Streetwise Professor

April 25, 2008

Oh, we won’t give in, We’ll Keep Living in the Past

Filed under: Military,Politics,Russia — The Professor @ 10:17 am

I read somewhere that Jethro Tull released a song titled “Living in the Past” in the early-70s. The Russian military should make this its theme song, if one believes Alexander Golts:

Serdyukov’s initiative to strip the military’s journalists, lawyers and doctors of officer rank is a clear attempt to decrease the number of officers. The army now has 400,000 officers out of a total 1.2 million service personnel. That comes out to one officer for every two soldiers. In most countries, officers constitute not more than 16 percent of a military’s total personnel. In Russia, the bloated number of officers resembles an inverted pyramid, with nearly as many colonels as lieutenants.

But the generals argue that a large number of officers is necessary to maintain a mass-mobilization army — one that could call up millions of reservists to fight a war against NATO. In answer to the charge that the number of colonels has nearly outstripped the number of lieutenants, the generals counter that someone must be available to lead the divisions of reservists.

Regarding the military’s enormous property holdings, generals argue that, while these assets might be superfluous in peacetime, they will be essential in the event of a major conflict with NATO. In defending their mass-mobilization strategy, which is still stuck in an old Soviet mindset, the generals complain about the incompetence and ignorance of civilians running the Defense Department.

First, as I have argued time and again, it is utterly fantastical to imagine a major war breaking out with NATO. One doesn’t know whether the Russian military command knows this and just uses it as a rationalization for their resistance to change, or whether Russian generals are delusional to a man.

Second, granting their delusions that a war with the West is a realistic prospect, basing plans for a conflict with NATO on a mass conscription army completely ignores the lessons of the last 30 years. Mass armies of poorly trained conscripts hurriedly assembled for battle are no match for highly trained professional forces. Period. You’d think that Russia would have learned from Chechnya that conscript forces are a disaster waiting to happen–Russian conscript armies were badly bloodied by nondescript gangs of Chechens with no armor or airpower. They would stand no chance against highly trained American troops with first rate armor, nonpareil air forces, excellent intelligence resources, smart weapons, etc., etc., etc.

Third, demographic realities make creation of a large mass conscript army simply impossible. Russia can barely find enough healthy conscripts to fill the ranks of its peacetime army, let alone field a force twice or three times as large (a size that would be consistent with the bloated complement of colonels.)

I would wager that most Russian generals are not delusional; they know that a war with NATO is the least important of Russia’s potential security challenges; they realize that mass conscription armies are an anachronism; and they understand that even if they wanted to raise a mass conscription army, they don’t have the population to do it. So the most reasonable explanation for their living in the past is that it is comfortable and profitable. Change is hard–and if they know that Russia really faces no military threat, why do the hard work? Moreover, as Golts notes, the military is rife with corruption, and change threatens to derail the gravy train.

Fighting the last war is dangerous if you really have one. Preparing to fight the last war is not so deadly if no conflict is in prospect. The Russian leadership acts as if that is the case, and feels just fine about living in the past.

April 24, 2008

Deconstructing the Conventional Wisdom on Basra, Maliki, and Sadr

Filed under: Military,Politics — The Professor @ 8:51 am

Austin Bay takes apart piece-by-piece the media’s rush to judgment on recent events in Basra and elsewhere in Iraq.

Remember the Iraqi government’s Basra offensive, launched a month ago and quickly declared a failure by an overwhelming majority of the talk show and editorial commentators? “Basra Blunder” was the headline of a column that received wide distribution; the column described Iraqi Prime Minister Nouri al-Maliki as an inept, impulsive figure “in way over his head.”

Today, Maliki and Iraqis in general have earned the right to sneer at such instant and shallow media negativism, for Knights Charge (code name for the anti-Shia gang offensive in Basra and southern Iraq) is proving to be an extraordinarily significant political and military operation with rather heady long-term payoffs.

“Instant and shallow media negativism.” That’s hitting the nail on the head. Read the whole thing.

