Streetwise Professor

April 29, 2016

Rounding Up the Usual Suspects, With Chinese Characteristics

Filed under: China,Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 8:32 pm

Commodity prices on Chinese exchanges, especially for ferrous metals, have been skyrocketing in recent weeks. Rebar, iron ore and coking coal have been particularly active, but thermal coal and cotton have been jacked too.

In response, the Chinese authorities are cracking down on speculation.  Exchanges have raised margins in order to attempt to rein in trading. The government is making ominous statements about speculation and manipulation. And we know what can happen to speculators who fall afoul of the government.

Ironically, prices never appear to be just right, by the lights of the Chinese authorities. Last summer, and earlier this year, speculators were allegedly causing stock prices and commodity prices to be too low. Now they are causing commodity prices to be too high.

This is a case of the Chinese authorities playing Claude Rains in Casablanca, and ordering a roundup of the usual suspects. Speculators make convenient targets, and they appear to be the proximate cause: after all, their trades produce the rapidly rising prices.

But the speculators are merely the messengers. If the Chinese authorities want to find the real culprits, they need to look in the mirror, for the speculators are responding to the most recent lurch in Chinese economic policy.

Put simply, after the economic slowdown of the second half of 2015 (a slowdown masked by fraudulent official statistics, but evident nonetheless), the government pushed the panic button and fell back on its standard remedy: injecting a burst of credit.  Some estimates put the Chinese debt to GDP at 237 percent. Since GDP is likely also an overstated measure of national income, due to fraudulent statistics and the fact that the losses on past investments have not been recognized (in part because much of the credit is pumped  into zombie companies that should be bankrupt) this ratio understates the true burden of the debt.

The surge in credit is being extended in large part through extremely fragile and opaque shadow banking channels, but the risk is ending up on bank balance sheets. To engage in regulatory arbitrage of capital rules, banks are disguising loans as “investments” in trust companies and other non-bank intermediaries, who then turn around and lend to corporate borrowers.  Just call a loan a “receivable” and voila, no nasty non performing loan problems.

There is one very reasonable inference to draw from this palpably panicked resort to stimulus, and the fact that many companies in commodity intensive industries are in desperate financial straits and the government is loath to let them go under: today’s stimulus and the implied promise of more in the future whenever the economy stutters will increase the demand for primary commodities. The speculators are drawing this inference, and responding accordingly by bidding up the prices of steel, iron ore, and coal.

Some commentors, including some whom I respect, point out that the increase does not appear to be supported by fundamentals, because steel and coal output, and capacity utilization, appear to be flat. But the markets are forward looking, and the price rises are driven by expectations of a turnaround in these struggling sectors, rather than their current performance. Indeed, the flat performance is one of the factors that has spurred the government to action.

When the Chinese responded to the 2008-2009 crisis by engaging in a massive stimulus program, I said that they were creating a Michael Jackson economy, one that was kept going by artificial means, to the detriment of its long term health. The most recent economic slowdown has engendered a similar response. Its scale is not quite as massive as 2008-2009, but it’s just begun. Furthermore, the earlier stimulus utilized a good portion of the nation’s debt capacity, and even though smaller, the current stimulus risks exhausting that capacity and raising the risk of a banking or financial crisis. It is clear, moreover, each yuan of stimulus today generates a smaller increase in (officially measured) output. Thus, in my view, the current stimulus will only provide a temporary boost to the economy, and indeed, will only aggravate the deep underlying distortions that resulted from past attempts to control the economy. This will make the ultimate reckoning even more painful.

But the speculators realize that the stimulus will raise commodity demand for some time. They further recognize that the stimulus signals that the authorities are backsliding on their pledges to reorient the economy away from heavy industry and investment-driven growth, and this is bullish for primary materials demand going forward: the resort to credit stimulus today makes it more likely that the authorities will continue to resort to it in the future. So they are bidding up prices today based on those predictions.

In other words, as long as the Michael Jackson economy lives and stays hooked, its suppliers will profit.

So yet again, commodity markets and the speculators who trade on them are merely a lurid facade distracting attention from the underlying reality. And the reality in China is that the government cannot kick the stimulus habit. The government may scream about (and worse) the usual suspects, but it is the real cause of the dizzying rise in Chinese commodity prices, and the burst of speculation.

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April 13, 2016

You Can’t Handle the Truth! Censoring Politically Inconvenient Research at the CFTC

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Politics,Regulation — The Professor @ 2:29 pm

I had missed that the CFTC’s Office of the Inspector General had found that the Office of the Chief Economist had “prohibited relevant but potentially controversial research” on position limits. According to the OIG, during a routine interview with a CFTC staff economist, without being asked, the economist told the OIG that s/he had been prevented from doing research on position limits. According to the OIG, “several OCE economists identified position limits as an example of a topic on which economic research is no longer permitted.” One said: ”you can’t write a report on something that destroys three years of (CFTC) work.”

The basic conclusion is damning:

Several other economists confirmed their impression that OCE is now censoring research topics that might conflict with the official positions ofthe CFTC. Some ofthis censorship occurs on the part ofindividual staffeconomists themselves-when selecting potential topics, they now choose non-controversial ones. However, multiple OCE economists also reported that the Chief Economist has declined to permit research on certain topics relevant to the CFTC mission, including position limits.

Some OCE economists expressed uncertainty as to the purpose of OCE’s research program if the Office is prevented from studying topics relevant to current CFTC rulemaking. Yet OCE economists reported that the Chief Economist has rejected or delayed research paper topic ideas if tey were related to pending rulemaking or could challenge the validity of agency regulations. One OCE economist described the policymaking process as one in which a decision is made and then analysis is done in a fashion designed to support the decision. There is a perception within OCE that the ChiefEconomist is “more Commission-friendly,” and that he discourages research that might offend Commissioners.

