Streetwise Professor

The Russian invasion of Ukraine has not shocked and awed the Ukrainian military, but it has shocked and awed Germany, fo’ sho’.

In a period of hours over the weekend (and remember, German stores close promptly at 6 and are not open on Sunday), Germany announced that it will:

(a) Increase defense spending to 2 pct of GDP.

(b) Build two new LNG import facilities.

(c) Consider delaying decommissioning its nukes.

(d) Consider all options for energy, including gas, nuclear, and coal: there are no longer any “taboos” on energy sources.

What will Greta say?:

The Germans are saying, in effect: Go away girl. The shit just got real.

I note that (a) and (b) topped the list of Donald Trump’s harangues against Germany, which caused the ruling class to shriek in anger: how dare he insult our dear allies? Actions speak far louder than an apology.

Alas, this reality therapy has not penetrated the thick skulls of the Biden administration. When asked about reversing Biden administration anti-fossil fuel policies, spokesmoron Jen Psaki instead continued to ride the renewables hobby horse. She thereby reinforced the message of the Most Clueless Man in the World, John Kerry, whose big concern about Ukraine is that it might distract Vladimir Putin from focusing on climate change.

Yes, reality is a mother. Enough of a mother to snap even the dreamy Germans out of their green and pacifistic reveries. But not enough of one to do the same in the Biden administration.

ISW reports (based on US intelligence, allegedly) that the Russians are in an operational pause, waiting for logistic support and reinforcements. I have to say, an operational pause after 3 days of a planned operation launched from your own borders is pathetic.

Perhaps I should not have been surprised at the logistic difficulties. This article by a retired US Army LTC who now does simulations for Nato implies that Russian logistics are not configured for high tempo offensive operations away from railheads. If anything, it suggests an army configured to fall back on its communications.

Russian tactical proficiency also seems lacking.

Russian units are not fighting as BTGs. They’re not doing combined arms warfare. They’re driving down roads in small detachments, pushing recon and VDV units forward. Tanks without infantry. It’s not going well for them because this isn’t how they organize and fight (more later). https://t.co/5AibDoyUmL

— Michael Kofman (@KofmanMichael) February 27, 2022

Tanks operating without infantry is a recipe for disaster because they are extremely vulnerable to ambush by anti-tank missiles or attack by drones. This is particularly true if they are operating on roads, especially through built up areas: the ATM crews can pick off the lead and tail vehicles, stop the entire column, go to town on the immobilized vehicles, and then scoot for safety.

This is not news. It has been known since tanks were first deployed in WWI.

This is pretty shocking. The otherwise sensible Kofman cautions that the Russians aren’t fighting the Ukrainians the way they would fight Nato:

Folks are taking the right lessons about Ukraine’s military from this, but a number of the wrong ones about the Russian military. This operation looks terrible, and it should, because it’s assumptions were nuts, but this isn’t the Russian mil fighting as it would against NATO.

— Michael Kofman (@KofmanMichael) February 27, 2022

Why wouldn’t the Russians bring their A game here? This suggests that they don’t have an A game.

What is transpiring suggests that in addition to logistic and tactical failings, Russia suffered a major intelligence failure, especially with regards to evaluating the combat capability of the Ukrainians.

In sum, piss poor performance, despite alleged prior planning.

So who will take the fall for all this? There were rumors (since denied) that Chief of the General Staff, Valery Gerasimov, had been fired. Maybe it’s not true now, but it could well be soon. Ditto with Defense Minister Sergei Shoigu.

A deeply suspicious–and arguably clinically paranoid–man like Putin may suspect that he has been deliberately sabotaged by the military. If you are looking for a mental model of the man now, Stalin is probably the best bet.

This picture of Putin, Shoigu and Gerasimov is unbelievable:

Again with the table! This suggests a man who is deeply scared about his immune system. (Look at his pictures. The puffy face is symptomatic of heavy steroid use.)

And check out the happy couple who can barely be made out at the end of the table:

A ruble for your thoughts, gentlemen?

By the way, I’m being cheap there: as of now, a ruble is worth about .9 cents.

So Plan A–decapitation and blitzkrieg–didn’t work. What’s Plan B?

Alas, I fear it is a reversion to Russian form, by pulverizing Kiev and perhaps other cities.

There was a story circulating last night that Putin had ordered Kiev be taken by tomorrow.

