Streetwise Professor

December 10, 2016

The CIA Leak About the DNC & Podesta Leaks: The Ad Hominem Fallacy Run Amok

Filed under: Politics,Russia — The Professor @ 10:52 am

Today’s Daily Freak Out relates to a WaPoo story claiming that a “secret” (not any more!) CIA study has concluded that Russians with “links to the Russian government” provided Wikileaks with the hacked DNC and Podesta emails. (I only note in passing the irony of leaking a document to stoke outrage about leaks. Evidently judgments about leaking are instrumental and situational.)

If the CIA has identified individuals who at the very least are accessories, presumably the FBI and DOJ will launch criminal investigation and (if the evidence is a rock solid as the CIA claims) indict them. Unless that happens, I put the credibility of this report somewhere around the level of Curve Ball and aluminum tubes.

Even the “secret” report acknowledges that the CIA has no evidence that these purported individuals were directed by the Russian government. Instead, the CIA infers that the Russian government intended to influence the election based on the (alleged) fact that the RNC was also hacked, but its communications were not leaked.

Can the CIA actually be this stupid? (Rhetorical question alert!)

If the DNC and Podesta emails were damaging, it was because they revealed highly unflattering information about Hillary Clinton and her legions of flying monkeys in Democratic Party circles. The leaked documents revealed that the DNC was actively partisan in its support for Hillary, and took active measures to rig the process against Bernie Sanders. (Which is why I still wouldn’t rule out that a disgruntled Bernie-ite in the DNC played a role here.) Individually and collectively, the emails cemented the narrative of a corrupt Hillary and a corrupt party establishment rigging the system against Sanders: the narrative was already out there, with plenty of evidence to back it up, and these emails just put the cherry on the sundae. They revealed that Hillary and the Democratic National Committee were actively anti-democratic.

It is quite possible that RNC emails would have also revealed a party apparatus intent on undermining an insurgent candidate. Who would have been Trump. That is, whereas the DNC and Podesta emails showed Hillary and her minions to be the perpetrators of an offense, the most likely scenario is that the RNC documents would have shown Trump to be the target and victim of a campaign to disable his candidacy. That would have actually played to Trump’s benefit! It would have fit right in with his narrative of a man fighting the system and the establishment. It would have confirmed all of the criticism he had leveled against the party during the primaries.

Can you see the difference here? If your IQ is above 85 or thereabouts, I presume so. But then apparently you would be disqualified for working as a crack analyst at the CIA.

And let’s always keep one fact in mind. Those who decry the impact of the leaks are effectively taking the position that it would have been better for the American people to have cast their votes in ignorance. That the problem with the leaks wasn’t that they were lies: it was that they revealed unpleasant truths. The provenance of the documents, and how they came to light is secondary or tertiary: the content is primary. If your defense is “it’s an outrage I got caught and those who caught me are dirty bastards”, you deserve no deference or sympathy.

This controversy is the ad hominem fallacy run amok, that it is the speaker (or the source) not the substance that matters.  If revelations about your conduct contributed to the election of a mercurial political neophyte, your conduct, not the party that brought it to light (no matter their motives) is to blame.

 

Print Friendly

December 7, 2016

Ivan Glasenberg’s Shock and Awe: But There Has to Be More Than Meets the Eye

Filed under: Commodities,Derivatives,Economics,Energy,Russia — The Professor @ 8:25 pm

Today saw a major surprise. I mean a major surprise. The Russian government announced that a consortium consisting of Glencore and the Qatar Investment Authority had purchased a 19.5 percent stake in Rosneft for €10.5 billion. (Glencore said the price was €10.2 billion.)

The major surprise was that outside investors were involved at all at this time. For weeks the story had been that Rosneft itself would buy back the shares from the Rosneftgaz holding company, and then sell them to a private investor at a later date. This looked like a sham privatization, which fit in with the idea that Igor Sechin was less than enamored with the idea of selling equity to outsiders.

Also a surprise was Glencore’s participation. Qatar’s name had been floated as a possible buyer, but not Glencore’s. And no wonder. The firm is just recovering from a near death experience, has been feverishly de-leveraging, and only a few days ago announced it would pay $1 billion in dividends next year. So it hardly looked like a firm that would have the cash to pay out of pocket, and was not a candidate to borrow a lot.

But it appears there is some financial engineering going on here. A Glencore-QIA joint venture will buy the Rosneft shares, and the two investors will put up a mere €300 million each in equity. The remainder will be financed (according to Putin) by one of “the largest European banks.” Furthermore, the debt is supposedly non-recourse to Glencore or QIA. This means that the loan is essentially secured by the Rosneft shares.

This would allow Glencore to keep the debt off its balance sheet, and skirt sanctions by not having an equity stake in Rosneft.

If those numbers are right, the deal will be leveraged 17.5-to-1. That reminds me of a real estate boom SPV–except that the underlying asset here is even riskier than subprime. Given the riskiness of the underlying asset (Rosneft shares) that gearing seems unsustainable to me. What bank would take that risk?: the bank owns all the downside, and the JV partners get all the upside.

You can bet that any bank wouldn’t let you buy Rosneft shares on that geared a margin loan–and a non-recourse one no less. So I am guessing that there is some other part of the deal that passes the equity price risk back to Glencore and QIA. For instance, a total return swap between the JV and its owners. Or a put (which would make it unnecessary for the JV to make payments to the investors in the event Rosneft stock rises in value, as would be the case in a TRS.) If that, or something like it, is going on here, this is a cute way to keep investment off Glencore’s balance sheet, and also may be a way to work around sanctions, because derivatives on Rosneft debt (e.g., CDS) and equity are not subject to the sanctions. I cannot believe that any bank would lend so heavily based only on the security of Rosneft stock. So there must be a part of the deal that hasn’t been disclosed yet. (This may also involve an arrangement between Qatar and Glencore that limits the latter’s exposure.) There is more here than meets the eye, at least from the initial reporting.

Speaking of sanctions, the fact that a European bank (who?–reportedly Intesa Sanpaolo) is stepping up suggests that they believe the structure is sanctions-proof. This may also be a Trump effect: banks may have less concern about aggressive sanctions interpretation and enforcement in a Trump administration.

If it is Intesa Sanpaolo–that’s also rather interesting. Italian banks aren’t exactly in great shape these days, and are particularly shaky in the aftermath of the rejection of the referendum on Sunday. It is one of Italy’s healthier banks, but like saying someone is one of the healthier patients in the oncology ward. (Its equity is about 7 percent of assets.) Normally a loan of this size would be syndicated to spread the risk. If it isn’t, the loan represents more than 20 percent of Intesa’s equity and almost a quarter of its market cap. That’s insane.

All the more reasons to think that the bank has to find a way to lay off the price risk in the deal. (All the ways I can think of would expose it to the credit risk of Glencore and QIA. The latter isn’t an issue . . . the former could be. All the more reason to consider the possibility of QIA providing some credit support in the deal even if it is formally non-recourse.)

