Streetwise Professor

February 28, 2015

Vladimir Putin: Cynical Prophet

Filed under: Politics,Russia — The Professor @ 12:22 pm

In 2012, Putin said this:

In 2012, Nemtsov spoke to Foreign Policy, calling for sanctions against officials in Putin’s government for human rights violations.

That year, Putin warned during a speech that a leader of the opposition might be targeted for assassination. “They are looking for a so-called sacrificial victim among some prominent figures,” Putin said. “They will knock him off, I beg your pardon, and then blame the authorities for that.”

This was the line Putin’s creature Peskov was peddling immediately after Nemtsov was murdered, and of course it will be the primary argument made to defend Putin, attack critics, and to justify the mass targeting of the opposition. A very flexible weapon, that: useful in both defense and offense.

So interesting to know that it had been prepared in advance, ready to be whipped out at the appropriate moment.

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February 27, 2015

Is Nato a Threat to Russia? If Only.

Filed under: Economics,Military,Politics,Russia — The Professor @ 8:53 pm

Putin and Lavrov and the Russian leadership  routinely rant about Nato and the threat it poses to Russia. They demand that Ukraine pledge not to join Nato as a condition for a resolution of the Russian invasion of the country. Sadly, numerous “realists” in the West just as routinely repeat and rationalize the Russian fears, and blame the current parlous state of Russo-Western relations on the post-1991 eastward expansion of Nato. (Yeah. I’m looking at you Stephen Walt and Ian Bremmer.)

This raises the question: Are the Russians and their Western apologists serious? If so, it calls into question their mental state.

The idea that Nato qua Nato poses a threat to invade Russia is risible. Hell, Nato’s ability to defend its eastern marches is quite uncertain.

Even if one ignores the fact that Nato has no intent to engage in a land war against Russia, on the basis of military capability Russia would have nothing to fear from Nato even if it was hard on Russia’s borders. Virtually all of Nato’s ground combat power is embodied in American units, which have almost totally withdrawn from Europe to CONUS. They pose no threat to Russia from Fort Hood or Fort Stewart or Fort Riley or Fort Bliss, and even if they moved into Poland-and hell, into Ukraine-they would not threaten Russia. Their numbers are insufficient, and the logistic obstacles of attacking Russia  are beyond daunting.

As for the rest of Nato, it as become a mockery of a military alliance. Only France spends more than 2 percent of GDP on defense. The Germans have stinted on defense: its military expenditures are closer to 1 percent of GDP than the Nato “standard” (honored more in the breach than the promise) of 2 percent. They have sold off a large portion of their modern armor. Recent reports state that a large fraction of its aircraft are inoperable. A particularly shocking story states that a supposedly elite unit attached to Nato’s rapid reaction force had to train with broomsticks at a recent exercise, due to the lack of machine guns. As for the Dutch, Belgians, and other assorted Lilliputians, they couldn’t threaten anybody.

Out of area operations are unthinkable. Even modest efforts in Libya (carried out almost entirely by airpower) and Africa (e.g., Mali) were dependent on US airlift, refueling, and reconnaissance assets.

European navies are similarly shrunken and incapable of projecting power.

Yes, the US has the capability of inflicting huge damage on Russia, but other Nato countries enhance that capability not by one whit. And virtually all of that capability is based in the United States proper.

So why are the Russians always on about Nato? Do Putin and the military realize that the alliance presents no danger, but just hype the threat because it gulls the domestic hoi polloi and credulous Westerners? Or are they so paranoid that they see threats where none exist?

I think it may well be some of both, but more of the former. By claiming Nato is a military threat, Russia gets to play the victim, an act which many at home and abroad fall for, and which provides a cover for the real reasons for Russia’s hostility. Putin et al fear the West, but more because they know that Russia cannot compete against it economically, politically, and culturally. They want to exploit, in a colonialist way, the ex-Soviet space. Ukraine was a classic example. Corrupt ties between Russia and Ukraine enriched Russian and Ukrainian thugs alike. Maidan threatened all that.

