Streetwise Professor

December 17, 2013

Don Putin to Bonasera Yanukovych: Some Day I Will Call On You to Do a Service For Me

Filed under: Economics,History,Military,Politics,Russia — The Professor @ 12:13 pm

The inevitable has happened.  Yanukovych traveled to Moscow, and received Putin’s promise to purchase $15 billion in Ukrainian government debt using the Russian sovereign wealth fund, and a further promise to cut gas prices substantially (though temporarily).  These terms are very similar to what Edward Lucas tweeted a couple of weeks ago, so his sources are vindicated.

There was no quid pro quo announced.  Specifically, Putin claimed that Ukraine’s joining of USSR Lite-the Customs Union-was not discussed.

This was a tactical choice.  Announcement of a formal agreement to join, or a plan to join, would have stoked the protests in Maidan and elsewhere in Ukraine.  But everyone can see the writing on the wall, and so I don’t think that makes much difference.  Announcing Ukraine’s accession to the organization would have just been gilding the lily.

This is something out of the Godfather, with Putin in the role of Don Corleone, and Yanukovych in the role of Bonasera.  “Some day I will call on you to do a service for me.”

For all the attention the deal is getting, it really doesn’t change much.  It was almost inevitable that Yanukovych would throw in with Putin.  As I said on Twitter, Putin was offering Yanukovych a fix, and the Euros were offering him years of rehab.  Easy choice for a corruption addict like Yanukovych.  The opposition and protestors will see through the lack of a formal announcement about the Customs Union, and will take this as proof that Yanukovych has sold out Ukraine to Russia.  The die has been cast, and the standoff between the protestors and the government will continue.  If the protests do not fade away, Yanukovych will have to decide whether to repress it, or just try to wait it out.

And as before, the key figures will be the oligarchs and the military and security forces.  In one ominous note, Putin offered increased cooperation between the Russian and Ukrainian militaries.  I’m sure he did.  He wants to make sure they are reliable.

What’s in this for Russia, as opposed to feeding Putin’s imperial ambitions?  Well, Putin has tied Russia to a money pit.  The Russian economy is already moribund, and the sovereign wealth fund is not sufficient to withstand a substantial drop in oil prices (which is a real possibility).  Investing in Ukrainian junk bonds is hardly the action of a prudent fiduciary.  Moreover, this cannot be the end of it.  This is just the first fix for the junky.  He will need more, and more, and more.  The $15 billion will get him over the immediate fiscal crisis, but it will soon rear its ugly head again, because the fundamentals of the Ukrainian economy are still abysmal.  And the investment is a wrong-way risk from Putin’s perspective.  If the Russian economy takes a hit, due to a fall in the oil price or anything else, the Ukrainian economy will take a hit too, and the bonds Russia has bought will tank.  This is exactly the opposite of the kind of investment one should put in a “rainy day fund.”

Insofar as the gas price is concerned, Gazprom’s stock price fell only slightly on the news.  Since the deal was largely anticipated, that’s not much of an indication of whether the price cut, which is substantial in dollar terms (almost 50 percent) is expected to last long.

One final note.  Yanukovych comes off looking even more buffoonish than before, which I hardly thought possible.  He justified his decision by saying that given the dependence of the Ukrainian economy on Russia’s, he had no choice but to throw in with Putin.

What?  He just noticed this dependence?  It escaped his notice while he was negotiating with the Euros?

This statement is almost as buffoonish as his threat to investigate those who negotiated the Association Agreement with the EU because they had put Ukraine at risk.  Again: he had no idea what was being negotiated, and what its implications would be?

It’s very Obamaesque, in fact.  Apparently Yanukovych only learns about these things by reading the paper, or something.

In sum, what transpired in Moscow today just formalizes what everyone who was paying attention predicted.  It really changes nothing.  The divide between the protestors and the government remains, and how that plays out from here no one can predict with any certainty.

December 16, 2013

Once a Tool, Always a Tool

Filed under: History,Military,Politics,Russia — The Professor @ 7:46 pm

Tom Friedman has always been an apologist for authoritarians (and worse) who never fails an opportunity to take their side against the US, or against those battling authoritarians.  Which is why longtime readers know that I refer to him as Tool Time Tom, because he’s a complete tool.

Case in point: Face the Nation on Sunday, where he made excuses for Putin and sneered at Ukraine and the Czech Republic (h/t @libertylynx).

Full disclosure: I did not watch Face the Nation.  I had something more important to take care of.  Like cleaning the lint trap on my drier.