Sorry, Vova. You don’t take a defended city in a day. Or a week. It usually takes months. Like the 2 months the Germans needed to take Warsaw in 1944 (and they obviously showed no scruple in their means). Or the 6 weeks it took in Grozny. Or the many weeks the US spent securing Mosul, or Fallujah, or Sadr City.

I could go on.

This is a terrible prospect.

Will Putin have the time to carry this out? To my amazement, the Europeans have shown some testicular fortitude and ramped up sanctions. The SWIFT restrictions on Russian banks, and most notably the restrictions on the Central Bank of Russia, threaten to demolish the Russian financial system, and like tomorrow: the sharp decline in the ruble is a harbinger of that. Moreover, this will hit ordinary Russians. There are already lines at ATMs, and bank runs are likely, as are runs on foodstuffs. This could–finally–galvanize widespread social unrest in Russia. With a fire in the rear and at the front, what will Putin do? How much time does he have?

Most concerning is the fact that Russia’s poor performance on the battlefield is a double edged sword. His conventional forces being revealed to be a paper tiger/Potemkin military, Putin has only a single card to play: nuclear weapons.

And he signaled his willingness to play that card today, by putting Russian nuclear forces on their highest level of readiness.

If Putin felt cornered before he launched this folly, how must he feel now?

Sobering as it is, the world’s fate may be in the hands of those unhappy men at Putin’s table, or their subordinates. Either through insubordination or coup, they can take the world’s fate out of the hands of someone who is either literally mad, or gives a damn good impression of it.

To the surprise of many, including to some extent me, the Russian assault on Ukraine has bogged down. But that’s probably not the right phrasing. It was never unbogged. It has made very little progress in the face of fierce Ukrainian resistance, and this was true from the opening moments of the assault.

The biggest surprise to me is that Russia has not been able to secure anything remotely approaching air superiority. On paper, they should dominate. But they have lost many aircraft, including not just ground attack SU-25s (which are pretty vulnerable) but also front line Sukhoi fighters and IL-76 transport aircraft (presumably loaded with airborne troopers, Russia’s best). Their main air attacks on Kiev have apparently used cruise missiles, which suggests concerns about the risks Ukrainian air defenses pose to Russian manned aircraft.

The first hours–days, actually–of a US assault would have been focused on dismantling the air defense system. (Remember the first 100 hours of Desert Storm.). Once that is achieved, the tanks roll. The Russians have done both simultaneously (perhaps for political reasons) and it is not working out for them.

On the ground, gains are apparently few, and achieved at high cost at places like Kharkiv/Kharkov. (Even though Ukraine probably has no von Mansteins in charge.) I thought Mariupol would fall pretty quickly, but the Russians appear to be more interested in moving east along the coast rather than securing the rest of Donetsk–which was ostensibly the pretext for this crime.

It seems that the Russian plan was to execute a coup de main to seize Kiev/Kyiv using airborne units and special forces (Alfa/Spetsnaz). They have not achieved that. They seized, then lost, then seized again an airport near Kiev that would have been the springboard for that. But damage to the runways and the losses of some planes that would ferry in the follow on forces have delayed that, and possibly scuppered it. Reports indicate that the VDV units are instead moving to Kiev/Kyiv overland from Belarus.

Some special forces units–in Ukrainian uniforms–have been killed and captured. (Here is an example from Nikopol.). Not a good look for the alleged elite. (Not a good look because of poor operational performance, and because of the violation of the rules of war: the Ukrainians had every right to shoot them on sight. But maybe they could serve as very effective weapons in the propaganda war.)

There are stories of some Russian penetrations into Kiev/Kyiv, but Zelensky is still there and the Ukrainians appear to be in control of the bulk of the capital.

Failure to execute a lightning strike that toppled the Ukrainian government now presents Putin with a grim choice. He obviously believes Kyiv/Kiev/the Ukrainian government is the center of gravity in this conflict. The failure of a decapitation strike against the Ukrainian government confronts Putin with the prospect of a protracted battle in the streets of the capital. Urban warfare is slow and bloody, a meat grinder par excellence.

