Streetwise Professor

February 12, 2012

Gazprom Imitates Otter: Italy Imitates Flounder

Filed under: Energy,Politics,Russia — The Professor @ 3:00 pm

Last week, Gazprom assured Italy that gas deliveries would return to normal by the end of the week.

Apparently not.

Which brought this classic to mind:

February 11, 2012

Lustration of the Oligarchs

Filed under: Politics,Russia — The Professor @ 4:03 pm

Vladimir Putin announced his desire that those who profited from the “dishonest privatization[s]” pay a “one-time levy” to expatiate their sins.  This, Putin claims, will assure “the legitimacy of private property.” No doubt Putin will demand that the guilty oligarchs also pay public penance, and ask Pope Putin for absolution of their past sins.

There is no dispute that there was a massive transfer of wealth from the public domain into private hands in the 1990s.  It was a dirty–and in some cases, like aluminum, bloody–process.  But sunk costs are sunk.  That is the past.  What Putin should be concerned about is the future, and this proposal–which may just be more populist babushka bait–will damage Russia’s future prospects.  For it emphasizes the principle, if it can be called by such an elevated name, that property is held at the sufferance of the state, and is subject to the whim and caprice of the strongman in the highly personalized, a-institutional Russian state.  Given that business in Russia is hardly clean now, and that even the most squeaky clean of enterprises is likely to transgress the law sometime, for the foreseeable future every executive will be at risk of expropriation in the future at the hands of some demagogue unconstrained by legal process and legal rights.  This prospect will suppress investment, and divert what investment does occur into the kinds of assets that can be moved quickly, or which depreciate quickly.  It will spur even more capital flight.  It is, in fact, inimical to Russia’s future growth prospects.

Putin apparently tried to calm such fears with his promise that this would be a one-time thing.  But this promise is completely incredible. Completely.  Putin–or some future successor–can always play Roseanne Roseannadanna, and claim that there’s always something that needs redress.

Indeed, the Khodorkovsky case provides a perfect example of the potential for multiple jeopardy in Russia.  He was tried for the same charges twice, and convicted twice.  In Putin’s Russian, you can never be sure that your debt to society has been put paid. As any victim of blackmail or a protection racket knows, the demands for payment never stop.

There’s another interesting aspect to this Lustration of the Oligarchs.  They are being called to account for their actions going back nearly two decades.  But there has never even been a hint of lustration of Soviet government or party or security service officials for their actions only a few years prior–certainly not from Putin and his ilk.  Even though these actions were often far more horrific, and were the direct cause of Russia’s agonies of the 90s.  But that would contravene the entire Putin narrative that the death of the Soviet Union was the greatest tragedy of the 20th century, wouldn’t it?

Putin didn’t stop there.  He also called for a luxury tax:

It should become the universally accepted payment for refusing to invest in economic growth in favour of hyper-consumption and vanity. I’d like to call your attention to the following fact. Many of you sitting here have known me for years, and they know what I’m about to say. People in so-called developed economies, whose capitals pass from generation to generation and might be 100, or even 200 years old, don’t look any different from the rest of the crowd. Unfortunately, this is not always the case in Russia . . . I’d like to say that this tax on wealth is not fiscal in nature. No one is going to overstate its fiscal importance. The fiscal component of this measure is insignificant. This is sooner a moral standard and I’d like the business community to understand this. It’s also obvious that this tax should not be levied on the middle class.

Sounds like he’s channeling his inner Obama.  Or is it the other way around?

But note again: “I’d like to say that this tax on wealth is not fiscal in nature. . . . This is sooner a moral standard.”  In other words, the “moral” judgment of those in power will determine the incidence of the tax.  Given the, uhm, situational and plastic nature of such “moral” judgments by such people, the potential for mischief here is immense.  Again, it makes the possession of property and wealth conditional on the whims of those at the helm of the state.

