Streetwise Professor

March 31, 2011

Rampaging Russophobes

Filed under: Economics,Politics,Russia — The Professor @ 9:36 pm

It’s amazing the things Russophobes will say.  Like this:

“Right now [Russia's] investment climate is so bad that it won’t be affected” [by the imminent failure of the BP-Rosneft deal].

What slander.  Must be some retrograde, Cold War fossil.

Check that.  It was Arkady Dvorkovich, Medvedev’s top economic aide.

Dvorkovich is actually a serial offender:

The risk of doing business in Russia will increase in the eyes of many foreign investors after the second conviction of Yukos chief Mikhail Khodorkovsky last month, Kremlin economic aide Arkady Dvorkovich said Wednesday.

“I think a considerable portion of at least the foreign community will have serious questions, and the assessment of risks of working in the Russian Federation will rise,” he said in an online interview with Gazeta.ru.

If he asks you to start his car, I’d take a pass.

Well, what about this outrageous slur against “Russian culture”?:

What are we witnessing at present? Unfortunately, we are witnessing a shortage of trust. And we should say this openly. I have already given my assessment to the investment climate in [Russia]. It is very bad here, very bad.

“For many relatively small companies, conditions for doing business have deteriorated rather than improved this year. Mandatory insurance contributions have been increased for quite understandable reasons. I know this. Electricity payments have increased in the majority of regions. This has also facilitated a rise in the prices of some other products of the economy.

“Corruption remains a factor affecting the overall economic situation. The grip of corruption is not weakening. It is holding the entire economy by the throat. The result is clear. Cash is fleeing our economy. Not as many people as we would have liked to believe in the possibility of safe and successful entrepreneurship. Not too many entrepreneurs believe in this.”

That’s gotta be some Russia-hater, right?  Wrong:  that was Dmitri Medvedev.  You know, the Dmitri Medvedev who happens to be President of the Russian Federation.

For those of you who think that I am some inveterate Russia hater, accept the reality that the vast bulk of what I have written about Russia’s political and economic system documents and critiques the very same dysfunctions that Dvorkovich and Medvedev bewail.  Deal with it.  Shrieking “Russophobia” at those who have the termerity to point out those dysfunctions is just a cop out.  A cheap way to avoid having to present a real, responsive argument.

And it’s not just Medvedev and Dvorkovich.  There are numerous Russian economists and political scientists that have come to similar conclusions.  Are they all Russophobes too?

No, these critiques are not at all about Russians personally, as a people, or culturally.  They are about different visions of society, economy, and politics.  Many Russians have been taking this side of the argument against other Russians for a long time.  Some Russians who arrogate to themselves the authority to determine what is legitimately Russian often claim that these are in fact foreign and profoundly un-Russian ideas.  And they’ve been doing so for almost two centuries.

If one wanted to summarize the target of the current critiques in a single word, it would be “Putinism.”  Of course Putinism is a variation on a long Russian political tradition, and exhibits similarities with other patrimonial, natural state systems.  But it is a recipe for stagnation, and is fundamentally corrupt and corrupting.  That’s the recurrent SWP theme over the past 5 years.  And serious voices in Russia agree with the gravamen of this critique.

I, of course, can only critique: I can’t do anything about it.  A barking dog, if you will.  But some who have the potential to affect the course of the caravan are finally making rumblings about challenging this system.  Most notably, Medvedev.

Yesterday he announced the most daring move of his presidency (a low standard, to be sure): he has ordered all state ministers to resign seats on the boards of corporations.  The nexus between business and state office is a defining feature of Putinism, so Medvedev’s move threatens the system.  These ministers-cum-directors can use their business positions for self-enrichment, and to deploy economic power to achieve political (and geopolitical) objectives.  Reducing the direct ties between high political office and high business position will hit certain people where it hurts: in their bank accounts, and in their ability to use economic blandishments to exercise political influence.

One of the most prominent targets of this directive is Igor Sechin.  It will be quite interesting to see how this plays out.

I am still skeptical about Medvedev’s ability to change the system substantively, and his stomach for the knife fighting that will be necessary to do so.  But this unexpected, preemptive strike at Putin’s inner circle is the most encouraging sign yet that his reformism is more than just talk. It may lead nowhere. It may lead to some initial changes that will eventually be overwhelmed by Russia’s historical legacy and the daunting difficulties of building impersonal, open institutions. But it’s a start: Putinism is just a dead end.

March 30, 2011

Cynical and Ineffectual: Not a Winning Combination

Filed under: History,Military,Politics — The Professor @ 9:22 pm

A couple of days ago there was optimism when Libyan rebels raced across the desert chasing Khaddafy’s forces out of several towns.   Today there is pessimism as the rebels raced back the other way, chased by government troops.

