Streetwise Professor

March 27, 2015

Political Narratives Don’t Win Wars: Armies With Accountable Soldiers Do

Filed under: Military,Politics — The Professor @ 9:02 pm

The Bergdahl case is similar to American Sniper: it is a Rorschach Test that reliably separates the progressive from the non-progressive.

After months of investigation, the Army bucked the pressure from the White House, and charged Bergdahl with desertion, and misbehavior in the face of the enemy. The sentiment in the military, and in particular among the soldiers in Bergdahl’s unit, is strongly supportive of the court martial. The right by and large shares this sentiment. The left, not so much.

The New York Times presented the case for the defense:

Sergeant Bergdahl, who joined the Army in 2008, was among the legion of recruits who were granted eligibility waivers to join the military during a period when it was struggling to attract applicants because of the multiple lengthy deployments to Iraq and Afghanistan that were common. His attempt in 2006 to join the Coast Guard was short-lived; he was discharged 26 days into basic training because of concerns about his psychological state. Before Sergeant Bergdahl walked out of his base in Paktika Province on June 30, 2009, it was clear to some of his family members back home, and some of his comrades in Afghanistan, that he was emotionally distressed and at times delusional. Citing an Army investigative report, his lawyer, in a letter to the military, describes his client as “naïve and at times unrealistic.”

. . . .

But trying him for desertion and misbehaving before the enemy — for allegedly engaging in misconduct that endangered his unit — stands to accomplish little at this point. A conviction would most likely deprive a traumatized veteran of benefits, including medical care, which he will probably need for years. A dishonorable discharge would make it harder to rebuild his life as a civilian.

In fact, one of the things that angers veterans most about Bergdahl is the possibility that he would get the same benefits as they do for dedicated service. They embraced the suck, and didn’t run. Giving the same benefits to a man they consider a deserter-and whom they blame for resulting in the deaths of those that served honorably-devalues them in their eyes.

If Bergdahl has a defense-including an insanity defense-he can make it at a court martial. If there are extenuating circumstances, those can be taken into consideration when determining punishment (if he is found guilty). But the good order and discipline of the service require that he face judgment. The Code of Conduct should matter. Accountability should matter.

But the NYT is not the real problem. The problem is from within the administration. It continues to push the view, expressed by Susan Rice immediately after the deal that secured Bergdahl’s release, that Bergdahl served honorably and that we always get our soldiers back, whatever the price. Most notably, the nauseating Jen Psaki said this:

“Was it worth it? Absolutely,” Jen Psaki told Megyn Kelly on Fox News’ “The Kelly File.” “We have a commitment to our men and women serving in the military, defending our national security every day, that we’re going to do everything to bring them home if we can, and that’s what we did in this case.”

Yes. She really said that. You can watch the video. Remarkable, isn’t it?

If the charges are correct, Bergdahl did not defend our national security. Quite to the contrary: he abandoned his duty to defend national security. Desertion is the antithesis of defending, making Psaki’s statement quite Orwellian. Slavery is freedom. Deserting is defending.

There is also the issue of what damage was done to national security by trading away five truly dangerous Taliban for Bergdahl. That we should attempt to secure soldiers that have fallen into enemy hands does not mean that we should pay any price. That can endanger more soldiers, sailors, airmen, and Marines than it saves.

This is yet another example of the administration’s government by narrative. They construct some story, some narrative, that is at complete variance with the facts but which serves a political purpose. Then they relentlessly repeat this narrative, even in the face of incredulous questions. (Yemen is another example: more on that over the weekend.)

Even worse, there are apparently “senior officials” within the Pentagon who are defending Bergdahl via a leak campaign:

 But the three tweets from CNN’s National Security desk reference two defense officials who say Bergdahl walked off his post to “report what he believed to be problems with ‘order and discipline’ in his unit.” The direct quote from the “second official” reinforces the impression that he and his colleague are speaking to Starr on background, and that rather than merely reporting what Bergdahl “says,” they are endorsing a version of events that is in Bergdahl’s legal favor.

The Army officers charged with investigating this have reached the exact opposite conclusion. They have determined, after a long-and indeed, overlong-investigation that the facts support a charge of desertion. They no doubt weighed, and rejected, the arguments the “senior officials” are raising. Meaning that said “senior officials” should STFU and let the duly constituted authorities carry out their duty.

If these individuals are indeed “senior”, their leaks can be viewed as an attempt to exert command influence, and thereby subvert justice. The administration’s public statements also smack of command influence, as do the White House’s efforts to pressure the military into not prosecuting Bergdahl.

This should have been a military matter first, last, and always. But after politicizing the release with the egregious deal that secured it, and the equally egregious Rose Garden ceremony with Bergdahl’s parents, Obama and his creatures are so invested in this flawed man that they cannot let the proper authorities perform their duty without interference.

