Streetwise Professor

August 31, 2016

Sechin Makes His Bashneft Bid

Filed under: Energy,Politics,Russia — The Professor @ 9:13 am

In my most recent post on the Bashneft saga, I surmised that there might be a quid pro quo: Rosneft would be allowed to buy the smaller producer in exchange for a promise to proceed with its long delayed privatization. It appears that something along those lines is what is going on, although whereas I conjectured that Putin made this offer to Sechin, Bloomberg reports that Sechin is pitching the idea to Putin:

Rosneft PJSC chief Igor Sechin, not taking no for an answer, has come up with a proposal to expand his energy empire while helping critics in the Russian government meet their goal of reducing the widest budget deficit in six years.

Sechin, a longtime ally of President Vladimir Putin, has asked the government to let state-run Rosneft buy its controlling stake in smaller oil producer Bashneft PJSC for $5 billion in cash, a premium to the market, according to two senior officials. Russia could then earn another $11 billion by proceeding with its delayed sale of 19.5 percent of Rosneft itself, generating a $16 billion windfall that would cut this year’s projected deficit in half, they said.

Sechin is also proposing to sell off small pieces of Rosneft to multiple investment funds and trading firms, rather than a big chunk to the Chinese or Indians.

This illustrates the transactional nature of Putinism. Presumably other interested parties have submitted their proposals to Putin, who will decide based on a mixture of efficiency, fiscal, and political considerations. The political considerations will focus on the distribution of rents among his retainers in exchange for political support and other services that those favored can provide Putin. Putin is in essence holding an auction, and the technocratic opposition to a Rosneft acquisition (at least before it privatizes) essentially forces Sechin to bid more aggressively.

One interesting aspect of this is the sequencing. If Putin bestows Bashneft on Rosneft in exchange for a promise of a future privatization, would Sechin dare to stall or delay once Bashneft is in hand, resorting to his usual arguments that due to this, that, or the other, the price isn’t right? If Rosneft sells off a stake in exchange for Putin’s promise that it can then acquire Bashneft, might Putin say at a later date: “Things have changed, so I’ve changed my mind”?  Making commitments credible in a personalized, natural state is not an easy thing. And these things get harder, the older Putin gets, as the end game problem looms larger by the day. The ability to evade future performance depends on  the political balance and economic conditions at the time performance is required, and those can shift dramatically.

So this is Sechin’s bid. It will be interesting to see whether Putin accepts it, and the conditions that he imposes in an attempt to make sure that Sechin lives up to his half of the bargain. Those conditions will reveal a good deal about not just Sechin’s current position within the hierarchy, but the degree of trust between the major players in the regime.

 

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August 21, 2016

The Price of Politics in Putin’s Natural State

Filed under: Energy,Politics,Russia — The Professor @ 10:20 am

After months of watching Rosneft, Lukoil, Gazpromneft, and others shout “Bashneft is mine!” “NO! It’s mine!”, Putin has apparently lost patience and said “None of you will get it!” Last week Medvedev announced that the sale of the company (seized from oligarch Vladimir Evtushenkov’s Sistema in 2014) would be delayed indefinitely.* Rustem Khamitov, president of Russian Republic of Bashkortostan (where Bashneft is located), suggested that the sale be delayed five years. Meaning never.

Yes, Medvedev made the announcement, but a decision like this is obviously Putin’s. Medvedev’s job is to announce controversial decisions or release bad news that Putin doesn’t want to be questioned about. Coming as it does in the midst of the surprise defenestration of Putin’s chief-of-staff Sergei Ivanov and other high-level reshuffling, this has set off considerable speculation about the real reason for the decision.

The main subject of speculation is what this means for Igor Sechin, head of Rosneft. Sechin wanted Bashneft badly, but the technocrats in the government, led by another Igor–Deputy PM Shuvalov–were fighting this tooth and nail. Perhaps Putin just got tired of the fighting, and pace my introduction, decided to end it by putting the company on the shelf.

Or maybe there is something more to it. The official reason given for the delay of the Bashneft is that the company is that the government wants to prioritize the sale of a piece of Rosneft:

Deputy Prime Minister Igor Shuvalov on Wednesday said Russia would consider selling Bashneft stake after it has completed the privatization of Rosneft,

“A sale of a stake in Rosneft is on the forefront now. We should focus on that. After selling the Rosneft stake, [the government] will return to selling Bashneft as we have a Presidential order to privatize this company,” Interfax news agency quoted Mr. Shuvalov as saying.