Note that what precipitated the crisis with Russia was not a Ukrainian move towards Nato-that was not on the table, and the very idea did not garner majority support in the country last year. Rather, it was Ukraine’s move towards greater economic integration with Europe that sparked Putin’s ferocious reaction. In addition to threatening the loss of markets for Russia’s non-competitive products, greater integration with Europe would have helped nudge the country down the path towards better governance and less corruption. This threatened the interests of Russia’s kleptocracy (over which Putin reigns) as as much as it did Ukraine’s. To that must be added an indirect threat that the example of an ex-Sovok republic moving towards political and economic modernity would  pose to a retrograde Russia.

At least that’s what I think is the most likely explanation for Russia’s unrelenting drumbeat against Nato. But I cannot rule out rampant paranoia. The Nemtsov murder also betrays considerable paranoia, as the opposition poses no real political threat to Putin.

What I can rule out metaphysically is that Nato is an actual military threat to Russia. To quote Patton, European forces in Nato couldn’t fight their way out of a piss-soaked paper bag even if attacked, let alone pose an offensive threat to a vast continental nation like Russia. And the Americans are very, very far away. Which means that Russian ranting about Nato is either camouflage for their well-grounded insecurity about their ability to compete economically, socially, and politically with the West, or the product of colossal paranoia, or both.

Regardless, it means that the only way that Russia can conceive of co-existing with the West is along the lines of the Yalta model, with the only question being where the lines are drawn. The sooner the West recognizes this, and moves beyond its romantic notion of a “special”, or even non-adversarial, relationship with Russia, the better. But the persistence of these romantic ideas even in the face of Russian aggression in Ukraine and the threat of more in the Baltics and elsewhere suggests that this won’t happen soon enough.

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Putin Reenacts the Kirov Assassination

Filed under: Military,Politics,Russia — The Professor @ 6:15 pm

Russian opposition figure Boris Nemtsov has been gunned down literally in the dark shadows of the Kremlin’s spires.

Just when you thought that Russia could not become more twisted and disturbing, something like this happens.

With a chutzpah that puts  OJ Simpson’s pledge to track down the real killers to shame, Putin announced that he is putting his Chekist skilz to work and taking personal charge of the investigation. This is to ensure that no mistakes are made that could result in the identification of the real executioners. There are frames to be fitted.

Through his creature Peskov, Putin denounced the crime as a “provocation,” fulfilling a prediction I had made on Twitter only moments before that he would use this killing to eliminate many enemies, not just one. This assassination will not be a two-fer. It will be an N-fer. Nemtsov will not be the only enemy eliminated: his death will be the pretext for eliminating many more, on the model of “for my friends, everything: for my enemies, the law!”

The narrative will be that this was part of a plot to blacken Putin’s name, and every-and I mean every-perceived enemy foreign and domestic will be implicated. Numerous, mutually contradictory conspiracy theories will be advanced and pursued simultaneously. These will permit the investigation, arrest, and prosecution of myriad Putin enemies, and the intimidation of many more.

In other words, we are going to see a reprise of the Kirov murder, which Stalin exploited to justify the purges that began soon thereafter. Note the similarity:

“Comrade Stalin personally directed the investigation of Kirov’s assassination. He questioned Nikolayev at length. The leaders of the Opposition placed the gun in Nikolayev’s hand!” (Barmine, Alexander, One Who Survived, New York: G.P. Putnam’s Sons, 1945.)

Why Nemtsov? He had long been a thorn in Putin’s side, authoring (along with Vladimir Milov) several white papers accusing Putin of gargantuan corruption. Recently, he had been an outspoken opponent of the war in Ukraine. He was organizing a peace rally to take place Sunday, and was allegedly on the verge of releasing another white paper documenting Russian participation in the Ukraine war.

