Streetwise Professor

January 13, 2015

It’s Deja Vu All Over Again, or the Putin Hamster Wheel, Crisis Edition

Filed under: Commodities,Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 8:12 pm

I was glancing over some posts from the 2008-2009 crisis period, and was struck at the similarities between what happened in Russia then and what is happening now. The imploding ruble. Capital flight. Discussions of whether capital controls were necessary to stem the rout. The heavily stressed banking system. The government’s desperate attempts to support the the banking system and big firms. The attempts of Rosneft and Gazprom to use the crisis as an excuse to feed at the government trough. Putin’s crazed and frequently paranoid ramblings, and a broader national paranoia.

Russia scraped by last time, in part because oil prices rebounded starting in mid-2009, and because the world economy (notably China) also fought its way out of the crisis. The stimulus-driven Chinese rebound was especially important, because it supported commodity prices, which was vital for a commodity producer like Russia.

Will it scrape by this time? Well, there is a lot of ruin in a country, as Adam Smith informed us, so it’s always risky to predict a collapse. And Russia has rebounded from even worse situations (think 1998).

That said, things aren’t nearly so favorable for Russia this time around. First, there is the self-inflicted wound: the invasion of Ukraine and the sanctions that followed. This is harming the banking and extractive sectors in particular. The fundamentals are bad enough for these sectors: sanctions exacerbate the problems. Second, Russia can’t look to a return to rapid Chinese demand growth to save it this time. China’s slowdown (which is have broad based effects, including on Tesla which has seen Chinese sales on which it was counting decline substantially) is at the root of the current commodity downturn, and since it is likely that this growth slowdown will persist Russia can’t look for succor from that quarter. Third, as bad as Russia’s institutional environment and governance were in 2009, they are even worse now. The ossification of Putinism (and Putin himself!) and his deep fear of overthrow are leading to regress, rather than progress in the development of the rule of law, secure property rights, and civil society, and the reduction of corruption, cronyism and rent seeking. The horrible institutions and governance will be a drag on growth. Fourth, the fiscal situation is weaker. Reserves are relatively smaller now, and Putin’s electoral promises to raise social payments and his commitment to increase dramatically armaments expenditures represent a significant departure from the fiscal probity of the Kudrin years.

Russia emerged tenuously from the last crisis, and never regained the pre-crisis rate of growth. Its post-2009 growth performance was lackluster, given the fundamental environment and Russia’s stage of development. In my view, the conditions for a recovery are even less favorable this time. Some-and arguably the lion’s share-of the reasons for that are self-inflicted, or more accurately, inflicted by one Vladimir Vladimirovich Putin, whom the Russian populace has chosen to inflict on itself. Consequently, though Russia will hit bottom and rebound, I think it is likely that this rebound will be even weaker than the last one. The national equivalent of a dead cat bounce.

Not that the current situation is not without its moments of levity. Today, for instance, oligarch Mikhail Prokhorov announced he is putting the Brooklyn Nets up for sale. Prokhorov’s wealth has been running in reverse for the past several years, and in the current circumstances, the Nets are arguably his most salable asset. His Russian holdings, not so much.

In a way this is sad, because although Prokhorov is a jerk like most NBA owners, he is also somewhat amusing. In contrast, other owners are just jerks.

But back to the main show. When looking at Russia today, Yogi Berra comes to mind. It’s deja vu all over again. Only worse.

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Call Me Buffy

Filed under: Commodities,Economics,Energy — The Professor @ 7:31 pm

When it comes to the Saudi predatory pricing meme, I feel like Buffy the Vampire Slayer. No matter how many times I drive a stake through its heart, in the next episode it reappears in a different guise.

Here’s yet another example. 

I stipulate that the current low price environment is imposing substantial financial losses on shale producers. I further stipulate that they are currently slashing capex, which will lead to production growth declines at the least, and perhaps production declines  (depending on the race between reduced number of new wells and the increase in well productivity), while prices remain low. I stipulate further still that these effects would be reduced, if the Saudis had cut output to support prices.

Yet it does not follow that the Saudis are not cutting output because they are attempting to drive out shale producers. Because they can’t do so for long. The capital that is leaving the industry now can come back in when demand rebounds. This will limit the price upside, thereby depriving the Saudis of any payoff to recoup the losses they are incurring now.

Instead, the Saudis, just like everybody else in the industry, are coping with the consequences of a decline in demand the best way they can. Given Saudi market share, the elasticity of demand for oil, and crucially, the elasticity of supply of shale oil (which is relatively high, due to the relative flexibility of the technology and the availability of a large amount of prospects), the demand for Saudi oil is relatively elastic. This makes output cuts money losing: the cuts don’t increase price enough to offset the lower number of barrels sold. So keep producing, and pray for a demand turnaround.

