Streetwise Professor

Robert Amsterdam has a good post describing one small episode in what passes for law and justice in Russia.  It’s worth keeping in mind whenever you hear “privatization,” “modernization,” “eliminating the humiliating dependence on raw materials,” “Skolkovo,” blah, blah, blah.

The key thing to remember is what my friend Sergei Guriev and his co-author Aleh Tsyvinski have said, as quoted in the RA post:

Such institutions are difficult to build in every society. In Russia, the task is especially problematic, because the ruling elite’s interests run counter to undertaking it.

In other words: you cannot possibly expect the foxes to build a secure hen house.

Which is why I often refer to Russia as Putin’s Purgatory.  The insiders have no interest in changing the status quo: so where will the change come from?  The opposition is weak, divided, under siege, and any slight chance that they would have of taking power via election is foreclosed by the rigged electoral system.  Moreover, they would probably be overwhelmed if they actually came to power.  Overthrowing through extra-electoral means those currently in charge would, almost certainly, pitch the country into another one of the paroxysms of apocalyptic violence that have ravaged it in the past.

So it will just go on and on, with droning platitudes about change with nothing ever really changing; a Russian Groundhog Day.  Not as bad as it could be, but nothing even slightly resembling a free, fair, and prosperous society.   That must be very dispiriting–which suits the ruling elite very well, because a dispirited and inert populace poses no threat whatsoever.

So what did Putin and Medvedev say on the 10th anniversary of the sinking of the Kursk?  Why, nothing, of course (in public, anyways)  (h/t R):

Navy ships of the Northern Fleet lowered their flags and sounded their sirens at 11:44 p.m. Thursday — the exact time of the 10th anniversary of the blast that destroyed the Kursk nuclear submarine in the Barents Sea.

Memorial events were held in St. Petersburg, Murmansk, Severodvinsk, Severomorsk and Arkhangelsk, where the 118 members of the Kursk’s crew are buried, Interfax reported.

All Russian Orthodox churches on Navy bases held services in memory of the sailors who died in the incident.

But officials chose to ignore the date, relatives of dead sailors said.

“We hoped that someone from the Defense Ministry or the Navy’s staff would contact us for the 10th anniversary. We thought that someone from the country’s authorities would come to commemorate the memory of our boys. But alas, looks like they don’t think death of 118 submariners is a big tragedy,” said Sofia Dudko, mother of the Kursk’s first mate, Sergei Dudko.

Neither President Dmitry Medvedev nor Prime Minister Vladimir Putin commented on the Kursk anniversary Thursday.

Putin’s silence is particularly revolting: he was President during the event, after all.  The men who perished were under his command.  He bears responsibility for the way the incident was handled–or, more accurately, not handled.  Responsibility–but not accountability.  And he has done everything possible to ensure that he will escape accountability in the future as well.

It is interesting to speculate on what could lead Putin to eschew even the minimal graciousness of a public statement honoring the service of the men who died, and extending the condolences of the state which they served–a state which he counts as the most sacred thing in all Russia.  Is he so callous that he doesn’t even care that people died under his command?  Is he so petty and insecure that he cannot countenance the mere possibility that his speaking on the subject will jog memories that reflect unfavorably on him?  Is he so wrapped up in his personality cult that he cannot tolerate that people might recall an event that undermines his carefully cultivated image of the Father of Russia, the Man Who Solves All Problems?  Is his ego so fragile?  Or does he believe that his image is so fragile that it will not withstand the slightest doubt about his omnipotence and omniscience?  Or is it that he just doesn’t give a damn about the poor slobs that toil for him and his precious state?

Whatever the explanation, it does not reflect well on the man at all.  He glories in command, and dreams of expanding the power of the forces he commands.  He expects men and women to experience privation and pain, and perhaps to die, under his command.  But in failing to remember some who did die under his command, he neglects the reciprocal duty of the chief: to be solicitous of the lives of those in his charge, and to honor them when they die or are maimed.

The Russian state failed the men of the Kursk when they sent them on a mission poorly trained in a defectively maintained boat with dangerously unstable weapons, all as part of a chest-thumping exercise to show that Russia still mattered.  The Russian state failed them when it botched any hope of saving the few survivors, and spent more time and ingenuity thinking up lies and cover ups than it did trying to conceive of a rescue.  The state owes them deference and honor in return.  And the self-appointed human embodiment of the state gives them–nothing.  Not even words.

Commemorating the dead honors their sacrifice, and keeps them alive in a way.  Ignoring them is like killing them all over again.  It screams: “You don’t matter.  I (Putin) MATTER!”

Vladimir Putin.  Adding insult to death.  Quite a day’s work.

