Streetwise Professor

January 31, 2011

A Year of Living Dangerously

Filed under: Economics,Energy,Financial crisis,Politics,Russia — The Professor @ 1:16 pm

Inflation is picking up in Russia–and elsewhere.  This presents a policy quandary for Russia.  Sadly, some Russian policymakers are considering the worst response: price controls.

Deputy Economics Minister Andrei Klepach said on Monday that the Economics Ministry may consider resorting to the tried-and-tested price control system to contain prices, but added that there were no plans to implement this in the near future. “This is a tool which can be used, and I do not rule out that such restrictions will have to be used this year,” Klepach told Interfax in an interview. Price caps, if and when introduced, are expected to affect staple foodstuffs like buckwheat, potatoes and other fruits and vegetables, he said. According to this seldom-used regulation, the government can impose price controls on certain food items for a period not exceeding 90 days if there is an increase in retail price of 30 percent or more in one or more regions.

Fortunately, however, some policymakers and market observers recognize the folly of these controls:

However, many economists, including the Russian Economics Minister Elvira Nabiullina, have rejected direct price control as a method to stabilize rocketing food prices. Nabiullina suggested during a one-to-one meeting with Prime Minister Vladimir Putin in September that the government could use other non-distortive means, such as market intervention from reserves, to keep prices down. Alfa Bank economist Natalia Orlova supports such views, adding that price control has never been an efficient way to keep down inflationary pressure. “Price control is a stop-gap measure meant to postpone the worst till later years,” Orlova said. “As Russia enters the election season, government officials believe such measures could provide temporary relief by keeping inflation below ten percent. But would it last?” The best that can be expected, she said, is a worsening of Russia’s trade relations with other countries. “For many companies, it will be no longer attractive to buy certain items from abroad – and even in the domestic market,” Orlova said. Ideally, Russia simply needs to increase the level of local competition in order to combat high prices, Orlova said. “One of the explanations for a high level of inflation in the country in recent years is that there is still a lack of competition in a number of markets,” Orlova said. “In both the construction and consumer markets, for instance, there are only a handful of big players and these players are able to dictate prices.”

Nadorshin, who heads market research at Jones Lang LaSalle, said placing price caps is hardly the most productive measures to contain rising inflationary pressure. “We have applied this method before in 2007 and again in 2008, and the effects on prices were quite negligible,” Nadorshin said. “Price control in the past has also led to hoarding by farmers and there is no guarantee that farmers would not do so this time around.”

Another hurdle before policymakers is that rising prices on staple foods is not peculiar to Russia, he said. Many developing countries including India, China, Malaysia and Indonesia are all facing similar problems. “If the problem is global, homebrew solutions can only exacerbate the situation,” Nadorshin said.

Overall, Russian macro policies have been reasonably sane in recent years.  The reluctance to employ price controls is a sign of good sense.

Russia, of course, is not the only nation struggling with food price inflation.  Emerging markets in particular are facing acute problems.  Food price inflation is arguably the issue that caused the widespread dissatisfaction with the governments in Tunisia, Yemen, and Egypt to coalesce into mass protest and revolt.  China is very uneasy about the political implications of rising food prices.

Some of this is driven by bad harvests in Russia, Argentina, and Australia.  But especially in emerging markets QE2 is a major factor.

On Friday I gave a talk at the Argus Americas Crude Oil Conference.  The title was “A Year of Living Dangerously.”  The basic theme is that there are many sources of uncertainty that will buffet economies and policymakers in the coming year.  A major one is QE2.  Although it appears to be having only limited success–if any–at achieving its stated purpose of spurring employment growth in the US, it is having huge collateral effects around the globe.  Again, in emerging markets in particular, hot money is putting pressure on governments and central banks; they don’t want to let their currencies appreciate relative to the dollar, which means importing inflation.  The policy responses are unpredictable.  There is gaming between countries.  Policy errors are more likely in such an environment.

And perhaps most importantly, as Sherwin Rosen said to my rather startled Econ 300 class at Chicago in the early-80s, “inflation F*CKS UP relative prices.”  Of currencies.  Of goods and services (most notably, of commodity prices relative to other stickier prices.)  This leads to distortions, resource misallocations, waste.

Some of the consequences are economic.  Others–pace Egypt–can be social or political.  And who can foretell what the consequences of monetary and policy gamesmanship between China and the US?

On its own terms, I think QE2 is dubious policy.  As I wrote soon after it was launched, it is designed to fight deflation, and prevent a Fisherian deflationary spiral–but who ever saw a deflation with spurting commodity prices across the board?  But its unintended consequences are ominous.  Bernanke is the Sorcerer’s Apprentice to top all Sorcerer’s Apprentices.  Just what will get inundated?

January 30, 2011

Hamster Wheel From Hell: Military Manpower Edition

Filed under: Military,Politics,Russia — The Professor @ 9:06 pm

Russia’s travails with military manpower issues continue without letup.  Recall that the cancer of dedovshchina led the authorities to cut the term of conscripts from two years to one: since the second year conscripts were abusing the first years, it was concluded that the problem could be eliminated by reducing the term of service to a single year.  At the time, I wrote that this would just create other problems, as it was delusional to think that soldiers serving a single year could form a credible fighting force.  They would be leaving the service just about the time they had learned anything.

Well, it seems that the military is finding that out the hard way:

Communist Party Deputy, Admiral (retired) Vladimir Komoyedov, the former Commander of the Black Sea Fleet, complained it is impossible to train a competent specialist within three months, noting that foreign militaries take one to two years to achieve this. Moreover, Komoyedov said that appointing a young “vorobey” (sparrow) to sergeant posts is a “profanity to the country’s military organization.” The Chairman of the All-Russia Trade Union of Military Servicemen, Captain First Rank Oleg Shvedkov, concurs that three months is insufficient to train a qualified military specialist, especially for the navy.

As a result, some–including Shvedkov–believe that the government will have to restore the two year service term for conscripts.

Indeed, a new law under consideration in the Duma, and likely to be signed by Medvedev, seems to be increasing the term of service by stealth in order to avoid the embarrassment of reversing itself so soon after reducing the term:

It will strengthen measures against draft-dodging, and most significantly allow a delay of five months to discharge those drafted in the spring; meaning these would serve for almost 18 months. According to the head of the government apparatus, Vyacheslav Volodin, agreement in principle has been reached on the proposals and it is expected that President Dmitry Medvedev will sign it into law by April 1, 2011 (Nezavisimoye Voyennoye Obozreniye, January 17).