Another interesting aspect to the deal. Trafigura has been an important bulwark for Rosneft in the last two plus years. It dramatically stepped up its pre-pay deals with Rosneft, thereby providing vital (though very short-term sanctions compliant) funding when the Russian company was cut off from the capital markets. Moreover, Trafigura’s participation was a linchpin in Rosneft’s acquisition of Indian refiner Essar. As a result of these deals, Trafigura had nudged out Glencore as Rosneft’s biggest Russian partner. Now Glencore owns a major equity stake, and as part of the deal gets a 220,000 barrel-per-day off-take agreement with Rosneft. This gives Glencore 11.5 million tons/year of oil. Trafigura has been doing about 20 million tons of crude and 20 million tons of product from Rosneft. (Glencore also has off-take volume stemming from a 2013 pre-pay deal.)

Perhaps Trafigura did not have an appetite or capacity for doing much more volume with Rosneft, but it must be disconcerting to see Glencore take such a large equity stake. That undoubtedly has implications for Rosneft’s future dealings.

This transaction says a lot about Ivan Glasenberg. Given the experience of the last two years, one could have understood if he had been risk averse. This shows that his legendary appetite for risk remains. (And the more of the equity risk that is passed back to Glencore through financial engineering, the bigger that appetite will be shown to be.) This was shock and awe.

This deal is a boon for Russia and Putin, who can really use the money, and outside money especially. I wonder if Sechin is all that pleased, though. As noted earlier, he has been dragging his feet on privatization. Earlier this year a Rosneft analysis said the company would only be able to raise $1-$2 billion: obviously this was intended to convince Putin that a privatization would be a giveaway that he should take a pass on. But I’m sticking with my earlier guess that going through with the privatization was the quid pro quo for Putin allowing Rosneft to buy Bashneft. And again, Vlad really needs the money.

One last thing to put this all in perspective. Yes, €10 billion seems like a lot, but that values Rosneft at around $55 billion. The company’s reserves are about 34.5 billion barrels of oil equivalent (BOE). Its output is around 1.75 billion BOE per annum. For comparison, ExxonMobil is worth ~$350 billion. Its reserves are a third smaller than Rosneft’s: 24.8b BOE. Its output of 1.43 billion BOEPA is about 80 percent of Rosneft’s. So on a dollars per unit of reserves or output basis, XOM is about 8-9 times as valuable as Rosneft. That speaks volumes about Rosneft’s inefficiency, and the political risks that go along with the normal commercial risks inherent in an oil company. Keep that in mind when evaluating Putinism.

 

Print Friendly

December 4, 2016

A Mad Dog, Not a Caesar

Filed under: History,Military,Politics — The Professor @ 10:15 pm

Ever since Gen. James Mattis (USMC Ret.) had been suggested as a possible candidate for Trump’s Secretary of Defense, I was fervently hoping that he would be chosen, and that hope was realized. Mattis has a long and storied career as a warrior–a true warrior–and is widely acknowledged as a thoughtful, scholarly man who thinks deeply on strategic issues. He also has a long history of blunt outspokenness, which is sorely needed in these PC times–and in particular, is sorely needed in a Pentagon in which PC rot spread deeply during the Obama administration.

Mattis is a throwback in many ways, not least in that he has the kind of background and biography more typical of 19th or early-20th century figures. No over-credentialed Ivy Leaguer he. He grew up in the wheat fields of Washington state, enlisted in the Marines at 19, and attended Central Washington University. He then worked his way up through the Marine Corps, earning promotion to four star rank on the basis of performance.

Mattis’ appointment has drawn almost universal praise in DC and the media centers, including from the New York Times. Truth be told, this is the only thing that makes me temper my enthusiasm for him.

The one possible objection that has been raised by the usual array of chin-pullers is that he only retired from the USMC a little over three years ago, thereby requiring Congress to pass a waiver to circumvent a 1947 law that requires seven years between the time an officer retires and he (or she) can become SecDef. Mattis’ appointment, the chin-pullers intone, threatens to undermine civilian control of the military.

Really? Dwight Eisenhower retired from the Army on May 31, 1952, and assumed the presidency in January, 1953. Ulysses S. Grant remained as Commanding General of the US Army while running for president in 1868, and only resigned shortly before assuming office in 1869. Neither turned into Caesars. (By the way, did you know that in 1789 Congress passed a law that prevented those who had been engaged in commerce from becoming Secretary of the Treasury?)

Further, I would note that the principle of civilian control of the military is drilled into US military officers from day one of their service–as I experienced personally at the Naval Academy. What’s more, any officer whose commitment to that principle comes into question is never going to make it to flag rank. Nor would Donald “You’re Fired!” Trump–of all people–brook mutiny at the Pentagon.

But it is best to hear Mattis out on this in person. In this 2015 interview–recorded before his appointment was even a remote possibility, and indeed, would have been reckoned to be a zero probability event, not least of all by him–his commitment to the principle comes through loud and clear. He states forthrightly that an officer’s duty is to give his civilian superiors his honest opinion, but that it is also his duty to defer to the authority of those civilian superiors. This was clearly not a calculated statement intended to help secure an appointment (which was hardly imaginable, let alone on offer), but a reflection of his beliefs.

In sum, the thought that James Mattis is a threat to civilian control of the military is inane.

The entire interview is worth watching, because it shows Mattis to be an articulate and thoughtful man who speaks frankly, with an almost world-weary mien. He speaks with authority on a variety of strategic, military and geopolitical issues, is persuasive, and has Trump’s respect and ear. He gave evidence of this even before being nominated, when he convinced Trump to backtrack on the torture issue. This is exactly the kind of man we need in office. The fact that he will be an articulate advocate and explainer of administration policy is also invaluable. (Mattis is far more articulate than General Flynn, in particular.)

Some have also questioned Mattis’ ability to handle the challenges of managing the vast Pentagon bureaucracy. Here the interview is also instructive, because it shows that Mattis has observed the closely managerial and process dysfunction in Defense, and in particular how the mega-contractors have warped the system. No babe in the woods he. Fixing the Pentagon is a Herculean task, and I doubt that Mattis can do it, but he can probably make more progress than anyone with a more conventional resume for the job could.

As commenter aaa noted, one blot on Mattis’ record is his role as a director at Theranos, which has proved to be a colossal con. In his defense it can be said that he was hardly alone: the list of directors and big money investors who were taken by Elizabeth Holmes’ shtick is a who’s who of American business and politics (e.g., George Schultz). This endeavor was outside of Mattis’ expertise, and the main criticism he deserves is for taking a position for which his training and experience did not particular suit him. That’s not the issue at Secretary of Defense.

In sum, “Mad Dog” Mattis is exactly the kind of figure the US needs at the Pentagon right now, and poses no threat to the institutions of the Republic. To the contrary, he is uniquely qualified to serve as an intermediary between the citizenry and the uniformed military, particularly given that he knows the uniformed military, and those in the military know and respect him. The country will be stronger with him serving in a civilian role so close in time to the end of his 44 years of active service.

 

Print Friendly

December 3, 2016

The Trumpharrumphers’ Latest Freakout

Filed under: China,Economics,History,Military,Politics — The Professor @ 2:30 pm

In the nearly 4 weeks since Trump’s election, we’ve seen a daily freakout on this issue or that. Every day, we hear about another statement or appointment or Tweet that is apparently going to result in the impending arrival of the end times. For those thinking about career moves, becoming a Pfizer manufacturer’s rep in a blue state is a sure winner, because Xanax sales are certain to skyrocket.