During “multiple” discussions with the OIG, the Chief Economist at first admitted that this was so, then backtracked:

He agreed that he had initially rejected a research proposal on position limits on the basis that it was politically controversial. The Chief Economist later stated his belief that the CFTC did not have the data or the in-house expertise to do this project in any event. The Chief Economist explained that this was a matter of discretion, and that he did in fact permit research into politically controversial topics. He provided an example ofresearch into high-frequency trading and instances ofself-trading. When asked, the Chief Economist agreed that the Chairman actively supported this line ofresearch. The Chief Economist also stated that he wanted to be able to take to the Chairman and Commissioners anything he or OCE did.


Chairman Massad has recently rejected the OIG’s conclusion, the statements of multiple staff economists, and the initial gaffe (i.e., truth telling) by the Chief Economist. It wasn’t politics, you see. It was priorities:

“Our Office of the Chief Economist has many excellent economists, the morale there is very good and the work they produce is very good. They often produce things that might conflict with the views I have and the views other commissioners have, but we don’t have any kind of political screen on what we do,” said Massad, testifying before the Senate Committee on Appropriations on April 12.

“We do have, however, priority setting. It’s a small division and we must set priorities. We can’t always have a staff person just do the research they would like to do, as opposed to research we really need to focus on. That’s the only way in which we focus their work,” he added.

To state the obvious: priorities are inherently political. The statement about priorities therefore does not refute the belief of the staff economists that the decision to forbid research on position limits was ultimately political.

Chairman Massad’s assertion also is flatly inconsistent with the opinions expressed by multiple individuals, including his own Chief Economist (before he got his mind right, anyways). Thus, there is certainly a widespread perception in the OCE that permissible research means politically correct research. Either this perception is correct, or Chairman Massad has done a poor job of communicating to the economists the criteria by which research resources are allocated.

In a Washington where everything is politicized, and in particular where Senator Elizabeth Warren clearly attempts to censor those expressing dissenting opinions, and attempts to intimidate and slander those who dare to express such opinions, it is utterly plausible that the economists’ perceptions are very well grounded in reality. I view the economists’ complaint as facially valid, but potentially rebuttable. Mr. Massad’s testimony does not even come close to rebutting their assertions. Indeed, knowing how to decode words like “priorities” from GovSpeak, if anything his testimony buttresses the complaint, rather than rebuts it.

But let me suspend disbelief for a moment, and take Chairman Massad at his word. Just what does that imply?

First, it implies that a position limits initiative that would impose substantial burdens on the industry is of insufficient importance to justify a researcher or two to spend a portion of their time to study. Not to denigrate the value of the economists’ time, but in the scheme of things this does not represent a huge expenditure of resources. If position limits are of that little importance, what is the potential benefit of the regulation? Why does the Commission persist in pushing it if it is not even worth the time of a few staff economists?

Second, what does this say about the Commission’s commitment to carrying out its statutory obligation to conduct a cost-benefit analysis of the regulation?

Third, and relatedly, if the Chief Economist is correct and his staff does not possess “the data or the in-house expertise to do this project” how would it even be possible for the OCE, and the Commission, to perform a valid cost-benefit analysis? In particular, since the proposed research appears to speak to the issue of the benefits and necessity of limits, how can the Commission generally, and Chairman Massad in particular, credibly claim that they have determined that limits offer sufficient benefit to make them necessary, or to exceed their cost, if its own Chief Economist claims that his office has neither the data nor the expertise to perform valid research on the effects of limits?

Position limits have been a political project from Day 1. They remain a political project, as Senator Warren’s recent jeremiad (directed substantially at yours truly) demonstrates. The economic case for them remains dubious at best. Given this history and this context, the assertion that prohibiting CFTC staff economists from researching the issue was politically motivated is all too plausible.

The Risk article that I linked to quotes Gerry Gay, who was Chief Economist under Wendy Gramm in the Bush I administration. Gerry notes that prior to 1993, economics and economists had pride of place within the CFTC. It was viewed as “an economist’s shop.”

That is a fair statement. What happened in 1993? The Clinton administration took over, and (as Gerry notes) de-emphasized economics. I remember distinctly an article in Futures Magazine that solicited the opinion of many industry figures as to the changes the new administration would bring. Ex-CFTC Commissioner Philip McBride Johnson’s statement sticks in my mind. This is almost an exact quote, though it is from memory: “We can now get rid of the economists and put the lawyers back in charge.”

That’s exactly what happened then, and with a few exceptions during the Bush II years, has remained true ever since. Just as Clemenceau said that war is too important to be left to the generals, the DC set established that regulating the markets is too important to be left to the economists. What’s more, particularly in the Obama administration, starting with Gensler’s tenure as head of the Commission, it was determined that certain kinds of lawyers had to be in charge, and they had to follow marching orders from politicians. Do not forget that Gensler was only able to overcome skepticism about his Goldman background by pledging fealty to the Democratic senators on the relevant committees, and to their agenda. Truly independent regulators get crushed. (Remember the fate of FCC head Tom Wheeler when he strayed just a little bit off the party line on net neutrality?)

Keep that in mind when attempting to determine the true story of the disapproved research on position limits. It has been determined that you can’t handle the truth.

Update: Note well that the CFTC economists’ concerns about acceptable research extend beyond position limits. It is clear that several believe that policy-relevant research is discouraged, at least if it could contradict existing or pending regulations. If that’s in fact true, it would be fair to ask why the hell the CFTC has economists anyways. Economics has a vital role in informing policy on markets. The economists could pay their lifetime salaries many times over by stopping or correcting one misguided regulation, or even one misguided piece of a broader regulation. (I recall a quote from Coase that an economist could pay for his lifetime salary by just delaying a bad regulation a day.) The only real reason to have economists at the CFTC or any agency is to provide critical evaluation of pending or existing rules and regulations. It is beyond absurd to preclude economists from working on exactly those things, when they could upset some politically-driven regulation.

