Streetwise Professor

Ahmadinejad’s little secret has been unmasked (h/t Mrs. SWP).

Haven’t written much Russia stuff lately–too many competing stories, too much competing for my time, and too much same-old, same-old in Russia.  But enough things have accumulated to deserve some comment.

First, to prove, as if more proof were needed, that Vladimir Putin is 110 percent Checkist, and -10 percent economist, he refuses even to countenance the possibility that his inane attempts to keep a lid on prices has caused shortages of gasoline. Instead, he sees dark conspiracies:

Russian Prime Minister Vladimir Putin accused oil companies on Thursday of a “conspiracy” to force up gasoline prices, as the world’s largest oil producer struggles to combat fuel shortages.

Putin rebuked Deputy Prime Minister Igor Sechin, his point man for energy, for suggesting at a government meeting that price rises had resulted from a lack of oil products offered for sale on commodities exchanges.

“It’s not a shortage. This is not about a shortage. This is a conspiracy. They are colluding,” Putin told Sechin, who serves on the board of state-controlled oil major Rosneft and is widely seen as the chief spokesman for the industry.

What a maroon.  And Sechin.  Oi  Perhaps his remark on commodity exchanges was mis-translated, because otherwise I have no clue what he was talking about.

By the way, the price control bug is spreading: here’s a story about China using “legal” means to impose unofficial price controls, with predictable effects (note the empty shelves in the pic).

Story 2.  When the Russia-China oil pipeline deal was signed, I predicted that the Russians would bridle at the super-secret pricing terms as soon as given the opportunity–and would attempt to renegotiate the terms later.  (My surmise at the time was the super-secrecy was intended to conceal how unfavorable the terms were–and hence how desperate the Russians were.)  The entertaining and informative John Helmer has some details:

This is unusual outspokenness from the state pipeline company whose chief executive, Nikolai Tokarev, has made a career of secretiveness. All the more curious, says a Russian analyst of state contracting practices, Alexei Navalny. He told Asia Times that the conflict with CNPC is not really with the pipeline company Transneft, but with the oil producer and exporter, state oil company Rosneft. Navalny has filed Moscow court actions as a shareholder of Rosneft for disclosure of the terms of the company’s contract to sell oil to CNPC. He believes the price formula set by Rosneft is “far from a market one”, and accordingly it is understandable why the Russian side wants now to extract more profit from the trade, while the Chinese insist on sticking to the contract formula. Navalny does not speculate on how the oil pricing is tied to Rosneft’s and Transneft’s repayments of their China loans.

Taking the longer-term Chinese view, over the 20-year contract term, with deliveries of about 2.3 billion barrels, at annual value at this year’s price average of not less than $10 billion, and if the price average holds up, a full-term value of $200 billion, this $2 per barrel dispute ought to be something the two sides can agree to share — without going to a court in London and without damaging the windfall both are enjoying. If they can’t, the usually reticent Tokarev will no doubt have to explain to Putin why not.

Not surprised.  It would be very interesting to see those contract terms . . . somehow I think that if revealed, they would be more “colonial” than the PSAs (like the one for Sakhalin II) that Putin raged about in the mid-00s.

Speaking of oil, the Arbitrage Court has given BP the worst of all worlds: approval of the Rosneft-BP share swap, and the right to participate in Arctic exploration efforts–but only through TNK-BP.  So now TNK-BP and BP–and now Rosneft–will be the Siamese triplets from hell for the foreseeable future.  Good luck with that.  Be careful what you ask for, Dud: you might get it, and in this case you did.

Last, Dmitry Gorenberg (whom I will meet when on a panel speaking about blogging as an academic at the Association for Slavic, East European, and Eurasian Studies meetings in November) posted the editor’s introduction from the new issue of Russian Politics and Law.  Two of the articles by obvious Russophobes named Gudkov and Petrov present an analysis that is very similar to the natural state-based analysis I’ve presented on SWP over the last 4 years or so:

Lev Gudkov’s article on “The Nature of ‘Putinism’ ” judges Putinism to be a particular type of post-totalitarian authoritarianism in which the political police wields power on behalf of the private interests of bureaucratic clans or corporations. Furthermore, he argues that this system of power is not merely conservative but is designed specifically to block the development of the rest of society and to prevent its modernization. Control in this system is exercised by the security services, who seek to milk both the state and society for their own personal enrichment. [Emphasis added.]