Ten years ago today, the Oscar II class Russian submarine K-141, the Kursk, sank with all hands in the Barents Sea.  The incident revealed a great deal about the decrepitude of the Russian Navy, and military more generally.  The Kursk was the pride of the once mighty submarine fleet, most of which was rusting at dock in 2000.  Despite the fact that it was one of the most modern Russian subs, and one of the few remaining operational, it was destroyed almost certainly by the failure of welds and/or gaskets in a test Shkval torpedo that resulted in the leakage of its hydrogen peroxide fuel onto metals and oxides in the torpedo, resulting in a chemical reaction that culminated in an explosion of the fuel and a kerosene tank; other nations had discarded the use of H2O2 as a torpedo propellant due to its extreme volatility.  (Russia did withdraw all high test peroxide torpedoes from service after the Kursk catastrophe.)

Inspections of the type of torpedo implicated in the explosion undertaken in 2000-2001 found corrosion and decayed gaskets.  A torpedo of the type that caused the sinking was dropped while being transported to the Kursk prior to her fatal voyage, but it was loaded nonetheless, and could not be unloaded because the cranes necessary to do so were not working, and had been inoperative for some time. The crew, which had virtually no sea experience whatsoever, had never handled the Shkval torpedoes.

The blast blew off a torpedo tube door that was not closed properly due to a design and/or manufacturing flaw.   This flooded the compartment and caused the ship to being sinking.  The explosion ripped through three compartments of the ship, including the control room, which should have been insulated from the blast by a bulkhead, but was not, because it could travel between compartments via a ventilation shaft.   The blast perhaps disabled the crew in the control room:  many suffered indications of trauma.  Whether it was that, or a failure to react properly to the sinking condition of the ship, they did not activate an emergency blowout procedure to shoot the ship to the surface.  The ship hit bottom at speed, digging a 2 meter hole into the seabed.  The force of the impact detonated additional torpedoes that ripped through all compartments forward of the reactor space.  Some crewmen in the aft spaces survived; for how long is a matter of conjecture.

Although other Russian ships in the exercise heard the explosion on sonar, none reacted, all believing it was part of the drill.  The loss of the sub was not known for some time in part because an emergency buoy did not deploy; if it had, the ship would have been discovered within an hour, instead of the 31 it took in the event.  It had been deliberately disabled to prevent an accidental deployment while the sub was operating in the Mediterranean the prior year.

After some hours, the Navy realized the ship was in extremis, and dispatched a submarine rescue vessel.  The lack of communications between the Kursk and the exercise flagship, the Piotr Velikii, was evidently written off to the fact that communications breakdowns were routine.

It took 31 hours for the submersible to reach Kursk, but it was unable to attach to the rescue hatch on the sub.  The search took so long in part due to the fact that the submersible’s batteries had not been replaced, requiring the vessel to shut down power for extended periods.

It is interesting to note that the Northern Fleet’s rescue equipment had been sold off for scrap or sunk as “redundant” in the mid-1990s.  (I wonder who pocketed the money from the scrap sales?)

All in all, a tragic testament to the state of the Russian fleet in 2000.  And remember, this occurred in the nuclear submarine Navy, which by all accounts was–and should have been, given the extreme technical and operational demands of the service–the most capable branch of the Russian Navy.

But far more revealing—and disturbing—was the mendacious reaction of the Russian military and political establishment.

Most crucially, it refused immediate American and British offers of submarine rescue vessels.   They eventually agreed to British and Norwegian help—but only four days after the accident, by then far too late to do anything, for the vessels could not arrive for two days after the grudging acceptance of the offer.

Even then, the Russian Navy’s actions towards the would-be rescuers was monstrous.  The higher ups actively attempted to sabotage the Norwegians by lying to the rescuers about the Kursk. They said the ship was resting at a steep angle–false.  The said the escape hatch was damaged–false.  They went so far as to state deliberately that the rescue hatch opened counterclockwise, not clockwise as was actually the case.  Imagine, working at 100 meters in the freezing Barents Sea, trying to open a hatch, and turning it the wrong way: would you conclude that the hatch was broken?  How sick is that?  What was the purpose?  The Norwegian admiral in charge was incensed at the Russian behavior, seeing as it endangered his men.

In the days after the incident, the Navy and the government issued a blizzard of non-information, mis-information and dis-information.  At first, the Navy denied that anything was amiss, acknowledging a mere “technical difficulty.”  The government denied the problem for some time; it took two entire days to even admit that the ship “was in serious trouble,” and then lied about when the incident had occurred.  Indeed, the day after the sinking, the Navy commander told the press that the exercise had been flawless.  Yes: flawless.

They never used the word “sink.”  They claimed the entire crew was alive.  They claimed they were in communication with the crew, and that the ship was supplied with air and power from the surface.  The Navy excused its evident lack of preparation for a rescue by bewailing the weather conditions and strong currents, even though the weather was fine and the currents benign.  All complete and outrageous fabrications.

