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Streetwise Professor

April 24, 2010

Three Russian Stories

Filed under: Energy,Military,Politics,Russia — The Professor @ 8:45 am

Three stories about Russia caught my eye.

Story number one: Playing the Sorcerer’s Apprentice comes with its own particular risks.  Not long after Putin played the cat with the canary over the Russian role in the overthrow of the Bakiyev government in Kyrgyzstan, Russia is now anxious since that country is at risk of spinning out of control.

Russia has already made noises about protecting militarily Russians in the Central Asian country.  Given that (a) Russia has already announced a policy that it reserves the right to protect Russians abroad, and (b) “protection of Russian citizens” was a pretext for the invasion and de facto annexation of Abkhazia and South Ossetia, this could be a prelude to a Russian military intervention in Kyrgyzstan.  But I doubt this is an appealing option to the Kremlin–or to the Russian White House (which is what probably matters).  Military engagement in Kyrgyzstan would be a far different kettle of fish from the invasion of Georgia, since (a) Kyrgyzstan is not continguous to Russia, and hence would present some serious logistical issues, and (b) intervening in a civil war in a backwards, Muslim country would bring back bad memories, and the prospect of a thankless and pointless task with no readily identifiable end game.

So, driven by its obsessive desire to hamper US and NATO operations in Afghanistan, and to deny the US any presence in Central Asia, Russia has contributed to the creation of a mess that it will present it with few appealing options.  (Not to mention that hampering US/NATO operations is completely contrary to its continued whinging about the NATO failure to eradicate, or even target, Afghan opium production.)

Be careful what you ask for: words to live by.

Story number two: Ukraine and Russia have apparently concluded a deal whereby Ukraine will extend the Russian lease on the Sevastapol naval base in exchange for discounted prices on gas.  Before commenting further, I should say that using “concluded” and “a deal” in any sentence involving either Russia or Ukraine, and especially involving Russia AND Ukraine, is quite dangerous.  No deal is ever really concluded when these jokers are involved.

In some respects, this is good news (again, to the extent that the deal is real, and not just the forum for ex post opportunism by one side, the other, or both in the months and years to come).  First, it provides Russia relief on gas prices without Ukraine conceding any control over its gas infrastructure to Russia.  (Though this means that that infrastructure could become a flash point in some future dispute.)  Second, it reduces the prospect for conflict in 2017, which would have been almost inevitable if Ukraine had attempted to force out the Russian Black Seas Fleet.   Third, it may also reduce tensions with Georgia (reduce, but not eliminate) because if forced from Sevastapol, Russia was considering building a naval base in Abkhazia, which would have created numerous problems in the region.  It is also probably a net economic winner for Russia, as it saves itself the cost of building a new base for its (shambolic) fleet.

Story number three: Gazprom earned the world’s largest profit in 2009, but was a distant 30th in market capitalization.  Little needs to be said of this: it is yet another testament to how aggressively the market discounts the future prospects of Russian companies, and for good reason.


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20 Comments »

  1. You didn’t mention the biggest Russia news this week – S/O writes a post In which I criticize Vladimir Putin ;)

    My first impression is that Ukraine won out on the deal, because Russia provides benefits now (lower gas prices) while the base may be canceled in the future. I have to read up on it, though. This deal also involved the transferal of several major Ukrainian industrial and military-industrial assets into Russian ownership.

    Comment by Sublime Oblivion — April 24, 2010 @ 12:57 pm

  2. Hate to correct both of you gents, but the biggest Russia news this week was it’s super-super-super succesful international bond offering, with it’s lowest yields ever.

    Professor, to adjust your final sentence a little:

    Little needs to be said of this: it is yet another testament to how positively the market views the future economic prospects of Russian Federation, and, since Russia possesses the world’s 3rd largest foreign currency reserves and has manageable debt levels, in contrast to the United States and most of Europe, it is for good reason.