Yesterday’s Freak Out by the Trumpharrumphers–which is spilling over into today–is that their bête noire took a phone call from the president of Taiwan. How this call came about is somewhat obscure. CNN reported that a former Cheney advisor now working the Trump transition, Stephen Yates, arranged it. Yates denies it.

That’s really neither here nor there. The issue is whether this is some grave blunder on Trump’s part. The immediate reaction by many is that this was thoughtless and rash, but I wouldn’t be so sure. It could very well be calculated to send a message to China that Trump does not accept the status quo that has developed over the past decades. China has challenged this status quo, particularly through its construction of artificial islands in the South China Sea. This could be Trump’s way of pushing back. Sending a message to the revisionist power that revisions can be a two way street.

It is a low cost way of sending that message. Unlike some alternatives, it is not latent with potential for an immediate confrontation. China would have to make an aggressive countermove. Consider an alternative way of sending a signal: sending US ships or aircraft to challenge Chinese claims in the South China Sea. That presents the potential of immediate conflict, due either to the decision of the leadership in Beijing, or a hotheaded commander on the spot. Recall that soon after Bush II took over that the Chinese forced down a US EP-3 aircraft off Hainan.

Not to say that Trump will not order freedom of navigation missions after becoming Commander in Chief. Just pointing out that taking the phone call certainly gets China’s attention, and gets it to think about what the new administration’s posture will be, without putting US and Chinese military forces in close contact in a way that could result in a disastrous incident.

One thing that is very striking about the hysterical reaction to The Call is that many of those responding most hysterically that it raises the risk of World War III have also favored a much more confrontational approach with Russia, especially in Syria. Gee, you’d think that declaring a no fly zone over Syria would create a far greater risk of an armed confrontation between nuclear superpowers than taking a phone call from the Taiwanese president.

This asymmetric approach to Russia and China makes no sense. Yes, Putin has a zero sum view of the world; wants to revise the post-Cold War settlement; nurses historical grievances; and believes that the United States is hell-bent on denying Russia its proper place in the world (or worse yet, overthrowing its government). But the Chinese have a zero sum view of the world; want to revise the balance of power in Asia; nurse historical grievances; and believe that the United States is hell-bent on denying China its proper place in the world. Russia hacks. China hacks. Indeed, if anything, Chinese hacks have been far more threatening to US national security than the alleged Russian hacks that have generated the greatest outrage, namely the DNC and Podesta email lacks. For instance, the Chinese hack of the Office of Personnel Management database likely caused grievous harm to US security: the DNC and Podesta hacks only embarrassed, well, political hacks. (Which probably explains the intensity of the outrage.) Insofar as Russian propaganda is concerned, if RT (which does not even register on the Nielsen ratings) and fringe internet sites gravely threaten US democracy, we have bigger problems to worry about: we will have met the enemy, and he is us.

The key issue is capability. With the exception of nuclear weapons, Russian capabilities are declining and limited, whereas Chinese capabilities are increasingly robust. The Soviets were big on “the correlation of forces.” The correlation of forces is strongly against the Russians at present. They have limited ability to project power beyond their immediate borders, and then only (in a persistent way) against ramshackle places like the Donbas and Abkhazia. The Russian Navy is a shambles: its current deployment off Syria would make Potemkin blush. The Navy faces the same problem that it has faced since the time of Peter I: it is split between inhospitable ports located at vast distances from one another. The submarine force has made something of a comeback, but its surface units are old and decrepit, and fielded in insufficient numbers. The potential for expansion is sharply constrained by the near collapse of Russian shipbuilding: even frigate construction is hamstrung because of the loss of Ukrainian gas turbine engines.

Russia is also in an acute demographic situation: during his recent speech, Putin crowed that fertility had increased from 1.70 live births/woman to 1.78–still well below replacement. This problem manifests itself in the form of increasing difficulties of manning the Russian military. It still relies on conscription for about 1/2 of its troops, and those serve for an absurd 12 months. After 8 years of reform efforts, 50 percent of the personnel are now kontraktniki, but the Defense Ministry’s refusal to release information on the number of contract soldiers who leave each year (while touting the number of new volunteers) suggests that there is considerable turnover in these forces as well. There is still no long-term cadre of non-commissioned officers, and the force structure is still very top heavy.

Moreover, this military rests on a very shaky economic foundation. In particular, Russian military manufacturing is a shadow of what it once was, and the fiscal capacity of the state is sharply limited by a moribund economy. This makes a dramatic expansion in Russian military capability impossibly expensive: even the modest rearmament that has occurred in the past several years has forced the government to make many hard tradeoffs.

In contrast, Chinese military power is increasing dramatically. This is perhaps most evident at sea, where the Chinese navy has increased in size, sophistication, and operational expertise. Submarines are still a weak spot, but increasing numbers of more capable ships, combined with a strong geographic position (a long coastline with many good ports, now augmented by the man-made islands in the South China Sea) and dramatically improved air forces, long range surface-to-surface missiles, and an improving air defense system make the Chinese a formidable force in the Asian littoral. They certainly pose an anti-access/area denial threat that makes the US military deeply uneasy.

In contrast to Russia, China is actually in the position of having a surfeit of military manpower, and is looking to cut force numbers while increasing the skill and training of the smaller number of troops that will be in the ranks after the reforms are completed.

Policy should emphasize capability over intentions. Intentions are hard to divine, especially where the Russians and Chinese are involved: further, the United States’ record in analyzing intentions has been abysmal (another argument for gutting the CIA and starting over). Moreover, intentions change. It must also be recognized that capabilities shape intentions: a nation with greater power will entertain actions that a weaker power would never consider.

Taking all this into consideration, I would rate Russia as a pain in the ass, but a pain that can be managed, and far less of a challenge to US interests than China. Putin has played a very weak hand very well. Indeed, as I have written several times, we have actually fed his vanity and encouraged his truculence by overreacting to some of his ventures (Syria most notably). But the fact remains that his is a weak hand, whereas China’s power is greater, and increasing.

I am not advocating a Cold War: East Asia Edition. But when evaluating and responding to capabilities of potential adversaries, China should receive far greater attention than Russia. Certainly there is no reason to risk a confrontation over Syria, and pique over embarrassing disclosures of corrupt chicanery that the perpetrators should damn well be embarrassed about is no reason for a confrontation either. A longer term focus on China, and managing its ambitions, are far more important. That is a relationship that truly needs a revision–a Reset, if you will. And methinks that Trump’s taking the phone call from the Taiwanese president was carefully arranged to tell the Chinese that a Reset was coming. A little chin music to send a message, if you will.

A more provocative thought to close. Realpolitik would suggest trying to find ways to split China and Russia, rather than engage in policies like those which currently are driving them together. A reverse Nixon, if you will. I am by no means clear on how that would look, or how to get there. But it seems a far more promising approach than perpetuating and escalating a confrontation with a declining power.

PS. This is fitting in many ways:

Print Friendly

December 2, 2016

Lucy Putin?