When Winning is Losing

Filed under: Military,Politics,Russia — The Professor @ 8:46 am

RFE/RL has a nice piece discussing the proposal that NATO expand beyond its current membership orientation to include democratic nations such as Japan and Australia, and change its orientation to act more proactively around the world. This is the kind of idea that drives Putin and his coterie into apoplexy. All of the whining about NATO going outside its traditional space (e.g., to Afghanistan) and expanding to include new members is grounded fundamentally in a fear that such an organization will render the UN–and the Russian veto in the Security Council–irrelevant. This would severely limit Russia’s ability to use its veto to thwart the initiatives of the US, Europe, and others in order achieve its largely negative goals.

If this happens, or if some other formal or informal concert of democratic nations develops, Putin and the Russian establishment will, again, have no one to blame but themselves. Russia’s reflexively oppositional policies, be it in Iran or Iraq or Kosovo or Bosnia or North Korea, have perhaps achieved some short term benefits. Russia matters. People must pay attention to Russia. Blah, blah. More substantively, oppositionism has actually encouraged and fomented conflict and unrest in places like Iraq and Iran and the Middle East generally, and encouraged North Korea, Serbia, Abkhazia, and Ossetia to resist the solution of conflicts. This has vexed the US and Europe, and has stymied the possibility for progress on myriad issues. Patience is running out. If the Security Council and other international bodies cannot facilitate negotiation and compromise, ideas like a super-NATO will become more attractive, and are more likely to be implemented. Just further evidence, as if it were needed, that Russia’s myopic policies may provide immediate gratification, but will inevitably lead to the very marginalization that its leaders dread.

Why One Should Be an Anti-Chekist, chapter 857

Filed under: Politics,Russia — The Professor @ 8:28 am

Here’s a lovely piece from Strategy Page:

Early on, it was believed that Storm [a highly destructive Botnet] was owned by a Russian criminal syndicate, but once more detailed proof was available, the Russian government refused to cooperate, treating Storm like some kind of secret military resource. And to the Russians, that’s apparently what Storm is. Meanwhile, the investigation indicates that the Storm crew have some American members, and now the search is on for them, or any other non-Russians who worked on Storm, and are not inside Russia.

China is known to play similar tricks, and Estonia was almost certainly the victim of a massive web assaulted coordinated from within Russia. If the Russian government was not involved, it has certainly done nothing–qui tacet consentit. Russia’s sheltering of internet criminals, and the serious possibility of government/military/intelligence complicity in their actions, is yet another indication of the chekists’ malign intent and effects.

Strategy Page also reports that the “stability” in Chechnya is based on a deal with the Devil, or more accurately, multiple deals with multiple Devils that could collapse into violence any minute:

In Chechnya, Russia finally established peace (at least by local standards) by putting the toughest warlords in charge. This is an old tactic, and has worked in the past. One problem was that the Russians did not want to divide the province into smaller parts, each run by a different warlord. So, as a compromise, Ramzan Kadyrov, and his allies, were put in charge of the Chechen Republic (province) government (via elections, of course.) Meanwhile, the other major gang, led by the three Yamadaev brothers (and clan), were put in charge of the Vostok Battalion. This outfit, with a strength of 300-400 men, is largely composed of rebels who have accepted the amnesty. To separate the Vostok Battalion from the government, it was attached to the Russian Army’s 42nd Motorized Rifle Division, which was stationed in Chechnya.

There was still friction between Kadyrov’s provincial police and counter-terror forces, and the Vostok Battalion (which was, technically, a counter-terror unit that worked for the army, not the provincial government.) The Vostok guys did not get along with the provincial forces, and in mid-April, weeks of growing tensions erupted into a daylong gun battle in the town of Gudermes. The Vostok Battalion called on the 42nd division to send reinforcements, which didn’t happen. Instead, the Russians prevented the provincial forces from getting reinforcements, and eventually got both sides to stop shooting. At least 18 were killed, and many more wounded.

Both sides accused each other of running criminal operations (kidnapping, extortion, prostitution and so on). Both sides were right, and the hostility was the result of turf battles. Who should be the chief criminal in what part of the province? The Russians have to sort all this out, otherwise, the fighting will resume.

Good luck with that.

