Streetwise Professor

Vlad Socor has two  pieces  on the South Stream pipeline project.  Here’s the nub of the analysis:

Despite facing gas production shortfalls (relative to internal and external supply commitments) post-2010, Russia is multiplying its supply offers to European consumer countries through South Stream and other pipeline projects. Gazprom signed bilateral agreements on building South Stream with state-controlled Italian, Bulgarian, Greek, and Serbian companies on May 15 in Sochi, with Prime Minister Vladimir Putin attending, and it is negotiating similar agreements with more countries (Interfax, May 15, 16; EDM, May 27).

As enticements, Moscow is declaring ever-larger design capacities for the putative South Stream pipeline system, rival to the European Union and the United States’ backed Nabucco and Southern Corridor projects. South Stream’s other goal is to threaten Ukraine with diverting gas transit volumes, from the Ukrainian transit system into the South Stream pipeline on the seabed of the Black Sea. The Kremlin will most likely roll back its South Stream project, if Moscow achieves its earlier goal of gaining control over the Ukrainian gas transit system.

Gazprom’s strategy reminds me of the movie The Producers; the company is promising the moon to everybody with little chance that it can deliver. The promised capacity is growing by leaps and bounds, from 30 bcm/year in 2008, to 47 bcm/year in February, to 60 bcm/year this month.    It is offering every country in the region a piece of South Stream, with new pipelines wending through southern and eastern Europe, and storage facilities here, there and everywhere.  But with nothing really to back it up.  There are no sources of gas committed to the project (unlike with Nord Stream, as dubious as those sources are).  Cost projections are ballooning along with capacity plans.  In the midst of an existential financial crisis, just where is Gazprom–which has seen its market cap plummet, its cash flows decline dramatically, and which has just slashed its dividend by 83 percent–going to get the $24 billion plus to pay for this project?  Not to mention the money required to develop the gas fields required to fill it and Nord Stream and meet anticipated growth in domestic demand.  

I’ve written before on the vaporware aspect of many Gazprom plans.  Just like software companies that announce brand new software initiatives (that never appear) in order to dissuade entry by competitors, Gazprom announces these grandiose expansion plans to deter entry, in this case, entry by Nabucco.  (Robert Amsterdam calls this “premature contractualization” but the idea is the same.)  The plans and capacities and the like are sort of Monopoly money that Gazprom throws around in an attempt to peel off enough countries to prevent Nabucco from getting the scale and traction it needs.  (Nabucco has its own problems, of course, not the least of which being where the gas for it is going to come from, and the indecisiveness of the Europeans.)  

The frantic increase in the amount of vapor being pumped out seems to suggest a certain amount of desperation on Gazprom’s part.  Nabucco has made some tentative strides of late, particularly getting Turkey more or less onside (even though it still hasn’t resolved the supply issue).  In response, Gazprom seems to be making more extravagant promises.

In other gas news which may be closely related to the South Stream saga, is this piece relating to a story I wrote a couple of posts about a few months back.  Turkmenistan is threatening to sue Russia over the gas pipeline explosion:

Turkmenistan threatened to take Russia to court over last month’s gas pipeline explosion, RIA news agency reported, escalating a dispute that has severed a vital energy link through Russia to Europe.

Turkmenistan blames Russia for blowing up the pipeline, which carries more than half of its most valuable export, by cutting the gas flows without enough warning.

“When you shut off the flows, you get what is called a vacuum-bomb effect,” Odek Odekov, head of Turkmen state geological institute Turkmengeologia, told reporters during an energy conference in Paris, RIA reported.

“The system has to be prepared for a shut-off three days in advance, and Russia did it in the course of one day,” he said.

Russia’s gas export monopoly Gazprom denies any wrongdoing and it has said it hopes to resolve the issue through talks. The company has avoided making detailed public statements on the matter.

Silence is probably advisable, under the circumstances.

As I originally opined, there is a strong case to be made that the cutoff of gas from Turkmenistan (which led to the explosion) was economically driven.  Russia had gotten what it asked for, but came to regret it.  In 2008 it agreed to buy all of Turkmenistan’s gas at what seemed to be a bargain price, but what which in the aftermath of the financial crisis turned out to be too much gas at too high a price:

Every month, Turkmenistan is therefore losing between $800 million and $1 billion per month in export revenues, said Mikhail Korchemkin, director of East European Gas Analysis. “Turkmenistan has every right to demand this money,” he said.

U.S. PUSHES FOR BYPASSING RUSSIA

Due a sharp drop in demand for gas in Europe, Russia no longer needs to buy Turkmen gas, because it can meet European demand more profitably by selling its own.

For the short term, therefore, analysts said the explosion played into Russia’s hands by halting imports from Turkmenistan.

Korchemkin estimated that Gazprom is getting an additional $330-450 million per month in net profits out of this situation, while the Russian budget is getting an extra $300-400 million in customs duties.

So there’s another  Producers parallel: when their scam failed, the hapless producers blew up the theater to avoid paying off their debts.  When its Turkmenistan scheme backfires, Gazprom blows up the pipeline to avoid paying off  its debts.  LOL.  

The cutoff of purchases from Turkmenistan helps Russia out of a short term difficulty, but creates serious longer term ones.  First, Turkmenistan has take-or-pay contracts with Russia.  Though Russia is likely to claim force majeure due to the pipeline explosion, if this matter gets to a reliable arbitrator, Gazprom may end up on the hook to pay for the gas it didn’t take.  