    Comment by lisa — April 24, 2010 @ 4:38 pm

  3. This really says it all to me:

    “People involved in the transaction said the Eurobond had attracted a diverse group of investors, many of whom had no previous history with Russia.”

    http://www.ft.com/cms/s/0/e31e873c-4e6f-11df-b48d-00144feab49a.html

    Comment by Dave — April 25, 2010 @ 6:47 am

  4. Ukraine utterly schooled Russia on the Sevastopol deal:

    http://larussophobe.wordpress.com/2010/04/22/editorial-ukraine-suckers-russia-but-good/

    The scope of this blunder by the Kremlin is truly breathtaking, and will burden future Russian generations, especially since the gas Russia has surrendered to Ukraine at bargain-basement prices is running out rapidly:

    http://larussophobe.wordpress.com/2010/04/22/editorial-russia-running-dry/

    To sum up: Within this century, Russia will have no oil or gas left to exploit, yet it is sending vast quantities at or below cost to Ukraine in exchange for a naval base when, for all intents and purposes, Russia has no navy. Russia has been suckered by its frenzied nationalism and ego into a deal that will ultimately cripple the nation.

    Comment by La Russophobe — April 25, 2010 @ 8:45 am

  5. LISA:

    You seem to be rather confused. The “bond offering” you refer to has Russia returning to international borrowing in a massive way in order to close shortfalls in its budget, which is operating in the red for the first time in years. It has Russia borrowing money from countries it hates, countries it buzzes with nuclear bombers, countries it is provoking into a new cold war. It happened because of the total lack of diversity in the Russian economy, which left Russia ridiculously vulnerable to the vagaries of the global economic slow-down, and is a sign of the beginning of the end for Russia.

    If you think things are going so wonderfully well in Putin’s Russia, we’d suggest you . . . move there. Considering it?

    Comment by La Russophobe — April 25, 2010 @ 8:48 am

  6. Phoby, Phoby, Phoby…

    So, according to you, only countries with undiversified economies have recessions, or float international bonds when they have a budget deficit?

    You are the first person I have ever heard imply that the US has an undiversified economy.

    Comment by rkka — April 25, 2010 @ 3:03 pm

  7. “Story number three: Gazprom earned the world’s largest profit in 2009, but was a distant 30th in market capitalization. Little needs to be said of this: it is yet another testament to how aggressively the market discounts the future prospects of Russian companies, and for good reason.”

    Two reactions

    1) As we know, “the market” is never mistaken about anything. Ever.

    2) HAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAHAH

    Seriously though, that’s really funny. Thanks for brightening my Sunday!

    Comment by hilarious — April 25, 2010 @ 3:53 pm

  8. RKKA:

    You are an illiterate gorilla.

    The point is that since Russia’s economy is based on NOTHING but gas and oil, when the gas and oil runs out the Russian economy implodes.

    The further point is that Russia’s borrowing is directly contradictory of its professed desire and ability to operate without relying on borrowing from the West, making it possible for Russia to provoke those countries with cold-war aggression without suffering financial consequences.

    You really should not drink so much vodka before writing things other people can see.

    Comment by La Russophobe — April 25, 2010 @ 4:23 pm

  9. Phoby, Phoby, Phoby…

    No less than the CIA World Factbook shows that Russia produces a wide range of goods, and is for instance one of the major exporters of food. Her livestock herd is rapidly recovering from “FreeMarketDemocraticReform” too, much to the chagrin of Tyson’s and the American Cattleman’s Association.

    And as for government debt, Russia is a piker. Her bonds sell well because the Russian government is solvent.

    Comment by rkka — April 25, 2010 @ 5:19 pm

  10. Lmao when rkka gets under Kim’s skin.

    Just reading up on Elbe Day (American and Russian soldiers met-up on the Elbe this day in 1945). Here’s the 1945 radio report from the CBC. Pretty moving stuff. Even Kim might crack an emotion if she had any.

