Streetwise Professor

It’s January, so that means that the Ukrainians are probably not singing the Gazprom Song right now.  Instead, they are engaged in their annual gas price battle with the Russian company.  Ukraine wants a lower price, but Gazprom says no.  OK, says Ukraine, if you won’t lower the price, we’ll take half the agreed to quantity.  No to that too, says Gazprom: you have a take or pay deal that obligates you to take at least 80 percent of 52 bcm.

The parties are due to meet for decisive negotiations on Sunday.  But one cannot rule out another gas war.

And Ukraine may in fact be singing the Gazprom Song after the negotiations are over.  Vladimir Socor claims that Ukraine’s president Yanukovich and his Party of Regions are preparing to cede control of Ukraine’s gas transmission network to Russia in exchange for a break on the gas price:

President Viktor Yanukovych and his government are setting the stage, politically and legislatively, for transferring Ukrainian pipelines to Russian control, in a package deal with Gazprom. The president and government wavered and agonized at times, but are now actively preparing Ukrainian public opinion for an imminent deal. In the endgame of negotiations, Ukraine’s governing Party of Regions is rushing legislation through parliament to authorize transfers of gas infrastructure. Leasing pipelines to Gazprom is one form of transfer, out of several under consideration.

Transferring ownership or control of assets in this way, in exchange for a pie crust promise on future gas prices, would be utterly foolish.  But don’t put it past the Ukrainians, whose government (to use the word quite loosely) is utterly dysfunctional.

Ukraine denies this:

Ukraine will not sell its gas pipeline network to Russia in exchange for supplies of cheaper gas, Ukrainian Energy Minister Yuri Boiko said on Friday, ruling out a solution long suggested by Moscow.

He pledged, however, to honour the existing deal, which Ukraine considers unfair, if talks on revising it fall through.

Ukraine, which depends heavily on Russian gas supplies, has sought for over a year to renegotiate a 2009 deal with Moscow, which it says sets an exorbitant price for the fuel. But talks have failed to produce any results so far.

“The issue of (a pipeline network) sale has never been on the agenda. We dismissed it immediately,” Boiko told reporters. “If we find a model that satisfies both sides, we will make a deal. Otherwise we will work under the existing contract.”

But as any investment banker can tell you, there are ways of structuring deals so that they are effectively sales even if they aren’t called such.  (Hence the Tymshenko’s government specifying of a large list of things the Ukrainian government wasn’t permitted to do with its pipes–the law that Yanukovich is trying to change, according to Socor.)

Besides, the relationship of the Ukrainian government to the truth is thoroughly Sovok (as a one time commenter was fond of pointing out), so Boiko’s protestations are hardly credible.

We’ll see what happens on Sunday, but it’s unlikely to be good–except, perhaps, for Putin, who has coveted Ukraine’s gas transport network forever.   The Ukrainians have done a masterful job of painting themselves into a corner.  Europe is distracted by its own issues, right now, but Yanukovich has completely alienated the EU regardless with his prosecution of Tymshenko.

So, the Ukrainians stand cold and friendless.  Perhaps they should start memorizing the words: “Let’s drink to you, let’s drink to us, let’s drink to Russian gas.”

Yesterday, Obama formally requested that Congress raise the debt ceiling by $1.2 trillion. This came only days after Federal debt surpassed 100 percent of GDP–and that doesn’t take into account the vast sums in future government spending commitments, on entitlements particularly.  With deficits running about 10 percent of GDP, debt will increase to about 110 percent of GDP in a year, 120 percent of GDP the year after that . . . I’ll leave the rest as an exercise for the class.  In the meantime, growth remains sluggish, thereby making it progressively more difficult to pay for that mounting debt.

Meaning that the country’s fiscal situation is fraught, and only likely to become more so, due primarily to the growth in entitlement spending.

So what is Obama’s response?  Supporting passage of a serious budget?  Advancing a credible and enforceable plan for containing entitlement spending growth?

Surely you jest.  The actual response is to reorganize the deck chairs on this fiscal Titanic:

President Obama announced Friday that he is elevating the head of the Small Business Administration to a Cabinet-level position, as he urged Congress to also grant him permission to consolidate that and other federal agencies in an attempt to make government more efficient.The decision to bring SBA Administrator Karen Mills into the president’s Cabinet does not need congressional approval. However, Obama’s much broader proposal to merge overlapping agencies does — the president appealed to Congress Friday to help make that happen.