Enraged by the duplicity, at one Navy press conference, the mother of a Kursk officer, Nedezhda Tylik, launched into a screaming denunciation of official dishonesty.  In an event captured on film, a nurse was seen to move up behind Tylik, and inject her with a hypodermic needle.  Tylik collapsed and was taken from the room.  (A still photo is available here; I have not found the video online for free despite a diligent effort; there is a documentary that has the film that can be purchased here.)  She first claimed she had been sedated against her will, and the Navy said that it had indeed given her a sedative; in an Orwellian way, it acknowledged the “solicitous administration of needed tranquilizers.”

Then, remarkably, in the aftermath of a domestic and international outcry, the Navy denied that it had sedated her, and Tylik also recanted, claiming that she had only been given her heart medication at her husband’s request.  Yeah, sure.  Who you gonna believe?  Them or your lying eyes? (Tylik maintains this version in the documentary.  But why did neither she nor her husband make that statement initially?)

Even worse were the repeated statements by Russian Navy officials and Duma politicians that US submarines were to blame.  Specifically, they mooted the theory that a US Los Angeles class boat monitoring the exercise had struck the Kursk, holing it and causing it to sink.  At the notorious press conference in which Tylik was tranquilized, Northern Fleet commander Admiral Popov claimed he would spend the rest of his days finding out who “organized” the Kursk’s destruction.  I’m sure he and OJ can team up on their investigations.

Those peddling the conspiracy theory gave no explanation at this remarkable result, by which a boat displacing 7000 tons submerged could strike and sink one displacing 24,000 tons.  It would have had to been either a refutation of the laws of physics, or a very damning reflection on Russo-Soviet submarine construction.   (No prior collision between a US boat and much smaller Soviet craft had ever led to such a catastrophic result.)

But of course, they never believed it.  It was all just a typically Soviet reaction in which the evil Americans are responsible for every Russo-Soviet disaster.

They did apparently convince one French filmmaker, who produced a documentary pushing this cock and bull story, with a twist.  The Frenchman–whom I shall not dignify by name–claims that the USS Toledo collided with the Kursk while shadowing the exercise; a trailing sub, the USS Memphis, heard the Kursk open its torpedo doors after the collision, and to defend Toledo fired a torpedo at the Kursk that miraculously hit the doomed sub right in the torpedo room, causing the detonation.  The clinching evidence, according to the film, was a clean round hole in the Kursk’s hull, telltale evidence of a hit by a torpedo with a shaped charge.  Uhm, the Mk 48 torpedoes that US subs carry don’t use shaped charges.  (Air dropped Mk 50s do use such warheads.)  Moreover, Mk 48 torpedoes don’t work by detonating directly against the hull of the sub.  And the Toledo never underwent a long stint in the yard for repairs, as would be required after a collision.  (And what is it with French fellow traveler filmmakers, not only this guy but the one who did the “documentary” claiming that the 911 attack on the Pentagon was actually an American missile strike?)

Putin, then President for a mere seven months and some days, reacted with . . . no, it would be more accurate to say he didn’t react.  But then he engaged in the damage control methods he has employed ever since (and is using again in the fires).  He promised a new apartment and a cash payment to the families of the dead sailors, and gave medals to the dead.  The payment to the Kursk dead was two orders of magnitude bigger than the standard death payment for Russian military dead.  But the ordinary Russian military dead weren’t a public issue.  As a further PR gesture, Putin also decreed the expenditure of an amount equal to twice the Navy’s submarine force operating budget to raise the ship so its crew could be buried, with full Orthodox rites.  So: defuse a crisis by throwing out blood money promiscuously.

In fairness to Putin, it should be noted that the Navy lied to him as shamelessly as it did to the world.

Putin was initially savaged by the Russian press, but surprise, surprise, within days the Russian press uniformly lionized him.  He has been much more effective at managing the press ever since.  They now skip right to the lionizing part, without fail—no matter how badly he fails.

Putin was at his most revealing when, less than month later in an appearance on Larry King Live, he responded to King’s question “What happened to the Kursk?,” by first pausing for some time, and then grunting through a creepy and tight semi-grin: “It sank.” It was a disturbingly bloodless performance.

Although the Kursk sank before I began to follow Russian developments as closely as I do today, I did track the Kursk episode with some interest.   Looking back, it was a very revealing experience.  Much of what I have written on SWP in the past four years was foreshadowed by the Kursk incident, the official incompetence and mendacity most notably.

I think it also heralded the death of any opposition press within Russia, for never again was Putin subject to the kind of open criticism he suffered in the days immediately following the sinking.  He soon launched an attack on all independent media within Russia.  Knowing who he is and from whence he came, it is likely that he would have strangled the press eventually.  But I have little doubt that the attack was accelerated by Putin’s rage at the criticism he received; he admitted that he “did not think about public relations.” Never again, he concluded.  No, not that never again would a disaster of such magnitude occur—for there has been a litany of disasters in the past 10 years (think Beslan and Nord Ost and on and on)—but never again would he permit an honest accounting of them.  It is one thing at which he has succeeded admirably.

