Streetwise Professor

December 2, 2016

Lucy Putin?

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:53 pm

I was somewhat surprised that OPEC came to an agreement. I will be more surprised if they live up to it: that would be not just going against history, but against basic economics. The incentives to cheat are omnipresent (as the Saudi’s ex-Minister of Petroleum of Petroleum Naimi acknowledged in the aftermath of the announcement). Further, what is the enforcement mechanism? Retaliatory output increases/price cuts (i.e., price wars)? Moreover, given that many OPEC nations are facing acute budgetary strains, the present looms and the future looks very, very far away: consequently, getting some additional revenue today at the risk of losing some revenue a year or two from now when a price war breaks out looks pretty attractive.

The breathless TigerBeat-style reporting of the meeting states that Russia’s last-minute intervention rescued the deal. A few things to keep in mind. Russian oil output has surged in the last few months, meaning that its promise to cut 300,000 bbl/day basically puts its output back to where it was in March. This is in fact pretty much true of the OPEC members too: the deal very much as the feel of simply taking two steps back to reverse the two steps forward that major producers took in the past 9 months (and the two steps forward were no doubt driven in large part to improve bargaining positions in anticipation of the November OPEC meeting).

Moreover, the timing of the Russian commitment is rather hazy. Energy Minister Alexander Novak said Russia would cut “gradually.” That can mean almost anything, meaning that the Russians can say “the cuts are coming! Trust us! We said it would be ‘gradual!'” and that there will be no hard evidence to contradict them.

The most amusing part of this to me is that many are interpreting Putin’s personal involvement as proof that the Russians will indeed cut. “If Putin tells Russian oil companies to cut, they’ll ask ‘how deeply’?”

Seriously?

Call me cynical (yeah, I know), but I find this scenario far more plausible: Putin sweet-talked the Saudis and Iranians to overcome their differences to cut output in order to raise prices, all the while planning to sell as much as possible at the (now 10 percent) higher prices. Breezy promises cost nothing, and even if eventually OPEC members wise up to being duped, in the meantime Russia will be able to sell to capacity at these higher prices. Yes, the OPEC members will be less likely to believe him next time, but Putin’s time horizon is also very short, for a variety of reasons. He’s not getting any younger. And more immediately, the Russian recession is dragging into its third year, and budgetary pressures are mounting (especially since he is committed to maintaining a high level of military spending). The Russian Wealth Fund (one of its two sovereign wealth funds) has been declining inexorably: the rainy day fund is almost empty, and the skies still haven’t cleared. And the presidential election looms in 2018. For Putin, the future is now. The future consequences of making and breaking a promise are not of great importance in such circumstances. But more money in the door today is very, very important.

Russia isn’t like other OPEC producers, which have national oil companies that respond to government orders. Although government-controlled Rosneft is the biggest producer in Russia, there are others, and even Rosneft and Gazpromneft have more autonomy than, say, Saudi Aramco. Yes, Putin could, er, persuade them, but a far more effective (and credible) tool would be to adjust taxes (especially export taxes on both crude and fuels) to give Russia’s producers an incentive to cut output (and especially exports, which is what OPEC members really care about). A tax boost would be a very public signal–and reversing it would be too, making it harder to cheat/renege. (Harder, but not impossible. The government could give stealth tax cuts or rebates. This is Russia, after all.) But I have not seen the possibility of a tax rise even be discussed. That makes me all the more skeptical of Putin’s sincerity.

So my belief is that Putin is stepping into the role that Sechin played in 2009, that is, he is being Lucy beckoning Charlie Brown/OPEC with the football. And Charlie Brown is attempting a mighty boot. We know how that works out.

Even if Putin lives up to his pinky-swear to cut output, Russia has cut a much better deal than the Saudis. The promised Russian cut is about 60 percent of the Saudi cut, yet both get the same (roughly 10 percent) higher price, meaning that (roughly speaking) Russian revenues will rise 40 percent more than than Saudi revenues do–assuming that both adhere to the cuts. The disparity will be greater, to the extent that Russia cheats more than the Saudis.

