Streetwise Professor

April 20, 2009

Ad Hoc “Anti-Crisis Psychotherapy” as a (Poor) Substitute for Economic Coherence

Filed under: Financial crisis,Politics,Russia — The Professor @ 9:48 pm

Pavel Baev has an interesting article in today’s Eurasia Daily Monitor.  He echoes several SWP themes.  (Indeed, Baev and I have been arguing along very similar lines for months.)  Key bits from his piece:

Manufacturing, for instance, registered a 20 percent decline in the first quarter of the year. Prime Minster Vladimir Putin tried to provide some reassurance for workers in the Tver railcar plant last week, but responding to a direct question about Kudrin’s forecasts he said only that the Finance Minister was “under a lot of stress” and had to protect himself from pressure (Kommersant, April 16). The high point in that “anti-crisis psychotherapy session” was Putin saying he had personally prevented the purchase of railcars from China.

Such personally-delivered stimulus packages for particular enterprises destroys the coherence of Kudrin’s fiscal course, which renders Russia’s anti-crisis policy far less efficient compared with the main world economies (Nezavisimaya Gazeta, April 17). The Consumer Confidence Index dropped accordingly to minus 35 percent in the first quarter and 48 percent of respondents expected further negative economic developments (PRIME-TASS, April 8). It is not only the middle-class that is experiencing a massive migration from the “upper” to the “lower” categories; the super-rich are also suffering: according to the Russian Forbes on April 16, the “golden hundred” of the richest individuals is now worth only $124 billion, having lost $380 billion in one year.

The simmering discontent among the most politically active and influential social groups worries Medvedev far more than rising unemployment, which compels experimenting with new ways of management and governance. His aides whisper, for instance, that the giant state corporations created within the past few years are no longer viable in the recession and must be compelled to open up their accounts before undergoing radical “sanitation” (RBC Daily, April 17). Putin, on the contrary, has taken a defensive stance insisting that his economic model of ever-increasing state control is sound and provides the best protection against the current turbulence -which will soon blow over. His own cabinet is deeply split over the priorities in budget and extra-budget funding, so that ministers declare diverging courses and their aides resort to in-fighting (Nezavisimaya Gazeta, April 16). This uncharacteristic lack of discipline within Putin’s team betrays more than his doubts about choosing a way out of the crisis; his very ability to control the forever feuding elite clans is also in doubt.

The natural response to any disturbance in the system of power created by Putin is to squash the opposition and squeeze the insufficiently loyal oligarchs; the enforcement mechanism, however, has become so corrupt that forceful responses cannot be mobilized. Complaining bitterly -and futilely- about corruption, Medvedev probably believes that the system he presides over has become incapable of acting on its own logic. Hence the hesitant steps towards a neo-perestroika policy aimed at ensuring that “the state and civil society can act in harmony and together,” as he told NTV in an interview on April 12. It is a different type of “harmony”‘ than the effective exclusion of society from politics that flourished in the autumnal years of Putin’s “era.” It is not certain that Medvedev will succeed in engaging the more dynamic parts of the middle classes in a new anti-crisis social contract, and the readers of Novaya Gazeta have good reasons to doubt that he will keep his part of the bargain while Putin looms over his less-than-heroic figure. Smooth words come easy to the accidental leader who cannot hide behind the fiction of “independence of the court” from the simple but stark dilemma: if Mikhail Khodorkovsky and Platon Lebedev are acquitted, it is all over for “Putinism.”

Putin’s ad hoc interventions are truly bizarre.  “Destroy[ing] the coherence” of Russian economic policy is an understatement.  Moreover, the adverse consequences will not be limited to their near term effects on the crisis response.  They will have the deleterious long term effect of cementing Russia’s reputation for arbitrary policy, thereby tending to deter plans by foreign firms to enter markets.  Case in point, this Bloomberg story about the effect of Putin’s Pull-a-Tariff-Out-of-My-A. . I mean Hat policies on Caterpillar:

Prime MinisterVladimir Putin‘s trade measures are starting to keep  Deere & Co.  combines andCaterpillar Inc.  trucks out of Russian wheat fields and coal mines, dimming the companies’ prospects for expansion abroad.

Deere and Caterpillar, reeling from the longest U.S. recession in a quarter century, were the companies most affected by loan restrictions and tariffs of as much as 25 percent that Putin imposed this year, according to a U.S. Chamber of Commerce survey of the top 50 American businesses operating in Russia.

Putin is trying to boost Russian industries with tariffs on everything from drugs to farm equipment as declining oil revenue saps the nation’s economy. The policies are hurting sales by Caterpillar,  Deere  and  Agco Corp.  in a market where revenue was forecast to rise as much as sixfold in the next decade.

The main casualty–Russian agricultural and industrial productivity.  Actions such as these are rob-Peter-to-pay-Pavel policies.  

But back to Baev.  I think his portrait of a leadership in disarray is probably realistic.  Putin is so clearly out of his depth in these matters, but he still wields tremendous authority.  More reasonable, knowledgeable people are trying to steer a saner course, but are in grave risk of foundering on the shoals of Putin’s authority.  But, an inflexible, out-of-touch leadership runs the risk of initiating a spiral of collapse.  (See Romanov, Nicholas II.)  

I know there are many smart economists in Russia who recognize that Rosneft and Gazprom and other “giant state corporations” are economic monstrosities that should not survive, that are a drag on the economy, and are hoping that the current crisis will hasten their demise.  But they are also the gravy trains for the siloviki, who are unlikely to go quietly into that good night.  

So the ingredients for a cataclysm are there.  A befuddled, out-of-its-depth leadership clinging to its privileges, power and wealth–including a large cohort of very scary, violent, amoral people.  A growing number of people in government and some business who recognize that the Putin course is erratic and insane, and who will try to work around it, leading to policy clashes and contradictions.  Oligarchs seeing their empires crumble, who are weighing the choice between risking the fate of Khodorkovsky and economic ruin.  Regional governments facing their own desperate straits.  A currently passive populace, but one which facing economic devastation.  

Putin’s instinct–and his only likely way to remain on top–is surely to crack down further while simultaneously throwing around what crumbs he has left to pacify increasingly unsettled constituents.  But there are so many things outside of his control.  He will try to use authority to keep things in order, but that authority is not limitless.  And what’s more, as soon as his control looks tenuous; as soon as the incoherence and extemporized nature of his actions become widely understood; the equilibrium can shift very dramatically.  The oligarchs will fear him less.  The regional governors will fear him less.  The bureaucrats will fear him less.  The people will fear him less.  Indeed, as his incapacity to deal with the situation becomes apparent; as the incoherence of his policies becomes more widely understood; as the disconnection between the reality of the situation and his delusional appraisal of it becomes even more pronounced; as the smallness and irrelevance of his attempts to blame-it-on-anybody-but-Russia become increasingly tiresome; he risks something that is deadly to a strongman: widespread ridicule.  A coalescence of these forces could–and I am tempted to say will–lead to a stunning collapse of Putin and Putinism.

