Streetwise Professor

Vladimir Putin was in fine form  in a speech in Berlin the other day, shrieking hysterically about the savage Europeans and their thieving energy policies:

Russian Prime Minister Vladimir Putin on Friday lashed out at European Union laws aimed at liberalising the continent’s energy market, saying they hinder investment and amount to uncivilised “robbery”.

Putin, speaking to an investor forum before talks with German Chancellor Angela Merkel, said the EU should consult Russia when drafting such important legislation.

“Our companies, together with German partners, legally acquired distribution assets in Lithuania. Now they are being thrown out there with reference to the Third Energy Package. What is this? What is this robbery?” Putin said.

“We often hear from our partners both in Europe and North America: ‘If you want to be members of a global family of civilised nations, you should behave in a civilised way.’ What is this then? Have our colleagues forgotten the basic principles?”

Nothing like sticking Putin’s beloved Gazprom to make him squeal like a piggy.

No doubt Putin believes that mandated unbundling of distribution pursuant to EU legislation, duly passed, is analogous to the expropriation of Yukos or Sakhalin II. Check that.  He actually thinks the latter were righteous and just: if you really want to hear him lose it, just say “Khodorkovsky.”   It’s unbundling that’s the crime.

Unbundling is a widely employed method to enhance competition in network industries.  It can work well, or it can work badly at enhancing competition.  But maybe that’s exactly what has Putin steamed: he’s not too big on promoting competition in the energy sector.

Moreover, it is not undertaken to expropriate property from one party to line the pockets of the state, or some individuals or firms favored by the state.  Moreover, the EU directive is meant to be applied uniformly across all companies, not selectively against individual companies who have fallen into disfavor, or who have something somebody else wants. Note that a German company, E.ON Ruhrgas, is also affected by the unbundling in Lithuania that vexes Putin, so it is not a measure directed at Russia or a Russian company alone.

In brief, Putin’s idea of “civilized” and the Anglo-Euro-American idea of civilized when it comes to property and regulation are quite different. There is a failure to communicate, and the failure is largely cultural.

I especially liked Putin’s assertion that the EU should “consult” with Russia when drafting its legislation.  Uhm, somehow I’m thinking that that’s just another Russian one way street.  Putin would shriek even louder if the Euros were to demand a voice in shaping Russian law, such as it is.  (Indeed, he has–as has Medvedev–told other nations to butt out when they expressed criticism of Russian legislation or legislative proposals.) Indeed, few things get him more incensed than any action by foreigners that he perceives slights Russia, treats it as an inferior to be instructed, or threatens to put Russia “on its knees.”

Lord knows that Merkel has her hands full, with the accelerating implosion of the Eurozone.  But I wonder just how much of Putin she’s going to take: she’s taken quite a bit already.  I also know that German business pushes her to deal with Russia to advance its interests, but Merkel has to know that there is a huge imbalance of economic power between Germany and Russia–and it don’t favor Russia.  So I imagine there will come a day when she slaps Putin down.

If, that is, she’s still in power to do it.  The meltdown in Europe puts her between the importuning PIIGS (and now maybe Belgium too) demanding German money to save the Euro and the EU and a German public that resists bailing out its spendthrift neighbors.  She may well be turned to powder between these political grindstones, leaving some other German chancellor to put up with Putin’s tantrums.

I wrote a couple of posts about capital outflows from Russia.  There were a several stories about that last week.  One, from Bloomberg, says:

Capital flight from Russia is climbing as companies use record-low borrowing costs to fund the most overseas acquisitions in two years, diversifying abroad as domestic economic growth lags behind other emerging markets.

Russian companies have announced $27 billion of foreign purchases this quarter, the most since the third quarter of 2008 and triple the amount in the last three-month period, data compiled by Bloomberg show. The cost for companies to borrow in rubles is the lowest on record at an average 8.9 percent a year in October from 9.7 percent in the previous month, according to data from the central bank published on Nov. 18.

The increase in overseas investment and repayment of foreign-currency debt drove Bank Rossii to more than double its projection for 2010 capital outflows last week to $22 billion from $8.7 billion. Foreign investors put less money into Russia- focused mutual funds in the past six months than any of the other so-called BRIC nations — Brazil, India and China — as investors favored more expensive shares in faster-growing economies, EPFR Global data show.

Another, from Russia Profile adds some detail about the mechanics:

Hard-hit by the double whammy of a sudden decline in capital inflow and a recent spike in capital outflow, the Russian Finance Ministry is planning to classify some import-export operations as “money laundering.” According to information posted on its Web site last week, the Finance Ministry is seeking to amend the country’s foreign trade regulations by imposing stricter controls on some aspects of the country’s foreign trade in order to stem soaring capital flight.

The amendments being proposed by the Finance Ministry are expected to plug some loopholes in the present regulations, compel companies to repatriate export proceeds and deliver imported goods that have already been paid for through contractual agreement. If passed, companies would no longer be able to close an ongoing transaction under the pretext that its currency-transaction particulars or passports have been transferred to a foreign bank. Companies would need to supply stage-by-stage details of import-export operations to their domestic banks, and refusal to repatriate proceeds will be deemed a money-laundering offence. The Finance Ministry also wants to put in place a system of electronic confirmation of export or import transactions at customs, in an effort to combat delivery of “phony cargoes.”

