Streetwise Professor

May 21, 2009

He Who Controls the Past

Filed under: Politics,Russia — The Professor @ 8:54 pm

A constant of Russian history has been the effort of the state to control history.  Dmitri Medvedev’s creation of a commission to counter “the falsification of history at the expense of the interests of Russia” is merely the latest endeavor to control the present and future by controlling the narrative of the past.  

This effort is patently illiberal, and as clear an indication as any of the vast gulf that separates the Russian worldview from the Anglo-American-European one.  Not to say that history is never hijacked for political purposes in the US or Europe or Canada, but in none is the power of the state explicitly enlisted to enforce an official historical view, and history is not seen as an instrument of state power and policy:

In a signal that the Kremlin is continuing its assertive foreign policy despite Russia’s weakening economy, Mr. Medvedev, in a decree made public Tuesday, ordered the commission to investigate and counter falsified versions of history that damage Russia’s “international prestige.”

Mr. Medvedev empowered the commission—comprising senior military, government and intelligence officials—to launch inquiries, unearth historical documents, and call government and expert witnesses, as well as formulate possible policy responses for the president to consider.

The ruling United Russia party also has proposed a draft law that would mandate jail terms of three to five years for anyone in the former Soviet Union convicted of rehabilitating Nazism. Analysts say they expect it to become law, though it will only be enforceable in Russia.

Although there is clearly a domestic agenda here, the main thrust seems to be directed at enemies in the near abroad.  Russia has been involved in intense squabbles over history with Poland (Katyn), Estonia (The Bronze Soldier/Tomb of the Unknown Rapist), Ukraine (Holomodor).  In that context, the following is of great interest:

He said grants would be given to pro-Russian historians in other countries to ensure their voices were heard. “We have to choose which history textbooks are telling the truth and which are lying,” he said.

In other words, this is largely an influence operation.  

A couple of things jump out at me when considering this:

  • Russia is clearly identifying itself as the proud successor of the Soviet Union.  Soviet history is Russian history, and a good thing to boot.
  • The Russian government is trying to equate opposition to Soviet occupation and oppression post-WWII with “rehabilitation of Naziism.”  This is deeply dishonest and manipulative.  Both Nazi oppression and Soviet oppression were crimes of epic dimension.  Asserting that Soviet opposition to Naziism justifies that regime’s actions, and absolves it for its crimes, is wrong.  It is incomplete, misleading history.  Moreover, this “truth” commission will forestall any examination of the USSR’s deep culpability in supporting Hitler before 22 June, 1941.  The USSR needs to answer for not only its own crimes, but for some of Nazi Germany’s as well.  

Russia does not need a commission to whitewash Soviet crimes.  It needs a commission to reckon honestly with the Soviet past.  My guess: not in my lifetime, and I’m not that old.

Why Would That Be?

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:25 pm

Russia has announced that it probably won’t send a delegation to OPEC’s May 28th meeting.  Think it might have something to do with Russia’s/Sechin’s repeated Lucy-and-the-football antics in late-08 early-09?  You know, the oh-yes-we’ll cooperate with you OPEC; we support output cuts OPEC; we’re with you 100 percent OPEC BS, followed by no output cuts, and indeed by actions that resulted in Russia increasing output and exports slightly, while OPEC was making hefty cuts?  Think that maybe OPEC sent via backchannels a “If you know what’s good for you don’t show your lying faces (plural) around Vienna again” message?  It couldn’t be that, could it?  

Fool me once, shame on you.  Fool me twice shame on me.  OPEC seems to have taken that aphorism to heart.

May 20, 2009

More Conventional Ignorance on Clearing

Filed under: Commodities,Derivatives,Economics,Exchanges,Financial crisis,Politics — The Professor @ 9:12 pm

I like Jeremy Grant of the FT, and his colleague Gillian Tett is a media darling right now, flogging her book on the financial crisis.  But in their article on the Geithner derivatives proposals (along with Aline van Duyn), they laid an egg.  They repeat the conventional wisdom on clearing, and the supposed benefits of forcing OTC trading onto exchanges.  Actually, it would be more accurate to say that they repeat the conventional ignorance on the subject.

They say that on exchanges “[t]rades are then ‘cleared’ on a central platform, which completes a deal even if one counterparty collapses.”  Similarly, they say that in OTC markets, “[t]hat means in many cases there is no centralised system to monitor prices or deals nor any third party to ensure a trade is completed if a counterparty fails.”  These quotes suggest that counterparty risk does not exist in a cleared market like it does in an OTC market.  This is wrong, because the clearinghouse can fail.  More to the point, given the size of the position of a defaulting party, clearing only affects the allocation of losses, not their total amount.  Now, this allocation can be superior, but not necessarily so.  But I grind my teeth at the suggestion that clearing magically makes default risk disappear.  

This also has implications for systemic risk.  In a cleared market, the default risks are borne in the first instance by clearinghouse members, who are typically systemically important banks.  Clearing can actually concentrate and increase the counterparty risks that these systemically important banks bear.  This point is seldom made, but it is important.  Grant, Tett and van Duyn overlook it altogether.  

Most egregiously, they say this:

The proposals Mr Geithner, Ms Schapiro and others have unveiled try to tackle these problems in four ways. First, they demand all “standardised” derivatives are  centrally cleared to remove counterparty risk, even if they are not traded on an exchange.  [Emphasis added.]

No. No. No. NO!  Clearing DOES NOT REMOVE COUNTERPARTY RISK.  The three FT reporters should be sentenced to write that sentence over and over again on a blackboard, Bart Simpson-like, until they get their minds right.  Moreover, to atone for this, the FT should be required to devote an entire front page consisting entirely of “CLEARING DOES NOT REMOVE COUNTERPARTY RISK” in headline-sized type.  

Again.  Clearing redistributes the losses arising from counterparty default.  It does not remove it, or make it magically disappear.  What’s more, it does so in a way that can reduce efficiency, and increase systemic risks.  

Sheesh.  Grant et al state: “A public debate about derivatives is long overdue.”  I agree.  It would be nice if that debate would be based on a thorough, fact-based, understanding of the actual tradeoffs involved in clearing and exchange trading.  Instead, this article just recycles the same old bromides.  

The article does the service of quoting this gem by new SEC head Mary Shapiro (which I had wanted to call attention to when I saw it last week, but got distracted):

As Mary Schapiro, chair of the Securities and Exchange Commission, says: “OTC derivatives, particularly credit derivatives . . . contributed to the financial mess we are cleaning up today.”

Just how did they contribute?  Yes, like the Treasury letter, you can point to the OTC posterchild, AIG, but that would be incredibly dishonest (as it was when Treasury did it).  It is dishonest because the type of contracts AIG traded would never be cleared, and never traded on exchanges, and hence would be/have been unaffected by the Treasury proposal.  But although credit derivatives have been accused over and over again of contributing to the financial crisis, the type of products that would be affected by the Treasury proposal are conspicuous by their absence from any honest accounting of culpability for the crisis.  

This only goes to show that Mary Shapiro’s replacing of the execrable Chris Cox has not increased the intelligence or market knowledge at the SEC.  And that is a very scary thought.