His only hope is a world economic recovery that pulls Russia along with it.  But that is not in immediate prospect, and anyways, the dynamic in Russia is already so unfavorable that even a world recovery may be too little and too late to save the system.

Which raises the question: What will replace it?  I fear that the answers to those questions are not happy ones.

What the Oil Market is Saying

Filed under: Commodities,Economics,Energy,Financial crisis — The Professor @ 8:42 pm

Oil was down almost 10 percent today, following the decline in equities.  But that’s not what I find intriguing.  What I find intriguing is that the price of oil was able to rise above $50/bbl, and stay there for awhile, despite extremely weak fundamentals.

These two FT Alphaville blog posts set out the story in detail.  They document continuing increases in inventories.  Specifically, both crude inventories and refined product inventories have been continuing their increase even as prices have inched upwards.  The increase in US refined plus crude stocks is a 4 standard deviation move–bigger than observed in almost 30 years.  Tanker rates are falling even as firms are chartering both clean and dirty tankers to store products and crude.  Refinery capacity utilization is at very low levels.

In a conventional theory-of-storage model, the increase in inventories would reflect a decline in demand/increase in supply that would also result in lower prices; the accumulation of inventories would slow, but not stop, the decline in prices.  Given that supply has actually dropped (due to OPEC output cuts), this would mean that demand has continued its precipitous drop.  

In the past I’ve argued that inventories and prices can move in the same direction when fundamental uncertainty increases.  An increase in fundamental volatility leads to increases in precautionary inventory holding.  The only way to accommodate this demand for higher inventories is to raise prices.

But that doesn’t seem to be a plausible explanation of what’s been happening in the last couple of months.  Some indicators of fundamental uncertainty, such as the VIX equity volatility index and credit spreads have actually eased in past months while the oil price was rising.  

So that leads me to another explanation, similar to the one advanced by the Diapason Commodities guy quoted in one of the FT pieces: Inflationary expectations.    

So what was behind the recent strength in crude prices? According to Corrigan most likely the same thing that was behind the equity rally – people investing in commodities and ‘real assets’ as an inflation hedge. As he explains:

This inflationary policy is already beginning to push people towards increasing their exposure to real assets — hence the rise in commodities and stocks   – a phenomenon very similar   to that which took place after the American devaluation of 1933, well ahead of the recovery in real output.  

Given the dismal news about the real economy, that’s the only thing that makes sense to me (in both the equities and commodities markets).  (Though Chinese strategic inventory accumulation is probably playing a role too.  That could be seen as inflation related too, however, as it involves the Chinese exchanging nominal claims, US dollar denominated securities, for real commodities.  That is a reasonable response to inflationary expectations; tends to reduce the demand for dollars; and cause an appreciation in the dollar prices of real commodities.  It is a Chinese contribution to quantitative easing.)  

You might say: “But the CPI and PPI actually dropped last month.  Inflation is the least of our worries: deflation is a more pressing concern.”  I would argue that these price measures are backwards looking; asset and commodity markets are forward looking.  And looking forward, there are many signs pointing to a potential spike in inflation.  It is not a probability one event, but the huge monetary overhang poses acute challenges to the Fed, and other central banks that have engaged in quantitative easing.  If they do not walk a very fine line, inflation could very well flare up.  And the line will be very hard to walk, because of the politicization of the Fed and other central banks, and the inherent credibility problem in anti-inflation policies as economies pull out of recession/depression/banana (a reference to Alfred Kahn’s quip in the 70s).  Therefore, it is not surprising to me that the dollar value of equities and commodities has strengthened somewhat recently.  

I will be keeping an eye on the connection between commodity prices and measures of fundamentals, especially inventories and capacity utilization.  Bearish fundamentals plus firming prices are a strong signal of potential stagflation.

A brief comment about today’s equity selloff.  I was actually surprised at the rally in stocks in recent weeks on bank earnings news.  I was surprised because I thought these earnings announcements said nothing about the main issue involving banks–the values of the assets in their portfolios.  Making money trading in an illiquid environment with wide bid ask spreads (because many competitors have exited the market), and intermediating in a market with a relatively steep term structure, is no surprise.  But what inquiring minds want to know is whether the banks are really solvent or not, and the answer to that question depends on the performance of all the bad assets.  It appears that today’s decline was related directly to inferences about the continued, and perhaps increasing, severity of this problem.  Inferences derived from reading between the lines in various bank earnings statements.  

For my part, I am paying little attention to bank earnings.  I am looking for clues about solvency.  And today suggests that the market is adopting a similar approach.

Well Said

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 7:11 pm

A succinct description of the fundamental flaw of autocratic regimes.

This is by George Handlery, and is about Russia specifically:

Could it be? The instinct-driven policy objective of Russia for more recognition as a major world power, is realizable only if pursued by system akin to that of the Tsars or the Commissars. In this case, the limited existing resources allotted by lacking development   (not the country’s unused potential) need to be enhanced by dictatorial methods. These can concentrate the available means to overcome qualitative handicaps. Essentially, like the sun’s ray’s are concentrated by a magnifying glass, “limited” resources become bundled by dictatorship to achieve maximal effect at a chosen point. The problem with using autocracy as a multiplier of laggard means pit against an advanced opponent, are twofold. (A) It diverts energies from stimulating general internal advancement for the pursuit of domination abroad. Thereby the developmental lag is perpetuated. (B) Playing a power-role not commensurate to the country’s comparative modernization, and not corresponding to her development, risks destroying the system. (World War One, Cold War.)

I’ve said very similar things before, just never so well, or so pithily.  

There are no better illustrations of Handerly’s point than Russia’s insistence on (a) re-asserting its dominance in the near abroad (see, for instance, this article about a foiled Nashi influence (provocation?) operation in Georgia), and (b) increasing defense spending dramatically at a time when the Finance Ministry sees the necessity of cutting the budget between 10 and 30(!) percent in 2010.  Talk about attempts to ” to play a power-role  not commensurate to the country’s comparative modernization, and not corresponding to her development” that  “risks  destroying the system.”