Second, it has made the wily Turkmen president  Kurbanguly Berdymukhamedov look for other options:

After the row with Russia, Berdymukhamedov has spoken out about the need to diversify gas exports.

Russia, keen to maintain control over the region’s gas flows, is plowing ahead with its own pipeline project in the region, South Stream

“But South Stream does not open any new markets for Turkmenistan, because Russia would remain its only consumer. Nabucco, however, opens up all of Europe,” Korchemkin said.

And Turkmen cooperation could be just what Nabucco needs to be viable.  And that, in turn, could well explain why The Producers at Gazprom have gone into high gear, promising more to every country in Eastern Europe than they can possible deliver.

Stephen Blank’s take on Medvedev’s historical commission is spot on, and worth quoting in full:

Unfortunately Medvedev is likely to achieve nothing positive by this move, except to confirm that Russia is regressing toward Soviet and Stalinist practices. While it understandably irritates Moscow that such charges as cited above are made against it, it has nobody to blame but itself. Since the Russian government has resolutely blocked archival research and refused to admit or show any sign of regret for past Soviet crimes (or for its own), it is hardly surprising that others have attacked it. Moscow could learn form the West, where the practice of history is open and where even revisionists have their day in court. However, if Moscow wants to produce history of the type associated with David Irving, it will only isolate itself and its people ever further from the truth and from the modern world. The government is now telling teachers and publishers what to teach and write in history textbooks that offer a sanitized version of Stalin, not to mention of Vladimir Lenin, who was no less a monster. So it can hardly complain when president Yushchenko calls the famine of 1932 to 33 a genocidal one.

If Medvedev wanted to foster genuine debate he would not have criminalized the teaching and writing of history or set up this neo-Stalinist committee, with stalwarts of the worst kind of statist Russian nationalism like Narochintskaya et al. on it. Instead, he would have left the matter to historians like those in the West who have long ago shot out the nonsense that gets published, like Viktor Suvorov’s books.   And if such works still get published, the debate goes on.  

But since the regime has staked its legitimacy on continuing and glorifying the Soviet empire and all its crimes, it obviously feels that it has no choice but to return to the past. Indeed we might say that in Russia, those who wish to revise the past end up reliving it. As long as such charades continue Moscow will have nobody to blame but itself for such nationalist phenomena, and will always be thought of as a rogue state in Europe. Here it could learn from Germany and from Japan’s failure to acknowledge its crimes. Germany is more or less trusted today and certainly not feared—not the kind of attitude other states display toward Japan or Russia. Is that the future Medvedev et al. want for Russia?

I have little to add, except to emphasize that the best way to establish the truth is to open the archives, and to let the research process–adversarial, controversial–take its course.  

Or are, as S/O suggests, Russians so fragile that they can’t handle the truth, or the disputatious process by which it is established?

This Reuters article provides confirmation that Russia’s opportunistic attempts to use OPEC to advance its own interests (opportunism analyzed in detail in several SWP points) have left the oil cartel spitting mad:

Russia is no longer a welcome guest of OPEC after boosting its production to levels far above those pumped by the group’s biggest exporter, Saudi Arabia, and snatching away market share.

After flirting with OPEC when a barrel of oil cost less than $40, Moscow has once more set its course on raising production to support an economy entering its first recession in a decade, leaving OPEC to shoulder the burden of record output cuts.

“OPEC members have cut almost 4 million barrels per day in order to subsidize the Russian oil industry and economy to the tune of about $150 million per day,” said Chris Weafer, chief strategist at UralSib investment bank.

“This is unlikely to sit well with OPEC member countries.”

. . . .  

Senior Russian government officials have attended the last few gatherings, while producers, including the largest independent oil firm LUKOIL (LKOH.MM), had signaled they might be willing to cut output.

Yet Russian oil production rose in April to 9.85 million bpd — 1.3 percent more than the 9.72 million bpd produced in February.

Saudi Arabia, the world’s top exporter, has been pumping less than 8.05 million bpd since February as it accounts for the bulk of OPEC’s cuts.

“Russia, rather than cutting exports, has now increased exports of oil products at a time when OPEC supplies are at their lowest in five years,” said Valery Nesterov, oil and gas analyst at Russian investment bank Troika Dialog.

While OPEC has cut output by about 5 million barrels per day since last July, Russia has increased the supply of oil and oil products by 6.4 percent, or 0.45 million bpd, Nesterov said.

“In other words, Russia has compensated for about 10 percent of the cuts made by OPEC.”

The Russian response?  A real howler:

Russian officials said they were not invited to this week’s OPEC meeting, but say their absence is not political.

“It has nothing to do with the rising oil prices. There are some organizational issues,” Anatoly Yankovsky, Russia’s deputy energy minister, told Reuters. Another ministry official said OPEC called Russia to its meetings as an observer during crises in global oil markets. “OPEC now considers that the situation is stable,” he said.

Yeah.  There are some organizational issues.  Like, the organization in question has had enough of Russia’s BS, and is not going to be played for chumps again by Igor Sechin.  

Now, I detest OPEC, and attempts to cut output collusively to prop up prices above the competitive level.  So, in that sense, it is a good thing that Russia cranked up output in response to OPEC cuts.  Though I know that Russia’s actions had nothing to do with any commitment to competition or any aversion to anti-competitive tactics.  