People need to get a grip; this is likely to be the way things will go, absent a major shift in tactics by the US and NATO.  Those with a passing familiarity to the campaigns in Libya in 1941-1942 will recognize the pattern.  Then British and Commonwealth forces would race west chasing fleeing Germans and Italians, only to race east, chased by the Afrika Korps.  Back and forth they went, repeatedly.

The desert offered no dominating topographical features that could be defended easily.  There was always an open flank (except when the British dug in at El Alamein, with the Med on their right and the Qattara Depression (an impassible morass of quicksand) on their left.  Given the open flank and the lack of defensible terrain, it was nigh on to impossible for a retreating force to make a stand; the attacking force would simply outflank any defending troops, and away they would go. But the advancing force would soon outrun its logistics, and the defenders would fall back on their bases; the attack would stall; and soon back they would go the other way.

Things aren’t exactly the same today.  The rebels are nothing like the Eighth Army, and the Libyan government troops are certainly nothing like the Afrika Korps, or even the hapless Italians.  US (and NATO) air forces are light years beyond anything seen under Ritchie or Cunningham or Montgomery or Rommel.  But the fundamentals aren’t all that different.  Which means that unless a serious ground force with serious logistical support goes into Libya, the stalemate is almost certain to continue.  NATO/US airpower can prevent Khaddafy from overrunning the rebels: when his armor is in the open, it is very vulnerable, and when advancing, his logistical tail is one big target.  But when Khaddafy falls back on his strongpoints, even with the support of airpower, the rebels cannot dislodge him.  A far more violent and sustained air campaign couldn’t pry Saddam out of Kuwait in 1991; it took heavy forces (VII Corps and the 1st Marine Division) to bash him out after his troops had been pummeled from the air.  The rebels have nothing close to that capacity.

The prospect for such a stalemate is leading the allied leaders to scramble for solutions.  Such as covert actions against Khaddafy, and arming the rebels.  But the likelihood that covert actions against Khaddafy will result in his death and ouster are close to zero.  It’s been tried many, many times before–and failed almost every time.  Self-protection is what dictators excel at.  How many times did the CIA try to kill Castro?  Saddam?

Insofar as arming the rebels is concerned–please.  There is no way to provide them with the combat power and training to make them a credible offensive force.  At best, arming them would just guarantee a protracted standoff.  And since when did arming combatants in a civil war constitute a humanitarian intervention?  Just look at all the wars in Africa which descended into horrific, indecisive bloodlettings when the opposing sides were supplied with arms by outsiders.

These plans are a confession of strategic bankruptcy.  The only decisive alternative–a robust ground intervention–has been ruled out.  The current operation can prevent a rebel defeat, but cannot a secure a rebel victory.  So the allies are casting about for anything that could possibly work.  But possible is not anything close to probable.  The most likely outcome is a grueling and indecisive civil war.  Again–that’s humanitarian?

Not to mention the possibility for blowback–given that many of those who may receive arms are dyed-in-the-wool jihadis.  Not foreseeing the possibility that Islamic radicals could turn on the US after we supported them in Afghanistan in the 1980s is understandable, and perhaps even excusable given the stakes in the conflict.  But since the stakes here are much lower, and since we have learned by hard experience the dangers of arming those who are ideologically opposed to us in order to achieve a tactical gain, arming the Libyan rebels is hard to understand and far harder to excuse.

I’ve heard for 30+ years how the US should avoid another Viet Nam, even when the analogy was completely inapt.  Well, incrementalism driven by a judgment that the only approach that is likely to be decisive is unacceptable was exactly the fatal error in Viet Nam.  So the latter day incarnation of the best and the brightest seem hell bent on doing it again; the analogy seems far more relevant now than in ’91, for instance, when it was heard ad nauseum.

One last thing.  Obama is reported to have signed an intelligence finding authorizing CIA support of the rebels with the possible objective of overthrowing Khaddafy.  As I just noted, this is unlikely to lead to anything more than a standoff in the desert.  But the cynicism is rather breathtaking.  Obama denies that regime change is an objective.  He genuflects to the UN, and claims that the US and its allies are acting subject to its authority–but the UN did not authorize regime change.  The gap between word and deed is vast.

If the man who ran for president on a platform of peace and transparency and deference to international bodies is capable of such a cynical betrayal of all of these, what that he says can be believed?