This defense of Bergdahl for political reasons is a profound insult to those who served honorably. If anyone should value a “commitment . . . to do everything to bring them home”, it is these men and women. But they obviously believe a distinction should be made between those who are captured while performing their duty, and someone who deliberately runs into the enemy’s camp. The deserter abandons his comrades, and has no claim on his comrades-or his country-to rescue him. And if his freedom is secured somehow, that should not immunize him from accountability for his actions.

Trying to short-circuit formal proceedings also casts a slur on the military. It suggests that the Army is incapable of judging fairly, and taking extenuating circumstances into account when passing sentence in the even that judgment is guilty.

There is clearly a colorable case that Bergdahl deserted his comrades. Let a court martial determine that. Political expediency should not subvert accountability: the military cannot operate without it. Political narratives don’t win wars. Armies with accountable soldiers do. Bowe Bergdahl should be held accountable, Obama’s tender ego be damned.

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March 25, 2015

What Do You Get When You Cross Nero With Ahab?

Filed under: History,Military,Politics,Russia — The Professor @ 9:02 pm

Obama.

The world spins into chaos, and Obama is so detached and indifferent, fiddling while it all burns. But maybe the comparison with Nero is unfair. To Nero. After all, Nero allegedly had a purpose in mind when burning Rome: it allowed him to bypass the Senate and rebuild Rome to his grandiose plans. (Bypassing the Senate . . . maybe there are more parallels than I thought!) Obama just appears to not want to be bothered. Or perhaps he is like Major Major Major Major, promoted well above his competence and knowing it, and retreating to the confines of his office and quarters in order to avoid confronting things he is incapable of solving.

Exhibit 1. Yemen is exploding, with Iranian-backed Houthis seizing power and the desperate Saudis striking back with air strikes. This obviously raises the possibility of conflict between the Saudis (and the rest of the GCC) and Iran. But the administration still defends the “Yemen model” as a success. No. Really. Spokesman “Josh Earnest” (that has to be a made up name, right?) says the concept of relying on foreign governments to fight terrorism is right, even though the government we relied on in this case has utterly collapsed.

Exhibit 2. Even though the tension between Russia and Nato is at Cold War levels; even though Russia is making nuclear threats against Nato members; even though the easternmost nations in Nato are increasingly anxious that Putin has them in his sights; even though there are doubts about the credibility of Section V of the Nato treaty; and even though Nato is struggling to find a way to respond to hybrid war, Obama is refusing to find time in his busy schedule to see the new head of Nato, Jens Stoltenberg. No doubt because Nato (through Stoltenberg, his predecessor Rasmussen, and military head Breedlove) have been the most hawkish on the need to confront Putin. This is something Obama has zero appetite for.  Don’t think for a moment that Putin doesn’t notice this obvious signal of Obama’s indifference to what is transpiring on Nato’s eastern flank, and will escalate there soon.

But perhaps I am being harsh in saying that Obama doesn’t care about defeat after defeat. After all, there is a collapse that makes him distraught. . . that of his NCAA bracket.

But while he remains utterly detached from crises that threaten the world order, he persists in his Ahab-like pursuit of a deal with Iran. Empowering the mullahs (as a deal would do) will only further contribute to the already perilous situation in the Middle East, as a combination of national self-interest and religious hatred will force Gulf Sunnis (and arguably Egypt too) to confront a resurgent Iran freed from the shackles of sanctions, and progressing towards nuclear weapons.

And how does Obama rationalize negotiating a nuclear deal with a country that is openly supporting the overthrow of a government that he repeatedly identified as a major ally against Al Qaeda, and upon which the US has lavished billions of dollars in aid (much of which is in the hands of the Houthis, not to mention a major cache of US intelligence documents, which the Houthis obligingly turned over to Iran)? These are the people he trusts?

As I read somewhere: if he wanted to undermine America’s national interests, what would he do differently?

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March 23, 2015

The Systemic Risk, or Not, of Commodity Trading Firms

Filed under: Commodities,Derivatives,Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 2:03 pm

My latest white paper, “Not too big to fail: Systemic Risk, Regulation, and the Economics of Commodity Trading Firms” was released today. A video of me discussing it can be found here (as can my earlier white papers on commodity traders and LNG trading).

The conclusion in a nutshell: commodity trading firms do not pose systemic risks, and therefore it is inappropriate to subject them to bank-like prudential regulations, including capital requirements. Commodity trading firms are not systemically risky because (a) they aren’t really that big, (b) they are not that highly leveraged, (c) their leverage is not fragile, (d) the financial distress of a big trader is unlikely to result in contagious runs on others, or fire sale problems, and (e) their financial performance is not highly pro cyclical. Another way to see it is that banks are fragile because they engage in maturity and liquidity transformations, whereas commodity trading firms don’t: they engage in different transformations altogether.