May 19, 2009

Yurgens Channels SWP

Filed under: Economics,Energy,Politics,Russia — The Professor @ 9:05 pm

The Telegraph has an interesting interview with Medvedev advisor Igor Yurgens.  Here are the bits that caught my eye:

“The present system shows signs of overextension,” Mr Yurgens said. “It shows signs of over centralisation and fragility  [where have I heard that before?] because it is based not on institutions  [ditto] but on the mythological vertical of power.

“The reform process stumbled halfway. We have to push very hard to restart those reforms otherwise we will not be ready to catch up with the G8. We will remain on the level of leading emerging nations.”

Yes, institutional weakness, and personalized, centralized rule create fragility that will make it lucky for Russia to “remain on the level of leading emerging nations.”  

Also an interesting article in the Moscow Times:

“April data suggests there is no reason for optimism on the state of our economy,” said economist Yevsei Gurvich, head of EEG think tank. “It creates a risk that a second phase of the downturn cannot be ruled out.”  

The Central Bank, which is under pressure to ease credit conditions, cut official interest rates twice in recent weeks and signaled more cuts despite inflation remaining in double digits. Officials have said the economic situation was stabilizing.  

“Today’s data signals very weak labor market data,” said Rasmussen. Many analysts will also be watching the next jobless data as a measure of domestic political risks, although public discontent with the anti-crisis policy remains subdued.  

The State Statistical Service did not release its monthly jobless numbers for March, publishing quarterly data instead, a move seen by some analysts as an attempt to gloss over unpleasant information.  

The service did not explain the move, and an absence of the monthly data for April will further undermine analysts’ view on stabilization of the Russian economy.  

Monday’s record fall in industrial production compared to a 13.7 percent year on year decline in March. The previous contraction record in the series’ seven-year history was set in January, when output fell by 16 percent.  

“The search for the bottom is still on. In May, we may see an even lower number,” said Trust Bank chief economist Yevgeny Nadorshin. “Problems in heavy industries, cuts in investment plans remain.”  

This article illustrates the policy dilemma facing Russia.  Attempts to spur economic activity by cutting interest rates risks fueling inflation and weakening the ruble.  No wonder Kudrin is “stressed.”

 

May 18, 2009

Worser and Worser

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 8:43 pm

Recently the Russian government reported that GDP was down in the first quarter 9.5 percent year on year.  More alarmingly, it was down 23.2 percent quarter on quarter:

Russia’s economy contracted sharply in the first three months of the year, hit by the global slowdown, Federal State Statistics figures show.

Economic output for the period to the end of March fell 23.2% compared with the previous quarter. On a year-on-year basis, output dropped 9.5%.

Russia’s economy had been growing thanks to high oil prices, which peaked at around $147 a barrel last summer.

But since then, the price of oil, a key export, has fallen by more than half.

The latest figures for the first three months of the year confirm estimates released last month by the government.

Industrial output has slowed in the wake of the global economic slowdown, and investors have withdrawn significantly from Russia.

I scratched my head when I first read the 23.2 percent number in a Bloomberg piece on Saturday (a piece which has mysteriously disappeared).  None of the articles I’ve read explain it fully, and the Russian government statistics websites are appallingly bad, so I couldn’t find the original source.  (The Federal Statistics Service website had a poll.  The least favorable response was “Could be improved”–which 90 percent of the 800 respondents had chosen.  A more reasonable alternative would be: “Couldn’t possibly be worse.”)  

My guess is that this is an annualized rate, indicating that quarter on quarter, GDP fell about 5.7 percent.  That is, fell from 100 on December 31, to 94.3 on March 31.  Ouch.  This is horrid, even by the abysmal standard set by Germany (a 3.8 percent decline, or about 16 percent annualized) in the first quarter, or Japan’s 12.7 percent annualized decline in the fourth quarter of 2008.  

\Russian manufacturing output continued to crater, and banks are racing to revise downwards their forecasts of 2009 growth; today Alfa Bank cut its forecast to -5.7 percent.  The only bright spot is the price of oil, which has been rebounding on OPEC cuts, the possibility of supply disruptions in Nigeria, and most importantly in my view, the prospects for inflation due to the Fed’s (and other central banks’) aggressive monetary policy.  

In other news of potential interest to some SWP readers (and you know who you are), today’s AFP carries an article on the implications of the economic contraction for Russia’s demographic woes:

Now the financial crisis has added to Russia’s pernicious mix of ill-health and  low birth rates, heralding an early reversal of the cheerier birth rates of the last three years, statisticians and sociologists said.

Russia’s state statistics agency Rosstat recorded 270,800 births in January and February, down by 3,700 from last year.

Rosstat head Vladimir Sokolin last month said the economically active population was shrinking by one million people per year and the country could face labour shortages as it emerges from the  global financial crisis.

“At this rate, the crisis could reduce to nothing all the government’s efforts of the last years to stimulate births,” said Valentina Petrenko, the head of Russian upper house’s committee for social policy and health.

“The risk of losing employment is in a big way linked to  pregnancy  and caring for young children.  Expectant mothers  and women, as a rule, are the first to be laid off,” she said.

Experts say that in the face of financial uncertainty more women plan against pregnancy and are opting for abortions.

Only five percent of women surveyed by state pollster VtsIOM as the first economic stress was felt in November said they planned pregnancies in the next two years.

Outside a city-run maternity hospital in northern  Moscow, two women stood apart from the knots of chatty families waiting in the spring sun with flowers and bottles of sparkling wine to celebrate a new addition to the family.

The two sat heads together, smoking and looking almost under dressed in jeans and sneakers.

Irina, who preferred not to give her last name and nervously grasped her friend’s hand, had come for the free abortion services offered at such clinics.

“I am still paying down my apartment each month, I can’t imagine being without a job much less anything else right now,” she confided, adding she was not living with her boyfriend.

“A friend of mine lost her job, but she said it would give her time to raise her child, but I don’t know…. I think it’s a bit crazy,” she said.

Andrei Akopyan, the head doctor at one of the Moscow’s reproduction and  family planning clinics, predicted the number of abortions would increase by 10 to 12 percent due to the  economic instability.

“It may be some families planned to have children, but they then found themselves forced to turn back on that decision,” he said.

“There are, of course, already more women who want to have abortions,” Khazem Alsoabi, a doctor at one private clinic, MedClinica, said. “The reasons I hear are financial, there’s no question of that.”

Searches for “abortion” on the Russian Internet portal Yandex have more than doubled since the onset of the financial crisis. The number of people who keyed in the search jumped from 94,526 in October to 151,471 in November.

According to the  United Nations,  Russia  has the highest rate of abortions in the world, in a hold over from Soviet times when the operation replaced traditional forms of contraception.

Last year was the first since the  fall of the Soviet Union  when the number of births narrowly outstripped the number of abortions in the country.

“There is even a new social category of women who say they are having abortions because they can’t pay back their loans,” said Svetlana Rudneva, who heads the Family and Childhood fund, offering counseling forunplanned pregnancies.

She said the charity fund had seen a hike in calls to its crisis line and more inquiries from women seekinglate-term abortions. The operation is legal up to the 12th week in Russia.

Women are increasingly citing economic insecurity as the reason why their families might pressure them to have an abortion, said Irina, a psychologist at another pregnancy hotline.