The latest Central Bank figures on the country’s balance of payments show that the amount of capital which is not repatriated has soared in recent months. This is despite domestic companies borrowing heavily and taking advantage of a record-low interest rate, which stood at a yearly average of 8.9 percent in October, down from 9.7 percent in September. Last week, the Central Bank more than doubled its projection for 2010 capital outflow to $22 billion, up from $8.7 billion projected in August. The foreign assets of Russian companies have also soared, reaching $24.8 billion in the first half of the year, figures from the Central Bank show.

There seem to be several things going on here.  One is that in an effort to rejuvenate the sputtering Russian economy, the central bank is holding interest rates low.  Even though nominal rates are above nominal rates outside Russia, at the current Russian inflation rate it is possible to borrow at negative real interest rates, and invest overseas at higher rates.  Another factor is the weak Russian economy and the chronic difficulties faced by foreign investors make foreign investment inside Russia not especially attractive.

The use of export deals to export capital brings to mind schemes that were common in the 1990s.  At that time, the Russian central bank was lending money at ridiculously low interest rates, and given high inflation, the real rates on these loans were substantially negative.  The proceeds of the loans would be used to buy goods (especially raw materials often at ridiculously low official prices) that were then exported (often illegally) and the proceeds stashed overseas.

As noted above, one of the drivers of this capital outflow is low domestic interest rates.  So, right on cue, in the immediate aftermath of the flurry of stories on capital outflows, analysts are saying that an increase in Russian interest rates is inevitable, and the Russian Central Bank did not renew its pledge to keep interest rates low:

Policy makers may raise the main interest rate next quarter for the first time since 2008, lifting the benchmark a quarter point to 8 percent by the end of March, according to the median estimate of 19 economists surveyed by Bloomberg.

Ruble Gains, Stocks Fall

The ruble strengthened against the dollar, adding 0.2 percent, the most since Nov. 18, to 31.3485 per greenback at 1:33 p.m. in Moscow. The Micex Index of 30 stocks slid 0.4 percent to 1560.34.

The first increase may be announced at the bank’s next meeting in December,Vladimir Osakovsky, a Moscow-based economist at UniCredit, said in a research note today. The regulator may choose to begin tightening policy by raising reserve requirements for banks before the end of the year, said Maxim Oreshkin, chief strategist for Russia and the Commonwealth of Independent States at Credit Agricole.

. . . .

Removing the reference to keeping rates on hold from the statement is a “signal of the central bank’s sentiment shifting towards a possible change of rates in the future,” Trust Investment Bank said in a note on Nov. 26. Policy makers may raise borrowing costs as soon as in February, it said.

But the RCB faces a dilemma, because the Russian economy is stagnant:

Russia’s economy expanded in the third quarter at the weakest pace this year. Gross domestic product grew 2.7 percent from a year earlier after expanding 5.2 percent in the three months through June. The government may miss its 4 percent target for economic growth this year “by a little bit,” Economy Minister Elvira Nabiullina said on Nov. 23.

In brief, Russia is not riding the same wave as other emerging markets and other commodity exporters.  It has tried to use monetary policy to spur growth, but in a (relatively) open economy, a lot of the monetary stimulus is leaking via capital outflows.  Budgetary realities make fiscal stimulus impractical too.  All of this means that Russia’s near term economic outlook is hardly rosy, and that even though it took the hardest fall of any major economy, it is experiencing one of the weakest rebounds.

Several times on the blog I’ve mused whether our current situation resembles more the 1930s or the 1970s.  As developments occur, I’m leaning more towards the former (although admittedly it is better to have the rogue states be Iran and North Korea, rather than Germany, Japan, Italy, and Russia, but even then the presence of nukes in the equation limits the comfort one can find in that).  Renowned foreign policy scholar Walter Russell Mead is of a similar mind.  He hearkens to Auden’s despondent 1939 poem, and is dismayed at the puniness of the world’s statesmen (and women) in the face of the current crisis.

He spares virtually no one.  Europe comes in for particular criticism, and very rightfully so.  To watch the delusional performance of the European “leadership” in its efforts to patch the gaping wounds in the Euro project (both the political and economic aspects)–which is doomed, utterly, in my view–is painful.  They are so wrapped up in their dream that they defy reality.  Mead is also quite critical of Japan–again with more than good cause.  He is also harsh in his judgment of the US, but he does not elaborate much on that in this post because he has made his case at length elsewhere.

The most interesting parts of Mead’s analysis pertain to China and Russia.  His analysis of China’s pressing problems, and the leadership’s apparent inability to cope with them, is a useful antidote to the conventional wisdom of China as Colossus, striding from triumph to triumph.  (To those with long enough memories, current portrayals of China evoke the popular image of Japan, circa 1988: although no analogy is exact, the utter failure of conventional wisdom in that instance should give pause to the advocates of the conventional wisdom regarding China, circa 2010.  Are you pausing, Tom Friedman?)

