Streetwise Professor

German utilities claim to be developing work-arounds that would provide Ukraine with gas in the event Russia cuts off supplies due to non-payment, or as part of an economic war against Ukraine.

Now Germany’s major energy utility companies are developing strategies to help Ukraine fill the shortfall if Moscow decides to cut gas supplies. Companies including RWE and E.on are working on plans to supply Ukraine with weeks’ worth of gas.

Currently, Ukraine taps around half of it gas needs from Russia. But last Friday, Russian Gas monopolist Gazprom threatened to suspend deliveries to Ukraine if the country doesn’t pay its outstanding February bill of €1.7 billion ($2.35 billion).

In an emergency, the flow through Europe’s pipelines could simply be reversed, with gas getting pumped from German reservoirs through the Czech Republic and Slovakia directly to Ukraine. Following this year’s especially mild winter, Germany’s reservoirs are much fuller than usual. Even long-term deliveries would be conceivable at the moment.

Ukraine already signed a framework agreement in 2012 with RWE to make the gas deliveries possible. Under the contract, the company has committed itself to delivering up to 10 billion cubic meters of gas per year to Ukraine, which the country was going to use this summer to fill its reservoirs for the coming winter. But RWE executives say they could provide deliveries much sooner.

RWE currently draws its gas from Norway or the Netherlands, both major suppliers in Western Europe. It would also be possible to redirect Russian gas from the Nord Stream Baltic Sea pipeline — which connects Russia and Germany — through pipelines in the Czech Republic and Slovakia to Ukraine.

Color me skeptical.

The article notes that there are clauses in the contracts with Gazprom that preclude redirection of supplies, but the German utilities claim these are readily circumvented: given that gas in German storage reservoirs comes from multiple sources, how  could Gazprom prove its gas has been redirected?

But this is based on the naive view that Gazprom’s sole (or even preferred) recourse against German supply of Ukraine would be to file a legal action.  It could decide instead to retaliate for German shipments of gas to Ukraine by shutting off gas flowing on the Nordstream and Yamal pipelines. Given no gas would be flowing to Germany via Ukraine, if Gazprom did so the German companies would soon be drawing down their stocks rather heavily and be vulnerable to Gazprom’s  tender mercies going forward.

Would they really be willing to take that risk on behalf of Ukraine?

And there is also the matter of the huge political pressure Russia would exert on Germany if RWE and E.on were to attempt such a thing. After all, former Chancellor Gerhard Schroeder chairs the Nordstream board and still exercises considerable influence in Germany, and Germany has proven quite vulnerable to Russian pressure in the past.  Numerous German businesses would be importuning Merkel not to antagonize Russia.

I strongly suspect that this “plan” and the article about it have been created and planted to give Merkel and Steinmeier political cover: “See! We are doing something to help Ukraine.”  But if called upon to perform on their promises, I would expect the Germans to fold like a cheap suit in the face of Russian threats to cut off gas.  And Putin is playing for keeps here.  Don’t think for a moment he won’t do it even though he would incur a greater economic cost than the Germans (and other European consumers of German gas).

And remember, gas is not the only lever.  Coal is the major alternative to gas, but Germany (and also the UK, to an even greater degree) get a large fraction of their coal supplies through Russia.   This is a real game of chicken, and I am not putting my money on the Germans.

That’s because based on experience, and my perception that Germany is trying to get short run political benefits by dispelling serious doubts about its commitment to Ukraine, I do not consider the proposed plan to be very credible.  Just as the French (and British) made promises to the Poles in 1939, and then left them hanging when Poland called on them to deliver, I think there is a strong possibility that these German promises will be of the piecrust variety: easily made, easily broken.

In other words, Ukraine should not base its plans on the assumption that Germany has its back on gas, or anything else for that matter.

Matt Leising has an interesting story in Bloomberg about a consortium of insurance companies that will offer an insurance policy to clearinghouses that will address one of the most troublesome issues CCPs face: what to do when the waterfall runs dry.  That is, who bears any remaining losses after the defaulters’ margins, defaulters’ default fund contributions, CCP capital, and non-defaulters’ default fund contributions (including any top-up obligation) are all exhausted.

Proposals include variation margin haircuts, and initial margin haircuts.  Variation margin haircuts would essentially reduce the amount that those owed money on defaulted contracts would receive, thereby mutualizing default losses among “winners.”  Initial margin haircuts would share the losses among both winners and losers.