Perhaps the anti-war activities and revelations about Putin’s lies about Ukraine were the proximate cause of Nemtsov’s killing. But I think that the murder serves a far larger purpose for Putin. It eliminates a gadfly, yes, but Nemtsov was hardly a threat. But a la Stalin and Kirov, the murder gives Putin a pretext to unleash a full-scale repression.

Will Obama, Merkel, and the other assorted cringers finally be forced to face up to the reality of what they are dealing with in the Kremlin? Call me a cynic, but I seriously doubt it.

Do not underestimate how bad things can get in Russia. And consider this happy thought. Stalin wasn’t embroiled in an international confrontation, and didn’t have nukes, when Kirov was killed (likely on his orders). Putin is, and does.

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Anna Chapman’s Bank Says: “I Don’t Want to Go on the Cart!”

Filed under: Economics,Politics,Russia — The Professor @ 10:37 am

The past months have been chock full of episodes of Russian absurdity. Some of them are quite disturbing. Some are rather amusing. This story involving the Central Bank of Russia’s seizure of Russian lender FundServisBank is a particularly good example. The absurdity begins-but only begins-with the fact that it counts Anna Chapman as one of its “top executives.” What better signal of top notch leadership could you ask for?

The linked article includes a photograph of Anna delivering deep thoughts on “entreprenurship” (complete with diagrams!): apparently spelling was not something that Anna quite nailed during her soiree in the US.

But that’s only the beginning. The bank apparently is furious at the CBR for depriving it of its option to gamble for resurrection:

FundServisBank claimed Wednesday that it had no financial problems.

“From a purely economic point of view the bank has no problems … you start to wonder who is behind this,” FundServisBank spokesman Grigory Belkin told The Moscow Times.

“Novikombank is taking the place of FundServisBank,” Belkin said.

“It’s like there is an experienced doctor who appears and says you are ill, fatally ill. You say ‘I am alive,’ but he says ‘no, no, no!'”

This brings to mind the classic bit from Monty Python and the Holy Grail, with FundServisBank doing a turn in the role of Dead Person, Novikombank playing Customer, and the CBR playing Mortician:

MORTICIAN: Bring out your dead!
CUSTOMER: Here’s one — nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: What?
CUSTOMER: Nothing — here’s your nine pence.
DEAD PERSON: I’m not dead!
MORTICIAN: Here — he says he’s not dead!
CUSTOMER: Yes, he is.
DEAD PERSON: I’m not!
MORTICIAN: He isn’t.
CUSTOMER: Well, he will be soon, he’s very ill.
DEAD PERSON: I’m getting better!
CUSTOMER: No, you’re not — you’ll be stone dead in a moment.
MORTICIAN: Oh, I can’t take him like that — it’s against regulations.
DEAD PERSON: I don’t want to go in the cart!
CUSTOMER: Oh, don’t be such a baby.
MORTICIAN: I can’t take him…
DEAD PERSON: I feel fine!
CUSTOMER: Oh, do us a favor…
MORTICIAN: I can’t.
CUSTOMER: Well, can you hang around a couple of minutes? He won’t
be long.
MORTICIAN: Naaah, I got to go on to Robinson’s — they’ve lost nine
today.
CUSTOMER: Well, when is your next round?
MORTICIAN: Thursday.
DEAD PERSON: I think I’ll go for a walk.
CUSTOMER: You’re not fooling anyone y’know. Look, isn’t there
something you can do?
DEAD PERSON: I feel happy… I feel happy.
[whop]
CUSTOMER: Ah, thanks very much.

First the Bruce Willis Bank. Now the Anna Chapman Bank. Is there nothing sacred that Russia’s creeping financial crisis will spare?

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February 24, 2015

Incoherence on Display: The FSB Head Transformed From Interlocutor to Persona Non Grata in a Week

Filed under: Military,Politics,Russia — The Professor @ 3:22 pm

John Kerry has criticized Russian actions in and lies about Ukraine. He hinted that further sanctions could be forthcoming, and that the head of the FSB could be targeted.