Guns and Personal Independence

Filed under: Military,Politics — The Professor @ 8:18 am

The inimitable Mark Steyn riffs on the connection between personal independence and firearms ownership:

As for “gun-totin’,” large numbers of Americans tote guns because they’re assertive, self-reliant citizens, not docile subjects of a permanent governing class. The Second Amendment is philosophically consistent with the First Amendment, for which I’ve become more grateful since the Canadian Islamic Congress decided to sue me for “hate speech” up north. Both amendments embody the American view that liberty is not the gift of the state, and its defense cannot be outsourced exclusively to the government.

I think a healthy society needs both God and guns: it benefits from a belief in some kind of higher purpose to life on earth, and it requires a self-reliant citizenry. If you lack either of those twin props, you wind up with today’s Europe — a present-tense Eutopia mired in fatalism. A while back, I was struck by the words of Oscar van den Boogaard, a Dutch gay humanist (which is pretty much the trifecta of Eurocool). Reflecting on the Continent’s accelerating Islamification, he concluded that the jig was up for the Europe he loved, but what could he do? “I am not a warrior, but who is?” he shrugged. “I have never learned to fight for my freedom. I was only good at enjoying it.”

Sorry, it doesn’t work like that. If you don’t understand that there are times when you’ll have to fight for it, you won’t enjoy it for long. That’s what a lot of Keith Reade’s laundry list — “gun-totin’,” “military-lovin'” — boils down to. As for “gay-loathin,'” it’s Oscar van den Boogaard’s famously tolerant Amsterdam where gay-bashing is resurgent: the editor of the American gay paper the Washington Blade got beaten up in the streets on his last visit to the Netherlands.

God and guns. Maybe one day a viable society will find a magic cure-all that can do without both, but Big Government isn’t it. And even complacent liberal Democrats ought to be able to cast an eye across the ocean and see that. But then he did give the speech in San Francisco, a city demographically declining at a rate that qualifies it for EU membership. When it comes to parochial simpletons, you don’t need to go to Kansas.

In fact, the connection is quite an old one. In The Military Revolution and Political Change, Brian Downing (no not the former Angels and White Sox catcher) wrote:

A second military impetus to constitutional form came from militias. . . . Prevalent throughout England and Sweden, village levies demonstrate a close link between citizenship rights and military service. The village hundreds, themselves important in constitutional development in Scandinavia, levied infantry formations from the male population, who, in return, were given voice in popular assemblies. As if to underscore the relationship between military service and participation in local government, members of the assembly arrived with their weapons and indicated assent to a motion by raising their spears. Furthermore, contracts were made in a ritual during which each party demonstrated free status by bearing arms.

Read that, and you should have a better understanding of the real meaning of the phrase “a well organized militia” in the Second Amendment. There is a clear link between a self-reliant and independent citizenry and its ability to bear arms. Free and responsible people can carry arms. Societies in which this right is denied or sharply circumscribed are less free in many ways.

Nor is Downing alone. Max Weber wrote:

The basis of democratization is everywhere purely military in character; it lies in the rise of disciplined infantry, the hoplites of antiquity, the guild army of the middle ages. . . . Military discipline meant the triumph of democracy because the community wished and was compelled to secure the cooperation of the non-aristocratic masses and hence put arms, and along with arms, political power, into their hands.

April 21, 2008

The Grain Basis–Speculative Footprint?

Filed under: Commodities,Derivatives,Economics,Exchanges — The Professor @ 8:39 am

On Econbrowser, the University of Illinois’ Scott Irwin presents an interesting analysis of the remarkable developments in the grain/oilseed basis (the difference between the cash price and the futures price) in the past couple of years. Scott (reporting work done with colleagues Darrel Good, Phil Garcia, and Gene Kunda) shows that the basis has widened dramatically in recent years, and considers various explanations.

One he entertains, but does not strongly endorse, is that the entry of speculative interests, most notably long only funds, has driven this development. I am extremely skeptical that speculators can cause the basis to become abnormally wide during the delivery period. In particular, long only funds almost invariably roll their positions forward prior to the delivery month. (As an example, the GSCI Index rolls forward contracts that are about to expire the month prior to the delivery month.) Funds that roll forward prior to the delivery month obviously cannot be inflating prices during the delivery month.