You could do a lot worse to learn about Putin and Putinism and the Russian military establishment than by revisiting the sad history of the cursed Kursk.

May her crew rest in peace.

Russia has ambitions of turning Moscow into a world financial center.  Proving that old habits die hard, rather than do the heavy lifting that would be required to achieve that objective–e.g., eliminating raiding, strengthening property rights, improving disclosure and transparency, bolstering minority shareholder protections, etc. (the list is very long)–the economic development ministry is recommending the Potemkin approach.  Or, to characterize it a little differently, a Soviet propaganda approach.  Literally:

According to a copy of the proposal [from the ministry] seen by Vedomosti newspaper, the economic development ministry believes Russia should create a multi-lingual internet portal to showcase Russia’s “history of success”. [What history is being referred to exactly?  Could be a pretty small website.]  The resulting campaign should draw not just upon global examples, but Russia’s previous propaganda efforts during the Soviet era, the proposal states.  [Emphasis added.]

After all, propaganda is easy; it might gull a few suckers who can be fleeced; and it does not require the implementation of reforms that would constrain the ability of the insiders to tunnel out vast sums.

To get an idea of how the game is rigged in favor of the insiders, consider the following story about the bidding process for the last large undeveloped oil property in the country:

Russia has finally set a date to auction off its last unalloted big oilfields, but analyst say the terms it set out for a potential buyer make the deposit difficult to use and develop.

. . . .

But analysts believe that the terms of the ownership, including obligations to sell 15 percent of produced crude through the oil exchange and to refine 42 percent of crude produced, can spook off the potential buyers.

“The proposed terms complicate the project significantly…. Crude exports will primarily go through the Northern Sea route, while the bulk of the refining complex is located in the European part of Russia.,” VTB Capital analysts said in a note on Wednesday.

“With additional transportation costs implied, as well as the lack of exchange trading for crude oil, the economics of the project could suffer as a result of the conditions which have been imposed.

Uralsib analysts believe that due to these conditions, Russia‘s largest oil producer, state-owned Rosneft, is a frontrunner in the tug-of-war for the fields. [Emphasis added.]

The conditions are heavily tilted to favor Rosneft.  I’m shocked! Shocked!

Russia has a choice.  It can continue to operate a system that funnels rents to the powerful.  It can create a system that protects investors and limits the pervasive corruption, rent seeking, and favoritism in order to attract investment.  It can’t do both.  All the neo-Soviet propaganda in the world can’t change that.  Any fool that falls for the propaganda deserves to lose everything–and probably will.

Two stories, pathetic in different ways, out of Russia.

Story 1 is that one of the Russian spies exchanged last month, Mikhail Vasenkov a/k/a Juan Lazaro much prefers being Juan:

But the senior spy among them says no thanks. In a plot twist rare in the annals of espionage, he wants his Juan Lazaro fake identity back.

There’s only one problem. The real Juan Lazaro died 63 years ago in Uruguay at age 3, a relative says. The spy used the dead toddler’s birth certificate to build a persona.

From a Moscow apartment where Russia’s government has him lodged out of public view, the veteran agent has sent word that he and his wife, deported together in the spy swap and separated from their 17-year-old son, want to use their Peruvian passports to return to Peru in the coming weeks and rebuild their lives as the Lazaros.

“He doesn’t want to stay in Russia,” says his American lawyer, Genesis Peduto, who talks to him on the phone.

“He says he’s Juan Lazaro and he’s not from Russia and doesn’t speak Russian. He wants to be where his wife is going, to her native country, where it will be easier for Juan Jr. to visit” from New York. “His family comes first.”

I recall reading (can’t find the article) that one of the spies was quite militant and proud of his actions during his pleading–I thought it was Lazaro/Vasenkov, but maybe I was wrong.  Whatever, he ain’t militant now.

I would agree that a future in Russia would be pretty bleak.  As Lazaro, he cut a somewhat macho figure.  Not quite the Dos Equis Most Interesting Man in the World,  but “Latin” and a little exotic and romantic.  He lived in New York and could travel.  The idea of growing old in a land that is now foreign to him, speaking a now unfamiliar language, far from his beloved son, would be extremely oppressive, I’d think.  Karaoke with Putin is small compensation for that–especially in the knowledge that it’s all downhill from here.  Oh, what a tangled web we weave, when first we practice to deceive.

Update (8/10/10 1548) h/t Mossy. Yes, my memory was correct: “Lazaro” had made a militant statement to the FBI:

He also said that his house in Yonkers, outside New York City, had been “paid for by the ‘Service’ and although he loved his son, he would not violate his loyalty to the ‘Service’ even for his son,” according to the document.