Tune in soon for the next installment of Buffy the Saudi Conspiracy Theory Slayer. Alas, I think it will be a long running series, and there’s not a lot of variation in the plot lines, because the economics don’t really change.

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January 11, 2015

Twitter Lunacy on Keystone Makes The Bigtime: The Senate Floor. Which Is No Coincidence.

Filed under: Climate Change,Commodities,Economics,Energy,Politics — The Professor @ 1:22 pm

A few weeks ago I ridiculed one of the arguments raised against Keystone XL: Namely, that oil transported on the pipeline will be exported. I pointed out that this is idiocy. The very purpose of the pipeline is to transport it to the very complex refineries at the Gulf of Mexico. These refineries are clearly able to outbid anyone for oil sands crude transported on Keystone XL, and they will. Moreover, export through the Gulf to Asia, is far more costly than export to Asia via Canada’s west coast.

The main targets of my ridicule in that post were various Internet and Twitter economic geniuses. Hardly an august group. But their voices have been heard! For now the Democrats in Congress are making this argument the centerpiece of their opposition to pro-Keystone legislation:

As Republicans revive the Keystone debate in Congress, opponents are trying to shift the focus to where the Canadian pipeline’s oil will end up once it reaches Texas: China or U.S. gas tanks?

Massachusetts Democrat Edward Markey stood on the floor of the Senate this week next to a giant sign reading “Keystone Export Pipeline” as he argued against a bill to approve the project.

Ed Markey. I should have known.

You can just see TransCanada CEO Russ Girling’s frustration at having to deal with such economic inanity:

Russ Girling, head of pipeline builder TransCanada Corp. (TRP) issued a lengthy statement saying it doesn’t make any sense to export the oil once it reaches the U.S. coast of the Gulf of Mexico, home to the world’s biggest concentration of refineries.

But TransCanada has concluded that this argument, inane as it is, is politically effective:

Girling said the company’s internal polling shows the export issue raises the most concern for Americans. In an interview last month with Bloomberg News, Girling acknowledged that critics found a “nerve that resonates” in that argument.

So much for the influence of economic reasoning on political debate.

I mentioned the Twidiots earlier. There’s something interesting here, and clearly illustrates a pattern. Specifically, that there are no coincidences, comrade. Especially in social media. Or to put it differently, there are too many coincidences for them to be coincidences.

The Twitter storm of the Keystone export meme coincided closely in time with Obama making the same point, and led into the Democratic leadership making this argument the center of their anti-Keystone campaign. In combination with other such “coincidences” strongly suggests manipulation of social media to support political strategies, and in particular administration political strategies. The Twitter storm that broke out in support of the (equally inane) administration free community college initiative over the last few days is another example.

Meaning that pushing back on Twitter stupidity may not be a waste of time. For such stupidity is often merely the handmaiden of some asinine political agenda.

 

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January 6, 2015

Whither Chinese Commodity Demand? Your Guess Is As Good As Mine

Filed under: China,Commodities,Economics,Energy,Politics — The Professor @ 8:40 pm

Commodities are down broadly: Oil gets the headlines, but most major commodities-especially industrial commodities-are down, with iron ore leading the pack. The main driver is Chinese demand: perhaps it’s more accurate to say that the main brake is slackening Chinese demand. Forecasting the course of future Chinese demand is challenging, because there is a huge political component to it.

China has long followed a commodity-intensive, investment-focused (including construction and infrastructure), credit-fueled economic model. It has long been recognized that this model is unsustainable because it is fraught with imbalances. There have been signs that China has recognized this, and in particular the new Xi government is attempting to to navigate this transition, signaling a desire to transform to a consumption-based model with growth rates in the 6-7 percent range rather than 10 percent (though analysts like Michael Pettis say that growth rates in the 3-4 percent range are more realistic.)

One sign of that is the central government’s recent attempts to rein in local governments that borrowed heavily through “local government funding vehicles” (“LGFVs”) to support local infrastructure, housing construction, and industry. Clamping down on LGFVs would be one way of steering China’s economy away from the investment-intensive model:

China’s local government bond issuers face judgment day as authorities in the world’s second-largest economy decide which debt they will or won’t support.

Borrowing costs soared by a record amount last month before today’s deadline for classifying liabilities, on speculation some local government financing vehicles will lose government support after the finance ministry starts reviewing regional authorities’ debt reports. Yield premiums on one-year AA notes, the most common ranking for such issuers, jumped a record 98 basis points in December.

Premier Li Keqiang has stepped up curbs on local borrowings just as LGFVs prepare to repay 558.7 billion yuan ($89.8 billion) of bonds this year amid economic growth that’s set for the slowest pace in more than two decades. The yield on the 2018 notes of Xinjiang Shihezi Development Zone Economic Construction Co., a financing arm in a northwestern city with 620,000 people, climbed a record 63 basis points in December.