Time will tell, but what I am predicting is that (a) Russia will not cut anything near 300kbbl/d, and (b) cheating by OPEC members will snowball, meaning that next November’s OPEC meeting will likely be another rancorous effort dedicated to repairing a badly tattered deal, rather than a celebration of the anniversary of a successful and enduring bargain.

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November 19, 2016

I’ve Learned My Lesson, But Far Too Many Have Not

Filed under: History,Military,Politics,Russia — The Professor @ 8:40 pm

Tim Newman has written numerous excellent posts of late, but the one that resonated most with me was this one from about a month ago, which in response to a reader’s question about what he admitted changing his mind about, he admitted to having misjudged the outcome in Iraq:

I supported the Iraq War for several reasons, one of which was I thought the Iraqis deserved the chance to be free of Saddam Hussein and run their country without him.  I genuinely thought they would seize the opportunity to demonstrate to the world that Arabic people are not incompatible with democracy and, so thankful that Saddam Hussein is gone, they would make a pretty decent effort to make things work.

Instead they tore each other apart and did everything they could to demonstrate that those who dismissed them as savages that needed a strongman to keep them in line were right all along.  I think this was probably the most depressing aspect of the whole shambolic affair.

. . . .

But the one issue I changed my mind on was that the US (or British) military should no longer be brought to bear for altruistic or humanitarian reasons.  It is rather depressing, but I am now a firm believer in the premise that a population generally deserves the government it gets.  No longer would I support a war that is not prosecuted for clear strategic reasons that are indisputably in the national interest.  So all those suffering under the jackboot of oppression?  Sorry, you’re on your own.  We tried our best and look where it got us.

I couldn’t agree more, for I have undergone a similar conversion. I too succumbed to Western universalism, and believed that freed from the oppressions of a sadistic dictator, Iraq had the potential to become a passably free, democratic country that could become a role model for a benighted region. I believed that the problem was misrule from the top, rather than dysfunction at the bottom.

I was wrong.

What Iraq has taught me–reminded me, actually, in a rather forceful way–that although political and economic freedom are highly desirable, the preconditions that make this possible are the exception, rather than the rule. Further, the preconditions are highly culturally and historically contingent. The experience brought home forcefully the relevance of civilization (as Huntington emphasized): not everyone yearns to be like Americans; in fact, to many Western/American beliefs and mores are an anathema; Western institutions and behaviors can’t be grafted onto fundamentally different civilizations and cultures, and they certainly won’t arise spontaneously in the aftermath of the overthrow of a repressive regime, especially one that has deliberately crushed civil society for decades (and I could say something similar of the FSU); the tragic view of history has much more predictive power than the progressive view.

I should have remembered the experience of the Reconstruction in the United States, or Napoleon’s experience in Spain, or myriad other historical examples of the futility of attempting to impose a social and political revolution on a hostile alien culture.

Iraq, and subsequently Libya, pushed me back to my Jacksonian roots. Reforming foreigners isn’t our business. What they do amongst themselves is up to them, as long as they don’t harm Americans or American interests in a serious way. If they do that, deal with them forcefully and quickly, with no dreamy ideas of “nation building” in the aftermath. A view summarized by one of my heroes, USMC General James Mattis, who while in Iraq said: “I come in peace. I did not bring artillery. But I’m pleading with you, with tears in my eyes, if you fuck with me, I will kill you all.” Translated: we’ll leave you alone, unless you don’t leave us alone. In which case, watch out.

It’s one thing to make a mistake, to misjudge. It’s another thing to make a mistake and then learn nothing from it. We are seeing that right now, in regards to Syria. To judge by the words of many on both sides of the current political divide, Iraq (and Libya) never happened. Why do I say that? Because figures on both the right and left are advocating direct American involvement in the Syrian civil war, even though it makes Iraq look like Sunday school.

