Streetwise Professor

December 23, 2009

The Amazing Destructive Power of the Bulava Missile

Filed under: Military,Politics,Russia — The Professor @ 6:16 pm

The problem is, it has destroyed the Russian navy.   Dr. Dmitry Gorenburg’s Russian Military Reform blog quotes this from a Russian source, Alexander Khramchikhin:

[The Bulava’s] effectiveness has turned out to be simply amazing. The missile has not entered serial production, and never will, but it has already destroyed the Russian Navy. Almost all the money allocated to the Navy’s development have been spent on this mindless dead-end program.

Any person who can see the real situation well understands that in a few years the Russian Navy as a whole, as well as all four of its component fleets, will cease to exist. This is already absolutely inevitable — the situation will not be changed even by mass purchases of ships from abroad.

In light of this, it is especially amusing to observe the fierce “battle for Sevastopol.” Why do we need it after 2017? To pay Kiev enormous sums to rent empty piers? By that time, at best the Novorossiisk naval brigade will be all that’s left of the Black Sea Fleet. And the discussion of whether we need a blue-water navy or a coastal one is a complete farce. We won’t even have a coastal force — the maximum that our “navy” will be able to accomplish in ten years is the immediate defense of a few main naval bases. Because we built the Bulava.

Gorenburg argues that this places too much blame on Bulava, and that there are other serious problems with the Russian navy:

Despite relatively generous financing over the last few years, its shipbuilders have shown time and again that they are incapable of producing ships in a timely manner. All of the navy’s shipbuilding projects have been repeatedly delayed. As the existing ships approach (and in many cases pass) the end of their expected lifespan, there are few replacements in the works.

In any case, there is little if any cause to fear that the Russian Navy is making progress in its oceanic ambitions, whether or not it still has any. Instead, we should be thinking of it as living out the last years of the leftover glory of its Soviet years. In another 10 years, its major ocean-going ships will be gone, with nothing but a few corvettes and a couple of French LSTs to replace them.

Remember not too long ago when the navy announced its delusional plans to build 6 aircraft carriers.   Do these people believe this stuff?   Who are they trying to fool?   Is it just a big scam?   The yawning gap between pretension and reality is so vast it’s very difficult to come up with a rational explanation.


Filed under: Commodities,Politics,Russia — The Professor @ 6:07 pm

Why is it that everything involving Russian business, and especially Oleg Deripaska, is murky beyond belief.  In a battle of leaks with Reuters, Bloomberg reports that the Hong Kong Stock Exchange has approved a $2 billion Rusal IPO.  Supposedly, however, the exchange imposed an unprecedented condition: that retail investors not be permitted to buy shares.  But the Hong Kong securities regulator says that such a constraint is not permissible under the law.  It also makes no sense.  Even if they can’t buy at the IPO, what’s to prevent them from buying in the secondary market.  Thus, the constraint would not protect retail investors.

John Helmer reports that there has been no formal announcement of the listing approval under the official protocols (i.e., a posting on the HKEx website).  Moreover, exchange officials have been dodging questions.  Thus, it is by no means clear that the IPO has truly been approved.

One can only imagine the pressure the exchange and the Hong Kong regulator is under.  And not from Russia only, but also from the big banks who are into Rusal for big money and desperate to get paid off from the proceeds of an IPO.

At the same time, the exchange and the regulator have to realize that Rusal, Deripaska, and Russia are poison, poison, poison.  You know that based on the merits–or more accurately, the demerits–of Rusal as a business and Deripaska as a businessman, there is no way an IPO should go forward.  This is especially true given the legal cloud Rusal and Deripaska are under in London, given a lawsuit filed by  Mikhail Chernoy that is bearing down relentlessly.

It will be very interesting indeed to see whether the exchange drinks the poison.  The most sensible explanation to what is going on is that Rusal leaked the story of the approval to put pressure on the exchange.  The exchange is also under pressure from the banks to go forward, and from the Russian government.  But the exchange really wants nothing to do with it.  Perhaps it is trying to stall, hoping that other developments, most notably the Chernoy suit, will make it necessary for Rusal to withdraw the application.  Good luck with that.

This is a very interesting case study in self-regulation (a subject I wrote a good deal about in the ’90s).   There are important members of the HKEx who have a vested interest in the IPO going forward.  There are others who would not benefit from this, but who would suffer from the inevitable damage to the exchange’s reputation.  It will be quite fascinating which faction will prevail.