More of exactly what Russia most decidedly does not need.  It needs more institutions, a real rule of law which constrains government fiat, and less unconstrained discretion in the hands of Putin and his ilk.

Putin was not done.  He also advocated the creation of an ombudsman who would protect businesses against the predations of officials.

That’s the plan, but just think how it’s likely to work in practice in Russia.  It actually sounds like a great corruption opportunity.  Just think of the boodle an ombudsman could rake in! From both sides!

But don’t worry, asserts Putin’s campaign chief, Stanislav Govorukhin. Putin has “civilized” corruption:

“Today we have returned to ‘normal’, ‘civilised’ corruption which, alas, there is in China though they shoot them there and in Italy and in America,” he said. “We are dragging ourselves out of the thieving outrage.”

Which, as Yelena Panfilova of Transparency International (an eeevvviiilll western NGO that is part of vast Amerikanski plot to subvert Mother Russia) says, basically means that the bribes are no longer collected by guys in track suits.

But that’s not really the point.  The relevant issue is the scale of corruption, not who collects.  The costs it imposes on business–and ordinary living.  Efficiency in corruption is not conducive to economic growth.  It just means that the sheep get shorn on schedule, and much closer to the skin.  Indeed, in a way it is even more dispiriting and more corrosive that corruption is the province of those who are, in theory, there to enforce the law than if it is dominated by mouth breathers with prison tattoos.  You can’t fight city hall, and if those who are supposed to be the protectors are actually those you need protection from, what can you possibly do?  Yes, the body count is smaller today, and that’s a good thing.  But the deadweight loss of corruption is undoubtedly higher now given how systematic and pervasive it has become.

I think it was Eugene McCarthy who said that the only thing that saves us from the bureaucracy is its inefficiency.  I suggest a corollary: the more efficient the (bureaucratic) criminals, the greater the deadweight costs.  These deadweight costs are economic, but they are more than that.  They are also paid in apathy, cynicism, and despair, which are hardly conducive to the flourishing of a truly civilized society.  Put differently: civilizing corruption further corrupts civil society.

The Hacking News

Filed under: Politics — The Professor @ 2:40 pm

A few Anonymous/hacking stories.

1. A group claiming to be part of Anonymous announced a threat against Israel.

This is worth listening to if only because it illustrates perfectly the group’s extreme presumptuousness, its arrogation of power and judgment, its claim to be judge, jury, executioner, and arguably God. “WE have tolerated”; “WE have let your sins go unpunished”; “You are unworthy to exist.” Yes, the rest of us should have no problem with unaccountable individuals taking such weighty matters into their own hands. What could go wrong?

Though I am actually hoping they go after Israel. You know, the country most likely responsible for Stuxnet. So I’m sure it will be an even match.

2. This is because two of the other stories tell you something about just how skilled, or not, Anonymous is. First, Anonymous claims to have taken down the CIA’s public website with a DDoS attack. DDoS is hardly skilled hacking. Hacking is like safe cracking: DDoS is like French farmers dumping a load of manure in front of the door of a McDonalds. Not really a lot of skill involved.

Second, the hack of Syrian government emails hardly appears to be that crafty either:

In the fall of 2007 Israel reportedly hacked into Syria’s air defense systems and disabled them, as a prelude to bombing a nuclear facility in the Syrian desert. This vaunted cyber exploit, it turns out, might not merit its spectacular reputation. Last week, the shadowy online activist group known as Anonymous penetrated 78 email accounts from Syria’s ministry of presidential affairs and posted their contents online. The hackers found that many of the accounts, including that of the allegedly computer-savvy Syrian president Bashar al-Assad, used one of the world’s weakest passwords: 12345. So much for Syrian cybersecurity.

I only have one bone to pick with that account: 12345 is THE weakest password.

This provides further evidence that the exhibitionists from Anonymous are largely opportunists, typically using either brute force methods like DDoS, or taking advantage of egregious security lapses.