Human rights groups seized upon a statement by General Smirnov that Russia has up to 200,000 draft-dodgers, and complained bitterly about his controversial assertion, which seemed aimed at deflecting criticism over the manning crisis. However, a critical commentary in Gazeta concluded that the authorities plan to increase the length of conscript service to 18 months (, January 20). The semantic ingenuity involves extending the service of only those drafted in spring, since increasing the actual term of service would almost certainly signal the failure of the military reform. Nonetheless, if the law is passed and a portion of conscripts serve longer than others, the compromise implies that the trend is towards a rising term of service.

The efforts to create a professional military have also foundered.

The country is caught between the devil and the deep blue sea.  A choice between a barracks life that resembles Lord of the Flies and an army consisting of men who leave just when they learn the rudiments of soldiering.  (Though it should be noted that the Lord of the Flies atmosphere survives: now it is just the soldiers who have served nine-twelve months brutalizing those just out of training camp.  If they limited the term of service to two days, the second day men would abuse the first day men.  A more fundamental change is required.)

The manpower crisis means that the Russian military is a hollow force:

These five VDV “immediate reaction” battalions are in effect Russia’s present expeditionary-capable combat force. According to the “New Russian Army” authors, if the Russian military becomes involved in an armed conflict that requires more than five battalions, it will be in trouble. It does not make much sense to spend billions of dollars to rearm the present Russian military if its manning crisis makes it a low-quality force. Conscript service must be increased, or the forming of contract all-volunteer units resumed, or both. But longer draft service would be unpopular and may create political problems, while additional kontraktniki require additional funding that may not be forthcoming. The present state of defense reform limbo may continue.

Five battalions.  For a nation that spans nine time zones (or eleven, before last year).

But the military’s priorities are hardware first, software a distant second:

Highlighting the weaknesses of a high turnover among conscript personnel serving in a tank unit, for instance, where conscripts are currently discharged twice per year, Astanin questioned why the reformers had underestimated the importance of the manpower issue. In his view, the answer lies in the Soviet and Russian military tradition of first prioritizing equipment and weapons, technique and only then considering how to develop manpower to exploit such potential. Historically, this has lowered the effectiveness of new weapons systems and in the initial period of war resulted in increasing the number of Russian causalities (Nezavisimoye Voyennoye Obozreniye, January 21).

It’s easier to buy shiny new stuff than change a fundamentally dysfunctional force.  And so much more lucrative too.

All this to-ing and fro-ing represents a basic failure to come to grips with Russia’s demographic reality.  The old military doctrines, the old military thinking, are not compatible with the demographic facts.

Russia’s vastness has not changed, but the old way of defending its enormous spaces are no longer feasible.  There may be some possibility of nudging the demographic trajectory a little, but not by enough to alter the military reality.  Russia will have to adjust its thinking–its doctrines, its strategy–to accommodate this reality.

One model comes to mind–the pre-WWI professional British military.  A small, professional force responsible for securing a sprawling empire.  Expeditionary in mindset.  Small, mobile, cohesive.  Made up of long-serving volunteers.

But how to get there is almost unfathomable.  The cultural and historical roots of the British Army are diametrically opposed to those of the Russian one.  Britain: a naval power, dominated by merchants and a free citizenry, deeply suspicious of standing armies.  Russia: a continental power, autocratic, with a tight nexus between the military and governing elites.

So that ain’t happening.  But the current system is unsustainable too.  Which means that the Russian government and military will continue to rearrange the deck chairs on a sinking ship.

January 28, 2011

No Cigar, John

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Financial crisis,Politics — The Professor @ 2:31 pm

Writing in Commodities Now, Reuters reporter John Kemp takes issue with my criticism of the CFTC proposal on position limits. I appreciate the attention, but I’m underwhelmed by his arguments.

There are a lot of details, but the gravamen of his complaint is that my view on the purpose of position limits is far too narrow:

Pirrong defines the rationale for intervention too narrowly. Large leveraged positions run by the Hunt Brothers did indeed threaten to bring down their own brokers and several other financial institutions. But systemic risk is not the only reason for regulators to intervene to prevent market manipulation.

Kemp directs his beef at the wrong guy.  His real problem is with the CFTC because these were the only–I repeat only–reasons the CFTC set out it its NOPR.  My critique of the proposal is that it was a vastly overinclusive way to achieve the objectives the CFTC set out.  Again, the objectives the CFTC set out.  I was responding to what was in the proposal, but I did mention quite pointedly that the CFTC was utterly silent on whether speculation was culpable in the mid-2000s price spikes, or those going on now.  How is it possible to respond to arguments and assertions that are not made?

Since it was the CFTC that was setting out the rationale for its proposed intervention, if that rationale is too narrow, Kemp should direct his ire where it belongs–the CFTC–not where it doesn’t–yours truly.

Kemp also critiques my views on manipulation and the proper way to deter it.  Oh no!  Please don’t throw me in the manipulation briar patch, Brer Fox!

Actually, born and bred in the briar patch, John.  We are agreed that past efforts to deter manipulation through ex post enforcement have been troubled, at best.  In this, Kemp is no doubt late to the game, because I’ve been making that argument since the mid-1990s.

That said, I’ve noted that manipulation is not inherently “unprosecutable” (a word Kemp lifts from Jerry Markham).   The problems with detecting, deterring, and punishing manipulation can be corrected by a proper understanding of the economics, and a judicious use of, yes, econometrics–something that apparently sends Kemp into apoplexy.

Moreover, I have made very concrete recommendations as to how manipulation law can be reformed to address the problems it has experienced.  (Not that you would know that from reading Kemp’s description of my views and arguments.)  The problem is that instead of taking a new, economics-based approach to the problem, Congress keeps returning to the vapory SEC 10(b)-5 “manipulative contrivance or device” standard, like a dog returning to its own vomit.  Doing the same thing over and over again and expecting different results is insane.  I’ve recommended specific and practical ways to stop the insanity.

As an aside, Kemp laments that manipulators have only been subject to civil, rather than criminal, sanctions.  There are a couple of issues here.  The first is that criminal sanction–imprisonment–is socially inefficient when defendants are not judgment proof.  The second is that Kemp’s lament actually supports the point I made in the previous paragraph.  Judge Miller in Houston found the existing anti-manipulation statutes unconstitutionally vague, and threw out criminal indictments against BP propane traders.  The suggestions as to how to correct the law would go a long way to addressing that vagueness problem that impedes criminal prosecution.