Since this is a periodically Russia-centric blog with a Russia-centric (and often Russia-obsessed) readership, I’ll quote his analysis of Russia in full:

If Europe offers the most shocking example of incompetence, and China faces the greatest possibility of explosion and crisis, Russia’s current suicidal course may be the most tragic example of poor policy intersecting with cultural failure to drive a great people down.Emerging from the sordid shadows of the Soviet Union, Russia faced four great challenges.  It needed to come to terms with the horrors and failures of the past, recognizing the enormous evil that Russia both suffered and inflicted during the Soviet period.  Just as Germany had to come to terms with the Nazi past to build a better future after 1945, Russia had to face the ghosts of Bolshevism and Stalin head on.  It has failed, and Russian life and culture remain poisoned by the residue of unrepented horrors and uncomprehended crimes.

Second, Russia needed to build a modern and competent state that in turn could provide the framework for a new economy and a new society.  Without a full reckoning with the Soviet past — and a full encounter in particular with the evils perpetrated by its security forces — this was not possible.  Nevertheless Russia has fallen well short of what it might have accomplished.    I remain glad that Vladimir Putin halted the disintegration of the Russian state that was visibly under way during the Yeltsin era, but with every passing year the critical failure of the Putin presidency to build the stable institutions and solidify the rule of law that a genuinely strong Russian state would require becomes more clear — and more costly.

The third task, of building the kind of capitalist economy that could provide its citizens with dignity and affluence, has also been left undone.  There is no one who thinks that the rule of law is secure in Russia, or that investors (foreign or domestic) have any real security for their investments.  Accumulating failures of governance ensure that Russia cannot enjoy the full benefits of its natural resources and this unhappy society remains a source of concern and confusion for itself and its neighbors.

The fourth task, of finding a suitable world role for a new Russia, has also been decisively botched.  Russia has no real friends anywhere in the world; there are those it can bully and those (a much greater number) that it can’t.  The United States, Germany and China all seek good relations with Moscow; no one trusts or respects it.  Prime Minister Putin’s recent visit to Germany, a country that quite recently hoped that stronger economic relations with Russia would be a cornerstone of its national strategy, was an embarrassing flop.  Putin’s call for a free trade zone including Russia and the EU was dismissed by Chancellor Angela Merkel; the Russian leader reportedly spent more time with the discredited former chancellor Gerhard Schroeder (who now works for Gazprom) than in substantive talks with German officials.

Russia’s failures in this department are not simply its own fault.  The United States, NATO and the EU have been horribly shortsighted in their Russia policies.  Since 1989 there have been two great western projects in Europe: the expansions of both NATO and the EU.  NATO expansion was seen by Russia as a great threat; EU expansion has the effect of marginalizing Russia both economically and politically.  While Russia’s own many failures and bad behavior did much to determine the west on this course, paying so little heed to Russian interests and sensibilities was unwise; now both Russia and the west must cope with the unpalatable consequences.

It is intriguing that Mead puts Russia’s need to come to grips with its past as its foremost challenge, and its greatest failure.  That resonates with many of the intense debates over Russia’s Soviet legacy that have taken place in the SWP comments.

I would say that Mead’s analysis is pretty fair (although I am sure that there will be outraged denials: bring ’em on, folks.)  Even the last paragraph has merit, although I would probably give more weight to the conclusion that “Russia’s own many failures and bad behavior did much to determine the west on this course.”  The EU’s marginalizing effect also reflects what little Russia had to offer those who were clamoring to get into the EU and NATO.

There’s not much grounds for optimism in what Mead writes.  But that’s because there’s not much room for optimism in the current situation.  Reveries have been dashed, but realities have not been grasped.  Good things seldom come of that.

Not surprisingly, the recent post on Russia’s new law on history sparked numerous comments. Also not surprisingly, the comments careened in a surprising direction, specifically, Russia’s role in WWI.  One skein of that argument was whether Russia saved France by eschewing in 1914 a plan to stand on the defensive against Germany, and instead mounting an offensive that distracted Germany enough to permit the French to fend off the German attack at the Marne.

This exchange spurred me to look at a couple of books on my shelf, William C. Fuller Jr.’s Strategy and Power in Russia, 1600-1914 and Kissinger’s Diplomacy.  These sources put a much less favorable light on Russia’s actions in the lead-up to Europe’s Armageddon.

Fuller argues that Russia’s agreement with France to attack Germany was part of a quid pro quo to get French assistance against Germany.  Russia was convinced that a war against Austria-Hungary was highly likely.  Moreover, it calculated that Germany would intervene on Austria’s behalf because it could not countenance the defeat of its only major ally.  But Russia could not beat Germany and Austria, so an alliance with France was imperative.  As Fuller puts it “[i]n 1912 the Russians began a desperate effort to re-cement the French alliance.”   He says further:

At the staff conversations of 1912 and 1913 the Russians tried to buy French good-will by promising to attack Germany with 800,000 men by the fifteenth day after the declaration of mobilization.”  [p. 439]

Fuller goes into more detail about the forces driving Russian thinking.  He notes that Russia’s tenuous position in Poland and its fear that Austria-Hungary would take advantage of Polish discontent led it to conclude that simultaneous attacks against Germany and Austria were imperative: “If Russia’s alliance policy compelled it to plan to attack Germany, it was its nationality policy that in the end made a simultaneous attack on Austria inescapable . . . . To attack Austria alone would be to imperil the French alliance and was consequently unthinkable.  To attack Germany alone was to risk the Austrian conquest of Poland.” [p. 441]

With respect to Russia’s ability to carry out these plans, Fuller notes how Russia’s pendulum swings between Asia and Europe led it to shift its forces to the east, thereby compromising its ability to fight Germany and Austria in the west.  Similarly, its Asian focus led it to stint on railroad building in Poland, which also compromised its ability to mass in the west.

