Streetwise Professor

October 26, 2008

Just Wonderin’ . . .

Filed under: Economics,Energy,Politics,Russia — The Professor @ 4:37 pm

How Gazprom’s financial travails will affect the prospects for Nordstream and South Stream.   Not too favorably, I’d wager.   (Though that depends on whose perspective you take.   Here, by “favorable” I mean “increasing the odds of completion.”)   By the same token, Europe and the US don’t have the money to throw at Nabucco, and are, shall we say, otherwise occupied with their own issues.   Thus, for the near future the Gas Wars may become just another Frozen Conflict.

One Good Link Deserves Another

Filed under: Economics,Politics — The Professor @ 4:10 pm

William Sjostrom, an American economist at the National University of Ireland in Cork (and South Side native and UC alum and fellow core theory/ocean shipping aficionado)   linked to my post on the Friedman Institute.   Bill has the goods on the intersection between the set of U of C faculty that belong to the Bill Ayres fan club and the set that has gone on record opposing the Institute.   Not that I am surprised in the least.

October 25, 2008

Russians Anonymous

Filed under: Economics,Politics,Russia — The Professor @ 9:15 pm

This article from the Wall Street Journal doesn’t include much that hasn’t been discussed here on SWP, but a couple of things caught my eye:

  • “President Dmitry Medvedev devoted his video-blog entry on the Kremlin’s Web site Thursday to the financial crisis, saying Russia could avoid the economic damage other countries have suffered from the crisis. ‘I will tell you honestly, Russia has not yet been caught in this whirlpool and has the opportunity to escape it.'” “Honestly”? Not caught in the whirlpool? Huh? If a 75 percent drop in the stock market, a banking crisis, and a 20 percent decline in the ruble isn’t a whirlpool, I’d hate to see what one really looks like. (And usually when somebody starts a sentence like this with “Honestly” you should immediately suspect the opposite.)
  • “Kremlin officials and state-run media have stressed that the U.S. is the epicenter of the financial crisis, and Russia’s financial system is fundamentally sound. Some Russians say they believe the crisis was manufactured to undermine Russia’s greatness in the same way the West undermined the Soviet Union.” The financial system is fundamentally sound. Right. Look, the system was overbanked to begin with. The banks are/were more heavily leveraged than Western banks, and recent reports suggest that a substantial fraction of those loans were to major natural resource firms that are suffering acutely as a result of the plunge in commodity prices–that’s not an encouraging sign. The stock prices of the big banks that have been the beneficiary of Kremlin largesse, VTB and especially Sberbank, are down hard; a lot harder than even most US or European banks. As for the statement that the West ginned up this crisis to undermine Russian “greatness”–what can I say? I am usually dubious of “some say” journalism–if somebody actually said it, tell us who did. But . . . the statement sounds all too real. The narcissism (yeah, we are soooooo obsessed with Russia that we’d tank our own economy just to spite those darned Russkies; the very thought that Russia might achieve greatness is something we just cannot abide); the paranoia; derzhavnost.

So, what is the response to an economic shock that is shaking Russia to its foundations? Denial and blame. Sounds like somebody needs to enter a 12 step program. Or maybe, 140 million somebodies, of whom I can name the two that should be first to speak at the meeting. “Hello, my name is Vlad . . . “; “Hi, my name is Dmitri . . . “

I Know There’s Some Leverage in There Somewhere

Filed under: Economics,Russia — The Professor @ 8:48 pm

I’m still poking around for information on financing of Russian real estate.   Maybe I’ll ping Richard Hainsworth of RusRating, but pending that, I came across this suggestive quote in an article by Roland Oliphant:

One of the hardest hit industries is the construction sector, where investors had relied on cheap credit from banks to fund projects. Maria Puziryova, who owns a small architecture firm, said that as credit dried up, investors have either defaulted on payments or “postponed” projects, leaving contractors short of cash to pay their employees. She is yet to fire anyone, and hopes she will not have to, but may not be able to delay doing so for long. “We have some reserves from our budget, but it won’t be enough to last through this crisis for three months. The majority of companies are firing their staff right now because they can foresee that they won’t have the finances to pay them,” she said.