Wretchard has it right:

The entire theme of the administration’s Libyan policy is “we don’t need no steenkin’ badges”. Not from the Congress, not even from the UN Security Council. For authority they can just write a little secret finding and as long as Washington insiders let him get away with it, it’s a done deal. Hillary can reinterpret the UN arms embargo to whatever she wants it to mean. Things are infinitely elastic, which is to say, they can do anything they want. It marks the final emergence of an incipient aristocracy from the cocoon of a Republic. It has no obligations to anyone. Not even to tell the truth to itself.

Those who believe themselves to be morally transcendent can rationalize any means to achieve the ends they have chosen–because they have chosen them.  The rules don’t apply to them.  Such hubris brings nemesis.

See You in Court, GiGi

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 12:43 pm

Back when position limits were first being debated at the CFTC in the summer of 2008, here on SWP I questioned whether the Commission had the statutory authority to impose limits in the absence of a finding that “excessive speculation” had caused unwarranted fluctuations in commodity prices.  According to John Kemp of Reuters and Commodities Today, that argument has been raised by numerous commentors on the CFTC position limit NOPR:

The last day of the two-month consultation on Monday witnessed a volley of carefully coordinated submissions from Goldman Sachs, Barclays Capital, Morgan Stanley, the International Swaps and Derivatives Association (ISDA) and a host of others, all urging the CFTC to withdraw the proposed rulemaking.

Many of the objections build upon the criticisms set out at length by the Futures Industry Association (FIA) at the end of last week. The responses help lay the legal paper trail that will be cited when the rule is eventually challenged in the courts.

The gulf between the commission and the industry is so broad it is unbridgeable. A legal challenge to the CFTC’s authority to impose position limits appears inevitable. The only question now is who will bring it. None of the big banks, oil companies or institutional investors is likely to want to court controversy by acting as plaintiff.

But the rule could be challenged by an industry association on behalf of its members (there is safety in numbers) or by any individual firm willing to stand up and accuse the CFTC of over-reaching.

. . . .

But more fundamentally, most objectors argue the CFTC has no rationale and no legal authority to impose position limits at all, notwithstanding passage of the Dodd Frank Act in July 2010 (PL 111-203).

The FIA continues to argue the commission has no authority to impose limits unless it can come up with objective evidence that speculation has actually burdened interstate commerce and position limits are necessary to cure the problem.

BTW, I wasn’t coordinating with anybody.  I think I was the first, and certainly among the first, to raise this issue.

I’m not a lawyer, and especially not an expert on statutory interpretation.  Regardless of whether the law requires the CFTC to act only after making a credible finding that speculation has in fact distorted markets, however, I believe that would be the prudent course.  Given the real potential for harm inherent in the regulation, it should be adopted only if that harm is balanced by some benefit.  Insofar as harm is concerned, if the regulations are binding, that means definitively that they impose costs on market users.  So what is the benefit?  Is it too much to ask the Commission to demonstrate that they are intervening to fix a real problem?

As I noted in my comment to the Commission, it gave a very limited justification for its limits.  What’s more, the limits as proposed were far more expansive than required to fix the problem that the Commission identified.  Thus, in my opinion, the proposed limits are unduly burdensome.  There are far more efficient ways to mitigate the specific problem that the Commission has identified.

On a related note, Kemp omits any discussion of another mandate in Dodd-Frank, namely, that the Commission determine the costs and benefits of its proposed regulations.  Gensler has attempted to stonewall implementation of this black-and-white statutory language.  Although he hides behind statutory language when he does not want to defend substantively his actions (“Don’t look at me!  Congress made me do it!”) he blithely ignores that which he finds inconvenient.  (Yet another soul looking for free options–politicians and regulators are particularly prone to this sort of opportunism.)

This suggests another legal and substantive attack on any position limit rule: even if a finding of “excessive speculation” is not required, the Commission should provide a cost-benefit justification for position limits.  It has not done so.

With good reason.  For if it even tries, the results will be laughable.  The argument I raised in my comment letter would imply that the NOPR would not pass the cost-benefit test, and that it wouldn’t even be close.

But Gensler seems intent on pushing forward.  If he succeeds (which is not assured, as indicated by the Commission’s cancellation of today’s meeting) the (bad) joke will be on the markets–and the millions who depend on them.

So, I presume the industry will see Gensler and the agency in court.  I hope the plaintiffs (whoever they are) make both the statutory authority and cost-benefit analysis arguments.  That would be very interesting.

March 29, 2011

Humanitarian Jupiter

Filed under: Military,Politics — The Professor @ 12:11 pm

I would have loved to have been a fly on Nicolas Sarkozy’s wall last night, during Obama’s address about Libya.  Mr. Me made it sound like the entire Libyan venture was his idea, and that he had been pushing it from the beginning.  The truth, of course is that just as with Egypt, Obama was a Johnny-come-lately who reacted to events rather than shaped them.  He was chasing the parade, and now he claims he was the drum major the entire time.  In reality, Sarkozy and Cameron were out in front on this, and dragged Obama along–and only then with a shove from inside his administration from Clinton, Rice, and Power.