The historical Russian approach to such battles is to use overwhelming firepower (cf. Berlin 1945, or more recently Grozny). But Putin supposedly venerates Kiev as the cradle of Russian civilization, and reveres St. Vladimir (a prince of Kiev) as “as the unifier and defender of Russian lands, as a visionary politician.” Will he subject this holy place to the Grozny treatment if Ukrainians (soldiers and civilians alike) fight his soldiers in the streets?

The cost in lives–including Russian lives–of such a choice would be immense. The financial burden on Russia of sustaining a high intensity conflict would also be acute. And making such a choice would almost certainly lead to the imposition of the most severe economic sanctions against Russia, namely its excision from the world financial system via expulsion from SWIFT and sanctioning of the Central Bank of the Russian Federation. This would no doubt set off some intense political dynamics within Russia.

Putin was counting on a short, decisive, victorious war. With every passing minute, it becomes clearer that he won’t get it.

What then, Vova?

Given that he is quite likely mentally unbalanced–severely so–that question is as fraught for us as it is for him.

So why hasn’t the supposed juggernaut juggered?

Well, for one thing, the enemy gets a vote. (More on that in a bit.)

For another, Russia’s performance in Georgia in 2008 was something of an embarrassment to Putin and Russia. In its aftermath Russia embarked on a wholesale shakeup of the military, involving substantial investment in new equipment (not just tanks, planes, and the like, but things like radios) and an attempt to reform the manpower system.

From the outside–and here I and others likely fell for Russian information operations–the changes appeared to be working. The Russian army was not the shambolic wreck it had been. But it is clearly not the juggernaut it presented itself to be.

From the outset one question in my mind was not the hardware, but the meatware. I wrote a lot 10 years or so ago about the Russian military manpower problem. The military had become less reliant on conscripts, but the conscript cycle had become shortened to a single year, meaning that many of the soldiers currently violating Ukrainian soil have been in the army only a few months–hardly likely to be effective fighters. Just how this new mix would respond to contact with the enemy was much harder to evaluate than the change in Russian materiel. The initial results are not impressive.

And it must also be noted that Ukraine also engaged in a crash reform of its military post-2014. Its performance has been far more credible than most expected. Thus, if anything, it appears that the Ukrainian military reforms over the last 8 years have been more effective than Russia’s over the last 14. Indeed, the Ukrainians have demonstrated considerable pluck, with numerous incidents (telling a Russian ship to “go fuck yourself” when the ship demanded their surrender, a soldier sacrificing himself to blow up a bridge in the faces of advancing Russians) that will build a legend of national resistance. (This in turn would make any putative Russian occupation all the more difficult.)

Initial reports (which must always be treated with care) indicate the the Russians are already facing serious logistical difficulties. If true, this is gobsmacking. If you can’t support a campaign on your own doorstep, you may be a colossus, but you have logistical feet of clay. This is especially true since the Russians had considerable time to plan and prepare, lay in stocks, etc.

And their logistical difficulties will only get worse. It is axiomatic that the further the advance, the more logistical friction impairs operational effectiveness.

And supply lines present the Ukrainians with a perfect opportunity to turn the asymmetric warfare table on the Russians. Partisan warfare against invaders has long been a speciality of Ukrainians, whether it be against the Red Army in the Civil War, the Germans in WWII, or the Soviets in the aftermath of WWII. Tanks can’t move without gas. Soldiers can’t fight without food. Detaching units to hunt down guerrillas erodes combat power.

In sum, Putin wanted and expected–and in fact, absolutely needed–a quick victory. It is increasingly likely that he will not get it. Another example of “no plan survives contact with the enemy.”

On the one hand, that is encouraging–although Ukraine will pay a high price in a protracted conflict. But we have to ponder how Putin will respond to a stalemate, or a long slog towards victory.

Putin tells a story from his youth in which he cornered a rat–to his regret (Putin’s, not the rat’s). Maybe it happened. Maybe it didn’t. But he tells it to send a message: if you corner me I will try to rip off your face.

He justifies his invasion of Ukraine as a legitimate act of self-defense because the US and Nato had backed him into a corner. That was a grotesque exaggeration, but he may well find himself in a corner in Ukraine.

One response to stalemate is to escalate. As Eisenhower said, “If you can’t solve a problem, enlarge it.” But if Putin’s military proves itself to be a brittle sword, what other means does he have to escalate? The answer to that question is obvious–and ominous. Especially when one considers Russian nuclear doctrine.