That said, I still find this dispute among thieves to be quite illuminating.  In particular, it casts a glaring light on the duplicity and opportunism that characterizes the actions of the siloviki that dominate the Russian energy business, and hence, by extension, the Russian government.  OPEC has found to its dismay (but to the joy of energy consumers) that Russian declarations of solidarity and cooperation are intended primarily to gull the credulous, and that such whispered sweet nothings are completely incredible.  Chumming for chumps.  This has implications that extend far beyond Russia’s dealings with OPEC.  In particular, it seriously undermines the case for a “realist” “reset” with Russia; what’s the point of negotiating grand bargains with such bald faced opportunists and liars?

Realism is all the rage in discussions of American policy vis a vis Russia these days. The self-styled realists claim that Russia and the US have common interests regarding Iran, Afghanistan, North Korea, and terrorism, to mention just a few matters. What’s more, they argue that the US has no interest in what Russia believes to be its vital privileged sphere, and that as a result American policy in Georgia and Ukraine, and missile defense in Poland and the Czech Republic, is a counterproductive, unnecessary irritant. Give Russia free reign in these areas, the realists argue, and there will be a mutually beneficial rapprochement that will lead to marked progress on heretofore intractible issues, such as Iran.

The realists are, alas, quite unrealistic. They take a two-dimensional, Flatland view of interest that ignores important historical, cultural, ideological, and political influences on policy. Realism is essentially a reductionist view. Although the geographic and economic factors that realists emphasize are indeed important, they are not the only, or even the most important, drivers of state policy. Grounded in the Westphalian worldview, which asserts that the internal affairs of states are none of the business of other states, they have the tendency to ignore these internal dynamics even though they affect the ways that a state interacts with other states. Realists tend to treat international relations as a big game of Risk, but the real world isn’t so flat–or so simple.

The problems with this approach are very pronounced indeed where Russia is involved, as they were with the USSR in years past. The Russian political and economic system; its historical inheritance; and its Muscovite-Tsarist-Orthodox-autocratic-statist mindset lead Russia to behave in ways that are quite difficult indeed to square with realist predictions. A fragile, closed-order system, where the political leadership is also inextricably linked with major economic interests (with some of the links quite explicit, but others almost certainly far murkier, corrupt–and lucrative), and which is not subject to civil audit and accountability, is likely to have a far different view of its interests than states with very different politico-economic systems. Neo-feudal states and societies (as Vladimir Shlapentokh characterizes Russia) behave differently than modern ones. Add in the historical and cultural legacy of Orthodoxy, Muscovite patrimonialism, and Tsarist imperialism, and the differences with Western states become even more pronounced.

Yet, by and large, realists ignore these differences, and dismiss them as irrelevant. This is a manifest error, as this article by Paul Klimmage make very clear. You should really read the whole thing, but this captures the essence of the argument:

The same kleptocratic impulses that drive the Kremlin’s management of its own economy inform the way it interacts with other states. In its foreign policy, Russia’s guiding principle is not some abstract notion of national interest, but rather the narrower interests of the elite — energy exports and cozy ties with likeminded regimes. The style has been thuggish, fed by the elite’s three great formative influences: the gangland 1990s, the KGB inheritance, and a territorial, zero-sum understanding of relations between states taken directly from the Cold War playbook.

But make no mistake – the Cold War is over, and the Kremlin’s playbook today looks more like a checkbook. The bottom line is that for Russia’s mercenary-minded elite, it’s all about the bottom line.

So how should the U.S. administration approach this corrupt, dysfunctional, undemocratic, and illiberal Russia? Unfortunately, there are few good options.

President Obama has opted for a realist reset, hoping to use mutual interests to rebuild trust for subsequent engagement on thornier topics. But realpolitik lives and dies on the accuracy of its assumptions. The key assumptions here are that mutual interests exist, and that Obama can parlay them into fruitful cooperation on the sticking points.

The harsh truth is that on crucial issues, real interests diverge. On Iran, Moscow has every reason to maintain the uneasy status quo, not aid the normalization of U.S.-Iranian relations, and certainly not foment a breakthrough that could end Russia’s lucrative status as the sole export conduit for Central Asian gas. On Afghanistan, the Kremlin’s interest is not stabilization, but rather tying the United States to supply routes contingent on Russian beneficence. U.S. policymakers who seek to make common cause on Iran and Afghanistan should take heed that Russian talking heads and state-controlled media spend lots of time ranting about the dangerous Americans and very little about the mullahs or the Taliban.

The point about Iran is particularly apt. Viewed from the realist perspective, Russian policy toward Iran is incomprehensible. It is far more understandable when Russian idiosyncrasies–notably the economic interests of the elite, as distinct from the genuine national interests of Russia–are taken into account.

There are many other SWP themes in Klimmage’s piece, notably the description of Putin as a cartel manager distributing rents among competing factions to keep the peace:

The leader — a function performed in Russia by Prime Minister Vladimir Putin — is a fine example of a post with limited formal powers vastly enhanced by the informal powers of the man who holds it. He acts as arbiter and conspirator, resolving disputes and playing interests groups off each other to prevent threats to his power. When Putin performs this task successfully, he keeps conflict under the radar and enhances his influence. When he stumbles, visible spats tarnish the veneer, as they did during a public polemic in 2007 between elite clans over KGB officers turned business moguls.

But my favorite part is his policy recommendation. A recommendation that would almost certainly never dawn on a realist, but comes naturally to someone more sensitive to the internal dynamics and tensions of Russia. It is, in essence, what I suggested in the aftermath of the Georgian War, and called the “Let Slip the Dogs of Accounting” option:

Plan B will involve measures aimed at dispelling the Kremlin’s impression of Western weakness. If Russia sends the message that the road to Kabul runs through Moscow — as it did when it enticed Kyrgyzstan to shutter a U.S. military base while kindly offering to facilitate a new U.S. supply line through Russia — send a stronger message by exploring a new base in Georgia. Or Azerbaijan. Or even Turkmenistan. If Russian energy skullduggery leaves European customers out in the cold, go after the ill-gotten assets of the Russian elite, targeting the sleazy offshore networks of individuals in leadership positions. [Emphasis added.]