3. That’s not to say that Anonymous cannot be damaging. It’s just that it damages innocent people. Hackers claiming an Anonymous connection broke into state computers in Alabama, and stole personal information on over 40,000 people. Yeah, that’s really sticking it to the 1 percent.

4. The alleged motive for the Alabama hack was that the state had the termerity to pass a tough immigration law. Whatever: these creeps can always find some excuse, and again substitute their unaccountable judgment for that of the duly elected legislature and governor of Alabama, who are subject to a variety of checks and balances–including the requirement that they need face the voters of the state. Something that the wussies from Anonymous would never do. [I cleaned that up.]

5. The CIA hackers claimed to be anti-pedophilia. What pedophilia has to do with the CIA escapes me. But this does illustrate that these people feel obliged to wrap themselves in some cause to justify their predations. The choice of pedophilia as a cause is quite interesting. A technology that greatly enables the distribution of child pornography–Tor–is also used by hackers to cover their tracks, and self-styled internet freedom fighter Jacob Appelbaum is involved with it, and evangelizes it heavily. When confronted with this dark side of Tor, Appelbaum and others wax eloquent (OK, they wax) about how Tor helps dissidents escape state persecution. This is a dishonest dodge, and it is quite interesting that some hackers now try to wrap themselves in the anti-pedophilia banner. Except they don’t go after pedophiles. They go after the CIA instead. Makes perfect sense.

Rogozin the Even More Ridiculous

Filed under: Politics,Russia — The Professor @ 2:13 pm

Dmitry Rogozin is a blogger’s best friend. You only have to link and quote: no need to add satire. His latest? Russia’s population needs to grow to 500 million:

But Deputy Prime Minister Dmitry Rogozin set the bar a whole lot higher Thursday, saying the country’s goal should be a population of 500 million — more than triple its current size.”140 million people—that’s [too] little. The solution is either to complain that we have those Chinese people, or not to point to our neighbor but to have children. Without children Russia will not have a population of 500 million, which we absolutely need,” Rogozin said in a speech to university students in Novosibirsk, RIA-Novosti reported.

Rogozin called for measures that authorities have advocated before, including cash incentives to promote large families and assistance to families in securing housing.

He also suggested creating new population centers across the country, including one that would help to develop eastern Russia.

“Incentives need to be created for developing the eastern part of the country. First, we have all the necessary resources for this, and secondly, the human ‘gulf stream’ washing people away from these regions needs to be stopped,” Rogozin said.

Look, the country has no chance of making it to 500 million arms, and before 2050 is in danger of falling below 500 million arms and legs.   Even by Rogozin’s high standards, this is crazed.

His disquisition about the eastern part of the country–Siberia, in other words–is quite interesting  This was an obsession of Russians and especially the Soviets.  As Hill and Gaddy argue in Siberian Curse, this obsession has been disastrous, levying a huge economic and human toll on the country.  But Rogozin is undeterred, and advocates trying again what has failed before.

Rogozin’s speech begs an important question: just why is there a “human ‘gulf stream’ washing people away from these regions”? The answer is pretty obvious. But Rogozin appears intent on on pushing against this tide.

The man is insane.  The man is also deputy prime minister, and widely noted as a comer in Russian politics.

Draw your own conclusions.

February 10, 2012

The Nashi Hack

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

A group claiming to be the Russian branch of Anonymous has hacked into Nashi emails, and announced the hack with this rather amusing video:

The Guardian has some details on the hack:

Apparently sent between November 2010 and December 2011, the emails appear to confirm critics’ longstanding suspicions that the group uses sinister methods, funded by the Kremlin, to attack perceived enemies and pay for favourable reports while claiming that Putin’s popularity is unassailable.

They provide particular insight into the group’s strategy to boost pro-Putin coverage on the internet, which in contrast to television is seen as being ruled by the opposition. Several emails sent from activists to Potupchik include price lists for pro-Putin bloggers and commenters, indicating that some are paid as much as 600,000 roubles (£12,694) for leaving hundreds of comments on negative press articles on the internet.