Given the stark difference between the reality and Obama’s self-serving representation thereof, I am sure that Sarkozy–a man with no small ego himself–is furious.  Indeed, Obama didn’t even mention Sarkozy by name, and France and the UK received one token mention.  In contrast to Obama’s repeated use of first person pronouns, this was petty and disrespectful.

Yes, “Smart Power” at work.

That was not the only pettiness in Obama’s speech.  His slurring of his predecessors Clinton and Bush was unnecessary, uncalled for, and beneath the office Obama holds.*  Usually presidents, after having experienced the difficulties of making life-and-death decisions, gain a respect for the challenges their predecessors faced, and mute their criticisms accordingly.  Not Mr. Me.

They called Clinton “The Big Me.”  He’s a piker in the narcissism category, compared to Obama, as frightening as that is to contemplate.

Substantively, the speech lays out what could best be described as a policy of opportunistic humanitarian intervention: the US deems that if a sufficient number of the right nations agree, it is legitimate for the US to use force to achieve a humanitarian objective as long as the risk to US forces is minimal.

In some respects, this formulation is defensible.  Protecting innocent civilians from the depredations of murderous regimes is a laudable goal.  At the same time, the commitment cannot be open ended and unconditional: costs must be weighed against benefits.

But the practical implications of this policy are murky and confusing, at best.  The actual conduct of the Libyan campaign, and Obama’s drawing a line at committing American ground forces to such a mission, suggests that he is fully beholden to the Jupiter Complex–if humanitarian aims can be achieved by hurling thunderbolts from the sky, fine, if not, no.  This formulation–which I think is a fair characterization of Obama’s position–sits very, very uneasily with the apocalyptic language that he used to describe the threat Khaddafy poses.  Saving a Charlotte-sized city is a moral imperative–as long as it doesn’t cost the bones of one American grenadier?

The refusal to contemplate military means to unseat Khadaffy is also quite difficult to reconcile with the justification for the intervention.  As long as Khadaffy and his regime exist, they are a threat to the civilian population.  If that is where the threat emanates, and the threat is as dire as Obama depicts, why not strike the head of the snake?  What’s more, how is a military stalemate–the likely outcome of the existing military and political strategy–conducive to achieving humanitarian aims?  A prolonged civil conflict is a recipe for a humanitarian disaster.  Furthermore, Obama’s menu of means to remove Khadaffy is pathetic, a series of measures that have failed repeatedly in the past to unseat dictators.  There is a disconnect between a diagnosis of the problem (Khaddafy is a murderous despot with a singleminded focus on survival) and the prescription (economic and political measures that will not threaten his survival).   This muddle of means and ends bodes ill for this particular intervention, and for others going forward.

The speech also makes it clear that UN approval is a necessary condition for intervention.  But what if China or Russia had vetoed a resolution?  Is there no humanitarian crisis so great that would justify a non-UN sanctioned intervention?

It was also disturbing that Obama almost completely overlooked Congress and the American people in his address.  There was one perfunctory mention of Congress.  Per his formulation, it is sufficient for the president to consult–once–with the bipartisan leadership of Congress not just before, but during, the commitment of US forces.  As has been pointed out by many in recent days, this is certainly a far different position than the one Obama, Biden, Hillary Clinton, and other figures in his administration adopted when they were in Congress.  But even if one is not fully sold on the War Powers Act, it is dangerous for the president to arrogate so much power to himself, and to denigrate Congressional authority to such an extreme degree.  It is dangerous Constitutionally, but also politically for Obama–and potentially for future chief executives.

I would say that Obama’s speech was calculated to achieve one objective: to rationalize the particular policy he adopted in this instance in response to intense political pressure.  (Well, that and to aggrandize himself, but that’s a given in every Obama speech.  Sorry, Sarko.)  As a result, the arguments were so hedged as to be virtually useless for ascertaining a principle that can be applied going forward.  Given the far more important–far more important–trouble spots that could erupt at any moment–Syria, Bahrain, Saudi Arabia, Yemen, Iran–this is quite troubling.  It means that Obama is flying by the seat of his pants.  This betrays a lack of strategic principle, an absence of an articulated policy that will lead the administration to make coherent choices going forward.  Instead, we can look forward to extemporized responses to developing crises, with those responses being almost purely reactive–to domestic political pressures, and to initiatives by other nations (e.g., France).  This reactiveness is almost guaranteed by Obama’s evident desire to let other nations lead.