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April 4, 2016

Barbarian at the Gate, Exchange Edition

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Regulation — The Professor @ 11:04 am

ICE’s Jeffrey Sprecher has a way of getting inside the heads of his competitors. He is obviously in the head of LSE CEO Xavier Rolet, before he’s even formally announced a rival offer for the LSE:

The boss of the London Stock Exchange has dismissed the owner of the New York Stock Exchange as a “slash and burn” organisation which would throw parts of the British bourse “in the bin”.

. . . .

He branded ICE’s ownership of Euronext, the pan-European exchange, as a “disaster,” claiming it had “eviscerated” the four-country exchange platform for cost-cutting.

Mr Rolet, who acknowledged that the LSE’s board would consider any “serious proposal,” made clear that he is not interested in a bid from an “interloper”.

“I don’t want just anyone, particularly not some ‘slash and burn’ type  organisation, to come in and kill all of the stuff we’ve done over the last few years,” he said.

“It is not a company based in Atlanta… that is going to worry about the financing of European industry… It’s just not going to be part of their strategy.

“Which is why they chucked out Euronext. They kept the clearing business that they had, and they kept the derivatives engine. And that is not a strategy for British industry. I doubt that this [Aim] would be part of the strategy of any frankly global exchange…Our 1000 Companies programme, that costs money. Our Elite programme, that costs money. All that stuff would be chucked in the bin.”

Rolet sounds like the typical 1980s CEO quaking in fear of a hostile takeover, fussing over every little piece of the empire he built. Which is exactly why everything about Sprecher that Rolet condemns as a bug is a feature.

ICE has an excellent record at making acquisitions work. A crucial reason for that is that Sprecher focuses ruthlessly on value and value creation, and doesn’t have sentimental attachments to particular businesses, especially those that are inefficient and bloated, and which don’t fit strategically within the organization he has built.

He recognized that Euronext was an excessively costly firm in a low margin commoditized business that didn’t offer any synergies to his core derivatives business. So he acquired EuronextLiffe, put Euronext on a diet, and spun it off for a decent price. He kept LIFFE and Euronext’s clearing business and integrated them into the ICE structure in a way that should make other acquirers (I’m looking at you, UAL!) green with envy.

As for sentimental musings about “financing European industry”, if it is so valuable, it would pay. If it doesn’t pay, it’s not valuable. No evident externalities here, and if there are, it’s fantasy to believe that any individual company will be able to internalize it.

As for programs that “cost money”: the question is if they generate an adequate return on that investment. If Aim, or the 1000 Companies program, or the Elite program don’t generate a compensatory return, they deserve to be binned or restructured. If they can earn a compensatory return, believe me, Sprecher won’t bin them. Rolet’s lament bears all the signs of a man who is personally invested in pet projects that he knows don’t pass the value creation test.

Rolet, in other words, sees Sprecher as a latter day Barbarian at the Gates. But if you give it even a superficial look, it is evident that by every measure ICE has been singularly successful at creating value in a very dynamic and competitive exchange and clearing space. If Jeff Sprecher is a barbarian, then civilized CEOs are vastly overrated. Give me the barbarians any day.

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March 29, 2016

Vertical Integration in LNG? Strike That: Reverse It

Filed under: Commodities,Economics,Energy — The Professor @ 8:24 pm

The LNG market has taken an even harder fall than the oil market, with prices down from a peak of over $20/mmBTU a couple of years ago to around $4 now. Slower demand growth plus the entry of megaprojects in Australia and the US have done a double whammy. Indeed, some big projects have been canceled of late due to the grim price environment.

Anticipating a growth in supply that was likely outstrip demand growth (but not by as much as has actually happened), in 2014 I predicted that an overhang of cargoes would catalyze the development of the spot market. This is in fact occurring. A larger fraction of the trade is being consummated on a short term basis, and longer term contracts are relying less on oil indexing (which I called a barbarous relic, and analogized to the drunk looking for his car keys under the streetlight) and destination clauses (which limit the ability of buyers to resell gas they don’t need), and more on gas-on-gas pricing and destination flexibility.

This is the beginning of a virtuous cycle by which liquidity begets liquidity, making spot trading even cheaper relative to long term supply contracts. As I referred to it in 2014, whereas in the first 50 years of LNG* it was necessary to rely on long term contracts to achieve security of supply and demand, in the next 50 years liquid markets would provide this security, as has been in the case in oil markets for the last nearly 40 years.

The oil market demonstrates that long term contracts are not necessary to support the financing of very capital intensive upstream energy projects. Further, there will be less of a need for megaprojects for some time (given the supply overhang). What’s more, smaller scale liquefaction facilities are becoming commercially viable. For example, the ex-CEO of Cheniere, Charif Souki, has a well-financed startup that is focusing on developing such projects.

Which means that the next decade of LNG will be an evolution towards a market that looks more like the oil market, or other traded commodity markets.

Some don’t see it that way, and seeing the financial struggles of megaprojects are suggesting a move in the opposite direction. For instance, today in Reuters, Clyde Russell pulls the panic alarm and recommends that LNG firms move to vertical integration:

The industry needs to consider going downstream in order to ensure its long-term viability.

Much like oil companies’ move from producing oil into refining it and then retailing fuels, so too will LNG companies have to find ways to establish a sustainable market that will create and maintain demand for their product.

This means investing in re-gasification terminals in developing nations, along with associated pipeline infrastructure and storages.

It may also mean building gas-fired power plants, transmission grids and or even partnering with companies at the retail level to install gas-powered heating systems in buildings and residences.

In the words of Willy Wonka: “Strike that. Reverse it.” (H/T Number One Daughter.)

There are a lot of reasons for vertical integration, none of which apply in the current LNG market. Neoclassical reasons include double marginalization (monopolies at successive levels of the value chain) or circumventing price controls.