Re the comments part. Makes me wonder . . .

But moving right along. This is a classical example of the frequent tension between means and ends. I have been extremely critical of Anonymous, and Wikileaks/Assange, Appelbaum, etc. That criticism is based on methods, lack of accountability, the dangers of self-appointed judges (many of whom are, quite frankly, sociopaths) not subject to any checks or balances violating laws and privacy, and the serious risks to innocent individuals and to individuals working for or cooperating with legitimate law enforcement or security agencies.*

The Olympian we-are-judge-and-jury-and-executioner mindset is quite evident in the video above, as it is in this video in which Anonymous announces its threat to dox Black Bloc types who Anonymous claims are discrediting the Occupy movement (h/t R):

Which means that even when I find the target of these attacks loathsome (as is the case with Nashi and Black Bloc), I cannot condone the means. I really don’t need Anonymous to tell me that Nashi is a cretinous, thuggish organization of Putin puppets. That is quite evident from information readily obtained without engaging in the cyber equivalent of breaking and entering. The problem of unaccountable individuals deciding who should be targeted, and what information should be released, remains. Even if those unaccountable individuals sometimes choose truly unsavory targets, giving them the discretion to choose whom to target is likely to lead to more harm than good.

Although the means are technologically novel, the fundamental problem is an old one: vigilantism. This presents very thorny challenges, most notably the legitimacy of the use of private force. I readily agree that an absolute bar again such use is unjustifiable. In circumstances of systematic repression–such as in Syria at present–or the substantial failure of the government to protect lives and property, the use of private force is legitimate and often beneficial.

Thus, it is incorrect, in my view, to make categorical judgments about vigilantism as always wrong or never justified. As with virtually anything in life, there are trade-offs. But given the very great potential for egregious abuse, the bar that any justification of vigilantism must clear should be set very high. Very high.

Some specific cases help clarify the issue. For instance, Assad is engaged in indiscriminate killing in Syria, using artillery to attack those resisting his regime–and killing many innocents in the bargain. His regime has no legitimacy under any theory except that of might makes right. There are virtually no alternatives to affect change other than violent opposition.

Given this set of facts, some acts of vigilantism–including the recent hack of some of his communications–clear the bar. Indeed, most acts of private violence directed against his regime are legitimate: my concern is what happens if the vigilantes prevail (witness Libya).

Other acts do not clear the bar. Again, as much as I dislike Nashi and the regime that it serves, its true nature is readily observable. Indeed, the group is almost exhibitionist in its methods. Information about it and opposition to it can be generated without resorting to hacking.

To an economist, to whom it is second nature to think about trade offs, the key issues are: Even if a given goal has some value, what is the most efficient way to achieve it? What do you have to give up to obtain it?

With respect to politically-related hacking, the answer to these questions very much depends on the polity in question. Such actions are more likely to be justifiable in polities with little public accountability, more constraints on information, and fewer checks and balances on the powerful. Even though Russia fares very poorly by comparison to the US and Europe on all of those dimensions, in my opinion the hack of Nashi doesn’t clear the bar–though it comes close. The dangers inherent in validating the actions of self-appointed, unaccountable “guardians” (i.e., vigilantes) far exceed the value of any information produced, or the effect of this information on politics and civil society in Russia. As Putin sometimes says, “the dog barks, but the caravan moves on.” The Putin/Nashi caravan will move on, regardless of whatever sordid details that Anonymous releases. Nashi are hacks, and we all know that: hacking them won’t have any effect, and condoning this conduct could lead to far more deleterious consequences.

Indeed, most of these efforts have not had the intended effect. Bradley Manning and Wikileaks mildly embarrassed the US government, but almost certainly had no lasting impact on US policy, certainly not the impact Assange and Manning were hoping to have. The only real effect they likely had was to endanger some people named in the cables. Similarly, it’s not like the release of the Assad material has stopped him from shelling Homs or killing indiscriminately elsewhere.