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:53 pm

I was somewhat surprised that OPEC came to an agreement. I will be more surprised if they live up to it: that would be not just going against history, but against basic economics. The incentives to cheat are omnipresent (as the Saudi’s ex-Minister of Petroleum of Petroleum Naimi acknowledged in the aftermath of the announcement). Further, what is the enforcement mechanism? Retaliatory output increases/price cuts (i.e., price wars)? Moreover, given that many OPEC nations are facing acute budgetary strains, the present looms and the future looks very, very far away: consequently, getting some additional revenue today at the risk of losing some revenue a year or two from now when a price war breaks out looks pretty attractive.

The breathless TigerBeat-style reporting of the meeting states that Russia’s last-minute intervention rescued the deal. A few things to keep in mind. Russian oil output has surged in the last few months, meaning that its promise to cut 300,000 bbl/day basically puts its output back to where it was in March. This is in fact pretty much true of the OPEC members too: the deal very much as the feel of simply taking two steps back to reverse the two steps forward that major producers took in the past 9 months (and the two steps forward were no doubt driven in large part to improve bargaining positions in anticipation of the November OPEC meeting).

Moreover, the timing of the Russian commitment is rather hazy. Energy Minister Alexander Novak said Russia would cut “gradually.” That can mean almost anything, meaning that the Russians can say “the cuts are coming! Trust us! We said it would be ‘gradual!'” and that there will be no hard evidence to contradict them.

The most amusing part of this to me is that many are interpreting Putin’s personal involvement as proof that the Russians will indeed cut. “If Putin tells Russian oil companies to cut, they’ll ask ‘how deeply’?”

Seriously?

Call me cynical (yeah, I know), but I find this scenario far more plausible: Putin sweet-talked the Saudis and Iranians to overcome their differences to cut output in order to raise prices, all the while planning to sell as much as possible at the (now 10 percent) higher prices. Breezy promises cost nothing, and even if eventually OPEC members wise up to being duped, in the meantime Russia will be able to sell to capacity at these higher prices. Yes, the OPEC members will be less likely to believe him next time, but Putin’s time horizon is also very short, for a variety of reasons. He’s not getting any younger. And more immediately, the Russian recession is dragging into its third year, and budgetary pressures are mounting (especially since he is committed to maintaining a high level of military spending). The Russian Wealth Fund (one of its two sovereign wealth funds) has been declining inexorably: the rainy day fund is almost empty, and the skies still haven’t cleared. And the presidential election looms in 2018. For Putin, the future is now. The future consequences of making and breaking a promise are not of great importance in such circumstances. But more money in the door today is very, very important.

Russia isn’t like other OPEC producers, which have national oil companies that respond to government orders. Although government-controlled Rosneft is the biggest producer in Russia, there are others, and even Rosneft and Gazpromneft have more autonomy than, say, Saudi Aramco. Yes, Putin could, er, persuade them, but a far more effective (and credible) tool would be to adjust taxes (especially export taxes on both crude and fuels) to give Russia’s producers an incentive to cut output (and especially exports, which is what OPEC members really care about). A tax boost would be a very public signal–and reversing it would be too, making it harder to cheat/renege. (Harder, but not impossible. The government could give stealth tax cuts or rebates. This is Russia, after all.) But I have not seen the possibility of a tax rise even be discussed. That makes me all the more skeptical of Putin’s sincerity.

So my belief is that Putin is stepping into the role that Sechin played in 2009, that is, he is being Lucy beckoning Charlie Brown/OPEC with the football. And Charlie Brown is attempting a mighty boot. We know how that works out.

Even if Putin lives up to his pinky-swear to cut output, Russia has cut a much better deal than the Saudis. The promised Russian cut is about 60 percent of the Saudi cut, yet both get the same (roughly 10 percent) higher price, meaning that (roughly speaking) Russian revenues will rise 40 percent more than than Saudi revenues do–assuming that both adhere to the cuts. The disparity will be greater, to the extent that Russia cheats more than the Saudis.

Time will tell, but what I am predicting is that (a) Russia will not cut anything near 300kbbl/d, and (b) cheating by OPEC members will snowball, meaning that next November’s OPEC meeting will likely be another rancorous effort dedicated to repairing a badly tattered deal, rather than a celebration of the anniversary of a successful and enduring bargain.

Print Friendly

November 29, 2016

A Policy Inspired More by the Marx Brothers Than Marx

Filed under: China,Climate Change,Commodities,Economics,Politics,Regulation — The Professor @ 9:51 pm

As goes China, so go the commodity markets. The problem is that where China goes is largely driven by a bastardized form of central planning which in turn is driven by China’s baroque political economy. In past years, China’s rapid growth conferred on the government a reputation for wisdom and foresight that was largely undeserved, but now more people are waking up to the reality that Chinese policy engenders tremendous waste, and that the country would actually be richer–and have better prospects for the future–if its government tempered its dirigiste tendencies.

Case in point: Morgan Stanley’s Chief China Economist uses the ham-fisted intervention into the coal industry to illustrate the broader waste in the Chinese system:

These reforms entail the necessary reduction of excess capacity, particularly in state-owned enterprises (SOEs) and industries where overproduction issues are often the most acute.

While economists agree that a reduction of excess capacity, particularly in heavy industry, is key to the nation’s efforts to get on a more sustainable growth trajectory, China’s supply side reforms bare little resemblance to the “trickle down” Reaganomics of the 1980s, which seized upon tax cuts and deregulation as a way to foster stronger growth.

In Morgan Stanley’s year-ahead economic outlook for the world’s second-largest economy, Chief China Economist Robin Xing uses the coal industry to detail two key ways in which supply-side reforms with Chinese characteristics have been ill-designed.

“The state-planned capacity cuts and the slow progress in market-oriented SOEs reform have come at the cost of economic efficiency,” laments the economist.

In a bid to shutter overproduction and address environmental concerns, Beijing moved to restrict the number of working days in the sector to 276 from 330 in February.

But in enacting these cuts, policymakers employed a one-size-fits-all approach.

“The production limit was implemented to all companies in the sector, which means good companies that are more profitable and less vulnerable to excess capacity are affected just as much as the bad ones with obsolete capacity and weak profitability,” writes Xing.

This is largely true, but begs the question of why China adopted this approach. The most likely explanation is that the real motive behind the cuts has little to do with “environmental concerns”, though those are a convenient excuse. Instead, forcing the most inefficient producers out of business–or allowing them to go out of business–would cause problems in the banking and (crucially) the shadow banking sectors because these firms are heavily leveraged. Allowing them to continue to produce, and propping up prices by forcing even relatively efficient firms to cut output, allows them to service their debts, thereby sparing the banks that have lent to them, and the various shadow banking products that hold their debt (often as a way of taking it off bank balance sheets).

If the goal was to reduce pollution, it would have been far more efficient to impose a tax on coal-related pollutants. But this tax would have fallen most heavily on the least efficient producers, and would caused many of them to fail and shut down. The fact that China has not pursued that policy is compelling evidence that pollution–as atrocious as it is–was not the primary driver behind the policy. Instead, it was a backdoor bailout of inefficient producers, and crucially, those who have lent to them.