Kissinger is even more critical of Russian policy.  Indeed, he even puts the blame on Russia for the “military doomsday machine” of responses to mobilization that culminated in the catastrophe of August, 1914.:

The first step in this direction occurred during the negotiation for a Franco-Russian military alliance.  Up to that time, alliance negotiations had been about the causus belli. . . .

In May 1892, teh Russian negotiator, Adjutant General Nikolai Obruchev, sent a letter to his Foreign Minister, Giers, explaining why the traditional method for defining the causus belli had been been overtaken by modern technology.  Obrucev argued that what mattered was how mobilized first . . .

Far from deploring the prospect of automatic escalation, Obruchev welcomed it enthusiastically.  The last thing he wanted was a local conflict. . . .

According to Obruchev, it was in Russia’s interest to make certain that every war would be general.  The benefit to Russia would be a well-constructed alliance with France would be to prevent the possibility of a localized war. . . . [a] defensive war for limited objectives was against Russia’s national interest. . . . However trivial the cause, war would be total; if its prelude involved only one neighbor, Russia should see to it that the other was drawn in.  Almost grotesquely, the Russian general staff preferred to fight Germany and Austria-Hungary jointly than just one of them.  A military convention carrying out Obruchev’s ideas was signed on January 4, 1894.  France and Russia agreed to mobilize together should any member of the Triple Alliance mobilize for any reason whatsoever.  [pp. 202-203; emphasis in original]

Kissinger notes that there were dissenting voices, notably Peter Durnovo, a former Interior Minister.  But from 1894 up through July-August, 1914 Russian policy was committed to fighting Germany and Austria-Hungary simultaneously.  Even when the Tsar tried to mobilize only against Austria-Hungary during the Sarajevo crisis, his military (“without exception disciples of Obruchev’s theories”) forced him out of it.  Kissinger also argues that Russian commitment to support Serbia was not completely rational, but was driven by concerns of reputation and honor and loss of face in the Balkans (evocative of Thucydides’s claim that men go to war out of fear, honor, and interest).

The rest of Kissinger’s (and Fuller’s) discussion of the beginning of WWI makes it plain that every power made calculations that contributed to that world catastrophe.  But Russian calculations were quite important in shaping the outcome, the ultimate consequence of which was, of course, the destruction of the Russian Empire and the Tsarist system.  This ended what one commentor noted was a period of remarkable economic and social transition in Russia.

I don’t know enough about this particular subject to do more than summarize what Kissinger and Fuller state.  I’m sure there are dissenting views.  And I’m sure they will be voiced, and strenuously, in the comments.  I look forward to that with anticipation.

This article about the failure of Russian universities to place in the top 200 of a well-respected ranking seems to epitomize much of what happens in Russia.  Poor placement in the rankings?  Either (a) trash the ranking system and advocate the creation of a Russian one, or (b) trash the ranking system and say “we don’t need no steenking rankings.”  Stubbornly refuse to reflect the realities of the internationalization of research in the modern age.  Cling to the glory days of a system that thrived, after a fashion, in the Soviet times:

Dismayed with Moscow State University’s lackluster ranking, its rector, Viktor Sadovnichy, said Russia needed to create its own ranking because international ratings are not objective concerning Russian schools.

The idea was explicitly backed by Prime Minister Vladimir Putin at a meeting with Russian rectors last month.

. . . .

“Russia’s research publication output is relatively low,” Baty said.

The ranking is based on 13 elements, including research income, ratio of international and domestic staff, income from industry, teaching, and citation impact. The ranking’s editors used data provided by Thomson Reuters to make their conclusions for the first time this year.

Russia’s limited volume of research publications indexed by Thomson Reuters, as well as those publications’ limited influence as measured by citations, is reflected in the rankings, which employ both publication volume and citation counts among the 13 separate performance indicators. Also, the system of measuring was changed this year so traditional prestige no longer holds much weight in the final reckoning.

“All these factors will make it difficult for Russia to be recognized among the top 200,” Baty said.

One of the measurements that Russian scholars frequently fail to fit is the citation index because many of their articles are written in Russian and remain unknown for the majority of the global scientific community. But even the country’s top scholars don’t encourage English.

When asked about Russia’s low citation index, Russian Academy of Sciences president Yury Osipov said in an interview with Gazeta.ru that Russian scholars don’t have to learn English because if “one is a high-level specialist, he will study Russian and read articles in Russian.”