That didn’t last long.  Maybe he was posing for some reason, such as trying to get on the good side of the SVR figuring that it would stand him in good stead in the event of a swap.  Or, maybe he meant it when he said it, but now he recognizes the reality of the situation.  I sense that he believes that “the Service” has betrayed him, and is discarding him now that he is worse than useless to them–that he is an embarrassment.  The Chekist karaoke, and Putin’s promise of a bright future, look even more like propaganda now.  It’s also worth noting that “Anna Chapman” is royally peeved at the loss of her UK passport.  Living on the SVR’s dime in the US or UK makes it easy to be “patriotic”: living on your own in the RF, not quite so attractive.

Story 2 is about a famous seed bank in Russia, the Pavlovsk Experimental Station.  A seed bank that 12 scientists starved to save during the horrific Siege of Leningrad.  But now the bank stands in the way of real estate development.  It sits on state property, which has been granted to developers.  The tale is incredibly Orwellian.

Orwellian feature #1:

On December 25, 2009 the Federal Agency for Public Estate Management under the Russian Ministry of Economic Development issued two resolutions (Orders No. 2058-R and No. 2061-R). They sanctioned termination of perpetual (irrevocable) tenure over lots 2 and 18 granted to VIR’s Pavlovsk Experiment Station and conveyance of this land to the Federal Fund of Residential Real Estate Development no later than in three months.

Uhm, how to you terminate “perpetual (irrevocable) tenure”?  Not so irrevocable or permanent, I guess.

Orwellian feature #2.  The Station is trying to contest its eviction in court.  The real estate developers have advanced a novel argument to fight the claim:

In what appears Kafkaesque logic, the property developers argue that because the station contains a “priceless collection”, no monetary value can be assigned to it and so it is worthless. In another nod to Kafka, the government’s federal fund of residential real estate development has argued that the collection was never registered and thus does not officially exist.

It is priceless, so it is worthless.  Wrap your head around that enigma, riddle, puzzle combo meal.  It’s been there for 85 years, survived the most horrific siege in modern history, has an unparalleled collection of genetic material, and an “irrevocable lease,” but because some piece of paper was not filed, it doesn’t exist.  And how do you give a perpetual lease to something that doesn’t exist?

I wonder who got paid how much to make this happen.  The whole episode is truly revolting.

George Stigler once wrote “‘data’ is not the plural of ‘anecdote.'” Apparently Paul Krugman didn’t get the memo.

In today’s NYT, he relates a modern-day Dickensian tale of the penury into which states and local governments have been cast as a result of eeeeevvvvviiiiilllll anti-government ideology, allegedly regnant since 1980:

How did we get to this point? It’s the logical consequence of three decades of antigovernment rhetoric, rhetoric that has convinced many voters that a dollar collected in taxes is always a dollar wasted, that the public sector can’t do anything right.

The antigovernment campaign has always been phrased in terms of opposition to waste and fraud — to checks sent to welfare queens driving Cadillacs, to vast armies of bureaucrats uselessly pushing paper around. But those were myths, of course; there was never remotely as much waste and fraud as the right claimed. And now that the campaign has reached fruition, we’re seeing what was actually in the firing line: services that everyone except the very rich need, services that government must provide or nobody will, like lighted streets, drivable roads and decent schooling for the public as a whole.

So the end result of the long campaign against government is that we’ve taken a disastrously wrong turn. America is now on the unlit, unpaved road to nowhere.

If you read the entire piece, you’ll note it is chock full of anecdotes.  Data not so much.  Not at all in fact.

So let’s look at the data.  I know it’s an onerous task to collect it, but I’m willing to make any sacrifice for the truth. The humanity!  I’m sure the compassionate liberal Krugman wanted to spare his overworked armies of RAs the indignity of such backbreaking labor.

In fact, it took me all of 10 minutes.  But I’ll recover.

From the beginning of the Dark Age, with the ascension of Darth Reagan to the presidency in 1980, state and local government spending as a fraction of GDP rose from 15 percent to 22 percent.  Even stopping at the time of the financial crisis, in 2008, state and local government accounted for 19.6 percent of GDP.

In other words, state spending grew faster than the economy during the entire Age of Anti-Government Ideology.  The rate of increase of that percentage was actually higher in the 1980s, under Reagan, than in the 1990s, under Clinton.  Indeed, it was higher still in the 2000s, when the new Dark Lord was president.

Insofar as state and local debt is concerned, in 1990 it totaled $993 billion.  In 2000, $1.28 trillion, and in 2008 $2.25 trillion.  Note the high rate of growth during the allegedly anti-government Bush years as opposed to the Clinton period.

There is clearly no prima facie case that states and municipalities were starved of resources at any time over the past 3 decades, be it the result of antigovernment rhetoric or any other damn thing.

