Streetwise Professor

Check this out if you want to see examples of the myriad deformities in Russian energy policy in one brief article.   Wasteful use of gas due to domestic price controls–waste that contributes to the release of greenhouse gases, by the way.  The use of state regulatory agencies to exert pressure on a foreign investor;  in this case, the mineral rights regulator  RosNedra threatening to revoke Hungarian firm MOL’s license unless it captures gas production associated with the output of oil.  A threat that would be unnecessary if state firm Rosneft had followed Yukos’s practice of  purchasing of the gas.  The involvement of  Surgut Neftegaz–sometimes called Rosneft chairman’s Igor Sechin’s favorite “private” oil company–attempting to take control of MOL.  The simultaneous adversarial actions of RosNedra, Rosneft, and Surgut Neftegaz towards MOL suggests that they are playing a triangle offense, with the Hungarians caught in the middle.

In a more economically efficient system, the price of gas would adjust to ensure its efficient use, and eliminate wasteful flaring.  This would alleviate Russia’s looming gas shortage.  It would also make it unnecessary for the regulator to coerce firms into doing this–and therefore would also deprive it of the cover to use its powers at the behest of state owned firms, and the private allies of state owned firms.

But this is not possible in a natural state like Russia.  Prices cannot be allowed to allocate resources efficiently, because it would damage important domestic political constituencies, including individual consumers, but more importantly, industrial consumers and power producers dependent on below-market gas prices.  And protections of foreign investors constrain the ability of the state to shift rents around in order to placate other constituencies, so they cannot be countenanced.

The pressures being exerted on ExxonMobil represent another example of how the political imperative to allocate rents in the natural state precludes reliance on market mechanisms to allocate resources; the necessities of subsidizing restive Siberian consumers and feeding Gazprom’s voracious appetites means that something has to give, and that something is a foreign investor.

This is why this attempt to interpret Russia’s adamant unwillingness to sign onto the foreign investor protections in the Energy Charter solely as a response to the Yukos expropriation are simplistic, and wide of the  mark:

But everything was outweighed, judging by everything, by just one sole argument. The Energy Charter is the legal foundation for a claim by former shareholders of the YUKOS company against the Russian state. Investors who have suffered from the artificial bankruptcy of the former company of Khodorkovsky are demanding of the government of Russia to pay them back for their losses. In its time, the market had appraised the YUKOS company in the tens of billions of dollars. Correspondingly, the sum of the shareholders’ claims is comparable is size as well.

. . . .

It is possible that the powers would do well to be more consistent. It looks somewhat strange that the development of international relations and questions of economic strategy are subordinate to the logic not of benefit for the country or of society, but lie in the stream of resolution of superannuated conflicts. But, probably, it is not at all the «YUKOS affair » that should be determining the policy of the country, or else it turns out that the tail is wagging the dog, although it should be the other way around.

Yes, Yukos is important, and yes, the prospect of having to compensate the expropriated is one reason why Russia cannot join the Energy Charter.  But it could not join even if Yukos had never existed.  The energy charter would force an element of market discipline and economic rationality that the natural state that is Russia cannot abide.   The Charter’s provisions on investment protection, transit, and transparency limit the Russian government’s flexibility to manipulate markets in order to allocate rents to maintain a political equilibrium.  Khodorkovsky and Yukos threatened that equilibrium, but there are other threats.   As a result, Yukos or no, Putin and the Russian elite are perfectly willing to forgo some of the efficiency benefits of more secure property rights and the uses of prices to allocate resources, in order to ensure the distributive and political benefits that government control of resource allocation confers.

That’s the way the natural state works.

In the immediate aftermath of the Russo-Georgian War, I wrote that a major objective of US policy should be to revitalize the relationship with Turkey:

Rebuild the Relationship With Turkey. Turkey is another frontline state, and a largely overlooked one in commentary and analysis on the Russo-Georgian War. Turkey has a strong interest in keeping Georgia independent of Russia. The Turks have ambitions to be an energy hub, a bridge from the Caspian to Europe. Georgia is essential to realizing those ambitions. The Turks also have an ethnic affinity with Turkic peoples in Azerbaijan and the ‘Stans that would be more firmly in Moscow’s thrall if Russia controls the Georgian cork to the Caspian bottle. Turkey is also a historical enemy of Russia, with Russia’s 18th and 19th century expansion having come largely at Turkey’s (or, more precisely, the Ottoman Turks’) expense.

. . . .

American relations with Turkey have been rocky, especially since the Iraq war (with Turkey’s refusal to permit the 4th ID to attack from Turkey into northern Iraq), due to the impact of Iraq on the Kurdish issue, and the increasing Islamicization of the Turkish government. These fractures were perhaps inevitable in the absence of the perception of a common threat and a common interest that made the US and Turkey close allies during the Cold War. Russian revanchism in general, especially as manifested in the Georgian campaign, could bring these two somewhat estranged nations back together. It should certainly be a major objective of US policy to achieve this.

Sad to say, there has been little visible progress on this front, although the Europeans did secure something of a victory by getting Turkey to agree to proceed with the Nabucco project; although it must be said that there are still many potential obstacles, and Turkey’s future cooperation is not guaranteed.  They relented on some of their demands (e.g., 15 percent of the gas for domestic use, linkage of Nabucco to EU accession), but they could un-relent in the future.

Putin and Russia, though, clearly have identified Turkey as a linchpin in their energy strategy, and hence in their broader foreign policy.  (The two are so inextricably linked it’s impossible to say where one ends and the other begins, just as it is hard sometimes to determine whether Putin is prime minister of Russia, or of Gazprom.)  Almost immediately after the signing of the EU-Turkey accord over Nabucco, Putin jetted to Ankara, where he and the Turks inked their own deals, and discussed other ventures.  Notably, routing the South Stream project through Turkish waters, the creation of a South Stream 2 project that would ship gas through Turkey to the Mediterranean, and construction of a nuclear power plant.