No doubt, with this attitude prevailing On High, these high level specialists will study Russian and read articles in Russian and more importantly, write articles in Russian.  And remain known only in Russia; contribute to scholarship only in Russia; be isolated from scholarly discourse outside of Russia; and, as a result, be marginal and marginalized.

It is not necessarily fair, in some cosmic sense, but it is a fact: English is the language of scholarly discourse in virtually every discipline.  A lingua franca is enormously important in advancing scholarly endeavors by facilitating the creation of a pool of knowledge that researchers around the world can add to and draw from.  The network effects are of seismic importance.  To cut off one’s nation from this deliberately and pridefully does no favors to one’s country, let alone to the cause of advancing knowledge generally.

To cut off one’s nation from this deliberately and pridefully does no favors to one’s country, let alone to the cause of advancing knowledge generally.  The biggest casualties of this stubborn pride are Russian scholars and would be scholars.  Some, who want to remain in their homeland, labor away in obscurity and do not achieve the impact that they are capable of.  Others, stifled by this parochialism, leave and seldom look back.  (Cf., the recent winners of the physics Nobel.)

This attitude is emblematic of Russia’s historically ambivalent relationship to the wider world.  That ambivalence has always had a cost, and that cost is becoming ever higher as the world becomes more interconnected.  The cost is particularly high in research scholarship.

The article quotes my friend, Sergei Guriev:

Sergei Guriev, rector of the New Economic School in Moscow and a Morgan Stanley professor of economics, said Russian universities “have been losing ground not only to their OECD counterparts but also to the universities from developing countries.” For example, China has six universities in the 200 institutions ranked by the Times Higher Education World University Rankings.

“Modernization and a knowledge-based economy by definition require advanced human capital. There can be no modernization of the economy — and of society — without the modernization of higher education,” Guriev told The Moscow Times.

That’s obviously correct.  If Russia hopes to advance beyond the status of the world’s largest raw material appendage, it will need to revitalize its educational system–higher education certainly, but primary and secondary education too. It is interesting to note that Sergei’s New Economic School is, as the name suggests, a new school that post-dates the Soviet collapse.  It is not a legacy institution, and is largely independent of government funding and control.  This makes it more dynamic and productive: in my fields of economics and finance, NES scholars are disproportionately represented among Russians who have had impact in mainstream, non-Russian publications.

In contrast, the dead hand of the Soviet past symbolized by fossils like Osipov, and which still looms large at the biggest Russian universities, will doom Russian traditional universities to even deeper oblivion.  Responding to scathing evaluations of university performance (which are based on relatively objective factors such as publication counts, impact factors, and citations) by calling for Russia to create its own rankings, or to disregard rankings altogether, rather than adapt to and integrate with current international norms of scholarship, is to deny a sad reality.

The Russian educational establishment seems in desperate need of a 12 step program of some sort.  The first step of which is to recognize the existence of a problem.  No ranking system is perfect, but most ranking systems will not relegate a truly great, or even very good, university to the NR category.  By denying that, and refusing to take the first step of recognizing a problem, Russia risks losing yet more ground.  Forget Skolkovo, and move to integrating Russia in the realm of global scholarship, so its researchers can benefit from and contribute to the knowledge commons.  To do otherwise is to condemn Russian universities to become even more isolated academic backwaters.

* This brings to mind a conversation with my seat-mate on a flight from Moscow to the US in 2005.  My now friend was flying to the US to study on a Fulbright.   I remember telling her that I was well aware of the great fortune of being a native English speaker in the world of scholarship.  It is arbitrary, but it is reality.

A few years back I learned that three of my ancestors were passengers on the Mayflower.  Two of them–my 10th great-grandfather Edward Fuller and his wife, Ann–didn’t make it to the first Thanksgiving.  They died during the first winter (April 20, 1621 and January 11, 1621, respectively), along with about half of the original Separatists (not Puritans) who sailed to the New World.  The third, their son Samuel, did survive: he was raised by his uncle, Samuel Fuller, a physician.  And Samuel (and Jane Lothrop) begat Hannah, and Hannah (and Nicholas Bonham) begat Hezekiah and after a lot more begetting, along came SWP.

Among many other things, I’m thankful that Samuel survived so that I could be begot.  But mostly I’m thankful for my family, my friends, professional good fortune, and for being born in the United States.  Recollecting the tribulations of people like the Fullers, and the ability of their survivors to rejoice in their meager blessings, I would be churlish to do anything but be deeply appreciative for the bounty conferred on me and mine.

In that spirit, I wish all of you in the Streetwise Professor community a joyous Thanksgiving, and a joyous holiday season to come.

Vladimir Putin is throwing the full weight of the Russian state behind efforts to save diminishing tiger populations.  Among the measures are tougher punishments for those who kill the endangered animals, or traffic in their body parts.

Meanwhile, it remains open season on journalists and oppositionists.  Medvedev makes noises about addressing this problem, but the real authorities that matter don’t even go through the motions of going through the motions to capture, let alone punish, those who kill, batter, or intimidate those with the termerity to criticize the state, key politicians, or their pilot fish (e.g., Nashi).