But there are mixed signals. Today China announced a $1 trillion stimulus:

China is accelerating 300 infrastructure projects valued at 7 trillion yuan ($1.1 trillion) this year as policy makers seek to shore up growth that’s in danger of slipping below 7 percent.

Premier Li Keqiang’s government approved the projects as part of a broader 400-venture, 10 trillion yuan plan to run from late 2014 through 2016, said people familiar with the matter who asked not to be identified as the decision wasn’t public.

. . . .

The projects will be funded by the central and local governments, state-owned firms, loans and the private sector, said the people. The investment will be in seven industries including oil and gas pipelines, health, clean energy, transportation and mining, according to the people. They said the NDRC is also studying projects in other industries in case the government needs to provide more support for growth.

The NDRC’s spokesman, Li Pumin, said last month China would encourage investment in those areas.

So which is it? A transition to a less-investment intensive model, implemented in large part by reducing the use of credit by local governments? Or continuing the old model, to the tune of $1 trillion over the next couple of years?

Commodity traders want to know. But given the opacity of the Chinese decision making process, it’s impossible to know. The signals are very, very mixed. No doubt there is a raging debate going on within the leadership now, and between the center and the periphery, and decisions are zigging and zagging along with that debate.

I see three alternatives, two of which are commodity bearish. First, there is a transition to a more consumption-based model: this would lead to a decline in commodity demand. Second, there is a crash or hard landing as the credit boom implodes due to the underperformance of past investments: definitely bearish for commodities. Third, the Chinese keep pumping the credit, thereby keeping commodity demand alive. The third alternative only delays the inevitable choice between Options One and Two.

In brief, for the foreseeable future, the most important factor in commodity markets will be what goes on in Chinese policymaking circles. And insofar as that goes, your guess is as good as mine.

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December 31, 2014

The Oil Price Decline: No Conspiracy Theories Need Apply

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 11:50 pm

2014 is in the books, and fittingly the last day of the year  saw a fall in the price of oil. The nearly 50 percent decline in oil prices from the end of June to today was the biggest commodities story of the year. This decline has spawned numerous conspiracy theories, which like most conspiracy theories, are pure bunk.

Most of the stories focus on Saudi Arabia and shale oil. In some versions, the Saudis decided to crash the price of oil to drive out competition from US shale production. I analyzed, and dismissed, this story some weeks back. In other versions, the Saudis decided to crash the price of oil in order to strike a blow at its arch enemy Iran, or in some variants, at Iran and Russia (either in cahoots with the US, or to punish Russia for its support of Assad).

Well, to crash prices it is necessary to increase output. The Saudis, however, did not increase output over the past 6 months: it has remained relatively static. This couldn’t be more different from what happened during the 1985-1986 price collapse, to which the most recent decline is often compared. In the early-80s, the Saudis cut output from about 10 million barrels per day (mmbpd) to as low as 3.5 mmbpd in order to maintain prices in the face of rampant cheating on output quotas by other OPEC members. Realizing that it was being the chump, the Saudis increased output about 44 percent. Nothing like that has happened in the past six months.

The other purported cause of the price decline is the increase in US output. This increase is indeed remarkable, but its timing and magnitude doesn’t explain the price decline. US output has been rising inexorably for a couple of years, and the rate of increase has exceeded forecasts, but not by nearly enough to explain the post-June price decline. Since June, US output has risen by about 100kbpd per month. Cumulatively, that’s about 600kbpd, or a less than .7 of world output. Even using an elasticity on the high side of 10*, this could account for about a 7 percent decline in the price. What’s more, some of the US increase has been needed to offset the on again, off again production in Libya and declines in production in Mexico.

Meaning that the focus on the supply side has been totally misplaced. This in turn implies that all of the hyperventilating about S&S-Shale and the Saudis-is wrongheaded.

Instead, the most likely explanation for the price decline is a decline in demand. The fall in price parallels quite closely declines in world GDP forecasts. Chinese manufacturing in particular has slowed. This has been reflected in other commodity prices which are driven by Chinese industrial demand, most notably iron ore, which has fallen almost 50 percent over the last year, and copper, which has fallen by about 15 percent since June. And somehow I don’t think the Australians or Chileans are attempting to punish their economic rivals or geopolitical enemies. They are just along for the ride on the demand train.

The biggest price daily oil price decline occurred the day after Thanksgiving, when OPEC announced it would not cut output. Prices have also declined on days when the Saudis or other Gulf states reiterated their intention to maintain output. But maintaining and increasing output are two different things. The Saudis didn’t announce that they were opening the taps, like they did in 1986. They are just saying they won’t shut them. And as I argued in an earlier post, given their market share and the elasticity of demand for oil, that’s a rational thing to do without having to resort to predatory explanations.