That would get their attention in a way that pressing the realist reset button n ever will.

Ronald Reagan drove realists crazy by his insistence that the character of the Soviet regime mattered. Whereas realist policies emboldened the Soviets, Reagan’s set them on their heels, and set in motion a train of events that led to the collapse of the USSR. Reagan’s actions were not a sufficient condition for such an outcome, but they were necessary.

As Klimmage argues, policies that are predicated on an understanding of the nature of the current Russian system are more likely to result in successful policy outcomes than realist nostrums that ignore salient drivers of Russian behavior.

So, just why are they called realists?

Yesterday I said some nice things about Medvedev’s realism on Russia’s economic prospects.  Unlike Putin, he has at time acknowledged the elephant in the room, for instance, stating that the Russian economy could contract by 8 percent in 2009, and that this could lead to serious budget problems.  These statements jibed with what Kudrin has been saying.  But today’s MT says that Medvedev launched a savage attack that all but called out Kudrin by name:

President Dmitry Medvedev on Tuesday warned ministers who give gloomy economic forecasts that they should look for new jobs, a move widely seen as a rebuke to Finance Minister Alexei Kudrin.

The remarks come as Russia goes through the painful process of drafting the budget for 2010 — in which Kudrin is playing a key role — after being forced to drastically cut spending in 2009 because of a fall in the price of oil.

“When my colleagues from the government say that Russia will not come out of the crisis for another 50 years, it is unacceptable. If you think so — go and work somewhere else,” Medvedev told a meeting with Russian businessmen.

Kudrin in April said Russia should not wait for “five, 10, 20 or 50 years” for the favorable economic conditions of recent years to return. Prime Minister Vladimir Putin said the comment showed that Kudrin was stressed out.

Another zig-zag?  A response to criticism from Putin/the siloviki  regarding Medvedev’s realistically gloomy assessments on the economy?  That is, is Medvedev triangulating?  Or is he being buffeted by infighting among the elite and trying to be all things to all factions?  Who knows?  (Though the “buffeted/all things to all factions option appears most likely to me.)

Which would make you a member of the UAW (a retiree, in fact):

But in its aggressive dealings with U.S. automakers, most recently General Motors, the Obama administration is coming dangerously close to engaging in financial engineering that ignores basic principles of fairness and economic realities to further political goals.

It  is  now clear that there is no real difference between the government and the entity that identifies itself as GM. For all intents and purposes, the government, which is set to assume a 50 percent equity stake in the company, is GM, and it has been calling the shots in negotiations with creditors. While the Obama administration has been playing hardball with bondholders, it has been more than happy to play nice with the United Auto Workers. How else to explain why a retiree health-care fund controlled by the UAW is slated to get a 39 percent equity stake in GM for its remaining $10 billion in claims while bondholders are being pressured to take a 10 percent stake for their $27 billion?  

Do the math.  The retirees get 4 times as much of the equity of GM, even though their claim is less than 40 percent as large.  That would be a ten-to-one rejiggering of the deal in favor of the UAW members, which would be dubious even if its priority was equal to that of the bondholders.  Since many of the bondholders are secured, and have higher priority than the junior creditors (including the fund), the transfer of wealth from the bondholders to the retirees is even larger.  

The above quote is from the Washington Post, by the way.  Hardly a right wing publication.  If the WaPo is gagging, you know it has to smell really bad.

Update.  Well, you won’t love it as much as the WaPo article would lead you to.  According to the FT, GM unexpectedly announced that the UAW will only get 17.5 percent of the company, plus about $9 billion in other consideration (preferred shares and a note).  Given that their claims amounted to $10 billion, that’s still a much better deal than the (more senior) bondholders are getting.  According to the FT article, the latter still get 10 percent of the equity in exchange for their $27 billion in securities.

This article by Dmitri Trenin in the Moscow Times echoes several points familiar to SWP readers, and which have been the subject of some debate in the comments section over the last couple of days:

The Russians are right about increased competition in their neighborhood but wrong about its nature and its drivers. The name of the game is not dominance and allegiance but freedom and models of development. The new Eastern Europeans and nations of the South Caucasus are not a prize to be won or lost in a global geopolitical game. They decide for themselves who they want to align themselves with — the EU, Russia or perhaps some combination of the two.  

The choice is not a simple “switching of alliances.” For all the talk of a Brussels diktat, the six countries — just like the Central Europeans before them — feel much more comfortable dealing with a nonhegemonic EU than a heavy-handed Moscow. Europe may see the six nations as backward and requiring economic assistance, but it treats them as independent. Moscow, by contrast, unabashedly views the neighbors as its own “zone of interests” (or “privileged interests,” as President Dmitry Medvedev distinctively coined.) This creates apprehension in those countries that remember very well what is what like to spend decades under Moscow’s control. It is noteworthy that in the aftermath of the Georgia war last August, not a single Russian ally or integration partner followed Moscow in recognizing Abkhazia or South Ossetia. They all refused not out of any affection or sympathy for Georgia or President Mikheil Saakashvili. They were simply sending a Moscow a distinct message: We are independent states, not adjuncts of a former superpower.  

