Streetwise Professor

In retaliation for US and EU sanctions, Russia is banning the importation of large categories of food products from each: food imports from the US are pretty much banned altogether.

These sanctions are aimed at an industry that is politically powerful far beyond its numbers. Chicken farmers in the US will squawk at the loss of about 1 percent of their revenues, and European dairy producers will bellow in anger. But the economic impact on the affected countries will be trivial. The US exports about $300 million in chicken to Russia (down substantially from a few years ago), which is essentially rounding error in US GDP. European net food exports to Russia are about 12 billion euros, or less than .1 percent of the EU’s 13 trillion Euro economy.

The impact on Russia’s people will be substantially greater. Russia imports about 35 percent of its food, about half of that from Europe and the US. Higher value, non-staples are disproportionately affected. This will lead to an appreciable increase in the cost of food, which represents a very large fraction of Russian household budgets. Whereas US consumers spend about 6.5 percent of their total expenditures on food, in Russia the figure is about 32 percent. A rise in food prices hits hard. A 10 percent increase, which is not unrealistic, cuts Russian living standards about 3 percent.

Putin ordered the government to find ways to increase food production, because, you know, that ukases always work as the Tsar intends. Russian food output will no doubt rise in response to higher prices, but in the short run the elasticity of supply is likely to be very low, especially for vegetables and dairy. Anyways, this increased output will only mitigate the price increases. If Russian firms/farms could produce more at current prices, they’d be doing so.

I predict that since increased Russian domestic production will have little effect on prices, Putin will soon resort to the tried-and-false nostrum of price controls, just like Russia did when food price inflation spiked in 2007. This will lead to lines and empty shelves, so Russians can party like it’s 1989: to those nostalgic for the USSR, be careful what you ask for. I note that Russia also adopted price controls, to disastrous effect, in WWI. Putin is idealizing Russia’s role in that war of late, and employs WWI reenactors to lead subversion campaigns in Ukraine, so maybe he’ll think it’s a great idea to reenact the price controls too.

Some have suggested that the higher food prices (or shortages that result from attempts to control prices) will dent Putin’s popularity. However, it is sufficiently high (approaching 90 percent) that it can take a few dents. Moreover, you know that there will be a propaganda campaign to stymie any discontent. No doubt this campaign will blame the west, and the US in particular, proclaiming that the import ban is necessary to show that Russia cannot be dictated to by its enemies: Russian attitudes towards the west have hardened substantially post-Crimea, and such a message will resonate.

The campaign is likely to idealize Russian capacity for sacrifice, particularly for the Motherland. There will be allusions to the Great Patriotic War, when Russians sacrificed to battle evil invaders from the west who were intent on subjugating Russia.

Putin will call for the Great Patriotic Diet, in other words. And sad to say, this will probably work.

No matter how successful the propaganda campaign is, the import ban will be just another burden on the already sputtering Russian economy. It was sputtering before Crimea and sanctions, but the post-Crimea sanctions have made it wheeze all that much more.

One symptom of this is the government’s announcement that it was diverting contributions to private pension plans in 2015 to plug holes in the state pension system: it had already done so for 2014. One state official took to Facebook to decry the move. He was promptly fired.

Oil prices have bailed out Putin before, but oil prices have weakened a bit lately, so that is putting additional pressure on Russia, and particularly on the budget. One of Putin’s old gambits is to stir up trouble in the ME to keep up oil prices. Maybe he’ll try that now, but it’s hard to imagine how much more trouble there can be there (the place is in chaos from Libya to Israel/Gaza to Syria to Iraq).

There is widespread speculation on what Putin will do next in Ukraine. The Ukrainian army is slowly but surely grinding down the Russian proxies in Donbas, pushing them into pockets in Donetsk and Lugansk, where they will be cut off from supplies and reinforcements if the circles are closed. Thus, the reasoning goes, Putin has a choice between humiliating defeat there, or going all in with an invasion.