Morgan Stanley further notes the inefficiency of the capital markets which favor state owned enterprises:

As such, this misallocation of production serves to amplify the already prevalent misallocation of credit stemming from state-owned firms’ favorable access to capital. That arguably undermines market forces that would otherwise help facilitate China’s economic rebalancing.

But this too is driven by politics: SOEs have favorable access to capital because they have favorable access to politicians.

The price shock resulting from the output cuts hit consuming firms in China hard, which has led to a lurching effort to mitigate the policy:

This month, Beijing was forced to reverse course to allow firms to meet the pick-up in demand — another case of state dictate, rather than price signals, driving economic activities.

“In this context, we think the more state-planned production control and capacity cuts cause distortions to the market and are unlikely to be sustainable,” concludes Xing.

“Beijing was forced to reverse course” because utilities consuming thermal coal and steel producers consuming coking coal pressured the government to relent.

The end result is a policy process that owes more to the Marx Brothers than to Marx. A cockamamie scheme to address one pressing problem causes problems elsewhere.

Methinks that Mr. Xing is rather too sanguine about the ability or willingness of the Chinese government to sustain such highly distorting policies. They have done so for years, and are showing no inclination to change their ways. Efficiency is sacrificed to achieve distributive and political objectives, and the bigger and more complex the Chinese economy the more difficult it is for the authorities to predict and control the effects of their policy objectives. But this just induces the government to resort to more authoritarian means, and attempt to exercise even more centralized power. This is costly, but these are costs the authorities are willing and able to bear. Inefficiency is the price of power, but it is a price that the authorities are willing to pay.

Print Friendly

November 22, 2016

In Like Flynn

Filed under: History,Military,Politics — The Professor @ 12:54 pm

Retired General Michael Flynn, fired as head of the Defense Intelligence Agency by President Obama, has become a lightning rod for criticism. This was true during the campaign, where he was an early and outspoken Trump supporter, and it has become doubly true since the election and his appointment as National Security Advisor designate. This criticism is largely unfair, and relies on the typical distortions and dishonest tactics that have become the norm for the “elite,” and the “elite” media.

For instance, Flynn has been excoriated for his alleged sympathies for Putin and Russia. These allegations rest on (a) his appearances on RT, and (b) the fact he sat at Putin’s table during an RT dinner. They also ignore the truculently anti-Russia, anti-Putin statements that Flynn made in his book. In a Politico piece that at least lets the man speak for himself, at length (although it also includes a typical dose of MSM snark), Flynn gives his opinions on these subjects:

Yet at times Flynn still struggles to reconcile his views with some of Trump’s most extreme positions, including his persistent praise of Putin.

“Putin is a totalitarian dictator and a thug who does not have our interests in mind. So I think Trump calling him a strong leader has been overstated, I’ll give you that,” Flynn said. “But Putin is smart and savvy, and he has taken actions in Ukraine and elsewhere that have limited our options, and the U.S. and NATO response has been timid. I think Trump’s strength lies in being a master negotiator, and he wants as many options as possible in dealing with Russia.” (Still, Flynn himself may have image problems here, since he appeared with Putin last year at an anniversary party for the Kremlin-controlled RT television network in Moscow.)

Yeah. A real Putin lover, that dude. This echoes what Flynn says in his book (co-authored by Michael Ledeen). This was out there for anyone interested in a fair portrayal of the man’s views to read, but no. Instead all we heard about was Flynn being pro-Putin because he sat with him once in Moscow.

Flynn has also drawn fire for his blunt statements about Islam. Well, get this. They are based on an up-close-and-personal view of our Islamist enemies. A view, it should not need mentioning, but does, that absolutely no one in the media and no one in the Obama administration and pretty much no one outside the US intelligence community has. Here again the Politico piece is informative:

As JSOC’s director of intelligence, Flynn interrogated the senior Al Qaeda commanders at length. Sitting across from them at the detainee screening facility at Balad Air Base, Iraq, Flynn wondered why such obviously educated and intelligent people were devoting themselves to tearing their country apart, regardless of the horrendous toll in innocent lives. Some of the men had electrical engineering and other advanced degrees, but instead of building a bridge or helping establish a functioning government, they applied their talents to attacking vulnerable governing institutions in order to terrorize and intimidate civilians. He could understand their hatred of American interlopers, but the vast majority of their tens of thousands of victims were fellow Iraqis.

During the course of those interrogations and hundreds of others in both Iraq and Afghanistan, Flynn concluded that what united the terrorist warlords was a common ideology, specifically the extremely conservative and fundamentalist Salafi strain of Islam. Salafis believe the only true Islam is that version practiced by the Prophet Muhammad and his followers in the seventh and eighth centuries. They reject any separation of church and state in favor of puritanical interpretation of Islamic Sharia law. They are intolerant of other religions or sects, and at least in terms of Salafi Jihadists, their ideology is violent and expansionist by its very nature. The terrorist leaders he interrogated on a regular basis—whether they marched under the banner of Al Qaeda, the Taliban or ISIS—were true believers, every bit as committed to their ideology and skewed moral universe as Flynn was to his own.

“Over the course of all those interrogations, I concluded that ‘core Al Qaeda’ wasn’t actually comprised of human beings, but rather it was an ideology with a particular version of Islam at its center,” Flynn said in the recent interview. “More than a religion, this ideology encompasses a political belief system, because its adherents want to rule things—whether it’s a village, a city, a region or an entire ‘caliphate.’ And to achieve that goal, they are willing to use extreme violence. The religious nature of that threat makes it very hard for Americans to come to grips with.”

He has looked the enemy in the face. Literally looked them in the face. Hundreds of times. He has interrogated them at length. You think perhaps he just might–just!–have a better understanding of what drives ISIS and Al Qaeda than 99.99999 of the people venting about his unacceptable, radical–and politically incorrect–views about the nature of Islamic terrorism?

The Politico article also details what led to Flynn’s disillusionment with the Obama administration and his criticism of its policies while he was head of DIA. In a nutshell: Flynn thought, based on his deep, personal knowledge of the Islamist enemy both in Iraq and Afghanistan, that Obama’s declaration of victory after Osama’s death was wildly premature. He was dismayed at the administration’s firing of Stanley McChrystal for having the temerity to push back on Obama’s Afghanistan policy. He was also furious at the sanitizing of intelligence about Islamist terrorism:

Worst of all from Flynn’s bird’s-eye perch at the DIA, intelligence reports of a growing threat from radical Islamist terrorism were often expunged as the intelligence stream worked its way up to the president’s desk. Flynn suspected part of the problem was National Security Adviser Susan Rice, who chaired many of the NSC deputies meetings and seemed uninterested in reports out of Iraq. But other intelligence bottlenecks have also come to light. After more than 50 intelligence analysts at U.S. Central Command complained to the Pentagon inspector general that their intelligence reports on the war against ISIS were consistently watered down, a recent House Republican task force report—written by members of the House Armed Services and Intelligence committees—concluded that intelligence on the ISIS threat was systematically altered by senior U.S. Central Command officials to give it a more positive spin.