“It’s one of many reasons cited to justify the abortion. But today, material difficulties is the main reason,” she said.

Migration to Russia could help compensate for the country’s drastic  population decline, said Anatoly Vishnevsky, head of the Institute of  Demography  at the Higher School of Economics.

But, for want of work,  migrant workers  are leaving Russia in droves. The number of migrants in the country fell by 27 percent in the first quarter of this year, according to the federal migration service.

“The situation was bad already. We’ve always been seen as a country in a demographic crisis. The population is falling and will keep falling,” Vishnevsky said.

“Of course, the current crisis will have an effect and that effect can’t possibly be good.”

This is journalism, not data.  But it does seem pretty clear that the economic bad news cannot be good news for Russian demographics–or public health.  

A major concern for Russian policymakers has to be that the measures they have taken so far appear to be having little effect:

Russia’s central bank could once again face a choice between allowing the rouble to weaken and taking steps to support the economy, says Gabriel Stein, chief economist at Lombard Street Research.

“According to estimates, Russian GDP shrank by 9.5 per cent in the first quarter from a year earlier,” he says. “There are some ‘green shoots’ of recovery – but even President Medvedev has acknowledged stimulus measures to boost the economy have so far not worked.”

Mr Stein says Russia is paying the price for its double exposure to the “most serious hazards of the modern world – energy and exports to continental Europe.” The former, he says, is the result of Moscow’s single-minded pursuit of energy control, regardless of the damage to Russia’s business climate.

“The rouble has strengthened this year, partly on . . . optimism about emerging markets, partly due to – but also a cause of – Russian stock market gains and partly  [on] high  interest rates.

“Rates were cut to 12 per cent last week, [but] remain attractive – and should provide a barrier to the rouble collapse that the state of the economy seems to call for.

“If maintaining the value of the rouble remains the goal, it will be very difficult to ease monetary policy further. Better to act now to moderate a devaluation which represents the loss of income implied by the collapse of energy prices.”

This is just basically a re-iteration of what I’ve said about the very difficult policy trade-offs that Russia faces.  

And other shoes remain to drop.  There are widespread predictions that loan performance will degrade dramatically in the coming months.  Moreover, the deep contraction will likely make the even more pessimistically revised government budget numbers non-operative in the very near future.  This will require a more rapid depletion of reserve funds.  

Inflation does appear to be abating–contrary to what I’ve been expecting.  But other than that, the prospects are very dark indeed.

Update.  This Bloomberg piece states that industrial output fell by a record in April.  This contradicts earlier estimates, based on PMI, that the pace of manufacturing contraction has been slowing.  

Russian  industrial production  fell at a record pace in April as the global economic crisis squeezed demand and companies cut investments.

Output dropped an annual 16.9 percent, the sixth consecutive decline and the biggest since the  Federal Statistics Service  moved to a new methodology in 2003, compared with a drop of 13.7 percent in March, it said in Moscow today. The median estimate in a Bloomberg survey of 11 economists was a decrease of 14 percent. Production fell 8.1 percent from March, when it grew 11.1 percent.

The economy of the world’s biggest oil producer shrank an annual 9.5 percent in the first quarter, the most in 15 years, as industrial output slumped and a 3 trillion-ruble ($93.4 billion) state stimulus package failed to boost lending. A $9 billion slate of state guarantees “failed” to kick-start lending to strategic companies, President  Dmitry Medvedev  said on May 13.

“The situation in manufacturing didn’t improve at all,” said  Vladimir Tikhomirov, the chief economist at Moscow’s UralSib Financial Corp., before the report. “Companies were still under a big strain to try to attract capital and were diverting a lot of their investment money to repaying current debt. Investment programs had to be postponed.”

The World Bank said on March 30 that a “silent tsunami” of bad debt threatens to stall a recovery in the world’s largest energy-exporting economy. As companies default on loans, the government may need to provide as much as $50 billion for bank bailouts, more than twice the amount pledged to banks in this year’s budget, according to UniCredit SpA.

Rate Cuts

The central bank cut its key interest rates for the second time in less than a month on May 14 in a bid to reduce high borrowing costs during the downturn.

Manufacturing tumbled an annual 25.1 percent in April, compared with a drop of 20.5 percent in March. Cement and brick output fell 34.7 percent and 39.9 percent respectively in April while production of trucks and vans fell 68.1 percent. Car production tumbled an annual 55.9 percent.

Billionaire  Mikhail Prokhorov, Russia’s richest man, said Russian property developers may suffer more as the country slides into the worst economic slowdown in a decade.

“The crisis hasn’t hit developers in full yet,” Prokhorov told reporters in Yelets, Russia, on May 15. “The worst is yet to come.”

“The worst is yet to come.”  Frightening words, indeed.

SWP in the WSJ

Filed under: Commodities,Derivatives,Economics,Exchanges,Politics — The Professor @ 7:49 pm

I was quoted in today’s WSJ:

Companies could try to skirt the regulations by creating new contracts that are similar but not identical to clearable trades.

“People will see where the lines are…[and] devise products that fall outside the scope of this particular regulation and that particular regulation,” said Craig Pirrong, a finance professor at the University of Houston.

The Treasury Department says that clearinghouses need to ensure that “customized OTC derivatives are not used solely as a means to avoid” clearing.

Regarding the sentence following my quote.  As I noted in my post on the proposed Treasury regulations, the clearinghouses are not in a good position to monitor the use of non-cleared products, due to their lack of information, and perhaps more importantly, their conflict of interest in seeing more business come their way.  Although the WSJ article accurately characterizes the Treasury’s position, so much the worse for Treasury.  It suggests a serious failure to think things through.

If they decide to prevent the use of customization to circumvent the clearing requirement, as it almost certainly must if the clearing mandate is to survive, Treasury and Congress will require a regulator to enforce the circumvention ban.  This would require an incredibly intrusive regulator, evaluating the design of every contract, and the intent behind it.  I can state almost categorically that no regulator has or will have the information, expertise, or ESP required to do this.  Moreover, this will just throw us back into the days of pre-CFMA requirement that all “futures” be traded on exchanges.  Not a good thing.  This created regulatory uncertainty, legal ambiguity, and served to protect the interests of exchanges.  One can only imagine the Talmudic inquiries that would be involved in determining whether a particular derivative is, or should be cleared, or was designed to escape a clearing mandate.

Regulators–or clearinghouses serving as their agents–should not be in the position of intervening so intrusively in the contracting decisions of derivatives markets participants.  Such intrusion will raise transactions costs, and interfere with the efficient allocation of risk in the marketplace.  What’s more, there is no reason to believe that this interference will reduce systemic risk.  Indeed, it could well increase systemic risk.

May 16, 2009

Medvedev Channels SWP

Filed under: Economics,Financial crisis,Politics,Russia — The Professor @ 5:09 pm

Several gems were contained in this Bloomberg story about the 9.5 percent decline in the Russian GDP in 2009Q1.  [Your bet is looking pretty good, Michel.]  In particular, no sooner had I written my post about short-termism in Russia, did I read this in the linked article:

A $9 billion slate of guarantees aimed at kick-starting lending to the companies designated as strategic enterprises had “failed,” Medvedev said on May 13.