Given that the “winners” include many hedgers who would have suffered losses on other positions, I’ve always found variation margin haircutting problematic: it would reduce payoffs precisely in those states of the world in which the marginal utility of those payoffs is particularly high.  But that has been the industry’s preferred approach to this problem, though it has definitely not been universally popular, to say the least.  Distributive battles are never popularity contests.

This is where the insurance concept steps in.  The insurers will cover up to $6 to $10 billion in losses (across multiple CCPs) once all other elements of the default waterfall-including non-defaulters’ default fund contributions and CCP equity-are exhausted.  This will sharply limit, and eliminate in all but the most horrific scenarios, the necessity of mutualizing losses among non-clearing members via variation or initial margin haircutting.

Of course this sounds great in concept.  But one thing not discussed in the article is price.  How expensive will the coverage be?  Will CCPs find it sufficiently affordable to buy, or will they decide to haircut margins in some way instead because that is cheaper?

As I say in Matt’s article, although this proposal addresses one big headache regarding CCPs in extremis, it does not address another major concern: the wrong way risk inherent in CCPs.  Losses are likely to hit the default fund in crisis scenarios, which is precisely when the CCP member firms (banks mainly) are least able to take the hit.

It would have been truly interesting if insurers would have been willing to share losses with CCP members.  That would have mitigated the wrong way risk problem.  But the insurers were evidently not willing to do that.   This is likely because they are concerned about the moral hazard problems.  Members would have less incentive to mitigate risk if some of that risk is offloaded onto insurers who don’t influence CCP risk management and margining the way member firms do.

In sum, the insurers are taking on the risk in the extreme tail.  This of course raises the question of whether they are able to bear such risk, as it is likely to crystalize precisely during Armageddon Time. The consortium attempts to allay those concerns by pointing out that they have no derivatives positions (translation: We are not AIG!!!)  But there is still reason to ponder whether these companies will be solvent during the wrenching conditions that will exist when potentially multiple CCPs blow through their entire waterfalls.

Right now this is just a proposal and only the bare outlines have been disclosed.  It will be fascinating to see whether the concept actually sells, or whether CCPs will figure it is cheaper to offload the risk in the extreme tail on their customers rather than on insurance companies in exchange for a premium.

I’m also curious: will Buffett participate.  He’s the tail risk provider of last resort, and his (hypocritical) anti-derivatives rhetoric aside, this seems like it’s right down his alley.

Yanukovych held a public appearance today, his second since absconding from Kiev. It wasn’t a press conference, because he didn’t take questions.  After the last episode, a wise choice.

He repeatedly reiterated that he is alive.  It sort of reminded me of the Bring Out Your Dead Routine from Monty Python and the Holy Grail, where the old man that John Cleese is trying to get hauled away on the dead cart says: “I’m not dead. I feel happy! I think I’ll go for a walk.”

Then he went on about the fascist, Banderaist coup in Ukraine, and the illegitimacy of the scheduled election.  He claims to be still the legitimate president of Ukraine.

He then did his MacArthur turn, swearing that he shall return.

Put together the MacArthur bit and the legitimate president bit and things aren’t all that humorous.  Perhaps this is just bravado, but it dovetails all to well with the Putin counterrevolutionary agenda, in which Russian forces invade Ukraine (well, they already have, but the rest of it) with the excuse of restoring the legitimate government, and Yanukovych rides into the country in their baggage train.

You know Yanukovych would not have appeared without Putin’s consent, and that Putin (or his people) wrote Yanukovych’s script.  This is Putin talking, using a big, ex-zek marionette.  (And what is it about Putin and criminals as his political puppets?: the self-declared ruler of Crimea is another one, in his case a mobster with the nickname of “Goblin.”)  This is Putin signaling his intentions.

Other than his colorable legitimacy, Yanukovych is totally useless to Putin.  Absent his role as the excuse for a restorationist intervention, Yanukovych would have no doubt played out the rest of the Python routine. “You’re not fooling anyone, you know” followed by a bash on the head.

That will come later, either after Putin succeeds in his objective and Yanukovych is no longer needed, or Putin fails, and Yanukovych is no longer needed.  Either way, don’t try to sell the big dummy any life insurance policies.

Russia is decrying the “lawlessness” in eastern Ukraine.

Classic recipe. Sow chaos and lawlessness by inserting provocateurs into a fraught situation.  Loudly decry the dangers associated with such chaos, and lie about its sources.  Emphasize the chaos in an agitprop campaign to justify intervention.