Speaking of econometrics, here Kemp is extremely misleading, and puts words into my mouth that I did not utter, and which do I endorse.  He says that I propose that the CFTC not “set limits or commence enforcement proceedings unless econometric tests showed an unequivocal effect” [emphasis added].

If there is anything unequivocal, it is that his statement is unequivocally false, for I never said any such thing.  Indeed, insofar as manipulation is concerned, he turns reality on its head.  For what I have shown in numerous articles, a book, and in testimony, is that econometric evidence and economic analysis generally is the best way of proving manipulation, rather than being an obstacle that makes prosecution of manipulators virtually impossible.  It is a sword that can be wielded against manipulators, not  a shied that defends them: although it is effective as a shield protecting the innocent.  Rigorous analysis of data is the best way to cut through trader BS, and prosecutor ignorance.

And that’s the point: we want methods that avoid false positives and false negatives.  My work shows that econometrics, when combined with rigorous economic reasoning and other economic tests that are not econometric per se, can do just that.

Before characterizing my views, John, you might want to be more familiar with what they actually are.

Even with respect to the issue of whether speculation has distorted prices in ways other than the Hunt-type scenario, I have been quite open about the basic limits of econometric analysis.  Here’s what I wrote in a piece in Regulation last summer:

One of the most important functions of markets is to discover prices; to provide a mechanism whereby information about supply and demand dispersed among millions can be aggregated.  Thus, no one has the information to know what the price “should” be; if someone did, we wouldn’t need markets.  But this always makes it very difficult to rebut assertions that a particular market price is distorted by speculation, or to prove that they were.

Moreover, in that article, I use some econometrics, but only very little.  I instead utilize some non-econometric approaches to test the implications of the speculative distortion story.  Thus, to attribute to me a slavish and myopic devotion to econometrics is just wrong.  I have a very catholic view of what kind of evidence is persuasive.

But I am a firm believer that data and evidence should be decisive.  Kemp argues that “policymakers must act on the balance of probabilities.”  Fine.  But just where, pray tell, are those probabilities to come from?  Kemp bashes econometrics, but advances no alternative.  Zero.  Zip.  Nada .

Sorry, but that just doesn’t cut it.  Econometrics is one tool that can be used to inform judgments about probabilities.  There are other tools–qualitative comparisons, and rigorous analysis of the economic logic of purported causal connections between speculation and price distortions, for instance–that can also inform those judgments.  The best approach integrates statistics, econometrics, qualitative comparisons and rigorous economic reasoning.  That’s the kind of approach I favor, and the kind of approach I’ve used–though you would never guess that in a million years if your only impression of my work is Kemp’s description thereof.

In the end, Kemp takes refuge in the position that as a matter of law, Congress has required the imposition of position limits, and that’s the end of that.  He worries that the CFTC could be sued if it failed to adopt such limits.

But even that legalistic defense is incomplete.  Congress has mandated the imposition of limits to achieve a specific purpose: the prevention and diminution of “unwarranted fluctuations” in prices.  Limits that are unnecessary to achieve that goal–because such unwarranted fluctuations are extremely unlikely to occur–or limits that are so overinclusive that they impede the achievement of other Congressionally mandated objectives, shouldn’t hide behind the fact that courts may find the exercise of such powers Constitutional.  “We do it because we can” is a recipe for regulatory mischief that undermines the very goals that Kemp claims to endorse.

My criticism of the CFTC NOPR is that it (a) identified a way in which large positions could cause unwarranted fluctuations, and (b) imposed limits that were completely unnecessary to address the very problem the CFTC identified.  Maybe Kemp has different theories regarding (a).  If so, he should spell them out, and specify his proposed remedies so that they can be evaluated and critiqued in order to ensure that they are indeed problems and the remedies are an efficient and effective way to address them.

In the end, I guess I do agree with Kemp on one thing: it comes down to an issue of the burden of proof.  I believe in markets more than regulators.  He apparently takes the opposite view.  I am more than willing to debate this anytime, anywhere.

But contrary to what Kemp insinuates, I do not believe that markets are unerring, that market power is not a problem, and that certain laws and regulations can improve the performance of markets.  I am not some sort of Dr. No, insisting upon unreasonable level of empirical support to reject the hypothesis that the Market Is Always Right.  (Indeed, a former colleague, upon reading my work on manipulation, referred to me as a “Chicago apostate.”)  I have a presumption in favor of markets, but it is a rebuttable presumption.  And with respect to manipulation in particular, I have both rebutted the widespread view that manipulation is not a problem, and recommended specific, targeted legal responses to mitigate that problem.

When it comes to speculation and position limits, however, those who have questioned markets have come no where near to rebutting the presumption in favor of markets.  I note–indeed emphasize–again that the CFTC does not even try beyond the specific areas identified in the NOPR: areas which Kemp believes are too narrow.  But Kemp hasn’t provided a credible alternative either.

Given the havoc that bad regulations routinely inflict on markets, a credible story and at least some evidence should be required to support a particular policy proposal.  A fair acknowledgement of the potential for unintended consequences is also appropriate.   I note too that Kemp does not even attempt to critique the unintended consequences of the CFTC proposal that I lay out in my comments.

When it comes to the specifics, Kemp ironically endorses my view–although he does not acknowledge this.  He says:

Reversing the burden of proof, it is worth asking opponents why anyone would want to run positions above the very high levels set out in the CFTC’s proposals. Are there legitimate reasons to want to run very large net positions, including in the spot month? Or is the only reason to exercise market power?

Uhm, that’s very close to what I recommend.  Give the CFTC the authority to question the legitimacy of very large positions, and intervene accordingly if there is no legitimate reason.  But that’s a far, far, different thing from a blanket prohibition of positions in excess of a particular size.

In sum, I stand by my specific criticisms of the CFTC position limit proposal.  Moreover, I emphasize that Kemp has presented a distorted view of my arguments, beliefs, and work.  His arms must be tired from giving a straw man such a thrashing.

But I’m still standing.

January 25, 2011

Won’t Get Fooled Again?

Filed under: Military,Politics — The Professor @ 8:27 pm

After laying low the day of the Domodedovo bombings, Putin made an appearance:

Prime Minister Vladimir Putin vowed revenge Tuesday for the suicide bombing that killed 35 people at a Moscow airport — a familiar tough-on-terrorism stance that has underpinned his power but also led to a rising number of deadly attacks in Russia.

Revenge.  Wow.  Who ever thought of that before?