This doesn’t relate to the financing of the purchase of houses, but I still find it hard to believe that such purchases are primarily equity financed, especially in pricey Moscow.

Today’s Reading

Filed under: Economics,Military,Politics,Russia — The Professor @ 8:37 pm

Is from Bruce Porter’s War and the Rise of the State (1994):

The Russian historian VasiliKlyuchevsky maintains that overtaking the West militarily was the undeviating goal of the entire Petrine reform program, even of those administrative innovations that were not directly military in nature. The obsession was passed on to his successors as well, catapulting Russia on a three-centuries-long course of Herculean efforts to keep pace with Western military advances. Because the Western powers interacted far more closely with one another in commerce, diplomacy and war–and because of the more rapid progress of capitalism, and later industrialization, in Western Europe–the West achieved rapid rates of technological innovation that Russia found difficult to match. The effort to catch up was a constant leitmotiv of Russian history from the time of Peter the Great onward. In attempting to match the West while rejecting Western values and refusing to liberalize Russian society, Russia only reinforced its autocratic course; state-driven innovation was substituted for social initiative, and despotism became an instrument for containing the social forces unleashed by modernization.

This passage struck me because a similar theme was raised by MIchel in one of his comments on “Russian Interlude.” I also found the last couple of sentences suggestive of current developments; rejection of Western values, refusal to liberalize, state driven innovation (e.g., Russian Technology Corporation, SC Rosnanotech, the declaration of anything that moves–even internet marketing companies–as “strategic”), the use of information control to “contain social forces. It all worked out so well before, so why not try it again?

Have at it, folks.

Snakes in Milton’s Paradise

Filed under: Economics,Politics — The Professor @ 10:25 am

Milton being Milton Friedman, and the University of Chicago was his intellectual paradise. In recent months, Friedman’s legacy has become the focus of a pitched political battle between the opponents and proponents of the establishment of a Milton Friedman Institute at the university.

The opponents argue that the MFI would inevitably support politically charged scholarship and promote a free market agenda at the expense of intellectual rigor and honesty, and that this is inconsistent with the mission of a leading university. They also express concern that the prestige of the institute will lead outsiders not intimately familiar with U of C to conclude that the university is a cabal of right wing ideologues. (As if. In my dreams.)

Coming from the academic left, charges of politically influenced scholarship are richer than Peking duck. I mean really people, look in the ‘effin mirror. Anyone who denies that political agendas–and mainly leftist ones–don’t pervade the humanities and social sciences is a liar. The only question is whether they lie to themselves, or only favor the great unwashed with their falsehoods.

In reality, every scholar in the social sciences brings a worldview, a mindset, a set of preconceptions to his or her research. They all have a frame of reference, a paradigm, that informs their research, guides their choice of problems, influences their choice of methods, and affects their interpretation of results and data. Every single one.

Can this result in bad scholarship? Indubitably. But not necessarily. Friedman himself is an exemplar of that. No honest person capable of evaluating Friedman’s work, even one who largely disagrees with him, can deny that he made immense contributions to economics. Even his more politically relevant writing was iconoclastic, and did not hew to any conventional political line. Most notably, his early and outspoken criticism of conscription and advocacy of an all volunteer military, and his consistent call for an abolition of drug laws hardly conformed to any conventional right-wing agenda.

There are other examples of “Chicago boys” letting their scholarly logic lead them to conclusions that don’t fit conventional political categories, or stereotypes of what the Chicago School stands for. Luigi Zingales of the supposedly ideological Graduate School of Business at UC recently advocated a mandated restructuring of bank capital structures (squeezing out equity holders and converting debt to equity), and cited the government’s abrogation of the gold clauses in private contracts during the depression as a precedent. Not to put myself in the same league as Zingales, let alone Friedman, but although I am a dyed-in-the-wool Chicago School guy of the old school variety that is largely a memory even at the modern Chicago, I publicly proposed the Humpty Dumpty option which, to put it mildly, is hardly what one would expect a Chicagoan to advocate.