Like I say–like the Bourbons: learned nothing, forgot nothing.  Or, to use a military expression: reinforcing failure (a cardinal military sin).  And doing so at a time when every resource is desperately needed to fight a crisis at home.  

On the one hand, this is stunningly bizarre.  On the other, as Handerly suggests, it is hardwired into the authoritarian mindset.  And we’ve seen of course–multiple times, in fact–how this plays out.  It isn’t pretty.

April 17, 2009

Stressed Out

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 4:19 pm

Not me.  Alexei Kudrin.  Putin says so, as a way of dismissing Kudrin’s increasing pessimism, which contradicts Putin’s happy talk on the Russian economy.  Given Kudrin’s vital role as Horatius at the Gate; the fact that he is one of the few economically literate people in the Russian leadership; and the fact that various siloviki have had their knives out for Kudrin and their eyes on the treasures he guards; this could be a very important development.

This comes as evidence of strains and severe differences of opinion  within the Russian leadership  over the economy and measures to address it are becoming very public.  The most obvious evidence comes from the Reuters article linked above, headlined “Russian Ministers Clash Over Crisis Time Tax Plans”:

Russia’s top economic decision makers clashed on Wednesday over whether some taxes should be cut to help business through the first recession in a decade, or whether the budget cannot afford to lose any more revenue.

Officials painted a fairly glum picture of the oil-dominated economy, saying the economy could contract more than 7 percent in the first quarter of this year, while consumption is falling and the difficult times could last for the next three years.

In an early indication of a significant downturn, Russia’s statistics service later reported a 13.7 percent industrial output slump in March in year-on-year terms, the second biggest decline since 2002.

President Dmitry Medvedev has urged officials to present a united front on the crisis, but cracks are starting to show.

. . . .

The fiscally prudent Kudrin on Tuesday warned Russia should not expect a return of the favorable conditions it has enjoyed in the recent years for the next “five, 10, 20 or 50 years.”

On Wednesday, Kudrin warned tax cuts would further undermine falling budget revenues in such a climate.

But the Economy Ministry, which focuses on longer-term development, and an influential Kremlin aide said lower levies may be needed to maintain competitiveness. “For business as a whole … I agree, we should not increase the financial burden, not even in 2011,” top Kremlin economic aide Arkady Dvorkovich told the Russian Union of Industrialists and Entrepreneurs (RSPP).

. . . .

“This is my personal forecast … but I think that some decision to cut VAT could be expected from 2011,” he said.

Economy Minister Elvira Nabiullina echoed his comments.

“We think we should not increase the total tax burden on businesses, especially at the time of crisis,” she told the same meeting. “We can propose reforming the tax system … We need to stimulate spending on innovation, social spending.”


Finance Minister Kudrin, who spoke after Dvorkovich and Nabiullina, discarded their suggestions as populist.

“If we talk about the coming years, then we have not completed the analysis of how the government will function in the conditions of new revenues,” Kudrin said.

“I think my colleagues did not calculate, did not weigh up and made statements for the public.”

He added that the 2009 budget revenues forecasts now looked “optimistic,” while the economic contraction for the first three months of the year could be deeper than the expected 7 percent.

Earlier this week, Kudrin said Russia should slash its 2010 budget revenue forecast by more than 30 percent and cut planned expenditures by 13 percent, or $39 billion. He also said the state could borrow abroad for the first time in a decade.

The background for this, alluded to in the article, is that (a) the GDP contraction in the first quarter was more severe than anticipated, perhaps greater than 7 percent, (b) industrial production contracted by a larger than expected 13.7 percent year-on-year in March  (the industrial production decline was more  severe than forecasts by economists polled by Bloomberg (12.5) and reported in  Forbes  (12.3 percent)),and (c) dire alarums have been heard emanating from three major Russian banks, VTB, Sberbank, and Alfa Bank, about the prospects for a tsunami of loan defaults in the coming months.  

It should also be noted that there are those among the siloviki who agree with Kudrin’s gloomy prognosis:

Railway cargo turnover, a key indicator of the trend in industry, fell 15.8 percent in March from a year earlier, compared with a 26 percent fall in January,  Vladimir Yakunin, chief executive officer at rail monopoly OAO Russian Railways, said in a Bloomberg Television interview on April 6.

“We are only at the beginning of the crisis,” Yakunin said.

Yakunin’s OAO Russian Railways is apparently in a dispute with steelmakers over agreements to purchase rails.  OAO RR wants to cut back purchases dramatically.  The steelmakers claim they have a deal.

The debate between Kudrin,  Dvorkovich and Nabiullina illustrates Russia’s policy dilemmas: they may all be right.  Kudrin may be right in the sense that the weak economy so imperils the government’s financial condition that it cannot afford a tax cut.  Dvorkovich and Nabiullina may be right in the sense that without some relief, Russian companies will struggle to survive.  Like a failing city with a plummeting tax base (e.g., Detroit, St. Louis), Russia can’t afford to cut taxes, and it can’t afford to keep them high, either.  

But the most interesting aspects of this are two.  One is that Medvedev has been relatively silent on these issues, his most notable remarks of late being some blather about the prosperity-freedom trade-off debate.  That is, for the most part, in the realm of political philosophy, and suggests some detachment from dealing with the immediate crisis.  

The other aspect is even more interesting than Medvedev’s apparent detachment.  That is Putin’s remark about Kudrin’s stress.  Maybe it was just a way of deflecting questions about the substance of Kudrin’s prognosis for the Russian economy.  But, given that it was not uncommon for high level Soviet officials who had become embarrassing in some way to “retire” for health reasons, there may be much more to it than that.  The “stress” remark lays the groundwork for Putin to shunt aside Kudrin if the differences between Putin’s assessment and Kudrin’s evokes so much cognitive dissonance in Russia that the Finance Minister’s continued presence becomes intolerable to the Prime Minister.  

Whether this happens or not is partly dependent on the path of the Russian economy, and government finances, in the coming weeks and months.   Stabilization or improvement would raise the odds of Kudrin’s survival.  But if his predictions turn out to be accurate, over the side he could go.  Thus, his departure would be a signal of the dire straits of the Russian economy, while at the same time removing from the scene the person most capable of handling these economic trials.  This would represent a double disaster for Russia, so it bears close watching.

April 14, 2009

Kudrin Channels SWP, Part II

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:01 pm

Today’s WSJ reports that Russian Finance Minister Alexei Kudrin is publicly acknowledging that Russia’s economic straits are far more dire than the government has been willing to admit heretofore:

Russia’s rapid economic decline may force the country to return to international debt markets next year to fund its budget deficit and pave the way for corporate borrowing, Finance Minister Alexei Kudrin said Tuesday.