Lucy Sechin Tees It Up Again

Filed under: Financial crisis,Politics,Russia — The Professor @ 5:36 pm

Igor Sechin is playing Lucy with the football yet again:

Russia will seek opinion from foreign investors on proposed changes to laws needed to unlock the country’s lucrative oil, gas and metals reserves and woo back companies scared off by a decade of resource nationalism.

But investors should be under no illusions of gaining access to the Kremlin’s most prized assets and should offer asset swaps to gain a foothold in Russia’s mineral sector, influential Deputy Prime Minister Igor Sechin said on Tuesday.

Long-awaited revisions to tough Russian laws on foreign investment in strategic mineral fields should be ready by the end of January, when they will be presented to investors, said Igor Artemyev, head of Russia’s Federal Anti-Monopoly Agency.

And Putin chipped in too:

Putin, now prime minister, on Monday chaired a meeting of the government’s commission on regulating foreign investment.

“On our part, we will do everything necessary to create the best conditions for attracting capital to Russia,” Putin was quoted as saying on the government’s website,

Russia, whose reserves of gold, nickel, iron ore and coal also rank among the world’s largest, argues that its largest deposits are of “strategic” importance to the country and thus off-limits to majority foreign ownership. This is unlikely to change in the near future, Sechin, an influential deputy to Putin, told Reuters in an interview.

He said Russia would not give up certain deposits, instead compensating investors if their exploration efforts discovered resources big enough to qualify as strategic.

“And if the existing licence and deposit are already strategic, it has that status and nobody can take anything away.”

He also proposed asset swaps as a means for foreign companies to secure greater access to Russian resources.

“There’s a good way for foreign companies to do this: exchange assets with Russian companies. There is such thing as parity but we tend to forget about it,” Sechin said.

Yeah, right.  Just another come on.  You give us assets that your courts will protect.  We’ll give you assets that . . . will protect if we feel like.

I see.  Foreigner makes a specific investment in exploration.  If they actually find something, the Russian government will take it and pay compensation.   But who decides what the compensation is?  I think we know the answer to that question.  I also think we know just how reasonable that compensation will be.

To be blunt, the content of the law is a secondary or tertiary consideration.  It’s enforcement of law in a way that protects property rights.  It’s not abusing laws (e.g., environmental laws, licensing laws, tax laws) as a means of expropriation.

Anybody who falls for Lucy Sechin and Putin is a complete sucker.

It is interesting, though, to see Sechin and Putin go all Eddie Haskell, acting all nice and stuff, in order to lure foolish furriners into their trap.  Given that the collapse in foreign direct investment has been a major cause of Russia’s well-below-world-average economic performance in 2009, they understandably have a desperate need to reverse that trend.  So far it hasn’t been working.  Perhaps investors are finally figuring out that Russia’s come hither look will change for the worse as soon as the country’s situation stabilizes.  Putin and Sechin may be at investors’ feet today, but watch out–they’ll be at their throats soon after they’ve put down their money.

Where Is Our Lincoln: One More Thought On Kansas-Nebraska & Obamacare

Filed under: Politics — The Professor @ 1:59 pm

The Kansas-Nebraska Act catalyzed Lincoln’s return to politics from a very lucrative, and successful legal career.  Which raises the question: Will a Lincoln emerge from our current struggles to assume the mantle of leadership in fighting the metastasizing state?

It is almost certain that, as in the mid-1850s, any such leader will not be a currently active political figure.  Like the Whigs in that era, the modern Republicans are a party of Lilliputians, intellectually mediocre (I am feeling generous today), not committed to any strong political principle, content to enjoy the status and perks of office, out of touch with the ferment in the country.

Lincoln seemingly came from nowhere, but in a sense his entire life was spent preparing for the opportunity that Stephen Douglas created with the Kansas-Nebraska Act.  Given that entry into politics is much costlier now, than then, I doubt that a new Lincoln, or even a pale imitation thereof, will emerge.  But, if Bismarck was right about that special providence for the United States of America, perhaps one will.