One could argue that spending should have been higher, that the growth observed absolutely and relative to the entire economy, was too small.  In which case, you need to present some empirically testable hypothesis, and then go out and test it.  Which Krugman, of course, does not even try.  Sorry, teary anecdotes don’t cut it.  Period. Have some data?  Fine. We can talk.  Otherwise, forget it.

Put differently, what are the testable implications of the anti-government ideology theory?  How is relative growth consistent with this theory?  Until Krugman specifies those hypotheses, and actually tests them, he’s just blowing gas.

Yeah, like  that’s a new development.

As for governments’ current strapped fiscal condition, here’s an alternative explanation which happens to be consistent with the actual, real, you know, data just discussed.  States and localities have been financially imprudent in recent years, increasing spending at an unsustainable rate.  Governments assumed that the good times would always last–we were in a new paradigm, dontcha know–and entered into commitments that were unaffordable unless les bon temps continuer a rouler.  When the music stopped, they were already greatly overextended.  They are currently in the painful process of adjusting their ends to their means.

Under this interpretation, throwing more money at states and localities is just so much fuel for the moral hazard fire.  It relieves them of any accountability for their fiscal decisions, laying the groundwork for the next crunch.

Krugman rationalizes this with more vulgar Keynesian stimulus reasoning.  But the money has to come from somewhere, and as much as Krugman is loath to admit it, people are sure thinking like Ricardians these days, hence their clear aversion to vastly increased public expenditures.

Russia continues to choke on the smoke from the ring of fire that is consuming the country.

I mentioned that one likely contributor to the seriousness of the outbreak was a change in Russia’s laws, under Putin’s direction, that dismantled Russia’s fire protection service.  This explanation is getting wider play as the fires continue to burn.

In brief, the law privatized anti-forest fire activities.  Russian state-employed fire rangers were eliminated on state land.  Instead, those leasing the properties–Russian forest product companies–were “responsible” for detecting and fighting fires.

But Russia being Russia, such “responsibility” is wholly theoretical.  After all, to work, responsibility must be balanced by accountability, and Russia is notorious for lacking reliable and regular mechanisms for holding malfeasors accountable for their conduct.  Even in the US, with a highly developed court system that can impose harsh punishments on tortfeasors, can witness disastrous failures to take efficient measures to reduce environmental damage: just witness the BP fiasco in the Gulf.  In Russia, such mechanisms are completely unreliable, so they have very little deterrent effect.

At best, the threat of ad hoc sanctions imposed by the power structures has the potential to deter.  But these sanctions are employed in a highly corrupt and skewed way: those without juice may pay a price for screwing up, those with juice, not so much.

And it must be emphasized that the pulp and paper sector has juice in Russia.  Not so much as energy, but enough (pace the Putin decision to reactivate the Lake Baikal paper mill owned by Deripaska).

Most notably, Medvedev came out of that sector.  He is reported to have been (it is unclear whether he still is) a 50 percent owner of a forest products company, Fincell.  He worked as legal director of Ilum Pulp from 1993-1999.  He was a director of Bratskiy LPK, a paper mill.  A recent taxonomy of the Russian oligarchic clans places Medvedev as a member of the pulp and paper oligarchy (h/t S/O).  No doubt that Medvedev and his cronies–and yes, the elfin Medvedev does have cronies–benefited from the changed law, and I would not be surprised to learn that he was a supporter and advocate.

Which means that the likelihood that any major decision maker in the forest product sector will pay a serious price for the fires, and any failure to take adequate precautions, is virtually nil.  Oh yes, there will probably be the usual ritualistic scapegoating, if only to present a facade of doing something; and perhaps, to punish someone who is out of favor for some other reason.

The lack of state capacity and a weak and corrupt legal system is only one reason why the privatization of this service was ill-advised.  Other economic considerations suggest the same thing.  The theory of privatization (based on property rights economics concepts) states that privatization is inefficient when it is very costly to verify that the supplier of the privatized service has undertaken agreed upon measures.  It would be likely very costly to verify whether Russian forest product firms have undertaken the appropriate fire-prevention measures, and fire fighting preparations, either ex ante, or ex post.  Knowing that the government doesn’t have the way to determine compliance with fire prevention/fighting standards is sufficient to make it inefficient, according to these theories, to put them in the control of firms subject to high powered incentives.  They have every incentive to chisel on these costs in order to enhance profits, knowing that there is no commercial or legal penalty for doing so.

Given the immensity of the costs of the fires, moreover, it is likely that most Russian firms would be judgment proof. Another reason not to rely on ex post deterrence to achieve this objective.

So, it is likely that Russia has neither the will nor the way to provide forest products firms with the incentive to take efficient, or even barely adequate, fire prevention and fighting measures.