Such a move would be Russia’s first foreign borrowing after a decade marked by buoyant growth. But a recent, rapid reversal into recession — which was fueled by a plunge in oil prices — and the deterioration of the global economy is putting pressure on the state coffers and leaving companies struggling to refinance foreign debts.

“It will take us several years to get out of this crisis,” Mr. Kudrin said during a finance ministry board meeting.

“We need to look at the possibility of entering the external market already in 2010, and this year to hold a roadshow…which will allow international investors to get better acquainted with our aims and plans,” Mr. Kudrin told the meeting, according to Reuters.

He added that the government’s forecast for a 2.2% contraction in gross domestic product this year already seems “optimistic.”

I agree that the 2.2 percent contraction forecast is indeed optimistic, and have been expressing that opinion for several months now, thereby eliciting the scorn of some commentors (the scorniest of whom has apparently vamoosed.  I wonder why?)  

Kudrin does not say so specifically, at least he is not reported to have said so by the WSJ, but the oft-revised government budget is predicated on that 2.2 percent decline in GDP.  Moreover, if that forecast is no longer operative, neither is the 7.5 percent-8 percent of GDP deficit number; a figure that Kudrin has said was a red line.  This puts further stress on Russian policymakers, who have fewer tools at their disposal than their counterparts in the US or Japan or the EU.  

Given these circumstances, Kudrin’s position is not an enviable one.  The administration is apparently concerned about the deficit:

The issue of public debt remains sensitive for the Kremlin.

On Tuesday, President Dmitry Medvedev’s top economic adviser, Arkady Dvorkovich, started a debate over the 2010 budget by saying the forecast of a 5% deficit is dangerous for macroeconomic stability.

“It [the deficit] should be lower,” Mr. Dvorkovich said, urging the Finance Ministry to work on cutting it.

An 8 percent of GDP deficit (predicated on the current forecast) seems unachievable if the economy indeed contracts by more than 2.2 percent as Kudrin deems likely, so a 5 percent deficit would require deep spending cuts–cuts that would conflict with Putin’s plan for a fiscal stimulus totaling $90 billion (3 trillion rubles.)  How Kudrin can square that circle is beyond me.  (This also suggests the potential for a very testy interaction between Medvedev and Putin.  If his chief economic advisor is calling for a 5 percent deficit, and that means that Medvedev is of the same mind, there would be a clear potential for conflict between Putin and Medvedev.)  

The WSJ article contains one odd statement about the purpose of Russian government borrowing:

Russia might tap the markets next year, issuing as much as $5 billion in Eurobonds, with maturities of three to five years, Konstantin Vyshkovsky, the head of the finance ministry’s debt department, told reporters.

“What is important is not so much the ability to receive funds to cover the budget deficit as it is to pave the road for corporate borrowers,” Mr. Vyshkovsky said.

What “pav[ing] the road for corporate borrowers” means, I have no idea.  If anything, increased government foreign borrowing would tend to crowd out private  foreign  borrowing.  Foreign lenders take some comfort in the fact that Russian reserves are sufficient–barely, for now–to cover private foreign borrowing. Government borrowing will represent a priority claim on those reserves, making foreign lenders less confident in the ability of Russian corporations to service foreign currency borrowing.  Perhaps Vyshkovsky is intimating that some of the government borrowing will be used to pay down private corporate debt, but this would contradict other recent policy pronouncements.

I cannot leave this subject without quoting Putin’s latest rant on the subject (from the Bloomberg article linked above):

“We managed to avoid the worst scenario,” Putin said. “At the same time, 2009 will be very hard for us.”

The government abandoned the three-year budget it approved last year and has delayed passing the 2009 spending bill as it debates ways to minimize the first economic contraction in a decade. The government and central bank have already spent or pledged more than $150 billion in emergency funding since September to cope with the country’s worst financial crisis since the debt default and ruble devaluation of 1998.

“Could Russia have avoided the crisis or completely escaped its negative effects?” Putin said in the State Duma. “Of course not, it’s impossible, an illusion. The problems didn’t arise here and they weren’t our fault.”

That’s funny.  Putin now asserts that escaping the negative effects of a world crisis was “impossible, an illusion.”  Of course, some people (ahem) were saying that in September, and October, and November, when Putin was actively promoting an illusion–the illusion of Russia as an island of stability in stormy world economic seas.  

Even more funny, in a sick sort of way, is the continued whinging about “problems didn’t arise here and they weren’t our fault.”  To some extent that’s true, but it’s not completely true.  The policy choices made–or not made–when Russia was “on top of the world, Ma” and oil prices were climbing steadily made Russia acutely vulnerable to a world contraction.  That is, by its fundamental nature Russia is a high beta country due to its resource dependence, but  Putin fostered policies that reinforced that feature.  Moreover, his undermining of property rights and the rule of law made the financial system in particular more brittle, and encouraged capital flight when things turned bad.  

So, Putin misdiagnosed Russia’s vulnerability to “things arising” outside of Russia, and implemented policies that increased that vulnerability.  Moreover, his apparently genuine belief in things that he now acknowledges to be “illusions” interfered with the creation of a more constructive policy when the collapse came.    

Just why, objectively, should he continue to be so popular in Russia?

Yes, Russia is Messing With OPEC (And I cleaned that up)

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 6:40 pm

Commentor lisa castigates me for illogic/inconsistency in my analysis of Russian oil export policy, and what I claim is its serial dishonesty with OPEC.  You’re wrong, lisa, and I have the data to prove it.

In a nutshell, my analysis was: (a) that Russia was not choosing its oil export duty to discourage exports as part of a cooperative strategy with OPEC to raise world oil prices, (b) that to the contrary, Russia was choosing its oil export duty to maximize revenues, and take advantage of OPEC’s output cuts by selling as much oil as possible at the higher price produced by OPEC output cuts, and hence (c) Russia’s professions of solidarity with OPEC are deeply dishonest.  

From today’s Bloomberg:

OPEC agreed at three meetings last year to cut output by 4.2 million barrels a day, a 14 percent reduction to 24.845 million, as prices fell from a record $147.27 on July 11. The group reduced pumping by 1.2 percent in March, according to a Bloomberg News survey of oil companies, producers and analysts. The 11 members with quotas produced 25.06 million barrels.