Barone on SWP on the Kansas-Nebraska-Obamacare Analogy

Filed under: Politics — The Professor @ 1:27 pm

Michael Barone is one of the most knowledgeable and insightful analysts of American politics.  OK.  Forget the “one of” (IMHO).  He is also a gentleman.  He wrote an article comparing the Reid healthcare monstrosity to the Kansas-Nebraska Act in today’s Washington Examiner.  I dropped him a quick email telling him about my post last week making the same comparison.  He emailed back almost immediately, and then very kindly wrote this in the Examiner’s Beltway Confidential blog:

I thought my comparison of Democratic health care legislation with the Kansas-Nebraska Act of 1854 in  my Wednesday Examiner column was an original idea. After all, even David Broder and Lou Cannon weren’t around to cover Stephen Douglas’s brilliant floor managing of this disastrous legislation. But fewer of our ideas are original than we suppose.  Blogger Streetwise Professor, who in non-blog life is Craig Pirrong, a professor at the University of Houston’s Bauer College of Business. Streetwise Professor posted his comparison on December 17, six days before my column. I swear I didn’t read it until today, but I’ll be checking out Streetwise Professor in the future, especially when I’m have trouble coming up with an original angle for my column.

Very much appreciated, Mr. Barone. I’m truly honored.

December 20, 2009

Well, If You Lived There You’d Cheer for Global Warming Too

Filed under: Climate Change,Politics — The Professor @ 4:52 pm

The attitude of many Russians, in government but especially in the scientific community, towards the anthropogenic global warming hypothesis (yes, it is a hypothesis) is quite fascinating.  Many respected Russian climatologists are clearly in the skeptic camp. And last week, the Moscow-based Institute for Economic Analysis called bullsh*t on the Hadley CRUT (yes, the same outfit embroiled in Climategate).  IEA points to another, completely different possible scientific sin committed by Phil Jones and the gang:

The IEA believes that Russian meteorological-station data did not substantiate the anthropogenic global-warming theory. Analysts say Russian meteorological stations cover most of the country’s territory, and that the Hadley Center had used data submitted by only 25% of such stations in its reports. Over 40% of Russian territory was not included in global-temperature calculations for some other reasons, rather than the lack of meteorological stations and observations.

The data of stations located in areas not listed in the Hadley Climate Research Unit Temperature UK (HadCRUT) survey often does not show any substantial warming in the late 20th century and the early 21st century.

The HadCRUT database includes specific stations providing incomplete data and highlighting the global-warming process, rather than stations facilitating uninterrupted observations.

On the whole, climatologists use the incomplete findings of meteorological stations far more often than those providing complete observations.

IEA analysts say climatologists use the data of stations located in large populated centers that are influenced by the urban-warming effect more frequently than the correct data of remote stations.

The scale of global warming was exaggerated due to temperature distortions for Russia accounting for 12.5% of the world’s land mass. The IEA said it was necessary to recalculate all global-temperature data in order to assess the scale of such exaggeration.

Global-temperature data will have to be modified if similar climate-date procedures have been used from other national data because the calculations used by COP15 analysts, including financial calculations, are based on HadCRUT research.

This allegation of cherry picking is extremely serious, if true.  Certainly, if the data/station selection procedure has a material impact on the results, the procedure should be made transparent (including release the code), and the underlying data should be made available so that others can devise alternative procedures and test the robustness of results to said procedures.  Given that (a) the CRUT procedure seems to produce the politically desired results, and (b) the emails that have been released colorably support the allegation that CRUT has an agenda, it is more than plausible that the discarding of the majority of Russian sites was not accidental, or driven by legitimate concerns regarding the quality of the sites and their records.  This skepticism would be bolstered if the IEA accusations that the omitted stations were better on crucial dimensions (notably, continuity of coverage and rural location unaffected by the effects of urbanization) are correct.  Omitting the stations that a priori would seem superior and getting “warmer” results would be highly, highly suspicious.

This is of course important for understanding the average global temperature data.  But AGT is merely a convenient summary statistic, and shouldn’t be given that much weight.  What is more important for the purpose of testing the implications of climate models is the spatial pattern of temperature changes–the “fingerprint” of global warming.  One implication of these models is that heating should be pronounced at northern latitudes, including in Siberia.  And indeed, this is one of the implications that advocates of the AGW hypothesis claim has been demonstrated empirically to support their call for draconian restrictions on carbon emissions.

But, what if this supposed empirical demonstration is based on data subject to a biased selection procedure?  If that’s true, one of the main empirical supports for the AGW hypothesis disappears.  Thus, the quality of the Russian data is a major, major issue that must be resolved in order to evaluate the empirical validity of climate models specifically, and the AGW hypothesis generally.  If the IEA is correct in its assertion that including the excluded stations would result in a lowering of the worldwide average temperature, the effect would be even more pronounced in northern latitudes, and CO2 would not have left the damning fingerprint that would convict it of a crime against Gaia.