Another rhyme with 1936-1939, by the way.

One has to have some grudging respect here, in the same way one has grudging respect for Satan in Paradise Lost.

I have no respect, however, for those erstwhile “leaders” in the west who fall for such well-worn and transparent ploys.

Like something out of 1984 (irony!), the disembodied head of Ed Snowden delivered remarks to SXSW in Austin.

Ed had nothing new to say.  Same old blah blah blah.  The only thing remarkable is that the appearance of the image of his talking head in front of the image of the Constitution did peg the cheesy-meter.  Jumping the shark doesn’t come close to conveying how lame this was.

Until someone asks Snowden “if as you claim your interest has been solely in exposing privacy violations against US citizens, why did you steal hundreds of thousands of documents relating to military and foreign intelligence matters, and why have the bulk of your leaks been related to such matters?” he deserves to be treated with extreme skepticism and scorned. But of course, the geek idiots at SXSW failed to do so.  Making them accessories after the fact in the Snowden operation.

It is becoming clearer by the day that the privacy campaign is an elaborate cover scheme meant to divert attention from an operation targeted at undermining legitimate US foreign and military intelligence functions.  It is also targeted at undermining US alliances, most notably with Germany, which has been (courtesy of Laura Poitras’s collaboration with Der Spiegel) the subject of a disproportionate number of the stories. The Germans are particularly vulnerable to such tactics, desiring so desperately to escape the burdens of their past by believing the Americans are as bad or worse.  (And by the way, German pusillanimity in the face of Putin’s aggression provides justification, as if any was needed, for surveilling German politicians.)

And look how important dividing the US from Germany is right now, in the midst of the Ukraine crisis.

There are no coincidences, comrades.

There have been many suggestions as to potential US/NATO military responses to Russian aggression in Ukraine. Some are quite stupid, or at least premature: for instance, one suggestion is to abrogate the US pledge not to station nuclear weapons in new NATO states like Poland.

By far the most important and effective military measure that the US can undertake is to provide Ukraine with intelligence.  Lots of intelligence. Satellite imagery detailing Russian deployments and movements. Intercepts from Russian tactical and command networks.

Today NATO announced the deployment of AWACS aircraft to Poland and Romania.

That’s great.  Question: who gets the information that the AWACS produce?  Only NATO? Or is it (or at least some of it) being shared with Ukraine?

Might I suggest something more: deployment of JSTARS aircraft, which provide a picture of deployments on the ground similar to what  AWACS provides in the air.

Intelligence is a force multiplier.  It would permit the Ukrainians to get inside the Russian OODA loop: forewarned is forearmed.  And it would help  make up for the Ukrainians’ relative weaknesses in armor, infantry, and combat air power. Though the disparities are somewhat overstated by comparing overall Russian and Ukrainian numbers, because there is no way that Russia can possibly deploy the entirety of its forces against Ukraine.  Given the advantages of the defense, and Russia’s serious logistical limitations, intelligence could be the difference maker.

Perhaps we are doing this already.  I surely hope so.  And if we are doing it, keeping it quiet is the right thing to do.

There’s a lot of talk about exploiting the US energy boom to undermine Putin and Russia.  This boom may have profound effects in the long run, but there is nothing that can be done now that can materially harm Putin in to punish him for his anschluss in Crimea, or subsequent aggressive moves he may make.

Yes, the US restrictions on exports of natural gas and crude oil are economically idiotic, even absent geopolitical considerations.  But even if those bans were eliminated tomorrow (a huge if, given he who sits in the White House-or golfs in Key Largo, as the case may be) Europe’s energy situation would not change one whit.

It would be possible to start moving large quantities of crude if the export ban were lifted, but this would be largely offset by a decline in US exports of refined products.  A major effect of the ban is to distort where crude is refined, not the total supply of crude and refined products (especially in the short run).  The major effect of the ban at present is to benefit US refiners who refine crude that is selling at below world prices because of the ban and export the products.  One study estimates that eliminating the ban would drop world oil prices by cents not dollars.

With respect to natural gas the situation is even less favorable.  Even if DOE granted all pending LNG export licenses, it will be years before product will start flowing.  Cheniere received the first license, in May, 2011, and its facility will not come on line until late-2015 at the earliest.  The company had a head start because it was converting an existing facility built to import LNG: other facilities will take longer to build because they are starting from scratch.