This is a nice restatement of the sugar-gall point.  And this is just so:

Ironically, Russia is likely to benefit from Europe’s cohesion and its neighbors’ success. Moscow’s obsession with the 19th-century notions of geopolitics is a drag on its own post-imperial adjustment. Only when it is fully divested of these hang-ups will it be able to find a fitting place and a useful role for itself in the globalized environment.  

In the long term, Russia will probably not follow its neighbors into the EU, although joining a pan-European economic area and a European-Atlantic security compact would make a lot of sense. Russia will stay as a separate unit, but it will recognize the EU not as its geopolitical rival, but as a regional leader and a rich source of modernization. The Kremlin will live to enjoy the proximity and learn to profit from the occasional friction. Finally, it will also learn the art of dealing with smaller neighbors through methods other than dominating, bullying or punishing them.

Obsession with 19th-century notions of geopolitics and “hangups” indeed.  Trenin is right that the Russian people, by and large, would benefit from a more cooperative relationship with its neighbors, one not predicated on a master-vassal mindset.  But, sadly, what’s good for Russia is not necessarily good for its elite, and there’s the rub.

In another article in MT, Vladimir Ryzhkof addresses other aspects of the atavistic, 19th-century autocratic mindset that characterizes Russia’s current rulers:

During all of these Putin and Medvedev years, the government has been methodically destroying its real enemies — freedom of speech, an independent judiciary, parliament, opposition parties and nongovernmental organizations.

It also thrust its way into Russians’ minds, forcing a pro-Kremlin and anti-Western ideology on them. This was necessary because the authoritarianism and the dismantling of the Constitution required a compelling ideological foundation. This was most vividly articulated during Putin’s speech immediately after the Beslan siege ended, when he referred to “enemies” who have encircled Russia and who are craving to seize parts of its territory and rich resources.  

One of the first attacks in this new ideological campaign was the revision of teaching manuals to correct passages in textbooks that had tarnished the country’s “glorious past.” Schoolchildren were told that Soviet leader Josef Stalin was an “effective manager” whose mass murders, forced hunger and state terror were “justified.”  

Medvedev’s latest move, on May 19, was the creation of a presidential commission “for counteracting attempts to falsify history to the detriment of Russia’s interests.” This opens the door to deprive Russians the freedom to know the truth about their own history. Now, state bureaucrats will decide which interpretation of history should be considered “falsified” and which is “true.”  

Playing with history is frightfully familiar. Under Stalin, the regime’s mistakes and crimes were whitewashed or completely expunged from the public record.  
. . . .

Now, it seems that the Kremlin is determined to distort global affairs and rewrite history to fit the Kremlin’s paranoid worldview. It will be filled with enemies and Russophobes, plots and secret operations against Russia requiring that the new dictator mobilize all of his forces in the fight against internal and external enemies.

I know there are some who read SWP who think, Jack Nicholson-like, that “Russia can’t handle the truth,” because of its cultural fragility and division.  That it lacks the “cultural unity” and “morale” to resist a critical, non-hagiographic treatment of its past.  I hope this is wrong.  It would be very sad if it weren’t.

But there is indeed evidence of demoralization, apathy, and atomization, as this Russia Profile story about popular reaction to police corruption demonstrates:

When Major Denis Yevsyukov went on a shooting spree in a Moscow supermarket late last month, the political shock waves were so severe that President Dmitry Medvedev fired the head of Moscow’s police force. Now, a wide coalition of NGOs and liberal politicians is calling for widespread reform of the police. But public sympathy for their cause is tempered by equally ubiquitous cynicism that anything can actually be changed.

 . . . .

At a street meeting held last week in central Moscow to demand police reform, the participants were divided on how best to tackle this Herculean task. Many said that it was impossible to talk about reforming the police in a vacuum, as it is an integrated part of a whole system that needs reforming. “We need reform not just of the police but of the army and the courts,” said Ludmilla Alexeyeva, a veteran campaigner from the Moscow Helsinki Group. “The reason the police causes antagonism among the population is because it is closest to the people on an everyday basis. At the moment, the main task of the police is not to defend people from criminals, but to defend ‘important people’ from the masses.”

A sense that it would be impossible to change things leads many Russians to feel that their protest voices are as worthless in the case of police reform as elsewhere. The meeting last week was held in the large central Moscow square at Mayakovskaya, and despite thousands of commuters and passers-by walking past the demonstration and banners, many of whom undoubtedly shared the views of the demonstrators when it comes to the police in Russia, few people thought to join in and add their voices to the protest.

According to Sergei Smirnov, a youth activist, “everyone knows” that the police force in Russia is corrupt, that it doesn’t seek to prevent crime but instead looks for personal enrichment, and that it hassles opposition activists and plants drugs on them or frames them for other crimes. However, said Smirnov, a feeling of powerlessness means that people don’t feel they can change anything, and so they stay silent. “I met some people this morning and told them about this protest,” said Smirnov. “They said that they hated the police and would love to change the way that the police operates, but they didn’t believe that there was any point in coming along to a meeting. The main problem in Russia is apathy. But if people don’t display a desire to change things, then the authorities will feel that there is no need to make an effort, either.”

As the last sentence suggests, from the authorities’ perspective, apathy/atomization is a feature, not a bug. As a result, the authorities have every incentive to encourage it.