Commodity traders are in line to be subject to Capital Requirement Directive IV starting in 2017. If the rules turn out to be binding, they will cause firms to de-lever by shrinking, or issue more equity (which may force them to forego private ownership, which aligns the interests of owners and managers). These will be costs, not offset by any systemic benefit. All pain, no gain.

It is my understanding that banks obviously think differently, and are calling for “consistent” regulations across banks, commodity traders, and other intermediaries. Since these firms differ on many dimensions, imposing the same regulations on all makes little sense. Put differently, apropos Emerson, a foolish consistency is the hobgoblin of little minds. Or bankers who want to handicap competitors.

The white paper has received some good coverage, including the Financial Times, Reuters, and Bloomberg. I will be writing more about it when I return to the states later in the week.

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March 22, 2015

Russia: The Travis Bickle of Nations

Filed under: Military,Politics,Russia — The Professor @ 4:02 pm

It’s been quite a week for Russia. In a documentary about Crimea, Putin said he would have put Russian nuclear forces on alert had the west contested his anschluss. Further, the Russian military deployed nuclear capable Tu-22M3 Backfire bombers to Crimea, and Iskander nuclear capable missiles to Kaliningrad. They launched massive maneuvers in the Northern and Western Military Districts, and threw another hissy fit over very small, largely symbolic US operations in the Baltics and Poland. Latvia accused its gentle giant neighbor of sending submarines to probe its waters, and Sweden claimed that one-third of Russian “diplomatic” personnel were intelligence agents engaged in preparations for Russian military action against its western neighbor. (Remember the Great Northern War and Charles XII!) Quite a week!

But they weren’t done! They saved the best (by which I mean worst) for last, when the ambassador to Denmark threatened the tiny Scandinavian nation’s navy with nuclear annihilation for having the temerity to incorporate its air defense frigates (of which it has a grand total of 3) into the Nato anti-missile defense network. Talk about overkill: nuclear weapons to target 6500 ton frigates? Really? What, does Russia doubt the accuracy of its conventional weapons, so it has to go with the close-counts-in-horseshoes-and-nukes theory?

Actually, you know that’s not it. It is just another example of Russia channeling its inner Travis Bickle. You know, the title character from Taxi Driver, played by Robert De Niro. “You talkin’ to me? You talkin’ to me? You talkin’ to me? Then who the hell else are you talking… you talking to me? Well I’m the only one here. Who the fuck do you think you’re talkin’ to?” [whips out nuclear weapon concealed inside sleeve].

The only question before the house is whether this is all an act intended to intimidate the neighbors into acceding to Russian demands, or they are descending into madness under the stress of events, just like Travis. I honestly don’t know, but don’t discount the second possibility altogether.

Regardless, it is apropos that this occurred right around the time of the death of Singapore’s  Lee Kwan Yew, who said “Russia has an enormous nuclear arsenal, but what else?”

One particularly disturbing aspect of this is that Vanin is not one of the real mouth breathers. He is a career foreign service man, who was once closely associated with the Yeltsin “family” and Roman Abramovich while serving as Chairman of the State Customs Committee. He was deeply involved in the Three Whales scandal. Three Whales was a FSB-connected furniture shopping center that was running a smuggling operation. The State Customs Service launched an investigation, which set off a war between Vanin’s people and the siloviki. Vanin was one of the casualties, losing his job when Putin reshuffled the organization of various ministries in 2004.

So the guy rattling the nuclear saber against a nation of 5.6 million people that was last a military power in the 10th and 11th centuries is not one of Russia’s real siloviki thugs. Comforting thought, eh?

The Pentagon, Nato and the Europeans are fretting about how to deal with Russia’s hybrid warfare. (Note I omit Obama from that list: I doubt he gives a damn.) They need to give more thought to the real reason why hybrid warfare can work: it is conducted under a nuclear shield wielded by madmen, or those who are content to give a portrayal  of one that de Niro could appreciate.

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March 17, 2015

The Biggest Loser, Iran Deal Edition: That Would Be Russia

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 11:52 am

I am following around Iranian negotiator Javad Zarif, arriving this morning in Geneva, and then going to Brussels next week. Don’t worry, I won’t go biking. Certainly not in the absurd getup that Zarif’s interlocutor-or should I say Sancho Panza-John Kerry did here on the shores of Lac Leman. The man is obviously immune to mockery.