Transactions cost reasons include asset specificity that create a bilateral monopoly problem. A classic example is site specificity, as when a power plant is located at the mouth of a coal mine. This reduces transportation costs, but would subject the mine owner to the opportunism of the power plant owner (and vice versa) if they were separate entities. Integration prevents wasteful haggling over quasi-rents.

These conditions don’t hold in LNG. In fact, the reverse is true. Since LNG can be shipped anywhere in the world, since it is an extremely homogenous commodity, and since there are an increasing number of producers, every producer can deal with many buyers, and every buyer can deal with many sellers. This eliminates double marginalization and asset specificity problems.

Moreover, integration can limit the optionality by tying a seller to a small number of consumers. There is  also a multiple equilibrium issue. If a large fraction of buyers and sellers are tied together via integration (or long term contracts), the spot market is less liquid, making it more costly for the remaining firms to rely on spot sales and purchases: this leads them to integrate (or enter into long term contracts), which reduces of the spot market further.

The LNG market is on the cusp of moving in the opposite direction, which would allow it to exploit optionality more effectively. And optionality is becoming more important as gas generation is becoming more common around the world, not just in Asia and Europe, but in Africa as well. This creates more destination options, and these options are valuable due to uncertainties in supply and demand. To take a recent example, drought in Amazonia has led to an increase in demand for gas generation in Brazil: traders like Trafigura have met the demand by sending cargoes there. When the rains return, the cargoes can find another market. As another example, the Fukushima nuclear disaster led to an increase in the demand for gas in Japan. A Russian supply disruption would lead to a spike in demand in Europe.

Given the inherent variability in gas supply and demand, which vary due to the vagaries of the weather, supply shocks, and myriad other factors, and which are crucially imperfectly correlated geographically, destination options are valuable. Flexibility allows gas to move to places experiencing increases in demand or reductions in supply via pipelines. Vertical integration impedes the ability to exploit these options, and hence destroys value.

Thus, vertical integration is the exact wrong way to go in LNG. The biggest virtue of LNG is that it can be shipped anywhere: why undermine that virtue by constraining shipping options? The deepening of market liquidity, which is proceeding apace, will reduce the transactions costs of exploiting optionality. The silver lining in the current glut of LNG is that is speeding the development of liquidity. Meaning that Clyde Russell’s prescription of vertical integration is the exact wrong response to that glut. The glut increases liquidity. Liquidity enhances optionality. Optionality creates value. Don’t stymie this salutary development. Go with it. It will pay off in both the short term and the long term.

* The first cargo of Algerian LNG was shipped in 1964. The birth of the LNG industry is often dated to that shipment, although LNG had been shipped from the US in the 1950s.

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March 22, 2016

Shocking! Physical Oil Traders Profit From *LOW* Prices! Who Knew?

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 1:25 pm

Major oil traders have profited handsomely from the low price environment. Today Gunvor released results, showing a big increase in profits to $1.25 billion. A big part of the increase was driven by profits on sales of its Russian assets, but the company’s news release states that earnings from continuing operations were up 10 percent. Gunvor’s results were driven by a 24 percent increase in traded volumes.

Timing is everything. No doubt Gennady Timchenko is cursing US sanctions even more now than in March, 2014. The sanctions preceded by a few months the epic oil price collapse which has boosted oil traders’ profits.

Vitol also released some limited information about its 2015. It did not release profits numbers, but the FT reports that in the 9 months ending September, its profits were $1.25 billion, about 40 percent more than in the comparable period of 2014. Vitol’s volumes were up 13 percent.

These results come on the heels of earlier good trading results from Glencore and Trafigura. Both companies showed large increases in volumes, up 22 percent in the case of Trafigura.

Revenues of all oil traders have declined because price declines have more than offset the effect of rising volumes. But that  just points out that what matters to traders is volumes, not flat price. Indeed, low flat prices can be a boon, because (a) to the extent they are driven by higher output, they are associated with increased volumes, and (b) they reduce working capital burdens.

The increase in trader volumes far outstripped increases in output of crude or refined products. This raises the question of what is driving the increase. It could be that a higher fraction of output is traded now. Alternatively, or additionally, each barrel may turn over more frequently. I don’t know the answer, but I am going to make some inquiries to learn more.

These bumper profits in the face of an oil price collapse proves, as if further proof is needed, the idiocy of David Kocieniewski and other non-specialist journalists and politicians (yeah, Liz, I’m taking the risk of turning to stone, and looking at you). Kocieniewski, you may recall (I sure do!), said that my opposition to position limits and my support of speculation in commodity markets was tainted due to my writing of a white paper for Trafigura, a notorious speculator that profits from high prices:

What Mr. Pirrong has routinely left out of most of his public pronouncements in favor of speculation is that he has reaped financial benefits from speculators and some of the largest players in the commodities business, The New York Times has found.

. . .

While he customarily identifies himself solely as an academic, Mr. Pirrong has been compensated in the last several years by the Chicago Mercantile Exchange, the commodities trading house Trafigura, the Royal Bank of Scotland, and a handful of companies that speculate in energy, according to the disclosure forms.

Except that as the events of the past couple of years demonstrate, physical traders aren’t speculators and don’t have an interest in (let alone the ability to) drive prices higher.

But why let the facts stand in the way of a good story, right?

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March 21, 2016

The Seen and the Unseen, Hedging Edition (With a Bonus Explanation of Why Airlines Hate Speculators)

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 8:16 pm

Most media coverage of hedging is appalling. It tends to focus on the accounting, and not the economics. Unfortunately, managements and analysts too often fall into the same trap.

This WSJ article about hedging by airlines is a case in point:

After decades of spending billions of dollars to hedge against rising fuel costs, more airlines, including some of the world’s largest, are backing off after getting burned by low oil prices.

When oil prices were rising, hedging often paid off for the airlines, helping them reduce their exposure to higher fuel costs. But the speed of the 58% plunge in oil prices since mid-2014 caught the industry by surprise and turned some hedges into big money losers.