Regurgitating Putinprop is somewhat of a change for Friedman: he spends most of his time sucking up to the leadership of the PRC.  But the Putin and China upsuckery share the same roots.

The regurgitation of the NATO expansion meme begs a question: just why-oh-why to the Baltics, Poles, Czechs, etc., want to be in NATO?  To carry out their long-term scheme to overturn the injustice of 1612 and realize their ambition to subjugate Russia?  Hardly.  The exact opposite.  Because they want protection against Russian control.  Putin and mouth breathing Russian nationalists are sore because NATO expansion denies them the imperial control they believe their due.  NATO is a shield behind which eastern European nations grope towards a more humane, civil, democratic, and free future, not a sword aimed at Russia.

But Putin can’t tell the difference.  And either can Tom Friedman.

December 15, 2013

Frankendodd Shifts Risk Around, Rather Than Making It Disappear! Who Knew?

Filed under: Clearing,Derivatives,Economics,Financial crisis,Politics,Regulation — The Professor @ 5:20 pm

According to one of my industry contacts, this article in the Fiscal Times has “created a lot of unwanted buzz” in DC.  Because our betters find it so very inconvenient when reality intrudes on their fantasies.

The article focuses on the clearing mandate.  It points out that the main effect of the mandate is to shift risk around, and concentrate it in CCPs.  The risk doesn’t go away.  It moves.

Let me think.  Who was pointing this out five years ago?  Modesty prevents me from naming names.

Clearing was sold-most notably by my bêtes noire Geithner and Gensler*-as a magic box that made counterparty risk disappear.  This was a false claim, and arguably a dishonest one.  I find it hard to believe that Gensler, for instance, really believed what he said.  And the alternatives are ugly.  He (and other advocates of the clearing mandate) either made arguments he (they) knew to be untrue, or was (were) utterly ignorant of the implications of the policies that he (they) was (were) implementing and supporting.  Choices: (A) Idiot. (B) Liar. (C) There is no choice (C).

In reality, clearing mainly shifts around counterparty risk, and creates new risks, most notably liquidity risks.

All of these things were foreseeable, and foreseen-by some. Who were ignored, and at times reviled.

Why did this happen? It seems to me that in the heated days of the crisis, there was a desperation to find a solution.  For a variety of reasons, most notably the fact that the major cleared markets dealt with the Lehman situation without much problem, policymakers seized on clearing as the panacea.  And once they had done that, getting the clearing mandate passed became an end in itself.  The decision had been made, all doubts had to be suppressed.

But where does that leave us? With the growing recognition that the alleged panacea was nothing of the sort.  With the creeping recognition that the mandate has created a new set of risks.  A new set of potential sources of systemic instability.  So now policymakers are scrambling to address and to mitigate these problems.

It would have been so much better had these problems been anticipated, in advance, and the law drafted accordingly.

This is not Monday morning quarterbacking. I and others anticipated these problems at noon on Sunday.  But we were left on the sidelines, while the geniuses called and ran the plays. We are going to be dealing with the consequences of that for years to come.

*One blessedly departed from government “service”, and the other blessedly about to do so.

Sebelius Plays Santa Claus, By Running Afoul of the Takings Clause

Filed under: Economics,Politics,Regulation — The Professor @ 4:39 pm

The latest extra-legal, ad hoc attempt to stave off the cataclysmic consequences of Obamacare, and the utterly inept implementation thereof, is quite something to behold.  Because the vaunted Healtcare.gov website does not incorporate a payment function (such an exotic concept, I know) and because insurers are receiving so much bad information, it is likely that a pathetically small fraction of the pathetically small number of individuals who have run the gauntlet to complete an application will actually pay their premiums in time to be covered by 1 January, 2014.  To avoid the catastrophe of large numbers of individuals finding themselves uncovered in the new year, the administration is “strongly encouraging” (euphemism alert!) insurers to play claims on policies that have not been paid for.  Moreover, since there is mounting concern over access to physicians, the administration is also “strongly encouraging” insurers to pay claims for physicians and hospitals that are not in the networks associated with the policies the insurers have issued. Furthermore, there is further “strong encouragement” that insurers pay to renew prescriptions that are not covered under existing policies.

With respect to the paying claims on unpaid-for policies, the administration is essentially enforcing insurers to extend credit in a business that does not normally extend credit.  In private insurance markets, policies doe not come into effect until premiums are paid.  Given that a good fraction of those on exchanges are likely not to be very creditworthy, this exposes insurers to the risk of substantial credit losses.  Since the policies were priced on the presumption that they did not embed credit, insurers are exposed to losses for which they will not be paid.

