Streetwise Professor

But hopefully it’s over.  Fingers crossed.

The latest outage was due to a a serious attack on the site.  According to my hosting service, “someone has implemented ‘Black Hat’ strategies on your site. ”  This resulted in the creation of 49K duplicate pages without canonical tags and 70K excluded pages, which pinged the site repeatedly bringing it to its knees.  This took more than 2 weeks to repair.

But–again, fingers crossed–I’ve installed several additional security features that should prevent a recurrence of these outages.  But since I’ve clearly been targeted, no doubt these measures will be tested.

Thanks for sticking with me.

This 1 March article from Caixin–which has since disappeared down the memory hole in China–is a stunning exposé about the ostensible purchaser of a 14.1 percent stake in Rosneft.  It portrays the company as a financial shell game that basically kited trade finance credit to grow like Topsy, and accumulate a collection of assets around the world–many of which it is now unloading.   The company also utilized shadow finance to raise funds via a securities affiliate.  It needed to grow rapidly to generate the financial churn that it used to finance itself. Now it is unraveling because the powers that be in China have, for some reason, decided this will happen–presumably because a forced unwind executed in a highly opaque manner is far preferable to an uncontrolled collapse that was impending.

That Glencore, Qatar, Intessa, Rosneft, and Russian and Chinese banks would agree to sell to such an entity, and/or to lend it money to permit it to purchase the Rosneft stake indicates either a shocking lack of due diligence, or more likely, a desperation to exit the deal and the lack of a more reputable buyer.  Given CEFC’s implosion, and the even more fraught circumstances of government-linked Russian companies, I’d be hard pressed to identify any company that can or will step into CEFC’s shoes.

An even more important issue here is why the Chinese authorities have yanked the reins on CEFC, and hard.  This follows the seizure of Anbang Insurance, and the regulatory pressure on HNA.

My suspicion is that the government realized that CEFC was a house of cards, and the financial strains of the Rosneft acquisition would bring the house tumbling down.  Indeed, it seems that the company was having real difficulties securing the funding, and if it had failed that would have been a major embarrassment to China. But this only raises more important questions, such as, what inferences should be drawn from the government’s intervention?  In particular, what inferences should be drawn about the state of the Chinese financial system?

One possible inference is that the CEFCs and Anbangs are the exceptions, and the government will intervene before they threaten the broader system.  That’s the comforting inference.  The more disturbing inference is that there are many houses of cards in China waiting to fall, and that the government can neither crack down on them all or let any fall, so it intervenes on a just-in-time basis.  This kicks the can down the road, and buys time to attempt to get the leverage in the system somewhat under control.

I say attempt, because this strategy is fraught with moral hazard.  A controlled wind-down cushions the blow for creditors, and the expectation that the government will do this in the future provides little disincentive to cut back on the extension of credit today.  Protecting creditors from the consequences of lending to the likes of CEFC ensures that they will continue to lend to similar companies in the future.  But letting companies fail in a way that imposes big losses on creditors threatens a crisis in the financial system.

I paid attention to CEFC initially because of the Rosneft angle.  But I think a far more important angle is what CEFC’s rise and fall say about the Chinese financial system, and the ability of firms to grow rapidly and to a huge size on the basis of the most dodgy financing mechanisms.  If CEFC is at all representative, the implications for the Chinese financial system are dire.  Which could explain the haste with which the government consigned the story to the memory hole.

Yeah.  This is getting old.  Third attack I’ve suffered since January.  My hosting service swears it’s not malicious, but as Ian Fleming wrote: once is happenstance; twice is coincidence; three times is enemy action.

Especially given the sh*t that’s allegedly going down with US and UK warnings of increase in hacking activity originating in Russia (though I am always skeptical of attribution in this context, given the Moriarty on the train problem).

Anyways, thanks for hanging in there with me.  And enjoy it while it lasts!

I clearly underestimated the impact that the sanctions imposed on Deripaska, Rusal, and others would have.  The initial reaction Monday by many was to puke everything Russian.  Everything.  The ruble. The overall Russian stock market.  Russian debt.  Every major Russian company.  They all crashed. The carnage was widespread and indiscriminate and extended far beyond those directly targeted.

Rusal was the biggest loser, and extended its losses today.  Overall, its stock price is down almost 55 percent.  Ivan Glasenberg resigned from the board, and just now two Russian non-executive directors also resigned.  The company is clearly toxic/radioactive.  I don’t see it surviving without massive state support, and perhaps nationalization.   But even then . . . who outside of Russia and China will buy its aluminum?  (Note China is already suffering an overcapacity problem in the metal, which US trade restrictions would only make worse.)