I am resigned that Sancho-I mean John-and Javad (remember, they are on a first name basis!) will reach some sort of deal that will clear Iran’s path to becoming a nuclear power in the near-to-medium term, with all of the malign consequences that entails. Which leads me to contemplate some of those consequences.

One of which relates to the price of oil (and natural gas), the malignity of which depends on whether you are long or short oil (and gas). Of course, one of the countries that is very long oil (and gas) is Russia, and from its perspective the consequences of a deal will be very malign. Which makes one wonder if Putin (or whoever is really in charge these days!) will attempt to do something to derail it. (Or are they too distracted by the folly in Ukraine? Or by dog fights under the carpet?)

The crucial issue is how rapidly, and by how much, Iranian output will ramp up if a deal is reached. There is both a political dimension to this, and an operational one.

The political issue is how rapidly a deal will result in the dismantling of the myriad sanctions that impede Iran’s ability to sell oil:

“Don’t expect to open the tap on oil,” one Gulf-based Western diplomat told Reuters. It is much easier to lift financial sanctions because so many components of Iran’s oil trade have been targeted, the diplomat said.

. . . .

But for Iran to sell significantly more crude and repatriate hard currency earnings, many U.S. and European restrictions on its shipping, insurance, ports, banking, and oil trade would have to be lifted or waived.

Yet because they represent the bulk of world powers’ leverage over Iran, initial relief would probably be modest, said Zachary Goldman, a former policy advisor at the U.S. Treasury Department’s Office of Terrorism and Financial Intelligence, where he helped develop Iransanctions policy.

Goldman predicted the first step would be to allow Tehran to use more of its foreign currency reserves abroad, now limited to specific bilateral trade.

“It’s discrete, and it doesn’t involve dismantling the architecture of sanctions that has been built up painstakingly over the last five years,” said Goldman, who now heads the Center on Law and Security at New York University.

Even with a nuclear deal, oil sanctions would probably effectively stay in place until early 2016, said Bob McNally, a former White House adviser under George W. Bush and now president of the Rapidan Group energy consultancy.

The operational issue is how rapidly Iran can reactivate its idled fields, and how much damage they have suffered while they have been off-line. The Iranians claim that 1mm barrels per day can come online within months. The IEA concurs:

Turning lots of production back on suddenly can be complicated—and time consuming—even if wells and reservoirs are maintained studiously. It could be even harder in complex Iranian fields that have been pumping for decades.

Still, some analysts have concluded that a good deal of that lost output could return more quickly than often anticipated. The International Energy Agency, for example, has said that it expects a relatively rapid burst of exports if sanctions are lifted.

“They’ve deployed considerable ingenuity in getting around sanctions and keeping fields in tiptop shape. We think Iran could pretty much come back to the market on a dime,” Antoine Halff, head of the IEA’s oil industry and markets division, recently told an audience at the Center for Strategic Studies in Washington.

Perhaps up to 2mm bpd of additional output could come back later. Then there is the issue of how a relaxation or elimination of sanctions would affect output in the long run as (a) western investment flows into the Iranian oil sector, and (b) other producers, and notably OPEC, respond to Iran’s return to the market.

In the short run, the 1mm bpd number  (corresponding to about 1.1 percent of world output) looks reasonable, and given a demand elasticity of approximately 10, that would result in a 10 percent decline in oil prices. Additional flows in the medium term would produce additional declines.

Even if Iran’s return to the market is expected to take some time, due to the aforementioned complications of undoing sanctions, much of the price effect would be immediate. The mechanism is that an anticipated rise in future output reduces the demand to store oil today: the anticipated increase in future output reduces future scarcity relative to current scarcity, reducing the benefit of carrying inventories. There will be de-stocking, which will put downward pressure on spot prices. Moreover, since an increase in expected future output reduces future scarcity relative to current scarcity, future prices will fall more than the spot price, meaning that contango will decline.

Some of the price decline effect may have already occurred due to anticipation of the clinching of a deal: the May Brent price has declined about $10/bbl in the last month. However, the movement in the May-December spread is not consistent with the recent price decline being driven by the market’s estimation that the odds  that Iranian output will increase in the future have risen. The May-December spread has fallen from -$4.47 (contango) to -$6.36. This is consistent with a near-term supply-demand imbalance rather than an anticipated change in the future balance in favor of greater supply. So too is the increase in inventories seen in recent weeks.

Predicting the magnitude of the price response to the announcement of a deal-or the breakdown of negotiations-is difficult because that requires knowing how much has already been priced in. My lack of a yacht that would make a Russian oligarch jealous indicates quite clearly that I lack such penetrating insight. However, the directional effect is pretty clear-down (for a deal, up for a breakdown).

