and reducing prices in Russia, thereby reducing the profitability of smuggling. This would have also increased Russian consumption, making Russians better off. Second, the Russian government could realize revenue by selling the confiscated products: God knows it can use every ruble it can get. Or it could just give the stuff away, and get a PR victory as well as reducing the incentive to smuggle.

In other words, no economic downside, and some economic upside (assuming the ban is rational).

Instead, the Russian government engaged in exhibitionist masochism, and destroyed the seized items in a very public and flamboyant way.

Why? Beats me. Maybe they were trying to make the point that Russia needs nothing from the decadent West. Or maybe they are in thrall to the broken window fallacy, and believe that destroying stimulates production.

I really don’t want to understand. Because to understand these lunatics, I would probably have to descend into lunacy myself.

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Gazprom Has Unprotected Sales, And Pays the Price

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 5:40 pm

I have long mocked Gazprom’s obstreperous, and economically unhinged, defense of an oil price peg of its gas sales. So today is another schadenfreude day, as the FT reports that Gazprom’s vaunted gas deal with China is finding that The East is Red (as in ink) because the price was linked to oil and “offers no protection against low [oil] prices.” (And despite the evident risks of going without protection, Russia is contemplating a ban on foreign condoms! Maybe Gazprom needs to be more “strict and discriminating” in its contracting practices.)

Apparently the company took strategic advice from Obama, who when asked by Fareed Zakaria what would happen if the Iran deal failed, said that “I have a general policy in big issues like this not to anticipate failure“:

Asked whether the contract built in protections to ensure that Gazprom would not make a loss in the event of a prolonged period of low oil prices, Pavel Oderov, a director at the company, said: “We have registered high risk appetite for this contract and we do not envisage such an event.”

By “high risk appetite,” I think he meant: “we were freaking desperate and we put it all on black (as in oil) to gamble for resurrection.”

And of course, Putin can’t let Gazprom eat a loss:

Separately, the Russian government is preparing to support the flagship project. According to a document published by the Kremlin on Monday, president Vladimir Putin ordered the Russian government to draw up by the start of September a “comprehensive action plan to ensure government support for the construction of gas transport infrastructure, including the Power of Siberia pipeline”.

Like the Russian government has money to throw around, especially since Gazprom (and Rosneft) are supposed to be the cash cows that feed the rest of its corrupt cronies, and the budget.

Insisting on the oil peg was always nuts. Note that one reason why many buyers of LNG want to move away from the oil-link is to diversify their price risk: that’s exactly why Russia, already a huge oil long, should have jumped at the chance to move away from a 100 percent reliance on oil price linkages. Yes, oil and gas prices are correlated, but imperfectly so, and moving away from oil-based pricing for gas would have reduced the country’s exposure to oil prices. But apparently Gazprom management and Putin believed that oil would always outperform gas, and insisted on the link. Be careful what you ask for, Vlad!

This is just the latest in a litany of Gazprom failures. Along with today’s bad news about the China contract-the cornerstone of Putin’s vaunted pivot to Asia-the company disclosed that production was down and sales to Europe were down in the first quarter. The company’s ruble profits rose only because the ruble cratered: talk about the cloud engulfing the silver lining. Further, the Turkish Stream project appears dead in the water, foundering upon-you guessed it-the inability to negotiate a price. That, and the cracked economic rationale for the project.

The world is finally awakening to the fact that the alleged energy behemoth is in fact an economically incoherent mess. In the US, it would have been taken over, and ruthlessly rationalized. Or put into rehab. Or broken up. But Putin continues to let it blunder on, like a vodka-sotted giant.

Not so long ago, Putin was considered some sort of virtuoso. He apparently thought so too. But now everything that used to work for him is self-destructing. And he seems quite bewildered at his turn of fortune.

In truth, Putin was not a virtuoso: he confused luck–high oil prices–for some sort of strategic genius. He was a huge spec long on oil, and looked brilliant when the price was high. When it is low, not so much. And idiotically, one of his champions insisted on increasing that exposure instead of diversifying away from it.

Well played. Well played.

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