I thought I might have misjudged seriously that Potanin would gain at Deripaska’s expense: on Monday Norilsk Nickel was down almost 20 percent, and Potanin was the biggest absolute loser.  Norilsk has since bounced back, and recovered much of its loss: it is now down about 7.5 percent from Friday.  But the “shootout” auction will still be between two gunmen who have been grievously wounded by fire from an unexpected direction.

Many other Russian companies that were pounded yesterday have also bounced back.  Severstal is actually trading above the pre-sanctions-news price.  Rosneft and Novatek have also recovered most of their losses.

Sberbank remains down–down more than 16 percent.  The bank disingenuously stated that the selloff was overdone because its exposure to sanctioned companies represented only 2.5 percent of its assets.  Well, since it is leveraged about 12-to-1, that represents 30 percent of its shareholder equity, which would justify a pretty big selloff.

The ruble remains down.  Indeed, it extended its loss today, and actually experienced a greater percentage decline today (almost 5 percent) than it did Monday (around 3 percent).  Perhaps this reflects the central bank’s statement that it would not intervene in support.  But it does indicate that this is perceived as a Russia-wide shock, and not one limited to a few billionaires and their companies.

The broader selloff, somewhat overdone as it was (as reflected by today’s recovery in many names) suggests a widespread estimation that other shoes will drop, and that billionaires that escaped the first round are still at risk for the Oleg treatment.

This raises the question of how the targets were chosen. Leonid Bershidsky argues that Deripaska and Rusal were targeted because taking Rusal’s aluminum off the market (as is happening, with the LME saying it will not warrant Rusal metal not already in warehouses) would be a much more effective way of supporting the US aluminum industry than selective tariffs.  This does have a certain logic, but if that is the logic, it would speak very poorly of the the US government, for it would imply the masking of a protectionist measure behind an allegedly principled reaction to Russian turpitude. It also doesn’t explain the other targets.

Nor does it explain the non-targets.  Novatek and Timchenko are much more tightly connected to Putin than Deripaska and Rusal. And Novatek LNG competes with US LNG, so there would be a protectionist rationale for hitting it.  Yet Novatek was not subject to SDN treatment, and as noted earlier its stock price has largely rebounded.  Perhaps a journalist friend in Moscow is right that Total’s big investment in it and its Yamal project has given it some immunity.

Similarly, Rosneft and Sechin are much more in the inner sanctum than Deripaska/Rusal.  Yet it too has escaped SDN.  Perhaps the risk of creating an oil shock is too great.

The “perhapses” indicate, however, that the rhyme and reason of the administration’s actions is not obvious.  And perhaps (there’s that word again) that’s what really has the market–and many rich Russians–spooked.  Given the capriciousness of the list, everyone is at risk.

Russia’s official reaction was of course negative, but one voice has been missing: Putin’s.  It’s not quite akin to Stalin, 22 June-3 July, 1941 (when he remained out of sight after the shock of Barbarossa), but it does suggest uncertainty as to how to respond.  Not a B’rer Rabbit reaction, at least not yet.

This uncertainty is no doubt fed by the realization of the vulnerability of the Russian economy to US policy.  I’ve written before that the US could crush Russia like an overripe grape by, for instance, cutting it off from SWIFT or the dollar system altogether.  This shows that it can wreak havoc with far more limited measures.

It’s also interesting that Xi made rather conciliatory remarks yesterday.  A coincidence? Perhaps (again). But Friday’s sanction action shows that Trump can act unpredictably and punishingly.  That likely concentrates minds in Beijing as well as in Moscow.

Whatever the logic of Friday’s thunderbolt, it should put paid to the Trump-is-Putin’s-pawn and Putin-has-something-on-Trump theories.  Indeed, a desire to terminate with prejudice those narratives is as good an explanation for the administration’s action as anything.  Not that reality will interfere with the conspiratorial ravings of those in the Democratic Party and the media and the neocon NeverTrumpers.  They are just too invested and obsessed, and nothing short of a preemptive nuclear strike on Moscow is likely to change that–and even then . . . . And with Trump threatening to attack Syria despite Russian warnings against it, maybe we’ll soon put that theory to the test as well.

On Friday, the US Treasury Department sanctioned several Russian billionaires, commonly but misleadingly referred to as oligarchs. Topping the list was Rusal’s/EN+’s Oleg Deripaska.  Also included were Suleiman Kerimov , Alexey Miller of Gazprom, and Viktor Vekselberg of Renova (which holds a substantial stake in Rusal).

Presumably the intent behind choosing these specific targets, and the sanctions law which led to their selection, is to somehow punish Putin, and to cause him to change his behavior.  The sanctions will probably fail in achieving these objectives, and could actually be a net benefit for Putin.

When it comes to Russian billionaires, there are distinct classes.