“This is the same sort of authority that every business owner has to make sure that his or her company keeps pace with the times,” Obama said. “Let me be clear, I will only use this authority for reforms that result in more efficiency, better service and leaner government.”

Under the proposal, six major trade and commerce agencies with overlapping programs would be merged. The Commerce Department would be among those that would cease to exist.

Overlooking Obama’s typical defiance of Constitutional niceties (he said he’d do this with or without Congress), maybe this makes sense, when evaluated on its own merits.  But any efficiency improvements that result are rounding errors on rounding errors. To say this is an irrelevance and a distraction is the understatement of the century.

The disconnect between this proposal (and the lack of serious proposals on the real problems) and fiscal realities is stunning.  Hell, this doesn’t even rise to the level of reorganizing the deck chairs: it’s more like flicking a speck of dust off of one of them.  It is, in a word, madness, given the times and the circumstances.

This is boob bait intended to fool enough of the people at one particular time (November, 2012, to be exact) that Obama is the voice of fiscal sanity.  That he is a responsible steward of the nation’s finances.

The crucial issue is whether enough people are, in fact, boobs.  There is reason for fear.  The media will certainly never point out the utter absurdity of such nanomanagement at a time we face looming fiscal problems–and when Europe is giving us a Ghost of Christmas Future demonstration of how scary those can become, and quite quickly.  Indeed, the media are like the sycophants in the Emperor’s New Clothes, treating this decidedly unserious nanosurgery as a serious response to a potentially fatal affliction.

An enabling press is to be expected.   In a healthy political system, one would rely on the opposition to point out the insanity of making a big deal out of ensuring that several departments have one phone number and one web site when the time to avert fiscal disaster is dwindling rapidly.  But the Republicans seem hell-bent on cementing their reputation as The Stupid Party, engaging in a very 80s debate over the economics and ethics of leveraged buyouts (LBOs), with self-styled conservatives making arguments and using rhetoric  that are indistinguishable from the editorial position of The Nation.  That’s when they aren’t (as R tirelessly points out) indulging a codger who favors a smaller government, but has no remotely realistic way to achieve his goals, and who routinely spews anti-American venom that would also fit quite well in The Nation–all in fear of upsetting his touchy–and often ‘tetched–supporters.  The Republican campaign is just one, long, nightmarish friendly-fire episode, allowing the real opponent to pose unscathed, and the real vital issues–the ones that galvanized the Tea Parties, no less–are all but ignored.

This is both politically stupid and grotesquely irresponsible.

And this is the way that nations careen into catastrophe.

When the NYSE-Deutsche Boerse deal was first announced, I wrote:

The biggest uncertainty surrounding the deal involves European antitrust approval.  As noted above, the merging exchanges are not direct competitors in any major product.  In the US, in the mergers of CME and CBT and CME and NYMEX, that fact was decisive in avoiding  Justice Department challenges.  It should be in Europe too, but I’m not as familiar with European antitrust thinking or precedents so I’m not sure they’ll see it the same way.

The most interesting question involves clearing.  European policymakers have been critical of vertical integration in clearing.  (The USDOJ is too, but only disclosed its (economically nonsensical) objections after the CME-NYMEX merger closed.)  They deem vertical integration as anticompetitive, and have failed to consider seriously the efficiencies that integration can generate (a subject I’ve written a lot about on SWP and my academic research).

Given this skepticism, the Euro antitrust folks may view this merger as an opportunity to open up access to clearing at Deutsche Borse and LIFFE.  That is, I could see them conditioning approval of the merger on the parties’ agreement to open up access to their clearing services.  It will be interesting to see whether they attempt to do so: I estimate that there is a non-trivial probability of this happening.  If they try, it would likely be a deal killer.  DB in particular has been adamant that integration is an essential part of its model and strategy, and LIFFE has adopted that view as well.  A deal becomes much less attractive–and, in my opinion, unattractive–if it requires a fundamental transformation of the exchanges’ business models.

Well, that’s pretty much come to pass.  The European Commission has apparently decided to block the deal.  Initial reports state that the Commission believes that the combined EuronextLIFFE-Eurex derivatives businesses would have too much market power, based on defining the relevant market as European exchange traded derivatives (an indefensible definition, IMO).  But some informed opinion suggests that the real sticking point was the refusal of the exchanges to open up the derivatives clearinghouse.  This was one of the proposed remedies, and one which the exchanges rejected.