As shipments declined, deliveries from exporters that aren’t in OPEC rose by 670,000 barrels a day in January. Russian overall exports climbed 6.3 percent in February and 2.2 percent in March, according to the Energy Ministry. Brazilian total exports more than doubled in both February and March, according to Brazil’s Trade Ministry.

The IEA has similar data for the period over which OPEC was cutting.  According to the IEA March report (the April report is subscription only), in December, Crude seaborne exports from the former Soviet Union (FSU) rose 410m bbl/d over November (ex BTC pipeline, which is mainly Azeri exports).  Total exports ex BTC rose 640m bbl/d (this includes some Kazahk exports via the Druzhba pipeline) in December vs. November.  Transneft exports rose 590m bbl/d.  In January, total seaborne exports ex BTC rose 150m bbl/d relative to December, and total exports ex BTC rose 170m bbl/d.  Transneft exports fell slightly.  

Russian product exports also rose.  Total exports of refined products from the FSU rose 150m bbl/d Nov-Dec, and another 150M bbl/d Dec-Jan.  Russian exports increased more than this, because, as IEA states, Ukraine and Belarus banned fuel oil exports during the Gas War.  

IEA also states that Russia oil production increased in January.  At the same time Russian oil output was nudging upwards, domestic consumption was falling dramatically due to the dramatically weakening Russian economy (a pronounced weakening that the IEA report remarks about several times):

Given the worsening economic outlook for Russia coupled with dismal oil demand readings for January, we have sharply revised down our oil demand prognosis for 2009.  Total oil product demand contracted 7.2 percent year-on-year in January, according to preliminary data, with all product categories bar gasoline posting sharp losses.  In particular, LPG, gasoil, naptha, and residual fuel oil–barometers of industrial production and power demand–shrank by 21.2%, 7.3%, 5.1%, and 4.0% year-on-year, respectively.  Moreover, a product associated with both consumer confidence and air freight–jet fuel/kerosene–fell by 10.4%.  [Note that since these are year-on-year figures, and consumption had increased from last January into the 3rd quarter, the falls in domestic consumption since 3Q08 are even larger than these figures.]

If Russia had been choosing its export duty to reduce exports as part of a coordinated strategy with OPEC to support oil prices, basic economics implies that: (a) exports would fall, (b) output would fall, and (c) domestic consumption should rise, or at least fall by a smaller amount than output (as setting taxes to reduce exports should divert output into the domestic market).*  In fact, (a) exports rose, (b) output rose slightly, and (c) domestic consumption plummeted. This pattern is consistent with my earlier analysis of the level of the Russian oil export duty. In essence, Russia set the export duty to divert supplies from the domestic market to the world market, exactly the opposite of what it would have done if it were acting in concert with OPEC to raise world prices.

In contrast, it is interesting to note that February 2009 OPEC output was approximately 8 percent lower than in the fourth quarter of 2008, and almost 10 percent lower than in the third quarter. Declines in Saudi output have been even more dramatic, falling 16.5 percent from their third quarter levels, 11 percent from the 4th quarter, and 5 percent from December.

In brief, it is abundantly clear that Russia set its export duty to take advantage of OPEC output cuts, encouraging exports, encouraging output, and stifling domestic consumption, rather than discouraging exports and production and encouraging domestic consumption, as would have been the case that it was attempting to reinforce OPEC actions.

And OPEC has noticed. From the Bloomberg piece:

Algerian Oil Minister  Chakib Khelil, who held the group’s rotating presidency in 2008, said March 17 that he was disappointed Russia hadn’t cut production to support prices. Suppliers need prices in a $60-to-$75 range to support production of higher-cost resources, Saudi Arabian Oil Minister  Ali al-Naimi  said on March 16 in Geneva.

Russia also lowered export duties this month to $15 a barrel from $15.70 in March to boost exports, the IEA said in the April 10 report. Brazilian production will rise 7.2 percent in 2009 to 2.54 million barrels a day, the IEA said.

And from the WSJ:

Mr. Sechin claimed Russia cut production and exports in recent months but most OPEC officials weren’t buying it. Exasperated, they say independent data show Russia boosted exports by almost 700,000 barrels a day the past six months, even as OPEC members shaved their own production.

As I’ve said before, this is actually one Russian policy that I endorse.  Undercutting the OPEC cartel is just dandy with me.  

That said, the whole episode demonstrates that Russia’s public statements about its policy goals are completely unreliable.  You need to look at what they do, not what they say.  And the oil case is an excellent example of how their actions give the lie to their words.

Combine this with Turkmenistan’s fury over the gas explosion (and the drastic cut of purchases that apparently caused it), the ongoing rancor between Ukraine and Russia (for which Ukraine also bears substantial culpability), the frictions over energy with Poland, Lithuania, and Belarus, and you get the picture.  The Russian Dale Carnegies: Putin, Sechin, and Lavrov, winning friends and influencing people through energy policy.

* Holding demand constant, a change in export duty intended to reduce exports to help support the world price would lead to a rise in domestic consumption.  Both world demand and domestic demand were likely falling, certainly in November-December, and domestic demand into 1Q09.  With falling for Russian oil, if Russia had chosen its export duty in coordination with OPEC output cuts in order to support world prices, exports should have fallen.  Exports can decline due to  a reduction in output and a smaller fall (or rise) in domestic consumption.  To help support the world price, declining export and domestic demand should have resulted in a decline in output, and a smaller decline in domestic consumption.  As noted above, however, Russian output increased slightly, and domestic demand plummeted.

April 13, 2009

Hate to Say I Told You So

Filed under: Economics,Politics,Russia — The Professor @ 5:10 pm

Almost exactly a month ago, in regards to the Telenor holdup in a Siberian court, I wrote: ”  The forum shopping opportunities across 11 time zones worth of corrupt and corruptable courts must be pretty amazing.”

The New York Times has just caught up with the forum shopping issue, and the potential dangers it poses for Western investors:

Telenor Ruling Stirs Fear of Court Shopping in Russia

OMSK, Russia — This Siberian city would seem an unlikely place to decide the most prominent civil lawsuit in Russia today.

It certainly seemed an unusual venue to Telenor, the Norwegian telecommunications company that recently lost $1.7 billion in a ruling handed down in a courtroom here overlooking snowdrifts and a stand of fir trees.

But the court, the Eighth Arbitration Court of Appeals, has a history of vexing Western investors in disputes with Russian companies. Rulings in Omsk and other courts in the West Siberian district have gone against  BP, the British energy giant, in a dispute for control of  TNK-BP, the British-Russian oil major;  Deutsche Bank  in a case curbing the bank’s ability to collect collateral for a $2 billion loan; and TeliaSonera, the Spanish cellphone operator, in a shareholder dispute. But even by Russian standards, the ruling against Telenor has set off alarms about the political risks of doing business in this country. The decision, wrote Christopher Granville, a Russia analyst for the investor newsletter Trusted Sources, “made the flesh creep, as usual.”