Moreover, the absence of a firm policy direction and framework is a recipe for intramural infighting among competing interests in the administration, which will detract even more from the coherence and predictability of American policy.  We’ve already seen that infighting–in public, in some instances, as on Meet the Press on Sunday in what was really a shocking on-air dispute between Hillary Clinton and SecDef Gates.

All this is very disturbing.  For the really big challenges are likely to lay ahead.  Syria and the Gulf are far more important to American interests than Libya, and also hold out the prospect for humanitarian disaster.  A reactive Jupiter does not inspire confidence in his ability to handle such potential crises.

* And per Ace of Spades, wrong–and arguably deliberately deceptive.  [Added subsequent to posting of original piece.]

A Taxing Dilemma

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:09 am

Interesting story about the Russian oil industry:

Russia’s government may make it illegal for oil companies to reduce crude output and oil-product sales when “there’s demand” and sales won’t be loss-making, Vedomosti reported.

The measure is included in the latest version of a new law on oil extraction, refining and transporation that is being debated in the government, the Moscow-based newspaper said, citing a copy of the drafted dated March 1.

Here’s what I think is really going on.  Russia taxes oil extraction very heavily, and relies heavily on oil taxes to fund the government.  When taxes become too onerous, companies rationally respond by cutting output (and by not investing in new productive capacity).  This puts a crimp in government revenues.  So the state is proposing to eliminate the ability of firms to respond to high (and potentially higher) taxes on oil by reducing output.

This is essentially another way of extracting rents from “private” oil producers in order to fund the state.  It suggests acute near-term fiscal pressures.

There is always “demand” at some price.  Who determines what is “loss-making” is key here.  Presumably this will be interpreted to mean that price (net of taxes) exceeds lifting costs.  But lifting costs are not the true opportunity cost of producing oil.  The primary opportunity cost is the “shadow price” of extraction: the revenue foregone on a barrel of oil that could be produced in the future, but is produced today instead.  The ukase to produce today indicates a divergence between the government’s estimate of this shadow price and the estimate of the owners of the wells.

In other words, this proposed law signals that the Russian government discounts the future more heavily than ostensibly private resource owners.  (I say “ostensibly private” because the rights of ownership are highly circumscribed if the state controls both price–through taxes–and output and extraction decisions.)  The Russian government wants revenue now, and plans to get a lot of it through resource taxes.  It wants to limit the ability of firms to reduce their tax burden by reducing output today (in order to produce more in the future, perhaps when fiscal strains are less acute).  Hence the law.

In brief, the significance of the law is primarily what it says about the fiscal situation in Russia, and the dependence of the government on resource taxes.

Russia is trying to push output to the max today to maximize current tax revenues.  But there is a recognition that producing resources–many dating from Soviet times–must be replaced, and the more that is produced today, the more rapidly these resources need to be replaced.  The problem is that the tax regime creates a severe disincentive to invest in new fields.  Hence the heavy lobbying by Sechin and other elements in the Russian oil industry to get tax breaks on new fields.

One problem is the inability of an autocratic state like Russia to make credible commitments on such a tax regime.  The proposed law is an example of the time-inconsistency problem.  Future changes in the law can effectively take away tax breaks granted today.

Thus, in the coming years Russia will face an increasingly complex dilemma.  There is an increasingly pressing need to replace the legacy fields developed by the USSR.  But there is chronic and increasingly acute fiscal pressure: an aging population and the regime’s use of increased social benefits to tamp down popular opposition mean increasing demands on the state budget.  The major source of revenue to fund these demands is resource taxation.  But there is a fundamental contradiction between a tax regime that would encourage investments to replace depleted legacy resources and a tax regime that will meet these fiscal demands.

Just how Putin et al can square that circle is not immediately apparent, to say the least.

March 28, 2011

Demographic Decline Continues

Filed under: Economics,Russia — The Professor @ 7:14 pm

Last year, some wild-eyed optimists suggested that Russia’s 2010 census would actually show that population had increased by as much as 1 million since the last census, in 2002.

Better luck next time.  The preliminary census results are in, and Russia’s population declined 2.2 million, or 1.6 percent.

Debates over demographic issues are ongoing in the comments–in posts completely unrelated to demographics, but that’s the way things go around here.  I imagine that this news will spark a similarly intense debate.

I realize that 8 years is a long time, and that it is possible that the population decline has slowed, bottomed out, or even turned around during the last couple of years.  I’d be interested in seeing any evidence that would support that view.  Have at it, folks.