The fingerprint evidence is already suspect.  Richard Lindzen of MIT has repeatedly emphasized that the tropical troposphere has not heated as predicted by the climate models.  That is a big empirical strike against the AGW hypothesis–but one that has not received sufficient attention.  If, in addition, the warming at northern latitudes is weaker than has been asserted heretofore based on censored/selected data, or does not exist at all, the empirical damage would be–or at least should be–fatal to the climate models (which emphasize the role of positive feedback effects to generate predictions of dramatic warming).

Thus, of all the fallout from the HadleyCRUT scandal, this could be the most important.  The full Russian record should be evaluated thoroughly, and stat, to understand what is truly happening in Siberia.

The American Thinker has a couple of interesting pieces on Climategate.  Definitely worth reading is this article by scientists David Douglass and John Christy about the blatant manipulation of the peer review process by AGW advocates masquerading as scientists.  I thought it was impossible for me to be more cynical about the peer review process than I already was based on almost 20 years of experience watching the sausage being made, and more than a few times through the grinder myself.  I was wrong.  This shorter article on the lengths to which AGW advocates will go to control more popular sources of information on climate change science is also quite illuminating.

That drip, drip, drip you hear isn’t rain.

Another One Bites the Dust

Filed under: Economics,Exchanges — The Professor @ 4:02 pm

Several of my academic articles are about competition between exchanges.  The basic conclusion of these articles is that the network effects of liquidity make price discovery a natural monopoly.  This means that a competition between two exchanges that do not attempt to “cream skim” uninformed order flow is likely to result in a winner-takes-all outcome, where all trading “tips” to a single exchange.  If a new entrant challenges an existing market, given the stickiness of order flow, the winning exchange is likely to be the incumbent.

Jeremy Grant in today’s FT provides a text-book example of the phenomenon.  About a year ago a group of banks  (UBS, Morgan Stanley, Goldman Sachs, Credit Suisse, BNP Paribas, Societe General, Deutsche Bank, Merrill Lynch and Citi)  that control a large fraction of order flow set up the Turquoise exchange to compete with the London Stock Exchange.  The banks hoped that the competition would force LSE to cut fees.

Turquoise operated an open, limit order book market like the LSE, as well as a dark pool.  Thus, it went head-to-head with LSE in competition in price discovery.  Not surprisingly, the venture never succeeded in attracting a large volume, despite the fact that the banks that started it dominate the equity markets.  The exchange gained at most 8 percent of FTSE 100 volume, and was unprofitable.

As a result, the banks have given Turquoise–yes, given it–to LSE.  LSE has agreed to invest to upgrade Turquoise’s technology, and will use the platform to trade a broader slate of European stocks.

Which all goes to show that, as the theory predicts, competing with an incumbent exchange in “lit” markets is extremely tough, though not impossible (as Eurex showed a decade ago in its competition with LIFFE).  It also demonstrates that control of large amounts of order flow is not a sufficient condition for an entrant to succeed, though it is arguably a necessary one.  It also shows that a for-profit, investor-owned exchange can compete successfully against a mutualized one, and that the return of the mutual model is not predestined.  Finally, this represents a cautionary tale for other nascent exchanges, such as ELX in the US.

GBS on the Principles of American Politicians

Filed under: Politics — The Professor @ 9:55 am

Sen. Ben Nelson’s decision to support cloture for the health care bill is about as surprising as the sun’s rise in the east this and every morning.  To expect one politician to play Horatius at the Gate is naive in the extreme, given the threats and blandishments that a committed and cynical Senate leadership and administration can use to cajole and persuade holdouts.

But Nelson’s performance does have its educational value in demonstrating just what passes for political principle. After preening about his moral objections to a health care bill that would pay for abortion, Nelson signed onto a deal that (a) does just that, with the merest “opt out” figleaf for cover, and (b) beggars Nelson’s Nebraska’s 49 neighbors by forcing them to pay for a big chunk of the state’s Medicare obligations.

Which brings to mind the famous anecdote about George Bernard Shaw.  The Irish playwright asked a young, beautiful socialite whether she would sleep with him for a million pounds.  The woman agreed, after which Shaw offered her 10 shillings for the same privilege.  The socialite huffily refused, saying “what do you take me for, a whore?”  To which Shaw said: “We’ve already established that.  We’re just haggling over the price.”