Like it’s worked so great so far.

That Putin has nothing better to offer than more retribution is a confession of intellectual bankruptcy.

Medvedev isn’t much better:

Medvedev on Tuesday gave a tough speech to officials at the Federal Security Service, the main KGB successor. He suggested that some of them could have been at fault and told them to do everything possible to find those responsible.

“The nest of these bandits, however they are called, should be eliminated,” he said.

Medvedev also blamed the transport police, ordering the interior minister to identify officials who should be dismissed or face other sanctions. Airport officials also did not escape blame.

“What happened shows that obviously there were violations in guaranteeing security. And it should be answered for by those who make decisions there and by the management of the airport,” he said.

Medvedev demanded robust checks of passengers and baggage at all major transportation hubs. “This will make it longer for passengers, but it’s the only way,” he said.

Beyond the fact that Medvedev is self-satirizing as a tough guy, his solution (“robust checks”) suggests that he’s channeling the TSA, which is another confession of intellectual bankruptcy.  Protecting the last target.  Not like there aren’t thousands more across Russia every single day of the week.  Every market, every big store, every train station, every Metro stop, every bar, every restaurant, every sporting event–every one a target.  So you make an airport–or even all airports–impenetrable.  So what.  The terrorists will just work their way down the target list, probably figuring that variety is the spice of life–or death, in the event–anyways.

The Israelis and Americans (in Iraq, especially) found through painful experience that fighting asymmetric threats is first and foremost an intelligence campaign.  You don’t defend, you attack–precisely, based on information painstakingly collected and analyzed.  You need to get highly granular information, especially on the leadership of the terrorists and on the engineers–the bombmakers, communications experts, moneymen.  And on the people they interact with, and on their families and contacts.  You constantly add to that information and exploit it to target the leadership and the engineers.  You kill or capture those you can, but if you don’t, at least relentlessly harry them to disrupt their planning and operations.  You need to get inside their OODA loop.  Where this has happened, in the West Bank and central Iraq and Anbar, for instance, terrorist activity has been reduced sharply.  Where it hasn’t–Pakistan, most notably–the problem is still chronic.

And it is chronic in Russia–so draw your own conclusions.  Despite the fact that they can operate with an impunity that the Americans and Israelis cannot and do not, Russia’s vaunted security services have not been able to do this.   Revenge and retribution will accomplish little.

A new meme is that the airport attack was targeted at Russia’s palpably desperate attempts to attract new investment (h/t R).  This may be an effect of the blast, but I seriously doubt that was the bombers’ calculation.  This meme reveals more about Russia’s economic anxiety than it does about the designs of the Chechens.  It is telling indeed that from the very first–mere minutes after the attack–a good deal of commentary about the bombing focused on the implications of the attacks for Russia’s investment prospects.  This tells me that this concern is foremost in the minds of the Russian elite, which in turn tells me that there is deep unease about the economic situation.

This reminds me of a story–somewhat off-color, so warning to those easily offended–that famous combat cartoonist Bill Mauldin tells in his book.*  He described how he observed in Italy that when under shellfire men put their hands over the body parts that they valued most.  Older men shielded their eyes.  The 18 year olds shielded their jewels.  We see now what the Russian elite really worries about losing.

The yawning gap between words and deeds that I mentioned in yesterday’s post is drawing considerable attention in some Russian commentary.  Time–miracles never cease–does a pretty good job of reporting this:

Taken together, these failures form a lengthening indictment of the ruling duo’s approach to the Caucasus dilemma.

. . . .

Russia’s leaders are left with few options when it comes to the Caucasus. They may no longer even have words. “The macho line can’t work this time, not even for Putin,” says Stanislav Belkovsky, a political analyst in Moscow. “You can’t pound your chest for the 150th time when the past 149 times have failed to bring any results. The Russian people can’t be fooled by this anymore.”

So as Monday’s airport bombing pushes the issue of security back to the center of the national debate, Putin and Medvedev are likely to find their usual methods dulled. They could look for scapegoats among their deputies, or they could again promise to annihilate the terrorists in the most colorful way they can think of. But neither of these maneuvers will do much to convince the Russian public that the terrorist threat is under control. The bombings are already convincing them of the opposite.

Truth be told, I really don’t think the Russian people have been fooled.  I think the real question is whether they are going to do anything about it.  Will they finally start singing “Won’t Get Fooled Again?”

Specifically, are they going to demand accountability, and not just of the poor schmuck who is head of security at Domodedovo–but all the way to the top of the vertical?  Are they going to question the perverse priorities, with the security forces going non-linear on rag-tag groups of peaceful protesters, jailing and harassing opposition leaders, while real threats to public safety can strike at the heart of the country (not just the airport, but the Nevsky Express–twice–the Moscow metro, Nord Ost Theater in Moscow, etc.)?

A friend tells me that there’s a Russian proverb that you get the priest that you deserve.  Well, quite often you get the government you deserve too.  Apathy, fatalistic shoulder shrugging at the inability of the authorities to deliver on their basic responsibilities, indifference to the one-way accountability in government, all just ensure that things will go on as before.  If Russia is going to change, that change is not going to come from the top.  It will have to come from a populace that demands something other than doing the same thing over and over with no good result.  Which means that if history is any guide, alas, change is not likely to come.

There is an international dimension to this enabling as well.

International organizations–most notably international sport organizations–have put tremendous amount of trust in Putin’s ability to secure the safety of events like the World Cup and the 2014 Winter Olympics.  The latter is particularly problematic, since Sochi is right in the terrorists’ neighborhood (though as events have shown they can strike far from the Caucasus).  Nonetheless, the IOC says it has “no doubt” that Russia will be able to ensure the Olympics are safe and secure.

How can such trust possibly be warranted?   Russians should ask: if Putin can indeed protect visitors at the World Cup and the Olympics, as he must have promised to the International Olympic Committee and FIFA, why can’t he protect us?  And the IOC and FIFA should ask given the routine failures of the Russian government in its efforts to combat terrorism, are Putin’s promises any good?  Or are the bribes just too big to pass up to raise such awkward questions?

So look to see what happens in the coming weeks.  If it is just more talk of retribution from the top and world-weary apolitical apathy from the rest, you’ll know that Russia will remain on the hamster wheel from hell for the foreseeable future.

* I think it was in The Brass Ring, but it might have been Up Front.  I read both years ago, and the story stuck with me.  Go figure.