Which is very bad news for the Russian government and economy, which are groaning under the effects of the oil price decline that has already occurred. Indeed, Iran’s return to the market would weigh on prices for years, reducing the odds that Russia could count on a 2009-like rebound to retrieve its fortunes.

Add to this the fact that a lifting of sanctions would open Iran’s vast gas reserves (second only to Russia’s) to be supplied to Europe and Asia, dramatically reducing the profitability of Russian gas sales in the future, and Iran’s return to the energy markets is a near term and long term threat to Russia.

Which makes Putin’s apparent indifference to a deal passing strange. The Russians freak out over developments (e.g., the prospect for an antitrust investigation of Gazprom, or pipsqueak pipeline projects like Nabucco) that pose a much smaller threat than the reemergence of Iran as a major energy producer. But they have not done anything overt to scupper a deal, nor have they unleashed their usual screeching rhetoric.

What gives? Acceptance of the inevitable? A belief that in the long run the deal will actually increase the likelihood of chaos in the Middle East that will redound to Russia’s benefit? Strategic myopia (i.e., an obsession with reassembling Sovokistan, starting with Donbas) that makes the leadership blind to broader strategic considerations? Distraction by internal disputes? Or does Putin (or whoever is calling the shots!) have something up his (their) sleeve(s)?

My aforementioned pining for a super yacht that would make Abramovich turn green again betrays my inability to penetrate such mysteries. But it is quite a puzzle, for at least insofar as the immediate economic consequences are concerned, Russia would be the Biggest Loser from a deal that clears Iran’s return to the oil market.

H/T to @libertylynx for the idea for this post.

 

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Is the AGW Paradigm Entering Its Crisis Stage?

Filed under: Climate Change,Politics — The Professor @ 10:39 am

I haven’t written about “climate change” for quite a while, mainly because the debate has become as flat as the global temperature trend. But two recent articles have stirred me to respond, in part because they ignore (or should I say deny?) that inconvenient truth. And in that tale there is the suggestion that the climate change paradigm is entering a crisis stage.

The most egregious is a study that purports to link the horrific Syrian civil war to climate change. Specifically it alleges that CO2->higher temperature->drought in Syria->civil war. This work is unscientific and manipulative, to the point of being mendacious, because every link in that causal chain is in dispute.

Even if one stipulates the first link, the second link is tenuous in the extreme. Like temperatures pretty much everywhere, temperatures in Syria experienced a jump around 1998, and have exhibited no real trend since. Climate models do predict that anthropogenic global warming should lead to drying in the eastern Mediterranean, but the mechanisms associated with this, namely a rise in air pressure and a change in sea surface temperature patterns, are not observed in the data. Yes, there has been an anomalous drop in precipitation in Syria, but this drop is substantially greater than CO2-driven climate models predict. Thus, the models upon which the CO2-drought causal link is based do not explain the observed data. Finally, as the study itself acknowledges, the water crisis in Syria has also been driven by bad water use policy as much or more as it has been by the decline in precipitation.

Then we get to the last link. Attributing any complex social phenomenon like a civil war to a single factor like a change in climate is a dubious exercise. Dubious in the extreme. Moreover, taken seriously, this hypothesis would predict that civil unrest/revolution in the Middle East would be associated with drought, and hence other countries in the region experiencing drought would be susceptible to revolution, and those not experiencing drought conditions would be less susceptible.

This prediction fails on both counts. Note that the Syrian revolution was a part of the “Arab Spring,” which resulted in a near simultaneous outbreak of civil strife in Libya, Egypt, Yemen, and Bahrain, as well as Syria. None of the first four countries experienced drought in the years leading up to 2011. Further, one country that did experience a decline in precipitation similar to that in Syria-Jordan-did not experience unrest. In other words, the theory has false positives and false negatives. Indeed, Syria is the only data point that matches. Cherry pick much?

Further, there are numerous other factors unique to Syria that help explain the outbreak of unrest and the subsequent horrific civil war. These include most notably the existence of a long-ruling dictatorship of a religious minority regime locked in a decades-long death struggle with the Muslim Brotherhood, and the dramatic growth in Islamism in the region generally. Perhaps the socioeconomic dislocations resulting from the drought exacerbated the potential for conflict, but to promote that to the center of the narrative is dubious at best.

No, this seems another example of cynical opportunism, whereby the climate change establishment hijacks human misery to advance its cause. The recipe is familiar. Find some tragic event, and then construct some story-usually quite tenuous-linking that tragedy to AGW in order to push the agenda. This is not science. This is propaganda.