Wait a minute. Just last week the head of the FSB was considered a worthy participant in the debate on the subject of terrorism: he headed the Russian delegation to the Countering Violent Extremism Summit. How ludicrous, and schizo, is that? The guy goes from interlocutor to persona non grata in a period of mere days. To quote Casey Stengel: can’t anybody here play this game?

Any sanctions forthcoming will likely have the opposite of the intended effect. Putin will interpret them as demonstrating a lack of seriousness, a token response meant to keep up appearances, rather than as a serious challenge. He will view such actions as a green light, not a yellow let alone a flashing red. He will understand that he faces an irresolute, incoherent, and timorous opposition, and will act accordingly.

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February 18, 2015

Ukraine Grieves: Putin Gloats

Filed under: Military,Politics,Russia — The Professor @ 9:55 pm

Ukraine bowed to military reality and hastily withdrew its remaining forces from Debaltsevo. There are only so many Alamos that one country can survive. It was unwise in the extreme to have attempted to defend that salient for so long.

Yes, an earlier withdrawal would have damaged Ukrainian morale, but the flight under the current circumstances has harmed morale far more than would have been the case earlier. Not least because it has given Putin the opportunity to gloat. Twisted little man that he is, he seized upon it:

“Of course, it’s always bad to lose,” Putin told reporters. “Of course it’s always a hardship when you lose to yesterday’s miners or yesterday’s tractor drivers. But life is life. It’ll surely go on.”

Not only is this an unchivalrous swipe at Ukraine (which he despises as much as he covets), it is a gratuitous insult directed at Merkel and Obama and the West generally. The reference to “miners and . . . tractor drivers” implies that Russian forces had nothing to do with Ukraine’s humiliation at Debaltsevo, when he knows, and knows that everyone else knows, that they had everything to do with it. Putin is saying, in essence: “Yeah. I’m shamelessly lying about Russian troops and equipment being in Donbas. What are you going to do about it? I know exactly what you are going to do about it: nothing.”

And in that, he’s correct. Today “Germany said it was too early to call the broader Minsk peace plan dead or ratchet up sanctions against Moscow.” It’s not dead. It’s resting. It’s stunned. It’s pining for the steppes. Extend and pretend is the European response to Russian depredations, just as it has been to fiscal profligacy in the south.

One can only hope that these words come back to haunt him. That his hubris calls forth nemesis.

No eulogist will say of Putin: “He was magnanimous in victory.” Well, given that the eulogist will be Russian, and perfectly capable of saying up is down with the straightest of faces, he probably will.

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February 15, 2015

As An Oil Analyst, Mullet Man Igor Sechin Makes a Better KGB Agent

Filed under: Commodities,Derivatives,Economics,Energy,Russia — The Professor @ 11:10 am

Igor Sechin, he of the ape drape, has taken to the pages of the Financial Times to diagnose the causes of the recent collapse in oil prices. I am sure you will be  shocked to learn that it is those damned speculators:

In today’s distorted oil markets, prices do not reflect reality. They are driven instead by financial speculation, which outweighs the real-life factors of supply and demand. Financial markets tend to produce economic bubbles, and those bubbles tend to burst. Remember the dotcom bust and the subprime mortgage crisis? Furthermore, they are prone to manipulation. We have not forgotten the rigging of the Libor interest rate benchmark and the gold price.

. . . .

Financial bubbles, market manipulations, excessive regulation, regional disparities — so grotesque are these distortions that you might question whether there is any such thing as an oil “market” at all. There is the semblance of a market: buyers and sellers and prices. But they are performing a charade.

What is to be done? First, financial players should no longer be allowed to have such a big influence on the price of oil. In the US, Senators Carl Levin and John McCain have called for steps to prevent price manipulation, though whether they will be implemented, and when, remains an open question.