Today, Medvedev poured cold water on the government’s bid to diversify the economy away from a dependence on exporting oil, gas and metals.

. . . .

“There have been no significant changes in the technological level of our economy,” Medvedev said in a meeting today outside Moscow.

‘Only on Paper’

The country’s venture fund, special economic zones and so- called techno-parks, all aimed at nurturing high-tech industries, “exist only on paper,” he said. Businesses are also to blame and only invest where a “high, quick return” is guaranteed, he said. [Emphasis added.]

So, Medvedev agrees with my diagnosis of the myopic economic behavior of Russians–a diagnosis that I’ve made for years, and which I have consistently attributed to the fundamental institutional and demographic weaknesses that pervade Russian society; in particular, when life, liberty, and property are insecure, it makes eminent sense to focus on the here and now, rather than the future.  (Here’s another post that explores this theme.)  

Please keep Medvedev’s words in mind, all you self-styled Russophiles, the next time you want to take issue with my analysis of the institutional impediments to Russia’s long term economic prospects.

And I wonder if the high-tech industries that “exist only on paper” (per Medvedev) include that much vaunted nanotech sector.  Anyone (ahem) care to comment?

May 15, 2009

Stephen Blank Is Priceless

Filed under: Military,Politics,Russia — The Professor @ 10:57 pm

Chicago PhD and Army War College Prof Stephen Blank is one of my favorite historians of Russia, and also one of my favorite commentors on contemporary Russia.  His contribution to today’s Russia Profile Expert’s Panel is worth quoting in full:

Frolov’s solicitude for the EU’s workload is touching, but his analysis and questions reveal so much about Russian misperceptions of the EU that we could write a long article or book about the subject.  

First of all, his remarks betray Russia’s belief that there should be no European security organizations other than itself in the former Soviet space, in other words—that these are not fully sovereign states and should belong to Russia’s sphere of influence.  

This point of view runs up against the fact that none of these states is prepared to sell its sovereignty to Russia, and that they have the right to seek whatever partnerships they please and with whomever they choose to do so. Secondly, he, like many other Russian analysts, still fails to understand that the EU has always been a security organization, not just a bureaucratic contrivance. In this he, like they, fails to grasp the transatlantic bargain, to use Harlan Cleveland’s term, a major part of which is the project of European integration embodied in the EU.  

Thirdly, he fails to acknowledge that the EU is not bound by Russia’s “Sacro Egoismo,” the belief that its security interests, as defined by Moscow, take precedence over everyone else’s in Europe.  

He also fails to acknowledge the years of valiant effort by the EU to deal with Moscow as a strategic partner, only to be shown by Moscow that it counts for nothing in Moscow’s eyes – take the unilateral Russian violation of the Medvedev-Sarkozy truce plan for last year’s war against Georgia, for example.    

Neither will he admit that Russia has done everything possible to split the membership of the EU, to fracture its unity, and in general to play a political game more apropos to 1809 than to 2009. Undoubtedly, Russia will try to retaliate because it cannot admit the legitimacy of any foreign presence in the CIS, or accept that other CIS states might want and need this new partnership. As for NATO membership or enlargement, that is a dead issue for now, given the domestic situation in Georgia and Ukraine. But once again, should they choose to join NATO and meet the qualifying conditions, there is no reason in principle why they should not be admitted.  

Russia obviously wants to continue to believe that the NATO of today is the NATO of 1955, and that these former Soviet states have no right to join because it will be offended. But it cannot make its proposal for European security and simultaneously demand a sphere of influence where its security is superior to that of other states, especially as the language of its appeal says that nobody should enhance security at another’s expense.

This is the Russian definition that suits the internal and psychological needs of a ruling elite that cannot rule by means other than predation and neo-imperialism. It is hardly an accident that virtually every East European and post-Soviet state, and even states like Pakistan, have recently furnished evidence or claimed that Russia is conniving to destabilize them. Given that clear evidence, why shouldn’t these states seek partnership with Brussels and why shouldn’t Brussels, which, after all, has equally good evidence of the Russian policy, reply affirmatively?

Couldn’t agree more.

Also worth reading, but for completely different reasons, is the contribution to the panel of Vladimir Baleaff, of the Global Security Institute who apparently believes that the Great Northern War is still going on, with Sweden and Poland threatening poor, besieged and beset Russia.  A perfect example of the mindset that I discussed in today’s earlier post, and an excellent foil to Blank’s analysis.

Short Timers

Filed under: Economics,Politics,Russia — The Professor @ 3:48 pm

Paul Goble links to, and discusses, an analysis by a Russian priest who argues that Russia is a “sociopathic land.”  The primary evidence for this diagnosis is the short term focus of Russian political and economic thinking: “In most cases, they are moved by consideration of their own benefit but only in the short term: the longer-term consequences of their actions do not affect them much.”  

It is always dangerous to anthropomorphize states or “lands,” or large collectives of individuals.  Hence, assigning a psychological diagnosis is problematic at best.  But Orthodox  Father Yakov Krotov is onto something.  Indeed, he’s onto something that I’ve written about a number of times on SWP, for the short term focus of Russian policy and actions is clearly evident.  In “Man in a Hurry” (from February, 2007) I noted that this was particularly characteristic of Putin.  

My explanation for this short term-ism is not psychological, but economic.  (Go figure!)  A variety of factors limit the rational time horizons of political and economic actors in Russia.  One is demographic.  Hard to think about the future when you don’t think you have a future.  Another arises from the insecurity of property rights and personal security.  Without protections of property, there is an incentive to grab short term gains, and forgo long term investments.  (One of the striking features of Russian economic development is the very low rate of investment relative to GDP, as compared to Asian Tigers, for instance.)  Similarly, due to the absence of legal protections, and the prevalence of mob-style settlement of political and economic disputes, there is a substantial risk of loss of freedom or life in some arbitrary, and perhaps violent, process.  This risk also tends to focus the mind on the present.  In a land of roving bandits (to use Mancur Olson’s phrase), “don’t start thinkin’ about tomorrow” are words to live by.  

The insecurity of person and property from the predations of the state and its agents is very real.  Very.  Consider this EDM article that considers the recent mass shooting by a Moscow police major in a broader context:

On April 27, Police Major Denis Yevsyukov, chief of the Tsaritsino district precinct in Southern Moscow, opened fire in a supermarket, killing two and injuring six -with four critically injured (www.publicverdict.org, April 27). The major also shot dead the taxi driver who had driven him to the store. What the authorities hastened to present as an act of random brutality on the part of a deranged individual, in reality represents a much deeper institutional problem within the police. Whereas most citizens in a Western country feel either indifferent or protected when they meet police on their streets, in Russia the same meeting evokes fear.

All law-enforcement services within Russia have become a public menace, but the Ministry of the Interior (MVD), which runs the police force, standing apart as being the most notorious. Policemen have become infamous for beatings, extortions, rape and robbery.