So it pretty much played out as I forecast.  The European regulators would demand an end to the vertical silo.  The exchanges would refuse.  The deal would die.   And that appears to be precisely where we are.  The deal is not formally dead, but it was coughing up blood last night (see about the 3 minute mark).

SWP daughter #1 alerted me to this hilarious video of the Gazprom Song.* Seriously:

“Let’s drink to you, let’s drink to us, let’s drink to Russian gas.” Nah. that doesn’t validate any stereotypes. By my count, the word “drink” appears 12 times in the song. Quite the way to project the image of an efficient, business-like company. Or a safety-conscious one.

This seems so Soviet. No doubt kolkhozes and Machine Tractor Stations had their own songs. Probably with fewer drinking references, though.

*A Google search revealed that this came out in 2009, and there was a flurry of stories about it in late-2009 and early-2010. How did I miss it?

This is self-snarking, so no comment is required:

Russian space chief Vladimir Popovkin said outside interference may be to blame for a series of mission failures, including the loss of a Mars-bound probe, Izvestia reported.

“I don’t want to blame anyone, but today there are powerful means to affect the trajectory of spacecraft, and we can’t exclude that these have been deployed,” Popovkin, head of Russia’s space agency, Roscosmos, was quoted as saying by the Moscow-based newspaper.

Popovkin does concede that earlier failures were due to “simple shoddiness”. So why the need to hint darkly at malign forces using tractor beams or something?  Is he serious?  Or is he just playing to some audience?  What audience might that be?  Is it taking its meds?

To be honest, I can’t think of any answer to any of those questions that wouldn’t be risible.  But that’s just me.

Bill Daley was demoted back in November, a move that had Valerie Jarrett’s fingerprints all over it.   Now Daley is gone altogether, resigning from the White House to return to Chicago to “spend more time with his family” (cue the Dirge of the Political Dead).

Daley and Jarrett (and Michelle Obama, not to mention the president) are Chicago Democrats, but just as in Russia there are vicious rivalries among clans that are ostensibly part of the same governing elite, there are deep-seated hatreds and rivalries within the one party of the One Party State that is Chicago.  Anyone who lived, as I did, through the Byrne-Daley-Washington election, the subsequent election of Harold Washington, Council Wars, and the open warfare that followed Washington’s death understands that.  The rule of Daley II had some similarities with Putinism, with Richie Daley–Bill Daley’s brother–running a natural (city) state, and dividing the spoils among the factions to maintain a semblance of peace.  But the hostilities never went away, and hands always rest on dagger handles.

Jarrett and Bill Daley belonged to different factions in Chicago.  Moreover, whereas Daley was and is a practitioner of crony capitalism who intermediated between government and heavily regulated businesses, Jarrett is and was more ideological, and her ideology is hard core progressive class warrior.

Bringing both factions so close within the White House was a recipe for conflict, and it is pretty clear that such conflicts indeed continued unabated, with Rahm Emanuel (another Chicagoan) and then Daley arrayed against Jarrett and Michelle Obama.  Obama’s political travails starting in 2009, culminating with the election of Scott Brown in early 2010, led to a fundamental divide over what path to pursue: a more accommodating traditional political course (the Emanuel then Daley position) or a more ideological, progressive one (Jarrett and Michelle Obama).

We now know who prevailed.  Daley had already been emasculated, but his departure sends a very powerful message–as it was no doubt intended to do.  Wall Street and the Fortune 500 set considered Daley a voice of reason who would rein in the more radically progressive tendencies in the administration.  How’s that working out now, guys?

With Jarrett and Plouffe (another hard core progressive) firmly in charge, and Daley publicly humiliated, the stage is set for a very divisive and ideological campaign this summer and fall.  A campaign with a class warfare core and strong OWS influences.  2012 promises to be as ugly as some of the campaigns of the 19th century, such as the Jefferson-John Adams contest of 1800 (as suggested by Jeff Carter) or Jackson-J.Q. Adams battle of 1828.

Oh joy.

Don’t I remember some guy running in 2008 as a uniter?  Those images and words will soon disappear down the memory hole.

There is one intriguing aspect of the timing of the Daley defenestration.  Over the weekend excerpts of Jodi Kantor’s new biography of Michelle Obama were published in the New York Times.  They depict a first lady at war with Rahm Emanuel and Robert Gibbs, with Valerie Jarrett firmly allied with Michelle.