In any case, the authorities should go further, ensuring that at least 10 or 15 per cent of oil trades involve actually delivering some physical oil. At present almost all “oil trades” are conducted by financial traders, who exchange nothing but electronic tokens or pieces of paper.

No, condemnations of speculation are not the last refuge of scoundrels attempting to assign blame for sharp movements in commodity prices: they are the first and only refuge. Prices going up? Speculators! Prices going down? Speculators! Poor, poor little companies like doughty Rosneft and even international cartels like OPEC are mere straws at the tossed before the speculative gales.

Sechin’s broadside is refreshingly untainted by anything resembling actual evidence. The closest he comes is to invoke long run considerations, relating to the costs of drilling new wells. But supply and demand are both very inelastic in the short run, meaning that even modest demand or supply shocks can have large price impacts that cause prices to deviate substantially from long run equilibrium values driven by long run average costs.

It is also hard to discern a credible mechanism whereby diffuse and numerous financial speculators could cause prices to be artificially low for a considerable period of time. (It is straightforward to construct models of how a local market can be manipulated downwards, but these are implausible for a global market. Moreover as I showed years ago, markets that are vulnerable to upward manipulation by longs are relatively invulnerable to downward manipulation by shorts.)

And the empirical implications of any such artificiality are sharply inconsistent with what we observe now. Artificially low prices would induce excessive consumption, which would in turn result in a drawdown in inventories. This is the exact opposite of what we see now. Inventories are growing rapidly in the US in particular (where we have the best data). There are projections that Cushing storage capacity will be filled by May. Internationally, traders are leasing supertankers to store oil. These are classic effects of demand declines or supply increases or both that are expected to be transient.

Insofar as requiring some percentage of oil contracts (by which I presume he means futures and swaps) be satisfied by delivery, the mere threat of delivery ties futures prices to physical market fundamentals at contract expiration. What’s more, the fact that paper traders are largely out of the market when contracts go spot means that they cannot directly affect the supply or demand for the physical commodity.

Sechin’s FT piece is based on a presentation he gave at International Petroleum Week. Rosneft thoughtfully, though rather stupidly given the content, posted Sechin’s remarks and slides on its website. It makes for some rather amusing reading. Apparently shale oil companies are like dotcoms, and shale oil was a bubble. According to Igor, US shale producers are overvalued. His evidence? A comparison of EOG and Hess to Lukoil. The market cap of the EOG is substantially higher than Lukoil’s, despite its lower reserves and production, and lack of refining operations. Therefore: Bubble! Overvaluation!

Gee, I wonder if the fact that Lukoil is a Russian company, and that Russian company valuations are substantially below those of international competitors, regardless of the industry, has anything to do with it? In fact, it has everything to do with it. Sechin’s comparison of a US company with a Russian one points out vividly the baleful consequences of Russia’s lawless business climate. It’s not that EOG and other shale producers are bubbles: it’s that Lukoil (and other Russian companies) are black holes.  (It was the very fact that Russia’s lack of property rights, the rule of law, and other institutional supports of a market economy that got me interested in looking at the country in detail in the first place almost a decade ago.)

I was also amused by Sechin’s ringing call for greater transparency in the energy industry. This coming from the CEO of one of the most opaque companies in the most opaque countries in the world.

Reading anything by Sechin purporting to be an objective analysis of markets or market conditions is always good for a chuckle. His FT oped and IPW remarks are no exception. As a market analyst, he makes a better KGB operative. Enjoy!

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February 9, 2015

Obama: On a Roll. Us: Getting Rolled

Filed under: History,Military,Politics,Russia — The Professor @ 7:19 pm

Obama is on a roll. A roll. It’s hard to keep up!

Last night he delivered an anti-sexual assault bit at the Grammys. Is anybody pro-sexual assault?