I can say with metaphysical certainty, that if Flynn had been fired for blasting the distortion of intelligence in the Bush administration, he would have been the toast of all the best parties in DC and New York, and lionized on the pages of the NYT and WaPo. But this telling truth to power thing is a one way street in DC.

Tell truth to the Bush administration: Righteous! Hero!

Tell truth to the Obama administration: Renegade! Loose cannon! Dangerous bigoted wacko!

I wrote about DIA’s truth telling about what became ISIS circa-2012. Another example of no truth goes unpunished.

There is currently a lot of tut-tutting about Flynn’s outspokenness and political advocacy from ex-military types, such as Admiral Mullen. Let’s just say that one should always be somewhat skeptical of those who achieve positions like Mullen did, especially in an administration like Obama’s (or Clinton’s), but Bush’s too. They are usually chosen for their biddability and political reliability, especially in times of (relative) peace.

Some of the things Flynn has said are puzzling, his apparent flip-flop on the coup in Turkey, for instance. But I would not leap (as many have) to the conclusion that he did so for mercenary reasons.

Flynn is obviously a strong willed individual unafraid to speak his mind. He also has deep knowledge of certain issues that none–yes 0.0000 percent–of his media or political critics have. So is it too much to ask to judge him on the substance of his views, and the basis for them, rather than on issues that are less than trivialities?

That question was purely rhetorical. The Lie Swarm gonna swarm.

I fear that a similar fate awaits General James Mattis, in the event that Trump nominates him for SecDef. (This would be a livin’ the dream moment for me, because Mattis is someone whom I deeply admire. But the fact that he would have to get a waiver to serve in this post tempers my hopes.) Mattis was another man who called out the intellectual flyweights in the Obama administration foreign poliicy apparatus, and who was unceremoniously defenestrated for his temerity. (Even Tom Ricks, an Obama-friendly voice, found this episode incredibly shabby and disturbing.)

Flynn’s appointment–and Mattis’, in the happy event–reveals something about Trump. He is willing to have outspoken subordinates. This represents a stark contrast with Obama, who surrounded himself with unimpressive toadies and political partisans (Ben Rhodes–are you effing kidding me? Susan Rice?), and who refused to tolerate any internal dissent (as the fates of Flynn, Mattis, and McChrystal demonstrate). Whether Trump endures internal opposition remains to be seen: the fact that he is at least willing to risk it is admirable, and deserves some praise, rather than the ankle biting of people like Flynn by the apparatchiks and careerists who dominate what passes for America’s political and media culture.

Print Friendly

November 19, 2016

I’ve Learned My Lesson, But Far Too Many Have Not

Filed under: History,Military,Politics,Russia — The Professor @ 8:40 pm

Tim Newman has written numerous excellent posts of late, but the one that resonated most with me was this one from about a month ago, which in response to a reader’s question about what he admitted changing his mind about, he admitted to having misjudged the outcome in Iraq:

I supported the Iraq War for several reasons, one of which was I thought the Iraqis deserved the chance to be free of Saddam Hussein and run their country without him.  I genuinely thought they would seize the opportunity to demonstrate to the world that Arabic people are not incompatible with democracy and, so thankful that Saddam Hussein is gone, they would make a pretty decent effort to make things work.

Instead they tore each other apart and did everything they could to demonstrate that those who dismissed them as savages that needed a strongman to keep them in line were right all along.  I think this was probably the most depressing aspect of the whole shambolic affair.

. . . .

But the one issue I changed my mind on was that the US (or British) military should no longer be brought to bear for altruistic or humanitarian reasons.  It is rather depressing, but I am now a firm believer in the premise that a population generally deserves the government it gets.  No longer would I support a war that is not prosecuted for clear strategic reasons that are indisputably in the national interest.  So all those suffering under the jackboot of oppression?  Sorry, you’re on your own.  We tried our best and look where it got us.

I couldn’t agree more, for I have undergone a similar conversion. I too succumbed to Western universalism, and believed that freed from the oppressions of a sadistic dictator, Iraq had the potential to become a passably free, democratic country that could become a role model for a benighted region. I believed that the problem was misrule from the top, rather than dysfunction at the bottom.

I was wrong.

What Iraq has taught me–reminded me, actually, in a rather forceful way–that although political and economic freedom are highly desirable, the preconditions that make this possible are the exception, rather than the rule. Further, the preconditions are highly culturally and historically contingent. The experience brought home forcefully the relevance of civilization (as Huntington emphasized): not everyone yearns to be like Americans; in fact, to many Western/American beliefs and mores are an anathema; Western institutions and behaviors can’t be grafted onto fundamentally different civilizations and cultures, and they certainly won’t arise spontaneously in the aftermath of the overthrow of a repressive regime, especially one that has deliberately crushed civil society for decades (and I could say something similar of the FSU); the tragic view of history has much more predictive power than the progressive view.

I should have remembered the experience of the Reconstruction in the United States, or Napoleon’s experience in Spain, or myriad other historical examples of the futility of attempting to impose a social and political revolution on a hostile alien culture.

Iraq, and subsequently Libya, pushed me back to my Jacksonian roots. Reforming foreigners isn’t our business. What they do amongst themselves is up to them, as long as they don’t harm Americans or American interests in a serious way. If they do that, deal with them forcefully and quickly, with no dreamy ideas of “nation building” in the aftermath. A view summarized by one of my heroes, USMC General James Mattis, who while in Iraq said: “I come in peace. I did not bring artillery. But I’m pleading with you, with tears in my eyes, if you fuck with me, I will kill you all.” Translated: we’ll leave you alone, unless you don’t leave us alone. In which case, watch out.

It’s one thing to make a mistake, to misjudge. It’s another thing to make a mistake and then learn nothing from it. We are seeing that right now, in regards to Syria. To judge by the words of many on both sides of the current political divide, Iraq (and Libya) never happened. Why do I say that? Because figures on both the right and left are advocating direct American involvement in the Syrian civil war, even though it makes Iraq look like Sunday school.

The catalyst for this waving of the bloody shirt is the carnage in Aleppo. John McCain in particular is beating the war drum, claiming that the US is now complicit in genocide in Syria. From the left, Samantha Power (she of Responsibility to Protect, which went so swell in Libya) obsesses about Syrian and Russian atrocities there.

Then there are the journalist/wonk pilot fish like Charles Lister and the execrable Michael Weiss, who churn out war propaganda in the best yellow journalism tradition, all the while doing their best to hide their connections with malign medieval regimes in the Gulf.

I will stipulate that what is occurring in Aleppo is horrific (although I would also note that the opposition is waging a transparent propaganda campaign  in an attempt to manipulate the US into intervening–a campaign in which Weiss, Lister, and their ilk are avid participants).

That said, what can the United States do about it? Would intervention lead to a less horrific result? What would be the likely outcome? Would the US be able to achieve its intended outcomes? What would the unintended consequences be?

Anyone who thinks about these questions without considering the sobering lessons of Iraq is a menace. But it’s worse than that, I don’t think that McCain, Power, Weiss, Lister, et al, think about these questions at all. It’s like Iraq never happened. The amnesia is rather astounding.