One interpretation of this is that is a big defeat for Sechin. Sechin has fought “privatization” for years. When the oil price has been high, Sechin has said that it would be stupid to sell because the company was undervalued; when the oil price has been low, Sechin has said that it would be stupid to sell when the stock price is commensurately low. In Sechin’s view, the market undervalues Rosneft 100 percent of the time, and the price is never right. The real reason is that nosey outside investors would cramp Igor’s style.

If this signals Putin’s resolve to push the sale of Rosneft, it would be a stinging defeat for Sechin. This would fit with the firing of Ivanov, as it would represent a further winnowing of the old guard.

A more charitable interpretation is that this is Putin’s way of cutting the baby. Shuvalov and others had objected to Rosneft’s participation in the Bashneft auction because purchase of the company by a state company would not be a proper privatization, and would violate Russian law. Perhaps Putin promised Bashneft to Sechin, but only after a sale of the stake in the company (which would still remain majority state owned).

What is clear is that the decision is not purely an economic one, but is driven by regime politics. Politics will drive the ultimate disposition of the company (and Rosneft), and will provide some information about who’s up and who’s down within the elite.

The episode provides a demonstration of the importance of rent seeking within a natural state like Russia. The delay is driven by a battle over rents, and the delay is quite costly. The Russian government needs quite badly the money (a material $5 billion or so) that a sale would generate. Oil in the $40-$50 range and sanctions have put a serious dent in Russia’s fiscal situation, and it has blown through a good fraction of its rainy day funds. Further, the stock price of Bashneft fell 8 percent on the day of Medvedev’s announcement. This is a measure of the value destroyed by state ownership.

This is real money, particularly for Russia right now. That Putin is willing to leave it on the table is a measure of the price of politics in Putin’s natural state.

* Evtushenkov’s fate is a perfect illustration of the parlous nature of an oligarch’s existence. Those attempting to draw inferences from past connections (such as they were) between Trump and Russians really need to keep that in mind, but never do. Hell, if figures like Yakunin, Victor and Sergei Ivanov, and perhaps now Igor Sechin can fall from favor, past connections with far lesser figures are less than meaningless.

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August 7, 2016

If Trump Really Has Deep & Enduring Russian Business Connections, He’s a Machiavellian Genius!

Filed under: Economics,Politics,Russia — The Professor @ 7:45 pm

The drumbeat about Trump’s connections to Russia pounds on, and is mainly sound and fury, signifying nothing. The campaign consists mainly of unsubstantiated theories, insinuations, and innuendo. Further, these appear to be tenuous at best and are often wildly implausible.

The gist of the theory is that Trump has said nice things about Putin. Putin has said nice things about Trump. Trump has criticized Nato. Putin obsesses over Nato. The DNC email was hacked, possibly by the Russians, embarrassing Hillary. So why? Trump business connections, naturally!

This theory has been floated by Democratic operatives, by George Will (heretofore not suspected to be a Democratic operative), and the #neverTrump crowd, and echoed repeatedly in the media. In ironically Russian fashion, the campaign has moved to social media, where reliable little pilot fish plumping for media attention and maybe even an apparatchik role in the Clinton administration (yeah, I’m looking at you @CatchaRUSSpy) are spreadin’ the word.

My basic problem with this is the whole idea of secret Trump business dealings that could only be revealed by looking at his tax returns. “Secret Trump business dealings” is an oxymoron. His whole MO is self-promotion and hype. If anything, he overstates his business successes. He is not the man to hide his light under the bushel basket.

Now if you were talking about Soros, no doubt he has massive number of business dealings that have escaped the public eye. But Trump? He’s all about the publicity. What’s more, litigation and leaks from partners or bankers would have almost certainly revealed any major dealings long ago. If Trump has succeeded in keeping some big deal in Russia completely secret for years, he’s the man we need in charge of our national security! He would clearly be far more capable of keeping secrets than Hillary.

As for his not releasing his tax returns, I can think of 1,000 better reasons than concealing past dealings with Russians. This fact is overdetermined, to put it mildly.