Then, in a Vox (!) interview released today, he continued his Terrorism: It Ain’t No Thang tour:

“It is entirely legitimate for the American people to be deeply concerned when you’ve got a bunch of violent, vicious zealots who behead people or randomly shoot a bunch of folks in a deli in Paris,” Obama said. “We devote enormous resources to that, and it is right and appropriate for us to be vigilant and aggressive in trying to deal with that — the same way a big city mayor’s got to cut the crime rate down if he wants that city to thrive.”

But, he added, “we also have to attend to a lot of other issues, and we’ve got to make sure we’re right-sizing our approach so that what we do isn’t counterproductive.”

Um, the people shot in the “deli” in Paris weren’t randomly selected. Well, randomly selected Jews, maybe, which means it wasn’t random. And that is about the most extreme statement of terrorism is a law enforcement issue I’ve ever seen. Let’s get Mayor Quimby on it!

Then there was today’s Merkel-Obama presser. Where to begin?

When asked about arming Ukraine, he said he hadn’t quite made up his mind:

“It is true that if, in fact, diplomacy fails, what I’ve asked my team to do is to look at all options,” Obama said. “But I have not made a decision about that yet.”

Sure! Take your time. It’s not like this situation hasn’t been metastasizing since the Minsk accords were signed in September. Why haven’t the options been explored long ago, and contingent decisions been made?

And about that diplomacy thing and contingent decisions. First, negotiation and diplomacy depend on threat points. Bolstering-or even threatening to bolster-Ukraine’s military capacity affects the outcome of negotiations by changing substantially the threat point. This idea that diplomacy floats in a world of its own is just cracked, and in fact dooms diplomacy to failure.

Second, Merkel and Hollande scurried to Moscow because Putin had flagrantly violated the Minsk accords. So now they are going to  . . . Minsk, to negotiate new accords. With the guy who broke the last ones. Have I got that right? Am I missing anything?

Obama emphasized the unity of the allies on the Ukraine issue. Recall that earlier he has said he did not want to get ahead of the Europeans. Translation re unity: leading from behind, and deferring to the least common denominator, which in Europe is very low indeed. Germany is bad enough, let alone France, Hungary, Austria, or Greece.

(Sorry. “Leading From Behind” has been rebranded: It’s now called “Strategic Patience.” Same dog food, different label.)

He praised Russia for its constructive role on talks with Iran, and said he looked forward to their future cooperation. As if Putin has the slightest inclination to help out the US. Well, since the deal Obama is panting for will likely harm US interests, maybe Putin will pitch in on that one.

He said that the Ukrainian people knew that America stood behind them. Really. He said that. He didn’t say how far behind. All Obama is providing is warm blankets and hot air, and I am sure that Ukrainians can muster only a bitter laugh at his claim of support.

Obama reiterated his view that Russia’s isolation would bring Putin to heel:

“Even as we continue to work for a diplomatic solution we are making it clear again today that if Russia continues on its current course, which is ruining the Russia economy and hurting the Russian people, as well as having such a terrible effect on Ukraine, Russia’s isolation will only worsen both politically and economically,” he told a joint news conference after meeting with German Chancellor Angela Merkel.

Yes, Putin is so, so isolated. He’s a hero on the European right. Several nations in the EU are far more sympathetic to Russia than the US. And he was welcomed like a conquering hero in Cairo today: check out the photo here (h/t @libertylynx). Sisi greeted him at the airport-a first. The Egyptians did everything but treat Putin like Pharaoh, complete with a procession down the Nile on a royal barge.

By giving such a lavish reception for Putin, Sisi was also giving Obama the middle finger. Or two middle fingers. If Obama were to visit, Sisi would probably have him picked up in a cab and driven to the nearest Cairo slum.

Obama’s obvious affinity for Morsi and the Muslim Brotherhood is going over very badly in Egypt, and not just among the military and the government. Sisi and many Egyptians believe themselves to be in an existential struggle with the Brotherhood, and Obama’s meddling and continued support for it angers them deeply. (What, mayors can’t handle them?)