Gudkov notes that this political system has a fundamentally different character from either the Soviet regime or a regular personalistic authoritarian regime such as that found in other countries. The new aspects of Putinism include its system for the legitimation of rule and its technology of power. Unlike Soviet-style totalitarian regimes, the Putinist political system is not a party-state, where the ruling political party has merged with the state. The regime also lacks an overarching ideology that seeks to justify its rule, nor does it engage in mass terror campaigns against political opponents. Furthermore, the population has partial freedom of access to information and the ability to engage in opposition activity as long as it does not threaten the ruling elite.

Unlike authoritarian states, the Putinist regime has a quasi-personalist and conservative character that focuses on restoring “Russian traditions” while engaging in ever-increasing corrupt activity. The personalism of the regime is particularly important, as Russia’s leaders have partially destroyed state institutions in order to cement their control of state power.

. . . .

The destruction of state institutions is the main focus of Nikolai Petrov’s “The Political Mechanics of the Russian Regime: Substitutes Versus Institutions.” Petrov argues that over the last ten years, Putin and his associates have eviscerated all state institutions except the presidency by systematically stripping them of any real power or purpose. What has been left behind are decorative institutions that appear to retain the powers of their former selves while actually performing few if any useful functions. The symbol of this transformation is the frequently cited remark by Boris Gryzlov, the Speaker of the State Duma, that the parliament is no place for political discussion. The substantive roles of both the Duma and the Federation Council have been handed over to various consultative councils, while the government itself as a decision-making organ was largely replaced by the presidential administration as long as Putin was president. Regional executives were, in turn, replaced by presidential representatives to the federal districts. The substitutions reached into the private sector, as well, with the replacement of independent large corporations with corporations controlled by the state and its top officials.

Petrov calls the system that results from this effort “highly managed democracy.” Its essential characteristics include strong personal power that is unlimited by institutions, the manipulations of public opinion through the mass media, and the holding of controlled elections. The consequences of building this type of government include excessive centralization, internal conflicts, inability to make decisions, and stagnation. These consequences in turn bring about a loss of flexibility and adaptability to changing circumstances on the part of the regime, followed by a gradual loss of effectiveness in governing. The system not only fails to react to crisis but also frequently causes its own internal crises because a lack of failsafe mechanisms prevents the authorities from realizing that they are making mistaken decisions. The crisis may come from a lack of resources to maintain the patronage system that keeps the government functioning, from an internal political conflict among members of the ruling elite that spreads beyond their ability to control, or from a local crisis that expands to engulf the whole country because of the leadership’s inability to deal with it.  [Emphasis added.]

While the system is designed to maintain the current leaders’ grip on power, in the long run, Petrov believes, it guarantees its own failure as hostility to the system gradually develops among the population. Because the public lacks the ability to change the system, anti government attitudes build among the population until they reach an “explosive” level that may bring down both the leadership and the entire system of highly managed democracy.

The last italicized portion is quite similar to arguments I’ve made here, arguments rooted in theory of the political economy of the natural state.

Personalization and de-institutionalization are quite detrimental to the country’s long run prospects.  Personalized, de-institutionalized regimes have little capacity for positive change and adaptation.  They tend to become ossified if the personal leadership ages in place (which is the most likely outcome in Russia), or instead become wracked by conflict and revolution if struggles over leadership erupt (which is the second most likely outcome in Russia).

I’ve downloaded the articles and will read with interest, and will report any additional interesting insights that I glean from them.