Again, although most analysis focused on supply, the post-Thanksgiving price decline was really attributable to demand too. Market participants were predicting that OPEC would cut output to support prices in the face of falling demand, and this expectation helped to prop up prices. When the expectation was contradicted, prices fell.

I was only surprised that people were surprised that OPEC didn’t cut output. I didn’t see that happening, and I was right: The Saudis only cut output very modestly (by about 3 percent) during the price collapse in the aftermath of Lehman. Where I was wrong was not understanding that it appears that it was almost universally believed that OPEC was almost certain to make a large cut: I was right about the Saudis, but wrong about what everybody thought about the Saudis. This is why I am blogging, rather than sipping Mai Tais on a yacht that would make Abramovich green with envy.

So, it’s not exactly a case of move along, there’s nothing to see here: the price decline is certainly worth watching. It’s just that what you are seeing is not the result of some grand scheme engineered by the Saudis or anybody else. If there is any scheming going on, it is China’s attempt to move to a more sustainable growth model that is less dependent on stimulus-driven investment in industry and infrastructure.

It is certainly the case that the decline in commodity prices generally, and the oil price in particular, could have -and is indeed already having-seismic economic and geopolitical consequences. It is definitely the case that Russia and Iran are going to suffer mightily as a result of the price decline. This may in turn force them to dial back their geopolitical ambitions, although particularly in the case of Russia it could lead to the opposite response by a desperate leadership. But just because these outcomes might be desirable to the US or the Saudis doesn’t mean that the price decline was deliberately engineered to produce them. They are just consequences of broad economic developments that were intended by no one. For the Saudis, the unintended geopolitical consequences at best palliate some serious economic pain.

Given that (unlike in 2008-2009) the demand decline isn’t due to weakness in the US economy, on the whole the US will benefit from the lower oil price, though some regions (like here in Texas and in North Dakota) will obviously suffer. Drilling activity in the US will decline, but this shouldn’t warm Saudi hearts, because if demand rebounds and drives up prices, drilling will rebound too. The oil and the technology aren’t going anywhere: they are on tap for when the price is right.

Recent academic research shows that most of the price variations in oil over the past decades have been demand driven, rather than supply driven. This most recent decline is just another example of that.

Conniving oil ticks and outlandish Texas oilmen make colorful copy , but usually the world is much more prosaic. Oil supply is very inelastic in the short run, so when demand declines even modestly, prices can plunge. This is counterintuitive to most: how can small changes in demand have such huge effects on prices? This leads to speculations about conspiracy, especially when the price changes can shake nations like Russia to their cores. But such speculations are idle. The normal operations of commodity markets routinely produce such price movements. Which is precisely why subjecting grandiose ambitions for geopolitical power to the vicissitudes of commodity prices is the strategy of fools.

And yeah. I’m looking at you, VVP.

Putin may not be having a happy New Year, but I close this post by wishing all my readers all the best for 2015. Enjoy the schadenfreud!

*This elasticity of 10 is related to the sensitivity of oil consumption to prices. Speculative storage makes oil demand more elastic. Indeed, in response to the price decline, visible speculative storage (primarily at Cushing) has increased, and the market has moved into a contango, which is associated with greater storage.

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December 22, 2014

CFIUS to Rosneft: You Can Do What You Like, Just Don’t Do It Here*

Filed under: Commodities,Derivatives,Economics,Energy,Russia — The Professor @ 7:29 pm

Bowing to the inevitable, Rosneft and Morgan Stanley scuppered their agreement to sell MOST’s energy trading operations to the Russian company. The official explanation was that the deal failed to get approvals from US regulators.

Go figure.

Glad that the Committee on Foreign Investment in the United States,which consists of Treasury, Justice, Homeland Security, Defence, State, Commerce, the US Trade Representative and the Office of Science and Technology Policy, saw off Igor and Co. Putting the FU in CFIUS.

That said, even if the regulatory approvals had been forthcoming, I don’t see how the deal would have worked. As I wrote in September, I didn’t see how a company without access to long term dollar credit (due to sanctions) could operate economically such a credit-intensive business as oil trading. Hell, today Rosneft’s other big announcement was that it paid off some loans it took on when it acquired TNK-BP. When a company announces a loan repayment like it’s some sort of triumph, you know that they aren’t in any position to buy and run a trading business.

Put differently, if CFIUS hadn’t have gotten Rosneft, the sanctions would have.

This might actually be a blessing to Morgan Stanley. The current high volatility, contango, low price environment is actually quite favorable for trading. Low prices reduce working capital needs. Contango makes for profitable storage opportunity. Volatility creates trading opportunities. MOST might actually get more now than Rosneft had agreed to pay.

*Title inspired by Springsteen’s Blinded by the Light.