Trump has been quite open in the past about his attempts to get into Russia, and how those attempts came to nothing. And let’s be real here. Every major business in the world looked to Russia as a huge opportunity in the 90s, and into the 2000s. For many–most, arguably–it ended in tears. Yes, look askance at businesses that did well there: many almost certainly succeeded because of corrupt deals. I’m thinking Siemens, or HP. (And to be fair, it seems that Siemens bribed everybody everywhere.) But those who tried and failed (a) can’t have continuing relationships that would be advanced or jeopardized, (b) likely didn’t pay bribes, or bribed the wrong parties, and (c) are likely to have a rather jaundiced view of Russia and Russian politics.

Further, when you are talking about Russia, past business dealings have very little connection with current conditions. One of the most pronounced regularities of Russia is that those who are riding high one minute quite often come to very hard falls somewhat later. Yesterday’s insiders are outsiders and sometimes pariahs today. If you have a connection with someone who is now on the outs with Putin, that connection is a liability to be shed, not an asset to be maintained.

Further, as Russia recovered from the 1998 crisis, and was riding high during the oil price boom, previously successful Westerners were considered less and less necessary, and were sidelined and forced out. Westerners became resented as parasites who attempted to exploit Russia’s weakness. Successful foreign investors had a huge target painted on their backs: look at TNK-BP, or Telenor/Vimpelcom. Once they didn’t need your money, they looked for any way to take the money you’d already made.

In the aftermath of the 2008-2009 crisis, Western financial connections became even more suspect as threats to Russian sovereignty.

And for those who have been paying attention Putin has been dramatically narrowing his circle of insiders, and that circle consists increasingly of those from the security services. Indeed, even some of the various security services are being left out in the cold. And worse: for instance, the head of the customs service was recently raided. Right now, the FSB, the GRU, and Putin’s new national guard are inside the circle. Everyone else dreads the knock at the door.

Insofar as biznessmen are concerned, (a) Putin has always had a deep suspicion of them, and (b) those who were seemingly favored in the 90s and 2000s are clearly on the outs now. The favored business people at present are Timchenko and the Rotenbergs. Show me any Trump dealings with them, and we’ll talk.

But this last point raises one of my pet peeves. Those who now pontificate on Russia and Trump’s connections clearly have NOT been paying attention. They betray a superficiality that would be embarrassing in a comic book. Many of the people and things that they mention became irrelevant years ago.

Further, one should be chary about claiming that they know what goes on in Russia, and in Putin’s pea-picking mind. Riddle, mystery, enigma, and all that. But fools rush in where angels fear to tread. And many a fool is making bold claims about a country and a politician they know little about, can know little about, and which until recently they ignored altogether. But now they’re experts.

The very byzantine nature of Russian politics and business over the last 25 years means that very few outsiders have navigated it successfully, even for a time, let alone many years. All I can say is that if Trump was (a) able to survive and thrive in that world, and (b) do it without anybody knowing, he’s a Machiavellian mastermind who would scare Putin to death.

The strained attempts to tie Trump to Putin are also transparently intended to distract attention from the embarrassing content of the DNC leaks–and, methinks, preempt leaks that are likely to come, from the Clinton Foundation, or even from Hillary’s server.  It’s a twofer for Hillary: discredit the message by emphasizing the malign (alleged) messenger, and tie the malign messenger to her opponent.

Beyond the implausibility of the insinuations, I doubt this will affect anyone who is not already a Hillary acolyte. Russian generally and Putin specifically are not bogeymen to most Americans. It’s not 1983. It’s not as if there are many people out there who would say “I liked this Trump fellow, but this Russia business  is just too much.” Those who don’t like Trump have many other reasons to do so; those who do are likely care little about Russia one way or the other; and those on the fence likely rank Russia low on the list of factors that will cause them to jump one way or the other.

So in the end, I find this obsessing about a Putin-Trump bromance to be amusing and embarrassing. I would be shocked that there’s any there there. It runs counter to Trump’s type, and it runs counter to history. The controversy transparently (pants?) suits Hillary’s political needs. Those who are hyping it are clearly partisan, and clearly ignorant. There are plenty of real issues to talk about, involving both Hillary and Trump. Let’s get on with that.