So glad he made that Cairo speech. It surely changed the world didn’t it? Really built a bridge between the US and the Muslim world, and healed all those wounds dating from the Crusades down to the evil Bush.

And speaking of the Muslim Brotherhood. Remember that supersecret meeting with Muslim “leaders” I wrote about last week? So yeah, among the “leaders” were ranking members of Muslim Brotherhood-linked organizations, including one that was named as an unindicted co-conspirator in a terrorism case. (But I forget: terrorism ain’t no thang.) No wonder he wanted to keep the guest listees and the subject matter secret.

What a week. The man is on a roll. On. A. Roll. And we’re the ones getting rolled.

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February 2, 2015

Arms and the Man

Filed under: History,Military,Politics,Russia,Uncategorized — The Professor @ 9:26 pm

The Obama administration is apparently reconsidering its refusal to provide lethal military assistance to Ukraine, although reading between the lines I suspect Obama is reprising his star turn as Hamlet. The security establishment seems solidly behind the idea, but Obama frets about getting into a proxy war with Russia.

Merkel came out steadfastly against the idea:

“Germany will not support Ukraine with guns and weapons,” said Merkel, speaking in Budapest. “We are putting all our bets on sanctions and doing our best to find a diplomatic solution.”

Telegram from Mr. Trotsky to Barack and Angela: you may not be interested in war, but war is interested in you.* Nattering on about diplomacy is pathetic given where things stand now, with the collapse of the Minsk accords and the dramatic escalation of conflict all along the contact line, but especially in the Debaltseve pocket. Merkel is engaged in wishful, not to say magical, thinking. Diplomacy and force are complements, and Putin will be uninterested in talk, except as a diversionary or delaying tactic, as long as the military option is viable.

One of the weapons the US is supposedly considering supplying to Ukraine is the Javelin anti-tank guided missile (ATGM). This could be a decisive weapon, and some wicked turnaround for Putin. Hezbollah inflicted great losses on Israel using Russian-made Kornet ATGMs in 2006.  If supplied in quantity, Javelins could neutralize Russia’s substantial advantage in armor, and dramatically raise the cost to the Russians and their proxies in blood, treasure, and equipment in any attempt to expand military operations in Ukraine.

How would this affect Putin? We don’t know what he is willing to pay for various outcomes in Ukraine, but making Ukrainian defenses substantially more effective could make the price for an outright conquest of part or all of Ukraine greater than Putin is willing to pay.

Putin has been able to get by so far by having his proxies bear the brunt of the casualties, and by suppressing news about Russian casualties. But even he would be unable to keep a lid on a large spike in losses. What’s more, his manpower and material resources are in fact quite constrained. Substantial losses could render his forces largely combat ineffective and incapable of a decisive victory.

The main risk is that it may be too late. The arms won’t magically appear in Ukraine overnight, and it would take some time to train the Ukrainians in their use after they arrive. If arms start to flow, Putin may conclude that he has a time window in which to advance, and therefore decide to move now, whereas he might be inclined to wait and rely on other means to dominate Ukraine if he believed that he could invade later if need be. Ironically, the more effective the arms we provide (or more accurately, the more effective Putin and his generals believe those weapons will be) the greater the incentive he has to move before those weapons arrive. Thus, the interval between the decision to arm and the time that the weapons are in Ukrainian hands will be quite fraught, and the US would need to be prepared to deter Putin in other ways during that interval.

There are widespread concerns that Putin would react to the arming of Ukraine by escalating elsewhere, such as the Baltics. He is clearly trying to signal his truculence, as with a provocative flight of nuclear armed Bear bombers through the English Channel. Thus, the issue becomes whether he can be deterred from challenging Nato directly in Estonia, Latvia, or Lithuania, or Poland for that matter. If he can’t be, Ukraine is the least of our problems. Or put differently, we need to revitalize our deterrent regardless of what we do in Ukraine, because Nato countries would be at risk.