One the one hand, this is worrisome, as it suggests that Turkey is more than willing to deal with Russia and engage in deals that will cement Russian gas dominance, at Europe’s (and Ukraine’s) expense.  It could be viewed as somewhat encouraging, though, because it also suggests a certain desperation on Putin’s part.  No sooner do the Europeans leave with Turkish agreement on Nabucco than Putin feels compelled to follow in their wake, offering all sorts of goodies.

There is, as always with these grandiose Russian gas projects, an element of unreality about them, not to say fantasy.  Medvedev and Putin are always slagging on Nabucco by questioning where the gas to fill it is going to come from.  But, pray tell, where is the gas going to come to fill South Stream (63 billion cubic meters/year) and South Stream 2 (16 billion cubic meters/year)?  South Stream in particular has growed like Topsy, with announced capacity more than doubling in a year’s time.

All this at a time when Russia is facing decline of its existing fields, delays in bringing new fields on line, cutting capex for exploration and development, not to mention a financial crunch that makes it highly doubtful that South Stream could be funded, even if there were the gas to fill it.  Also, Russia is facing a domestic supply crunch aggravated by the political necessity to keep domestic prices artificially low.  Russia has for years plugged its supply gap with gas from Central Asia, but the prospects for continuing to rely on that are bleak, thanks in no small part to Gazprom’s short-sighted cutting off contracted imports from Turkmenistan in response to its cash crunch.  Hence, there are even more doubts about the availability of gas for new pipeline projects.

Turkey is probably smart to exploit Russia’s willingness to deal, figuring that it might get something out of Russia and Europe.  Indeed, the smartest move would be for Turkey to continue to support Nabucco and to continue to negotiate with Russia.  Given Russia’s proven track record of ruthless opportunism (contract?  what contract?) if Turkey were locked into Russia with no Nabucco alternative it would be extremely vulnerable to holdup down the line.  Conversely, with Nabucco, it would have some leverage over Russia.  And Nabucco with no Russia would be preferable to Russia with no Nabucco, because the Europeans are more reliable contracting parties, and are far less likely to engage in holdups than the Russians would be.  And it is very possible that if Nabucco were dead, South Stream would soon follow it into the grave, leaving Turkey with zip.

All that said, a more proactive US policy towards Turkey would be welcomed, if only to force Putin to raise the bid further.  And the Europeans should not let this Russian-Turkish deal undermine their determination to proceed with Nabucco.  That prospect is no doubt a major reason for Putin’s Turkish sales job, and there’s no reason to hand him an easy victory.

GM’s sale of Opel is still hanging fire.  The German government is exerting heavy pressure on GM to choose the Sberbank-Magna deal (under which Sberbank would most likely sell its share to Deripaska’s OAO Gaz) over the rival RHJ International bid.  But GM is balking, for reasons that are quite understandable, to anyone who is familiar with Russian business practice:

Sources say that GM feels that Magna has taken advantage of unwavering support from German unions and local politicians, force-feeding Detroit a deal that it simply could not swallow.

Neither Magna nor RHJ will comment on the talks, but Smith has carefully documented developments in the negotiations in hopes of fostering understanding in Berlin for GM’s views and preparing the political ground for a possible deal with RHJ.

“We started the week with about 30 issues to resolve … I can report some progress, resolving perhaps one-third of the issues during a first day of talks,” he stated.

Smith explained on Thursday that most of his time in talks with Magna was still devoted to resolving deviations from a memorandum of understanding signed in May between GM and Magna, of which some were “very fundamental in nature”.

Sticking points included Opel’s involvement with GM’s Chevrolet brand in Russia, intellectual property transfer rights in Russia, access to advanced technology, product development responsibilities, and minority shareholder rights. [Emphasis added.]

All of these are legitimate concerns, and GM would have virtually no chance of enforcing any claims over IP, or shareholder rights (it would retain a minority 35 percent stake under the deal), in a Russian court.

But as Art Durnev of McGill University and Pat Akey of the LBS point out, Magna should be quite cautious as well:

Mr. Deripaska, Russia’s richest man before the financial crisis, has unparalleled control over the Russian aluminum sector and other related industries such as automotives. He emerged from the “aluminum wars” in Russia vastly wealthy and very well connected to the Russian government. In 2007, Mr. Deripaska invested US$1.5-billion in Magna, giving him control of 42% of the board seats and 20% ownership of the firm. He purchased the shares on a bank margin where they were pledged as collateral. After he received a margin call last October, he was forced to sell the shares at a loss of approximately US$625-million.

The benefit for Magna, Canada’s largest automobile parts manufacturer, in entering this deal is apparent: access to the expanding auto market in Russia with one of the best-connected businessmen in the Kremlin. However, Magna may have discounted the opaque nature of Russian businesses and the objectives of its newest investor when agreeing to the deal. Mr. Deripaska has stated publicly that his interests corresponds to the Kremlin’s, which are likely not the same as the interests of the existing stakeholders in Canada.

Russian politics are quite volatile. Last month, Vladimir Putin publicly blasted the oligarchs and, before a TV audience, forced Mr. Deripaska to sign a contract for supplies to restart production at idle factories. Should Mr. Deripaska fall out of favour, his existing companies’ future would be very uncertain, adversely affecting Canadian co-investors.

. . . .

This volatility already led Mr. Deripaska to diversify abroad. Like other Russian oligarchs, he had moved much of his wealth to the United Kingdom; however, a compromising conversation he had on his yacht with British politicians last year led him to move his assets again. He cannot access the United States (due to allegations of connections to Russian organized crime) so he is transferring his remaining assets into ventures within Canada. Canadian investors, therefore, are bearing the political risk that Mr. Deripaska is trying to diversify away.