Color me skeptical.  Russia still has serious, serious public health problems, notably AIDS and multi-drug resistant TB.  With regards to the latter, the WHO recently issued a report indicating that Russia has the third largest number of infections in the world.  Consider.  China has almost 10 times the population as Russia, but only about double the number of infections, meaning that Russia’s infection rate is about 5 times China’s.  The ratio is only slightly better when compared to India.  These problems are bad in themselves, but are symptomatic of deeper problems that have baleful implications for Russian health and the potential for population growth.

Alcohol is of course a serious problem too.  But maybe there is good news.  Some Russians are reducing their consumption of vodka.  Unfortunately, they’re substituting whiskey.  This line is priceless:

“I actually find that countries with a strong history of distillation are usually more responsive to Scotch whisky, and this is especially true of Russia,” he told The Moscow Times in e-mailed comments.

I’ll bet.  I’d also bet it will be an uphill struggle, to say the least, for the country to record a population increase by the time of the next census.

And no, I won’t be persuaded by arguments that it’s worse in Latvia.

Convergence, or, Less Than 6 Degrees of Separation from SWP

Filed under: Music — The Professor @ 5:12 pm

Even though most of the images in this Rancid video for the song “Black Derby Jacket” off Rancid 2000 (my favorite Rancid CD, by far) are of New York, the very first shot is of the Chicago Board of Trade building, taken from LaSalle Street.  It is essentially the very same view as the background of this blog.  (Look fast–it is visible for only an instant.)

Interesting convergence, since the Streetwise Professor name was inspired by a song written by Lars Frederiksen, the handsome red-headed gentleman and guitarist who make s a few fleeting appearances in the video.

March 26, 2011

Beyond StuPid

Filed under: Energy,Politics,Russia — The Professor @ 7:59 am

A Swedish arbitration panel has ruled in favor of the AAR consortium and found that BP’s deal with Rosneft to explore and develop oil properties in the Arctic  had violated the TNK-BP shareholder agreement.  Under this agreement, BP pledged to undertake all its Russian operations through TNK-BP.  After BP signed the deal with Rosneft, its TNK-BP partners, AAR, succeeded in obtaining in London an injunction halting the Rosneft transaction.  The arbitration ruling extends the injunction and makes the deal’s ultimate fate even more doubtful.

Given BP CEO Robert Dudley’s experience with AAR–he was CEO of TNK-BP until he was ousted in an ugly dispute with the Russian “partners”–you have to wonder what the hell he was thinking when he entered the Rosneft deal without first securing a release from AAR.  The shareholder agreement’s term wasn’t a secret.  Dudley knew from harrowing experience that AAR plays rough and plays for keeps.

Did he assume that Sechin and Rosneft would lean on AAR to make things go forward?  Did Sechin provide assurances that he would?  Dudley would have been utterly foolish to rely on such an assumption–trebly so to rely on any assurance from Sechin.

Did BP believe that it knew how to navigate the treacherous shoals of Russian energy politics and ???????  What could have possibly led them to that conclusion?  The company’s handling of Kovykta was a disaster (e.g., going to Sechin to ask for help in convincing Gazprom to play ball–as if!).  Dudley’s humiliation at TNK-BP was another fiasco. Once burned, twice shy, you’d think.  Twice burned, thrice shy.  But not BP.

AAR now has Dudley and BP by the short ones, and can extract a pretty price from the British company.  Although some have suggested that AAR will not want to cross Sechin and will eventually accede to a BP-Rosneft joint venture (in exchange for a nice lump of cash no doubt), you cannot rule out the possibility of a double game here, with Sechin and Fridman et al cooperating behind the scenes to shakedown BP.  Think of the side-payment possibilities between AAR and Sechin: Sechin stands aside while AAR bleeds BP for the last cent–or pence–and in return, AAR kicks back some of that to Sechin/Rosneft.

Or Sechin could effectively stand aside, forcing BP to give up on the Arctic partnership–but continuing with the stock swap with Rosneft.  That would give Sechin his cake–a big share stake in a western supermajor–with the opportunity to sell the Arctic JV to another supermajor.

Amazingly, BP has said that it plans to proceed with the share swap even if the Arctic JV must be aborted. (Just what is beyond stupid, anyways?)  Many investors have apparently not lost their minds, even if the company’s management has: these investors are telling BP it should scrap the swap if the exploration deal is scuppered.

Maybe that’s not what is going on, but you can bet that Sechin is hardly taking BP’s interests to heart here.  Instead, he is scheming to figure out how to work the situation to his advantage–and letting the devil take BP.

There is a lot of irony in this story.  For one thing, the original AAR-BP spat over TNK-BP was in large part a dispute over strategic direction.  The AAR group wanted TNK to extend operations overseas, whereas BP wanted to focus in Russia.