So what is causing the periodic basis blowouts? Squeezes are one possibility. But, squeezes would be associated with (a) sharp drops in cash prices immediately following contract expiration, (b) very large deliveries, (c) a dramatic narrowing in the deferred basis (i.e., the difference between the cash price and the next-to-expire futures price), and (d) a widening of spreads between delivery locations (e.g., on the Illinois River) and non-delivery locations (e.g., central Iowa). The Irwin piece doesn’t mention whether these things have occurred.

As some of the Econbrowser commentors note, absent a squeeze, the wide basis would seem to represent a substantial profit opportunity to those operating the regular warehouses and shipping stations (the facilities where delivery actually occurs.) These firms, which include agbiz giants such as ADM and Cargill, could buy cash grain, sell futures, make delivery, and capture the basis. So why don’t they do so?

In essence, commodity trading is the business of making transformations in form, location, and time. The operators of river shipping stations regular for delivery against CBT soybean and corn contracts are in the business of transforming these products in space–from the farm to the barge on its way to the Gulf for export, primarily to Asia.

Of course firms incur costs to make this transformation. The question is: is the marginal cost of delivery so large that it equals the inflated basis? Irwin is skeptical.

Absent the exercise of market power by those who operate regular delivery facilities, however, the basis measures the marginal cost of making delivery. (By reducing throughput through their facilities to less than the competitive amount, the facilities operators would depress cash prices, elevate futures prices, and thereby cause the basis to widen to a level in excess of marginal cost. This would, however, likely require collusion among them.) So, absent evidence of manipulation or collusion, or some other exercise of market power, the basis will equal the marginal cost of the transformation from farm to barge; if the basis is above the marginal cost, competitive firms would sell futures, make delivery, and buy cash grain, thereby driving up the cash, driving down the futures, and narrowing the basis.

It should also be noted that there is somebody willing to pay the futures price and stand for delivery to obtain a shipping receipt. If the taker was not receiving something of value commensurate with the futures price, he would sell futures. (And I am very highly confident that it is not long only funds, or even hedge funds, that are standing on delivery.)

What could cause the marginal cost (and marginal value) of delivery to be so high? Here’s one conjecture that is worth some investigation. Consider corn and soybeans. These contracts are satisfied via delivery of shipping receipts. (I was on the committee that helped design these contracts in 1997.) The contract rules state that the owner of the facility issuing the shipping receipt give priority to the holders of these receipts in determining whose barges get loaded. That is, by issuing a shipping receipt, the owner of a shipping station on the Illinois River (which could be Cargill, ADM, Louis Dreyfus, Zen-Noh or one of a couple of other firms) gives up control of its facility. Put differently, by making delivery, the owner of a facility gives the taker of delivery the option to control the shipping receipt issuer’s facility. The taker has the option to choose the timing to load out the grain. The taker will behave so as to maximize the value of this option. That is, he will exercise the option to use the facility to load out grain when it is most valuable to do so–which is just when it is most costly for the operator of the facility to give up control. That is, the owner of the shipping receipt has the option to transform grain from farm to barge when that marketing opportunity is most valuable–which is just when the owner of the delivery facility would find it valuable too, but cannot exploit it because he has shorted a call on his facility by issuing a shipping receipt.

This option is valuable to the taker of delivery, and costly to the maker of delivery. Therefore, the regular firm that can issue shipping receipts will do so only if the futures price compensates it for the value of the option it provides to the taker of delivery. Asset and infrastructure owners in all commodity markets are becoming increasingly aware of the inherent optionality in physical assets used to transform commodities in space, time, and form. They are explicitly valuing these options, and making trading, investment, and resource allocation decisions based on these valuations. Thus, I would expect that operators of regular facilities take option values into account when making delivery decisions. Similarly, takers of delivery surely take these values into account.

Are option values sufficiently high to explain the wide basis? Skepticism is warranted, to be sure. It must be said that it has often been the case that “real options” theory has been used to rationalize wildly inflated valuations (see energy trading, circa 2000.) Nonetheless, it is possible that optionality has contributed to the level of, and variations in, the basis. If optionality is important, the basis should fluctuate with changes in volatility. Volatility of what? Volatility in the value and cost of making the transformation from farm to barge. Thus, higher volatility in export demand and higher volatility in domestic demand for processing should contribute to higher option values and higher basis levels. A spike in domestic processing demand (driven, e.g., by an increased demand for ethanol) reduces the derived demand for barge loading facilities; a drop in domestic processing demand increases the derived demand for these facilities. Export shocks have similar effects. Transportation cost shocks also matter. Changes in fuel prices that change the costs of shipping grain also affect the derived demand for these facilities. Variability in all these shocks, and the correlations between them, contribute to the volatility that can create option value.