Glad to see the priorities are all in order.

In the US too.  The Obama administration’s response to the litany of human rights abuses in Russia is, well, pretty much nothing.  Administration policy is “engagement uber alles”:

In his interview with The Times, Mr. Nemtsov said Mr. Obama is wrong to engage Mr. Surkov through the commission on civil society.

But the White House has said that it is important to engage someone close to Mr. Putin’s inner circle on democracy and civil rights issues.

“I think his criticisms are legitimate,” a senior White House official said. “There are other political people in Russia, who have said to us categorically, ‘Do not dissolve this. If you engage with this guy, it gives us a direct shot at the guy who matters.'”

This official said that “we think it’s better to engage than not to engage.”

We see daily the wonderful results of various US engagement initiatives, such as in Iran.  Or North Korea: Yeah, that’s paying dividends.  (Can you say: “Incoming!”?  I knew you could.)

I remember when progressives who are now Obama’s main constituency went ballistic at Reagan administration policy of engaging South Africa during the apartheid era.  I ask in all seriousness: why was engagement a monstrosity then, but the best–and in the eyes of this administration apparently, only–way to deal with governments and regimes with serious human rights problems?   Each state is different, of course, meaning that differences in policy may well be warranted.  But it would be nice to know what factors are critical in determining whether engagement is the best policy alternative so that the policies can be appraised.  Why is engagement good sometimes and an anathema others?  For it seems that at present, “engagement” is merely a monotonous mantra rooted in dreamy wishes of comity and fears of confrontation, rather than a sober evaluation of the pros and cons of the policy vis a vis alternatives.

And speaking of dreamy wishes, here’s your proof:

The Obama administration has sought to engage Mr. Medvedev while marginalizing the former president and current prime minister, Mr. Putin.

How’s that Putin marginalization thing working out?  Sheesh.  If this is the basis for our Russia policy, we are well and truly delusional.

Speaking of ballistic, part of the administration’s reason for treading lightly with Russia on human rights matters is strategic arms limitation.  Obama has invested heavily in the new START treaty, and is doubling down by demanding approval of the treaty during the lame duck session (another Obama political gamble that is likely to end disastrously).  There are many problems with this strategic weapons-centric approach.  One of particular note, and of particular irony, is that it is essentially an artifact of a Cold War mindset in which the superpower nuclear balance was all that really mattered.  That world is well and truly gone, as the emergence of China, and the development of nuclear threats in North Korea and Iran clearly demonstrate.  In this environment of tremendous strategic flux, locking the US into restrictions rooted in bipolar Cold War thinking is extremely unwise.  Obama asserts that the new START is a lynchpin in a broader anti-proliferation effort: that by leading by example, the US and Russia will encourage others to temper their strivings for nuclear weapons.

As if.  This is just another dreamy inversion of reality, from the experts on the subject.

Some weeks ago I opined that it was foolish for Poland to lock itself into a very long term contract with Gazprom (going out to 2037) given the prospects for shale gas.  I did a little digging (or should it be drilling?) for information on shale gas prospects in Poland, Ukraine, and elsewhere in Europe, but other things (e.g., life) intervened and I didn’t follow up.  Fortunately, Deutsche Welle recently ran a piece on the subject that contains some interesting data and commentary:

The largest deposits of shale gas in Europe are assumed to be located on Polish territory. New technology from the United States could make it possible to exploit these gas reserves. Test drillings are planned all across the country.

According to geologists, Poland could become the largest gas supplier in Europe after Norway and Russia. It would make the eastern European country rich – much richer than previously assumed, said energy expert Pawel Nierada from the Sobieski Institute in Warsaw.

“Conservative estimates already show that Poland could suddenly become a serious exporter on the European gas market,” Nierada said. “The reserves exceed our country’s consumption many times over. It’s hard to imagine what it would be like if the more optimistic estimates of the US government were to turn out to be true. Then, here in Poland, we would have more gas than Norway.”

Specifically, estimates are that Poland has 3 trillion cubic meters of recoverable gas.  This is a small quantity compared to Russian reserves, but (a) it’s relatively large compared to Polish consumption, and consumption in adjoining countries, (b) it’s close to market, rather than locked in forbidding locations in northern Russia, and (c) it’s not in the tentacles of the gas octopus, and hence not in the clutches of one of Poland’s historical enemies.

There are skeptics, of course:

But many people are skeptical about this procedure, Nierada said.

“There are also critical voices which say that the technology is still in its infancy – the experts from the Russian gas company Gazprom, for example,” he said.

Gazprom, expressing skepticism?  Go on.  Tell me another one.

In fact, the company has acknowledged in word and deed that the shale revolution in the US has already derailed some big plans, and the extension of that revolution could truly rock Gazprom’s world, and not in a good way.  So the company has every incentive to play skeptic in the hope that this will slow down the shale juggernaut–and every sentient being should discount its skepticism as heavily as the market discounts its stock price.  Indeed, Gazprom is actively looking to get into shale plays in the US.  At the very least, this indicates that it (quite sensibly) wants to learn more about the details of the technology and the performance of shale plays so that it can plan accordingly.  Alternatively, it could indicate that the company knows very well that shale is for real, and wants to get into the game.  Either way, it belies its skeptical public statements.