There was one somewhat more intriguing, and encouraging, development in today’s news.  It’s hard to know what to make of it, because Medvedev is quite cautious, and not always consistent.  What’s more, it is difficult to know how much power he really wields.  But it is interesting that Medvedev has publicly echoed Kudrin’s pessimism on the economy.  This is quite contrary to the Alfred E. Neuman “what, me worry?” message that the siloviki are pushing:

President  Dmitry Medvedev  said Russia’s economy will contract more than originally forecast this year and the government will run a budget deficit of at least 7 percent of gross domestic product.

“The global financial crisis is far from over,” Medvedev told government officials, including his predecessor  Vladimir Putin, in the Kremlin today. “In 2009, unfortunately, we expect a deeper contraction than our initial forecasts,” he said.

The economy of the world’s biggest energy exporter shrank an annual 9.5 percent in the first quarter, the worst contraction in 15 years as industrial production slumped and demand for exported commodities plunged because of the worst global financial crisis since the Great Depression. It may shrink as much as 8 percent this year, Economy Minister  Elvira Nabiullina  said in an interview last week, a steeper decline than the ministry forecast in January.

Russia’s budget strategy from 2010 to 2012 will focus on targeted welfare spending, paring back the deficit as well as shifting to a “strict” spending regime, Medvedev said.

“This doesn’t automatically mean cuts, but for many areas, which are not priorities in the current conditions, this is something we will have to do,” he added.

‘Optimistic Number’

Russia’s first budget deficit in a decade will be “no less” than 7 percent of GDP this year, and even that is an “optimistic number,” Medvedev said.

It is indeed optimistic because the budget deficit forecast is based on a 2.2 percent contraction in 2009.  Even though oil prices are likely to be higher than the price assumed in the budget forecast, which will generate higher revenues, it is hard to believe that this will be sufficient to offset the budgetary impact of a much sharper economic contraction.  

But the interesting thing here is the implicit swipe at Putin.  The premier has yet to acknowledge fully the depth of the crisis.  Note that he was in the audience, but his reaction to Medvedev’s remarks is not recorded.  Very interesting.

Medvedev is very much a mixed bag.  He has been very, uhm, Russian in his approach to the near abroad, and the battle over the past.  He has, in some sense, seemed to have been trying to out-Putin Putin on such matters.  But on some economic issues,he seems to recognize that Putinism is a dead end.  I would not go so far as to call him “liberal”, as some have done.  I would just suggest that he is not as clueless about economic issues as Putin and the siloviki.  Damning with faint praise, to be sure, but progress of a fashion.

In my first post on the Obama administration’s flouting of creditor priorities in the Chrysler bailout/bankruptcy, I argued that a likely consequence would be to impair the ability of firms with substantial union membership (e.g., Ford, the airlines) to obtain credit.  Now numerous financiers have rendered a similar verdict:

Hedge fund managerGeorge Schultze  says he may avoid lending to any more unionized companies after being burned by President Barack Obama in Chrysler LLC’s bankruptcy.

Obama put Chrysler under court protection on April 30 after lenders balked at a proposal giving them about 29 cents on the dollar for their $6.9 billion in debt. The investors said the president’s plan favored a union retiree medical fund whose claims ranked behind them for repayment. It was offered a 55 percent equity stake in the automaker.

Pacific Investment Management Co., Barclays Capital and Fridson Investment Advisors have joined Schultze Asset Management LLC in saying lenders may be unwilling to back unionized companies with underfunded pension and medical obligations, such as airlines and auto-industry suppliers, because Chrysler’s creditors failed to block Obama’s move. The reluctance may put additional pressure on borrowers seeking capital in the worst financial crisis since the Great Depression.

“Lenders will have to figure out how to price this risk,” Schultze, 39, said in a telephone interview from his office in Purchase, New York. “The obvious one is: Don’t lend to a company with big legacy liabilities or demand a much higher rate of interest because you may be leapfrogged in a bankruptcy.”

. . . .

‘Rights Were Trashed’

Jack Welch, former chief executive officer of General Electric Co., criticized how the government handled Chrysler’s bankruptcy, saying unions were favored at the expense of creditors.

“I didn’t like the terms,” Welch, 73, said in an interview yesterday at the Boston Convention Center. “The creditors’ rights were trashed and the unions got 55 percent of the company.”

. . . .

‘Justifiably Concerned’

“Creditors are justifiably concerned” about what precedent the auto bailouts are setting, said  Mark Kiesel, global head of corporate bond portfolios at Pimco in Newport Beach, California. Pimco managed $747 billion as of Dec. 31.

“When you get these companies that have legacy costs, that’s something you have to factor in when evaluating credit risk,” Kiesel said. “Any investor is going to price in increasing political risk in considering where to put their money.”

Pimco, manager of the world’s largest bond fund, didn’t have a stake in Chrysler and owns an “infinitesimally small” amount of GM debt, according to a  report  by co-chief investment officer  Bill Gross  on the firm’s Web site.

The government’s “grassroots trend” signals “an increasing uncertainty of cash flows from financial assets” and risk premiums will increase as a result, Gross wrote.

Warren Buffet has expressed similar concerns.  (Irony alert: I am no big fan of Buffet, Jack Welch, or Bill Gross.)  

This is actually pretty obvious, but the resulting dynamic may be far more obscure, and insidious.  Unionized firms with limited access to capital are more vulnerable to financial distress.  And under the current administration, they are likely to receive Federal support, furthering government control over the economy.  (Government support may include direct financial support, but also regulatory changes or tax advantages.)  

When I was a kid, Jay’s Potato Chips had an ad: “You can’t eat just one.”  There are some similarities to bailouts, and to the erosion of contractual rights.  Once that process starts, there is a feedback mechanism that raises the likelihood there will be more.  And the Chrysler fiasco has started that process with a bang.