Spreads–such as the basis–price bottlenecks in the transformation process. Therefore, bottlenecks are the first thing to look for when trying to explain anomalously large spreads. Sometimes these bottlenecks can be created through the opportunistic, strategic behavior of traders (as in a squeeze). Sometimes they result from unusually high demand, or disruptions in supply. The analysis presented herein suggests when there is uncertainty, spreads can price in contingent bottlenecks. Speculators will affect spreads only to the extent that they exacerbate or mitigate bottlenecks; given that most commodity funds do not participate in the delivery process, they cannot be contributing to the price of a delivery month bottleneck.

I would mention one historical case that comes to mind; it was discussed in Chapter 2 of my book (with Roger Kormendi and Phil Meguire), Grain Futures Markets: An Economic Appraisal. The cash futures delivery month basis became very wide in July, 1988 for corn, wheat, and soybeans. This was the time of a historic drought, and the operators of Chicago elevators brought in massive quantities of old crop grain in order to protect their hedges, knowing that they would not be able to attract large quantities after a shrunken 1988 harvest. Delivery warehouses were chock-full, and the Chicago cash-futures basis became very wide. In this case, the basis was pricing a bottleneck in storage space.

April 18, 2008

Putting the Lie in LIBOR

Filed under: Derivatives,Economics — The Professor @ 10:24 am

Today’s Wall Street Journal reports that the LIBOR rate spiked up on the British Bankers’ Association’s announcement that it was accelerating its investigation of whether banks have been systematically misreporting the LIBOR rates they pay to acquire funds on the interbank market.

This reminds me of the effect of the release of the Christie-Schultz study showing that NASDAQ dealers did not quote odd-eighth spreads, and speculating that this may have reflected collusion among the dealers. The narrowing of spreads upon release of the study was damning evidence that something was indeed amiss. The banks’ raising their reported LIBOR rates is similarly suspicious. Haven’t these guys heard the old line: “That’s my story and I’m sticking to it?” Changing stories when the old one is questioned is tantamount to confession.

My prediction: this will result in a class action bonanza, and perhaps other individual lawsuits. The CME’s Eurodollar futures contract–the largest in the world–is settled against LIBOR. Systematic downward biased reporting of LIBOR rates post-credit crisis could have cost those short Eurodollar futures immense sums. Similarly, those short swaps would have received smaller cash flows if LIBOR rate rates were misreported. The OTC swap markets are immense, and even a few basis points of skewing of the LIBOR rate could cost those short swaps huge amounts of money.

When will these people ever learn? And does it take the prospect of huge legal costs to get them to clean up their acts?

April 17, 2008

Here We Go Again

Filed under: Derivatives,Economics — The Professor @ 8:23 am

Today’s WSJ also carries a thorough article about growing doubts concerning the reliability of the widely-used LIBOR index. This is a big deal, in large part because trillions of dollars of notional amount of interest rate swaps have cash flows tied to LIBOR.

This story is becoming tediously familiar. Market participants rely extensively on price benchmarks created from the unverified reports of self-interested market participants. Rampant misreporting wreaked havoc in the energy business in the early-2000s. Similar stuff went on in the corporate bond and muni markets in the 1990s and before. A lot of the chaos in the credit derivatives and structured products derives from the lack of reliable pricing information.

The tragedy is that the technology certainly exists to collect, validate, and disseminate actual transaction information, thereby eliminating the need to rely on self-interested self-reporting. Especially in markets where more and more trades are taking place through electronic intermediaries as well as traditional voice brokers, massive amounts of data can be captured, verified, and streamed to users at very little cost.

The powers that be like the current system, however. Their preferences, though relevant, should not be determinative. There are serious public policy issues here, and potentially massive externality and public good problems. Markets discover prices, and price information is extremely valuable. Prices guide resource decisions. Moreover, regulators use price signals; in the LIBOR case, for instance, banks’ little white lies to the BBA (that collects the LIBOR data) may mask vulnerabilities in the banking system, meaning that regulators may be blindsided by the cracking of the next big financial institution.