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December 20, 2014

Can a Money Launderer Truly Come Clean?

Filed under: Energy,History,Politics,Russia,Uncategorized — The Professor @ 8:07 pm

During his press conference, Putin made a very arch reply to a question about Khodorkovsky’s ambition to be president: “Of what country?”

Well, Khodorkovsky is making it clear that the answer to that question is “Russia.” He gives voice to his ambitions in an extended interview in the FT, and repeats his forecast that Putin’s main danger comes from within his “entourage”.

In some respects, Khodorkovsky’s re-emergence and frank statements of his political ambitions and his vision of himself as savior of Russia are a favor to Putin. Especially in times that bring back uncomfortable memories of the 90s collapse, the most notorious oligarch from that era makes a perfect foil for Putin. Breaking the oligarchs was one of the primary foundations of Putin’s reputation and popularity (with the war in Chechnya being another). What better way for Putin to remind Russians of why he is needed than the reemergence of Khodorkovsky?

And Khodorkovsky is definitely a very flawed vessel. Even if his prosecution and imprisonment was a travesty of justice, that’s not to say that he couldn’t have been convicted in a fair trial. For contemporary reporting, both Russian and non-Russian, makes it clear that Khordorkovsky was a ruthless operator who used every trick in the book to avoid taxation, and expropriate minority shareholders and creditors. This article from April, 2000 provides the chapter and verse.

Most of these tricks involved offshore shell companies that he owned. For instance, Khordorkovsky would engage in asset stripping, whereby assets of his Russian enterprises were transferred to the shell companies he owned. Another trick was stock watering, whereby his entities would issue large numbers of new shares of stock that were sold to his shell companies, thereby diluting the ownership of outside investors. He used these devices to great effect in the immediate aftermath of the  financial crisis. Non-Russian banks who had made loans to Khodorkovsky’s Menatep Bank collateralized by Yukos shares saw the values of these shares plummet when he stripped Yukos assets and watered the stock in a way that would have made Daniel Drew and Jay Gould blush.

Khodorkovsky was also the past-master at transfer pricing schemes, whereby output of his Russian companies would be sold to offshore entities at a fraction of the world price; the offshore entities would then sell at the world price. According to the Foreign Affairs article, during the first nine months of 1999, Yukos sold 240mm barrels of oil at about 10 percent of the world price to offshore entities, pocketing $800 million.

And of course, there is the way that he acquired Yukos, via the Loans for Shares deal, and the rigged auction that followed the (inevitable) government default on the loans.

Khodorkovsky was definitely not the hero of western investors back then. In fact, he was a villain.

For all this, Khodorkovsky exhibits little remorse. Arguably none:

I ask about the “loans-for-shares” auctions in 1995 when a handful of businessmen — the oligarchs — lent money to the near-bankrupt Russian state and received stakes in state businesses as collateral. When the state failed to repay the loans, the oligarchs sold the stakes to themselves at knockdown prices. Today the auctions are seen, I remark, as a kind of “original sin” hanging over Russian business.

“I wouldn’t entirely agree,” Khodork­ovsky says. At the time it looked, he continues, as if a Communist candidate would beat President Boris Yeltsin in the elections, which would have spelt the end of private business. Given the risks, no foreign investor was interested. So the shares were worth only what Russian investors would pay — in Khodorkovsky’s case, about $300m, for just under 80 per cent of Yukos.

. . . .

The tax “minimisation” schemes — selling oil through onshore tax havens — at Yukos that were the heart of the trials against him were known to the authorities and even senior ministers, he insists. “In tax law, it’s a crime in most countries if you’ve hidden something. But we didn’t hide anything.” [This remark is particularly disingenuous.]

Note that his justification of the loans for shares fails altogether to address the issue of the rigged auctions. If no other investors were interested, why were the auctions rigged in order to ensure that none could possibly win?

The unapologetic attitude towards not paying taxes is not new:

Khodorkovsky was robustly unapologetic. ‘ As long as the tax regime is unjust, I will try to find a way round it.’

What complicates the Khodorkovsky story is his apparent conversion in around 2000, when Yukos adopted GAAP accounting and western governance standards, and began hiring American managers, including Bruce Misamore as CFO. Was this a Road to Damascus conversion, or a calculated strategy to make the company attractive to western supermajors? Certainly this was the effect: at the time of his arrest, he was on the brink of selling a large stake in Yukos to either Exxon Mobil or Chevron.

His late-in-the-day embrace of western business practices and his persecution are relevant in evaluating his character and motives today, but his history cannot be overlooked. I for one am very skeptical that he has undergone a fundamental change. The failure to repudiate some of his more outrageous actions certainly raises doubts. Someone should address them.