The book details that Michelle’s and Jarrett’s enmity to the Daleys went back almost 20 years:

“Mrs. Obama worked in the Daley administration between Sept. 16, 1991, and April 30, 1993, according to City of Chicago personnel records. She was hired by Jarrett, then Daley’s deputy chief of staff.

Kantor writes Mrs. Obama “disapproved of how closely Daley held power, surrounding himself with three or four people who seemed to let few outsiders in — a concern she would echo years later with her own husband.

“…She particularly resented the way power in Illinois was locked up generation after generation by a small group of families, all white Irish Catholic — the Daleys in Chicago, the Hynes and Madigans statewide.”

When Jarrett was forced out of City Hall in 1995 — even though she was close to Daley — “the Obamas were horrified, their worst suspicions about the world confirmed.”

Jarrett, Gibbs, Obama’s top strategist David Axelrod, Mrs. Obama’s former chief of staff Susan Sher and Chicago pals Eric Whitaker and Marty Nesbitt “gave me many hours of interview time each,” Kantor wrote in her acknowledgements. In all, Kantor got the cooperation of 33 current and former members of the Obama administration and close friends.”

Note particularly that Jarrett was forced out by the Daleys in 1995.  Revenge is a dish best served cold, and payback is a bitch.  Note also the racial and ethnic component to the intramural Democratic struggles in Chicago–hardly a secret to anyone who lived in Chicago in the 1980s and 1990s.

The fact that Daley’s departure comes hard on the heels of the release of the book excerpts could be coincidence.  But perhaps not.

The book also provides considerable support for something I’ve long believed–that Jarrett is Obama’s Svengalina.  When push comes to shove, Obama will go with Jarrett, either out of ideological sympathy, Chicago tribal loyalty, or something more psychodramatic than that.

In the end, though, what is particularly important is what the exile of Bill Daley portends for the national political situation.  And what it portends is not good.

An adviser to German Finance Minister Wolfgang Schaeuble has told a Greek paper that the 50 percent haircut deal (PSI) is no longer operative:

The planned 50 percent writedown of Greek government bonds held by private creditors as part of a debt swap won’t be enough to make the country’s debt sustainable, an adviser to German Finance Minister Wolfgang Schaeuble told To Vima in an interview.

The write down, which aims to lower Greece’s debt to 120 percent of gross domestic product in 2020, will have to be greater and shouldn’t be voluntary, Oxford University professor Clemens Fuest told the Athens-based newspaper.

I’ve just seen on Twitter a 60 percent number being batted around–no link as of yet.

In addition to the scuppering of the 50 percent “deal” agreed to in October, the significant part of this statement is that the haircut shouldn’t be voluntary.  This suggests that governments are tiring of the negotiations, and believe that immediate action is necessary.  Indeed, given the horror with which Euro officialdom had previously contemplated the possibility of an involuntary haircut of this magnitude–which would trigger CDS, if ISDA wants to maintain a shred of credibility–this drip-drip-drip of leaks indicates that said officialdom recognizes that the can has arrived at the end of the road.

Back in October, at one of the many Euro summits, the European government leaders uhm, persuaded the Institute of International Finance, representing large banks and insurers holding Greek debt, to accept a 50 percent “voluntary” haircut on their holdings.  ISDA’s credit event determination committee fell into line, and ruled that since it was “voluntary”, the writedown did not constitute a credit event that would trigger CDS payouts.

Germany was the main country pushing for these haircuts, euphemistically termed “Private Sector Involvement” (PSI).  There have been stories in the last week that Germany is pushing for even bigger haircuts–on the order of 75 percent.  Not to be outdone, a member of the council of the European Central Bank–which has always been twitchy about PSI–has mooted a counterproposal: 0 percent.

Glad to see that the bargaining range is narrowing!  Pretty soon Germany will be demanding that the bondholders pay the Greeks and the bondholders will be demanding that the Greeks pay the banks double what they owe.

Germany’s insistence on PSI is strange in many ways.  The conventional rationale is that it is necessary to punish–and hence deter–morally hazardous risk taking.  But given that the whole pretense of the Eurozone was that all government debts were created equal, and given that Basel treated Greek debt as riskless as Germany’s, any moral hazard is ultimately traceable to European governments and regulators.  How dare those banks do what they were told to?