I am not regulation-happy, by any means. For instance, I think that most of the hue and cry over the need for additional regulations in the derivatives markets is unadulterated BS. But here is a situation where (a) there is a clear benefit to a regulatory mandate to improve the quality of price information, and (b) the social costs are very small. It may well be that there are large private costs–a lack of transparency redounds to the benefit of big bank trading desks, and improved transparency will reduce trading profitability. But I have yet to see a credible argument made that these private costs represent anything but a transfer; indeed, real resources are expended to reap these transfers.

Congress and the regulators would do well to focus on this situation in LIBOR, and in other markets including energy and OTC credit products. The cost-benefit ratio of regulations that would improve the quality of price information, and centralize the dissemination of prices discovered in fragmented OTC markets is highly favorable. I would hope that regulators will pursue this with vigor, but fear that this will remain only a hope given the intense opposition of vested interests.

Core Theory and Lester Telser Get Some Well Deserved Recognition

Filed under: Economics — The Professor @ 7:59 am

Holman Jenkins’s column in today’s WSJ gives well-deserved props to my thesis advisor, Lester Telser. Jenkins rightly recognizes that Lester’s work on core theory is the key to understanding the airline industry’s chronic financial difficulties. The theory predicts that when demand is divisible, but costs are not, (a) it is often optimal to operate with excess capacity, but (b) when there is excess capacity, competitive pressures push prices to marginal costs that are not sufficient to cover even the avoidable costs (e.g., fuel) of operation, let alone make a contribution to capital costs. This fits the airline industry and its checkered history to a “T.”

Jenkins also makes the analogy between airlines and ocean shipping, the subject of my thesis; I showed that core theory can explain the pattern of adoption and non-adoption of collusive arrangements in the shipping market. He doesn’t mention my work, but he does cite the roughly contemporaneous research of Bil Sjostrom (a Chicago guy, though now in Ireland), which is a good thing. (In an email, Holman said he had tried to find an online version of my thesis. LOL! Good luck with that, since it was written BDE–Before the Digital Era.)

Core theory is a potentially valuable tool that provides numerous insights on developments in a variety of industries. It is also a tool that mainstream IO economists shun like the plague. Noncooperative game theory rules, and although I understand that it is in theory desirable to model everything as a non-cooperative game, this comes at too high a cost. Core theory makes shortcuts regarding how coalitions form and the process of negotiating deals within coalitions, and noncooperative game theorists snort derisively at this. But ALL theories make shortcuts. The issue is whether the shortcuts allow you to come to insights that are not possible if you don’t make them. Full noncooperative treatment of multi-agent bargaining situations are extremely difficult–so guess what, noncooperative game theorists make shortcuts! Sad thing is, many of these lead to observationally vacuous theories. In contrast, as the body of Lester’s work (with assists from Sjostrom, Bill Sharkey, George Bittlingmayer, and me) shows, core theory is anything but observationally vacuous. It actually helps explain the real world. What a concept!

I gave up (for the most part–a few things are still in inventory) working on core related stuff because it was too hard for a junior person to swim against the professional tide. The immediate reaction of most mainstream IO economists to a mention of core theory was an “are you nuts” look, and an effort to change the subject. What a shame, because, as the airline and shipping and other examples show, core theory often has far more interesting things to say than the Nth tweaking of noncooperative oligopoly models. In particular, it provides a ready method for exploring and exploiting the implications of cross sectional and time series variations in cost and demand structures for industrial structure. People in business know that cost structures matter a lot. Unfortunately, traditional noncooperative game theory-based IO almost completely ignores this issue.

Perhaps Jenkins’s article is a harbinger of a renewed interest in how costs and demand affect market structure. Here’s hoping. And if it is, core theory is the most promising way to examine this issue.

And, I am deeply appreciative to Holman for giving Lester Telser’s research some well-warranted visibility. Lester is one of the best economists of the last 50 years, but his iconoclasm and originality have, sadly, meant that he hasn’t received the recognition he deserves.