The other major irony, of course, is that BP can’t blame Russian lawlessness for this one.  BP lost fair and square in western courts.  These courts found that BP had violated a contract, and that its Russian partners could enjoin BP from proceeding with transactions that constituted the breach.  Proving that the law is sometimes as it should be–no respecter of persons.

And the irony just doesn’t stop: presumably BP wanted the TNK deal subject to UK law in order to protect it against Russian predations.

The real irony would be that BP was counting on Russian lawlessness to allow it to breach its contractual agreement.  That Sechin and Putin would intervene to undermine AAR’s legal rights.  That visions of Khodorkovsky would keep the oligarchs in line.  That may yet happen, but don’t count on it.  But if that was the company’s calculation, it deserves whatever it gets, and worse.

This is just the latest in a series of major screw-ups by BP.  There’s Macondo, of course.  Texas City.  The propane corner.  The connivance in the release of the Lockerbie bomber.  The scandals involving Lord Browne.  Not to mention its pratfalls in Russia.  All the other supermajors put together–ExxonMobil, ConocoPhillips, Chevron, plus some foreign firms–haven’t matched BP’s collection of mis-steps.  I’d say that this record of mismanagement would make the company a takeover target–but who’d want to take over such a snake-bit firm, especially since the takeover would also bring with it deep entanglements with sweethearts like Sechin, Rosneft, and Fridman/AAR?

March 24, 2011

Alphonse and Gaston Do Kinetic Military Action

Filed under: History,Military,Politics — The Professor @ 11:18 am

I remember reading a story (which I can’t track down with things at hand) in which an anxious aide went to Napoleon with the news that another nation had joined a coalition against France.  Rather than being dismayed, Napoleon said (I’m quoting from memory): “Excellent.  My success is now assured.”

To put it differently, although diplomats and many politicians swoon over alliances and coalitions, the attitude of military commanders is far more ambivalent–and often dubious and dismissive.  That’s because although coalitions may bring numbers, and sometimes signal that the war is not intended to advance a particular nation’s interests, they are often antithetical to military success.

Coalition action is often contrary to the principles of war.  Most notably, it is often devastating to unity of command.  Sometimes, through great effort in the face of an existential, total struggle, as with the UK and US in WWII, these problems can be managed and overcome.

That is definitely not the case today.  The current coalition attacking Libya is a catastrophe.  An absolute catastrophe.  Nobody wants to lead; the natural leader of the coalition, the US, is most anxious not to.  It is an insult to Alphonse and Gaston to compare these efforts to the cartoon Frenchmen’s mutual deference.  Everybody has different ideas regarding objective.  Everybody is saying something different.  Differences in opinion are fracturing one of the most successful and enduring alliances in history (NATO).

What’s more, this incoherence and lack of leadership is having corrosive effects on other crucial military principles.  Most notably–the objective.  Who knows what that is?  And with no well-defined objective, military force is being employed in a diffuse and scattered way–contrary to the principle of mass.  Moreover, the least-common-denominator tendencies inherent in a coalition mean that the most timorous tend to exert disproportionate influence–contrary to the principle of the offensive.

The most likely outcome of this exercise in how-not-to-run-a-military campaign is a protracted stalemate between a weak but intensely focused dictator fighting for survival and a gaggle of rag-tag militias backed up by squabbling powers with a bad case of the Jupiter Complex.  And it is difficult to see how a stalemate will alleviate a humanitarian catastrophe, which is the ostensible purpose of this operation.  Indeed, as Wretchard writes, it is more likely to create or exacerbate such a disaster.

Some other Napoleonic advice is apropos here: “If you start to take Vienna, take Vienna.”  Dithering about with no leadership, no direction, no objective, and no decisive use of military power makes things worse, not better.  You don’t get points for high-minded intentions if your actions wreak havoc.  Obscuring intentions and actions in a fog of asinine euphemisms doesn’t change the realities.  If you start to take down Khaddafy, take down Khaddafy.  Otherwise, shut the hell up and stay the hell home.  Half-assed half measures get people killed for no good purpose, and all the Nobel Peace Prizes in the world do not change that brutal fact.

Another piece of Napoleonic wisdom was also ignored: “The reason I beat the Austrians is that they did not know the value of five minutes.”  Obama et al wasted five weeks, not a mere five minutes.  What’s being done now might have been decisive five weeks ago–but no longer.

Obama and his people yammer about shaping the conditions.  They are shaping conditions, all right–for a debacle.

March 21, 2011

Incoherence All Around

Filed under: Military,Politics,Russia — The Professor @ 7:29 pm

The Obama administration’s insists that its objective in Libya is limited to protecting civilians against Khaddafy’s predations.  It also insists that it is not targeting Khaddafy.  Obama has said Khaddafy must go, but he argues that financial pressures and sanctions will achieve this result.