The administration is floating–re-floating, actually–a proposal to levy a tax based on mileage driven.  From an economic perspective, this is a puzzler.  If the objective is to reduce CO2 emissions or pollution, it would be far preferable to do so via fuel taxes because (a) pollution is a function of fuel consumption, and (b) fuel consumption depends not just on mileage driven, but on vehicle size, age, maintenance, etc.  Any system that attempts to adjust the tax rate based on vehicle type and weight, etc., would still be less effective at taxing pollution than a fuel tax.  Not to mention that this would require an entirely new monitoring and enforcement mechanism that isn’t free.  All this isn’t that hard to figure out.  So what gives?   Social control comes to mind.  Any other suggestions?

For all those who are bleating that SEALs should have taken an unarmed Osama prisoner, I recommend reading John Keegan’s The Face of Battle, that describes just how fraught and ambiguous the process of taking prisoners is during the heat of battle.  For many soldiers with the most basic survival instinct, the most sensible rule is don’t take prisoner anyone even capable of resistance, especially in a fluid situation.  Prisoners can cause trouble.  For instance, at the Battle of Atlanta, 22 July, 1864, Confederates from Govan’s Arkansas Brigade taken prisoner by the Iowa Brigade grabbed weapons and attacked the Iowans from the rear when the Federals were on the verge of being overwhelmed from the front and hence could not pay attention to their captives.  A guy that you thought you had subdued can do things that threaten your life, e.g., just interfering with your ability to return fire when somebody else attacks you unexpectedly.  That risk is particularly great in an enclosed space–like Osama’s compound, where you don’t know what lurks behind the next corner or in the closet or in the ceiling tiles.

And if you surrender, at best you are buying a lottery ticket, or taking a chance at Russian roulette, betting that a adrenaline-charged man that you were trying to kill a few seconds ago is in a charitable mood.  Keegan analyzes European battles between combatants for whom suicide attack was not a cultural norm.  The prisoner taking calculus takes an even more sinister turn when those you are fighting–such as the Japanese in WWII, or the jihadis today–do have such a cultural norm.

It’s not pretty, but that’s the way it is.  That is the face of battle, especially at close quarters.  Very few walk out of those situations with hands up.

This Get Smart bit is ironic and sadly appropriate on so many levels when it comes to the administration’s bungling of the aftermath of the Osama raid:

I mean, water torture? Really? What did the writers know in 1965? But the real foresight is the “would you believe” line. Maybe Jay Carney should start practicing that one, complete with the Don Adams voice.

On 17/18 November, 1941, a team from Britain’s 11 Commando launched a raid on a building in Beda Littoria, Libya that had been identified as the headquarters of Irwin Rommel, the legendary commander of the Afrika Korps.  The mission was to kill Rommel, who had beaten the British badly in the North African desert.  The mission failed.  Rommel wasn’t even there.  All but two of the raiders were killed, along with 3 German supply colonels and a soldier.*

Afterwards, the tragic failure of the mission (“Operation Flipper”) was lamented, but its ethics or morality weren’t questioned.  In other words, in war it is perfectly legitimate to target the enemy’s commander.  Indeed, it would be interesting to hear an explanation of why in a war it is legitimate to slaughter poor privates wholesale, but the generals who command them are sacrosanct.

One interesting coda to Flipper.  The raid commander, LCOL Geoffrey Keyes was killed.  Rommel had him buried with full military honors.  Even Rommel apparently considered an attempt to murder him in cold blood in the dead of night to be a legitimate act of war.

The raid that culminated in the termination (with extreme prejudice) of Osama Bin Laden was no different in conception or objective than that launched by 11 Commando on a rainy, inky Libyan night almost seventy years ago.  Commandoes were dispatched to dispatch the commander of enemy forces during a war.  End of story, you would think.

But no.  In various quarters, some expected (e.g., various self-appointed spokesmen for Muslim opinion) some less so (e.g., large swathes of the German political and intellectual establishment) have questioned the legitimacy of American action in Abbottabad.

Apparently such fears have spooked the administration.  Initial stories regarding Osama being armed are no longer operative, so an alternative narrative was trotted out: the SEAL who pulled the trigger thought that Obama was reaching for a weapon.  The only thing missing from a bad police drama would be the SEAL carrying a drop weapon to plant at Osama’s side.