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July 30, 2016

Dogs Fighting Under the Carpet, Ex-Mullet Man Edition

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

There is a very revealing struggle going on in Russia right now. It is a pitch-perfect illustration of how Putinism works.

At issue is the Russian government’s privatization initiative, and specifically the privatization of the oil company Bashneft (a Russian firm with a very sordid, checkered past, but I repeat myself). Igor Sechin covets Bashneft, in large part because Rosneft production has been falling (estimates for 2016 are a 2 percent decline), and with sanctions and the company’s inefficiency, here is little hope of reversing the decline. Getting ahold of Bashneft would increase Rosneft’s production and reserves, and Bashneft’s production has grown handsomely of late (almost 11 percent in the last year): Sechin could buy what he can’t create.

But government technocrats, led by Deputy Prime Minister Arkady Dvorkovich, are adamantly opposed to a Rosneft takeover. The opposition stems in part because acquisition of Bashneft by a state-owned firm would make a travesty of privatization, and also thwart the goal of using privatization proceeds to address the government’s fiscal strains, which requires outside money. The opposition also reflects the understanding that enhancing Rosneft’s position in the Russian oil industry is detrimental to the future development of that industry. Rosneft is more parasite that creator.

Dvorkovich therefore flipped out when Russian bank VTB invited Rosneft, as well as other state-owned companies like Gazprom Neft, to participate in the privatization auction. It initially appeared that Putin had sided with Dorkovich, and an anonymous spokesman in the Presidential Administration had confirmed this. This was hailed as a huge defeat for Sechin, and perhaps a harbinger of a change in the balance of power within the Russian government.

But not so fast! An “official” said that the exclusion of Rosneft was “unofficial”. But then this week Putin’s spokesman Peskov, who had confirmed only a week before the “understanding” that Rosneft was out of the running, reversed himself, and said that “formally speaking” Rosneft was not a state owned company, and hence it could participate. You see, Rosneft is owned by a holding company, which is owned by the state. So  even though economically this is a distinction without a difference, legally it provides enough of an opening for Igor to slip through.

So who knows what will happen? Maybe Rosneft will be allowed to participate, under the understanding that it will not win. Or maybe the fix is in. Or maybe Putin is just letting Dvorkovich and (ex-)Mullet Man battle it out ender the carpet for a little while longer before ruling. This would allow him to weigh the arguments–and also to force the contenders to make bids for his support. Putin will rule depending on how he wants to balance the competing political factions, and who can offer the most to Putin or others he wants to favor.

And as in the heyday of Kremlinology, outsiders will attempt to discern deeper lessons from the outcome. Who is on top? How committed is Putin to reforming the Russian economy? How wedded is he to the idea of state champions? Or is he willing to concede that given Russia’s economic straits it is necessary to make accommodation to more Western commercial and legal norms?

The problem with the answers to all of these questions is that even if you are right today, nothing is set in stone. Putin could reverse course later. Maybe next month. Maybe next year. This is an inherent problem with autocratic systems: autocrats can’t make credible commitments. The only precedent is that there are no precedents. Today’s decision matters. . . for today.

So whatever the outcome of this current dog fight, it will tell you about the current state of play and the current balance of power, and not much more, because for an autocrat, tomorrow is another day.

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July 24, 2016

A Remedial Lesson in Internet Research for Michael McFaul

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

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

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

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

I replied:

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He responded (smarmily):

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I replied:

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His retort:

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Me:

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

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“We professors.” LOL.

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

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

Then he gets nasty and personal:

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

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

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

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

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

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

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

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

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

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

Hillary_reset

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

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

 

 

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June 22, 2016

Sometimes Hooligans are Just Hooligans

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

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

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

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

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

You’ve got to love the British press:

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

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

. . . .

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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April 10, 2016

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

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

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

My reaction: BFD.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

 

 

 

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March 15, 2016

A Prudent Gambler Cashes in His Chips

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

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

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

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

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

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

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

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

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

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February 10, 2016

I[gor], Robot (Hater)

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

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

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

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

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

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

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

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

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

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

Sechin also engaged in a little wishful thinking:

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

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

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

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

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

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

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

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

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

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

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February 6, 2016

Putin Plays Pyrrhus

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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