The catalyst for this waving of the bloody shirt is the carnage in Aleppo. John McCain in particular is beating the war drum, claiming that the US is now complicit in genocide in Syria. From the left, Samantha Power (she of Responsibility to Protect, which went so swell in Libya) obsesses about Syrian and Russian atrocities there.

Then there are the journalist/wonk pilot fish like Charles Lister and the execrable Michael Weiss, who churn out war propaganda in the best yellow journalism tradition, all the while doing their best to hide their connections with malign medieval regimes in the Gulf.

I will stipulate that what is occurring in Aleppo is horrific (although I would also note that the opposition is waging a transparent propaganda campaign  in an attempt to manipulate the US into intervening–a campaign in which Weiss, Lister, and their ilk are avid participants).

That said, what can the United States do about it? Would intervention lead to a less horrific result? What would be the likely outcome? Would the US be able to achieve its intended outcomes? What would the unintended consequences be?

Anyone who thinks about these questions without considering the sobering lessons of Iraq is a menace. But it’s worse than that, I don’t think that McCain, Power, Weiss, Lister, et al, think about these questions at all. It’s like Iraq never happened. The amnesia is rather astounding.

Here are my answers. There are no good guys in Syria, and even if with US assistance Assad was overthrown, it would not end the civil war, which would just devolve even further into a multi-sided hell that makes Libya and Iraq look like a picnic; it would empower jihadists who will slaughter as many or more as Assad has; the flow of refugees will not stop, although the composition of the refugees might change (with Alawites and Christians replacing Sunnis); if the opposition gets control of Syria, it will be the jihadists who control the opposition, and Syria will become a base for anti-American and anti-Western terrorism.

Syria is even more broken, complex, divided and fissiparous than Iraq was/is. It is rooted in the same political and religious culture, and the same civilization. Minority-based Baathism has had 13+ more years of power in Syria. So what has happened in Iraq in the last 13+ years is probably the best scenario in Syria. And I would consider even that happy prospect to be among the least likely.

And one more thing. An American intervention in Syria would risk a superpower confrontation. Even a unicorns and rainbows outcome in Syria would not make such a risk worthwhile, and as noted above unicorns and rainbows would not be the result–a dystopian, sectarian war of all against all would be. And the US should be in the middle of that why, exactly?

Some, notably Weiss and even more respectable journalists like Edward Lucas, link Syria to a broader conflict with Putin’s Russia. Syria, Lucas tells us, is Putin’s first step in rebuilding the USSR.

Seriously? That sounds like the ravings of someone playing Risk on LSD.

Pray tell, where does Putin go from Syria? The road to the Elbe runs through Aleppo? Who knew?!? Even if Putin succeeds in propping up His Man in a shattered country that has no natural or human resources to speak of, what then? Does that change Putin’s calculus of exercising power or force in the Baltic, or the European plain? Does that change Russia’s fundamental strategic weakness (most notably a decrepit economy that is utterly incapable of supporting an extended confrontation with the US)? No to all. Hell no, actually. Syria is a diversion of Russian effort and strength in one of the least consequential countries in the Middle East.

Yes. Syria is a humanitarian catastrophe. But as Tim Newman said, the US (or British) military should not be dispatched to intervene in such places for humanitarian or altruistic reasons. Because regardless of how altruistic the intentions, the outcome will be grim, and policy should be based on what is possible not what is desirable. If the desirable isn’t possible, leave it be.

I would go further. Even if you believe–especially if you believe–that Russia and China pose grave threats to US interests, Syria is not the place to fight. It will be another ulcer that will drain American morale, produce debilitating internecine political conflict, kill and maim American service men and women, and sap its military. Better to devote resources to recapitalizing the American military than to pour them into a lost cause like Syria–or pretty much anywhere else in the Middle East.