Among the deleterious consequences is that these things descend into a retaliatory spiral. This appears to be what is happening in Russia. Navalny was the victim of a hack. Nashi was United Russia’s website was hacked. A cycle of hacking is apparently well underway. This is not a good thing. It is the cyber equivalent of street fights between rival party (e.g., Communists vs. Nazi SA) gangs in Weimar Germany. These are destructive in and of themselves, but also provide the perfect pretext for the authorities to crack down hard–and stifle everybody’s freedom even more. That’s especially true in a place like Russia, and the opposition will suffer most.

If anything goes, likely everything will. As much as I loath Putin and Nashi, this is the wrong way to go about it. It is unlikely to hurt them seriously. It will invite a crackdown. It is not conducive to the strengthening of civil society, as it is really just a tactic in a civil war. It can easily get out of control because the perpetrators are not accountable–on either side. Although a stronger case for anti-government hacking can be made in Russia than the US, even there I worry that it is likely to bring about more bad than good.

* Not to mention that they don’t seem all that bright or knowledgeable. Assange comes off as incoherent in most interviews. Appelbaum appears to be an idiot savant, quite expert in internet technology (and pornography) but only capable of regurgitating prog pablum on any other issue. See my earlier post for a discussion of his clueless disquisitions on IP legal matters. The thought of people such as this taking law and politics into their own hands, with no mechanism of accountability, is quite chilling.

February 7, 2012

Kafka Would Understand

Filed under: Economics,Politics,Russia — The Professor @ 8:11 pm

Russian prosecutors have announced that they are continuing the prosecution of Sergei Magnitsky. Who is dead.

What’s the point of a posthumous prosecution? The real reasons: To intimidate others from challenging corrupt law enforcement officials.  To play defense against accusations of corruption by continuing to assault Magnitsky, even in death.

But that’s not the reason the prosecutors are giving.  Instead, adding insult to injury, the prosecutors claim that they are pursuing the case to secure Magnitsky’s honor and dignity:

Police reopened the case against Mr. Magnitsky last summer, saying it would provide a venue for relatives and supporters to clear his name.

. . . .

The Hermitage statement said a police investigator had offered to drop the case in a letter provided to Mr. Magnitsky’s mother last week, but only if relatives stated they had no “desire to protect the honor and dignity of the deceased.”

Kafka would be so proud.

Another famous Russian prosecution is in the news.  My friend Sergei Guriev quite courageously said that Khodorkovsky should be freed, and that everyone involved in the Magnitsky case should be fired:

At a “Russia 2018” panel, New Economic School Rector Sergei Guriev said the Russian government could send an important signal to the investment community by releasing its most famous political prisoner:

To really prove that the Russian state is interested in a better business climate, first of all, they should release Khodorkovsky and fire all of the executives that are involved in the Magnitsky case. This will prove that the Russian government is interested in improving the investment climate.

I agree that’s what Russia should do, but Putin will never, ever do that.  Partly because he fears that Khodorkovsky could become the leader that the opposition so desperately lacks.  Partly because that freeing him would be to acknowledge that Putinism is fundamentally flawed.  Partly because freeing him would be to discredit the prosecution.

But mainly because Putin has an inveterate, unreasoning, visceral, Pavlovian hatred for Khororkovsky.  Watch the scene in Part II of the BBC program on Putin and the West, in which Khodorkovsky calls out high level officials in Putin’s personal circle–and by implication Putin–for corruption.  Watch Putin’s reaction.  And watch anything else you can find where Putin is asked about Khodorkovsky.  Even if you don’t understand Russian, you can understand exactly what is going on.

So props to Sergei for speaking out.  But the fact that what he says should be done–and rightly so–will never be done while Putin breathes tells you is exactly why Putin’s Purgatory will persist.