If Putin’s madman strategy-real or feigned-is potentially effective in intimidating the West into acquiescing to his subjugation of Ukraine, magical thinking and Hamlet-like fretting are certainly effective at egging him on. People like him sense weakness as a predatory beast can. Arguably the strongest argument for arming Ukraine in the face of Putin’s threats is that it could get him to reassess the strength of American resolve. Obama’s record of temporizing-on Syria, on Isis, on Ukraine-has given Putin considerable reason to believe that when pushed, Obama will back down. It will take something rather dramatic, such as arming Ukraine in a big way, to convince Putin otherwise: even that is merely necessary, rather than sufficient. But if it’s done, it must be done lavishly, and not in a token fashion. But given how stingily we are with arms to the Syrian opposition and even the Kurds (who are actually accomplishing something against Isis), I find it hard to believe that Obama will do that.

The conundrum is that Putin will view American (and European) passivity as an invitation to keep pressing forward. Those who oppose doing something more robust, such as arming the Ukrainians, argue that this action will goad him forward as well: they are deluding themselves if they think he can be appeased. So it seems that regardless of what course is taken, Putin will keep trying.

At least Bloomberg is somewhat consistent. It says that we’re not going to seriously oppose Putin anyways, why give the Ukrainians any false hopes by giving them weapons? Just tell them to get used to living under Russian domination again and don’t encourage them to wage a futile war on their own.

But if you don’t want to acquiesce to Putin dominating the entire Warsaw Pact space, you have to make a stand somewhere. If the Ukrainians are willing to make that stand, give them the means to do it.

* This phrase is widely attributed to Trotsky, but the closest anyone can find written by him is “you may not be interested in the dialectic, but the dialectic is interested in you.”

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January 31, 2015

Russian Central Bank Roulette: Rubble the Ruble or the Banking System?

Filed under: Economics,Politics,Russia — The Professor @ 2:53 pm

On Friday the Central Bank of Russia surprised pretty much everyone by cutting its policy interest rate from 17 percent to 15 percent. Bloomberg lays responsibility at Putin’s feet, and no doubt he had to approve. But the evidence the article cites is not dispositive by any means. Yes, Central bank Governor Elvira Nabiullina had sworn up and down a little more than a week ago that the bank would not cut rates: if she’d said anything differently, she would have set off a speculative attack on the ruble, so she had to say that even if a policy change was being considered.

The fact is that CBR faces a terrible trade-off. Keeping the interest rate high damages severely the banking system, and is a drag on the real economy. Lowering the interest rate undermines the ruble (which indeed fell sharply on the news) and stokes inflation, which is already high and accelerating, and which has a disproportionate adverse impact on low and middle income individuals. Significantly, the RBC’s pubic statements have shifted from mentioning only inflation as a policy target, to a Russian version of Humphrey-Hawkins balancing of inflation and growth.

No doubt there is substantial political support for this that extends far beyond Putin. In particular, domestic banks are central bankers’ most important constituency and responsibility. Indeed, central banks are at risk of capture by domestic banks, and a banking crisis is frequently a greater fear than a sharp depreciation in the currency (though those things are of course related). Major Russian bankers, notably Sberbank’s German Gref have been lamenting the damage that high interest rates are doing to banks. Further, a mid-tier Russian bank (SB) began to limit deposit withdrawals, and the entire sector is suffering funding difficulties. Given all this, the CBR decided to rubble the ruble rather than the banking system. This is a piece with the government’s plans to recapitalize the banking system.

In sum, given the choice between supporting the ruble and the banking system, it chose to support the banking system. That appears to be the more imminent danger, and one that is of primary concern to the CBR. No doubt Putin agrees, but it’s unlikely he had to force an unwilling Central Bank into that decision. If another sharp selloff in the ruble occurs, the bank may reverse course, but for now, it has chosen the banking system (and Russian corporate borrowers) over the ruble and inflation.

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