The change in law therefore increased the likelihood and severity of the catastrophe currently being experienced.  Yes, given the dry conditions and intense heat, it is likely that many fires would have broken out this year.  But things are almost certainly worse as a result of the law.  It placed fire prevention and firefighting in the hands of people with no incentive, positive or negative, to invest resources into the task.  In a country with corrupt courts, a politically connected industry pays no price for making such investments.  So why do it?

And now the country is paying the price.  Again.

A part of the Russian Academy of Sciences predicted this immediately upon passage of the law.  They were very prescient.

It will be interesting to see whether those ultimately responsible, Putin and Medvedev, pay any political price.  I doubt it.  That would be as telling as anything, and make it clear that that yet more catastrophes await.

* I never saw Johnny Cash play “Ring of Fire,” but I have seen ZZ Top and Social Distortion cover it.  An amazingly adaptable song.

My recent post on the Russian wheat embargo, which I considered rather benign, drew the ire of a reader who emailed me to say that I’d written “another BULL SH*T Russia post” (caps in original–but not the asterisk).

Thanks so much for writing!  I’m really looking forward to your Christmas card!

Rereading the post, I found nothing exceptional.  The title was the most inflammatory thing about it.  But I think the gist of the post is correct, including the title.  And I have a very strong historical basis for my claim that embargoes such as this one are highly damaging to a nation’s commercial reputation, with long term economic consequences.

So, wait for it . . . SWP is about to say “whatabout!”  As in “whatabout Nixon’s 1973 soybean embargo?”  An absolute charlie foxtrot, like most of Nixon’s economic policies (e.g., wage and price controls).  God spare us another such “conservative.”

In 1973, demand for soybeans spiked due to an El Nino of unusual severity that devastated the Peruvian anchovy catch and central African peanut production.  (Can’t blame global warming or CO2 for that!  Indeed, that was a time when Global Cooling was becoming the angst du jour.)  These were major sources of protein for animal feed.  The only real substitute was soybean meal, so the loss of anchovy and peanut production drove up demand for soybeans, and the price with it.  Meal prices doubled, and soybean prices increased 81 percent.  The US livestock industry was hurt by the higher prices, and so Tricky Dick imposed an embargo on US exports of soybeans and soybean meal.

US prices dropped substantially, but prices elsewhere, notably Japan and Europe, skyrocketed.  Japan in particular was deeply disturbed, and lost confidence in the reliability of the US as an exporter.  Japan imported 92 percent of the soybeans it consumed from the US, and was seriously injured by the loss of this source of protein, and the resulting rise in food prices.

It actively sought alternative sources, and identified Brazil as the most attractive source.  The Europeans similarly considered Brazil a desirable substitute for the US.  There was a considerable increase in investment Brazilian soybean production and infrastructure.  Although there is some dispute as to the exact contribution of the US embargo to Brazil’s becoming a  leading soybean exporter, it is widely agreed that the embargo materially contributed to Brazil’s rise to leadership in this commodity.

More generally, the embargo damaged US-Japan relations.  Agriculture Secretary Earl Butz admitted that the embargo was a serious policy error (while at the same time defending Nixon over Watergate).

As a general rule, I oppose embargoes.  The 1980 embargo was a bad idea.  So was Ford’s 1975 mini-embargo.

So this isn’t a Russia thing or a Putin thing.  It is an economics thing.  Restricting trade is a bad idea.  And one of the effects of an embargo is that it harms the commercial reputation of the country imposing the embargo.  Indeed, imposing embargoes at exactly the time when importing nations are most in need of the commodity is particularly damaging; fair weather suppliers, like fair weather friends, are not friends at all.  Once you get that rap, people will find ways to reduce their reliance on you, which will have long term consequences.

And given Russia’s track record on trade and embargoes, it has precious little reputational capital to draw upon in such circumstances.  It has even less now.  It wants to build up its ag export business in a big way.  It just made that a whole lot harder.  More Putinist short-termism that will impose long term damage on the Russian economy.

What’s more, the conjectures in the post about Kazakhstan and Belarus were more than fair, and were indeed echoed by a highly respected independent source.

So, Walter: not BULL SH*T at all.

Here are the effects of an embargo.  It helps domestic consumers, but hurts domestic producers.  The domestic consumers’ gains are typically short lived, but the impact on domestic producers can be long lasting due to the reputational damage.  It is especially harmful to foreign consumers, like the Japanese in 1973, and like Egyptians, Africans, etc., today who are major importers of wheat and who will be greatly harmed by the higher prices resulting from the embargo; so if you’d like to hurt very poor Egyptians and Africans to help relatively well-off Russians, this is a policy for you!  Foreign suppliers are helped–North Dakota and Kansas and Texas should send Putin a Candygram.

But when you net the losses against the gains, the former are bigger.  Embargoes create deadweight losses.  They make the world poorer.  That’s why I don’t like them, whether imposed by Jimmy Carter, Richard Nixon . . . or Vladimir Putin.  (Although, it is interesting, don’t you think, that this something these three have in common, besides being execrable national leaders?)