The outcome rekindled fears, particularly among Western banks that are in trouble at home — and must contend with large exposure to Russian corporate debt — that malleable courts and widespread jurisdiction shopping have become a shield against collecting loans. Western banks and companies are owed $453 billion by Russian corporations, an amount three times as much as they are owed by Chinese, Indian and Brazilian companies combined.

“There’s no question the jurisdiction was created artificially,” Peter O’Driscoll, a partner at the London offices of Orrick, Herrington & Sutcliffe, representing Telenor, said in a telephone interview. “This particular weakness in Russian law exposes any legitimate business, whether Russian or foreign, to being sued in some obscure court far away from Moscow, and having an outcome not dissimilar to ours.”

I can’t say that I’m all that sympathetic to the Western banks.  After all, it’s not as if these developments should be a shock.  Hell, I wrote almost exactly three years ago (20 April, 2006–my 20th post) about fools who invest in Russia getting separated from their money.  Speaking of investing in Russia, I said “I’d rather take my chances on three card monte.”  That holds today, but many Western banks, and firms like Telenor and BP, have found that out the hard way.

It will be interesting to see whether once the economic situation in Russia stabilizes, the fools will again rush in where angels should fear to tread.  I predict that they will consider the bargains to be had in Russia to be so great that they will overlook the huge political and legal risks, and plunge in.  Telenor and forum shopping and the like will be forgotten as potential riches glitter before their eyes: Only to disappear in some other obscure Russian courtroom in the back-of-buggery (to steal a colorful phrase from my colleague Phil Rogers).


Filed under: Energy,Politics,Russia — The Professor @ 4:53 pm

It seems to me that two stories reported largely separately last week are related: the Turkmenistan gas pipeline explosion, and Gazprom’s threat to fine Ukraine for not taking contracted quantities of gas.  Here’s the scenario that makes sense.  Ukraine fails to perform on its take or pay obligations to Gazprom–or to whomever is the real counterparty to the most recent gas deal.  Much of the gas supplied under these contracts purportedly originates in Turkmenistan.  Importantly, though, Turkmenistan doesn’t sell directly to Ukraine.  Instead, Gazprom and/or intermediaries take title to the gas in transit, and likely under take-or-pay type contracts with Turkmenistan at prices that are now well above what the gas can be sold for in Europe.  So, when Ukraine reneges, Gazprom and/or intermediaries are on the hook to pay Turkmenistan for the (high priced) gas but aren’t getting money from Ukraine.  So, they cut off gas shipments from Turkmenistan, causing the explosion.

Today, a Bloomberg article suggests a connection, but does not make it explicitly:

 OAO Gazprom  may seek as much as $530 million in fines from Ukraine for failing to import contracted volumes of natural gas in March,Kommersant-Ukraine  reported, citing an unidentified Gazprom official.

Russia’s gas export monopoly notified NAK Naftogaz Ukrainy that it intended to levy fines at the end of last week, Kommersant said. In March, Naftogaz bought 0.95 billion cubic meters of the fuel compared with 2 billion cubic meters envisaged by a January contract, according to Kommersant.

Gazprom has “insured itself” in the event that Turkmenistan manages to restore full gas flows via Russia after a pipeline explosion, the newspaper said. State-run Gazprom had cut supplies from the Central Asian country by as much as 90 percent before the blast, Kommersant said.

Turkmenistan plans to complete repairs to the pipeline today, though Gazprom hasn’t said when it intends to end limitations on pumping gas from the country, Kommersant said. Ukraine is the main consumer of Turkmen gas, according to Kommersant.

The report also casts doubt on Russian Foreign Minister Lavrov’s–claims that the explosion was not the result of a slashing of gas imports:  “This accident is purely technical,” Lavrov said late Friday, according to Russian news agency RIA-Novosti. “I am counting on the fact that this will all be quickly settled.”  (Although with Lavrov, the meaning of the phrase “purely technical” could encompass almost anything.)  Gazprom has studiously avoided making any comment, so the Kommersant statement that Gazprom had not said when it intended to restore gas shipments could be one of those “when did you stop beating your wife?” type of statements, i.e., it presumes what has not been admitted.  But, Gazprom’s silence is quite damning.  And just how Gazprom “insured itself” is rather hard to figure out from the Bloomberg story.  

Now, if Ukraine did indeed renege on take-or-pay obligations, its counterparty should be able to enforce those obligations.   But, any Ukrainian malfeasance does not provide Gazprom with a legitimate basis to renege on its contractual obligation to Turkmenistan.  Gazprom and/or any intermediary that bought Turkmen gas for sale to Ukraine assumes Ukrainian performance risk.  It cannot just pass that risk on to Turkmenistan.  And doing so through a unilateral, arbitrary action that inflicts substantial damage on the transportation network, not to mention potentially threatens lives, is clearly unacceptable.  

It is a delicious irony, though, that Gazprom was so anxious to lock up Turkmen gas that it now can’t sell.  That is, Gazprom is hoist on its own petard.  It–and the Russian government–has adamantly stood in the way of any direct dealing between Turkmenistan and the consumers of its gas.  To prevent such deals, it inserted itself as the intermediary in all Turkmen gas transiting Russian territory.  In so doing, it accepted both price and performance risks, both of which are now hitting it very hard.  

In other words: Be careful what you ask for, you might get it.

Gazprom is evidently desperate to get out from under this unforeseen, and now onerous, obligation, that it is willing to use any means fair or foul to do so.  Expect mainly foul.

The Devil You Think You Know

Filed under: Climate Change — The Professor @ 4:14 pm


New presidential science advisor John Holdren (pictured above) is proposing the use of geo-engineering to counter a potential future catastrophic global warming:

The concept of using technology to purposely cool the climate is called geoengineering. One option raised by Holdren and proposed by a Nobel Prize-winning scientist includes shooting pollution particles into the upper atmosphere to reflect the sun’s rays.

Using such an experimental measure is only being thought of as a last resort, Holdren said.

“It’s got to be looked at,” he said. “We don’t have the luxury … of ruling any approach off the table.”

His concern is that the  United States  and other nations won’t slow global warming fast enough and that several “tipping points” could be fast approaching. Once such milestones are reached, such as complete loss of summer sea ice in the  Arctic,  it increases chances of “really intolerable consequences,” he said.