There’s a possible candidate. One of the initiatives that Khodorkovsky funds in order to advance his agenda is Interpreter Magazine, edited by Michael Weiss. This is beyond passing strange, because Weiss has crusaded against Russian money laundering through the use of shell companies and transfer pricing schemes-the very techniques that his paymaster refined into an art 20 years ago. Interestingly, I can find no evidence that Weiss has subjected his patron to similar scrutiny. Not even an acknowledgment that the denizens of Londonograd that he excoriates are pikers compared to his pioneering patron, let alone an inquiry that could attempt to determine whether the man who emerged from prison a year ago is different from the man who went into prison in 2003, and who did the things that put him there.

This would be a truly valuable investigation, far more important than anything Weiss or Interpreter has done. This is particularly true given Khodorkovsky’s return to political life.

There is another strange twist here. Khodorkovsky has come out in opposition to sanctions, and in support of Russia’s annexation of Crimea: he claims that returning it would be undemocraticthe act of a dictator. Given that Putin also claims to be carrying out the public will, this raises questions about how differently Khodorkovsky would act if he were in Putin’s place. It also raises questions about his commitment to the rule of law, which he claims to support.

In sum, Khodorkovsky is playing a political role. Indeed, he is holding himself out as the man who can put Russia on the path away from autocracy towards the rule of law and respect for civil society. He has a past. A very disreputable one, though one perhaps redeemed by reform and punishment. But one can never be sure that the past is truly gone. Given that the most scurrilous acts in the past involved money laundering and shell companies, you’d think that a journalist who has crusaded against those things would be the man to find out.

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December 19, 2014

Obama’s Press Conference: Bad Economics, Dissing a Friend, Embracing an Enemy

Filed under: Climate Change,Economics,Energy,History,Politics — The Professor @ 9:43 pm

Hard on the heels of Putin’s press conference, Obama held one of his own. Blessedly, it was shorter. That’s the only good thing I can say about it.

At least Putin’s pressers offer some entertainment, some of it intentional, some of it accidental. Obama’s appearances are as entertaining as a root canal performed to the accompaniment of fingernails on a blackboard.

I will limit myself to comments on two issues.

First, yet again Obama slagged on Keystone XL. And yet again, he delivered a disingenuous, economically ignorant attack on the pipeline:

“There is very little impact – nominal impact – on U.S. gas prices, what the average American consumer cares about,” Obama told reporters during an end-of-year press conference.

. . . .

“It’s good for the Canadian oil industry, but its not going to be a huge benefit to us consumers,” he said.

Obama stressed that the issue at hand for Keystone is “not American oil, it is Canadian oil.”

“That oil currently is being shipped out through rail or trucks and it would save Canadian oil companies, and the Canadian oil industry enormous amounts of money if they could simply pipe it all the way down to the Gulf,” Obama said during his final press conference of 2014.

“It’s very good for Canadian oil companies, and it’s good for the Canadian oil industry but it’s not going to be a huge benefit to U.S. consumers, it’s not even going to be a nominal benefit to U.S. consumers,” Obama said.

Where to begin?

  1. What the hell did the Canadians ever do to him? Does he hate them because they are members of the British Commonwealth? (And we know he loathes Britain.) It is truly astounding to see a president who is so solicitous of many thuggish regimes be so dismissive of a longtime friend and ally. Speaking about Keystone, Obama turns into an American Firster nativist, rather than his usual pose as Citoyen du Monde.
  2. Last time I checked, the oil would be refined-and value added to it-in American refineries.  That would benefit American oil companies, American workers, and the owners and employees of companies that supply the refineries. The money savings would be split between American and Canadian companies. But maybe because the refineries are located in Texas and Louisiana, which have repudiated Obama massively, that’s a bug not a feature. Or maybe Obama doesn’t understand that oil doesn’t magically transform itself into gasoline, diesel, etc.
  3. Or maybe Obama persists in the delusion that the oil will be exported, disregarding basic economics, common sense, and the analysis of his own State Department.
  4. There would be no impact on gas prices only if the supply of Canadian crude is completely inelastic: in this case, the quantity of oil produced and refined would be the same, regardless of how costly it is to transport it to market. If supply is somewhat elastic, lowering transportation costs increases output, which lowers product prices; moreover, holding output fixed, reducing transportation costs reduces the final product price. And perhaps most importantly, the alleged justification for stopping Keystone is the environmental damage Canadian heavy crude inflicts. But if supply is perfectly inelastic, there is no environmental benefit of raising transportation cost, because this will not affect the amount of oil produced, and hence will not affect the amount of CO2 it produces. (Not to mention that pipelines are a safer, more environmentally sound way of transporting this oil.) So if Obama is right about gas prices he is wrong about environmental benefits, and vice versa.

Unbelievable.

Come to think of it, I think that Obama’s real reason for opposing Keystone XL is that the Venezuelans would be the biggest losers. I am pretty sure he has much more of an affinity with Chavistas than Canucks.