Here are my answers. There are no good guys in Syria, and even if with US assistance Assad was overthrown, it would not end the civil war, which would just devolve even further into a multi-sided hell that makes Libya and Iraq look like a picnic; it would empower jihadists who will slaughter as many or more as Assad has; the flow of refugees will not stop, although the composition of the refugees might change (with Alawites and Christians replacing Sunnis); if the opposition gets control of Syria, it will be the jihadists who control the opposition, and Syria will become a base for anti-American and anti-Western terrorism.

Syria is even more broken, complex, divided and fissiparous than Iraq was/is. It is rooted in the same political and religious culture, and the same civilization. Minority-based Baathism has had 13+ more years of power in Syria. So what has happened in Iraq in the last 13+ years is probably the best scenario in Syria. And I would consider even that happy prospect to be among the least likely.

And one more thing. An American intervention in Syria would risk a superpower confrontation. Even a unicorns and rainbows outcome in Syria would not make such a risk worthwhile, and as noted above unicorns and rainbows would not be the result–a dystopian, sectarian war of all against all would be. And the US should be in the middle of that why, exactly?

Some, notably Weiss and even more respectable journalists like Edward Lucas, link Syria to a broader conflict with Putin’s Russia. Syria, Lucas tells us, is Putin’s first step in rebuilding the USSR.

Seriously? That sounds like the ravings of someone playing Risk on LSD.

Pray tell, where does Putin go from Syria? The road to the Elbe runs through Aleppo? Who knew?!? Even if Putin succeeds in propping up His Man in a shattered country that has no natural or human resources to speak of, what then? Does that change Putin’s calculus of exercising power or force in the Baltic, or the European plain? Does that change Russia’s fundamental strategic weakness (most notably a decrepit economy that is utterly incapable of supporting an extended confrontation with the US)? No to all. Hell no, actually. Syria is a diversion of Russian effort and strength in one of the least consequential countries in the Middle East.

Yes. Syria is a humanitarian catastrophe. But as Tim Newman said, the US (or British) military should not be dispatched to intervene in such places for humanitarian or altruistic reasons. Because regardless of how altruistic the intentions, the outcome will be grim, and policy should be based on what is possible not what is desirable. If the desirable isn’t possible, leave it be.

I would go further. Even if you believe–especially if you believe–that Russia and China pose grave threats to US interests, Syria is not the place to fight. It will be another ulcer that will drain American morale, produce debilitating internecine political conflict, kill and maim American service men and women, and sap its military. Better to devote resources to recapitalizing the American military than to pour them into a lost cause like Syria–or pretty much anywhere else in the Middle East.

One of the most encouraging outcomes of the election is that the likelihood of American intervention in Syria has gone down as a result: Hillary was clearly much more favorably disposed to intervention (e.g., she spoke favorably of the idiotic idea of no fly zones, a McCain hobby horse) than Trump. If Trump truly is Jacksonian, or defers to his Jacksonian base, he will not get involved. Indeed, methinks this is exactly why McCain has become particularly unhinged in the past days. He realizes the prospects for intervention have plunged, and in his impotence he is raging.

Obama’s instincts were actually sounder than Hillary’s here. Would that he had the courage of his convictions and eschewed any involvement whatsoever. Instead, he gave mixed signals (“Assad must go”, the “red line”), and authorized a CIA effort to support the (jihadist-dominated) opposition–an effort that succeeded in getting 3 Green Berets killed a few weeks ago. (The CIA is an institution that I have also had a serious change of views about.)

Historical parallels are never exact. But it is difficult to find one as close as between Iraq and Syria–temporally, culturally, or civilizationally. Given the historical precedent, it is beyond reckless even to contemplate seriously US involvement in the Syrian civil war. But too much of our political class are latter-day Bourbons, having forgotten nothing and learned nothing. One of the benefits of the rejection of the political class on November 8th is that there is a very good prospect that we will also reject some of their worst ideas, of which intervention in Syria on humanitarian or geopolitical grounds is probably the worst of all.

 

 

Print Friendly

November 16, 2016

Lie Swarms

Filed under: Politics — The Professor @ 8:40 pm

If you get your “information” through Twitter, mainline print/online publications, or the netwits, you probably think that Trump’s newly appointed chief strategist Steve Bannon is the love child of Nathan Bedford Forrest* and Leni Riefenstahl. Racist. Anti-Semite. Master propagandist.

One should always be suspicious of such tendentious portraits, and that suspicion is especially warranted here. Spengler (David P. Goldman) wrote a furious and effective rebuttal of the attacks on Bannon which is worth a read, but do yourself a favor and read the man in his own words–and not the clip quotes attributed to him by his enemies on the left and among the #NeverTrump right. (One should be doubly suspicious when such disparate groups unite in an attack.)

In that 2014 speech and interview, Bannon comes off as bright, thoughtful, and articulate. Certainly he has strong views, but they are not the noxious brew that his attackers attribute to him. His main sensibility is religious. As for anti-Semitism, note that he stresses the Judeo-Christian tradition. He believes in capitalism, but he is not a “hard” libertarian or Objectivist. His brand of capitalism is of the Smith-Hayek-Friedman variety. He decries the devolution of capitalism in corporatism and crony capitalism. He attacks bailouts. He is stridently anti-jihadist. He is also a believer in national and cultural identity, and obviously a critic of globalism.

He spoke about Putin before Putin became a devil figure in the US campaign. His is a nuanced view. On the one hand, he slams Putin as a kleptocrat and ruler of an illegitimate form of capitalism–state capitalism. He also notes Putin’s deviousness and recognizes the threat he poses. But he does not exaggerate that threat, and appreciates that Putin has struck a chord among Russians by appealing to their patriotism and cultural identity.

He also discussed what is now referred to as the alt-right before it became a thing in the popular mind. He frankly admits that opposition movements like the Tea Party inevitably attract fringe elements, but believes in the end that these fringes don’t define these movements: they are free riders not drivers, and will eventually “boil off.” He is not uncritical of the European populist movements: “With all the baggage that those groups bring — and trust me, a lot of them bring a lot of baggage, both ethnically and racially — but we think that will all be worked through with time.” He draws distinctions between movements like UKIP or the Tea Party and continental European nationalist parties and groups, finding the latter more tinged with racism and anti-Semitism.

Reading the talk, and you will have an understanding of how Trump won. One of his key strategists had a very clear understanding of the discontent of the non-elites. He is genuinely sympathetic to the people that the left alternately scorns and claims to represent. All in all, Bannon clearly is not the man his enemies portray him to be. Methinks that the fury of their attacks reflects a deep fear that he is indeed a discerning thinker and able political strategist–and information warrior.

Spengler said that the attacks on Bannon are an example of the Big Lie. I take issue with that. What we are seeing with Bannon, and have seen and are seeing with Trump, is something different: it is the Lie Swarm.

The Big Lie is an effective propaganda tactic in a centralized, vertical media system dominated by a small number–and in totalitarian systems, basically one–of information channels. Radio or television with a small number of national stations either directly controlled by the state, or subject to substantial state pressure (e.g., the US in the days of the Fairness Doctrine). To oversimplify only a little: one message, one medium.