. . . .

Magna and other Canadian companies should consider the implications of entering into cross-border investments. The Russian government has not been shy to advance its political-economic agendas and physical investments in areas that have poor investor protection institutions are more susceptible to nationalization.

Akey & Durnev raise the prospect that Magna could suffer if Deripaska falls from favor.  I think it is also a very real possibility that Magna could suffer even if Deripaska remains in favor.  It does not take a leap to imagine circumstances under which Deripaska exploits his Kremlin connections, resulting in Magna being harmed in favor of Deripaska’s OAO Gaz.  Either way, Magna is treading on very dangerous ground.

It is also hard to understand the obsession of the German government with forcing a Canadian-Russian deal over an EU (Belgian) alternative.  Do Merkel and the German unions really believe that Deripaska (and Putin) will have the interests of German workers at heart, or that Russia would hesitate for a moment to act in ways that are detrimental to Opel?  And Magna itself is hardly a model citizen, even without Deripaska in the mix.  Magna’s  Frank Stronach has had myriad problems with minority shareholders, including this new lawsuit.  So Germany is treading on very dangerous ground as well.  But as I’ve noted before, the Germans have been strangely deferential to the Russians, especially in these times of economic stress.  But the Germans should remember: Marry in haste, repent at leisure.  And Magna should remember too.

Dmitri Medvedev continues his split personality performance, sounding liberal on economic matters, but a chest-thumping Russian nationalist on foreign policy, especially on matters related to the near abroad.  The tragedy is that his economic pronouncements have virtually no possibility of being implemented, but that his foreign policy statements likely reflect the future course of Russian policy.

With respect to economics, Medvedev ordered a legal inquiry into Russian state corporations:

President Dmitry Medvedev ordered prosecutors to investigate Russia’s state corporations on Friday, questioning the need for the powerful institutions championed by Prime Minister Vladimir Putin.

The state corporations, which enjoy privileged legal status, are part of the economic vision Putin enacted during his two terms as president. He touted them as engines of Russia’s development that will eventually be sold to the private sector.

On Friday, the Kremlin released a brief and toughly worded statement in which Medvedev ordered an official probe into these firms. “The President ordered (prosecutors) to present their proposals including on whether there are reasons to further use … structures like state corporations.”

. . . .

Medvedev’s order to Prosecutor General Yury Chaika, who normally handles high-profile criminal probes, called on him “to pay special attention to general questions about how effectively (these firms) are using the state property transferred to them.”

. . . .

Some analysts suggested that Medvedev’s order on Friday was aimed at finding extra revenues amid the economic crisis rather than challenging the legacy of Putin, with whom Medvedev rules Russia in a so-called “tandem” power-sharing arrangement.

“When the state of the budget is one of the sore points for the Russian economy, such measures are directed at finding extra sources of financing in case oil prices fall,” said Yaroslav Lissovolik, chief strategist at Deutsche Bank in Russia.

Roland Nash, head of research at Renaissance Capital, Russia’s largest investment bank, said the order was part of Medvedev’s anti-corruption drive. “He has talked constantly about cleaning up Russia, and a very good place to start would be the state corporations,” Nash said.

Medvedev is right that the state corporations are a massive millstone around the neck of the Russian economy.  It is particularly laughable to think that such monstrosities, which have every incentive to throttle competition, can be the source of innovation.  They are, instead, far more likely to be means for the connected to tunnel state assets, as Mr. Nash states openly, and which Medvedev obliquely suggests with his statement about the “effectiveness” of the use of state property.

Medvedev also stressed his intention to curb burdens–including the burden of corruption–on small and medium-sized businesses:

Russian leader Dmitry Medvedev Wednesday attacked red tape and official extortion of  small businesses, a sector he wants to play a bigger role in the economy and provide more jobs in the economic downturn.

Modernizing the economy and reinforcing the rule of law are priorities for Medvedev, who took over last year from his ally and mentor Vladimir Putin, now his powerful prime minister.

“Experts say money spent by businessmen on overcoming red tape takes up a considerable part of (businesses’) annual revenues,” Medvedev told a meeting of officials gathered to discuss the issue in the town of Zvenigorod outside Moscow.

“Straightforward extortion of money (by officials) also exists, and that is simply disgusting,” he said.

Promoting small and medium-sized businesses is a major part of Medvedev’s plans to modernize Russia, whose wealth remains heavily reliant on the export of oil, gas and minerals. Those sectors, along with heavy industry, continue to employ large numbers of people in Russia.

Again, these statements are exactly correct.  The rate of business formation, and the proportion of output produced by small firms, is far less in Russia than eastern Europe, for instance, and corruption is a major reason.

But if you search “medvedev state corporations” you will see that the President has been saying these things throughout his term, and nothing happens.  Indeed, the more he speaks, the more you get the impression that he is in fact powerless to change things.  Moreover, that makes me wonder whether Putin actually prefers it that way.  The disconnect between word and deed makes Medvedev’s impotence plain, which in turn reinforces perceptions that Putin is actually in charge.

Moreover, when it comes deeds, they often don’t match his words.  Indeed, there is a sort of zig-zag nature to Medvedev’s actions regarding the economy and state corporations.  For instance, last month he signed legislation creating a state corporation to build tollways.  (Road building, it might be added, is outrageously corrupt, even by Russian standards, contributing to the appalling quality and astronomical costs per kilometer of road built.)  He also signed a decree transferring the assets of 426 state companies to Russian Technologies, the poster child for bloated state corporations:

In a presidential decree signed on July 10 and announced on July 14, Medvedev approved the transfer of the state’s assets in 426 companies to Russian Technologies, the giant state corporation that was formed on the basis of the state arms trader Rosoboronexport and already controls titanium maker VSMPO-AVISMA and automobile manufacturer AvtoVAZ (Reuters, July 14; Moscow Times, July 15). Russian Technologies is headed by Sergei Chemezov, who served with Vladimir Putin, the former Russian president and current prime minister, in the KGB in Dresden, East Germany, in the 1980s.