In one of the few feelgood stories of this dreary summer, Paul Krugman was last seen shouting “runaway, runaway” from a nasty netstorm in his comment section.   Change your armor, PK!

It’s about time somebody consistently called Krugman out.  (Steve Landsberg tries regularly, but dammit Jim, he’s just one man.)  In his repeated shrieks for more, More, MORE STIMULUS!,  Krugman resembles nothing more than an 18th century physician who, gazing upon his ghostly pale, weak, and failing patient, concludes he hasn’t been bled enough.

Another such “cure” would kill us.  Krugman’s commentors have figured that out, and a good swathe of the country has as well.  The administration hasn’t, but since most of the Democrat delegation is also screaming “runaway” while scattering in terror at the mere thought of even being seen with Obama, perhaps we’re safe for a little while, anyways.

There is a viral rumor that Fannie and Freddie will unilaterally reduce the principal amounts owed on underwater mortgages.

This is generating a lot of criticism, and talk of “bailout.”  Yes, there is probably a bailout element to it, and the political timing would be highly suspect.  But to the extent these mortgages are underwater, F&F are eventually going to eat losses.  Any such program, if rumor is fact, will not be entirely a bailout.  The program would be a mixture of political payoff and recognition of reality.

But even the rumor and the credence many people give it emphasizes a point I’ve tried to make repeatedly about F&F.  Namely, that those who strive mightily to absolve F&F of any responsibility for the housing boom and bust refuse to come to grips with the GSE’s massive losses.  The losses already recognized are huge.  The rumor is essentially an acknowledgement that the losses to come are, er, huger.

Those who defend F&F tiresomely point to statistics about the measured characteristics of F&F’s portfolio, e.g., the percentage of subprime and Alt-A.  They argue that F&F’s participation in such lending was small, compared to non-GSEs.

But the ultimate measure of risk and credit quality is realized performance on the portfolio.  F&F’s huge losses demonstrate that the credit quality of the portfolio was actually quite low, that the value of the portfolio was quite sensitive to housing prices and/or concentrated in overpriced regions, or both.  Most likely, both.   In other words, the huge losses say far more about the credit quality and housing price risk of the portfolio than analyses based on characteristics measured ex ante.  Especially inasmuch as there is reason to believe that F&F fudged these measurements (and isn’t fudging one of Fannie Mae’s main activities?) in order to  increase the amount of credit extended to riskier borrowers in the most bubbly and overpriced markets, while maintaining the pretense that it was continuing to maintain underwriting standards.

The proof of the pudding is in the eating.  We are now eating F&F’s losses.  They demonstrate, quite forcefully, that their brand of pudding was rotten.  Going on and on about statistics allegedly demonstrating the quality of the ingredients doesn’t mean squat if the first bite makes you puke.

The rumor relates to the consequences of past actions.  Sunk costs are sunk.  What is a mistake is to ignore the causes of these past actions, and to repeat the mistakes going forward.  Fannie Mae, however, is falling back into bad habits:

The Washington Independent has an excellent story today about an ongoing housing programme in the US that is almost breathtaking in its stupidity.

Known as “Affordable Advantage”, it involves a kind of partnership between Fannie Mae, the government-sponsored enterprise, and the housing finance agencies of individual states. Here’s the explanation from the Washington Independent:

Before the recession hit, these housing finance agencies, known as HFAs, issued tax-free bonds and used the funds on programs to encourage developers to build in underserved areas and to support single-family mortgages. When the financial crisis hit, private companies — leery of the collapsing housing bubble and freezing mortgage market — no longer wanted to buy the HFAs’ bonds.

Then Fannie Mae entered the scene, agreeing to buy these bonds under the assumption that the homeowners had strong credit histories. In exchange, the HFAs said they would buy back loans that went delinquent.  And this is how the programme now works (also from the Washington Independent, emphasis ours):

Now, qualified homebuyers in the three states pioneering Affordable Advantage do not need to put down the 3.5 percent minimum down payment required by the Federal Housing Administration, or much of a down payment at all. They can get 100 percent financing — a loan as big as the purchase price of the house — for a 30-year, fixed-rate mortgage — a vanilla mortgage. The deal includes a program to help homebuyers if they become unemployed, lowered fees and there is no requirement that the homebuyer purchase mortgage insurance.

The only requirement is a $1,000 downpayment.  Perhaps you can already see where this is going.

Yeah, we can see where it’s going because we’ve already been there.  “Groundhog Day” is not a business plan.

But what’s the one thing that the “financial reform bill” didn’t do?  That’s right: it didn’t do a damn thing about F&F.

So if the rumor about F&F’s treatment of existing mortgages turns out to be true, that will be less worrisome than the things that they continue to do and are likely continue to do going forward.  The only way to prevent that going forward is to put these monstrosities down, with extreme prejudice.