One of the most encouraging outcomes of the election is that the likelihood of American intervention in Syria has gone down as a result: Hillary was clearly much more favorably disposed to intervention (e.g., she spoke favorably of the idiotic idea of no fly zones, a McCain hobby horse) than Trump. If Trump truly is Jacksonian, or defers to his Jacksonian base, he will not get involved. Indeed, methinks this is exactly why McCain has become particularly unhinged in the past days. He realizes the prospects for intervention have plunged, and in his impotence he is raging.

Obama’s instincts were actually sounder than Hillary’s here. Would that he had the courage of his convictions and eschewed any involvement whatsoever. Instead, he gave mixed signals (“Assad must go”, the “red line”), and authorized a CIA effort to support the (jihadist-dominated) opposition–an effort that succeeded in getting 3 Green Berets killed a few weeks ago. (The CIA is an institution that I have also had a serious change of views about.)

Historical parallels are never exact. But it is difficult to find one as close as between Iraq and Syria–temporally, culturally, or civilizationally. Given the historical precedent, it is beyond reckless even to contemplate seriously US involvement in the Syrian civil war. But too much of our political class are latter-day Bourbons, having forgotten nothing and learned nothing. One of the benefits of the rejection of the political class on November 8th is that there is a very good prospect that we will also reject some of their worst ideas, of which intervention in Syria on humanitarian or geopolitical grounds is probably the worst of all.

 

 

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November 15, 2016

Igor Sechin Takes His Revenge

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:07 pm

The Bashneft sale to Rosneft (which I wrote several posts about) is a done deal, but apparently there was some unfinished business. Namely, the business of  revenge.

On Monday Economic Development Minister Alexei Ulyukayev was detained for corruption. He allegedly took a $2 million bribe to “allow” the sale. Indeed, Bloomberg claims he was caught in the act:

Ulyukayev, 60, was detained on Monday “in the act” of receiving the cash, said Russia’s Investigative Committee. He was later charged with demanding the money from Rosneft PJSC to allow its purchase last month of the government’s 50 percent stake in regional oil producer Bashneft PJSC, the agency said in a statement. The economy minister denies any wrongdoing, his lawyer Timofei Gridnev told Business FM radio. Investigators moved that he be held under house arrest before he arrived for arraignment Tuesday at Moscow’s Basmanny Court.

Ah, Basmanny justice. Gotta love it.

This all seems quite bizarre. The Bashneft acquisition was clearly a source of intense conflict with the Russian government, with the government ministries–including Ulyukayev–initially expressing opposition. Then there was temporizing, with Putin seeming to come down on both sides of the issue. Then it was decided in Rosneft’s–that is, Igor Sechin’s–favor.

Presumably, Putin was the ultimate decider here. If so, Ulyukayev was in no position to “allow” anything. Maybe he had a chance to make his case, either directly to Putin, or indirectly via Medvedev. But once he lost, he would have been delusional to think he had any leverage over whether the deal would proceed.

Further, the timing is beyond strange. The deal was decided in September, and finalized on October 12, more than a month ago. So, did Ulyukayev give net 30 terms on the bribe? Net 60? Was it half now, half later? Is bribery really done on credit in Russia?

I would also venture that attempting to shake down Sechin and Rosneft is tantamount to suicide. Did Ulyukayev attempt such a risky thing? Did Sechin play along and then facilitate a sting by the Investigative Committee? Or was this a set-up job from the start?

One thing that is almost certainly true is that this is Sechin taking his revenge, and sending a message to others: look at what happens to those who cross me.

The Energy Ministry, under Novak, also opposed the deal initially. I wonder if he is sleeping well.

There are some comic elements to the story. Several stories breathlessly report a law enforcement leak saying that Ulyukayev’s phone had been tapped “for months.” Um, pretty sure it was tapped like forever.