. . . .  

Holdren, a 1981 winner of a MacArthur Foundation “genius” grant, outlined these possible geoengineering options:

—Shooting sulfur particles (like those produced by power plants and volcanoes, for example) into the upper atmosphere, an idea that gained steam when it was proposed by Nobel laureate  Paul Crutzen  in 2006. It would be “basically mimicking the effect of volcanoes in screening out the incoming sunlight,” Holdren said.

—Creating artificial “trees”—giant towers that suck  carbon dioxide  out of the air and store it.

The first approach would “try to produce a cooling effect to offset the heating effect of carbon dioxide and other  greenhouse gases,” Holdren said.

But he said there could be grave side effects. Studies suggest that might include eating away a large chunk of the ozone layer above the poles and causing the  Mediterranean  and the  Mideast  to be much drier.

And those are just the predicted problems. Scientists say they worry about side effects that they don’t anticipate.

While the idea could strike some people as too risky, the Obama administration could get unusual support on the idea from groups that have often denied the harm of global warming in the past.

OK.  Comparing Holdren to Dr. John I. Q. Niedelbaum Frink was a cheap shot.  Holdren clearly views such an intervention as a last ditch measure, to be used only in extremis.  But there is something more than a little mad-scientistish about this scheme, even under supposedly dire conditions.   In particular, it seems to embed a serious internal contradiction, related to the unanticipated side effects feared by “scientists” (just who, exactly, it would be nice to know.)  

The internal contradiction arises from the stated rationale for geoengineering, namely, that there are “tipping points” where positive feedback loops lead to extreme, discontinuous climate changes.  Such tipping points/discontinuities/positive feedback mechanisms are characteristic of chaotic systems.  These are complex systems with dense, unknown, and likely unknowable interconnections.  The response of such systems to shocks is highly sensitive to initial conditions, conditions which are impossible to identify let alone measure.  (Indeed, even if the relevant conditions could be identified exhaustively, and measured, even slight measurement errors could lead to wildly flawed predictions of response.)  

This is explained concisely in Useless Arithmetic: Why Environmental Scientists Can’t Predict the Future, by Orrin Pilkey and Linda Pilkey-Jarvis:

[p]erhaps the single most important reason that quantitative predictive mathematical models of natural processes don’t work and can’t work has to do with ordering complexity.   Interactions among the numerous components of a complex system occur in unpredictable and unexpected sequences.

So, geoengineering would represent an exchange of a devil we think we understand something about (runaway global warming in which climate changes discontinuously in response to a small incremental forcing) for a devil we don’t (the response of the climate to a big shock, e.g., man-made volcanoes, in the midst of an already chaotic event).  

The choice here does not seem to be obvious, although an advocate of the precautionary principle would argue that the very unpalatability of the choice dictates more robust action now.  But that’s a debate for another day.

April 11, 2009

Something Brewing in Ashgabat

Filed under: Commodities,Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 8:43 am

Great News!  All is not well between Russia and Turkmenistan.  Although happy talk emanated from Moscow in the aftermath of  Turkmenistan President Gurbanguly Berdymukhammedov’s state visit to the Rusisian capital, developments in the weeks following the visit are definitely not to Putin’s and Medvedev’s liking:

Turkmenistan has delivered its clearest statement to date that it wants to see the development of a direct gas export pipeline system to carry thecountry’s gas to European markets.

A commentary on the official web site on Saturday  stressed the importance of “the shortest and most convenient routes” to new markets, but it did not directly say that Turkmenistan was looking for either a trans-Caspian gas pipeline to Azerbaijan or its onward connection to Europe via the Caucasus. Instead it spoke of the need for “diversification of energy supply and involvement of new countries and regions in the geography of energy routes.”

“The statement is a clear indication that the Turkmens are looking much more actively to Europe,” Dr Jennifer Coolidge, Executive Director of Caspian and Gulf Consultants, which specializes in analysis of Turkmen energy affairs,said.

The statement was unexpected because it came just a few days after Turkmenistan President Gurbanguly Berdymukhammedov visited Moscow for talks which Russia announced had paved the way for joint development of a new $1.2 billion East-West pipeline within Turkmenistan.

In an apparent reference to Russia’s halting of all gas exports to Europe via Ukraine on January 7, the statement said new routes were needed “to diversify supply of Turkmen natural gas and build the reliable and stable system to transit Turkmen energy to international markets.”

The foreign ministry commentary also indicated Turkmenistan’s unhappiness over price negotiations with Russia. The statement attacked the idea that international consortiums of gas producers should serve as “supranational  regulators of the price policy” — an apparent criticism of Russia’s work in promoting the Gas Exporting Countries Forum – and specifically attacked monopoly practices in gas trade whilst praising competition.

“The only true scheme to fix the natural gas prices is direct agreements between sellers and buyers,” the statement said.

Turkmenistan has a particular dispute with Russia in this regard, as Turkmen gas has been a staple of Ukraine’s gas supply for decades. But in recent years Turkmenistan has had to sell this gas to intermediary Russian  companies — first Itera, then EuralTransGas and currently RosUkrEnergo –only to see Russia then selling this Turkmen gas on to Ukraine at much higher prices.

Dr Coolidge considered that the sharp tone of the statement should be considered a declaration by Turkmenistan that it was not prepared to have its policies determined by Russia on either the issue of export routes or the price for Turkmen gas exports.

“Coming immediately after the Moscow visit, it is a clear indication of sending Turkmen gas to Europe directly and of securing greater independence on pricing.” she said.

She added that Turkmenistan remains concerned as to whether it will in fact receive the price for 2009 deliveries that it had negotiated with Russia  before the Ukraine dispute in January.

Turkmenistan has delivered its clearest statement to date that it wants to see the development of a direct gas export pipeline system to carry thecountry’s gas to European markets.

A commentary on the official web site on Saturday  stressed the importance of “the shortest and most convenient routes” to new markets, but it did not directly say that Turkmenistan was looking for either a trans-Caspian gas pipeline to Azerbaijan or its onward connection to Europe via the Caucasus. Instead it spoke of the need for “diversification of energy supply and involvement of new countries and regions in the geography of energy routes.”

“The statement is a clear indication that the Turkmens are looking much more actively to Europe,” Dr Jennifer Coolidge, Executive Director of Caspian and Gulf Consultants, which specializes in analysis of Turkmen energy affairs,said.