The other example is a study that uses an ensemble of climate models to make the frightening prediction that the rate of global temperature increase is almost certain to accelerate in the coming decade.  The Guardian article states that this is based on “data from more than two dozen climate models.” Well, that’s exactly the problem. Models don’t produce data. They produce predictions, and the predictions of these models fail to match the real data in crucial ways. Most importantly, the lack of warming in the last 17 years is a black swan event that the models have uniformly failed to predict. But unabashed by the failure of their models to reproduce the recent past, and in particular to the failure of the real world data to live up to the models’ apocalyptic predictions over that period, the modelers confidently predict the near future: “Pay no attention to the last decade. Just wait! Apocalypse is around the corner!” This is Heaven’s Gate, not science.

The increasingly frantic efforts of the AGW alarmists is most likely a symptom of the failure of previous predictions to come true, combined with the failure of the previous alarmism to generate popular support for costly policies to mitigate CO2 emissions. It is a doubling down on belief, rather than a sober application of the scientific method. It is right out of Kuhn-the crisis stage of a paradigm. And that’s what AGW is: a paradigm, not “settled science” (which is an oxymoron).

Sadly, in an age where science has become politicized, this is accompanied by political witch hunts, such as the one waged by a watermelon Arizona congressman, that has led at least one scientist (Roger Pielke, Jr.) to “shift . . . academic work away from climate issues.”

Ironically, no doubt many of those who cheer such efforts also think Galileo was a hero. Square that circle for me.

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March 14, 2015

Где Влад? High Temperature? Room Temperature? Coup-ed Up?

Filed under: Military,Politics,Russia — The Professor @ 6:38 pm

As of this moment, Vladimir Putin has not been seen in public for more than 9 days: you can keep up to the minute track here. Of course this has set off a flurry of speculation about his condition-or his fate. I obviously have no better idea than anyone else, but I’ll just lay out some possibilities.

  • He’s ill, with a condition ranging in severity from a bad cold to a coma, or in the limiting case, he’s dead.
  • There is an attempt to oust him. (Of course, illness and ouster are not mutually exclusive: a physically weakened Putin is a tempting target, and a dead one obviously requires a replacement with multiple contenders making a play.) Anders Aslund hypothesizes that Putin and Sechin, backed by the interior ministry and its forces, are locked in a death struggle with Sergei Ivanov, Russian nationalists, and the FSB. Andrei Illarionov claims that the generals are out to oust Putin. The Nemtsov murder is seen as a catalyst or symptom of these events. One theory is that the FSB is furious with Putin giving Kadyrov a free rein, and is trying to pin the murder on Chechens in order to strike at Kadyrov. It is worth noting that Sechin has been subject to public criticism lately, including by Putin. That could signal some attempt to reallocate power and property that could lead all of the various contending clans to take to the mattresses. Who knows?
  • Putin is playing possum, feigning incapacitation in order to see whether anyone thinks this is an opportunity to seize power. That would be a good way for a paranoid man to smoke out threats.

The Kremlin’s ham fisted handling of the publicity (reporting on meetings that have yet to occur, and releasing photos and video from a meeting that likely occurred before Putin submerged) is only fueling the speculation.

As for illness, it would have to be pretty bad to induce him to go incommunicado for so long, given the angst this is creating. Julia Ioffe argues that Putin cannot even admit to having a cold, as this would puncture the aura of invincibility that he needs to rule successfully. Given the choice between admitting to a cold, and doing something that leads to wild speculation that he’s lying on a cold slab (speculation that can be destabilizing), I would think he’d load up on the DayQuil, make a few public appearances, and bluff his way through. So if it is illness, it would likely be severe.

And if it isn’t, and Ioffe is correct, just think of what that means about Russia’s political system, and its future. A system whose stability depends on the illusion of an invulnerable leader is doomed to collapse with probability one, because the illusion is just that-a chimera. Putin isn’t getting any younger, and Russian men are not noted for their longevity: for most, their old age begins in the early-to-mid-60s, if they are lucky enough to make it that long. So before too long, Putin will suffer a serious health problem, with all the uncertainty that entails in a personalized system with no tried and stable succession mechanism and which has a vast security apparatus that just might be tempted to seize power.

A power struggle in the Kremlin is a possibility, but the dogs are always fighting under the carpet. It’s hard to determine whether anything out of the ordinary is going on now. Isn’t it interesting how Kremlinology is making a comeback?

As for a coup, I’m skeptical. If that was occurring, or had happened, you would expect to see a noticeable increase in military and OMON activity in the capital. A big increase. Either as a defensive measure by Putin, or as a movement by the plotters, or both. No such movement has been reported.

In the absence of information, people are putting dark interpretations on unremarkable events: minds seem to need to fill in blanks.  For instance, last night Twitter was ablaze with speculation about what was going on in Red Square. Semis were seen driving to the square, and there were pictures of bleachers and some sort of construction work. Theories trying to connect this to Putin’s disappearance ran rampant. But the explanation was simple: the outdoor ice rink near GUM was being taken down. (Is there rampant speculation when the Rink at Rockefeller Center is taken down?)