I have my doubts that he will invade. The troops massed at the border, 20,000 or so, are probably sufficient to deal with the still shambolic Ukrainian forces in Donbas, but logistical difficulties would make a further penetration difficult, and an occupation would likely turn into the Donbas Ulcer. Further, an outright invasion would likely trigger truly punitive sanctions.

In short, although outright defeat of his proxies would be humiliating, an invasion of Ukraine, even if capped by a victory in Donbas, would be a disaster that could not be justified on any cost-benefit basis. Pace Pyrrhus: “One more such victory, and we shall be undone.” Or pace Dryden: “Even victors by victories are undone.”

But humiliation and invasion are not the only two alternatives open to Putin. He could attempt to turn Donbas into a bleeding ulcer for Ukraine, by mounting a guerrilla campaign/low intensity insurgency, dressed up as a people’s revolt against the oppressive fascists. This will be sufficient to maintain a (frozen) conflict that would distract Ukraine, impede the formation of a stable state and government, make it unacceptable as a candidate for Nato, and cause the EU to treat it at arms length. Such a campaign would exploit Putin’s best military asset, spetsnaz units, that specialize at this kind of warfare. It would be less provocative to the west: if the US and EU can largely acquiesce to what Putin is doing in Donbas now, it would put up with a low intensity guerrilla campaign

Meaning that the standoff between the west and Russia is likely to persist for some time. Meaning further that Russians better get used to the Great Patriotic Diet, because they’ll be on it for a while.

Update. It’s rather amusing that Medvedev made the announcement of the food import ban. If it turns out to be unpopular despite the likely propaganda campaign, it will be blamed on sorry old Medvedev. That’s his job: scapegoat in waiting.

In his press conference last week, Obama responded to a question about whether the US would provide lethal assistance for Ukraine:

Well, keep in mind, the issue at this point is not the Ukrainian capacity to outfight separatists. They are better armed than the separatists. The issue is how do we prevent bloodshed in eastern Ukraine. We’re trying to avoid that. And the main tool that we have to influence Russian behavior at this point is the impact that it’s having on its economy.

Where to begin?

First, the “separatists” are pretty well-armed, so it’s not so clear that the Ukrainian military has a decisive advantage. A stalemate produced by conflict between two roughly matched forces would lead to a greater effusion of blood.

Second, a major reason to bolster the Ukrainian military is to deter Russia from invading, or from increasing the strength of the “separatist” forces. Bolstering the Ukrainian military would realistically achieve these outcomes. And both, by the way, would reduce and prevent bloodshed in Ukraine.

Third, giving the Ukrainian military a more decisive advantage over the separatists would speed its victory, which would be perhaps the best way to reduce and prevent bloodshed in Ukraine.

Fourth, why rely on a single “tool” to “influence Russian behavior” (i.e., economic sanctions) when other tools are available? Multiple tools, especially complementary ones like military, diplomatic, and economic measures, are usually far more effective when used in combination, rather than one at a time.

Fifth, it’s a little late in the day to “avoid” bloodshed in eastern Ukraine. The war is well and truly underway.

There might be good reasons for not providing lethal assistance to Ukraine (and intelligence as well). As is his wont, however, Obama didn’t provide them. His justification for this policy-which is part of a pattern, as witnessed by the refusal to provide ammunition and arms to the Kurds desperately fighting ISIS-is beyond inane.

Before departing on his I’ll Golf While the World Burns Vacation and Birthday Party, Obama gave an interview for The Economist. It is beyond belief.

Here is what jumped out at me (from a Reuters article summarizing the interview):

President Barack Obama dismissed Russia as a nation that “doesn’t make anything” . . .

Obama downplayed Moscow’s role in the world, dismissing President Vladimir Putin as a leader causing short-term trouble for political gain that will hurt Russia in the long term.

“I do think it’s important to keep perspective. Russia doesn’t make anything,” Obama said in the interview.

“Immigrants aren’t rushing to Moscow in search of opportunity. The life expectancy of the Russian male is around 60 years old. The population is shrinking,” he said.

Obama told Putin last week that he believes Russia violated the 1988 Intermediate Range Nuclear Forces treaty designed to eliminate ground-launched cruise missiles.