There are Putin’s favored billionaires–his buddies like Timchenko and the Rotenbergs (who share St. Petersburg roots with Putin).  To a large extent these figures are billionaires because of Putin–they are beneficiaries of his largesse.  As further evidence of their privileged position, he compensated them through favoritism to offset their losses when they were targeted for sanctions early on.

There are the billionaires Putin hates (or hated).  These are the 90s oligarchs proper, men like Khodorkovsky, Berezovsky, and Gusinsky, who are in exile or dead.

Then there are those billionaires he tolerates, because they steer clear of politics and pony up to pay for Putin pet projects (e.g., the Sochi Olympics).  Deripaska, Vekselberg, and Kerimov are in this category.

Deripaska in particular is hardly a Putin favorite, and at times Oleg has tested Putin’s tolerance–as evidenced by the pen throwing incident at Pikalevo in 2009, where Putin chastised Deripaska publicly, likening him to a cockroach who ran at Putin’s approach.

Punishing this group is unlikely to cause Putin any loss of sleep. And indeed, he may reap some benefits.  The sanctions make these men and their firms more dependent on him and Russian state support–and he can extract a price for this support.  Furthermore, it pays into his narrative of Russia being unfairly targeted by a hostile West (and the US in particular).  Indeed, the peripheral political role of those sanctioned allows Putin to make the colorable claim that the US harbors an animus against Russia and Russians generally: he will therefore be able to claim that this is just another example of American Russophobia.

Perhaps most importantly, Putin has been attempting rather pathetically to get wealthy Russians to repatriate their fortunes: truth be told, the US government is making a more persuasive case for that than anything Putin has done or even could do.  Putin is therefore somewhat in the position of B’rer Rabbit, and the US in the position of B’rer Fox.

All of these factors strongly suggest that the US action is at best symbolic, and perhaps counterproductive.  They certainly are insufficient to induce Putin to ratchet down his confrontation with the US, and may indeed play into his justification for such a confrontation.

Putting motivations and incentives aside, the sanctions will not have much impact–if any–on Russian capabilities to implement Putin’s confrontational strategy.

So again, a flamboyantly symbolic act, with little practical benefit accruing to the US.

This is not to say that the individual targets will not suffer–they will.  It’s just that Putin won’t feel their pain, or will use it to advance his own purposes.

Deripaska’s case is particularly striking.  The sanctions were clearly a surprise: Rusal stock fell 20 percent on the news, which would not have happened had it been anticipated.  [Update: as of Monday morning Central Time, Rusal is down 50 percent, and the company has asked customers to stop payment while it tries to right the business.] Moreover, Rusal/EN+/Deripaska were subjected to the most harsh form of sanctions–Special Designated Nationals (SDN) sanctions.  These are more punishing than those imposed on Rosneft, for instance.  Under SDN, any US person (including corporations) is forbidden to transact with the sanctioned individual or entity.  Moreover, secondary sanctions can be imposed on non-US entities that deal with an SDN target.  US firms can be precluded from dealing with foreign firms subject to secondary sanctions.  This makes it far more risky for non-US firms to cushion the blow against (say) Rusal: such firms may have to make the choice between transacting with US firms (especially banks and other financial institutions) and transacting with Rusal.  Many will likely say: “Lots of luck, Oleg! Been nice doin’ business with ya!”

Topping the list of firms facing this grim choice is Glencore, which has a marketing deal with Rusal through 2018.  This deal was expected to be renewed, except on a smaller scale for 2019 forward.  (On a smaller scale because Rusal has been moving away from selling primary aluminum which Glencore markets to selling value added wire rods, billets, and slabs directly to industrial customers.)  Glencore also owns 8.75 percent of Rusal, which it had announced it will convert into EN+ shares.

Of course one of Glencore’s strategies has always been to go where other companies daren’t.  Its appetite for political risk is clearly much larger than its peers in mining, and even its Swiss commodity trading peers.  But tempting fate with Uncle Sam on sanctions is a different matter, and thus I would consider a renewal of the marketing deal to be unlikely, and Glencore may also be looking to unload its Rusal/EN+ shares, although to whom and at what price are rather difficult questions to answer.  Probably to Russian entities (or a buyback financed by Russian state banks), and perhaps the Chinese, and for a song.

Glencore shares fell modestly on Friday, so the blow is not perceived as being too heavy.  But the company is likely the biggest loser other than Oleg himself.

The grievous blow directed at Deripaska also raises an issue that has not attracted much attention in the US or Europe–the fate of Norilsk Nickel.  Nornickel has been subject of a long running battle for control between Deripaska and Vladamir Potanin.  Roman Abramovich had indicated his intent to sell a block of shares that he had purchased as part of a peace deal between Deripaska and Potanin, and this raised the possibility of a “shootout” auction for the block between the two.

Well, methinks Oleg is plumb out of bullets right now, and so Potanin will prevail.  Which means that even a Russian billionaire can benefit from US sanctions on Russian billionaires.