So he’s done gone and done it. I can’t say that I believed this was the likely outcome, for reasons set out in previous posts. But there was enough uncertainty about Putin’s preferences and beliefs that it was always a possibility. And that possibility has become a reality.

Putin has appeared particular unhinged in his two most recent speeches. A combination of paranoia, grandiosity, and megalomania. The most bizarre aspect of his remarks is his portrayal of Ukraine as some existential threat, and in particular some existential military threat to Russia. It is hard to choose which would be worse: he believes it, or he doesn’t. The former would imply a paranoid man completely out of touch with reality, the latter a complete cynic willing to camouflage his covetous, irredentist, and history changing ambitions with transparently false justifications. (Similarly it is a no win situation in a choice between he is really unhinged or he is just playing it on TV.)

The recriminations in the West (and in the US in particular) are already underway. To be honest, Putin’s action suggests that there would have been little that anyone could have done to deter him. For reasons I’ve discussed, the action should have been self-deterring.

The only thing that could (not necessarily would) have made a difference would have been a concession by the US and Nato not to incorporate Ukraine now or in the future. It was stupid even to have contemplated Ukraine membership in Nato, so such a concession would have actually benefitted Nato and the US. Further, it would have deprived Putin of his pretext, and his reaction would have revealed more about his true agenda.

That said, such a concession was a necessary condition for avoiding the invasion, not a sufficient one: if Putin’s ambitions were truly larger, he would have proceeded regardless. But an invasion after a concession would have provided far more precise information about Putin’s goals than we have now. We are still in the dark as to whether seizing Ukraine will achieve Putin’s objectives, or whether those objectives are more expansive.

As my previous post indicated, Putin’s pre-invasion demands strongly suggest that his objectives are indeed more ambitious, and involve nothing short of rolling back Nato to its pre-1997 state. If that is indeed the case, the capitulation of Kiev would represent only a beginning and not an end. And that is a very disturbing prospect as it increases the odds of a Russia-Nato conflict in the near future.

Operationally, things are proceeding exactly as one would expect. The main outstanding question is how much opposition Ukraine’s armed forces will be able to mount.

I am also curious about what fraction of the invading forces are conscripts, and where they are in the conscription cycle. Those could influence how the campaign will proceed.

Back to Putin’s mental state. Recently he has been reprising what I referred to as “a man in a hurry” more than a decade ago. His haste seemed to have been in abeyance in recent years. So why has it returned?

A couple of possibilities come to mind. The first is that he just saw this as an opportunity. A weak and divided west, with a feckless and obviously mentally and physically limited American president. Germany compromised by its energy dependence on Russia, and its general Daimler über alles attitude. (BTW, Angela Merkel is probably grateful she left office–but she must called out on this mercilessly.)

A second possibility is that he is seriously ill. There have been rumors to this effect circulating recently–but there almost always are regarding strongmen. (There are rumors about Erdoğan’s health too.) But this precipitous, not to say maniacal, rush to war is something that a man on a mission would do if he believes the window to accomplish it is closing.

More later, as more information becomes available, and on what the options are available to the US and Europe, and what impediments may foreclose those options. (Re the latter, think of a country that begins with “G” and ends with “Y”.)

The most striking thing about the “Ukraine situation” (quote marks explained shortly) is its weirdness. All you hear about is Ukraine, Ukraine, Ukraine, but Putin’s recent demarche was not only about Ukraine, or even primarily about Ukraine (hence calling it the Ukrainian situation is highly misleading). Instead, Putin has demanded a restoration of pre-1997 eastern Europe, specifically the rollback of Nato and the elimination of Nato forces in inter alia Poland, Bulgaria, Romania, and the Baltics. To Russia, Ukraine matters primarily to the extent that its inclusion in western security (and economic) structures would exacerbate an already unacceptable status quo.

I am reminded of this classic National Lampoon cover:

In my imagined reboot, Ukraine is the dog, Putin is holding the gun, and the caption is “If you don’t get Nato out of eastern Europe, we’ll kill Ukraine.”

In other words, and not for the first time, Ukraine is a pawn in a bigger game between great powers. Or to shift metaphors, Ukraine is a stage for an elaborate kabuki between Russia and the US (with western Europe playing its usual bit part).