But more importantly, there is a process–imperfect to be sure–to identify and criticize bad scholarship. Just as the American legal system relies on an adversarial process in which interested–biased–parties present their cases to fact finders who must sort through the contending claims in an attempt to determine the truth, through the publishing process and public debate and argument academics present their cases to their peers and the world at large. The process is combative and adversarial, and through this process there is a high likelihood (not a certainty, alas), that bad scholarship will be revealed as such.

Indeed, a bigger problem in academia is groupthink. (Richard Pipes’s discussion of this subject in his autobiography Vixi is quite illuminating.) The process of public debate and the dynamics of academic promotion and the job market too often induce conformity rather than independence and iconoclasm. There is no danger that a Milton Friedman Institute would dominate academic discourse in economics and public policy, and dictate adherence to a free-market party line to the profession. Indeed, even if–especially if–its opponents fears are realized it would be an exception to the prevailing academic currents in the social sciences generally, but even in economics particularly. Three Finger Brown could count the number of like-minded institutions on his pitching hand. That is not a good thing. Indeed, whereas at one time there were distinctive academic environments at different universities–Chicago economics was very different from its Cambridge counterpart, as an example–there is a stultifying homogeneity in academic economics today. An unabashed, distinctive free market-oriented institute would shake things up, stimulate debate, and in fact improve the rigor of the research and argumentation of those taking the opposing views. Competition has a way of doing that.

Ironically, this is especially important at the very time when events have led many to conclude that Friedman’s ideas about free markets were fundamentally wrong. Friedman was an outspoken critic of an overwhelming post-New Deal, post-Keynesian intellectual consensus, and thank God for that. His tireless work–and yes, at times polemicism–identified many chinks in the intellectual armor of the adherents of this consensus. Groupthink was alive and well then, and Friedman was essential in challenging it. As I have said before, the great lesson of the Great Depression is that all too many learned the wrong lessons from the Great Depression. More than any individual, Friedman laid bare these errors.

In the midst (I was going to say aftermath, but that would be wishful thinking) of the financial crisis, this consensus is on the verge of coalescing again. Although some of its criticisms of the operation of the market in recent years arguably have merit, many are likely fallacious. Given the magnitude of the stakes, it is imperative that there exists a place that supports research that challenges the consensus, and that protects scholars from professional pressures–and political pressures–that stifle debate and promote conformity. The MFI could–and should–serve as such a place. The adversarial process advances scholarship, knowledge, and understanding. To have an adversarial process, one needs adversaries. Thus, I hope that folks like John Cochrane and Lars Hansen and Bob Lucas stand firm and don’t let the university be buffaloed into neutering a Friedman institute, and distancing it from the Friedman legacy. (And I hope that Jim Heckman figures that out too, because he’s been showing troubling signs of waffling.)

One last thing. There should be no illusions that all of the opponents of the institute are high minded defenders of academic integrity. This is about power. Period. The academic left brooks no opposition on its march through the institutions. These people don’t like markets–the market for ideas especially. They more than believe the postmodernist claim that all discourse is a mask for power relations: They live it. There is an ideological component to this battle, sure enough, but the real ideologues are not the MFI’s defenders, but its critics. Just note that MFI’s most visible critic outside the university thinks Bill Ayres is just a swell guy. I would bet large money that this is not a minority view among the MFI’s attackers.

For those whose eyes may glaze over at what at first blush appears to be an intramural contest between eggheads at the University of Chicago, you should realize one thing: There is a larger national political lesson here. Hyde Park is the intellectual sea in which Barack Obama has swum for the past twenty-odd years, and the other fish include hard lefties that oppose the MFI. You can draw your own conclusions from that. Mine is: Post-partisan my foot. (I cleaned that up, BTW.)