Are insurers to be compensated for the inevitable credit losses?  By whom? The Federal Government?  If so-has such compensation been duly authorized by Congress?  (Rhetorical question.)  If Congress hasn’t authorized it, where is the money going to come from?

If not-is this diktat not an unconstitutional taking of the property of insurers?  Does it not compel them to provide services without compensation?

Similarly, insurers designed policies, physician and hospital networks, and premiums to trade-off costs and benefits.  To economize on premiums, they limited network access.  Forcing them to provide costly access to a broader network, but not permitting changes in premiums, is yet another taking

In other words, Sebelius is trying to play Santa Claus, but in so doing, is running afoul of the Takings Clause.  The property of private insurers is being taken without compensation. They are being forced to provide valuable things (credit, access to a broad physician network, prescription coverage) for which they are not being paid.  All to shield the administration from the catastrophic consequences of the baked-in defects of Obamacare, and its comical incompetence in implementing it.

The lawlessness of this administration, especially when it comes to Obamacare, is quite beyond belief.

December 12, 2013

Finding the Silver Lining in the Toxic Cloud, or, Shanghai Meets Obamacare

Filed under: Economics,Politics — The Professor @ 6:02 pm

For the past weeks, Shanghai has been enveloped in a choking toxic smog.   This is a tremendous embarrassment to China, so two official news agencies responded by attempting to find the figurative silver lining in the literal cloud:

In online articles, state broadcaster CCTV and the widely read tabloid the Global Times, published by the Communist Party’s official People’s Daily, tried to put a positive spin on the smog problem.

The Global Times said smog could be useful in military situations, as it could hinder the use of guided missiles – giving the example of smoke used by Serbian forces against Nato airstrikes in the Kosovo war.

Meanwhile, broadcaster CCTV listed five “unforeseen rewards” for smog, including helping Chinese people’s sense of humour.

This came to mind when reading this NYT article which makes every excuse possible for the next predictable failure of Obamacare: the dropping of group coverage by small business, resulting in turning over millions of employees to the tender mercies of The Website From Hell, Medicaid, or, if they’re lucky, the government approved Junk Insurance Plans that would be unconscionable if an insurance company sold them to you (according to Obama, anyways).

All in all, I find the Chinese propaganda more amusing and plausible than the NYT’s.

We Are In the Best of Hands. The Very Bestest.

Filed under: Economics,Politics — The Professor @ 5:43 pm

The Fascism With A Smile campaign to fool suckers into signing up for Obamacare is in full swing.  The White House is engaged in a flood-the-zone campaign to get people to Get Covered.

What a concept! Imagine if they had, I dunno, a website where people could sign up, send their information to an insurance company, pay their premium.  That would be amazing!

But today this campaign surpassed the ability of even a Swift to satirize.   The White House posted this on Twitter.

Peace. Piece. I know.  I always have such a hard time knowing when to use which.

Perhaps this is a Freudian slip.  The administration knows that the success of Obamacare depends on a lobotomized population.  People who have lost a piece of their minds, if they had any to begin with. Or maybe it’s just that the creator of this propaganda has issues with Mom.  S/he wants to give her a piece of her/his mind.  But what about the “quality control”? The “editing” process?  Does everyone at the WH have Mom issues?

Isn’t it grand? Turning over control of 1/6th of the US economy to people who don’t know the difference between “piece” and “peace”, or who don’t care enough to make the distinction when producing propaganda intended to gull the great unwashed.

The next challenge for the administration: to grasp the subtle differences between “there”, “their”, and “they’re”.

We are so screwed.

December 11, 2013

Ukraine: The Seen and the Unseen

Filed under: Military,Politics,Russia — The Professor @ 8:30 pm

Although the focus in Ukraine is the drama in Maidan, the matter will be decided by what happens in the barracks and the counsels of oligarchs.  Here are a couple of interesting articles analyzing how the oligarchs are leaning.  They suggest that the oligarchs would feel more secure in a more European country than a Russian one.  For a variety of reasons.  Because they fear being caught in a new Belarus, cut off from the ability to travel to their European homes.  Because they fear that once Ukraine is firmly in the Russian orbit, they would quickly be displaced by Russians.  Because they feel that their wealth, ill-gotten as it is, would be more secure if Ukraine became more European and less Russian: such is the logic of primitive capitalist accumulation.