Commenting on Medvedev’s decree handing over state assets to Russian Technologies, Mikhail Fishman and Konstantin Gaaze wrote in the Russian edition of Newsweek: “Now Medvedev finds himself in an embarrassing situation. He signs a controversial decree that violates, in the opinion of experts, his own statements about liberalizing the economy.” Fishman and Gaaze quoted experts as saying that while Medvedev’s campaign to replace officials with independent directors on the boards of directors of state companies has “symbolic meaning,” what is needed in practice is “to lower barriers to small businesses and limit the role of state corporations in competitive economic spheres.” Medvedev’s decree moves things in the opposite direction.

Fishman and Gaaze also noted that in signing the decree granting state assets to Russian Technologies, Medvedev has greatly strengthened the position of Chemezov, who, as they wrote, is a key member of the group of siloviki hardliners who continue to surround Vladimir Putin. It remains to be seen whether the continued influence of the siloviki is compatible with Medvedev’s stated goals of fighting corruption and liberalizing the Russian economy.

But he also ousted silovik Chemezov from a presidential commission on modernizing the economy, and the investigations of state corporations may also be aimed at Putin’s pal:

The timing of Medvedev’s order suggests the investigation may be targeted at least in part at Russian Technologies, which is headed by longtime Putin ally Sergei Chemezov, who has recently come under criticism for his management of military plants and AvtoVAZ.

Medvedev on Thursday ousted Chemezov from a presidential commission on modernizing the economy. The Kremlin offered no explanation, but Chemezov reportedly had missed several meetings.

What’s the message? You can be corrupt, but don’t miss a meeting?

On foreign policy, though, Medvedev has been the epitome of consistency, and adherence to the siloviki hard line, on Georgia in the days surrounding the anniversary of the war, and now on Ukraine:

President Dmitry Medvedev launched a Kremlin drive to bring Ukraine into its fold on Tuesday as he waded into the country’s presidential elections with a call for a new leader to break with the “anti-Russian” policies of the incumbent and to co-operate with Moscow.

In an open letter to Viktor Yushchenko, neighbouring Ukraine’s pro-western president, the Russian leader refused to renew diplomatic ties by saying he was postponing the dispatch of a new ambassador to Kiev until there was a change in relations.

Mr Medvedev criticised Mr Yushchenko for pursuing anti-Russian policies that include arming Georgia in its war against Russia last year and pursuing Ukraine’s entry into Nato while “ignoring the opinion of your country’s citizens”. In his strongest attack yet against Mr Yushchenko, Mr Medvedev accused him of putting gas supplies to Europe at risk and departing “from the principles of friendship and partnership with Russia”.

“We have the impression that Kiev consistently seeks to break traditional economic ties with Russia, first and foremost in the energy sector,” said Mr Medvedev. “Russia hopes a new Ukrainian leadership will be ready to build ties between our countries, ties that will indeed answer the true hopes of our peoples in the interests of strengthening European security.”

Here’s more:

Russian President Dmitry Medvedev waded into neighbouring Ukraine’s presidential election campaign on Tuesday, attacking the incumbent as “anti-Russian” and urging the next leader to cooperate with Moscow.

In an open letter to Ukraine’s pro-Western President Viktor Yushchenko, Medvedev said he would postpone sending a new ambassador to Kiev, and accused Yushchenko of putting gas supplies to Europe at risk by disrupting ties with Moscow.

. . . .

“This is a tough diplomatic demarche,” said Vladimir Fisenko, head of the Ukrainian think-tank Penta. “This is a signal for the presidential campaign, aimed against Yushchenko.”

“It is also a signal to all Ukrainian politicians that it’s time for Kiev to change its course.”

It is widely agreed that the real issue here is gas:

Alexei Mukhin, the head of the independent Russian think-tank Centre for Political Technologies, said gas was the Kremlin’s main source of concern.

“Russia is preparing for delays in gas payments in December and January,” Mukhin said. “Many in Ukraine are likely to try and use the gas card in their election campaign.”

Yushchenko has criticised a deal on gas prices and transit that Tymoshenko struck with Russian Prime Minister Vladimir Putin in January.

An EU-Ukraine deal on rebuilding Ukraine’s gas network infuriated Moscow because Russia was not involved, and Medvedev mentioned this again in a posting on his website.

“The supreme Ukrainian leadership is negotiating the supplies of gas — Russian gas — with the European Union, bypassing Russia, and is signing a document contradicting the Russian-Ukrainian deals of January,” he wrote.

This is not surprising at all.  And to be honest, I’m actually pleased by the elfin Medvedev’s attempt to play tough guy.  (But, Please!  No shirtless photos!)  Why?  Well, because it worked out soooooo well for Russia last time that it interfered in the Ukrainian Presidential election.  That  was decisive in sparking the Orange Revolution.  (Funny, nobody seems to mention that particular triumph of Putin.  Sort of down there with Beslan, Nord Ost, the Kursk.)

You’d think they’d learn.  Well, no actually.  And heavy-handedness would go over particularly badly if it appears that the main objective is gas.  Even the heretofore supine Europeans are increasingly aware of the effects that Russian dominance of Ukraine would have for their energy security.  They made the first tentative steps towards providing support for the Ukrainians on gas, and although they seem reluctant to get to deeply involved in dysfunctional Ukrainian politics, they may have little choice if Russia reverts to form.  And Medvedev’s broadside suggests that they have every intention of doing so, thus setting up a confrontation between Russia and Europe.  A confrontation that would reach its peak in the depths of winter, nearly on the anniversary of the 2009 gas war.  Would Russia spark another gas war in a gambit to  swing the election?  Would a desperate Yuschenko or Timoshenko do so in order to stoke a nationalist surge in the hopes that this would prevent the election of Russian ally Yanukovych?  I imagine something spectacular will happen, as both sides have a predilection for brinksmanship.