October 23, 2008

The $64 Question

Filed under: Economics,Energy,Politics,Russia — The Professor @ 7:56 pm

Actually, the $63.90 question–that’s today’s price (per the WSJ) of Urals Med–is: how much stress will this lower oil price put on the Russian government? Flagship firms are feeling the bite in a major, major way. Gazprom, down 6.36 percent on the day, 48 percent on the month, and 63.8 percent on the year. Rosneft down 5.71 percent on the day, 49.8 percent on the month, and 61.3 percent on the year. Gazprom credit protection costs up 145 bp (about 13 percent) in a single day. (Couldn’t find similar figures on Rosneft.) Tatneft was down 40 percent.

These are the firms that are supposed to be the cash cows that fund all the goodies for the big shots and the country at large–and they are turning to the government in search of cash themselves. That situation is not sustainable, and will exacerbate the factional frictions–seething just below the surface even in high times–within the Russian ruling elite.

Moreover, high energy prices had masked the inefficiencies at these firms. It is easy to look smart when the price of your product is sky high. The real challenge of management is dealing with hard times. There is room for serious doubt as to whether the chekist cadres that run these companies are up to the task of navigating through such turbulent waters. They weren’t promoted for their management acumen, or their knowledge of the oil and gas business. Their skills are not the skills that are needed in current circumstances. High prices covered a multitude of sins, and those sins are about to be revealed in a big way. Which will only contribute to the backbiting and infighting.

And we needn’t revisit the implications for the Russian budget, and the political ramifications of that.

Regardez la deluge.

Information Management–Flirting with Catastrophe

Filed under: Economics,Politics,Russia — The Professor @ 7:37 pm

Paul Goble echoes a point made earlier here on SWP:

Not surprisingly, this imposition of such censorship [on reporting of the financial crisis] is yielding some Soviet-style results, including among other things the acceptance of the government’s version of reality by many, the belief among others that the government’s effort to hide the facts means that the situation is even worse than it is, and the re-appearance of Soviet-style anecdotes to discuss what is going on.

But the existence of greater freedom in some print media outlets and on the Internet not only means that many Russians continue to have access to information the government is trying to restrict but also that some of them are raising pointed questions about what is going on, actions that are is eroding still further the regime’s standing among these groups.

Russians who rely on government television channels for news about their country and the world, Anton Orekh pointed out in “Yezhednevniy zhurnal” this week, would know something about the financial crisis spreading around the world, but they would not know that it has also hit their own country hard (

Following Putin’s insistence that the Russian government is in control of the situation and instructions from the authorities not to use the word “crisis’ in discussing it, Russians who live in this virtual world who believe, as apparently do some in the Kremlin, that “only what is on television” really exists, thus have one picture of the world.

But those who use the Internet, read some of the more independent newspapers, or even take the time to look around are very much aware that the international financial crisis has hit Russia very hard, be it from the collapse of the stock market, the falling price of oil, or the decline in the ruble exchange rate.

( on Tuesday offered an hour by hour comparison of what has been on Russian central television and what appeared on the Internet about the crisis. According to the first, Russia has no problems but the United States is to blame. According to the latter, the situation affects Russia and is much more complicated (

. . . .

But others were less enthusiastic about what the Russian government and the stations under its control have been doing. Lev Lurye, a historian and television host said he could understand the desire to avoid panic, but he added that the failure to tell the population the whole story may make the situation worse not better.

Russians will learn what is really going on one way or another, he said, and consequently, “if experts on the television screens talked about the real situation and about the crisis and its projected course of development, then society would carry on more calmly.” By not doing so, television may lead many to draw apocalyptic conclusions.

Roman Mogilevsky, a sociologist who studies information policy, agreed that anyone who wants to learn the truth can. But the way Russian television has been behaving lately, he said, has “a certain similarity with ‘Swan Lake’ in 1991,” a reference to the playing of classical music when the coup against Mikhail Gorbachev was taking place.