January 24, 2011

The Dodomedovo Bombing

Filed under: Politics,Russia — The Professor @ 9:51 pm

My condolences to all those who lost their lives in today’s terrorist atrocity in Domodedovo Airport in Moscow. My condolences as well to their families and friends, and to Russians generally who have to live under greater threat of terror attack than to I do in the US.

As to the attacks themselves and their likely perpetrators I have little to add beyond what is in the press reports. But one thing struck me as very weird (h/t R).

Specifically, almost immediately after the blast, there were news reports linking the bombing to an accidental explosion on December 31. This led authorities to the husband of a woman killed in the blast. This man, apparently associated with a Chechen separatist group, fingered another woman who disclosed a bomb plot and named three men who supposedly trained the Domodedovo bomber.

How this could be stated so definitively in minute detail so soon after the attack is something of a mystery.  In the US and Europe, the first reports in the aftermath of any event like this are usually confused, contradictory, and maddeningly imprecise.  And if the initial report is true, it casts the competence of the security forces in a very poor light. If they had the names of suspects in the cell weeks ago and couldn’t stop the attack, it doesn’t look good.

And maybe that’s the point: maybe this story was planted to make some elements of the security forces look bad–and most likely planted by a rival security force. For minutes after the first story, The Moscow Main Directorate of Internal Affairs denied having any foreknowledge and called into question the veracity of the earlier reports.

This suggests: (a) some element in the security forces (e.g., FSB, as a wild guess) wants to make another element look bad in order to enhance its own power, (b) there is a lot of CYA going on, or (c) both.  I’m guessing “both.”

There was also confusion over whether the airport shut down after the bombing.  Given that trains on the Metro ran in the immediate aftermath of the Moscow subway bombing, it wouldn’t surprise me if the airport did continue to operate.

The attack illustrates that you can’t defend everywhere; every place where large numbers of people congregate is a tempting target, and it is impossible to defend them all.  Instead, stopping terrorist attacks requires intelligence and aggressive efforts to identify, find, disrupt and disable would be perpetrators.  That obviously didn’t happen here.  If the disabling didn’t occur even though the terrorists had been identified weeks ago, that’s a real problem.

A primary source of Putin’s popularity, and a major justification for his strangulation of political and civic freedoms in Russia, has been his alleged success in combating Chechen terrorism.  Given the regularity of major attacks in the heart of Russia, it’s rather difficult to fathom just what the basis for Putin’s reputation as the vanquisher of terrorists might be.  Yeah, he talks a good game, complete with prison slang about killing terrorists in outhouses, but even with a pervasive security apparatus operating with little constraint, the performance hasn’t matched the words.  (And, pathetically, to keep up with Putin the elfin Medvedev feels compelled to talk tough, e.g., his expressed desire of ripping the heads off the attackers of the reporter Oleg Kashin.  Embarrassing.)

The coming days are a time for mourning in Russia.  But after Russians mourn their dead, I hope they question more aggressively and critically the yawning gap between gangster bravado and less than bravura performance.  I hope they start asking whether Putin and the government are holding up their end of the security-for-liberties bargain.  If they do, the victims of Domodedovo will not have died completely in vain, and Russia will have a chance to become a more humane place—and, ironically, a safer one.

January 23, 2011

Massive Fail

Filed under: Commodities,Derivatives,Economics,Energy,Exchanges,Financial crisis,Politics — The Professor @ 9:13 pm

I have written a comment letter about the CFTC’s proposed rule on position limits, which I will submit tomorrow.  A draft is here.  It’s fairly long, so I’ll summarize it here.

I have said repeatedly that it is imperative for the Commission to identify the specific problems that it believes position limits will mitigate, and how they will do so.  Creditably, in its NOPR, the Commission does set out specific ways in which large, concentrated positions can inefficiently destabilize markets.  It is best described as a Hunt Brothers scenario, in which a levered player takes a large concentrated position in a market.  Such a leveraged player may be forced to liquidate, and the liquidation of such a large position can cause extreme price moves, and perhaps, pose a systemic risk.

Fair enough.  I’ve written about the Hunts in the past, and have made similar points. So that is a danger.  But crucially, the CFTC does not identify any other ways in which large positions can cause “unwarranted” price fluctuations, which is the basis for its position limit mandate.  Therefore, per the CFTC’s own analysis, its position  limits should focus on addressing a reprise of the Hunt situation.

But the major problem with the CFTC proposal is that it will constrain the trading of many market participants who in no way pose the dangers that neo-Hunts would.  That is, the proposed limits are over-inclusive.

In particular, they will constrain trading by exchange traded funds (ETFs) which are (for the most part) unleveraged.  Indeed most ETFs are completely collateralized.  Moreover, even if an ETF is big, it is different than a single trading entity like the Hunts because ETF trades are driven by the decisions of thousands of ETF investors.

In other words, ETFs are nothing like the kind of speculator–and the only kind of speculator–the CFTC has identified as a danger, but they will suffer collateral damage as a result of the CFTC’s limits.

They will not be the only innocent casualty.  Many other “massive passives”–such as pension funds–will also be affected, even though they do not pose the risks that the Commission uses to justify the imposition of limits.

The problems with the proposal don’t end here.  In particular, although “crowding out” is not explicitly in the new proposal (in contrast to the Commission’s proposal of January 2010), the new proposal has a feature that is just as pernicious, and just as inane: the “within-class” limit.

Due to the powers granted by Frank-n-Dodd, the CFTC now has the power to regulate positions in both OTC swaps and futures, whereas before it only had authority over the latter.  The Commission proposes to create two classes of positions: the futures class and the OTC class.  It proposes several limits imposed on the classes collectively and individually.  For one of the limits, the two classes will be netted against one another, and any speculator must have a net position for all months and a single month that are less than or equal to the speculative limit.  But in addition, each speculator’s OTC position must be smaller than the spec limit, and its futures position must also be smaller than the spec limit.

Here’s the problem.  Assume for simplicity that the limit is 100.   Consider a swap dealer who is short 150 swaps to customers, and hedges this using 150 futures.  This complies with the across-class limit, because it nets out to zero.  But it violates the futures class and the OTC class limits.

This feature therefore limits the ability of intermediaries–swap dealers–to hedge risks.  It is effectively a tax on swap dealers, and will reduce liquidity in the swap market.

There are reasonable grounds to suspect, based on the past statements of some Commissioners, that this is a feature rather than a bug from their perspective.  In my opinion, however, it is flat wrong.  OTC market making is a legitimate activity, and OTC deals (hedged by exchange transactions) are often the most economical way for some market participants to take on the investment or speculative positions they desire.  There is no reason to penalize this activity the way the proposed rule does.