In other words, we now know what his excellency, Sen. Ben Nelson, is, and have established the upper bound on his price.

There is such a weird disconnect between what is going on in the Capitol and what is happening in the country; I’ve never seen the like before.  Although they are not united in their reasons, most Americans left, right, and center are united in their opposition to the bill slouching through the Senate.  Some hate it because it is socialistic.  Some hate it because it is not socialistic enough.  Some hate it because it is burdensomely expensive.  Despite this widespread, and intense, dislike, the bill advances inexorably nonetheless.  It is very difficult to understand how this is in the political interest of those who are pushing it forward, but there it is.

The political consequences of this are likely to be seismic.  It is difficult to fathom what they will be exactly, but the palpable alienation of the public from its ostensible representatives is so extreme, and so unprecedented, that the political fallout will be intense.  Such alienation means that the if the US is not in a pre-revolutionary situation, it is in a pre-pre-revolutionary situation.  Fortunately, our system of regular and frequent elections holds out the prospect of channeling this alienation into constructive political action that will punish those who act with such contempt towards those they purportedly represent.  But since those who disagree with the Reid Monstrosity do so for radically different reasons, this coming election year is likely to be the bitterest in memory, and the losers are unlikely to acquiesce willingly at the outcome.  Given the intensely personal nature of health care, and the government’s involvement therein, this means that decisive election or no, the PPR situation will persist, and could evolve into a PR situation.

In other words, those who believed that Obama’s election would usher in a new Era of Good Feelings were sadly deluded (although that this belief was delusional should have been readily apparent).  We will be lucky if this period is named, by future historians, as the Era of Bad Feelings, because I fear that it could become much worse than that.

December 18, 2009

I Couldn’t Make This Up

Filed under: Politics,Russia — The Professor @ 9:09 pm

In the irony department: When on the plane last night after writing the post on skinny Russians, what did I happen to read in the New Penguin Russian Course* but this footnote:

In a culture where fat tends to be regarded as a good thing (it keeps the cold out), there are some features of the Russian language that should intrigue westerners obsessed with slimming.  [NB.  The author is a Brit.]  Note that худой ‘thin’ also means ‘bad’, поправиться ‘to get fatter’ also means ‘to get better’, жирный ‘fat’ has associations with richness (жирный кусок ‘fatty piece’ is used of something tempting), and the phrase с жиру беситьсй ‘to be in a rage because of fat’ means ‘to be too well off.’

Which could all explain why some people are a little touchy on this subject.  Just sayin’.

* If you’re wondering, the answer is slow but steady.

December 17, 2009

The Real Skinny on Russia

Filed under: Economics,Politics,Russia — The Professor @ 8:41 pm

WindowOnEurasia quotes Rosstat figures showing (a) Russians’ caloric intake is the same as German POWs held by the USSR in WWII (in late-’41, anyways), (b) this intake fell from 2007 to 2008 (no data on the effect of the crisis, but it couldn’t have been good), and (c) even the higher 2007 intake was “below medical norms.”   The article also states: “it is not just the size of caloric intake that is worrisome: the mix of goods – too much alcohol [go figure] and too little fresh food.”  This is obviously an important health issue, and one with national security implications, as many Russian males are physically unfit, in large part due to the effects of poor nutrition, to serve in the military.

This brings to mind an experience from the summer past.  Two Russian college students, young women, stayed with us for awhile.  During a dinner conversation, Mrs. SWP asked them if Russian boys were big and strong.  They both giggled.  Then Marina (herself a slip of a thing) said: “NO!  They’re all too skinny!”  The entire SWP family would watch in amazement as they would pack it away, like they hadn’t eaten before.  And these are young women from middle-to-upper middle class families in a large city.  When they left, Marina wrote a nice thank you note, which emphasized especially “the wonderful steaks!!!!!” (exclamation points in the original).  It was amusing, in a way, but really quite telling and sad.

And to think that Russia was once the world’s breadbasket.  I wonder if those who comment here about Stalin’s achievements in industrializing Russia and the USSR fully comprehend the significance of the fact that this alleged achievement wrecked Russian (Soviet) agriculture.  The late Gaidar’s book described in detail how this was a major contributor to the USSR’s ultimate collapse.  And the legacy lives on: an industrial wreck, trapped in amber, and an emaciated populace.

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