And Aleksandr Nevrozov, a journalist, told that he was still uncertain as to what was really going on, but he said that he was “waiting for the moment when the president and premier will stand on the [Lenin] mausoleum [on Red Square] and in front of them financiers and stockbrokers will march by and shout; ‘We are ready for the crisis!'”

The Alfred E. Neumann-Bobby McFerrin (“Don’t Worry, Be Happy”) approach is yet another hard but brittle policy tool. As long as it works, things will cruise along pretty well. But if it doesn’t work–the results could be cataclysmic, with cascading panic and a complete loss of trust in Putin and the government. It is another instance where Putin et al attempt to exert total control, at the risk of a complete loss of control if things go wrong.

Better and Better

Filed under: Derivatives,Economics,Politics,Russia — The Professor @ 7:22 pm

Just a few of today’s dropping shoes:

  • S&P lowered its outlook on Russia.
  • Gold and foreign currency reserves fell $15 billion in the last week due mostly to the central bank’s attempts to defend the ruble–and the ruble continued to decline.
  • The cost of debt insurance on Russian government bonds rose 135 basis points, to US Treasuries plus 769 bp.
  • Sberbank shares fell 10 percent (they are now worth far less than $1, and have fallen more than 80 pct this year). MICEX suspended trading on the shares–the shares of the bank that the government has provided extensive support.
  • Credit default protection on Russia’s pride, Gazprom, rose 188 bp to 15.6(!) percent.
  • CDS protection on Sberbank rose to 13.4 percent.

I could go on, but you get the picture. Yet, at least in the domestic media, Putin and Medvedev continue their Alfred E. Neumann (What? Me Worry?) routine. It is very, very, sad. And it makes the probability of a blowup all the more likely.

Boy, I’m Glad He Cleared That Up!

Filed under: Commodities,Economics,Energy,Politics — The Professor @ 7:10 pm

According to this Interfax report, Vladimir Putin has provided assurances that investment in Russia’s energy sector is risk free!:

Investment in Russian oil, gas sector risk-free, Putin tells Shell CEO

Moscow, 20 October: Russian Prime Minister Vladimir Putin has assured Shell chief executive Jeroen van der Veer that investment in the Russian oil and gas industry carries no risks.

“These concerns can be lifted,” Putin said, commenting on the Shell CEO’s view that Russia had to guarantee good payback terms when foreign companies developed Russian deposits.

“In Jackpot, you can win or lose, and more often than not you lose. But if we draw up a system in which we can fully repay the spending on exploration and not refuse to reimburse you for developing these deposits, then there will be no losses, and there’ll be an opportunity to win big,” Putin said, commenting on the Shell CEO’s remarks.

“We intend to continue to improve regulatory standards in the sphere of natural resources,” the prime minister said.

For his part, Russian First Deputy Prime Minister Igor Shuvalov explained the gist of the discussion between Putin and Van der Veer: “Jackpot carries high investment risks. Our head of government stressed that investment carries no risks.”

I feel so much better now!

I mean really, how is one to interpret to such Orwellian statements? Is it that Putin has an extremely sadistic sense of humor and he just wanted to torment Van der Veer, one his previous victims (Sakhalin II)? Or, perhaps, making such outlandish assertions and then standing back and to observe that nobody contradicts him validates his sense of absolute power. Or maybe, just maybe, he has stared into an (economic) void, and has come to the realization that the vision that the world was at his (and Russia’s feet) when oil was $140+/bbl was chimerical; that his previous cockiness was nothing but a case of the Cocaine Blues; and that Russia desperately needs the likes of Shell and other foreign investors.

Even if the last conjecture is right, hopefully Shell and BP and others will think “once burned, twice–no thrice–shy.” For if Vlad has turned on a dime once, he can do it again. And once somebody has put their money in assets–like oil wells–that cannot be picked up and moved out of Russia, he will have no compunction at expropriating yet again. And he will do so exactly at the moment when the investments are most valuable.

So, Mr. Van der Veer, and your fellow energy CEOs: Don’t be a sucker.

« Previous PageNext Page »

Powered by WordPress