This is all plausible, but one must also apply a little game theory.  There are multiple oligarchs, and if any one steps out alone he is vulnerable.  Yanukovich can isolate that individual, and perhaps get the other oligarchs to turn on him by promising them a piece of his empire if they support the government.  The collective action problem may well prevent the oligarchs from turning decisively on Yanukovich.  But no doubt there are communications going on behind the scenes.  Each is attempting to figure out what the others are thinking.  There are likely furtive efforts to conspire.  Whether they will be able to overcome the collective action problem, and unite against the government, remains to be seen.

I mentioned two decisive factors: the oligarchs and the army (including other security forces, especially those in the Interior Ministry).  These are not independent.  Money can buy armies.  Or at least units of armies.  Buying off army officers may provide the most bang (literally) for the oligarchic buck (or the Hryvna, as it were). We are talking about Sovok land here.  Everything-most notably the military and its weapons-is for sale.  (In the Chechen Wars, Russian army officers notoriously sold their units’ arms.  In some cases, to the Chechens.)

So what is going on for all the world to see in Maidan is important, and affects the dynamic, what is happening behind the scenes, is likely more important still.

Speaking of Maidan, yesterday the police engaged in some aggressive actions against the protestors.  Moving in, dismantling barricades, etc.  But then they withdrew.  The opposition rejoiced.

One interpretation is that the police lost their nerve, and were overawed by the size of the crowd and its refusal to be cowed.  But I wonder if perhaps something else is going on.  Whether these were probing actions, designed to test reactions, gather intelligence, and so on.  Let’s just say that I would not get too giddy about the apparent hesitation by the security forces.  Again: The unseen-what is going on inside the security forces-is as or more important than what is seen on the streets.

How the Nuclear/Conventional War Worm Has Turned

Filed under: History,Military,Politics,Russia — The Professor @ 7:32 pm

Back in the darkest days of the Cold War, the most frightening doomsday scenario was the the US would be forced to go nuclear because NATO forces would be overwhelmed by a conventional Soviet attack through the Fulda Gap.

Oh, how the worm has turned.

Now, the Russians are threatening that they will go nuclear in response to a US conventional attack.  There is something of a difference.  In the Cold War, the threat to NATO forces came primarily from massed Warsaw Pact armor.  Today, it is precision strike conventional weapons that give the Russians nightmares.  But just as the American fears in the 70s and early-80s were a confession of weakness in a major military category, the Russian fears today are a confession of their abject weakness in several major military categories.

Of course, given the source perhaps it is wise not to take this threat too seriously.  For the source is Rogozin.  You know, Rogozin the Ridiculous.

December 9, 2013

Make the Bastards Pay

Filed under: Regulation — The Professor @ 5:13 pm

A friendly bit of advice.  If you are on a flight originating in the EU, and the flight is delayed more than two hours, the airline owes you cash compensation.  If the flight is delayed or cancelled, and you arrive at your destination more than 4 hours after schedule, for flights over 3500 km you are owed 600 Euros, or nearly a cool $1000 at the current exchange rate.  Lesser compensation is due for shorter flights, or smaller delays.

I was on a United flight from Amsterdam to Houston that was cancelled.  I called United to demand my compensation, and they were very, very responsive as soon as I mentioned the EU regulation.

Not that they advertise it, mind you.  I overhead another passenger mention it when we were deplaning upon arrival at IAH.  Per these regulations, the airline is supposed to apprise you of your rights.  But United didn’t in this instance.   So I’m performing a public service by letting you know what is due you.  If they do to you what they did to me and 100+ of my newest friends on Sunday, make the bastards pay.  I only request a 10 percent gratuity, to show your appreciation 😉

Unfortunately, it just works on flights originating in the EU, or airlines registered in the EU.  I had a Dulles-Geneva United flight cancelled in September, for which I get bupkus.  Which made the collecting the 600 Euros all the sweeter this time around.

December 8, 2013

Between Putin and the People

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

Today saw a renewal of the massive protests in Kiev.  Indeed, they were arguably larger than those that occurred last weekend.  Organizers called for 1 million Ukrainians to meet at Maidan.  Crowd counts are notoriously unreliable, and it is doubtful that a million actually protested, but the photographs and videos of the events demonstrate that the demonstrations were massive.