Speaking of Russia’s “regional challenges,” Obama said in the interview: “We have to make sure that they don’t escalate where suddenly nuclear weapons are back in the discussion of foreign policy.”

Of all the Obama idiocies, this has to rank near the top.

Of course, some are cheering the fact that he dissed Putin and Russia. Big. Fucking. Deal.

Those who cheering are missing the import of his remarks. This is Obama’s way of saying that Russia doesn’t matter, and hence its depredations can be ignored. In the long sweep of history, it is doomed to oblivion. So why worry? Ukraine? Temporary issue. This too shall pass.

To quote Keynes: In the long run, we are all dead. Or in the short-to-medium run, if you are Ukrainian (and maybe Lithuanian, Estonian, Georgian, etc.)

I would note that the Mongols, Huns, Vandals, Goths, etc., etc., etc., didn’t make anything either. Aggressive powers are heavy on the destruction, not the production. Their inability to make is one reason why some peoples and nations strive to take. That is exactly why they have to be stopped.

What’s more, “making stuff” is certainly a source of power, it is neither necessary nor sufficient. Putin has proven masterful at exploiting Russia’s pumped and mined, rather than manufactured, wealth to exercise power and influence.* Indeed, Russia’s energy wealth is the primary weapon that Putin has used to intimidate the Europeans into impotence: note that the last round of sanctions, allegedly so harsh, excluded gas, and Gazprom remains untouched. Russia, for all its alleged economic primitiveness, has been far more successful at exercising power using energy than Germany has with all its manufacturing prowess.

By condescendingly criticizing Putin’s short-termism, and apparent failure to understand Russia’s interests as well as he does, Obama overlooks the fact that a short-sighted leader can wreak tremendous carnage in pursuit of those allegedly short-destructive goals.

By dismissing Russia’s importance, and leaving the fate of every bordering country to It Will All Work Out in the End When Russia Collapses, Obama is basically washing his hands of the region.

If Obama’s diagnosis is correct, and Russia is really an aggressive but weak power, his prescription is all wrong. A weak power can be stopped by the application of power by an immeasurably stronger one, before it runs amok. But Obama just wants to stand back, and let nature-or history, actually-take its course.

But it gets worse. Note Obama’s remarks on the nuclear issue. In not so many words (because in using so many words before regarding Syria, he created a huge mess), he drew a red line: as long as Putin doesn’t “escalate where suddenly nuclear weapons are back in the discussion of foreign policy”, it’s OK! More of a green light, than a red line, actually.

So just don’t use nukes, Vlad, and you are good.

Putin will read this interview, and will then rub his hands with glee. Obama clearly expressed his extreme unwillingness to confront Putin in any meaningful way, and by saying implicitly that escalation short of the threatened use of nuclear weapons will draw no US response, Putin has every incentive to escalate.

This frivolity, this egg-head approach to foreign policy that focuses on long run trends while ignoring short run imperatives and the nature of our adversary, is exactly why the world burns.

*I would also take issue with the implication that mining and oil and gas production are somehow technologically backwards and less economically productive than manufacturing. Jed Clampett to the contrary, oil does not just flow from the ground. Nickel and gold are not lying around for the taking. Both require tremendous applications of technology and capital.

I wonder if Obama will denigrate Canada as a country that “doesn’t make anything”?

Never mind. It would be quite in character.

Putin is effing with Edward Snowden. Snowden’s one year of asylum ended on July 31, and he applied in mid-July for another year. As yet, he has heard nothing, except that he will be permitted to stay while his fate is decided.

Putin is most likely sending Snowden a message.

What is the message? That he is in Russia at Putin’s whim and sufferance. That he had better do as he is told, and not get any ideas. That he is owned.

Note that the Russians doubtlessly are deeply suspicious of Snowden, and likely despise him. To give an idea of what they think of those who turn their backs on their own country to assist Russia, consider what it is doing to Ukrainian soldiers captured in Crimea who decided to join the Russian military. Their Russian military records bear the notation: “Prone to treason.”