One indication of how the interior ministry became criminalized was revealed in the case of Lieutenant-General Alexander Orlov. Formally acting as an aide to the then Interior Minister Vladimir Rushailo, Orlov in effect ruled the MVD between 1998 to November 2001 -after which Rushailo left to take over the Security Council. Orlov, whose personal fortune was estimated at some $100 million, immediately disappeared. Though the authorities placed him on a wanted list, he conspicuously visited Moscow restaurants and Rushailo’s son’s dacha (www.warweb.ru, May 8, 2005).

On the same day that Major Yevsyukov went on his shooting spree, prosecutors accused five Moscow police officers of operating as a criminal gang. The accused officers served in the police organized crime squad. They have been charged with kidnapping a Tajik citizen to extort money from his relatives, before allegedly beating him to death. The officers also face charges of selling drugs and forging criminal evidence (The Times, April 28).

Indeed, law-enforcement officers being transformed into a criminal gang are nothing new. The most notorious (though far from unusual) case, known as “the case of uniformed werewolves” was publicly exposed in 2003. Six senior officers from the Moscow Criminal Investigation Deprtment, much romanticized over decades as the service of dedicated crime-busting role-models without fear or reproach, were charged with organizing a criminal group, extortion, fraud, racketeering, and beatings among other things. Lieutenant-General Vladimir Ganeyev, the chief of the Ministry for Emergencies’ internal security department (the Russian version of FEMA) headed this “werewolf group” (www.utro.ru, July 2, 2003). Four more officers from the same department were arrested as members of this criminal group in 2007 (Moskovsky Komsomolets, June 14, 2007). According to numerous testimonies, published by the respected human rights Public Verdict Foundation and other rights groups, beatings remain the main investigative modus operandi at Russian police precincts.

. . . .

In December 2008 an elite riot police squad (OMON) in the Republic of Bashkiria went on the rampage, assaulting locals in the cities of Blagoveshchenk, Salavat, Chishmy and some nearby villages. According to the media and human rights activists, in Blagoveshchenk alone up to 1,500 males (2.5 percent of the entire population) were detained and brutally beaten. Officials indicated that 342 were detained, with 197 registered as seriously injured by beatings. The Moscow-based bi-weekly Novaya Gazeta alleged that the riot police had carried out mass rape. “I have seen a lot, but I wept as I listened to this tape,” commented Novaya Gazeta’s correspondent Marat Hairullin, as he quoted testimony from a rape victim: “There were three of us…He was wearing a mask…They said either this, or you will be charged with crime…they made me lie on a desk…It really hurt…” (Novaya Gazeta, January 14, 2005).

Alexi Bayer mentions another phenomenon–over-the-top consumerism–that is also consistent with a short term lifeview that reflects a dim view of the future and its risks:

I have no idea who paid him to stand there and whether his withering English sarcasm was part of his job description. It is true, however, that in recent years Russian visitors have developed a reputation for crass nouveau-riche consumerism. Although Russia no longer has world-renowned writers, artists or composers, wild Russian spending and partying have become legendary the world over.  

I’ve also emphasized in the past that such short-termism has macro-political implications.  Short time horizons tend to make it more difficult to engender cooperative behavior among powerful elites.  This can contribute to political instability and brittleness.  And indeed, this instability and brittleness can in turn make short termism rational.

So, I can understand certain regularities in Russian economic and political behavior; they would not be rational in a more stable, secure environment, but are eminently sensible in one in which political, legal, economic, and health conditions create tremendous future risks.  But Bayer mentions other behaviors that do seem to be pathological, as he (and Father Krotov) describe them:

What is funny, however, is that Russians insist that theirs is a deeply spiritual culture that contrasts with the shallow materialism of the West. [You can say that again.]

Most nations, like most individuals, have an overly flattering opinion of themselves.  This is clearly not how its neighbors view Russia, especially after the war in Georgia. And, judging by the company Moscow keeps in its foreign policy — the likes of Belarus, Venezuela and Iran — it seems more at home with international pariahs.

. . . .

Even though Soviet citizens were cynical about the official propaganda, pervasive lying still distorted their perceptions. World War II is a good example. The simplistic, black-and-white Soviet version of events — that the Soviet Union was an innocent victim of German aggression and that the Red Army brought only freedom to Poland, Czechoslovakia and other countries — has never been questioned either officially or in popular mythology. Inconvenient facts like the Molotov-Ribbentrop Pact, the brutal treatment of the liberated countries and the wanton sacrifice of millions of Soviet soldiers and civilians do not seem to dim the national myth.  

Russia’s attempt in the 1990s to become integrated into the international community foundered in part because of its inability to understand how its recent history was perceived in the West. Similar self-delusion shapes Russia’s relations with former Soviet republics and Eastern European countries, causing frequent international spats and bouts of mutual recrimination.  

At home, too, the deeply ingrained influence of Soviet propaganda has been negative. Ordinary Russians have had it drummed into them how technologically advanced, industrialized and rich their nation has always been. They find it hard to understand the disconnect between their putative wealth and pervasive poverty and backwardness they see all around them. As a result, Russians tend to seek scapegoats for their dismal standards of living: They blame foreigners, ethnic minorities or 1990s oligarchs for stealing their wealth.  

There is a widely held belief in Russia that Soviet President Mikhail Gorbachev and President Boris Yeltsin dismantled the Soviet Union on orders from foreign secret services. Indeed, how else to explain the ignominious crumble of an empire that had routinely described itself as monolithic, powerful and destined lead the rest of humanity to the bright communist future?  

Self-delusion not only tends to exaggerate Russia’s achievements and contribution to world history and economy but diminishes its standing, too. The Soviet media loved to repeat ad nauseam how the country was surrounded by enemies. Even today, many Russians sincerely believe that foreign governments secretly plot to dismember their country and get their hands on its natural resources.  

This is why the Kremlin reacts so angrily to NATO’s eastward expansion or the installation of elements of the U.S. missile defense system in Poland and the Czech Republic. Russia would have been a far more secure nation — and much more open toward its neighbors and partners in the international community — if it took a realistic look at its nuclear arsenal and understood that no military power on Earth would ever want to tangle with it.  

This disconnect between self-perception and reality is at turns comical and frightening.  The most frightening aspects manifest themselves in paranoia.  A couple of examples.  First, the use of the Victory Day celebrations to draw analogies between the Nazi invasion of the USSR, and NATO and EU expansion:

Opening what was described as one of the most spectacular Victory Day parades in recent years, President Dmitry Medvedev said Russia’s victory over fascism during the 1941-45 Great Patriotic War was “a great example and a great lesson” to all nations.

Speaking side-by-side with Prime Minister Vladimir Putin, Medvedev said the lesson was “still valid today, when again and again those nations appear to be the ones indulging in military adventurism.”

Russia’s president insisted that “any aggression against our citizens will be decisively rebuffed, and Russia’s future will be peaceful, successful, and happy.”

Medvedev’s comments also came amid renewed tensions with NATO, whose decision to hold war exercises in Georgia has been termed a “blatant provocation” by Medvedev. Russia defeated Georgia in a five-day war last August.  

Another example is the Kremlin’s recent strategic assessment and policy document:

Russia may face wars on its borders in the near future over control of energy resources, a Kremlin document on security policy said on Wednesday.

The paper did not name potential adversaries, but Russia, the world’s biggest energy producer, shares a border of more than 3,600 km (2,250 miles) with resource-hungry China and a small sea border with the United States.