Yes, there are uncertainties about shale.  The environmental concerns, from what I have learned, seem over-hyped: and there are firms out there who have every incentive to try to hype fears in order to impede shale gas as a competitive force.  More substantial questions relate to the production profile of shale wells, specifically, that production tends to fall more rapidly from shale wells than traditional ones.  But this is an evolving technology, so the possibility that additional innovations will mitigate that problem.

But as I wrote in my earlier post, the very fact that there is considerable uncertainty with an appreciable upside potential means that it is wise to avoid locking into long term commitments until that uncertainty is resolved.  Poland specifically, and Europe generally, are in the very early days of the shale experiment.  There is some uncertainty about how the technology that has worked in the US will perform in European formations, in addition to the technological and production uncertainties just mentioned.  But the US experience, in which shale has completely demolished the conventional wisdom about the future of the North American gas market in a period of less than 4 years, and which has made earlier major investment plans based on this conventional wisdom costly failures (e.g., LNG import terminals in the US–shed a tear for Cheniere; Gazprom’s abortive plans to export LNG to the US), should make everybody everywhere extremely chary about entering into expensive long term commitments.  There is a real option value here–a value to waiting–and greater uncertainty actually makes that option to wait more valuable.

But I guess “everybody” doesn’t include the Poles, and “everywhere” doesn’t include Poland.  For they tweaked their deal with Gazprom to meet EU objections, and leapt into a long term commitment with Gazprom.  This was incredibly foolish.

The impression of foolishness is only reinforced by some of the rationales advanced by Polish officials:

Production in Poland could begin in ten years at the earliest, gas companies said. But experts think it could start earlier. Then, the country could fulfill a dream it has had for hundreds of years: to be economically – and therefore also politically – independent from Russia.

In spite of that, though, politicians across the spectrum have been slamming on the brakes, such as economics minister Waldemar Pawlak.

“Up till now, shale gas has been more of a media phenomenon,” Pawlak said. “We still don’t know how difficult it will be to produce in Poland. It will also be more expensive than gas from conventional sources, because more drilling is necessary for the same amount of output.”

Poland’s president Bronislaw Komorowski has been skeptical, too. He said that all those production towers across the country would be an eyesore.

Economic factors drive skepticism

Even if there are factual reasons for the skepticism, experts have long criticized Polish politicians for being too passive. For years, Poland has relied on imports from Russia without even considering the exploitation at least of conventional gas resources in the country. This was mainly due to the monopoly of the state-owned gas firm PGNiG.

“The company was never interested in producing gas itself,” Nierada said. “It earned its money very easily, after all, by buying gas from Russia and simply adding its margin. The company didn’t care about how high the final price was.”

An economics lesson for Economics Minister Pawlak (there’s a joke in there somewhere):  “We don’t know” is a reason to avoid long term commitments until you find out: that’s the implications of real options theory, in a nutshell.  Moreover, even if it takes more wells in Poland to produce the same gas that could be produced in the frozen wastes of Russia, costs (to Polish consumers) could well be lower because (a) it’s a damn site more expensive to explore, drill, and produce in many of the godforsaken places Gazprom will go to produce gas to meet its contractual obligations, (b) it’s expensive to transport gas from godforsaken places in the frozen north to Poland, and (c) Gazprom is likely to exercise considerable market power if unconstrained by competition from Polish or European sources.

And I would add, Mr. Pawlak: $4-$5 gas is not a media phenomenon.  It’s the real deal.  Yes, declining demand resulting from the financial crisis has had something to do with the cratering of the price of gas in the US.  But that’s not the whole story.  Increased production has had a very huge impact.

As for President Komorowski.  Please.  You’re embarrassing yourself.  Visit DFW some time.  Hell, I can see oil wells from my office in Houston.  And production towers go up, and then they come down, and producing wells are barely noticeable.  It’s no big deal.  Really.

Indeed these objections from Polish officials are so pathetic that it raises darker suspicions.  Such as: they have been, er, suborned by Gazprom/Russia.  The alternative explanation is cluelessness.  Not a happy choice.

But Poland has made its bed, and will have to lie in it.  Maybe shale gas will prove to be a flash in the pan.  But maybe not.  And the fact that the “maybes” are so divergent means that Poland’s hasty decision to betroth itself to Gazprom for the next decades was unwise, and extremely so.

The uproar over the TSA partly reflects the substance of the matter, but also reflects the fact that the TSA embodies all the things that energized the electorate a couple of weeks back.  It is the epitome of a distant, callous bureaucracy that seems to have been inoculated against common sense.  It is the avatar of big government yielding big aggravation and small results.

And the agency’s reaction to the firestorm of criticism is also emblematic of the problems that are fueling popular discontent:

A senior Homeland Security official (who would not allow his name to be used) told CNN this week that “the mood at DHS and TSA is anger.” The official griped to CNN that the real outrage was how TSA agents were being treated. In San Diego, one such agent “was accosted and verbally abused by a member of the traveling public,” said the official. “The fact that some in the media would hail the traveler as some kind of folk hero is shameful.”