The long run impact of eliminating the export ban depends on the elasticity of supply of gas in the US.  If it is very elastic at current price levels, then yes, once the ban is lifted world prices will fall substantially, and Russia will be hit hard by that.  If supply is less elastic, the impact will be far smaller.  The elasticity of supply will depend crucially on technological factors, including the suitability of new formations to fracking and horizontal drilling, the depletion rates of wells, and the rate of technological innovation.  All of these factors are quite uncertain, and if the experience of the past decade says anything, it says be leery about making predictions about natural gas supply.

In brief: US energy export policy is stupid, but fixing the stupidity will have no appreciable impact on Russia for years.

Similarly, fixing stupid European policies on energy (e.g., fracking bans, massive renewables subsidies like Energiewende) should be done for reasons independent of geopolitics, and even if done tomorrow will have no material impact on European energy prices or Russian energy revenues for years to come.

The main way to impose substantial costs on Russia today via energy would be to impose trade sanctions.  Given the fact that the oil market is essentially global in scope, and that coordinating a global boycott of Russian oil would be virtually impossible, natural gas is a more feasible target.  Europe could boycott Russian gas  unilaterally, and there is no effective way for Russia to sell that gas to Asia or anywhere else.

There is a substantial asymmetry here.  Russia depends heavily on gas exports.  Approximately 25 percent of the Russian government’s revenue comes from Gazprom. The knock on effect on the Russian economy would likely be huge, as severe fiscal constraints would likely put substantial strains on the Russian banking system.

Yes, Europe would be hurt by higher prices and lower consumption of gas.  But gas comprises a far lower percentage of European expenditures than it does of Russian income, meaning that the hit on Europe would be far smaller.  Moreover, some of the impact could be mitigated by substantially increasing coal imports, increased Norwegian production, and some diversion of LNG from Asia to Europe, especially to the UK (which has excess LNG import capacity and could use LNG to displace North Sea gas which it could then pipe to Europe).   Moreover, winter is ending, and the cost of a supply interruption in the spring and summer would be far less than the cost in the winter.

But I doubt that is going to happen, because of another asymmetry.  The asymmetry in political will.  Old Europe has no stomach for a confrontation with Putin over Crimea, Ukraine, or much of anything else. (And yes, Donald Rumsfeld was an a$$hole-a claim I can vouch for based on family experience-but the Old Europe vs. New Europe formulation does capture an essential truth, especially where Russia is involved.) This lack of intestinal fortitude means that Old Europe-and especially Germany-is unwilling to pay any price to punish Putin.  Talk is free, and that’s all they are willing to pay.

And don’t think for a moment that Putin hasn’t based his plans on exactly that calculation.

In an attempt to scare off any attempt at sanctions, Russia has threatened retaliation: Lavrov has told Kerry any such moves will “boomerang.”  Other Russian officials have said that Russia can insulate itself from the west, thereby making it immune to any sanctions.

The retaliation that has been threatened includes expropriation of the assets of western companies.  A quite predictable Russian reaction, and typically self-destructive.  Any such expropriation would just cement Russia’s reputation as a lawless country where foreign investors rush in where angels fear to tread.  Russian equity valuations would crater, and direct investment would too.  Capital flight would accelerate.  The costs inflicted on Russia would dwarf those inflicted on the US and Europe, and would last for years.

Other that that, a great plan!  Another major asymmetry: any Russian retaliation would harm Russia far more than Europe or the US.  Some boomerang.

It reminds me of the old joke about the genie who grants the muzhik one wish, with one condition: anything the muzhik wishes for he gets, but his neighbor gets double. The muzhik thinks for a minute, then says: “I wish that you pluck out one of my eyes.”

All that said, I do not think that economic sanctions in the form of boycotting Russian energy or other exports, or cutting off imports (e.g., of drilling equipment) are the most effective, or the least costly, way of imposing costs on Putin and the elite on whom he depends. As I have said since Georgia, 2008, the best way to attack Putin and the elite is to go after their money in the west. (This policy is getting widespread publicity now.  I will lay claim to being a very early advocate.)

Such a measure is targeted on those who make the decisions, rather than Russia and Russians generally: as such, it could not be used by Putin to claim that the west was waging a war on Russia.  Indeed, it could undermine his political support not just among the elite who would be paying the price for his adventures, but among the broader population who are already disgusted by corruption and who would be unlikely to have any sympathy for that corruption being exposed, and the ill-gotten gains being seized.  The cost on western economies would very small indeed.  It would represent a victory for the rule of law.