Philadelphia Fed President Charles Plosser has publicly acknowledged concerns about damage to the Fed’s credibility as a result of its aggressive quantitative easing program, and its close coordination with the Treasury:

The Federal Reserve’s myriad emergency programs for the U.S. economy threaten the central bank’s independence, raising the risk of future inflation, Philadelphia Federal Reserve President Charles Plosser said on Thursday.

To resolve the problem, Plosser argued the Treasury Department should agree to take on riskier assets like mortgage bonds that have been absorbed by the Fed in an effort to free up credit markets.

“When a nation’s treasury or finance ministry and its central bank work too closely together, there is a clear risk that the government’s spending will end up being financed by the central bank’s power to create money,” Plosser said at a Money Marketeers meeting in New York.

“History shows us that you can get very bad economic outcomes with rapidly rising inflation,” he said, citing the case of Zimbabwe as an extreme example.

. . . .

Plosser emphasized the need for autonomous central bank policy to a healthy and stable financial system. He expressed worries about the more than $360 billion in mortgage debt that the Fed has taken onto its balance sheet, part of a commitment to buy up to $1.5 trillion in mortgage and agency debt.

Such obligations, he said, are no less the debt of the U.S. government than an actual Treasury note.

“We need to draw a bright line once again between monetary policy and fiscal policy,” Plosser warned, adding that some aspects of the current debacle were “eerily reminiscent” of the 1970s.

“We have rapid monetary expansion in the face of an apparently substantial output gap.”

. . . .

Plosser has supported the Fed’s actions as a temporary support, but has been consistent in warning that there should be a better game plan.

“These actions have the potential of altering the delicate political balance of the (Fed), putting at risk its independence and, in so doing, diminishing its credibility and ability to maintain price stability,” Plosser said.

“Eerily reminiscent of the 1970s”=Stagflation.  That’s what Plosser is warning about, and I agree.

Richard Fisher, President of the Dallas Fed, has similarly acknowledged the threats to the Fed’s credibility and independence, and the resulting threat of inflation:

His bigger concern these days would seem to be what he calls “the perception of risk” that has been created by the Fed’s purchases of Treasury bonds, mortgage-backed securities and Fannie Mae paper.

Mr. Fisher acknowledges that events in the financial markets last year required some unusual Fed action in the commercial lending market. But he says the longer-term debt, particularly the Treasurys, is making investors nervous. The looming challenge, he says, is to reassure markets that the Fed is not going to be “the handmaiden” to fiscal profligacy. “I think the trick here is to assist the functioning of the private markets without signaling in any way, shape or form that the Federal Reserve will be party to monetizing fiscal largess, deficits or the stimulus program.”

. . . .

Mr. Fisher defends the Fed’s actions that were designed to “stabilize the financial system as it literally fell apart and prevent the economy from imploding.” Yet he admits that there is unfinished work. Policy makers have to be “always mindful that whatever you put in, you are going to have to take out at some point. And also be mindful that there are these perceptions [about the possibility of monetizing the debt], which is why I have been sensitive about the issue of purchasing Treasurys.”

He returns to events on his recent trip to Asia, which besides China included stops in Japan, Hong Kong, Singapore and Korea. “I wasn’t asked once about mortgage-backed securities. But I was asked at every single meeting about our purchase of Treasurys. That seemed to be the principal preoccupation of those that were invested with their surpluses mostly in the United States. That seems to be the issue people are most worried about.”

As I listen I am reminded that it’s not just the Asians who have expressed concern. In his Kennedy School speech, Mr. Fisher himself fretted about the U.S. fiscal picture. He acknowledges that he has raised the issue “ad nauseam” and doesn’t apologize. “Throughout history,” he says, “what the political class has done is they have turned to the central bank to print their way out of an unfunded liability. We can’t let that happen. That’s when you open the floodgates. So I hope and I pray that our political leaders will just have to take this bull by the horns at some point. You can’t run away from it.”

And Fisher’s last sentence is what scares me.  Prayer is the right word to use there, for rational calculation suggests that political leaders are highly unlikely to take the bull by the horns. His diagnosis of the actions of the “political class throughout history” pressuring the central bank into profligate printing of money is spot on.  So why should we expect things to be that much different in the US in 2009, especially given the degraded condition of our politics, and our political leadership?  Fisher’s “prayer” brings to mind Samuel Johnson’s judgment on second marriages: a triumph of hope over experience.  

Plosser’s and Fisher’s statements suggest a coordinated plan by the Fed to calm fears regarding the Fed’s credibility and independence.  Bernanke suggested as much in his answer to my question at the Atlanta Fed conference two weeks back.  

And these fears are very real.  It’s nice and all that Bernanke et al are trying to allay concerns, but talk is just that.  The question is whether the Fed can withstand the intense political pressure that will come as the Fed tries to navigate between the dangers of throttling an incipient recovery and sparking a huge inflation.  With the massive government spending in the coming years, and the resulting explosion in the Federal debt, the Fed’s apparent commitment to supporting the housing sector, and myriad other factors, there is a major risk that today’s fine words will mean little when push comes to shove.  Given the choice between voting for a massive tax increase, or dragooning the Fed into an imposing on inflation tax for which it will have no accountability, my money is on Congress doing the latter. After all that’s what political classes have done throughout history.  Just as Richard Fisher.