Indeed, by limiting liquidity the rule threatens to exacerbate large price moves in response to shocks.  Prices have to move more in less liquid, less flexible markets in order to accommodate big shocks.  Stifling liquidity through the within-class rules is therefore counterproductive.

I would also note that the Commission provides no economic justification for this restriction.  In particular, it doesn’t even try to show how this restriction addresses the Hunt Problem that is the sole substantive justification for the limits in the first place.

The Commission also fails to justify the size of the limits it proposes, which approach 2.5 percent of open interest for large markets.  To put things in perspective, the Hunts’ position was over 25 percent of the market at times.  So maybe 25 percent held by a single leveraged trader poses a risk: how does that justify a  2.5 percent limit on everybody, including non-leveraged traders who are in fact agents for myriad individuals making independent trading decisions (e.g., ETFs)?

The Commission also fails to recognize that its limits could drive business into the physical markets, thereby distorting prices producers receive and consumers pay.  This is perverse, given that the ostensible purpose of the limits is to prevent and diminish such distortions.

In sum, the non-spot month limit proposal is fundamentally defective.  It identifies a problem, and then identifies a blunderbuss-like “solution” that will hit a lot of trading activity that does not and cannot cause this problem.

The spot-month limits are flawed too, because they are logically inconsistent.  The proposal limits caps spot-month delivery-settled derivatives positions at 25 percent of deliverable supply, but does not explicitly place a cap on the amount of deliverable supply a speculator can hold.  The proposal caps cash-settled positions at 5 times the delivery settled limit, i.e., 125 percent of deliverable supply, and also permits the holder of cash-settled positions to hold 25 percent of deliverable supply.

Spot month limits can be justified as a means of preventing corners.  Well, corners can be carried out by holders of cash-settled positions as well as delivery-settled ones.  Indeed, that happened a lot in the Brent market in the 90s and early-00s, and may in fact be happening right now.  Somebody can manipulate a cash-settled contract by buying excessive quantities in the cash market, driving up prices, and thereby artificially inflating the settlement price of the derivative.

If the objective of the limits is to prevent market power manipulations in both cash-settled and delivery-settled markets, the limits are logically inconsistent.  The delivery-settled limit implicitly assumes that it is possible to distort prices by accumulating less than 25 percent of deliverable supply.  Well, you can do that with the cash-settled contract, and then get a profit on a position that is five times larger.

In sum, the position limit proposal is a good example of bad regulation.  It inflicts harm on “massive passives” (perhaps intentionally) even though this type of trader does not pose the only threat that the Commission has identified: this is a massive fail.

I should also note that the proposed rule provides not a word of justification of the widespread view that speculation caused the price spikes of the 2007-2008 period, or is causing the current runup in commodity prices.  It certainly provides no evidence.  But such price spikes are routinely evoked in Congress, the press, and even in statements by Commissioners, as evidence of the need for such limits.  Since the Commission apparently does not have the confidence in such a belief to include it as a justification for limits in the formal proposed rule, this should play no role in deliberations over the rule going forward.  To do so would be to play bait-and-switch.

Instead, the rule should be evaluated solely on the basis of its efficacy and efficiency in addressing the specific problems with speculation that the Commission has identified.  When this is done, it is clear that the rule is grossly excessive because it impedes legitimate conduct that poses none of the risks that the Commission believes warrant regulation.  The rule should therefore be rejected, and if replaced at all, replaced with something that is targeted at the specific ill that the Commission has diagnosed.

January 19, 2011

Defensively Doubling Down on Stupid

Filed under: Politics,Russia — The Professor @ 11:21 am

Monday, stung by criticism of his question about the link between violence and freedom in America, Itar-TASS correspondent Andrei Sitov wrote an email defending himself and his question.  In so doing, he doubled down–on stupidity, yes, but also on chutzpah and hypocrisy.

After a swipe at the right to bear arms (a point I’ll return to), Sitov proceeds:

But, as one of them wrote to me, other “more fundamental” freedoms such as the freedom of speech have nothing to do with the case.

If that is so why was America’s first reaction to the Arizona killings a soul-searching debate on the limits of political rhetoric?

Because hyper-partisan fanatics (yeah, that means you, Krugman) fixated on the idea that vast swathes of America are seething with hate and prone to political violence immediately jumped to the conclusion that political rhetoric just had to have something to do with it.  The only real question is the extent to which this was a knee jerk reaction by the obsessed, or a cynical effort to take political advantage from a tragedy.

Why did Sheriff Clarence W. Dupnik, who is overseeing the investigation point at the “atmosphere of hatred and bigotry” in the national political discourse which in his view may have influenced the attacker? “That may be free speech, – he said, – but it’s not without consequences”.

See the above.  Moreover, Dupnik has proven himself, beyond cavil, to be a hack who was talking out of his a**, with absolutely no basis whatsoever for his remarks.  Anybody who cites Dupnik as a legitimate authority is an utter fool.

Why did President Obama himself deplore the “sharp polarization” of the discourse and urge his countrymen to talk with each other “in a way that heals, not in a way that wounds”?

Funny how reducing sharp polarization of discourse would just happen to have the effect of reducing criticism of Obama.

Sitov continues:

Americans have a proud tradition of individualism. Human rights are a core value here; there is almost a “cult of personality” ­ of the personal rights and freedoms of eevery US citizen.

Sitov obviously has no clue about just what a “cult of personality” is.  Which is amazing beyond belief, given that he was born in the country that perfected the entire concept, and lives in a country that perpetuates it to this day.

But the true (black) comic gold comes near the end:

Questioning authorities is an important function of the press. I am trying to do my job raising subjects which I feel are important. But I ask questions to get answers, not to start an argument. I always accurately report on those answers. And I obviously never presume to tell the Americans how they should run their own affairs.

Questioning authority?  Stop it man, you’re killing me; maybe you should replace Ricky Gervais on next year’s Golden Globes.  Do you “question authority” back in Russia?  Have you called out Putin or Sechin?  And just what happens to reporters who really question authority in Russia?  Do they get answers?  Seldom.  Do they get a 9mm round in the head, or a savage beating, or a push out a window?  It happens.

Sitov continues to push the empirically unsupported claim about the trade-off between freedom and violence:

Imagine what would happen if rights and freedoms in the US were suddenly severely restricted.  There would probably be much less random violence in the streets.  But the government of the people and by the people chooses not to impose such restrictions. Freedoms continue. So do tragedies. It’s a matter of political choice.