Which brings me to the other issue: Cuba.

I am ambivalent about the embargo, or the lack of diplomatic recognition. I can argue either side. But there are many things about this initiative that make me uneasy.

For one thing, Cuba is in dire straits. This is where Venezuela comes in. The Bolivarian paradise has been carrying the Castros’ shambolic regime for years, but is now itself on the verge of economic collapse. Default is imminent, and at the current level of oil prices economic collapse is a real possibility. Venezuela is already cutting back support to the Cuban regime, and will cut it back further. Given that, the Castros are desperate, and Obama could have extracted a much better deal. A deal that would have given some benefit to the Cuban people, rather than bailing out the regime and allowing to continue its repression and depredations.

Obama’s rhetoric was also offensive, and at times historically ignorant. He characterized the embargo as a “failed policy.” Pretty rich for a serial failure to insult 9 previous presidents and 26 Congresses. He could have made an affirmative case for a new policy, and recognized the reasons for the previous policy, without such condescension.

Moreover, he made mention of the need to move beyond “the legacy of colonialism and communism.” Communism isn’t a legacy in Cuba: it is a daily reality. Insofar as colonialism is concerned, is Obama referring to Spain? Because he sure as hell can’t be referring to the US: Cuba was never an American colony. The Teller Amendment to the declaration of war against Spain in 1898 forbade the US from annexing Cuba. It was under US administration for four years, but achieved full independence in 1902. (Obama made the colonialism/communism remark in a discussion of Latin America generally, but this doesn’t really save him. Cuba is the only longstanding Communist country in Latin America; colonialism ended in Latin America in the 1820s; the US-via the Monroe Doctrine-kept out colonial powers in the 19th century; and colonialism is the least of Latin America’s problems, which tend to be very much home grown. In mentioning colonialism, Obama was just regurgitating a standard prog trope.)

Obama also engaged in his self-indulgent habit of making history all about him. He noted that Fidel Castro assumed power two years before Obama’s birth, and the Bay of Pigs invasion occurred soon before he was born. (Interesting that he uses the “I” word to refer to Bay of Pigs, but not Ukraine.) Who cares? What does this have to do with anything?  Does he have to bring himself into everything?

I’ve therefore decided that I will hereafter designate all dates by BO and AO: Before Obama and After Obama. Castro assumed power in 2BO. Bay of Pigs occurred in Year Zero. Obama elected in 47 AO.

The means by which Obama pursued this policy was also typically high handed, and failed to include or consult with anyone in Congress. And no, I don’t include corrupt tax scofflaw Charlie Rangel, who was photographed lounging like a beached whale in the Cuban sun after helping in the negotiations.

The means and the outcome of the Cuban opening also make me uneasy about deals with Iran.

I could go on, but I’ll close with one point. People have compared this to Nixon’s opening of China. Superficially, this is plausible. But there is a major difference.

Nixon could go to China because his stalwart anti-Communist credentials (which had won him the intense enmity of the left) made it credible that Nixon was acting in the interests of the US, rather than indulging his ideological preferences: if a McGovern or a Henry Wallace had attempted the same there would have been justifiable suspicions of their motives and the benefits to the US. In contrast, Che is worshipped has a hero rather than condemned as a psychopathic murderer in Obama’s political circles. His administration has taken a very benign approach to leftist Latin American regimes, including Venezuela and Nicaragua. This raises doubts about what his Cuba initiative will entail, and whether it will advance American interests or benefit the long-suffering and repressed Cuban people.

So to summarize Obama’s last press conference: he slammed a long-time ally and sucked up to a long-time enemy. Which pretty much summarizes his foreign policy, generally.

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December 15, 2014

Ruble Rocket to Russia

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:55 pm

What a wild day. The Ruble weakened dramatically from the open this morning (15 December), falling about 2.5 percent. Then the Russian Central Bank intervened, spending a rumored $1 billion to prop up the currency. This caused about an 86 pip rally, but this lasted for mere moments, and then the Ruble rocketed lower, reaching 64.24 by the end of the day. That’s down a mere 10.22 percent boys and girls. (The weird thing about currencies quoted like the Ruble is that up is down.)

Here’s the ugly picture. You can see the little bitty (and very temporary) impact of the intervention at a little after 8am.

Screen Shot 2014-12-15 at 7.26.48 PM

In other words, the RCB blew $1 billion for a blip. A billion here, a billion there, and you’re talking real money. In so doing, the RCB gifted those evil speculators whom Vlad inveighed against about $65 million in a few short hours. Merry Christmas!