The statement was unexpected because it came just a few days after Turkmenistan President Gurbanguly Berdymukhammedov visited Moscow for talks which Russia announced had paved the way for joint development of a new $1.2 billion East-West pipeline within Turkmenistan.

In an apparent reference to Russia’s halting of all gas exports to Europe via Ukraine on January 7, the statement said new routes were needed “to diversify supply of Turkmen natural gas and build the reliable and stable system to transit Turkmen energy to international markets.”

The foreign ministry commentary also indicated Turkmenistan’s unhappiness over price negotiations with Russia. The statement attacked the idea that international consortiums of gas producers should serve as “supranational  regulators of the price policy” — an apparent criticism of Russia’s work in promoting the Gas Exporting Countries Forum – and specifically attacked monopoly practices in gas trade whilst praising competition.

“The only true scheme to fix the natural gas prices is direct agreements between sellers and buyers,” the statement said.    Turkmenistan has a particular dispute with Russia in this regard, as Turkmen gas has been a staple of Ukraine’s gas supply for decades. But in recent years Turkmenistan has had to sell this gas to intermediary Russian  companies — first Itera, then EuralTransGas and currently RosUkrEnergo –only to see Russia then selling this Turkmen gas on to Ukraine at much higher prices.

Dr Coolidge considered that the sharp tone of the statement should be considered a declaration by Turkmenistan that it was not prepared to have its policies determined by Russia on either the issue of export routes or the price for Turkmen gas exports.

“Coming immediately after the Moscow visit, it is a clear indication of sending Turkmen gas to Europe directly and of securing greater independence on      pricing.” she said.

She added that Turkmenistan remains concerned as to whether it will in fact receive the price for 2009 deliveries that it had negotiated with Russia      before the Ukraine dispute in January.

She said the consideration of new routes “fits into the discussions that the Turkmen authorities have been having with Austria’s OMV and Germany’s RWE on a Caspian Energy Corp.”

The Caspian Energy Corp.’s stated aim is to assess prospects for development of a trans-Caspian gas pipeline. This would then be able to hook into the existing South Caucasus Pipeline from Azerbaijan to Turkey, enabling it to connect up with the planned Eur7.9 billion ($10.6 billion) Nabucco pipeline project, in which both companies are also involved.

The EU-backed Nabucco pipeline is intended to carry Caspian gas on strictly commercial terms all the way to the Austrian hub at Baumgarten, with European Union officials specifically arguing that Nabucco should be seen as a way of attracting large volumes of gas — eventually as much as 60-120 Bcm/year — from Turkmenistan, as well as Azerbaijan, to Europe.

During Berdymukhammedov’s Moscow visit, an aide to Russian President Dimitry Medvedev said March 25 that the two presidents would sign during one of their future meetings an agreement on developing a major internal pipeline intended to connect the giant South Yoloten field with coastal producing  regions near the Caspian port of Turkmenbashi.

But on March 30, the Turkmen authorities announced that Berdymukhammedov had instructed the “Turkmengaz” state concern to announce an international tender for design and construction of the 30 million mt/year East-West gas  pipeline with a length of 800-1,000 km.

Such a pipeline would play a vital role in ensuring that any  trans-Caspian pipeline system to Europe would be able to access the giant South Yoloten field, which the UK’s Gaffney Cline declared last September contained a minimum of 4 trillion cubic meters of gas-in-place.

Russian accounts had said the aim of the east-west line was to provide a feeder for the planned Caspian Coastal pipeline, intended to run from the Turkmenbashi area to Russia.

The April 4 statement stressed the importance of a planned conference in Ashgabat over April 23-24 at which Turkmenistan hopes to gain further global support for its proposals to enhance “reliable and stable transit of energy to international markets under the aegis of the UN.” The conference is also expected to serve as a sounding board for companies seeking to take part in the East-West pipeline tender.

To summarize: Turkmenistan has taken a very brash, public, and outspoken position in direct opposition to virtually every Russian/Gazprom position on major gas policy issues, namely control of transportation, pricing, intermediaries, and a “Gas OPEC.”  Russia wants to control the transportation of gas, and ensure that Turkmen gas transits Russia on its way to European markets; Turkmenistan wants direct access to Europe.  Russia wants to control the marketing of gas, via shady intermediaries; Turkmenistan wants to deal with the consumers of its gas directly.  (Side note: another illustration of Russia’s/Gazprom’s peg-the-needle hypocrisy, given its constant demands to have direct access to downstream customers in Europe, and now in the US.)  Turkmenistan is worried that the Russians won’t pay what they’ve agreed.  Russia is seriously shopping the idea of a “supranational” cartel of gas exporters; Turkmenistan flatly opposes this idea so near and dear to Putin’s heart.

They must be fuming in the Kremlin and the White House on the Moskva, especially after

Medvedev said that Moscow and Ashgabat will soon sign new agreements on natural gas production and transportation, RIA Novosti reported. “We studied in detail cooperation in the fuel and energy sector, including progress in the implementation of very important accords, such as the intergovernmental agreement on the Caspian pipeline, and other projects,” Medvedev said after talks in Moscow with Berdymukhammedov.

. . . .

Russian presidential aide  Sergei Prikhodko  told journalists that Energy Minister  Sergei Shmatko  would soon head for Ashgabat to fine tune an agreement on the East-West gas pipeline, to link northeastern Turkmen deposits with the Caspian gas pipeline. He said the Russian and Turkmen leaders would soon meet again to sign the deal.

Given Turkmenistan’s defiance on every major issue, and its recent blunt statements regarding the pipeline explosion (arising from Russia refusing to accept contracted deliveries of gas, according to Turkmenistan), somehow I think that Medvedev can put his pen away.

This raises the question: What accounts for Turkmenistan’s sudden obstreperousness?  Things are so opaque in that part of the world, it’s very hard to say.  My guess is that Gazprom’s/Russia’s acute financial difficulties, and its desperation to get out of contracts to buy gas at high prices, have demonstrated clearly to the Turkmens that they cannot be dependent on Russia, as Russia will screw them at every turn. Moreover, they may sense that Russia/Gazprom are in a weak position right now due to the financial crisis, and so there is now a glittering opportunity to slip out of Moscow’s suffocating grip.  Maybe too the European move in Ukraine gave the Turkmens some indication that the game may be changing.  And, certainly, there must be all sorts of byzantine diplomatic maneuverings going on involving the US, the EU, and China, as well as Russia.

Whatever the reason, Ashgabat’s newfound spunk is very welcome.  I say again: let us hope that Foggy Bottom and Brussels will seize this opportunity, although, I share R’s doubts that they will.

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