    http://archives.cbc.ca/war_conflict/second_world_war/topics/1669-11552/

    Comment by lisa — April 25, 2010 @ 6:10 pm

  11. Okay, boys and girls*, here’s my take.

    1. As I’ve said before, Kudrin has been a very prudent minister, for whom I would trade just about any US Sec Treasury except maybe George Schultz or Andrew Mellon.
    2. Specifically, against tremendous pressure, Kudrin has done an amazing job at running Russian fiscal policy. This is the bright spot in the Russian economic picture.
    3. That said, don’t get too excited about the implications of the bond sale for the broader picture of the Russian economy. It is more of a barometer of conditions in the oil market (which is a major contributor to the Russian fisc) than anything else. What’s more, Russia remains, due to its dependence on oil and gas, a “high beta” economy, meaning that it is more sensitive than average to worldwide economic conditions.
    4. Also don’t get too excited about Russian public debt, because Russian corporate debt is still massive, and it is clear that here is an implicit bailout/guarantee of some debt issuers. In that sense, Russia is kind of like a giant SIV, sort of like what Citibank and others were operating during the boom in the US. Bringing those things on balance sheet is a bitch.
    5. Moreover, Putin is making a lot of promises to a lot of people. That has Kudrin worried.
    6. Part of the reason Putin is making promises to spend money is that the manufacturing economy and other non-oil and gas parts of the economy are sputtering–precisely because the strong oil revenues are strengthening the ruble.
    7. Russia better hope that the US recovers, that Europe doesn’t implode due to metastasizing budget crises with Greece, and then other countries, and that China continues to pump up its economy. Because as I said above, Russia is hostage, and especially its budget is hostage, to the performance of the world economy. I have to say to me that sounds like relying on drawing an inside straight.

    * And perhaps boys pretending to be girls.

    The ProfessorComment by The Professor — April 25, 2010 @ 9:53 pm

  12. This really says it all to me:

    Russia’s credit rating is way too low, as it boasts some of the strongest fundamentals in the world, but it’s still tarred by its increasingly irrelevant “emerging market” moniker, argue Russia watchers. While beleaguered EU member Greece is falling over backwards to try to convince investors to buy its bonds, Russia’s roadshow, which kicks off on April 21, will be a walk in the park by comparison.

    The world has been turned upside down by the global financial crisis. Nowhere is this clearer than in the two countries’ bond offerings. While Greece is sagging under a heavy public debt burden, Russia not only has almost no debt to speak off (Capital Economics predicts 9.5% of GDP by the end of this year), but also has well over $400bn in hard currency reserves. That’s five times more than either the US or UK, making it the third-richest country in the world in terms of cash. While Greece will struggle to pay off its bonds as it staggers under a 12% budget deficit, Russia has $24 in cash to cover each dollar the government plans to borrow. …

    The price of the bond will highlight the overly cautious stance of most rating agencies on Russia. Currently, Russian sovereign debt has a ‘BBB’ rating, which is only two notches above junk bond status. At the same time the US and UK have (so far) kept their ‘AAA’ ratings despite their worsening finances. Most economists are predicting Europe’s external debt to rise from 100% of GDP to 130% over the next five years, while that of Russia is expected to continue falling. Indeed, analysts say that the ratings of developed countries’ have disconnected with reality, while countries like Russia are being penalised. “On the basis of our model, the [best possible] ‘AAA’ rating for the US and the United Kingdom cannot be explained, as these two countries are rated two to three rating notches better than countries with comparable fundamental data,” Ingo Jungwirth, an analyst with Raiffeisen International, wrote in a study in March.

    His study found that based solely on the country’s finances, both the US and UK should be downgraded three notches to a ‘AA’. However, if the ratings agency actually went through with a downgrade, the cost of borrowing to both countries would spike and spark a financial global crisis, which would probably wreck the global economy for decades. Jungwirth suggests that these two countries earn a “bonus” for being too big to fail.

    http://businessneweurope.eu/story2045/Rerating_Russia

    Comment by Sublime Oblivion — April 25, 2010 @ 10:26 pm

  13. This really says it all to me:

    “People involved in the transaction said the Eurobond had attracted a diverse group of investors, many of whom had no previous history with Russia.”

    http://www.ft.com/cms/s/0/e31e873c-4e6f-11df-b48d-00144feab49a.html

    Comment by Simon — April 25, 2010 @ 11:10 pm

  14. “…because Russian corporate debt is still massive…”

    Russian corporate debt is hardly massive, except by comparison to Russian government debt or Russian household debt. The -total- might come to around 100% of GDP. Like I said, Russia is a piker when it comes to debt.