The months leading up to the Ukrainian election will be very interesting indeed.

In my post discussing the latest Putin Village People tryout pix, I mentioned that as bizarre as it seems to most Americans, Russians eat this stuff up.  A couple of articles discuss this phenomenon.

This one is from AP:

But the most astounding image was of 56-year-old Putin riding a horse through the mountains, his bare chest on full display.

While Americans may think of the Marlboro man, for Russians the more powerful association is the warrior heroes of Russian fairy tales who rode horseback and defended Russia from foreign invaders.

“They are trying to play on Russian folk traditions,” said Yevgenia Albats, editor of the political magazine New Times.

“The message is: I am the master of the Russian universe,” she said. “I go to our roots, to nature, the land that is not occupied by anyone. I am the one and only warrior in these lands.”

The shot of Putin posing in the tree drew comparisons to Nightingale the Robber, a character from a popular Russian folk epic who lives in a nest and has mystical powers. It was this picture that the Kremlin-friendly newspaper Izvestia put on its front page Wednesday, with more inside.

Or, Putin as Russian folk hero Yermak Timofeyevich, warrior conquerer of Siberia.

This part is pretty funny:

The latest photographs reignited discussion on Russian blogs about gays in Russia, with much of the debate devoted to whether the shoot presented Putin as something of a gay icon.

His 2007 camping trip with Prince Albert was satirically compared to the movie “Brokeback Mountain,” a love story about gay cowboys.

Ya think?

This article is from the St. Petersburg Times:

Surveys from the Levada Center, an independent polling agency, show that Putin’s approval ratings shot from zero to more than 70 percent in 1999 and have never dropped below 40 percent for any prolonged period since then. Recent polls provide ample evidence that Putin’s popularity has not suffered from the economic downturn that has hit the country hard since last fall. In fact, the figures may serve as a crushing defeat to predictions that the crisis could bring down or weaken his reign.

. . . .

For Russians, politics traditionally takes precedence over the economy, said Olga Kryshtanovskaya, a sociologist with the Russian Academy of Sciences. “The political factor is far more important — and Putin is not just perceived as the one who is in power but as the one who controls the siloviki,” she said, referring to the powerful clan of military and security service officials in the government.

Russians also harbor a lasting desire for strongman leadership as opposed to multipolar democracy, said Yekaterina Yegorova, head of the political consulting firm Nikkolo M and a veteran insider of the country’s political scene. “The notion that you take to the streets when you can no longer afford to buy meat does not correspond to the Russian psychology,” she said.

Yegorova argued that a much broader “unspoken contract” exists between a majority of the population and the leadership. “They want a type of father figure — a strong leader who takes responsibility and who makes important decisions for their lives — and in exchange they accept living according to certain rules,” she said.

Both articles suggest that Putin’s appeal is deeply atavistic.  Putin as the mythical hero.  Putin as the  Ð±Ð¾Ð»ÑŒÑˆÐ¾Ðº of the big Russian peasant household.

This is just another manifestation of the personalization of politics in Russia, and is of a piece with former fondness of figures like Stalin, and before that, the Tsars. It testifies to the weakness of impersonal institutions in Russia. In its atavism, its personalization, its anti-institutionalism, it reveals the immaturity of the Russian polity. This immaturity will not change soon, especially given the assiduous efforts of Putin and the siloviki to stoke the personality cult. And by strengthening the personalized, a-institutional nature of Russian state, Putinism will delay yet again Russia’s transition into a mature civil society and passably democratic polity.

The Federal Trade Commission issued its final rule on market manipulation, as authorized by Congress under the Energy Independence and Security Act of 2007:

The  final Rule prohibits any person, directly or indirectly, in connection with the purchase or sale of crude oil, gasoline, or petroleum distillates at wholesale, from (a) knowingly engaging in any act, practice, or course of business – including the making of any untrue statement of material fact – that operates or would operate as a fraud or deceit upon any person, or (b) intentionally failing to state a material fact that under the circumstances renders a statement made by such person misleading, provided that such omission distorts or is likely to distort market conditions for any such product.

The rule, and the enabling legislation, are patterned on the anti-manipulation provisions of the securities laws, rather than the commodity laws.  And therein lies a problem, and renders the rule another monument to Congressional cluelessness on commodity market manipulation.

The emphasis on “fraud and deceit” makes some sense in securities markets.  Securities values are information-driven, and hence manipulative schemes in such markets frequently rely on fraud and deceit to distort investors’ information sets, and thereby distort securities values.

Things are quite different in commodity markets.  Although some manipulative schemes do rely on making untrue statements (e.g., false price reporting), by far the most important type of manipulation in commodity markets–including oil markets–involves the exercise of market power.  It is nigh on to impossible to wrench the concept of “fraud and deceit” to cover genuinely manipulative exercises of market power in the oil markets.  So, one of two things will happen.  Either the rule will prove completely useless, because it does not touch the most troublesome form of conduct in commodity markets; or the FTC will play legal Twister to try to interpret a rule written to attack information-based manipulations in order to take action against market power manipulations.

I would bet that the latter alternative is the more likely outcome, for a several reasons.  First, it is in the nature of regulator agencies to extend their power as far as possible, and stretch the rules to the breaking point to do that.  Second, the FTC will be under pressure from Congress to act in the event somebody does try to execute a market power manipulation.