Moreover, the Greek PSI had to walk a thin line.  The story was that only Greek debt would get a haircut: this was necessary to prevent disastrous runs on Portuguese, Italian, and Spanish debt.  But it is hard to give a coherent rationale for that: investing in Greek debt was morally hazardous, but investing in Portuguese debt wasn’t?  Really.

No political promise is credible–especially in Europe right now, and especially given that the logical basis of the promise is dubious at best.  Pushing for a bigger haircut on Greek debt is bad news for Portuguese, Italian, and Spanish debt because bigger haircuts on Greek debt raises the expected haircut on the debt of these other countries.  It raises both the size of the haircut, conditional on one occurring, and the probability that haircut will actually be applied to these other countries (i.e., that the promise will be broken): if Germany is so insistent on haircuts for Greece today, why won’t they be just as insistent for Portugal tomorrow, despite their fine words to the contrary.  (This is the essence of the ECB councilor’s argument.)

Finally, the big problem with a Greek default has always been that banks and insurers would suffer huge losses that would jeopardize their solvency.  That is, a Greek default that led to big writedowns would impose big losses on German, French, Dutch, etc., banks.  These losses could be big enough to require some taxpayer bailouts.  But a big “voluntary” haircut would do the same thing.  Thus, Germany’s insistence on a big PSI always seemed like financial S&M.

One last thing about this divergence of views.  It makes it clear that despite all of the stirring pronouncements, nothing is settled in Europe.  Nothing.  Everything is still up for negotiation.  And the parties are moving apart on key issues, not closer.  Today’s surge in Italian and Spanish yields and subsequent ECB intervention is in part a manifestation of the realization that that we are not even at the middle of the beginning.

Putin is planning a defense hardware splurge, spending $60 billion/year on new equipment over the coming years, this despite the near exhaustion of the reserve fund, and more crucially, the fact that the software to operate these shiny new weapons is plummeting in numbers and quality.  That is, Russian manpower issues are becoming increasingly fraught, and in typical Russian fashion, reforms announced with much fanfare are fading away.

The demographic collapse of the 1980s and 1990s is now wreaking havoc on Russia’s ability to man its armed forces.  Chief of Staff Makarov admits “there is no one left to draft.”  Russia will take in only about 180K conscripts, pretend to train them, subject them to abuse, and then turn them loose just about when they might know enough to be more dangerous to an enemy than themselves.

But no worries! There are plans–plans, always plans–to have 425,000 contract soldiers (h/t R).  Just where these kontraktniki are supposed to come from is quite a puzzle.  If Mother Russia’s mothers were not bearing enough sons in the 1990s to produce conscripts, they weren’t producing enough sons to serve as volunteer soldiers and sailors either: volunteers or conscripts have to be found in the same barren pool of men born in 1994, 1995, etc.  If there is “no one left to draft” there’s also “no one left to recruit.” And if you really thought that Russia would pay market rates to get soldiers they could get for free (to the state, anyways), I have a bridge to sell you.

And “free”, by the way, is only a slight exaggeration.  Dmitry Gorenburg provides data on the new, improved, increased pay scale for conscripts:

Position	Monthly pay (rubles)
Petty officer (starshina)	1800
Assistant duty officer at command post, translator	1700
Deputy platoon commander, head of medical clinic	1600
Head of firing range, checkpoint or fuel depot	1500
Squad commander, head of coding post, sanitation or cooking instructor	1400
Artillery weapon firing commander, driver-mechanic of self-propelled strategic missiles	1300
Driver-mechanic, senior driver, senior communications operator, recon, nurse, senior rescue personnel, student at professional military school	1200
Driver, communications operator, rescue personnel, grenade-thrower, sniper, machine-gunner	1100
Rifleman, camoufleur, road builder, electrician, student at technical school or at military school (incl cadets at Nakhimov and Suvorov schools)	1000

That’s between about $35 and $60 a month, boys and girls.  And these rates are double the 2011 rates.  Yes, there are possible pay enhancements, but as Gorenburg notes, at most that gets you to $200/month: most conscripts are being paid $35/month. But they get free food and board, you might retort. Uhm, have you heard about the food? The barracks?

No, a movement towards a volunteer military is not about numbers, because it is not a magic wayback machine that can go back to 1994 and produce more babies.  It would be about quality.