But again, a look at his own country would reveal a place with far less freedom, and far more violence.  Indeed, the violence is far greater than reported in the official statistics that I quoted in my earlier post on Sitov.  Consider this from the MT:

The number of crimes in the country has grown drastically over the past decade, new research shows, debunking optimistic but unconvincing reports to the contrary favored by law enforcement agencies.

A total of 3 million crimes were registered nationwide in 2009, according to official statistics, but the real number of crimes committed that year — including unreported ones — stood at 26 million and will reach 30 million by 2020, according to a research group with the General Prosecutor’s Office Academy.

. . . .

Official statistics show a drop in the number of murders — from 34,200 in 2001 to 18,200 in 2009 — but they only reflect the number of criminal cases that were opened, the study said.

Taking into account reported murders where no cases were opened, the figure would stand at 46,200 for 2009, the group said. But even this figure appears incomplete, considering there were 77,900 unidentified dead bodies found that year and another 48,500 people were reported missing.

Words fail.  Surely, some of these additional corpses were victims of accidents, drug overdoses, drinking while swimming, etc., but surely too a good fraction of them were murder victims.  Just taking into account the numbers in which murder cases were not opened, but apparently should have been, Russia’s murder rate is 2.5 times the official rate, which itself is about 3 times the US rate, meaning that the real rate is 7.5 times the US rate–and perhaps far more.*

To put things in perspective, multiplying the  official rate of about 15 by 2.5 gives a rate of 37.5 for the entire country.  The highest murder rate in the US is in New Orleans, at 50, followed by Richmond, CA at 46, St. Louis and Detroit at 40, and then a handful of cities in the 30s and 20s.  So the entire country of Russia is about as dangerous as the most lethal cities in the US.

And of course, since murders and other violent crimes are overwhelmingly concentrated in those cities, the murder rate in most of the rest of the US is miniscule.  And note that Americans in those other places with miniscule murder rates have the same freedoms–including the right to bear arms, which they exercise to an extent that flabbergasts Sitov and most other Europeans–that Sitov asserts are inextricably linked with violence and mayhem.

In contrast, Russians do not have the same rights, and notably don’t have the same gun rights as Americans, but from Smolensk to Murmansk they are murdered and subject to other violent crimes at rates that beggar belief.

In other words, Sitov’s theory–which he is sticking to doggedly–is complete bunk.

In his email, Sitov whines that he, like other foreign journalists, are routinely overlooked in White House press briefings.  I can’t speak to the issue of other foreign journalists, but in Sitov’s case, with his stubborn asininity, is it any wonder?  Indeed, those ignoring him are doing him–and Russia–a favor.

* In studies of crime, murder statistics are usually considered more reliable than data on other crimes (such as burglary or even rape) that must be self-reported, because it’s hard to overlook a dead body.  Apparently Russian police have found a way around that little problem.  Want better murder statistics?  No problem!  Just ignore them.  It makes one wonder what other statistics are suspect.

He’s From the Government, and He’s Here to Help Us

Filed under: Economics,Politics — The Professor @ 10:16 am

Yesterday President Obama took to the oped page of the WSJ to announce his plans to promulgate an executive order that

requires that federal agencies ensure that regulations protect our safety, health and environment while promoting economic growth. And it orders a government-wide review of the rules already on the books to remove outdated regulations that stifle job creation and make our economy less competitive.

All well and good, perhaps, but the piece leaves about the same impression as a promise by Ghengis Khan that his Mongols will wipe their feet on the doormat before pillaging your home.

I exaggerate, of course, but there is an immense disconnect between the words in the oped and the ongoing actions of the administration.  Yes, discarding bizarre rules like those that require treating saccharine like industrial waste is beneficial.  But that victory, such as it is, took place when every department of the federal government has gone on a regulatory binge.  I am most familiar with what is going on at CFTC, and that is enough to make me shudder as I watch an agency that historically has earned the sobriquet “stepchild” systematically re-engineer every aspect of the immensely complex derivatives markets.  But even a cursory glance across the regulatory landscape reveals hyperactivity everywhere, from Net Neutrality at the FCC, to the new Consumer Financial Protection Agency, to the EPA, which is beavering away at a scheme to regulate carbon emissions–something that an overwhelmingly Democrat congress failed to pass.  And then, of course, there is Obamacare.

Even the example that Obama touts–fleet fuel efficiency standards–illustrates the point.  Yes, perhaps the changes Obama mentioned mitigated the harm of the regulations.  But fleet fuel standards are a grotesquely inefficient way to achieve the policy objectives that Obama sets out, and they have wreaked tremendous havoc on the American auto industry–as Holman Jenkins has pointed out repeatedly on the same WSJ oped pages.  At best, the changes that Obama mentions made the regulation less horrible.

In other words, this executive order is, at best, microsurgery on the capillaries, undertaken at a time that blood is gushing from all the major arteries.

Given the disconnect between the nanoscale of the executive order, and the macroscale of the regulatory state, there is room for skepticism–and indeed, even cynicism–about the initiative.  This smacks of a PR venture–“See, I am actually pro-growth”–intended to counter the widespread–and well-earned–criticism of the effects of the metastasization of the regulatory state.  A shiny object dangled in front of the easily distractable to divert attention from the fact that the  regulation is continuing to grow inexorably.

Yes, I guess it is a good thing that Obama is promising that Leviathan will slick down that cowlick and clean under its fingernails.  But that’s very small comfort given that Obama and Congress have fed the beast a steady diet of steroids over the past two years and show every intention of continuing with the regimen as long as they can.

January 18, 2011

The Case of the Retiring Air Traffic Controller

Filed under: History,Politics,Russia — The Professor @ 8:03 pm

Back in September I wrote a post that quoted a story claiming that the air traffic controller on duty when the aircraft carrying Polish President Kacyzinski and 96 other high-level government officials crashed had retired three days after the crash, and that the Russian government claimed that it was unable to find him.  (How convenient.  And how amazing it would be that in a state like Russia with its relative lack of mobility and intrusive police and security presence that a government employee could disappear when he would be an essential material witness in an investigation with international implications.)

That story is of particular interest today given this report from Stratfor (h/t R):

Russian air traffic controllers failed to warn the crew of then-President Lech Kaczynski’s plane that they were off course shortly before crashing in 2010, Polish Interior Minister Jerzy Miller said Jan. 18, AP reported.