In the modern fractured information environment, with a proliferation of outlets and social media that allows free access to millions, coordinating on a single message is far more difficult in such a diffuse and fragmented system. But this technology is perfectly suited for unleashing a swarm of half-truths and lies that forms what can best be described as an emergent order. It is not consciously designed by anyone, but without central coordination design it does exhibit order and synergistic behaviors.

One swarm tactic that is becoming increasingly common is Six Degrees of Hitler/Putin/The KKK/etc. Target A has some connection to B who has some connection to C who has a connection with D who said something that could be interpreted as being vaguely fascist . . . so Hitler!

In some respects, it is harder to fight the Lie Swarm than it is the Big Lie in a society where there the media is not rigidly controlled. A single lie can be rebutted if the target of the lie has the ability to make the case and the access to enough eyeballs and ears to do so. It is almost impossible to swat every lie in the swarm, especially since the lies change and mutate from day to day, and since whenever you are in a position of rebutting a lie you tend to draw attention to it. But unrebutted lies are often as treated as facts, so if you don’t kill them all some damage is done.

Bannon, and especially Trump, are primary targets of the Lie Swarm, especially since Trump had the temerity to actually prevail in the election. Don’t get me wrong–there is much about Trump to criticize. But there has been a kind of Gresham’s Law at work here: the bad criticism has driven out the good. Screeching “racist!” “Anti-Semite!” “Fascist!” on the basis of the most twisted and biased interpretation of the flimsiest evidence has overwhelmed substantive argument.

And the Swarm really hasn’t figured out that their attack will do little to get Trump supporters to change their minds. If anything, it will do the opposite, because the “deplorables” know that they are being attacked and smeared as much as Bannon and Trump. Furthermore, the Swarm seems hell-bent on living out Einstein’s definition of insanity: doing the same thing over and over, and expecting different results. Hillary’s whole campaign was based on personal attacks on Trump and his supporters, and she enlisted the Swarm in this endeavor.

And it backfired stupendously. Why should they expect that doubling down on it will work any better?

So I have mixed thoughts about this. On the one hand, the Lie Swarm’s infestation of the current public discourse is disgraceful and dispiriting. On the other hand, it has proved a spectacular failure in achieving its objective, so if they want to double down on it, why stop one’s enemies when they are making a mistake?

* For those not familiar with Civil War or Reconstruction history, Forrest was the first Grand Wizard of the KKK. (It is beyond doubt that he was prominent in the KKK, but some dispute whether he was the Grand Wizard.) He also happened to be probably the only true military genius of the Civil War, in which he rose from private to Lieutenant General and earned (ironically) the sobriquet “Wizard of the Saddle.”

Print Friendly

November 15, 2016

Igor Sechin Takes His Revenge

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 12:07 pm

The Bashneft sale to Rosneft (which I wrote several posts about) is a done deal, but apparently there was some unfinished business. Namely, the business of  revenge.

On Monday Economic Development Minister Alexei Ulyukayev was detained for corruption. He allegedly took a $2 million bribe to “allow” the sale. Indeed, Bloomberg claims he was caught in the act:

Ulyukayev, 60, was detained on Monday “in the act” of receiving the cash, said Russia’s Investigative Committee. He was later charged with demanding the money from Rosneft PJSC to allow its purchase last month of the government’s 50 percent stake in regional oil producer Bashneft PJSC, the agency said in a statement. The economy minister denies any wrongdoing, his lawyer Timofei Gridnev told Business FM radio. Investigators moved that he be held under house arrest before he arrived for arraignment Tuesday at Moscow’s Basmanny Court.

Ah, Basmanny justice. Gotta love it.

This all seems quite bizarre. The Bashneft acquisition was clearly a source of intense conflict with the Russian government, with the government ministries–including Ulyukayev–initially expressing opposition. Then there was temporizing, with Putin seeming to come down on both sides of the issue. Then it was decided in Rosneft’s–that is, Igor Sechin’s–favor.

Presumably, Putin was the ultimate decider here. If so, Ulyukayev was in no position to “allow” anything. Maybe he had a chance to make his case, either directly to Putin, or indirectly via Medvedev. But once he lost, he would have been delusional to think he had any leverage over whether the deal would proceed.

Further, the timing is beyond strange. The deal was decided in September, and finalized on October 12, more than a month ago. So, did Ulyukayev give net 30 terms on the bribe? Net 60? Was it half now, half later? Is bribery really done on credit in Russia?

I would also venture that attempting to shake down Sechin and Rosneft is tantamount to suicide. Did Ulyukayev attempt such a risky thing? Did Sechin play along and then facilitate a sting by the Investigative Committee? Or was this a set-up job from the start?

One thing that is almost certainly true is that this is Sechin taking his revenge, and sending a message to others: look at what happens to those who cross me.

The Energy Ministry, under Novak, also opposed the deal initially. I wonder if he is sleeping well.

There are some comic elements to the story. Several stories breathlessly report a law enforcement leak saying that Ulyukayev’s phone had been tapped “for months.” Um, pretty sure it was tapped like forever.

Ulyukayev has a reputation as a “liberal” in Russia, and assorted Western dimwits expressed Shock! Shock! at his arrest. Prominent among these were Anders Aslund and my fellow professor and buddy Michael McFaul. I say dimwits for several reasons. First, is it news to them that the “liberals” in the Russian government are marginalized, and exist at the sufferance of people like Sechin who are in Putin’s inner circle? Second, are they so credulous as to believe that these liberals are untainted by corruption? Puh-lease. Ulyukayev appeared in the Panama Papers. Further, the “liberals” and “reformers” mainly go back to the Yeltsin period, and remember that  Yeltsin elevated Putin in exchange for foregoing any investigation or prosecution of the rife corruption of the Yeltsin administration. Ulyukayev was associated with Gaidar, who was also tied to corruption (although the publicly revealed instances were small beer by Russian standards).

There are no clean hands in Russia. This very fact is what usually keeps people in line, for they know the adage “for my friends, everything: for my enemies, the law!” Everybody is vulnerable to prosecution, because everybody is corrupt: actual prosecution is used sparingly, however, to punish those who have committed a political transgression.

Ulyukayev clearly committed such a transgression, and hence he finds himself in the dock.

There is no reason to be shocked by this. It merely confirms that people like Sechin are the real power. But this is apparently a revelation to alleged Russia experts.

Bashneft is the Hope Diamond of oil companies: it seems to bring bad luck to anyone who touches it. Ural Rakhimov, the son of the boss of Bashkortostan (where the company is located), who profited from the corruptly done privatization of the company in 2002, but who apparently fled Russia when the privatization and subsequent sale came under government scrutiny. Vladimir P. Yevtushenkov, who bought Bashneft from Rakhimov, but then wound up under house arrest for 92 days for allegations related to the privatization: he walked only after the government seized Bashneft shares from Yevtushenkov’s holding company before performing the re-privatization Kabuki that ended with the company being bought by Rosneft. And now Ulyukayev.

Will the skein of bad luck end with Rosneft and Sechin? That’s a good bet, but not a lock. Who knows what changes in power are in store, especially as Putin ages, or if there is some economic or political shock?

Print Friendly

Next Page »

Powered by WordPress