“In a competition for resources, problems that involve the use of military force cannot be excluded that would destroy the balance of forces close to the borders of the Russian Federation and her allies,” said the document, which maps out Russia’s security strategy until 2020.

“The attention of international politics in the long-term perspective will be concentrated on the acquisition of energy resources,” the paper said.

It said regions where such a competition for resources could arise included the Middle East, the Barents Sea, the Arctic, the Caspian Sea and Central Asia. Russia also sees increased competition for food, fresh water and land.

What an anachronistic worldview.  Dudes, it’s not 1909 any more; this reads like some social-Darwinian-race-for-colonies document produced by the Kaiser’s Foreign Ministry, or the British Foreign Office.  Robert Coalson at Power Vertical has more:

And, indeed, the document does not reflect any warming of  Russia’s relations with the West. It states that a major threat to Russian security is “the policy of some foreign states aimed at attaining an overwhelming military superiority, particularly in the area of strategic nuclear weapons, through targeted, informational, and other high-technology means of conducting armed conflict, non-nuclear strategic arms, the development of missile defenses, and the militarization of space” (It is clear why Andrei Savelyov, head of the Great Russia party,  commented  that “in places the document is so ungrammatical and illogical that it makes the reader weep”).

Likewise, it deplores NATO’s efforts to “move the military infrastructure of the alliance to [Russia’s] borders and efforts to give it global functions, which contradict the norms of international law.” This would seem to call into question even NATO’s efforts in  Afghanistan. The doctrine asserts that “the  North Atlantic  alliance, as well as flawed legal instruments and mechanisms, are increasingly creating threats to international security.” Dmitry Tymchuk, a Ukrainian military analyst,  said  the document amounts to declaring the disbanding of NATO as a strategic goal of  Russia.

 Again.  NATO, even were it to expand further, would not pose a threat to Russia.  Nor will the BMD facilities in the Czech Republic and Poland.  They indeed limit the ability of Russia to dominate the nations on and beyond its borders, but (a) by what right does Russia have to exercise such dominance over the objections of the citizens of these nations?, and (b) NATO has neither the capacity nor the will to utilize these nations to interfere in Russia’s internal affairs.  

Coalson also notes that the document (a) reflects the elevation of the state over the rights and interests of individuals, and (b) conveniently undermines any effort to hold the government accountable for social and economic goals by eliminating any specific benchmarks by which to measure performance:

However, the status of concerns about the rights of citizens and the state of democratic institutions is definitely downgraded in the current document. Viktor Litovkin, editor of the military supplement of “Nezavisimaya gazeta,”writes: “In comparison to the old National Security Concept, which spoke about the priority of the security of the individual, society, and the state, the new Strategy brings to the fore national defense and state and public security. Of course, it does not forget about human rights. But they are not discussed in the sort of systematic way that they were before.”

Unlike its predecessors, the new strategy document includes benchmarks by which, in theory, the government’s success can be measured. These include categories like the level of unemployment, the difference between the economic potential of the top and bottom tenths of the population, a consumer-price index, and the like. However, these categories are listed without any baseline or target figures. Gazeta.ru reported that such targets are included in a secret protocol to the public document.

Such documents are not particularly relevant as concrete action plans.  They are, however, revealing glimpses at worldviews and modes of thought.  And the worldview that is revealed is an atavistic, paranoid one that emphasizes relations based on force rather than exchange.  That is, to the extent that political Russia thinks about the future, it does so by looking into the past.  

This is eminently self-defeating.  As I’ve said before, you catch more flies with sugar than gall.  But Russia appears to be blissfully unaware that its truculent behavior towards its neighbors–no, towards everyone–drives those it wishes to influence into the arms of those it deems its enemies.  This interview with Polish Foreign Minister Radoslaw Sikorski is priceless in this regard:

RFE/RL: Almost without exception, various EU officials and many of your colleagues have vehemently rejected suggestions that the EU is looking for a “sphere of influence” in the East. What does the EU have against influence?

Radoslaw Sikorski:  I think people object to the 19th-century sound of the idea of a sphere of influence. But we don’t apologize for the European Union being civilizationally attractive to its neighbors. And if they want to make their internal laws [and] procedures more compatible with ours, that’s something we rejoice in and that’s something that will certainly pull them towards us.

RFE/RL: Do you not think that there is a certain danger that Russia, seeing this as a competition for influence, could draw the EU into a different logic — one of confrontation — over the long term?

Sikorski:  Let’s be realistic. Visa liberalization is not really the kind of thing people had in mind in the 19th century when they spoke of spheres of influence. These are just facilitating mechanisms for the people of these countries. Equally, most of our countries are in the World Trade Organization, and deepening free trade is also beneficial for all, and is not something you can have much of a competition over. And then projects to do with civil society, to do with scholarships and assistance in meeting various standards — I really don’t see how any reasonable person can see anything threatening in any of this.

RFE/RL: Do you think Russia is a force for stability in Eastern Europe?

Sikorski:  Russia is certainly a force [! almost British understatement], and she seems to have made her own choice for the time being. But various countries that used to be in the former Soviet Union seem to gravitate more to European standards and European ideals, which is hardly surprising.

Poland, for example, is the home of Solidarity; we fought for our freedom long and hard and we believe that democracy works, that a true market economy based on competition rather than the political control of assets is more efficient, and that the sacrifices involved in getting your procedures, your laws, your institutions right are worth it even in the long run.

But, of course, Russia is on a somewhat different directory [trajectory? If so, yet more dry wit].

RFE/RL: Given that there is this polarity between the Russian attitude and the EU attitude toward the Eastern Partnership, whether the EU likes it or not, do you think there exists a long-term “third way” for these countries or will they at some point have to make a choice?

Sikorski:  We used to have a saying in Poland: “The ‘third way’ leads to the Third World.” Look, we are putting great words on something that really is at this stage very modest. Visa liberalization, free trade, a bit of help in training officials in EU law and such things — I don’t think they have any potential to cause controversy, and I certainly don’t think they will force anybody to choose, because these countries will want to trade both with the EU and Russia, just as Poland does.

I was just in Moscow [on May 6] and I was amazed and pleased to discover from my notes that Poland had $30 billion [worth] of trade with Russia last year, and that Russia is actually our second-biggest trading partner, even though we’ve been members of NATO for 10 years and the EU for five years. So I really don’t see that there is a contradiction.

Sikorski views relations in terms of exchange, not dominance; in terms of freedom to choose, not “I have an offer you can’t refuse.”  And he cannot understand how anyone could object to such a basis for relations.  But Russia clearly does object.  Muscovite modes of thought live on, and leads to short-sighted actions that undermine the very same long term goals sought.  An attitude of “if I can’t have you, nobody will” is a certain way to drive the object of your desire in the arms of a protector.  But, operating with an overdeveloped sense of self-regard, which precludes viewing others as equals, causes Russian leaders to frame all relations with neighbors in terms of dominance rather than exchange; to frame them in imperial terms, as it were.  