Last summer Putin made derogatory remarks about the fates of those who defected to the USSR. He specifically sneered at their disloyalty.

So Putin-and the rest of the Russian security establishment-have no respect for Snowden. They are using him. And they are sending him a message that they are using him, so that he understands perfectly his place.

Some have wondered whether Putin is considering using Ed as a bargaining chip with the US. I consider this far-fetched, because he could easily revoke asylum at any time. Moreover, there are many reasons for the Russians to keep Snowden, even if they have already squeezed him dry.

First, reputation: turning over Snowden would make others less likely to defect to Russia with information. (Though it must be noted that many of those who make this choice are sufficiently narcissistic to believe that they are immune to the fates that have befallen others, and others who do so are desperate or corruptible.)

Second, the Russians do not want the Americans to know for certain what Snowden has taken, and what the Russians know.

Third, the Russians do not want the Americans to learn anything from Snowden about how he was handled by the FSB, from the meeting at the Russian consulate in Hong Kong to his final destination in Moscow. Or from perhaps before. If Snowden was a Russian asset before he fled to Hong Kong, he will certainly never leave Moscow.

No doubt Putin will let Snowden twist in the wind for a while. Just to make sure the that message sinks in. Then he will grant another year’s asylum. Probably without the fanfare that accompanied  last year’s announcement. And the process will repeat itself again next year, with even less attention than this year. And the year after that. Until Snowden sinks into obscurity, and likely despair. And someday, Putin will probably prove a prophet, about this, anyways:

“How is he going to build his life? In effect, he condemned himself to a rather difficult life. I do not have the faintest idea about what he will do next,” Putin said.

Adidas stock got pounded earlier this week, following a drastic cut in its revenue and profit forecasts.

The company blamed many factors, including Russia:

Adidas also said it was scaling back investment in Russia, where it runs more than 1,000 stores, due to a fall in the rouble since the start of the Ukraine crisis and increasing risks to consumer sentiment and spending there.

“Current tensions in the region point to higher risks to the short-term profitability contribution from Russia/CIS,” it said, adding it would significantly reduce its store opening plan for 2014 and 2015 and increase the number of store closures.

Adidas had said as recently as last month it had not seen any impact on its business in Russia – beyond the translation effect of the weaker rouble.

The gopniks need to buy more track suits! Sanctions may destroy the gopnik market! Now we know why Adidas has been pressing Angela to go easy on Putin.

This brings to mind a hilarious incident from the spring, when Russian Communist Party head Gennady Zyuganov shocked Russian sensibilities by wearing an Adidas track suit while laying flowers on Stalin’s grave:

Russian Communist Party leader Gennady Zyuganov caused a stir on the Russian blogosphere for laying flowers at the grave of Soviet dictator Josef Stalin while wearing an Adidas tracksuit jacket.

A Twitter user who registered under the name “Josef Stalin” quipped: “Zyuganov showed up in an Adidas tracksuit top, a white shirt and dress shoes. [I’d have had him] shot for this outfit!”

Zyuganov made the dress code blunder on Sunday at a ceremony on Red Square to mark the 92nd anniversary of the establishment of the pioneers, a Soviet-era Communist youth organization.

But the best part was Zyuganov’s excuse:

He told the Russian News Service radio station that he wore it because “nobody makes good tracksuits yet in our country.” He did not specify why he had to wear a tracksuit jacket at all, but perhaps it was its red color that made the Communist leader warm to the garb.

His gaffe may have caught people’s attention because Adidas goods symbolized capitalist swank for many Soviet people under the Communist regime.

Yeah. Capitalist swank. That’s why the Russian equivalent of chavs wear them.

Rest assured. Zyuganov swears he has no promotional contract with Adidas. It was purely a fashion statement.

If Russia can’t make a good track suit, then good luck with that self-reliance that Putin, Lavrov, Medvedev and Rogozin the Ridiculous are promising in high tech goods, military equipment and finance in the aftermath of the sanctions. I’m sure it will all work out swell.