Last year, Delta Air Lines Inc., the nation’s No. 2 airline by traffic, racked up hedging losses of $2.3 billion, while United Continental Holdings Inc., the No. 3 carrier, lost $960 million on its bets.

Meanwhile, No. 1-ranked American Airlines Group Inc., which abandoned hedging in 2014, enjoyed cheaper fuel costs than many of its rivals as a result. “Hedging is a rigged game that enriches Wall Street,” said Scott Kirby, the airline’s president, said in an interview.

Now, much of the rest of the industry is rethinking the costly strategy of using complex derivatives to lock in fuel costs, airlines’ second-largest expense after labor.

Roughly speaking, hedgers “lose”–that is, their derivatives positions lose money–about half the time. If the hedge is done properly, that “loss” will be offset by a gain somewhere else on the income statement or balance sheet. The problem is, it’s not identified specifically. In the case of airlines, it shows up as a lower cost of goods sold (fuel expense), but it isn’t identified specifically.

The tendency is to evaluate the wisdom of hedging ex post. But you cannot evaluate hedging that way. You hedge because you don’t know which way prices will go, and because a price move in one direction hurts you more than a price move in the opposite direction of the same magnitude helps you. If you knew which way prices were going to go, you wouldn’t need to hedge.

That is, hedging is valuable for an airline if reducing the variability of profits attributable to fuel cost changes raises average profits. How can this happen? One way is bankruptcy costs. If an airline loses $1 billion due to a fuel price spike, it may go bankrupt, and incur the non-trivial costs associated with bankruptcy: this is a deadweight loss. The airline receives no bonus equivalent in magnitude to bankruptcy costs if it gains $1 billion due a fuel price decline. Therefore, reducing the variability of fuel prices reduces the expected deadweight losses (in this case, expected bankruptcy costs), which is beneficial to shareholders and bondholders.

As another example, an airline that becomes more highly leveraged because of an adverse fuel price movement may underinvest (relative to what an unleveraged firm would) due to “debt overhang”: it underinvests because when it is highly leveraged the benefits of investment accrue to bondholders rather than shareholders. Again, there is unlikely to be a symmetric gain when the company becomes unexpectedly less leveraged due to a favorable fuel price movement. Here, reducing variability reduces the expected losses due to underinvestment.

Hedging can also reduce the costs of providing incentives to management through tying pay to performance. Hedging reduces a source of variability in performance that is outside of managers’ control: since they are risk averse they demand compensation for bearing this risk, so hedging it reduces compensation costs, and makes it cheaper to tie pay and performance.

The problem is, none of these things show up on accounting statements with the clarity of a 9 or 10 figure loss on a derivatives position put on as a hedge. The true gains from hedging are often unseen. The true gains are the disasters avoided that would have occurred in the absence of a hedge. There’s no line for that in the financial statements.

The one saving grace of the WSJ article is that it does mention a relevant consideration in passing, but doesn’t understand its full importance:

Another factor in the hedging pullback: a round of megamergers, capacity cuts and more fuel-efficient aircraft have fattened the industry’s profits, leaving carriers in better financial shape—and less vulnerable to a spike in fuel prices.

Two of the factors that make hedging value-enhance that I mentioned before (bankruptcy costs and underinvestment) are more relevant for highly leveraged firms that are at risk of financial distress. Due to the factors mentioned in foregoing quote, airlines have become less financially distressed, and need to hedge less. But that should have been the focus of the article, rather than the losses on previously undertaken hedges.

And that should be what is driving airlines’ decisions to hedge, although the statement of American Airlines’ president Kirby doesn’t provide much confidence that that is the case, at least insofar as AA is concerned.

Airlines are interesting because they have historically been among the biggest long hedgers in the energy market. This is true because they are one major consumer of fuel that (a) cannot pass on (in the short run, anyways) a large fraction of fuel price increases, and (b) are big enough to make justify incurring the non-trivial fixed costs associated with hedging.

Fuel costs are determined by an airline’s routes and schedule, and fuel consumption is therefore fixed in the short to medium term because an airline cannot expand or contract its schedule willy-nilly, or adjust its aircraft fleet in the short run. Thus, fuel is a fixed cost in the short to medium term. Furthermore, the schedule and the existing fleet determine the supply of seats, and hence (given demand) fares. Since supply and hence fares won’t change in the short to medium term if fuel prices rise or fall, airlines can’t pass on fuel price shocks through higher or lower fares, and hence these price shocks go straight to the bottom line. That increases the benefits for financial hedging: airlines have no self-hedges for fuel prices.

This is to be contrasted to, say, oil refiners. Refiners are able to pass on the bulk of oil price changes via product price changes: pass through provides a self-hedge. Yes, crack spreads contract some when oil prices rise (higher prices->lower consumption->lower utilization->lower margins), but refiners are able to shift most of the crude price changes onto downstream consumers. This reduces the need for financial hedges.

Further, many downstream consumers–gasoline consumers like you and me, for instance–don’t consume in a scale sufficient to justify incurring the fixed costs of managing our exposure to gasoline price changes. Therefore, a large fraction of those who are hurt by rises in the flat price of energy don’t benefit from financial hedging.

Conversely, those hurt by falls in flat prices, firms like oil producers and holders of oil inventories, don’t have self-hedges: they are directly exposed to flat prices. Moreover, they are big enough to find it worthwhile to incur the fixed cost of implementing a hedging program.

This leads to an asymmetry between long and short hedging, which is evident in CFTC commitment of traders data for oil. This asymmetry is why long speculators are essential in these markets. Without long speculators, the (predominant) short hedgers would have no one to take the risk they want to get rid of. This would put downward pressure on futures prices, and increase the risk premium embedded in futures prices.

Which is why airlines have been in the forefront of those hating on speculators. Not because speculators distort prices. But because long speculators compete with long hedgers like airlines to take the other side of short hedgers like oil producers and traders holding oil inventories. This competition reduces the risk premium in futures prices.