But this would impose some costs on some very connected people in the west.  Moreover, precisely because it would strike so deeply at Putin it would cause him to lose his sh*t, and fear of that causes the Euros to shrink away from it in terror.

But this is something the US can pursue unilaterally.  Yes, given that most dirty Russian money is in Europe or the Caribbean, these measures would be much more effective if the Europeans participated. But the US still can wield considerable power (note how it forced Switzerland to heel on tax issues-not something that I agree with, btw, just pointing out that the US has leverage) and indeed, the mere threat of exposing what it uncovers could make the Europeans think twice.

But again, there is a lack of will.  Hope drives policy: “If we concede Crimea to Putin, he will stop.”

In sum, there is a powerful policy tool at our disposal.  A far better tool than is available in most such circumstances.  Other tools (sanctions) are more costly.  Yet other supposed tools-increasing US energy exports-are chimerical.

If we’re serious, we’ll use it.  But I have my doubts that we’re serious. If Europe (and to a lesser degree the US) has demonstrated anything in recent years, it is that they are past masters at kicking the can.  Crimea, Ukraine, and Putin are likely to be just another can.

News flash: Vladimir Putin did not decide to invade Crimea until after the Yanukovych regime fell.

That brilliant insight is courtesy of the New York Times.  How would we know if the Times wasn’t there to tell us?

The collapse of the regime obviously changed Putin’s calculus.  He had no reason to invade while Yanukovych was in charge.  So of course Yanuk’s panic was a necessary condition for the events that followed.

The article relies heavily on two individuals, Dmitri Trenin and Mark Galeotti, who didn’t predict Putin’s move.  They therefore have considerable reason to try to make this turn of events seem beyond the ability of mere mortals to foresee.  The problem is that both confidently denied that Putin would move on Ukraine and did so after the collapse of the February 21 deal and Yanukovych’s flight.  Which means that they didn’t understand how Putin would react to the precipitous collapse of the regime.  The fact that this collapse might have been unlikely on 20 February is irrelevant to  predictions about events conditional on the collapse occurring.  Trenin’s and Galeotti’s conditional forecasts were wrong, making the surprising nature of the conditioning event totally irrelevant to the issue of their understanding of Putin’s decision making.  They obviously lacked such an understanding, so why go to them for analysis?

Trenin also asserts, without providing a shred of evidence, that Putin was “very passive” before February 21.

Please.  It is far more plausible that Putin was closely involved with events in Ukraine, and arguably was providing support to Yanukovych (including in the form of security personnel), and most likely directing Yanukovych and/or people within the security structures of the regime.

Putin’s actions subsequent to the fall of the regime indicate how important Ukraine is to him.  Would he really have been “very passive” in response to events spiraling out of control in Kiev?  Putin precipitated the entire crisis by dragooning Yanukovych into spurning the EU and subordinating Ukraine to Russia.  Would he have then just stood by “very passively” when those actions precipitated a revolution in Ukraine?

My take at the time was that Putin was pushing for a crackdown and Yanukovych was balking.  At least some in the US intelligence community now say the same. (And yes, I get that the intelligence community is also engaged in CYA, and yes, I get that the story is in Newsweek, aka The Bitcoin Enquirer.)

Why does anyone look to the NYT for deep analysis?  And why would the NYT go to two people who blew the call to explain what happened?

Major banks are having major concerns about the risks associated with CCPs in the aftermath of a failure of  a Korean brokerage firm that resulted in the mutualization of losses on the KRX.  The firm failed due to a fat-finger error (puts? calls? whatever!) and its margins were insufficient to cover its trading losses.

This experience is making CCP member firms re-evaluate the risks of CCPs, the risk controls implemented by CCPs, and the incentives of CCPs to control risk.   They realize that CCPs do not eliminate counterparty risk so much as redistribute it.  They are concerned about the incentives that CCPs have to manage those risks unless they have substantial exposure to them (“skin in the game”).

But here’s the thing.  This particular sequence of events is exactly what CCPs are best suited to handle: the insuring of idiosyncratic risks.  In this instance, the idiosyncratic risk was an random operational error at a single brokerage.

But that’s not why the G20 advocated clearing mandates.  The G20 went down the clearing path to mitigate systemic risk, which occurs when a shock hits many institutions simultaneously.  That is a very different beast indeed.