But the experience with other “reforms” intended to improve quality suggest that this is a faint hope as well.  First, actual kontraktniki numbers have always trailed promises badly.  Second, the volunteer soldiers have not made much of a dent in the brutality of the barracks.  Third, another major announced reform–the creation of a cadre of professional NCOs–is also fading:

There was no glowing report concerning the planned new generation of Non-Commissioned Officers (NCOs), now largely consigned to an ongoing small-scale experiment in Ryazan to train NCOs in courses lasting two years and ten months, instead Serdyukov turned to the imminent appearance of Military Police.

The new Military Police is intended to address “hooliganism”–because dedovshchina has been decreed out of existence:

The Main Directorate of the Military Police has been established, their training, pay and jurisdiction worked out, and their task it seems is to tackle “hooliganism” in the barracks. The minister prefers this euphemism due to his conviction that dedovshchina no longer exists, having apparently evaporated after reducing the terms of conscript service to twelve months. Evidently, Serdyukov fails to appreciate how central dedovshchina remains to life in the Russian barracks, but this “hooliganism” needs to be somehow controlled; and Military Police will be expected to perform this role (Rossiyskaya Gazeta, December 21).

It is open to question as to how successful this initiative may prove in offsetting the sharper end of dedovshchina, though there are rather puzzling elements to the proposed recruitment policy. By his own admission, among the more controversial aspects of the reform was the officer downsizing, which originally aimed at reaching 150,000 in the scarcely believable manpower total of “one million,” but was later adjusted to 220,000. Part of that rapid downsizing involved the novelty of placing thousands of officers at the disposal of their commander, a type of limbo that meant they were not in the table of organization and equipment, but neither fully out. Some Military Police will be recruited from among these limbo officers. Consequently, Serdyukov’s vision for dealing with “hooligans” is to partly police them with the disaffected (Rossiyskaya Gazeta, December 21).

That is, the new MPs are to be staffed with po’d supernumerary officers.  I’m sure it will work out swell, given (a) the likely attitude problems of those shuffled off into this duty, (b) the fact that these officers are the products of the very system in which barracks abuse was rampant, (c) the likelihood that training for these officers will be slapdash at best, and especially (d) in Russia, police criminality is rampant, and indeed, police are among the worst predators in society.  Meaning that making more of them is hardly guaranteed to reduce criminality.

I remain agog and aghast at the spectacle of spending billions on hardware when the manpower problems are so extreme.  The likely explanations for this disconnect?  Politics: splurging on defense is politically popular.  Economic: it’s a way of propping up enterprises, especially in single industry towns.  And the topper, IMO: corruption.  The opportunities to skim from defense spending are rife.  The manpower system lends itself to petty grifting by unit commanders and others in the chain of command, but the big rubles are in the defense contracts.

And besides, fixing manpower problems is hard, messy, and unglamorous.  Very few opportunities for VVP to pose in front of some large phallic object wearing one of those butch uniforms he likes.

A couple of other Russian defense items.  First, the Russian flotilla with the “aircraft carrier” making its way to Syria has just passed through the Straits of Gibralter, and is leaving goodwill in its wake!  Not really: it’s leaving something in its wake, and goodwill ain’t it (another h/t to R):

The crew of a Russian aircraft carrier has been accused of dumping waste off Scotland’s north coast after seeking shelter from winter storms.

Elements of the Baltic Fleet started arriving 30 miles (48km) off the Moray Firth on Monday.

The SNP’s defence spokesman Angus Robertson said there had been reports of crew throwing waste overboard.

Portsmouth-based Royal Navy destroyer HMS York has been shadowing the vessels.

The warships, including aircraft carrier Admiral Kuznetsov, were still off the firth earlier, but moving slowly.

. . . .

The Admiral Kuznetsov was headed for Syria when it and other vessels sought shelter in “deteriorating weather”, according Russian military news agency Interfax-AVN.

The Royal Navy and Ministry of Defence (MoD) have released images of HMS York close to the carrier.

In a statement, the MoD said: “The 65,000 ton carrier, with other warships and support vessels, is thought to be en route to the Mediterranean on exercise.

“The aircraft carrier anchored outside British territorial waters some 30 miles off the Moray Firth where she was thought to have taken advantage of the relative shelter to avoid the worst of current bad weather in the North Sea.”

No comment re taking shelter.

And finally, apparently continuing to grasp at the reset, in defiance of Congress (you’re shocked, I’m sure), the Obama administration has decided to share technical information about the SM-3 anti-missile defense system with Russia (yet another R h/t: she scores the hat tip hat trick!):

In the president’s signing statement issued Saturday in passing into law the fiscal 2012 defense authorization bill, Mr. Obama said restrictions aimed at protecting top-secret technical data on U.S. Standard Missile-3 velocity burnout parameters might impinge on his constitutional foreign policy authority.