Why the need to provide such excuses anyways?  Apropos the Rommel raid, enemy commanders are fair game.  By pretending that it needs to prove self-defense or somesuch to justify popping two caps into Osama, the administration is buying into the idiotic view that we aren’t at war with Al Qaeda.  Not all is fair in war, but Osama’s fate was.  Just say so.

It’s passing strange that the administration that made Death by Drone its preferred MO in dealing with terrorist threats (including an attack today) feels obliged to provide other justifications for killing Osama.  If firing Hellfire missiles from 20K feet at terrorists is just fine, why is firing a couple of rounds at point blank range against an unarmed Osama any different?  If Osama was defenseless against a SEAL, the targets of Predator strikes are equally defenseless against a Hellfire.  And the end result is the same.  And Obama’s qualms about just leveling the Abbottabad compound were that civilians would be killed and that definitive evidence of Osama’s demise would be absent, not that Osama would be killed without any legal due process or opportunity to defend himself.

So why not just say?: Yes.  The SEALs went there to kill the commander of a force with which the US is at war.  They did.  That’s war.  War is hell.  Deal.  (Oh, and don’t f*ck with us.)

But this is just another example in the administration’s spray and pray approach to the post-mission information war.  I mean, all of these issues–the burial, the photos, the explanation of the SEALs’ mission–were completely predictable before the raid was undertaken, and should have been decided on then, and explained accordingly.

The handling of the photos is still another example.  First Panetta says they will be released.  Then Obama says no, and in so doing insults hundreds of millions of Americans by suggesting that any desire to see the photos is unseemly triumphalism akin to an end zone celebration.  Uhm, no, Mr. President.  Terrell Owens is not the typical American.  You may disagree with the reasons why many–and I would think most–Americans want to see graphic (in all multiple senses of the word) evidence of Osama’s demise, but they have nothing to do with triumphalism.

Obama’s–and the administration’s more generally–handling of the photos and the explanations for what transpired in Abbottabad and why suggest that they believe we can’t handle the truth.  Otherwise, why would they be so economical with it?

In short, we can handle the truth.  We deserve the truth.   If Obama is going to take credit for ridding the world of Osama, he should tell us the truth of why and how it was done, and the aftermath.  No, not the operational details.  But the objective of the mission (shoot on sight?), and some evidence that it was carried out successfully.   That’s not a  lot to ask.  If you think the mission was justified, there should be no hesitancy in defending it on its own terms.

* The sad fate of Operation Flipper and the brave men who carried it out, like the tragic fates of many other commando operations throughout history, illustrates the grave risks associated with these endeavors.  The success of the raid on Osama is a testament to the unbelievable skill of the SEAL operators, the aircrew that inserted and extracted them, and all of the myriad intelligence and military assets that made the raid possible.  Flipper and the other commando tragedies throughout history also suggests that there was a strong reason to deal with Osama from 30K feet with multiple JDAMs.  Yes, there are risks to that too, but arguably far less than mounting a SEAL raid.  That’s probably why the military apparently pushed the bombing option as the best choice.

The LME has announced that it is considering severing its clearing relationship with LCH.Clearnet (a relationship that goes back to the Tin Crisis of the 1980s) and setting up its own clearinghouse.  This is a perfect illustration of the disconnect between market participants on the one hand, and regulators on the other.  Regulators are extremely suspicious of the “vertical silo” model, but exchanges are migrating in that direction: recently, ICE, EuronextLIFFE, and LSE have set up or moved to set up integrated clearing operations.

As I wrote years ago, both on the blog and in some academic work, vertical integration makes sense for exchanges on transaction costs grounds, even though it involves the sacrifice of some margining and netting economies, especially for relatively narrow exchanges like the LME or ICE (less so for multi-asset class exchanges like CME or Deutsche Borse).  Regulators seem a little slow on the uptake about this point, being instead haunted by hobgloblins screeching that integrated CCPs are anti-competitive (and thereby ignoring well-understood economics).