When Will Rip van Winkle Europe Wake Up?

Filed under: Energy,Politics,Russia — The Professor @ 1:53 pm

The past week has seen a confusing series of events involving Gazprom.  (A collection of several stories can be found here.)  Europe and Russia have been gripped by a brutal cold wave, driving up the demand for gas.  Gas shipments to Europe from declined substantially, between 10 and 30 percent, depending on the country.

Gazprom initially claimed that it had not cut shipments, but that Ukraine was stealing gas destined for Europe.  Then Gazprom admitted that yes, it had cut flows, but only by 10 percent, and only temporarily.  Gazprom also claimed that it was not physically capable of increasing gas flows–which doesn’t explain why it cut the flows.  It also claimed that it had increased supplies to Europe (“Our company has increased the supply of gas to the maximum not only to European countries, but also the former Soviet Union,” said Gazprom Deputy Chief Executive Alexander Medvedev). Gazprom also told Putin that it had increased output by 30 percent over the same period last year, and had taken substantial additional quantities out of storage.

So it increased flows even though it wasn’t capable of doing so, but it decreased them too.  Or something.

I see no way of reconciling all of these statements.  It appears that Gazprom’s (and Russia’s) first reflex was to blame Ukraine for any shortfalls in gas delivered to Europe: this would be quite helpful in the context of this year’s wrangling with Ukraine over prices and quantities.  But that story soon became inoperative, and the company/country is/are now engaging in a modified, limited hangout (in the immortal words of Nixon aide Ron Ziegler), admitting some cutbacks.

Most likely explanation. 1. Gazprom was unable to meet domestic demand that spiked during the cold snap without reducing shipments to Europe. 2. Given the increasingly fraught political situation, and Putin’s populist campaign, there is no way Gazprom would favor Europeans over domestic consumers, even though domestic sales are loss-making (due to price ceilings). 3. So Gazprom cut shipments to Europe to ensure Russia was adequately supplied, and in addition, Ukraine siphoned off some gas.

Putin and Gazprom’s Medvedev tried to work these events into their narrative of how spot gas markets are bad:

Vladimir Putin: Mr Medvedev, what about the spot market? Why don’t they buy on the spot market? On the free market?

Alexander Medvedev: Mr Putin, it appears that all that talk about a high-liquidity spot market turned out to be, to put it mildly, a considerable exaggeration since the spot market does not have high liquidity. Although spot market prices went up (they are lower than our prices), Europe was unable to meet its long-term needs in the spot market because ultimately it does not work.

Vladimir Putin: It is virtual to a considerable extent.

Alexander Medvedev: That’s right.

Vladimir Putin: That is, it doesn’t have real products in the required amount.

Alexander Medvedev: It doesn’t and cannot have the required amount.

(These staged dialogs crack me up.  The conversations in Pimsleur’s lessons sound more natural.)

One really weird thing about that: “Although spot market prices went up (they are lower than our prices).”  That says a lot.  One interpretation is that spot market prices spiked in Europe to clear the market, a market that suffered a supply disruption from Russia at the same time that gas demand spiked, and the spot market prices were still lower than Russian prices.

But don’t be too cocky, boys.  Episodes like this should provide the Europeans with even stronger incentives to develop alternative supply sources, and to push the development of a vibrant spot market that doesn’t make them hostage to Gazprom.  Especially when Gazprom spokesman talk like this:

OAO Gazprom, Russia’s natural-gas exporter, is meeting its contractual obligations for supplies to Europe, while sending less than customers have requested during freezing weather, an official said.

“They are asking for more than we are obliged to supply,” said Sergei Komlev, head of pricing at Gazprom’s export division. “There is a difference between wishful thinking and agreed contractual volumes.”

Let them eat cake!

Note well that Gazprom insists customers take or pay for gas when contracted volumes exceed requirements.  They are perfectly willing to make you take gas when you don’t need it, and tell you tough luckski when you do.