Another kerfuffle: the flag that normally flies over the Kremlin was absent. A sign! An omen! Whatever. If there’s a coup you’ll know soon enough.

This is just Russia living up to Churchill’s aphorism: a riddle, wrapped in a mystery inside an enigma. This makes it extremely susceptible to bouts of severe unpredictability, which is a sobering prospect given its aggressive tendencies and massive arsenal (especially its nuclear arsenal). Given the lilliputians in the US and Europe who are responsible for reacting to such a spasm this is not comforting. Meaning all I have to say is: Vlad! Get well soon!

That’s especially true because anyone who replaces Putin is likely to be as bad, or worse. That’s especially true if he’s ousted by a coup, because that’s a process of the survival of the baddest.

In other words, we don’t have a Putin problem. We have a Russia problem. Putin is a symptom of a political system that will survive him, and will evolve, but likely into something worse.

 

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March 13, 2015

Obama’s Telling Shift on the Legislative Role in Diplomacy

Filed under: History,Military,Politics — The Professor @ 8:03 pm

@libertylynx points out a very interesting contrast. The awful developments in Iraq over the last several years, most notably the rampage of Isis and the dramatic expansion of Iranian influence in the country, are directly attributable to Obama’s decision to withdraw all US military forces.  He did so after failing to negotiate a Status of Forces agreement with the Maliki government. This occurred primarily because of a particular demand that Obama made of Maliki: namely, that the Iraqi premier get his parliament’s approval of any agreement. Obama stated that such approval was necessary to make the deal credible and viable. He said legislative buy in was essential. Of course, this did not happen, and almost certainly Obama knew it would not happen. This gave him the pretext to bug out.

Fast forward 3-4 years. Whereas Obama had insisted on Iraqi legislative approval of a deal with the US, now Obama is dead set against letting the American legislative branch have any say whatsoever in a deal with Iran. So much for the need for legislative approval to give a deal credibility.

Obama obviously has no principled view of the role of the legislature in foreign policy. He didn’t want a Status of Forces agreement, so he insisted on Iraqi legislative approval because he knew it would not be forthcoming. He desperately wants a deal with Iran, so he adamantly opposes American legislative approval because he knows it is not likely to happen. His views on legislative involvement in diplomacy are not principled, but merely instrumental and change with the circumstances.

Indeed, not only is Obama not shutting out Congress, he is actively demonizing it in the most demagogic fashion for having the temerity to insist on having a voice. When he said that Senate Republicans were making common cause with “hardliners” in Iran, he was basically dog whistling, and his attack dogs responded with alacrity, accusing the Republicans-including the leader of the effort, Tom Cotton, a Marine combat veteran-of treason. The new  cry, advanced by another of the administration’s transparent social media manipulation campaigns is #GOPWantsWar.

A typical Obama false choice. His claim is that the only alternative to the specific deal he is “negotiating” is war. Think about that for a moment. It presumes that (a) absent any deal, Iran will proceed hell bent for a nuclear weapon, and (b) a nuclear Iran is such a dangerous regime that it must be prevented from acquiring the bomb, by war if necessary.

But apparently such a regime is a suitable negotiating partner, will adhere to any deal, and will eschew its nuclear ambitions even though a deal will effectively take both economic and military coercive measures off the table. Moreover, Iran clearly has hegemonic ambitions in the region, and a deal will give them greater resources to achieve them.

It is therefore by no means clear that a deal will reduce the likelihood of war. In my view, it is likely that the reverse is true. Moreover, those opposing a deal-who include many Democrats, as well as most Republicans-are advocating measures other than war, notably an increase in economic pressure, to force the Iranian government to forego its nuclear ambitions, and to limit its ability to achieve that capability. #GOPWantsWar is therefore a slur of the most scurrilous sort.

It gets worse, actually. Obama, claiming to be embarrassed for the Republicans, lies shamelessly about what the letter the 47 Republicans wrote. The Republicans never suggested that Obama was untrustworthy.

Further, catch this: “For them to address a letter to the Ayatollah who, they claim, is our mortal enemy . . . .” That is, Obama asserts that it is merely a Republican claim that Iran is an enemy of the US. The implication is clearly that Obama believes that it is not. That explains a lot.

I don’t believe Obama wants war, though I do believe that a soft deal with Iran like the one that is apparently imminent makes it more likely. I don’t believe in the slightest that he wanted Isis to run amok in Iraq, but his misjudgments and Machiavellian maneuvers made this outcome possible.