Another symptom of these complexes is the disconnect between display and reality.  Russia’s military muscle flexing is, as I’ve often written on SWP, a classic example of this.  Roger McDermott of Eurasia Daily Monitor describes the most recent manifestation of this behavior:

The Victory Day military parade in Moscow on May 9, marking the 64th anniversary of the Soviet defeat of Nazi Germany, offered a curious mixture of pomp, myth and nostalgia -all vital elements for the Russian leadership. As the Spassky Tower on Red Square struck 10:00 am, the parade began, overseen by President Dmitry Medvedev and Prime Minister Vladimir Putin from a dais erected in front of Lenin’s mausoleum concealed by a Russian tricolor in an effort to avoid its more obvious Soviet overtones. The display of “military power” which ensued was assiduously calculated to offer a striking visual image against which Medvedev could warn any country considering “military adventurism” against Russia. It also served as a temporary escape from the reality of the crisis within Russia’s armed forces and the deepening economic malaise affecting the country (ITAR-TASS, May 9).

Medvedev avoided any specific reference to the war with Georgia in August 2008, though he alluded to the five-day conflict, saying that the lesson of World War II “remains acute today when again there are those who engage in military adventurism.” Moreover, amongst his Victory Day messages of congratulations, Medvedev also included the leaders of Abkhazia and South Ossetia. He referred to personnel taking part in the parade that had, “proven the high capability of the Russian military in real action” (www.kremlin.ru, Interfax, May 9).

The preparations for the parade had been costly and intensive. This involved training the various military units for almost two months in Alabino, 50 kilometers south-west of Moscow which boasts a replica of Red Square. The cost of staging the parade itself was estimated at 205 million rubles ($6.3 million). Local authorities in Moscow confirmed that expenditure had involved repairing paving slabs on Red Square and in the surrounding area, as well as preparing the roads for the arrival of military vehicles. It also paid for city workers to clean a large Soviet symbol -a red and gold star- to be placed above the GUM department store for the occasion (ITAR-TASS, www.russiatoday.ru, May 9).

. . . .

Yet, inadvertently underscoring the mythical dimension of the display, all the uniforms worn for the event featured the new design originally scheduled for introduction throughout the armed forces, which has since been abandoned owing to the costs involved. Indeed, Serduykov must have been stunned by his commander-in-chief claiming that the Georgia conflict had proven the combat capability of the Russian armed forces. After all, he has consistently argued precisely the opposite: the conflict had revealed major structural flaws and justified a radical reform program.

Indeed, Russia’s experience of the global financial crisis has impacted on several aspects of that much publicized reform plan. Re-locating the Navy headquarters from Moscow to St. Petersburg and introducing new uniforms have proven early casualties in the process, caused by lack of finance. This has also undermined the intention to reduce the officer corps by 2012 with cuts of as many as 200,000 posts, and plans to modernize and re-equip the military -which exposed the decayed condition of the country’s defense industries- leaving the entire process in jeopardy. In March, Serdyukov suggested that as much as 90 percent of Russian military equipment might be obsolete: in stark contrast to the hardware used on Red Square (Interfax, March 21).

Nevertheless, the Russian leadership confronted with economic downturn and seeing NATO as a threat to the country, attempts to re-mould an image of its military power in order to threaten Russia’s “enemies.” “I think, the Red Square parade made everyone feel proud for our country,” Medvedev told veterans at a Kremlin reception after the parade (Rossiya TV, May 9).

The pattern emerging in relation to these parades, with the reappearance of military hardware on Red Square in 2008 and staging a larger Victory Day parade this year, suggests that the event in 2010 will be held on an even more grand scale -marking the 65th anniversary of the end of World War II. In the meantime, the gap between image and reality is steadily widening, perhaps necessitating the continued emphasis placed on “show.” However, few senior Russian military personnel will believe the claims made on May 9 that the country’s conventional military power is capable of adequately meeting the challenges of modern warfare.

In other words, Putin’s Potemkin military, redux.  

The self-righteous arrogation of the right to interpret the past is another symptom:

In a special video posting on his official Kremlin blog President Dmitry Medvedev emphasized that the World War II Victory-Day on May 9 is an “all-Russian celebration, uniting the entire nation.” But it is not all positive. Around half of Medvedev’s video address was spent on renouncing “the falsifiers of history, who are becoming increasingly vicious, ugly and aggressive.” Medvedev announced, “We must defend historic truth, though it is not easy and sometimes revolting. We cannot close our eyes to the terrible truth of the war, but we will not allow anyone to undermine the sacrifice of our people” (www.kremlin.ru, May 7).

Moscow has recently accused the authorities in the Baltic republics and Ukraine of rehabilitating WWII-era nationalistic Nazi collaborators. But Medvedev’s statement was vague on who in particular are the villains. The ruling United Russia party has introduced legislation into the State Duma that will make it a criminal offense to “question the Soviet victory in WWII,” punishable with a large fine and a prison sentence. Liberal commentators on radio Ekho Moskvy believe this legislation may be used not only against someone in the Baltic or in Ukraine, who are beyond Russian jurisdiction, but to punish liberal historians or dissidents, who question or investigate communist crimes (www.echo.msk.ru, May 8).

The “anti-falsification” legislation may be used to brand political opponents of the present regime as traitors. Recent opinion polls show that the Russian public has a unique opinion of WWII. A poll by VtSIOM showed that 77 percent of Russians believe the Red Army liberated the East European nations from Nazi occupation, and then allowed them to freely live and develop. Only 11 percent believe that the Soviet Union imposed pro-communist regimes and undermined the independence of the former Warsaw Pact nations. A sizable majority (60 percent) agree that anyone, who publicly opposes the “Soviet victory and sacrifice,” is a felon (Interfax, May 9).

This pro-communist public nostalgia and the staunch survival of Soviet myths denying the occupation of Eastern Europe by the Red Army after WWII, is cultivated and supported by official Russian propaganda. Not only does the older Soviet-educated population believe the narrative, but the majority of younger people also accept it (Interfax, May 9). The restoration of Soviet-style massive displays of military might on May 9 on Red Square is a deliberate pragmatic policy by the present regime, hoping to gain more legitimacy by parading itself as a direct successor of Soviet communist greatness.

I find this particularly disgusting because: (a) the USSR played a major role in facilitating in rise in Nazi military power, (b) the USSR was similarly directly responsible for the onset of the war (cf. Molotov-Ribbentrop, among other things), and (c) its sacrifice in WWII, and its undeniable contribution to the vanquishing of Germany, do not excuse its appalling treatment of its own population, or the populations of the lands it occupied and dominated.  I would have a more sympathetic view of Russians’ criticisms of its neighbors’ historical revisionism if they would take a more honest view of their own, something that is definitely not in the cards.  And this, as another Goble piece illustrates, will also have pernicious effects:

The authors of “The Rehabilitation of Nazism” on the territory of the former republics of the USSR and most of those who have commented on it have focused on the ways such a law could be used by Moscow against the governments of some of these countries.

But Irina Pavlova, one of the most thoughtful Moscow commentators on public life there, argues that the real and far more negative impact of this legislation is likely to be on the Russian Federation itself, where, she suggests, this legislation sets the stage for the re-imposition of a Soviet-style official version of the Russian past (grani.ru/Politics/Russia/m.151005.html).
In an essay she entitled “An Afterward to Victory Day,” Pavlova argues that “far from everyone understands the genuine meaning of this legislative initiative.” And she seeks to provide it by noting that “what is important is Russia is not so much the laws themselves as the subtexts and instructions about what society as a whole may not suspect” until too late.  