(Curiously, although Potanin was on the “Forbes List of Potential Sanction Targets” announced earlier this year–as was Deripaska–he was not hammered the way Oleg was.  I have no idea why.)

All in all, there are loser and winners from Friday’s sanctions.  The losers are clearly Deripaska and to a lesser degree a non-Russian (despite the first name!), Ivan Glasenberg. One like winner is a Russian billionaire, and other winners are likely Chinese.

One person who is clearly not a loser, and may even be a winner, is the ostensible target–Vladimir Putin.

So other than throwing a few Russians to the US hounds baying for Russian blood, it’s really hard to see the point of this exercise.  It doesn’t advance American interests in any meaningful way.  Anyone looking for any change in Russian behavior–in Putin’s behavior–in the coming months will almost certainly be disappointed.  This is more another act in the ongoing American political melodrama than a serious policy move.

To alter a saying which Putin is fond of  quoting: the hounds will bay but the caravan–Putin’s caravan–will move on.

Not to mince words (since when do I ever do that?) but the gun control movement’s latest poster boy, David Hogg, is a repulsive, narcissistic punk who is using his dead fellow students’ corpses as a platform for demagoguery.

Now, if I had more of a public profile, CNN, Bloomberg, etc., would be dispatching a swarm of flying monkeys to get me, and my little dog too, for uttering such heresy.

I find Hogg so loathsome because he assumes a mantle of utter moral righteousness (and self-righteousness), and because he slanders anyone who disagrees with him as an accessory to mass murder.  And, of course, CNN, Bloomberg, etc., and the bulk of the political left in the US wholeheartedly agree with his calumnies (because they sincerely believe them), and find him useful because they believe that he will advance their cause.

Said media and leftists (but I repeat myself) claim that Hogg is beyond criticism because he has moral authority, due to his (somewhat ambiguous) proximity to the Parkland massacre.  And because he is a teenager, which apparently gives him some sort of additional authority, even though self-superiority rivals acne as the most repulsive teenage affliction.  Hence the frenzy directed at anyone who criticizes him.

Word to the wise: whenever anyone asserts moral authority to advance a cause, it is because they know that they cannot persuade on the basis of logic, reason, or evidence.  Like other appeals to authority, it is logically fallacious.  Indeed, appeals to expert authority are actually less disreputable than appeals to moral authority, because at least the former can be justified somewhat on Bayesian grounds.  Appeals to moral authority are also a form of ad hominem argument–that is, the audience is supposed to judge the truth of an assertion on the basis of the identity of the individual making a claim, rather than the logic or evidence supporting it.

I could colorably claim equal moral authority to Hogg.  In September, 2016, minutes after I left for the university, my neighbor opened fire indiscriminately with a semiautomatic 45 ACP Thompson carbine, wounding ten, before he was smoked in a shootout with police.  I was probably in as much danger as Hogg was, but that matters diddly squat in evaluating any argument I might make regarding guns and gun control, which is as much as Hogg’s proximity should matter.

Thus, I judge the frenzy with which the left pushes Hogg and some of the other Parkland students (all the while suppressing the voices of those with equal standing but who disagree with them) as an admission of their utter failure to make a reasoned argument in support of their agenda.  Conceding the inability to prevail on the merits, they appeal to emotion and resort to intimidation.

I mentioned before that anti-gun advocates believe that Hogg and his supporters believe that they have found the magic bullet (sorry, I couldn’t resist) to achieve their desire to disarm Americans.  In the past, they have failed repeatedly, and are becoming desperate.  So this time, they actually believe that by being more insulting, more slanderous, more supercilious, more condescending, and more morally superior they will dragoon their opposition into submission.

Yet further proof that doing the same thing over and over and expecting different results is a form of insanity.

Note there is not even an attempt to persuade.  There is merely an assertion of authority, combined with attempts to intimidate anyone who defies it.

They just don’t get it, and probably never will.  They don’t realize that their behavior just hardens and intensifies the opposition that they face, without attracting a single convert. We’ve seen this over and over and over again in the past two years. They utterly fail to understand that the phenomena that they despise, whether it be the election of Trump or the refusal of large numbers of Americans to budge an inch on gun control is a reaction to them. The more they fail to achieve their political objectives, the more they insist on reprising their act, only louder and more obnoxiously.  Which only engenders and even stronger reaction against them.

Unless and until the left and the media stop treating their opponents as objects of hatred and scorn, and as moral monsters, they will fail.  Since they are so utterly convinced of their own rectitude, and in their heart of hearts actually view their opponents as beneath contempt, however, they will not stop.  When David Hogg becomes old news, they will find someone else.  And that will fail too.  But then they will find someone else.  And the political hamster wheel in the US–not just on gun control–will continue spinning pointlessly.