So where from here?  Yanukovich added fuel to the fires that are inching towards him by meeting with Putin in Sochi.  Edward Lucas might have fueled the flames even further when he tweeted that a deal had been struck, with Yanukovich securing $15 billion from Putin, along with a substantial cut in gas prices, in exchange for a promise that Ukraine would join Putin’s simulacrum USSR, the Eurasian Economic Union, in 2015.  Lucas was quickly criticized for being too quick on the tweet, as it were, and spreading a thinly sourced rumor.  Putin’s Carney Peskov said the EEU had not even been discussed, that no deal was done, and that further discussions would take place at a technical level.  But the Ukrainian PM Azarov (who makes Yani look like a real charmer) said that a big deal is in the works.

But remember: they’re all Sovoks, so absolutely nothing they say is worth the air of the breath that carries the words.

A hamfisted crackdown in November was an inflection point in the crisis: the attack turned what had been a somewhat forlorn protest into a much more intense national movement.  (Well, semi-national: protests are massive in western Ukraine, and muted, at best, in the east of the country.)  This is no doubt making Yanukovich abstain from further violence.  The very size of the crowds, and the international attention they are getting, are also a deterrent.  There have been ominous signs-the surrounding of a TV station by the Berkut, warnings to evacuate government buildings some protestors have occupied-that force might be used, but so far the government has been restrained.

So Yanukovich will likely try to wait out the protests, in the hope that they will peter out.  This is probably a futile hope.  He made a similar calculation in 2004, and we know how that worked out.  If anything, the opposition is even more motivated today, as the stakes are perceived to be higher.  2004 was about a corrupt election.  2013 has been framed as a choice of tomorrows, between a humane European future with normal people in a normal country living normal lives on the one hand, and a return to a bleak past as a Russian satrapy.

What’s more, Yanukovich does not have the luxury of time.  Ukraine’s economic situation is desperate.  The country’s foreign reserves are down to about 2 months of imports.  Its interest rates are among the highest in the world.  It needs money, and it needs it now, or it risks fiscal collapse. The IMF has offered money, but on terms that make Yanukovich, his cronies, and his oligarch allies blanch.  Putin is apparently offering money, but on terms that would make a substantial part of the country, and virtually the entire western part, even more furious than it already is.  Today’s massive demonstrations were a response to a rumor of deal: think of the reaction to the reality of one.

Yanukovich, in other words, is caught between Putin and the people.  But it’s worse than that.  Neither trust him.  Both will think that if he sides with them, he is more than capable of reversing course later.

And he has to make his choice soon.

Putin has the cash.  Putin can offer other resources-notably, support to the security services.  Covert, preferably, but overt if necessary.

Putin may have an interest in getting Yanukovich to crack down on the protests.  Once that happens, the Ukrainian president will have nowhere to turn for support.  He will be totally dependent on Putin.  The primary consideration that may lead Putin to want to avoid a violent outcome is that it would inevitably be associated with him and Russia, and could lead to boycotts of the Sochi Olympics, or at least a drumbeat of stories that would detract from what Putin is trying to achieve with the games.

Although he doesn’t have a lot of time, given Ukraine’s parlous economic circumstances, since he has no good immediate moves to make, my guess is that Yanukovich will play for time and pray for a miracle.  When that doesn’t come, he will probably choose Putin, because that gives him at least a chance at survival.  And when he makes that choice, the possibility for a violent outcome is very real.

The eventual outcome depends in large part on whether Yanukovich can rely on the military.  The Berkut (his interior forces) are presumably reliable, but will the army stand idly by if Yanukovich attempts a Tiananmen solution?  (Remember the situation in Romania in 1989, where the military refused to fire on revolutionary crowds.  Similarly, during the coup in 1991, Soviet military units, notably a division of paratroopers under Lebed, refused to obey orders to surround the White House where Yeltsin was leading the resistance.)  In violent situations, those who control the resources with the greatest potential for organized violence prevail.

I have no idea what the situation inside the Ukrainian military is.  No doubt the Russians have penetrated it, especially at senior levels.  But whether it is a reliable force, or one that could turn on Yanukovich, I don’t know.  And sadly, even though this is arguably the most important determinant of where things go from here, the media is totally uncurious about it.  They are too wrapped up in the romance of what is going on in the streets to pay attention to the historical reality that what goes on in the barracks is far more important in determining how revolutions play out-or don’t.

One last word.  The Obama administration has been-again-MIA.  Yes, the loathsome Samantha Power tweeted support for the protestors, but as in Iran in 2009 the administration has been notable mainly for its absence on this issue. It should step up to the plate on this.  Because it’s the right thing, and because it could take Putin down a few pegs.

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