I am often accused of equating modern Russia with the USSR.  (For evidence, just look at the comments on some recent posts.)  That’s bull.  Like Stephen Blank, and Richard Hellie, I think that Putin’s Russia is much more a return to the traditions of Muscovy, and Imperial Tsarism, than the USSR.  Most of the similarities between modern Russia and the USSR arise from the fact that the latter also inherited some Muscovite/Tsarist traits.

The words in the post title are Faulkner’s, written about the South.  But it’s not really true of the US South any more.  It is, however, very, very, true in Putin’s Russia.  The latest evidence–and evidence of the historical continuity with Imperialist traditions–comes from Putin’s quite amazing performance at the Donsky Cemetery on 24 May, 2009:

Prime Minister Vladimir Putin yesterday laid flowers on the Moscow grave of General Anton Denikin, a White Russian leader whose opposition to the aspirations of non-Russian nations in the Russian Empire and unqualified commitment to the “indivisibility” of Russia opened the way for the victory of Vladimir Lenin and the Bolsheviks.

Indeed, it was Denikin’s unwillingness to make any concessions to non-Russian groups, combined with Lenin’s false promises of respect for national self-determination that led to the collapse of the anti-Bolshevik cause and allowed the communists to triumph, first at the expense of the Russians and then of the non-Russians among and around them.

And consequently, as several commentators have already pointed out, Putin’s latest remarks, including in particular his denigration of the separateness of Ukraine, are certain to drive many non-Russians away from Moscow, even if they appeal to Russians as “the [latest] end of the [Russian] civil war” and a reaffirmation of the continuity of Russian history.

Yesterday, Putin laid flowers on the graves of anti-Bolshevik generals Anton Denikin and Vladimir Kappel, émigré nationalist philosophers Ivan Il’in and Ivan Shmelyev, and Aleksandr Solzhenitsyn at Moscow’s Donskoy Cemetery. Accompanying him and relaying some of his words was Archimandrite Tikhon.

After laying flowers on the leader of the South Russia government, Putin quoted Denikin’s suggestion that “no one must be allowed to interfere in relations between us, big and little Russia, Ukraine. This was always an affair of Russia itself!” And he added that Denikin considered that any movement toward disunity was “impermissible.”

According to Tikhon, Putin “recalled how he had read the memoirs of Denikin in which the latter said that despite his hostility to Soviet power, even to think about the dismemberment of Russia was a crime, … especially when one is talking about the Little Russian land – Ukraine” (grani.ru/Politics/Russia/Cabinet/m.151488.html).

And the Russian Orthodox churchman added that Putin had given the money from his personal account for the restoration of the graves of Denikin, Il’in and Shmelyev. Several months ago, Tikhon said, Putin had seen pictures of the graves and decided that he had to intervene to support the preparation of new headstones.

During his visit, Putin praised Denikin and the others as leaders committed to the Russian state, noting that “the main thing which distinguished them was a deep and true love for the motherland, for Russia, true patriotism,” something that made them “heroic people” in what Putin conceded was “a tragic time.”  [Emphasis added.]

This is of a piece with Putin’s sputtering, angry statement to President Bush that Ukraine is not even a state:  “Ukraine is not a state! What is Ukraine? Part of its territory is Eastern Europe, and part, a significant part, was given to it by us!”

Putin’s remarks–or, more accurately, his adoption of Denikin’s–also illustrate a point I’ve often made on SWP (thereby sparking outraged reactions from the self-styled Russophile set).  Namely, the condescending, proprietary, paternal attitude that Great Russians take towards Ukrainians and the Ukraine.  “Little Russia.”  What anachronistic, demeaning tripe.  

This is also deeply disturbing, inasmuch as it reflects further evidence of a pattern, and an irredentist belief that the dissolution of the USSR–or, if you like, the Russian Empire–was illegitimate and definitely not irreversible.  Combine this with the recent gas war,  the threat to do it again  (perhaps accompanied by a rousing chorus from the Red Army Choir), Ukraine’s bad economic conditions and dysfunctional politics, the Georgian War and its aftermath, Russian demands for a zone of special privilege, and on and on, and it is clear that all the ingredients are present for a significant ramping up of pressure on Ukraine, with very unpredictable consequences.  Putin’s statement also resonates the revanchism implicit in Medvedev’s historical commission, which is motivated largely by a desire to legitimize Soviet actions in Eastern Europe in the aftermath of WWII; given Russia’s unabashed claiming of the Soviet legacy, this implies a legitimate claim of Russia in Eastern Europe over the objections of the region’s existing states.  

The Orthodox angle is also another throwback to Muscovite/Tsarist times: the account of Putin’s trip to the cemetery comes from  Archimandrite Tikhon, who accompanied Putin on his pilgrimage.  

The potential for mischief here is great.  Like many things, what is happening is overdetermined.  I think that Putin has dreams (delusions?) of restoring Russian greatness; the economic crisis makes a foreign adventure an appealing distraction; control of Ukraine would remove a major threat to Putin’s dreams of energy dominance; and the weakness of Ukraine and the division and pusillanimity of the Europeans creates a target of opportunity.  There are many reasons for Putin to make an aggressive move.  

Not that the Ukrainians, or Eastern Europeans generally, will reciprocate Putin’s imperial desires.  Indeed, as the linked article from Paul Goble notes, if anything it is likely to drive them even further from Russia, just as Denikin’s policies did.  As I’ve said many times, Russia has yet to learn that you catch more flies with sugar than gall.  But Putin has gall in abundance.  

Learned nothing. Forgotten nothing.  Not even past, indeed.