If banks lie awake at night worrying about the incentives of CCPs to mitigate idiosyncratic risks, they should never sleep ever if they think about systemic risk.  CCPs are ill-adapted to handle systemic risk precisely because risk pooling/diversification works for idiosyncratic risks, but not systematic ones.

Put differently: the failure of the Korean brokerage did not create a wrong way risk.  The failure did not cause a hit to the default fund when the non-defaulting members were under financial strain.  But defaults that occur during a crisis situation are laden with wrong way risk: losses are mutualized precisely when the members of the default fund are least able to bear them.

So if banks are concerned about the potential for a CCP failure in response to a bad realization of an idiosyncratic risk, think about the appropriate level of concern about the viability of CCPs in response to systematic risks.

A bite of kimchi can have a truly bracing effect. Would that regulators around the world take heed of the lessons of recent events from the land of kimchi.

Historical analogies to current events can be illuminating, but dangerous.  Even if strong similarities exist, difference do too, and therefore caution is required when using them.

This is especially true with analogies to Naziism and Hitler.  Argudendo ad Hitlerum is fraught with peril, and is used far too cavalierly.

Hillary found out about the perils when she compared Putin’s incursion into Ukraine-and yes, Crimea is Ukraine-to Germany’s actions in 1936-1938: the occupation of the Rhineland, the Anschluss, the taking of the Sudetenland, and the eventual seizure of the rest of Czechoslovakia.  Her remarks unleashed a storm of criticism.

Mark this day in you calendars.  I am going to come to Hillary’s defense, sort of.  (As to why that is particularly remarkable, consider this bit of personal history.)

There are strong parallels between what Putin/Russia is doing in Ukraine now, and what Hitler/Germany did in 1936-1938.  Most notably, seizing pieces of sovereign territory,  using as a justification the imperative and right to defend fellow ethnics, and putting on sham plebiscites to justify the seizures.

Moreover, there are very strong parallels in the response of the European nations to Hitler’s aggression and Putin’s: that is, no real response at all.  A palpable fear to confront the aggression.  A willingness to concede one flagrant violation of a sovereign nation if the aggressor crosses-his-heart-and-hopes-to-die that he will be satisfied with what he’s taken so far.

There is also a parallel in the cravenness of many in the West (Britain and France in the 30s, Britain, France and Germany in the 2010s), particularly a call to recognize the aggressor’s legitimate interests.  (This is epitomized in the current situation by this piece in Reuters. Complete apologetic BS.)

But the pushback comes: Putin isn’t Hitler!

Well, Hitler wasn’t Hitler in 1938.  That is, we look back at events in 1938 seeing what transpired in the 1940s.  In 1938, no one had any idea of the monster that Hitler was to become.  In many ways, he was perceived like Putin is today.  An aggressive advocate of his nation’s interests, redressing historical injustices.  A reasonable, rational actor who would stop advancing once his nation’s legitimate interests were recognized, the historical wrongs reversed, and his co-ethnics protected.  Hitler then and Putin now were also widely viewed as ridiculous figures, prone to bizarre public displays, and hence not really dangerous.

And that’s exactly why making parallels to 1936-1938 are entirely appropriate.  Those judgments proved horribly wrong, and the consequences were horrific beyond belief.

Putin needn’t be anywhere near as evil as Hitler for the consequences of unchecked Russian aggression to be horrible indeed.  Meaning that the lesson of 1936-1938, that checking an aggressor can forestall truly frightening consequences, is valid today.  (And even Hitler could have been checked.  He was virtually petrified with fear when he went into the Rhineland.  It was the failure to stand up to him then which emboldened him in the years to come.)

What’s the downside of taking robust economic, non-military measures against Putin today?  Some modest economic pain.  What’s the upside? Deterring unpredictable, and potentially disastrous actions by an erratic autocrat emboldened by the weakness of his adversaries.

As insurance policies go, it seems like a very reasonable purchase.  Yes, we don’t know what Putin will do.  We don’t really know his ambitions.  We cannot look into his soul.  We don’t know how his behavior will change if nations opposed to him cave at every turn.

But is precisely that uncertainty which makes paying a premium today a bargain.  Hitler demonstrates what the tail risk is.  Putin doesn’t have to be nearly that far into the tail to be a grave danger to vast multitudes.

Better to take something of a hit now, in order to reduce substantially the risk of a future calamity.

That’s the lesson of the 1930s.  And Putin doesn’t have to be as evil as Hitler to make it imperative to take heed of that instruction.