This makes it costlier for airlines to hedge, but their higher costs are more than offset by lower hedging costs for producers, stockholders, and other short hedgers. This is why speculators are vital to the commodity markets, and thereby raise prices for producers and reduce costs for consumers.

But apparently this is totally lost on Elizabeth Warren and her ilk. But as the WSJ article shows, ignorance about hedging–and hence about the benefits of speculation–is widespread. Unless and until this ignorance is reduced substantially, policy debates will generate much more heat than light.

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February 26, 2016

The Notorious S.W.P., or, Dr. Pirrong Goes to Washington

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 8:20 pm

If Elizabeth Warren were to have her way, you’d see my mug on the wall of your local Post Office. What have I done to become to earn her nomination as Public Enemy? Having the temerity to oppose position limits, and co-authoring a report summarizing the deliberations of the CFTC’s Energy & Environmental Markets Advisory Committee, which strongly criticized the need for, and details of, the Commission’s proposed position limits rule.

The backstory is this. In 2015 I was an associate member of EEMAC. (As of 10 days ago, I am a full member.) The Committee’s sponsor, Commissioner Christopher Giancarlo, asked me to write the (Dodd-Frank mandated) report summarizing the Committee’s deliberations at two meetings in 2015. I agreed, and along with Jim Allison (who just retired from ConocoPhillips), I wrote a relatively short draft that just summarized the transcripts of the two meetings. The report went through some additional edits, and was then submitted to the nine full members of EEMAC for their approval. It was approved by an 8-1 vote.

The conclusions and recommendations of these meetings were rather straightforward to recapitulate, because there was considerable agreement on the major issues of (a) whether position limits were necessary, (b) the proposed rule’s bona fide hedging exemptions, and (c) whether to implement limits for spot months only initially, or to implement for all months.

If you read the transcript, and read the final report, you will see that the report is a faithful record of what happened during the meetings. As I said in yesterday’s meeting, I viewed my role to be that of “faithful scribe,” and that’s what I was.

But since the message in the report was NOT what Elizabeth Warren (and one of the EEMAC members, Public Citizen’s Tyson Slocum) wanted to hear, Warren, Slocum, and Warren’s journalistic creatures (most notably the New York Times) decided to kill the messenger. Warren wrote a letter to the CFTC, demanding that the report be withdrawn. Slocum wrote a dissent to the majority report. Assorted journos scurried along behind. Each called foul on my authorship. Here’s what Warren said about yours truly:

The second panelist I am concerned about is Dr. Pirrong. According to the New York Times, “Mr. Pirrong has positioned himself as the hard-nosed defender of financial speculators – the combative, occasionally acerbic academic authority to call upon when difficult questions arise in Congress and elsewhere about the multitrillion-dollar global commodities trade…. [who] has reaped financial benefits from speculators and some ofthe largest players in the commodities business,” and played a key part in “a sweeping campaign [by the financial industry] to beat back regulation.”10

With specific regard to the position limits rule, Dr. Pirrong served as a consultant for the International Swaps and Derivatives Association – a lead plaintiff suing to block the very rule he was asked to provide his views on for the EEMAC.11 There is no record indicating that these conflicts were even disclosed by Dr. Pirrong when he served as a witness, let alone addressed by the EEMAC.

Thanks, Liz! You’re too kind! Honored to be the kind of person your kind of person considers a threat.

One of the journalists slouching after her, the New Republic’s David Dayen weighed in:

The recent inclusion of Craig Pirrong on the committee is perhaps the most flagrant example. Pirrong, who co-wrote the first draft of the report with James Allison, is a professor of finance at the University of Houston, who has been paid by several industry participants and trade groups for his research into commodity speculation. He was also a paid research consultant for the International Swaps and Derivatives Association, the very group that got the initial rule overturned by the courts.

The CFTC report relies mostly on Pirrong’s research and a presentation he made to the committee last year, which did not include the opinion of anyone who believes in the dangers of excessive commodity speculation. In fact, 10 of the 13 witnesses at EEMAC meetings came from industry, two were representatives of CFTC, and the other was Pirrong. The meetings never mentioned that there would even be a final report.

This is amusing on several levels. The first is the fact that the New Republic became the dumpster fire of left-wing opinion rags under the ownership of Christopher Hughes (which ended today, with the magazine’s sale).

The second is that last sentence about no mention of a final report. Er, it’s mandated by law, genius. A law you no doubt love, no less–Frankendodd.

The third-and best-is the title of the piece: “Why Elizabeth Warren is on the Warpath This Week.” This is particularly hilarious. I could see a right-wing mag saying that, as a snarky allusion to the very blonde Warren’s exploitation an alleged Cherokee heritage to game affirmative action to work her way up the greasy pole of legal academia (thereby earning herself the nickname Fauxahontas). But for a lefty to title a piece that way is too precious.

My reply? Yawn.

This ad hominem ankle biting is old and tiresome. This is what passes for serious criticism on the left. It is particularly appalling that a former dean of Harvard Law School can’t do any better than this. No substantive criticism whatsoever. You’d think that if I was just a paid hack that the substance of what I’ve written would be readily dismantled. But Warren and her acolytes don’t even try.

Which is probably wise. That is revealing in itself: you don’t fight battles you know you would lose, so you choose other methods, such as ad hominem slurs, questioning motives rather than challenging facts and logic.

The gravamen of the criticism, such as it is, is also just plain wrong. Warren, Slocum, Dayen, the New York Times, and various Twitter trolls all cite to the 2014 New York Times article which claims that I did paid research for multiple speculators. As Slocum put it in his dissent: “The Times continued that Dr. Pirrong has a long list of paid contracts with energy speculators.”

Long list? The article lists three.