The US character in this drama is particularly weird. The US was hysterically screaming that the invasion is “imminent.” It even named the date–16 February. Then it dropped the word “imminent” for a bit, before resurrecting it. Yesterday Biden said he was “convinced” that an invasion is forthcoming, and even claimed that he knew the ultimate objective–Kiev/Kyiv, i.e., a complete overthrow of the Ukrainian state. (Perhaps this was a veiled attempt to walk back his previous “limited incursion” gaffe.)

But . . . those supposedly in the cross hairs continue to downplay the threat. Ukrainian president Zelensky has told Biden (and the Defense Department, State Department, and various Deep State leakers) to chill. Yesterday the Ukrainian defense minister said that “we estimate the probability of a large scale escalation as low.”

Why is the US so alarmist, when those whom it is ostensibly alarmed about are not? Only weird explanations come to mind. One is that Biden (or more accurately, those really in control) actually want a conflict with Russia. Insane–but plausible, because other agendas are at work here. Another is that this is a cynical manipulation. The government knows Putin is highly unlikely to invade but is exaggerating the threat in order to take credit for his not doing so: “See! We stood up to Putin and he backed down!” (Kind of like my invisible tiger gun. What? You don’t think it works? Well, you don’t see any tigers around, do you?)

I seriously doubt that Putin will invade, on any scale. Or let’s put it this way, any invasion would likely turn out very badly, so a sane Putin would not do it. Yes, that leaves the possibility that Putin is not rational, but then, how could he be deterred?

A large scale invasion–i.e., Biden’s scenario of a drive on Kiev and the overthrow of the Ukrainian state–would saddle Russia with a costly, long occupation at best, and a perhaps an extended guerrilla war. (The nationalist militias that figure greatly in Russian and pro-Russian narratives on Ukraine present a credible threat of such an outcome.) A Ukrainian Ulcer, as it were.

And that is not to mention the consequences of any economic measures against Russia. And most importantly, it would certainly result in the exact opposite of what Putin currently demands: namely, greater militarization of eastern Europe and greater integration of that area into Nato force structures. (The just announced sale of M1 Abrams tanks to Poland is a harbinger of such an outcome.) It would also greatly increase the odds of Sweden and Finland joining Nato.

A more limited operation (e.g., movements focused on the Black Sea coast of Ukraine) would be less costly in terms of the operation itself and the occupation aftermath, but would mainly succeed in extending the front (currently limited to Donetsk and Luhansk) with the concomitant costs, thereby expanding an already draining frozen conflict, and adding another economic sinkhole to the great Russian empire. Moreover, it would almost certainly result in the same western and eastern European reaction in terms of sanctions and bolstering of Nato.

Perhaps Putin’s demands regarding a return to the pre-1997 status quo are a bargaining chip that he will sacrifice for some concessions on Ukraine. Recognition of Russian possession of Crimea and the Donbas, perhaps. And/or preclusion of Ukraine joining Nato and western economic and government structures. Installation of a compliant regime in Ukraine, and de facto Russian veto over the Ukrainian government.

In other words, his reservation price for not shooting the dog is lower than his current offer.

But even this negotiating strategy requires a credible threat to back it. The credibility of the threat to invade Ukraine is dubious, for the reasons outlined above.

Predicting the outcome of bargaining games under asymmetric information is always very difficult, and that’s what we have here. If I had to guess, I would say that the ultimate outcome will be something along the lines that Macron mooted when he met Putin: Finlandization of Ukraine. (Though it is uncertain whether Putin heard him across a 17′ table, which is yet another weird tableau in this already weird drama.)

To me, the most worrisome is not Putin’s mental state, but the mental state of Biden and the real decision makers (who can easily manipulate a weak and befuddled president). US propaganda games and hysteria do not inspire confidence. There are other agendas at work here, and those agendas are not likely to be compatible with a reasoned approach to Ukraine.

The US has accused Zero Hedge of “amplifying Russian propaganda.”

Well, I have to agree. Indeed, you read it here first . . . if you’ve been reading for more than a decade. Because of that ZH has attacked me on several occasions, and blocked me on Twitter eons ago.

But does that mean that you should ignore Zero Hedge, and defer to what the US says, especially the “intelligence community,” and get all of your information from the US government sources and western media that relies on it? Absolutely not.