Here’s the AP report:

Russian air traffic controllers failed to warn the crew of Polish President Lech Kaczynski’s plane that it was off course shortly before it crashed last year in Russia, Polish investigators said Tuesday.

Interior Minister Jerzy Miller –who heads a Polish panel investigating the crash –made the claim nearly a week after the release of a Russian report that laid the blame squarely on the Poles.

. . . .

Miller said that Russian controllers consistently told the crew that the plane was on the correct course to land _ but the aircraft was actually flying 70 yards (meters) below the level where it should have been. He said it was also 80 yards (meters) off course just seconds before it crashed close to the airport.

“The controller should not be telling the crew that they are on the right course while they were off course,” Miller said. “There is no information at all from the control tower to the crew to tell them that they are not on the right path to descend.”

Miller presented parts of the recorded conversation between the crew and tower coupled with a video animation of the descent.

In the recording the tower tells the crew that all airport systems are on and ready.

Note that the Poles will not absolve the flight crew:

The Polish commission is to publish its findings in February and Miller said it will be even tougher on the Poles who were responsible for the flight.

But the Poles will demand that the Russians identify any errors made on the Russian side:

However, Polish officials insist that Moscow address whether any mistakes might have been made by Russian officials.

Good luck with that.

It would be very interesting to learn what happened to the controller.  Did he really retire?  Did he really disappear off the face of the earth?  (Anybody have him in the dead pool?)

I don’t know for certain, but in light of these Polish accusations, the  curiously timed “retirement” and unknown whereabouts of the controller are a matter of considerable importance.   Has anybody seen any subsequent reporting on this subject, either supporting or debunking the story?  If it is true, it would cast serious doubts on the Russian account.  If it is not, what has he had to say?  Were the Poles allowed to question him?

Regardless of the truth of the retirement/disappearance story, there is a yawning gap between the Russian narrative and the Polish one.  The Russian narrative places all the blame on the Poles–most notably on the deceased president.  The Polish narrative assigns blame to both the Poles and the Russians.  (Likely, both conditions–errors by the Russian controllers and foolhardy flying by the Poles–were necessary for the crash to occur like it did.)

Recently Poland and Russia have made steps towards something of a rapprochement; the recent deal between Poland and Gazprom is one example of that.  Will a dispute over the crash impede that warming trend?  That remains to be seen.  But Russian actions with respect to the handling of the crash forensics should serve to remind the Poles that with the Russians, “reset” often resembles Lucy resetting the football.

January 16, 2011

The Gambler’s Fallacy

Filed under: Economics,Energy,Politics,Russia — The Professor @ 2:34 pm

The biggest news of the last couple of days is the announcement of the BP-Rosneft agreement.  Under the agreement, the firms exchange stakes, and will undertake a joint venture (theoretically) to produce oil in Russia’s Arctic.

The BP move smacks of desperation.  The company reminds me of a gambler who has lost several big hands in a row, and figures that his luck just has to change.  The most recent big loss, of course, was in the Gulf of Mexico.  But it has also suffered major losses in Russia.  These include the effective expropriation of the Kovytka gas project; Gazprom refused to provide transportation from the field, the company was at risk of losing its license which required it to produce (which it couldn’t do because it couldn’t transport and sell), so it ceded the stake to Gazprom.  The other big loss involved BP’s current CEO, Robert Dudley, who was run out of Russia–literally–in a battle between BP and its Russian partners for control over the TNK-BP joint venture.

And of course other western majors have had bad experiences in Russia.  Shell over Sakhalin II.  Exxon over Sakhalin I.  This is why despite the fact that there is oil in Russia, other majors are not rushing out to do deals there even though they, like BP, are intent on finding new reserves.  As an example, Chevron Conoco-Phillips just sold its stake in Lukoil.

But BP has had its successes in Russia.

Just kidding.

It would be one thing if BP had proven its ability to navigate Russia’s treacherous energy politics, but it hasn’t.  Indeed, it has been very clumsy.  It was outmaneuvered continually in the TNK-BP saga. Its attempts to rescue its Kovytka stake were tragicomic.  They approached Igor Sechin–former intelligence operative, deputy prime minister, chairman of Rosneft, thug, and head of a Rosneft-centered clan that was a mortal rival of the Gazprom-centered clan–for help in dealing with Gazprom.  This was about as bright as approaching the Tagliattas to intermediate with the Corleones.

In one sense, you have to cut the company some slack for its past experiences: they are not alone.  No supermajor has had anything but headaches–and worse.  All the advantages are with the Russian state.  They have many levers that they can pull.  Everything from environmental and licensing rules to taxes to guns.

But that means that it is hard to cut the company slack about its current decision.  How could it possibly think that this time it will be different?

The nature of the oil business makes this problem particularly acute, and the risks of opportunism are particularly acute in the BP-Rosneft JV.  Rosneft needs technology to exploit the offshore opportunities in the Arctic.  BP has the technology and expertise.  BP understands that its ability to utilize that expertise in other areas, most notably the US  Gulf, are doubtful at best as a result of the Horizon disaster.  So, in some sense, there is economic sense to the deal, in that each party has something the other wants and needs.

But deals have to be enforceable, and here the problem is one of asynchronous performance that creates extreme hazards in enforcing any deal.  BP has to commit its technology and expertise and capital at the front end.  It does so in the expectation that when the oil flows, it will profit accordingly.  But once it has sunk its capital and technology into the frozen Russian wastes–once it has incurred massive costs–its bargaining position vis a vis Rosneft and the Russian state declines dramatically.  The Russian state can then start playing its tricks to squeeze BP.

And it almost surely will.   It is really almost impossible to fathom how BP believes that it can avoid this problem.  Asynchronous performance is inherent in the proposed JV.  Russia has a demonstrated track record of acting opportunistically, especially in the energy sector.  Reputation has clearly not kept Russia from acting opportunistically in the past.  There are no legal protections to speak of: indeed, in Russia, the legal system is the sword of the state, rather than a shield for private capital.  This means that BP will run extreme legal and political risks in attempting to collect on its commitment of capital and technology.

When thinking about this deal, remember one of the sources of dispute between TNK and BP: the former –the Russian partners–wanted to invest more outside of Russia.  That’s pretty telling, if Russia is where the best oil prospects are–physically, anyways.

Maybe BP knows something that isn’t immediately apparent that has convinced it that this time it will be different.  But it almost never is.

Hope springs eternal.  But to me, the more appropriate aphorism is: fools rush in where angels fear to tread.

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