  1. CME. Not a speculator. My work for CME consisted of writing an analysis of the hedging performance of the WTI contract, and serving as an expert in patent litigation involving Globex. Nothing to do with speculation.
  2. Royal Bank of Scotland. Never did work for them. Not an energy speculator.
  3. Trafigura. Not a speculator. A hedger.

As I pointed out at the time of the NYT article, using Trafigura as the Gotcha! just demonstrated how clueless the author of the Times piece was. Now Warren and Slocum are exhibiting similar cluelessness. Trafigura is not a speculator. Its main use of derivatives is as a hedger, and on the short side. Further, contrary to the insinuation that Trafigura likes high prices, it is generally neutral as to price level because it makes money on margins not flat prices, and in fact can profit in low price environments–and has profited handsomely in the recent historic price decline.

People with such a limited understanding of the way things actually work are not worthy of serious attention. Those who are stubbornly and deliberately ignorant (like Warren and Slocum) just deserve scorn.

As for the ISDA connection, I did write a comment letter that ISDA submitted in conjunction with its comment letter on position limits. However, I was NOT paid for that. I directed that ISDA make a donation in my name to the Wounded Warriors Project.

This confusion about who is and who isn’t a speculator illustrates the cosmic stupidity of Warren’s (and Slocum’s and the journalistic clique’s) criticism of EEMAC and its make-up. There are no true speculators represented on the Committee–either its full or associate members. None. No banks–Warren’s usual bêtes noires. No hedge funds. No managed futures funds. No ETFs. Speculators qua speculators were conspicuous by their absence. It is impossible to argue that the EEMAC was doing Wall Street’s bidding.

Instead, the membership is dominated by end users-including public utilities, municipal utilities, producers, merchants-and exchanges. These entities are not speculators whose participation would be constrained directly by the limits, but are mainly hedgers who would face substantial compliance burdens and undue constraints on their risk management activities. Further, they rely on the liquidity and risk bearing capacity supplied by speculators to hedge cheaply and effectively. Constraints on speculation threaten to raise hedging costs. Moreover, if speculation indeed destabilized prices, these firms would suffer.

Thus, these are the firms that limits are intended to help. And they are saying loud and clear: don’t do us any favors.

But Warren et al are apparently incapable of–or more likely, unwilling to–distinguish among the diverse participants in energy markets. To them, everyone is a speculator, and opposition to speculative limits is some dark conspiracy among those who engage in destabilizing betting on commodity prices. Thus, Warren’s criticism of the make-up of EEMAC is extremely indiscriminate and profoundly ignorant. She is so invested in her black-and-white cartoon view of the world that she can only explain opposition to restrictions on speculation as some evil plot by malign corporate interests and their lackeys–including yours truly.

And considering all that, I wear Warren’s hatred like a badge. I must be doing something right. And I plan on keeping on doing it.

As Maria Callas said, “When my enemies stop hissing, I’ll know that I’m slipping.” With Warren hissing at me like a cobra, I guess I ain’t slipping yet.

As for the substance of the meeting, the EEMAC’s efforts may be for naught. Chairman Massad clearly signaled that he is hell-bent on proceeding with implementing the position limits rule. In doing so, he used a simile that rivals Gensler’s apple metaphor for inanity:

“It strikes me a bit like saying you’re against speed limits because they may make you late for work,” Massad said.

Huh? No, it’s not like that at all. The comparison is so off-base it’s not even worth trying to modify it to make it coherent.

As the participants in EEMAC clearly and almost unanimously stated, they are against position limits because they are all pain, and no gain. The “speed limits” aren’t necessary because the activity that they constrain does not create dangerous risks. Further, not only do they not produce any appreciable benefit, they constrain perfectly legitimate and salutary actions by large numbers of market participants.

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February 20, 2016

Brent: The George Washington’s Axe of Oil Pricing Markers

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Regulation — The Professor @ 12:53 pm

Platts is preparing for a Brentless future by introducing a new Dated Brent CIF Rotterdam assessment.  The idea is that as North Sea production continues its decline, other streams of light crude that are imported into Rotterdam can be added to the assessment. Adding (or substituting) say Nigerian crude to the FOB Brent assessment would be much more difficult because of locational differences: FOB Nigeria and FOB North Sea can be quite different, even adjusting for quality, due to freight differentials. A CIF contract eliminates that.

The decline in North Sea production has been occurring for some time, so the need to adjust the pricing mechanism has been apparent. Plants has been thrashing around for a while, mooting the possibility of adding other crude (e.g., Urals Med) to the assessment.  It had already widened the delivery window to make more cargoes eligible (remember 15 Day Brent? 21? It’s now 25 Day.) This problem has become more pressing though, as the decline in prices is hastening the decline in North Sea production.

It is ironic that at the same time that Platts (and therefore, ICE) are grappling with the problem of  declining supply, the main rival to Brent has the exact opposite problem. The WTI contract is currently drowning in oil. Storage at Cushing is bumping up against capacity, and there are reports that some storage operators there are refusing requests to store additional crude.

Although the current situation at Cushing (and in the North American market generally) is as much a demand story as a supply story, the facts are that (a) the NYMEX WTI contract is linked to a much more robust and flexible production base than Brent, and (b) the WTI contract’s periodic difficulties are due to infrastructure issues that are more readily, cheaply, and rapidly addressed than production issues. Thus it has been for the past five years or so, as I discussed when I wrote that those foretelling the demise of WTI were fundamentally mistaken:

But these problems are all surmountable.  WTI’s problems arise from the consequences of too much supply at the delivery point, which is a good problem for a contract to have.  The price signals are leading to the kind of response that will eliminate the supply overhang, leaving the WTI contract with prices that are highly interconnected with those of seaborne crude, and with enough deliverable supply to mitigate the potential for squeezes and other technical disruptions.