Europe has had numerous wake up calls regarding the reliability of Russia as a gas supplier since 2006.  Maybe one of these days it will finally wake from its slumbers.  The burgeoning market for LNG gives them the opportunity to reduce reliance on Russia in the future, and to rely instead on more flexible supplies with market driven prices (rather than oil-linked formula prices), and to manage price risk through derivatives.

When that happens, the wishful thinking will go quite the other way.

February 5, 2012

Learn From Their Mistake

Filed under: Politics — The Professor @ 8:37 pm

Last Friday the hacking group Anonymous released a tape of a phone call between the FBI, the UK’s Scotland Yard, and the representatives of several European law enforcement agencies.  The law enforcers were discussing investigations of hackers.

Anonymous claimed that it had hacked into FBI computers, and was able to read the FBI communications continuously.

This is obviously a huge embarrassment to the FBI, but it was clear at the outset this was typical Anonymous bravado. After looking at the email that Anonymous posted on pastebin, it was pretty clear what happened.  The email was sent to 43 people-and hence involved 44 people including the sender.  It listed a call in number and access code.  Given the large number of people on the call, and the sloppy way in which some people handle email, the most likely explanation is that Anonymous got a hold of this one email, dialed into the call, and taped it.

Yesterday the FBI stated that this was indeed what happened:

The FBI has admitted that Anonymous eavesdropped on the conference call, but told the New York Times that the phone call wasn’t hacked. Instead, Anonymous somehow obtained an email containing the conference call login information, which was sent to 44 people at the FBI and overseas agencies on January 13. According to the Times, a foreign police official forwarded the email to a private account, where it was intercepted by Anonymous.

Sloppy handling of email.  Inexcusable, but all too common.

Hackers are a menace, but the most menacing ones aren’t the exhibitionists.  Indeed, obsession with publicity is likely to be their downfall.  The dangerous ones are those who do tremendous damage and don’t brag about it.

The main lesson here is that people doing stupid things are the biggest security risk.   Since everyone who does anything online is a potential victim and target, this is a lesson for everyone.  Take some time to evaluate your online activity. Use complex passwords.  Don’t use the same password for more than one account.  Use an app to store passwords, and to generate strong passwords.

Apparently some cops–even those involved in investigating hackers, remarkably–haven’t figured this out.  Learn from their mistake.

Now the Real Show Begins–And Likely Ends

Filed under: Economics,Financial Crisis II,Politics — The Professor @ 7:54 pm

For weeks the Perils of Pauline melodrama regarding Greece has focused on the euphemistically-labeled “Private Sector Initiative”, the negotiations between an organization that sort of speaks for banks and the Greek government.  But that was always a sideshow: it was never the crux of the matter. The main act, the real issue, was whether Greece would knuckle under to (primarily German) demands that it cede control of its budget, and much of its social and economic policy, to outsiders.

The Germans are acting on the principle of he who pays the piper calls the tune. Very logical, from a logical German perspective.  But not really in this situation, because the piper is not usually into the payer for hundreds of billions as is the case here.  Which gives the piper a tremendous amount of leverage, on the old principle that if you owe the banker $1000 and can’t pay, you have a problem: if you owe the banker several hundred billion and can’t pay, the banker has a problem.

Negotiations between the German payers and the Greek piper are on the brink of failure:

The two sides were still far apart over projected cuts of 25 per cent in private sector wages, 35 per cent in supplementary pensions and the closure of about 100 state-controlled organisations with thousands of job losses.

Eurozone officials are deliberately refusing to allow Greece to sign off on a €200bn bond restructuring plan because the threat of default is the leverage they have to convince recalcitrant Greek ministers to implement necessary cuts.