Ulyukayev has a reputation as a “liberal” in Russia, and assorted Western dimwits expressed Shock! Shock! at his arrest. Prominent among these were Anders Aslund and my fellow professor and buddy Michael McFaul. I say dimwits for several reasons. First, is it news to them that the “liberals” in the Russian government are marginalized, and exist at the sufferance of people like Sechin who are in Putin’s inner circle? Second, are they so credulous as to believe that these liberals are untainted by corruption? Puh-lease. Ulyukayev appeared in the Panama Papers. Further, the “liberals” and “reformers” mainly go back to the Yeltsin period, and remember that  Yeltsin elevated Putin in exchange for foregoing any investigation or prosecution of the rife corruption of the Yeltsin administration. Ulyukayev was associated with Gaidar, who was also tied to corruption (although the publicly revealed instances were small beer by Russian standards).

There are no clean hands in Russia. This very fact is what usually keeps people in line, for they know the adage “for my friends, everything: for my enemies, the law!” Everybody is vulnerable to prosecution, because everybody is corrupt: actual prosecution is used sparingly, however, to punish those who have committed a political transgression.

Ulyukayev clearly committed such a transgression, and hence he finds himself in the dock.

There is no reason to be shocked by this. It merely confirms that people like Sechin are the real power. But this is apparently a revelation to alleged Russia experts.

Bashneft is the Hope Diamond of oil companies: it seems to bring bad luck to anyone who touches it. Ural Rakhimov, the son of the boss of Bashkortostan (where the company is located), who profited from the corruptly done privatization of the company in 2002, but who apparently fled Russia when the privatization and subsequent sale came under government scrutiny. Vladimir P. Yevtushenkov, who bought Bashneft from Rakhimov, but then wound up under house arrest for 92 days for allegations related to the privatization: he walked only after the government seized Bashneft shares from Yevtushenkov’s holding company before performing the re-privatization Kabuki that ended with the company being bought by Rosneft. And now Ulyukayev.

Will the skein of bad luck end with Rosneft and Sechin? That’s a good bet, but not a lock. Who knows what changes in power are in store, especially as Putin ages, or if there is some economic or political shock?

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October 6, 2016

Igor for the Win!, or Privatization With Russian Characteristics

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 5:19 pm

Today Russia announced that Rosneft has been approved to purchase Bashneft. This despite the Economics Ministry’s earlier attempts to prevent state-owned Rosneft from participating in a “privatization” of a company that had been de-privatized (through expropriation), and Putin’s statement that this was not the best option.

But there’s more! The company was handed to Rosneft on a platter. Rosneft didn’t have to win an auction. There was no competitive tender process. It was just Christmas in October for Igor.

This speaks volumes about how Russia is run. (I won’t say “governed” or “managed.”) In a natural state way, a favored insider was rewarded despite the fact that all economic considerations push the other way. For one thing, privatization has been touted as a way of alleviating Russia’s severe budgetary problems. This will not do that. The decision occurred at a time when all indications are that the economic stringency will endure. There is no prospect for a serious rebound in oil prices, and there is also little prospect of an easing in sanctions. Indeed, Putin’s obduracy in Ukraine and his escalation in Syria may result in the imposition of additional sanctions. Putin’s spending priorities are increasing the economic strain. He plans to increase defense spending by $10 billion, and reduce social spending by less than that. Furthermore, Rosneft is a wretchedly run company that will generate far less value from Bashneft than would another owner, including a private Russian firm like Lukoil.

In brief, a cash-strapped Putin passed up an opportunity to generate some revenue and handed over Bashneft to a company that destroys value rather than enhances it. Such are the ways of a natural state that functions by allocating rents to courtiers. Privatization, with Russian characteristics.

In sum, in the Bashneft deal, Igor wins. And Russia loses.

The only thing that could potentially redeem this is if there was a quid pro quo, namely, that Sechin would relent to the sale of big stake in Rosneft to outside investors. Nothing of the sort was announced today, and perhaps they are waiting for some time to pass so as not to suggest that there was a deal. But I doubt it. I am guessing that Igor will win that argument too.

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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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