I spoke with a group of FTC staffers while the rule was being drafted.  It was discouraging in the extreme to hear, that when I told them that the rule did not touch the most important form of manipulative conduct in commodity markets, that they were completely unaware that there was such a thing as market power manipulation.  I participated in a workshop on the rule that the Commission held in November, and hammered home the issues of market power manipulation.  But to no avail.  As stated in the final rule:

Some commenters argued that the final Rule should extend to conduct such as speculative activity or the unilateral exercise of market power, because in their view such conduct is inherently manipulative.   See, e.g., CFA at 8 (arguing that the Commission “could have considered the exercise of market power and excessive speculation as manipulation” because they “have no economic justification”); Greenberger at 1 (opining that the proposed Rule could offer a tough enforcement mechanism against speculative activity); Senator Cantwell at 2-3 (asserting that Congress intended for the FTC’s rule to reach a broad range of conduct, including the withholding of supply); Pirrong, NPRM, at 2 (arguing that the proposed Rule should not focus on fraud or deceit, but rather on the exercise of market power).   However, the rulemaking record does not support extending the final Rule to cover such conduct, except to the extent that the practices used are part of a course of conduct that otherwise violates the final Rule.

Whatever that means.  Translation: we had already released a Notice of Proposed Rulemaking that was totally silent on the issue of market power manipulation, so the train had already left the station and we weren’t about to look like fools and start over.

Actually, the FTC doesn’t bear the primary culpability.  Congress is the one that put the train on the wrong track.  It wrote the “fraud and deceit language” in the statute.  It was the one that had no clue about what manipulation in a commodity market really involves.

Sadly, it’s not the first time that Congress made the same mistake.  The law giving FERC anti-manipulation powers does as well, and as a result, FERC’s rule is also fundamentally flawed.

The Congressional cluelessness on all things derivative does not stop with manipulation.  It is pervasive.  It is on display daily in the myriad efforts to completely reshape derivatives regulation.  The ACES (Waxman-Markey) climate change bill contains several sections that would take derivatives regulation back to the days of rumble seats and the Charleston.  Other regulatory proposals bouncing around Capitol Hill would do the same.

What’s their motto?  “Today we screw up the energy markets! Tomorrow, the world!”?  It would fit.

A couple of interesting articles questioning the reality of Chinese growth.  One, from Forbes, homes in on something I’ve been saying: there is an extreme disconnect between China’s official growth statistics and another independent measure of economic activity, electricity generation:

China watchers have been dubious about the quality of Chinese economic data for some time. And a recent spate of seemingly conflicting data has fuelled that criticism.

One particular quibble involves the relationship between electricity usage and industrial value added — another measure of output. The worry is that failings in the way official data are compiled may be generating results that are giving investors misconceptions about the health of  China’s economy.

During the first half of this year, industrial value-added rose a robust 7 percent, while total electricity usage fell 2.24 percent. This seemingly implies that output is growing and contracting simultaneously. The divergence has attracted attention, not least because industry is half of the economy and electricity usage is one of those bits of data that is hard to massage. Even Chinese Premier Wen Jiabao has openly said that electricity usage is the data that he trusts most.

. . . .

China’s National Bureau of Statistics has posted a few articles on its website trying to reconcile the two sets of data. But their explanation — that China’s industries have become less energy dependent during the thick of the financial crisis — just does not stack up. [It sure don’t!]

The article focuses on the fact that Chinese government statistics are biased towards large, and particularly state-owned firms, and overlook small firms that have been major contributors to recent Chinese growth.  Here’s one example:

In a similar vein, the state-compiled Purchasing Manager Index consistently looks more bullish than a similar index compiled by brokerage firm CLSA this year. The two diverged sharply in March, when the official number was 52.4, indicting expansion; while the CLSA figure was only 44.8, which indicates contraction. The official index tracks mainly large state-owned firms while the CLSA index is more weighted towards small, private firms.

A relative in-depth analysis from the American Enterprise Institute reinforces these points, and adds considerable detail:

Make no mistake: China’s 8 percent growth target for 2009 will be achieved, almost by definition. Whether or not that is a healthy outcome depends upon how you look at it and upon understanding just how China’s economy functions and what China’s growth “accomplishment” means. Chinese economic data are constructed very differently from the roughly comparable U.S. statistics, so that looking at Chinese data through a lens conditioned by U.S. data-building and reporting conventions can be misleading.

. . . .

China’s 8 percent output growth target will be met because China’s economic statistics are based on recorded production activity, rather than being a measure of expenditure growth–defined as the sum of consumption, investment, government spending, and net exports–as U.S. data are. The U.S. stimulus package, for example, attempts to boost GDP by undertaking measures that will boost consumption, investment, and government spending. China, however, decrees measures that will generate recorded increases in production spending. Part of the Chinese stimulus package involves large transfers of funds from the central-government planners directly to state-owned enterprises and to fixed-asset investment projects that are aimed at public works spending largely under its control.

Once China had announced its 8 percent growth target, it began to disburse funds directed at a sharp increase in public works spending. It is important to understand that the disbursal of funds is recorded as GDP growth. So the government can easily control the pace of growth by the pace at which it releases funds that have already been allocated in the stimulus package to the creation of higher production or growth numbers. Funds disbursed for fixed-asset investment by state-owned enterprises or provincial governments are counted as having been spent when they are disbursed. In fact, the funds go out to the state-owned enterprises and provincial governments and may be held until actual projects are identified and undertaken.

The same convention, counting production and shipments as de facto outlays by end-users, is employed with respect to retail sales data in China. Shipments to retailers are counted as retail sales on the apparent assumption that ultimately all goods shipped will be sold at some point in the future. China’s nominal retail sales have been rising at a rate of about 15 percent year-over-year during the first half of 2009 because that is the rate at which shipments to retailers have been occurring. There is very little direct data available to measure actual sales by recipients of the retail shipments to ultimate consumers.