    Russian corporations also hold equally “massive” foreign assets. As does the Russian government.

    And one of the most… interesting… economic things going has been watching Latvia’s economic policy being run from the grave by the mouldering bones of Andrew Mellon.

    Comment by rkka — April 26, 2010 @ 5:29 am

  15. The Cost of Realism
    In Commentary, James Kirchick laments how backing for an authoritarian leader in Russia’s backyard may have cost the U.S. support from a natural ally in the war against terror. Excerpt:

    http://www.commentarymagazine.com/viewarticle.cfm/the-cost-of-realism-15422

    the simple fact is that the war against the Taliban would be made immeasurably more difficult were the Manas air base to close. Insofar as the Taliban returning to power in Afghanistan would be a disaster for the people of that country and present a haven for al-Qaeda, ensuring a stable government there is not just an American concern but also a global one. And Bishkek has its own national interests in this realm as well. In the immediate years prior to 9/11, militants from the Islamist Movement of Uzbekistan, a terrorist group sheltered by the Taliban, launched multiple attacks into southern Kyrgyzstan. That doesn’t mean that the domestic problems of Kyrgyzstan are not important. But fixing them (something that is largely the responsibility of the Kyrgyz people themselves and beyond the seemingly awesome powers of the United States) cannot come at the expense of eliminating a vital supply line to Afghanistan.

    Comment by Boris — April 26, 2010 @ 5:34 am

  16. Lmao when rkka gets under Kim’s skin.

    Just reading up on Elbe Day (American and Russian soldiers met-up on the Elbe this day in 1945). Here’s the 1945 radio report from the CBC. Pretty moving stuff. Even Kim might crack an emotion if she had any.

    http://archives.cbc.ca/war_conflict/second_world_war/topics/1669-11552/

    Comment by Simon — April 26, 2010 @ 5:54 am

  17. well said rkka and boris – I also wonder if Kim will just ignore this:

    http://advstage.washingtontimes.com/pages/america-russia.html

    Not very often former FSOs tell the gov publically they’re playing with fire, even if it’s not completely substantiated, there’s enough there to be troubling. I thought we’d dropped Misha the Tie Eater like a bad habit but apparently not.

    Comment by Mr. X — April 26, 2010 @ 1:10 pm

  18. “To sum up: Within this century, Russia will have no oil or gas left to exploit, yet it is sending vast quantities at or below cost to Ukraine in exchange for a naval base when, for all intents and purposes, Russia has no navy.” Wait Kimmie, I thought NOT selling Ukraine gas at below EU market levels was an act of energy imperialism. Oh dang, there I go with logic again.

    And no oil and gas left to exploit? Are you kidding? Have you ever talked to any petroleum engineers who have worked in Russia?

    Comment by Mr. X — April 26, 2010 @ 1:14 pm

  19. “…because Russian corporate debt is still massive…”

    Russian corporate debt is hardly massive, except by comparison to Russian government debt or Russian household debt. The -total- might come to around 100% of GDP. Like I said, Russia is a piker when it comes to debt.

    Russian corporations also hold equally “massive” foreign assets. As does the Russian government.

    And one of the most… interesting… economic things going has been watching Latvia’s economic policy being run from the grave by the mouldering bones of Andrew Mellon.

    Comment by Don — April 27, 2010 @ 5:55 pm

  20. “Like I said, Russia is a piker when it comes to debt.” Yes, Japan’s total debt is something like 200% of GDP and its demographics are worse than the other most indebted countries in the world, the Scandinavians (check the recently published Forbes list in case you don’t believe me). I suppose one can pretend Japan is better off than Russia despite its lower birth rate because the Japanese can presumably work until their Nineties with the help of small and giant robots. Still Phoby (did I detect that the Professor was hinting Kim might be a dude looks like a lady?), Goble and other liberasts won’t be talking about the imminent doom of Dai Nippon.

    Comment by Mr. X — April 30, 2010 @ 2:24 pm

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