Consequently, in order to understand what this legislation may ultimately mean, it is important to look beyond the text itself which is clearly directed against non-Russian nations, some of whose members cooperated with the Nazis, and consider those at the top of the Russian political system who send “signals” as to how they want this act to be applied more generally.

On his video blog, she points out, President Dmitry Medvedev noted that “we have begun to encounter what are called historical falsifications” and these “are becoming ever more severe, evil and aggressive.” Consequently, he said, there is a need, in Pavlova’s words, “to be objective as the powers that be understand” whatever issue is at hand.

That sent a clear “signal” to those who wanted to hear. General Makhmut Gareyev, president of the Academy of Military Science and an officer long associated with official views on World War II, responded to Medvedev’s words with a reassertion of the need for “an objective treatment of the military history of Russia.”

He told an Ekho Moskvy interviewer that “no historians will give an answer” like that. “It is necessary,” the general continued, “that government organs participate in the creation of a new work. For example, only the General Staff, the Ministry of Foreign Affairs, and the KGB and the FSB today can explain what really happened in 1941.”

Another person who heard this signal from Medvedev was Yury Zhukov, a researcher at the Institute of Russian History who has played “a definite role in the contemporary glamorization of Stalin,” told “Komsomolskaya Pravda” that “Russian citizens who intentionally distort the facts of history must be subject to criminal punishment.”

“All deviations from the official truth about the war,” Pavlova suggests, “from his point of view are “a clear expression of a pro-American and anti-Russian view about that which we by rights call the Great Fatherland War.” To prevent the situation from deteriorating further, Zhukov said, “it is necessary to create a single state history textbook.”

In this way, Sergei Shoigu’s initiative is being transformed into a weapon not so much against people in other countries who may have different views about World War II than Russians do than against “independent historians” who are not prepared to follow the line laid down by “veteran-preservers and historians who serve the present day powers that be.”

Yet more short termism.

I think we all tend to be our own worst enemy.  But Russia’s worst enemy is far, far more destructive than most.

May 14, 2009

What Kind of Green Shoots? A View From the Metals Markets

Filed under: Commodities,Derivatives,Economics,Energy,Financial crisis — The Professor @ 7:41 pm

I’ve written about the hard-to-explain behavior of oil prices and stocks.  But oil isn’t the only commodity around, so I thought it would be worthwhile to look at some others to see whether their behavior may shed light on which version of the “green shoots” theory their behavior supports–the green shoots of a recovery in output, or the money-is-green version that the price rises are a harbinger of inflation.

The best data on prices and especially stocks for industrial commodities is available for non-ferrous metals.  Here are the comparisons (all data from the LME):

  • Copper 3/2/09.  Cash: $3329, 3 Months: $3355, Stocks: 530,875 MT.
  • Copper 5/13/09.  Cash: $4507, 3 Months: $4530, Stocks: 373,750 MT.
  • Lead 3/2/09.  Cash: $1160, 3 Months: $1166, Stocks: 60,750 MT.
  • Lead 5/13/09.  Cash: $1450, 3 Months: $1440, Stocks: 73,500 MT.  
  • Nickel 3/2/09.  Cash: $9602, 3 Months: $9607, Stocks: 99,378 MT.
  • Nickel 5/13/09.  Cash:  $12450, 3 Months: $12545,  Stocks: 111,648 MT.
  • Primary Aluminum 3/2/09.  Cash: $1270, 3 Months: $1310, Stocks: 3,243,900 MT.
  • Primary Aluminum 5/13/09.  Cash: $1428, 3 Months: $1521, Stocks 3,880,325 MT.
  • Tin 3/2/09.  Cash: $11,047, 3 Months: $10702, Stocks: 9,140 MT.
  • Tin 5/13/09.  Cash: $13,890, 3 Months: $13,615, Stocks: 13,405 MT.
  • Zinc 3/2/09.  Cash: $1078, 3 Months: $1104, Stocks: 355,500 MT.
  • Zinc 5/13/09.  Cash: $1430, 3 Months: $1475, Stocks: 322,025.

Note that the prices of each commodity have risen.  Depending on the metal, the rises have been between about 15 percent and 40 percent.  For some of the metals, spreads have narrowed.  For instance, the contango in copper has decreased, as has that of lead (which has gone from contango to backwardation).  For aluminum, however, the spread has widened, as it has for zinc (though not in percentage of the spot price).  

Interestingly, lead, nickel, tin, and especially aluminum stocks have increased; stocks for copper and zinc have decreased, especially the former.  Aluminum is of special interest, as this is a major industrial commodity, and is highly sensitive to industrial uses (e.g., in autos).  

Overall, the story is quite mixed.  Copper suggests bullish fundamentals: a sharp rise in price and a pretty steep fall in stocks.  But, overall, the stocks data give no evidence of a near term strengthening in demand that would explain the price rises across all metals.  Note the rise in aluminum price and the contemporaneous nearly 20 percent increase in stocks.  Hardly a signal of a rebound in industrial demand.

There are two interpretations consistent with the data: (1) spot demand remains low, but demand is expected to pick up in the future, and (2) real spot demand remains low, future real demand is expected to remain in the doldrums, but prices are being buoyed by expectations of a possible inflationary burst (i.e., the money is green version of green shoots).  

Even the copper data, and perhaps data from the oil market, are potentially consistent with (2).  It is widely reported that China is stockpiling copper and oil.  Indeed, some of the copper stocks decline may be a mirage as copper is merely being transferred from LME warehouses to Chinese strategic stockpiles that are invisible to the market, rather than being consumed.  This could reflect a Chinese substitution of dollars/dollar denominated assets into real assets such as copper (and perhaps oil) due to their fears about the US dollar and inflationary pressures in the US.  That would be consistent with the inflationary expectations story, and indeed, a channel by which these expectations influence current prices.

If I had to choose between (1) and (2)–between an anticipated increase in future real demand and an anticipated increase in nominal demand due to inflationary pressures–I guess I would choose (2).  Suffice it to say that although I’m not metaphysically certain as to which explanation is right, the data do not contradict the inflationary expectations story.  Moreover, the future demand/spot demand story is not that convincing.  Anticipation of future demand should lead to an increase in current demand, but that is not being reflected in stocks.  

With stocks largely signaling weak real demand (especially when one considers that the copper stock drawdown may not reflect an actual increase in copper consumption), but prices rising, there is a very good chance that metals prices are in fact a harbinger of inflation.  In his speech at the Atlanta Fed conference on Tuesday, John Taylor suggested that the Fed may not have much time before it has to decide whether to switch gears and fight inflation.  The metals data support that suggestion.  Indeed, if China’s actions in the copper market reflect a substitution of real stuff like the red metal for dollar denominated nominal claims, rather than a real need for the commodity, the time for choosing may be coming much more quickly than is conventionally believed.

Just sayin’.  Or, perhaps I should rephrase that: Just the metals market sayin’.  Listen up, Chairman Bernanke.

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