A consensus has quickly emerged that taken at face value, this “strategy” is completely incoherent.  A brutal dictator like Khaddafy is unlikely to succumb to financial pressure.  Depending on an internal coup is also hardly realistic.  We hoped for that for years in Iraq, and our hopes were disappointed: hope, of course, is not a strategy.  The only way to protect Libyan civilians is to destroy the regime and its ability to resist.  This requires a more intense air campaign–and even that may be insufficient (see Iraq I and Iraq II).  Killing Khadaffy and most of his command structure is almost certainly a necessary, though not sufficient, condition to achieve the objective Obama and his military commanders have publicly announced.

A half-assed campaign risks a stalemate that will ultimately play to Khaddafy’s advantage.  Time, we have learned more than once, is not on our side in these endeavors.  The initial fervor lapses, especially when there are setbacks and civilian deaths.

But maybe these statements should not be taken at face value.  Perhaps Obama, the French, the British, and others involved are really targeting Khadaffy, but have decided not to acknowledge this objective.  Reports that several of Khaddafy’s bunkers have been hit would suggest that the true objective differs from the publicly announced one.  The Arab League’s volte face suggests that some of its members perceive that the campaign being carried out goes beyond what they had said they would support.

This alternative would perhaps exonerate Obama of accusations of military and strategic incompetence, but call into question his credibility.  This raises the questions: Why would Obama lie?  Who is he trying to deceive?

It is unlikely that Obama is trying to deceive the American people, or Congress.  I presume that a broad majority in both Congress and the electorate would support a more robust campaign, and one that specifically targets Khaddafy.   Even those who are uneasy about getting involved at all (including yours truly, at this late date), would say: if we’re going to do it, do it all the way.  And besides, Khaddafy has deserved it for decades.  So Obama would likely get more support from Americans and from Congress if he forthrightly declared his intention to change the regime in Libya, and implemented a campaign more likely to achieve that objective.

This leaves only one alternative: Obama et al are lying to the UN, and are going beyond the mandate of the UN resolution, but not admitting it.

Under this alternative, Obama is effectively admitting that the UN imposes unnecessary constraints on the actions of the US and its allies, and provides succor to dictators.  That the UN is a problem, not the solution.

I agree.  But admitting this, as Obama would be doing if he is in fact deceiving the UN about his true goals, completely explodes the justification for his habitual deference to that body.  Why the insistence on UN approval when he recognizes that the conditions for said approval are unacceptable and jeopardize the lives of innocent civilians?  Why the genuflection to the UN generally, on this and other matters, if he believes that it is dysfunctional on matters of fundamental importance?

So Obama can’t escape the charge of incoherence by pleading Machiavellian duplicity: if his true goals differ from his stated goals in Libya, and hence he is lying to the UN, his deference to that body on this matter and others is incoherent.

This means that either Obama is being honest about his objectives in Libya, and is pursuing a strategically incoherent course, or he is lying about his objectives in order to circumvent the UN, in which case his broader UN-based, multilateral, deferential foreign policy is incoherent.

And the incoherence is not limited to the US.  Russian policy on Libya is also a complete shambles.  Putin rages about the air campaign:

“This UN Security Council resolution is without doubt defective and harmful,” Putin said on Monday, after calling it a “medieval call to crusade.”

And Medvedev chastised Putin strongly for these remarks:

By Monday evening disagreement between Putin and Medvedev looked even more evident as the Russian president called Putin’s statement “inadmissible.” “Russia did not exercise [the veto power] for one reason,” Medvedev retorted. “I do not consider this resolution to be wrong. Moreover, I believe that this resolution generally reflects our understanding of what is going on in Libya…It is absolutely inexcusable to use expressions that in effect lead to a clash of civilizations – such as ‘crusades,’ and so on. That is unacceptable,” Medvedev said.

Whoa.  When has Medvedev ever said that Putin has uttered something “unacceptable”?  That’s a first, as far as I know.

Evidently the division within the Russian government led to its decision to abstain from a vote on the UN resolution authorizing force in Libya.

Although it’s very risky to attempt to read too much meaning into the growls from beneath the Russian carpet, this breach appears more real, more passionate, and less contrived than those that have occurred before; this seems real, rather than Kabuki theater.  This bears watching to see whether developments in Libya affect the political dynamic in Russia, or whether the intramural disagreements over Libya policy are a harbinger of intensifying conflict between Putin and Medvedev in the run-up to the elections in December (for the Duma) and next year–for the presidency.

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