Moreover, this brings home a point I made in some things I’ve written over the past couple of years about the uncertainties of the evolution of market structure in the aftermath of Dodd-Frank and EMIR.  For instance, in the Journal of Applied Corporate Finance I wrote that “strategic considerations will influence decisively the way that the industry develops.”  By that I meant exactly that transactions-cost driven decisions regarding CCP ownership would play an important role in the industry evolution.  What’s more, these decisions will have implications for the costs and benefits of clearing, and the systemic risk effects of clearing mandates.

The financial markets are an extremely complex system.  Market participants will make decisions regarding things like clearing arrangements based on private costs and benefits, even though those will have systemic effects not internalized by the decision makers.  Legislators and regulators overlooked this almost entirely when deciding that clearing was the magic solution to counterparty risk.  As a result, they have unleashed a process that will have unintended consequences that will in turn spark regulatory and legislative responses.

This process has just begun.  It’s already complicated, and will get more complicated in very short order as dreamy regulators and legislators butt up against commercial reality.

No time for a lot of posting today.  Up to my elbows in work (grading; research; white paper; expert report); then my daughter’s lacrosse game; and tonight a Social D concert (all work, no play . . . ).  Just time for something quick.

Yesterday I noted the leaks denigrating Secretary of Defense Robert Gates.  Today, I read some counter leaks emphasizing Obama’s hesitancy in deciding to execute the mission to execute Osama.  The 16 hour “sleep on it” part was widely reported yesterday.  Today I read stories that allege that Obama had first approved in March a B-2 strike on the Osama “mansion”, but then demurred when he was told that the place would be turned to rubble.  Uhm, he had to be told that?  Another story claims that Obama was in full Hamlet mode up to the very end, and that Panetta and Clinton were pushing him hard to pull the trigger, and that indeed, the CIA and Pentagon told Obama that he had to OK the mission.

I have no idea whether these stories are true.  But the competing leaks (Gates just wanted to bounce rubble, Obama had to be forced into acting) suggest a very deep schism within the administration, most notably between the DoD and CIA on the one hand, and the White House on the other.  Given the broader context of an ongoing struggle between forces arrayed on the opposite banks of the Potomac, this is quite believable.

We haven’t heard the last of this.

The SEALs of DevGru shoot very straight, of course.  In the aftermath of the Osama raid, the administration is busy shooting itself in its collective foot.  First, Deputy National Security Advisor John Brennan spins an elaborate tale of an armed Osama resisting while cowering behind his wife.  Today, Press Secretary Carney reads a statement that says, uhm, it didn’t go down like that at all: yes, a woman was shot, but Osama wasn’t hiding behind her and he wasn’t armed.  Brennan also released the incorrect name of the Osama spawn that was killed in the firefight.

Carney wrote this off as the result of the fog of war.  Which is exactly why Brennan was a fool for shooting off his mouth before the fog cleared.

Next, the administration can’t figure out whether to release any images of Osama’s death, or of his dead body.  Why are they making this decision now?  This was an inevitable situation, and should have been addressed pre-mission.  Insofar as inflaming Muslim sensibilities is concerned: (a) outrage is a continuous state among some people, so why pander to that?  and (b) uhm, I thought the whole story was that Osama wasn’t a representative of true Islam, so why would true Muslims be outraged?  And spinning tall tales about Osama’s demise is hardly the best way to avoid the inflaming thing.

There are pretty compelling reasons to release definitive evidence of Osama’s death–if only to reduce the potential for the rise of an Osama Lives! cult and to provide some closure to several hundred million Americans.  What’s more, if the administration believes that its actions were justified and legitimate, it should have no qualms about acknowledging the consequences of its actions.  Squeamishness about frankly acknowledging the consequences of its deeds–in technicolor–suggests a guilty conscience.

Ambrose Bierce wrote: “There are four kinds of Homicide: felonious, excusable, justifiable, and praiseworthy.”  The administration clearly believes that the killing of Osama falls in categories three and four of the Bierce taxonomy.  If so, it should act like it.   We’re not talking about tying Osama’s body to the back of a chariot and dragging it around the city walls to the lamentations of his women.  If some Euroweenies or eUNuchs get the vapors, so be it.