In other words, there is some stuff being produced, but no reliable evidence on whether it’s being consumed.  Moreover, some stuff is being counted as produced merely because the money to pay for it has been shoved out the door.  Hardly what one would consider high quality growth.  Or maybe not even growth at all.

John Makin’s AEI piece recommends looking at credit creation for an indication of how the economy is really doing.  In his view, the more credit the government is pumping into the economy, the more pessimistic they are about its true prospects and performance:

It is possible, however, to make inferences about the pace of demand growth relative to production or supply growth in the Chinese economy by watching the behavior of the central bank and its control over the growth of money and credit. If policymakers observe that demand growth and progress on infrastructure projects is lagging behind announced production-side GDP data, they can attempt to boost demand growth by increasing the growth of money and credit. Such growth has accelerated sharply during the second quarter in China, indicating that while the measured pace of China’s increase in production is rising, the public works projects and actual spending already recorded are falling behind schedule.

. . . .

It is the intensification of efforts to use rapid money expansion that serves as evidence that private consumption and private investment have remained weak even though they are difficult to measure since little data are available on such demand-side components of GDP. Meanwhile, as already noted, China’s export growth remains weak, with exports dropping at a year-over-year rate around 20 percent during the first half of 2009, after growth rates of 17 percent in 2008 and 25 percent in 2007. Having announced a stimulus package that will boost domestic demand in order to compensate for the loss of export growth on overall economic growth, China’s planners are not about to risk any cessation of the intense monetary stimulus currently underway. That said, there are signs that problems are emerging from China’s growth policies that amount to assuming that supply creates its own demand with the help of adequate monetary stimulus.

Those problems that Makin mentions in the last sentence include surging bubbles in real estate and stock prices.  These bubbles are being fed not just by domestic credit creation, but by substantial flows of hot foreign money into the Chinese market.  Makin notes that since February–a mere 6 months ago–housing prices in 13 Chinese cities have risen 13 percent, a 26+ percent annual rate.  This is a very rapid pace, even by the standards of the dizzying rates of appreciation in overheated US real estate markets in the mid-noughties.  The stock market has also risen by more than 70 percent.  Looks bubblier than champagne to me.

My takeaways?

First, reported Chinese growth is a chimera. Chinese government statistics appear no more reliable than Soviet figures. The disconnect between electricity generation changes and reported growth is highly suspicious, especially for a manufacturing-intensive economy noted for its energy-intensity as well. The focus on big state firms that don’t produce what people want, and the slighting of small firms that do, in the collection and reporting of statistics also raises red flags (and not of the Red Flag of Revolution! variety).

Second, Chinese growth reporting is eerily like 90s-style earnings management. There’s a target, and the numbers WILL be massaged in whatever way necessary to hit the target. Indeed, some of the tactics bring sordid episodes like Enron and WorldCom to mind.

Third, it seems that the Chinese are betting on a recovery in the West, and hence a concomitant recovery in exports, and are determined to keep up the earnings management and the credit stimulus until that happens. That is a highly risky strategy. If the desired recovery doesn’t happen before the bubbles collapse, China will face both a domestic demand and a foreign demand crunch. Moreover, even if “successful” in the sense that a recovery in exports allows the government to ease up on the stimulus, it will have contributed to a substantial misallocation of capital and created the risk of substantial inflation.

In brief, in my view, like governments around the world, China is taking an extremely short-sighted perspective. It is greatly increasing the risks of large future dislocations in order to palliate current problems. It may work, but the risks of things spinning out of control are appreciable.

California prides itself as being the trendsetter for the nation.  Hopefully this is one California development that will not be a harbinger for the country:

Russia Beats California as Default Swaps Favor BRICs

Investor demand for emerging-market bonds is driving the cost of insuring against debt defaults below industrialized governments for the first time.

Credit-default swap prices from Turkey to Indonesia are falling as bonds rise amid signs that their economies are recovering faster than developed nations. As the U.S. and U.K. borrow record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and China have $3 trillion in reserves, up 19 percent from January 2008 and now 43 percent of the worldwide total, data compiled by Bloomberg show.

The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day.  Brazil swaps just had their biggest four-month slide ever. For  China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.

. . . .

Swaps on California have risen more than three-fold in the past year as its credit rating was lowered two levels to Baa1 by Moody’s, the same level as Russia, which reneged on $40 billion of sovereign debt payments in 1998. Russian default swaps are near a 10-month low of 255 basis points, about 20 basis points less than contracts linked to California. The former Soviet state’s 7.5 percent, 2030 dollar bonds are at a 2 1/2-month high of 101.74 cents on the dollar.

“If California is issuing their own dummy currency in the form of IOUs, that’s not a good sign,” said Augustus’ McNamara.

I pray that the rest of the country will take heed of the literal and figurative bankruptcy of the “progressive” California approach to government and regulation, and put a screeching halt to the Obama administration’s campaign to bring it to the rest of the nation.  For if the administration succeeds, we may be reading headlines like “Russia Beats US as Default Swaps Favor BRICs.”

This is said only half in jest.  The California model is unsustainable, and provides a chilling example of how the most vibrant economy and polity in the world can be undermined by spendthrift behavior and regulatory excess.  Indeed, California’s very bounty makes it most able to withstand such lunacy.  The rest of the country, as favored (relative to the rest of the world) as it is, has less of a margin for error.

Adam Smith said there is a lot of ruin in a country, and there is more ruin in California than just about anywhere in the world.  But the governing class in the state is testing just how much ruin there is.  Extending the California model to the nation at large will almost certainly ruin us.  But Obama is delegating implementation of virtually his entire vision to the Pelosis, Waxmans, and Boxers of the world.  That is, to the poster children for the mindset that is driving California into penury.  That cannot end well–unless it ends by their failure to achieve their dreams (i.e,. my nightmares).