Greek unions are going to strike Tuesday.  Greek politics are highly fractious. But the fundamental issue is that the Greeks have tremendous bargaining power.  They would be not much worse off–if at all–by accepting the terms being thrust upon them than they would by defaulting: the European deal is essentially paying debt comes first, and only after that is paid can the Greeks spend anything on themselves.  Not a very attractive deal for the Greeks.  The Germans, et al, however, would be much worse off if Greece defaulted.  Given this, the Greeks have considerable bargaining power.

Yes, there is tremendous room for a mutually beneficial deal.  But given the political nature of the problem, the fact that there are multiple items to be negotiated, and multiple parties involved (with multiple affected groups within each), transactions costs are high and the chances of a failure are acute.  And even if a deal is signed, the ability of the Germans, et al, to force the Greek government to live up to any agreement it make,s is quite limited.  Rioting in the streets of Athens, social turmoil, widespread strikes are likely if the government caves.  Not going to be much money going north if that happens.

So maybe Pauline will be pulled from the tracks at the last instant.  But IMO it’s more likely that she ain’t.

February 4, 2012

The Third Rome Won’t Be Unbuilt In A Day

Filed under: Politics,Russia,Uncategorized — The Professor @ 9:47 pm

Few things are less precise or more politicized than crowd counts.  This is true in spades in Russia, where today witnessed dueling marches–one for the opposition, the other for Putin.

As for official estimates of crowds–well, consider the source. The “police” estimated the opposition crowd at 40,000 and the pro-regime crowd at 138,000.  Independent observers and several Russian papers dismissed both figures as risible.

But it is clear that the size and intensity of opposition crowds has not diminished.  An appreciable number of a notoriously apathetic, defeated, and atomized Russian public is persisting in its opposition to the dreary prospect of 12 more years of Putin’s purgatory.

To restate the obvious. The opposition is fragmented. It is largely leaderless. There is no agreement on any positive agenda, just the negative agenda of opposing Putin, the Party of Crooks and Thieves, and the corrupt status quo.

But those are the laments of the unrealistic and the impatient.  The Third Rome won’t be unbuilt in a day, but these fissiparous protests represent a necessary first step in the process.

In the immediate term, the protests will not result in the replacement of Putin at the ballot box.  But they have already changed dramatically the dynamics within the elite.  Putin’s ability to play the role of balancer depended in large part on the perception that he was overwhelmingly popular.  Now he is widely ridiculed, which is political poison to someone who presumes to be the Father of the Nation.  His ability to balance is seriously compromised, increasing the odds of intra-elite infighting that could lead to a reshuffling of power.  Not regime change, exactly, because the system will likely remain authoritarian, but less unified, less stable, and less domineering.

In the longer term, the protests are a harbinger of the development of a self-conscious middle class, deeply ashamed at the degradation and corruption of Russian political life, insistent on the development of a civil society independent of the state.  This is a necessary condition to a transition to a less authoritarian system.  Not sufficient, but necessary.  The transition is not imminent, but it has begun.

Putin and his clique now know that despite their bravado, control of the media, and paid-for rallies, that the opposition is not going away. So how do they respond? The main thrust of the attacks against the opposition has been to play on Russian xenophobia by portraying it as the tool of foreigners.  (For a taste of this, check out S/O’s comment in an earlier post.) I expect these attacks to be ramped up, perhaps including some Russian equivalent of a Reichstag fire.  Putin, and Lavrov, and Rogozin and others will ramp up their anti-US, anti-Western rhetoric.  The harassment of Golos and other groups will escalate.  The vote rigging efforts will ramp up.

These efforts will likely achieve their objective in the short run. But in the medium to longer term, Putinism–and Putin–will be eroded by a rising tide of opposition. The coordination game, positive feedback, tipping mechanism is underway, which will make it progressively more difficult for the regime to operate without making more and more concessions to the opposition.  The dynamic is not favorable to the survival of the vertical.

Which means that Putin’s dream of a Third Rome under his rule will not come to pass.   And as the saying goes, there will not be a fourth.

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