It is necessary to turn away from questioning motives, and to focus on substance. And I will close by noting that those who are most aggressive in questioning the motives of their opponents are the ones who believe they cannot prevail on the merits.

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March 10, 2015

Resource Rents, Russian Aggression, and the Nature of Putinism

Filed under: Commodities,Economics,Energy,History,Military,Russia — The Professor @ 9:00 pm

This nice piece from the WaPo points out the link between oil prices and Russian aggressiveness:

From this perspective, Russia is not so much an insecure superpower as it is a typical petrostate with a short-term horizon that gets aggressive and ambitious once it accumulates substantive oil revenues. Back in the early 2000s when the price of oil was $25 a barrel, Putin was a friend of the United States and didn’t mind NATO enlargement in 2004. According to Hendrix’s research, this is exactly how petrostates behave when the oil prices are low: In fact, at oil prices below $33 a barrel, oil exporters become much more peaceful than even non-petrostates. Back in 2002 when the Urals price was around $20, in his Address to the Federal Assembly Putin enumerated multiple steps to European integration and active collaboration aimed at creating a single economic space with the European Union among Russia’s top priorities. In 2014 – with the price of oil price around $110 – Putin invaded Ukraine to punish it for the attempts to create that same single economic space with the E.U.

I made these basic points eight years ago, in a post titled “Cocaine Blues.”

The graph depicts Gaddy’s estimates of the energy rents accruing to the Soviet–and Russian–economy. Each of the two spikes in the graph corresponds to a period of Soviet/Russian adventurism. The first shot of oil/cocaine during the 1970s oil shock fueled Soviet aggressiveness around the world. The second oil/cocaine shot–the post-2003 runup in oil prices–is powering Putin’s recent revanchism.

There were some follow up posts on the same theme.

This post from Window on Eurasia quotes a Russian social scientist who disputes the importance of oil prices in explaining Russian behavior in the Putin era. Instead, Vladislav Inozemtsev identifies the lack of formal institutions as the characteristic feature of Putinism.

But these things are not mutually exclusive. Indeed, another SWP theme from about this same time period (2007-2008) is that Russia is a natural state in which Putin uses control over resource rents to maintain a political equilibrium. Resource rents permit personalized rule and impede the development of formal, impersonal institutions.

In other words, in Russia, resource rents, and especially oil/energy rents matter, both for its political structure and evolution, and its behavior as an international actor.

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Chinese Chutzpah: Using IP to Ice Cotton Competition

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Regulation — The Professor @ 7:32 pm

China is notorious for flouting intellectual property rights. From stolen technology (including notably military gear) to designer knock-offs, China pirates everything and everyone. It is therefore a rather jaw-dropping act of chutzpah for to Chinese Zhengzhou Commodities Exchange to send a nasty cease-and-desist letter to the Singapore subsidiary of ICE demanding that ICE not copy ZCE’s cotton and sugar contracts:

Intercontinental Exchange has been forced to delay the launch of its new Singapore platform after a Chinese exchange threatened legal action to stop the US group launching two commodity futures that are copies of contracts offered in China.

The move by the Zhengzhou Commodity Exchange is likely to send shockwaves through the global futures industry because it signals that China will not tolerate foreign exchanges copying its futures contracts, and comes despite the practice of offering “lookalike” contracts being accepted around the world for years.

The ICE contracts are not copies, exactly. Similar to its “NYMEX lookalike” contracts, which cash settle against the expiring NYMEX future, the ICE Singapore commodity contracts are to be cash settled based on the settlement price of the expiring ZCE future. The ZCE future is delivery-settled. Meaning that the delivery mechanism ensures convergence between physical and futures prices, and the lookalike contract can ensure convergence by cash-settling against the delivery-settled contract.

The issues here are common to all intellectual property controversies. Strong intellectual property rights impede competition. Against that, free riding off the creativity or investment of others can impede innovation.

There isn’t a one-size-fits-all answer to this trade-off. In the case of exchange traded contracts, I tend to lean towards weak intellectual property rights.  The network effects of liquidity tend to weaken competition, and to give incumbents a strong advantage over entrants. There is already a substantial stream of rents to being first that gives strong (and maybe overly-strong) incentives to innovate, making strong intellectual property rights superfluous, and indeed damaging because they place another burden on already weak competition.

The US courts arrived at a similar conclusion, ruling that NYMEX did not have property rights over its settlement prices that it could use to preclude ICE from using them to cash settle its contracts. This is one factor that has encouraged a relatively robust competition in energy derivatives, which is the exception rather than the rule.

In sum, I hope ICE is able to prevail in its battle with ZCE. In part on economic grounds, and in part on the grounds that it burns me to see IP pirates protect their turf by asserting IP, especially over something for which IP is unwarranted.

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