But there is hope.  They are encountering resistance that they never expected.  The next two months–the August recess, and the days after Congress’s return after Labor Day–could be among the most historically important period in the country’s recent history.

When deciding whom to support, I suggest taking a close look at California,  America’s Ghost of Christmas Future.

Russia, not exactly known for its solicitousness to public health, has one-upped its silly spring actions against swine flu with a summer follow up:

Last week, Gennady Onishchenko, Russia’s Nosferatu-like chief medical officer, called for the Russian regions to consider restricting children’s travel to the UK in order to prevent the spreading of swine flu. On Wednesday Moscow followed the Sverdlovsk Region in actually banning groups of children from visiting Britain. But the “cordon sanitare” imposed by the authorities has drawn criticism from the tourism industry, which calls it an unconstitutional restriction on freedom of movement. And it probably will not prevent the spread of the disease anyway.

. . . .

But the travel agents may be right to question whether such strong quarantine measures are justified. Although the outbreak has indeed reached epidemic levels in the UK, British health professionals seem much more relaxed than their Russian counterparts. “All in all, it’s a storm in a tea cup,” said James Wight, a doctor working in England. “Deaths attributed to swine flu totaled 29 on July 17 – apparently not worse than you would expect from an outbreak of standard flu, and targeting people with other underlying health problems rather than the healthy.”

And, Turina argues, if the H1N1 really was dangerous, the limited embargo Rospotrebnadzor has imposed would be useless. “Children who travel privately go to the same schools, take the same busses, and sit in the same classrooms as those who happen to have booked a group tour. It’s a virus – it doesn’t discriminate according to what kind of travel deal you have,” she said.

The singling out of the UK also seems odd, given H1N1’s near ubiquity. In other circumstances it might be tempting to call it political – Onishchenko has a reputation for banning imports of food stuffs whenever Russia’s relations with a given country are strained. He found something wrong with American frozen chicken in the aftermath of the war with Georgia last August, and in June he sparked a trade war with Minsk when he banned Belarusian milk products. But Britain’s relations with Russia have been unusually uneventful as of late – at least, free of radioactive murders, small wars or trade disputes.

I think that the last paragraph breaks the code for unwrapping the enigma and solving the riddle, at least when it comes to explaining the oddities of Russian public health campaigns.

I don’t Twitter, and a good thing that, at least today:

For the early adopters of Twitter who have been around for a while,  Twitter’s two-hour outage this morning may not seem unusual. What makes this morning’s outage different from past failures is that this time Twitter fell prey to a denial-of-service attack.

Dedicated denial of service attack.  Hmm.  Like in Estonia during the Bronze Soldier conflict.  Like in Georgia during the war last year.

But why would anybody target Twitter–and Facebook, and Blogger, and Youtube, and LiveJournal?  Well, for the same reason that somebody would attack Estonia and Georgia: because they had the audacity to cross Russian nationalist thugs.  Well, “they” isn’t right.  “He” is right.   These sites were attacked because they hosted accounts from a single individual who supports Georgia:

A pro-Georgian blogger with accounts on Twitter, Facebook, LiveJournal and Google’s Blogger and YouTube was targeted in a denial of service attack that led to the site-wide outage at Twitter and problems at the other sites on Thursday, according to a Facebook executive.

The blogger, who uses the account name “Cyxymu,” (the name of a town in the former Soviet Republic) had accounts on all of the different sites that were attacked at the same time, Max Kelly, chief security officer at Facebook, told CNET News.

“It was a simultaneous attack across a number of properties targeting him to keep his voice from being heard,” Kelly said. “We’re actively investigating the source of the attacks and we hope to be able to find out the individuals involved in the back end and to take action against them if we can.”

. . . .

Twitter  was down for several hours beginning early Thursday morning, and suffered periodic slowness and time-outs throughout the day.

“The people who are coordinating this attack, the criminals, are definitely determined and using a lot of resources,” Kelly said. “If they’re asking our infrastructure to generate hundreds of pages a second, that’s a lot of pages our users can’t see.”

Facebook and Google were able to minimize any impact to their sites. Facebook even managed to keep the Cyxymu account accessible to Web surfers from that region, Kelly said, although it was inaccessible to people in other geographic areas, including San Francisco.

These are truly sociopathic bastards, so obsessed with silencing anyone who opposes their twisted vision that they will vandalize indiscriminately networks relied on by millions for myriad purposes.

Hey, you sick bastards, I have an idea: why not try to engage your adversary in a civil debate?  Or even an uncivil one.  But that no doubt would be too challenging for people smart enough to shut down massive computer networks, but not confident enough in the merits of their case to believe that they can prevail in an argument.  Or too lazy and too thuggish to want to try, content instead to use force to silence their opposition.

It’s bad enough when the thuggishness that pervades Russian politics and civil life, such as it is, stays in Russia.  That’s their sty, and to listen to the self-styled Russophiles that comment here, and elsewhere on the internet, they like it that way.  So be it.  But when it spills over to disrupt the lives of millions of others lucky enough to live elsewhere, it’s not just their business anymore.

No doubt there will be no Russian government fingerprints on this, and no doubt, the Russian government per se is not responsible.  But it’s well known that self-same Russian government does nothing to combat the rampant cybercrime and cybervandalism that emanates from within the borders of Russia, that pillar of order, ruled by the all wise Lord of the Power Vertical.

One would hope that this would spur the administration and the Europeans to do something serious about Russian cybercrime, to make the Russian government pay a price for its complicity in it.  I am not holding my breath.

Just where is the reset button on Twitter?

H/T R.