Brent’s problems are more fundamental, because they arise from declining supply.  Even as paper volumes continue to rise, physical volumes available for delivery are falling inexorably.  The Brent complex had faced this problem before, and confronted it by adding Forties, Oseberg, and Ekofisk to the eligible stream.  But BFOE production has declined from 1.6 mm bbl/d in 2006 to barely more than half that today.  And the decline continues apace.  This makes the contract vulnerable to squeezes of a kind that were chronic in the 1990s and early 2000s, and which spurred Platts to add the three other grades to the benchmark.

. . . .

Which means that those who are crowing about Brent today, and heaping scorn on WTI, will be begging for WTI’s problems in a few years.  For by then, WTI’s issues will be fixed, and it will be sitting astride a robust flow of oil tightly interconnected with the nexus of world oil trading.  But the Brent contract will be an inverted paper pyramid, resting on a thinner and thinner point of crude production.  There will be gains from trade–large ones–from redesigning the contract, but the difficulties of negotiating an agreement among numerous big players will prove nigh on to impossible to surmount.  Moreover, there will be no single regulator in a single jurisdiction that can bang heads together (for yes, that is needed sometimes) and cajole the parties toward agreement.

The CIF alternative makes sense, and is probably superior to the “economic par” contract I suggested in the 2011 post. But once you move to a Rotterdam pricing basis, why remain tied to an assessment mechanism based on transactions in immense full cargoes? The large size of the lots inherently limits the number of transactions, which makes the assessment mechanism more erratic and subject to manipulation. The lumpiness of the market has also led Platts to design a baroque process involving bids and offers, contracts for differences, futures prices, spreads, etc., to increase the number of trades that go into the assessment.

The WTI contract, in contrast, is based on delivery in store of modest-sized (1000 barrel) units of crude. This is much more flexible, and permits a large number of firms to participate in the delivery process. This makes delivery and the threat of delivery a reliable and efficient way of ensuring convergence of futures to cash market values. The mechanism is not immune to all types of manipulation: delivery squeezes are still possible (though relatively unlikely in current market conditions). But small numbers of transactions can’t have a pronounced impact on pricing, and the in store delivery mechanism does not rely on an arcane and mysterious assessment mechanism (which also helps to enrich the party making the assessment).

So rather than shifting to a Rotterdam CIF mechanism, why not shift the futures market to a Rotterdam in store delivery contract? This mechanism is more flexible and resilient in the short run, and is readily adjusted in the long run to respond to changes in the underlying physical production base as NYMEX did by adding foreign crude streams (including Brent) to address the (then) declining domestic production base.

I can see why Platts wouldn’t like this, but it has some decided advantages for ICE, not the least of which is reducing its dependence on Platts. Given the difficulties of changing contract specifications, or generating liquidity for even a better contract introduced in competition with an established liquid one, I doubt this will happen. Which means that ICE, and the market generally, will have to continue to endure periodic changes the “Brent” assessment mechanism as North Sea production continues to decline.

I put “Brent” in quotes because the handwriting is on the wall: any future European-based contract may be called “Brent” even after Brent (and Forties, and Oseberg, and Ekofisk) no longer represent the bulk of the benchmark stream. The contract will come to resemble the old Harry Anderson comedy bit, where he juggled a chainsaw and an axe. He would stop juggling, hold up the axe and say: “This is George Washington’s axe. The handle was replaced years ago, and I just put on a new head, but it’s George Washington’s axe!” So it will be with Brent, and sooner than anyone would have thought even a few short years ago.

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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 2, 2016

Russian “Privatization”? Only If Putin Is Desperate Indeed

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 10:11 pm

Putin held a meeting with the CEOs of seven state-owned enterprises to discuss the sale of minority stakes in their companies (a move sometimes mischaracterized as “privatization”). Putin frankly admitted that the impetus for this discussion is Russia’s dire budgetary situation. Putin caused some confusion by saying the “new owners of privatized assets must have Russian jurisdiction,” leading some to conclude that he was ruling out foreign investment. Peskov clarified the next day, saying that Russia welcomed foreign investors, but “If the question is about a foreign investor, that’s one thing. If it’s about a Russian investor, it must not be another offshore scheme.”

I consider it likely that this initiative will be stillborn, at least insofar as sales of stakes to foreigners are concerned. Putin said that the sales must not take place at “knockdown prices.” Well, in the current environment, the prices (especially for Rosneft and VTB) are likely to be very low indeed.

This is especially so since foreign investors will demand a substantial discount to compensate for expropriation risk. Savvy investors with long memories will recall that Putin justified expropriating Shell’s Sakhalin II project by saying that the terms of the Sakhalin PSA were unfair to Russia, and that Shell had exploited Russia’s economic desperation when it signed the deal at a previous time of low energy prices. Putin (or whoever succeeds him) could easily resurrect such rhetoric in the future when oil prices rebound. Further, minority shareholders in Russian enterprises–especially state enterprises–have few protections against schemes that divert assets, or which dilute their holdings.

Given that prices are likely to be very low, if there are sales to foreigners, it will indicate (1) that Russia is desperate indeed, and (2) Putin et al consider it unlikely that sanctions will be relaxed anytime soon.

If there are sales, it is likely to be to Russian oligarchs, and in particular those with extensive holdings outside Russia. Just as Putin dragooned them into paying for Sochi and other prestige projects, he could well pressure them into overpaying for stakes in the state enterprises. This would allow him to kill two birds with one stone. It would help stanch the budgetary bleeding. It would also advance Putin’s longstanding goal of onshoring Russian capital. That would fit with the “owners must have Russian jurisdiction” remark.  And Putin has substantial leverage to get oligarchs to do his bidding–literally.

Even if partial sales take place, it will be merely a stopgap budgetary measure: it will not indicate a fundamental reconsideration of Russian economic policy.  Putin is still obviously a firm believer in the state control/state champion model, despite its manifest inefficiency. Putin prefers the control over resources that state control provides to having an efficient economy. Which is why he finds himself in his current straits.

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