April 16, 2008

All Gall, No Sugar

Filed under: Military,Politics,Russia — The Professor @ 9:45 am

Vladimir Socor provides more evidence that Russia intends to bully Ukraine and Georgia into staying out of NATO. Putin and Lavrov, so sensitive to Russian territorial integrity, have more than once made irredentist threats against Ukraine, most notably making aggressive noises about eastern Ukraine and the Crimea. Important Duma members have mooted the possibility of renouncing the 1997 Russia-Ukraine interstate treaty guaranteeing the inviolability of Ukraine’s borders. On cue, Chief of the General Staff of Russian Armed Forces, General Yuriy Baluyevsky, threatened military actions. With respect to Georgia, Putin and Russia have made it very clear of their intention to exacerbate tensions in Abkhazia and South Ossetia.

Some in Russia–even some close to the Kremlin–recognize that this is foolish, and more likely to drive Ukraine and Georgia closer to NATO, rather than make them rethink their desire to join the alliance:

Some Kremlin consultants regard those open threats as counterproductive to Russia’s interests and purposes. Vyacheslav Nikonov (himself no stranger to questioning the territorial integrity of Russia’s neighbors) argues, for example, that Moscow’s rhetoric in the wake of NATO’s summit can only strengthen the resolve of governments in neighboring countries to seek protection from NATO (Interfax, April 11, 12). Sergei Karaganov, chairman of the Council on Foreign and Defense Policy (CFRS), a Kremlin advisory body, told the CFRS’s conference just held in Moscow that political measures would be more effective than military measures against Ukraine and Georgia if they moved closer to NATO. He recommended discretion and quiet planning for deploying such measures at an appropriate time (Interfax, April 12).

The Georgian and Ukrainian governments are not intimidated. Georgia’s Parliament Chair Nino Burjanadze, Minister of Foreign Affairs Davit Bakradze, and other officials have rejected such “interstate blackmail” and reaffirmed Georgia’s irreversible “national choice” to join NATO. These and other Georgian officials describe Moscow’s threats to Georgia and Ukraine as added vindication of the two governments’ goal to join NATO (Civil Georgia, Rustavi-2 TV, April 8-12).

In statements on April 9 and 11, the Ukrainian Ministry of Foreign Affairs said that Moscow’s questioning of Ukraine’s territorial integrity was “unacceptable” under international law. It asked the Russian government to observe the 1997 Russia-Ukraine interstate treaty, which also stipulated refraining from threats of using force (Interfax-Ukraine, April 12). Verkhovna Rada Chairman Arseny Yatseniuk called those threats “inexcusable,” and the Rada’s national security and defense committee chairman Anatoly Hrytsenko (a leading proponent of NATO membership) noted that Baluyevski’s ideas merely reflected those of Russia’s top political leadership (Interfax-Ukraine, April 11).

This is all pretty obvious. So obvious, in fact, that one wonders why Putin et al haven’t figured it out. Perhaps they only know one method to get their way; force and threats of force. This works admirably to intimidate their internal opponents to comply with their demands, but is ill-suited to the international stage. Putin’s internal opponents have no one to turn to because there is no alternative source of power within Russia. Ukraine and Georgia can find succor in NATO–the very thing that Putin wants to prevent. So, his chosen means are calculated to achieve the very opposite ends that he intends. It is very strange indeed that he and his henchmen are so limited in their imagination that they cannot see that their bluster is self-defeating.

There is another interesting tidbit in a RFE-RL article on the same subject:

During Ukraine’s 2004-05 Orange Revolution, Putin personally intervened on the side of then-Prime Minister Viktor Yanukovych, who led the “anti-Orange” camp. The failure of that heavy-handed intervention was presented around the world, including in Russia and Ukraine, as a major foreign-policy fiasco for Moscow. Media reports at the time indicated that the failed effort in Ukraine was coordinated by Putin’s then chief of staff, Dmitry Medvedev.

Rather difficult to square this “heavy-handed intervention” (which included poisoning of Viktor Yushchenko with dioxin) with Medvedev’s “liberal” image, dontcha think? He was either a willing collaborator who agreed with the ends and the means, or he was just Putin’s tool faithfully carrying out orders he found objectionable on either pragmatic or moral grounds. Either way, this history does not suggest that a Medvedev presidency in Putin’s shadow will result in a noticeable change in Russian foreign policy.

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