As an illustration of the PC attitudes that are hovering over this whole episode, after the president’s speech the commandant of the Naval Academy told a crowd of Middies “you can hit us and knock us down, but we will kick your ass.”  A video of his impromptu remarks was put on YouTube–and then promptly removed.

What’s the problem, exactly, with telling those who want to kill us that we will hunt them down if it’s the last thing we do?  I think that’s a very salutary message to send.  In a grave in Luxembourg a very profane American war hero is spinning at about 4000 RPM.

Third, and most interesting, is the leaking at the expense of SecDef Robert Gates.  The story is that Gates wanted to flatten the Osama compound and make the rubble bounce with a B-2 strike due to the riskiness of a commando operation, but Obama overruled him.  There’s some merit to Gates’s position–if that was his position.  A commando operation is incredibly risky: if the helicopter that went down had crashed outside the compound the whole thing could have gone very, very wrong.  (I’m very skeptical, BTW, that the helo really suffered a mechanical problem.  More likely a golden BB fired by a lookout in the compound or running into some obstacle designed specifically to thwart a helo landing–which had to have been considered a major risk by those in the compound.)  That said, the counter arguments are strong too–namely, the risk of not being able to determine definitively that Osama was there and had snuffed it.

In other words, there was no compelling right choice; each alternative had its pros and cons.  Gates was doing his job of advising the president according to his best judgment.  So why shiv him on his way out the door?  Is this payback for his mutinous behavior before?  Is this the way to encourage future advisors to give their frank opinions?

One last thing.  In my post yesterday I wondered about whether Chez Osama had been thoroughly exploited for intelligence purposes, because nothing about that was mentioned in the initial reporting.  However, several stories came out today stating that the shooters were accompanied by an exploitation team that did collect quite a cache of intelligence, including computers.  Hopefully many more dominoes will fall as a result.

Osama Bin Laden is dead, and blessedly at the hands of US Navy SEALs rather than as the result of kidney failure or somesuch.

President Obama deserves praise for approving a high risk operation.  He pulled the trigger–which can be a very hard thing to do–but the gun was nearly a decade in the making.

Obama’s announcement speech was too maudlin for my taste, and the “we are not at war with Islam” trope was grating.  Most disappointingly, however, he was characteristically churlish in his invidious, though implicit, comparison of himself to Bush:

And so shortly after taking office, I directed Leon Panetta, the director of the CIA, to make the killing or capture of bin Laden the top priority of our war against al Qaeda, even as we continued our broader efforts to disrupt, dismantle, and defeat his network.

The comparison is particularly disappointing given revelations that the key piece of intelligence that set off the painstaking effort that ultimately led to Osama’s demise was obtained as the result of an interrogation in the very Guantanamo Bay facility that Obama repeatedly demonized in his campaign and during his time in office (though he did not follow through on his promise to close it).  Somehow I’m guessing that they didn’t get the source to give up the information on OBL’s courier by bribing him with promises of an extra fig at dessert.

As for the consequences of the killing: viscerally satisfying, operationally irrelevant.  Operationally irrelevant because a man who is communicating to the world only through one or two couriers is incapable of exerting any real operational control over a far-flung terrorist network.

The most important consequences of eliminating Bin Laden will be what this causes to happen in Pakistan, and between Pakistan and the United States.  The answers to the who-knew-what-when-in-Pakistan questions could have explosive repercussions.  Along those lines, I have seen no reporting on what intelligence information (documents, computers, etc.) was obtained from the compound, or on who is in control of the site now and what is being done there to obtain information.  (Methinks that is part of the reason why Obama decided against a B-2 strike on the facility–and a good thing, too.)  What is learned from the detritus of Osama’s life could have seismic effects in that unstable country, and due to that very instability, predicting what those effects might be is virtually impossible.

In sum, this is finishing up some old business.  What it portends for the future depends on how it shakes things up in Pakistan.