As first disclosed in this space several weeks ago, U.S. officials are planning to provide Moscow with the SM-3 data, despite reservations from security officials who say that doing so could compromise the effectiveness of the system by allowing Russian weapons technicians to counter the missile. The weapons are considered some of the most effective high-speed interceptors in the U.S. missile defense arsenal.

There are also concerns that Russia could share the secret data withChina and rogue states such as Iran and North Korea to help their missile programs defeat U.S. missile defenses.

Officials from the State Department and Missile Defense Agency have discussed the idea of providing the SM-3 data to the Russians as part of the so-far fruitless missile-defense talks with Moscow, headed in part of by Undersecretary of State Ellen Tauscher, who defense officials say is a critic of U.S. missile defenses.

Their thinking is that if the Russians know the technical data, it will help allay Moscow’s fears that the planned missile defenses in Europe would be used against Russian ICBMs. Officials said current SM-3s are not fast enough to catch long-range Russian missiles, but a future variant may have some anti-ICBM capabilities.

Allay their fears.  How therapeutic.  New flashes: (1) it’s way beyond “fear”, and paranoia is much harder to cure, and (2) allay all you want, but the Russians are not going to budge on missile defense.

This last item would present a nice segue into the administration’s just announced defense retrenchment, but that will have to wait for the weekend (hopefully).

That would be Gomer Pyle, in Russian.  The (ironic) surprise is that the initial official Russian account of the fire on the Yekaterinburg was bunk.

Those accounts claimed that the rubber coating of the hull (intended to reduce the sub’s noise profile) burned, and that the hull was not breached.  The maintenance of hull integrity supposedly meant that the partial submerging of the sub did no damage internally.  The account also put the blame for the fire on welding igniting wood scaffolding.

But these fascinating photos, uhm, poke a big hole in that story.  And by “hole” I mean that literally as well as figuratively: there was already a large opening in the hull, in the torpedo room (forward).  The flames are clearly coming from inside the torpedo room.  There is no evidence of fire on the exterior of the hull.  The scaffolding actually looks metal (though from the photos it appears that the decking might have been wood).  The scaffolding on the starboard side is intact. The scaffolding on the port side near the opening does not appear to be on fire, and anyways the flames are shooting from the ship towards the scaffolding, not the other way around.  Given the location and size of the hole, it is clear that the sub took on water when it was partially sunk to the depth illustrated in the photos.

In other words, every statement made about the fire was a complete crock.

Again: surprise, surprise, surprise.  Or, if you like, сюрприз, сюрприз,сюрприз.

So, ’tis a mystery what was being done in the forward torpedo room (presumably some major modification) and how the fire started there. What’s not a mystery is that the first impulse of Russian officialdom–especially military officialdom–is to lie, lie, lie.

But there is a huge disconnect between the old habit of reflexive lying and the new world in which bloggers can routinely approach nuclear subs in drydock, snap pictures, and post them on the internet.

So what will happen going forward? 1. Will officialdom continue in its dinosaur ways, and lie reflexively despite the fact that its lies can be disproved by somebody with a digital camera (or a phone) and an internet connection?  2. Or will officialdom recognize that the old ways don’t work anymore, and resist the Pavlovian instinct to lie in the face of disaster? 3.  Or will officialdom redouble its commitment to cracking down on the messengers who reveal officialdom’s lies.

I’m putting on a butterfly trade.  I’m shorting 2, and buying 1 and 3.  The torpor of some officials favors 1.  The repressive instincts of others 3.

Further thoughts: The fact that there was an internal fire gives the lie to the claim that the reactors were never in any danger.  Moreover, the fact that there was a fire inside the pressure hull means that the estimate that the ship would be repaired within a year are likely wildly optimistic.  Depending on how quickly the watertight doors were closed, there could be substantial smoke damage in the after compartments.  The heat of such an intense fire could cause major damage to the structural integrity of the ship: would you want to take her deep after parts of the pressure hull and structural frames of the boat had been subjected to intense heat?  Heat and smoke also probably wreaked havoc with wiring and electrical systems on the boat.

And insofar as the hole is concerned, another hypothesis: the Yekaterinburg had been in a collision that had caused major damage that was being repaired.