Well.  I guess it’s all even then.  We’re angry at them.  They’re angry at us.

The DHS/TSA anger betrays an attitude that is, in fact, the source of  the popular discontent.  The attitude is one of cluelessness mixed with arrogance.  “We’re from the government and here to help”–what Ronald Reagan called the nine scariest words in the English language.  All the while not recognizing that those that they are allegedly helping  don’t think that they are in fact being helped, and indeed, feel that they are being abused, belittled, ignored and degraded all for no demonstrable benefit.

In brief, DHS/TSA views the populace as ingrates.  The populace views DHS/TSA as insufferable, abusive, and out of touch.  That’s an unbridgeable gap.

This mutual alienation between TSA and vast swathes of the public is symptomatic of a far more widespread phenomenon.  The attitude of many in government is that Father Knows Best, and us children should just shut up and follow directions.  The attitude of the majority of the citizenry is that the government doesn’t have a clue, and they bridle at the Olympian disdain emanating from just about everybody in DC from Obama on down, a disdain that seems entirely unwarranted given the piss poor performance that characterizes so much of what the government presumes to do.

Moreover, there has always been a broad rebellious streak in the American populace, far less of a tendency to accept docilely that the government is wiser and inherently worthy of deference than is the case in most other countries.  Sufficiently provoked by a pushy government bureaucracy, that rebellious streak is activated.

The TSA has become the bulls-eye of this anger because unlike many bureaucracies, it deals out its indignities wholesale, in the public eye.  Millions experience it every day.  Millions more can see it because it occurs in full public view.  And many of those who see it, having flown themselves, can readily identify with those who are mistreated.

If DHS/TSA continue to respond to the criticism with sullen–and not so sullen–assertions that they’re right and aren’t going to change, the conflict will only escalate.  They will only feed the growing belief that the government as a whole is utterly unresponsive to citizen concerns.

A good chunk of the country spoke pretty loudly on 2 November.  It’s pretty clear that many people were not listening, or uncomprehending, or just don’t give a damn, e.g., Obama, the Democratic House caucus that retained the leadership that personified what angered the public.  TSA and its injured and outraged reaction to the outrage directed against it just indicates that they aren’t listening either.  Which is why this controversy will only fester, and why it is bigger than the TSA, scanners, and officially sanctioned sexual assault.  It is a highly visible example of a more fundamental conflict: a profound alienation between the people and a government that in theory is the government of, by, and for the people.

As long as those in government continue to channel Dick Tuck, that alienation will only intensify.  And the political implications of that will be seismic.

Russia has approved a plan to sell stakes in a variety of state companies for an estimated $32 billion. Notable by its absence from the list is Transneft, the state oil export pipeline monopoly.  Transneft management has been outspoken in its opposition to any sale of a stake in the company to outside investors.

And no wonder.  Why would they want any nosy outsiders in on their rackets?  Their big time rackets, as news reports indicate:

The leaking of an official report suggesting $4 billion was stolen by Transneft insiders during the construction of a pipeline to the Chinese border was greeted Wednesday with the government offering congratulations to the state-controlled oil pipeline operator for completing the project.

“They stole. They overstated prices. They connived with contractors to cheat. Then they destroyed the documents,” Andrei Navalny, a minority Transneft shareholder and lawyer, wrote on his blog, where he published what he described as a Transneft report requested by the Audit Chamber.

. . . .

One of the largest allegations of expropriated funds in Navalny’s Transneft report is in the “baseless inflation of estimated project-exploration values” as a part of the initial phase of the ESPO pipeline. The amount alleged to have been stolen is more than 10 billion rubles.

There are more details here.

Now the allegations are directed at the previous management, and the company’s current management hinted that it agreed with the reports of massive fraud by its predecessors.   But they would, wouldn’t they?  They have many reasons to.  For one, they can use this to shovel blame for any subsequently discovered problems or missing sum on the previous management.  Moreover, this is the perfect pretext to undo arrangements with contractors and others entered into by the prior management–so the current management can replace them with its own tunneling schemes.

The allegations bring to mind the Credit Mobilier scandal of the 1860s-1870s in the US.  Credit Mobilier was a firm that was contracted to construct the Union Pacific Railroad.  Credit Mobilier was owned by officers and directors of the UP, and (among other things), overcharged the railroad for construction.  Since the government was footing a big portion of the construction of the road, the overbilling defrauded the government.  Something similar was going on (should I say “was”?) at Transneft.

Big infrastructure builders like Transneft (or the UP) are the perfect vehicles for this kind of scheme.  Nosy independent shareholders would be harmed by these actions, and would have an incentive to try to uncover them (although if the minority shareholders are diffuse their incentives would be somewhat weaker).  Depending on where the company is listed, the private shareholders could take legal action against the company if such a scheme were uncovered by them.  Auditors would also be more concerned about liability, and would have an incentive to be more inquisitive.

So it is no surprise whatsoever that Transneft has resisted so vociferously being included in any Russian privatization plan.  The last thing it wants is to risk any sunlight illuminating the dark tunnels through which so much money flows.