Ominously, this decline was not a response to a similar decline in the price of oil. Although oil ended down on the day, it was rallying on news from Libya at the time that the Ruble was plunging. What precipitated it? One leading candidate is Friday’s announcement that Ru626b in Rosneft bonds could be used as collateral at the RCB: this approval came much more rapidly than normal. Thus, in effect, the RCB was lending rubles to Rosneft, using bond investors as cutouts. Rosneft felt obliged to issue a press release saying that “not a single ruble, raised within the bond issue, will be used to buy foreign currencies.” Note the weasel phrase: obviously rubles are fungible, so the loan frees up other rubles for Rosneft to sell. Meaning that this smacks of an RCB bailout of Rosneft. This is bad enough, but it could also foreshadow similar actions for other beleaguered Russian companies.

Then, in the very early hours of the 16th, Moscow time, the RCB announced a whopping 650 basis point increase in the interest rate, from 10.5 percent to 17 percent.

The initial effect has been to bring the Ruble back under 60. There is reason to doubt that this will last. First, previous rate increases-though not as big as this-had only a temporary effect on the relentless decline in the currency. Moreover, the rate rise will be highly contractionary, and a weakening economy will put downward pressure on the Ruble. Further, people draw inferences from central bank actions: perhaps the RCB is signaling a very serious fundamental weakness or an impending bank run or its belief that many Russian corporates will be dumping rubles to raise dollars and Euros; any of these signals would mean that its intervention could have the perverse effect of fueling a further decline. In addition, the rate rise does nothing to eliminate the need of Russian firms to obtain dollars to repay maturing debts.

Even if the rate intervention works in the sense of stabilizing, or even reversing, the collapse in the currency, this will come at a cost. As I noted, the effect of the rate rise will be highly contractionary. The government had already been predicting a recession. That is now a certainty, and it is likely to be a severe one. Especially if oil continues doing the limbo.

The RCB action reminds me of a fox chewing off its snared leg. The best of some very bad options.

The situation is obviously volatile, with many things going on (including pronounced weakening in other emerging market currencies and stock markets as well as the oil situation). Moreover, it will no doubt engender a political response, which will feed back onto the markets. How it will affect the increasingly paranoid Putin is hard to know. A climbdown (if credible) in Ukraine would do wonders for the Ruble, but methinks Putin is more likely to double down than climb down.

One prediction is safe: the next days will be memorable. Deserving of some memorable music: Rocket to Russia, by the Ramones.

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December 10, 2014

Judo Pays, Even When the Torrent of Rents Turns Into a Trickle

Filed under: Energy,Politics,Russia — The Professor @ 8:33 pm

As the capo di tutti capi of the natural state that is Russia, Putin’s primary responsibility is to distribute rents in order to secure political support. This is a relatively easy task when oil prices are high and the money is cascading in. Things are somewhat more challenging when the torrent turns into a trickle, as now.

Those closer to the tsar get taken care of: those less favored have to get by on scraps. Putin’s judo buddies-Gennady Timchenko and the Rotenbergs-are the closest to him, and they are continuing to live off of state largesse:

Having grown rich on government contracts during the boom in Putin’s Russia, friends of the president are benefiting anew as times grow tough. Lucrative orders keep rolling in for the favored few even as western sanctions and a collapse in oil prices push the economy to the brink.

The development has polarized Russia’s oligarchy and pitted Putin’s small circle against less well-connected rivals in a battle for money and privilege.

Companies linked to Rotenberg and another Putin confidant, Gennady Timchenko — both targeted by U.S. sanctions for their ties to the president — are landing a growing amount of state contracts. Together, they have won at least 309 billion rubles of work since U.S. sanctions were imposed in March, filings show. That figure — which works out to about $8.1 billion at the average exchange rate over the period — is 12 percent more than they received in all of 2013.

A Rotenberg-affiliated company is also about to secure a 228-billion-ruble order to build a bridge to Crimea, which Russia annexed in March, according to a high-ranking government official, who spoke on the condition of anonymity because the contract hasn’t been officially awarded.

Since the judo gang (and Sechin too) is getting a bigger slice of a shrinking pie, others are becoming resentful:

Executives who are used to prospering from government ties complain privately they are being elbowed aside. One Russian billionaire said Rotenberg and Timchenko have all but cornered the market in government contracts. He spoke on the condition of anonymity to avoid jeopardizing his companies’ chances of winning business.

The question is whether this discontent will coalesce into a an opposition that can challenge Putin’s rule. At present, I think that is not much of a threat, because if Putin is saving all the carrots for his friends, he keeps a tight grip on the knout to bash anyone who might dare to oppose him. The fate of Vladimir Yevtushenkov and Bashneft serves to concentrate the mind of anyone thinking of challenging Putin, and coordinating opposition from several grasping, suspicious, and short sighted oligarchs is extraordinarily difficult.

So the Putin system will wheeze along, making some enormously wealthy, and letting the devil take the rest.

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