Alas, the US government–and the intelligence community in particular–is itself a font of propaganda and disinformation. Moreover, much of the mainstream media (especially the WaPo, NBC in all its variants, CNN, and NYT) is little more than a mouthpiece for the US intelligence community. By design. The CIA in particular has used and manipulated US media (often with the latter’s enthusiastic cooperation) for decades.

In other words, the US complaint about Zero Hedge is very much the pot calling the kettle black.

They remind me of the mirror image characters in the old Spy v. Spy cartoon in Mad Magazine:

In other words, pick your propaganda/info op.

In its McCarthy-esque fashion, the administration labels anyone who disbelieves its propaganda is a Russian shill. Recently, when challenged by the AP’s Matt Lee, State Department Spokesman Ned “Pencilneck” Price responded:

“If you doubt the credibility of the U.S. government, of the British government, of other governments and want to, you know, find solace in information that the Russians are putting out, that is for you to do.”

And I actually suggest you do it. As part of its function as a disruptor, Zero Hedge runs masses of material from sources and voices who confront the official, media sanctioned narrative, not just on Russia but on COVID, wokeism, and on and on. It is of wildly varying quality and credibility and viewpoint, but that actually gives it a leg up on the US media, which is monotonously uniform and of unvarying low quality. If you are a discriminating reader you can filter out the Russian disinformation (which as I noted in my 2011 piece is not the totality of its content, but which ZH includes in a mass of other material in class information operation style) and other crap, and get some valuable information that among other things allows you to identify US government and media disinformation. It’s also good to know what message the Russians are trying to send.

And definitely don’t rely on the official or leaked pronouncements of the US government, and especially the intelligence community (but also, alas, public health officials). If you do, you are a sucker.

The past days (weeks in the case of Canada) have seen a surge of protests in Canada, Australia, New Zealand, and France. The regimes have acted aggressively in France and Canada in particular. Protestors in Paris–and truth be told, innocent diners at cafes–were tear gassed and many were arrested (and some brutalized). Canadian authorities have taken escalating steps against truckers in Ottawa and on the Ambassador Bridge between Detroit and Windsor, OT.

The Canadian action followed a particularly egregious statement by the appalling Prime Minister Justin Trudeau. Adopting the wearied, condescending, and supercilious tone of an aggravated parent lecturing a 6 year old, Petit Justin said he had heard the truckers–but was blowing them off. And they had to go to their rooms like good little boys and girls or he would have to get out the whippin’ stick.

Trudeau’s words and actions (and those of bloated Ontario Premier Doug Ford) were welcomed with squeals of delight from the ruling class and its numerous pilot fish, such as the Harvard lecturer (who falsely advertises herself as a professor) who advocated slashing truck tires and siphoning their fuel, and who intimated that even more draconian measures to deliver “hurt” were justified. Similarly, the French crackdown won accolades from the usual suspects.

It is difficult to distinguish the government responses to civil disobedience in Canada, France, and other locations (e.g., the Netherlands, Germany) where anti-mandate/anti-NPI protests have occurred from how Russia responds to such agitation. The main difference being how the western ruling and chattering classes respond–cheering the former and damning the latter.

A common cause of mass civil disobedience in democratic societies–especially when it involves ordinary working people as is the case in Canada, etc.–is the well-known fact that democratic institutions such as voting and representative government are relatively unresponsive to the intensity of preferences. They are driven, roughly speaking, by the preferences of the median citizen. When there is a sizable group in the minority whose preferences diverge substantially and intensely from the median, governments will be at least unresponsive to and often virulently opposed to that minority: the incentives inherent in the democratic political institutions drive that response. Despairing recourse through normal political means, those with these intense but divergent preferences see civil disobedience as the only option available to them.

When such people are by-and-large ordinary, law abiding working people, the protests will be orderly and even carnival-like, as has been observed in Ottawa. But that matters not to the rulers. Such challenges to their authority enrage them. Moreover, in the scenario I am considering, in which protests are driven by a large divergence between minority and median preferences the government will often have considerable political support even if it acts quite aggressively.

I think that is what we are seeing throughout the world right now. In many countries COVID-rationalized restrictions garner considerable support, and arguably the median citizen supports them. Governments are heavily invested in these measures. But large numbers of people are intensely opposed. As a result we see large protests and obdurate governments which apparently believe that compromise is not politically advantageous. Hence the outbreaks of large protests that governments feel empowered to crush.

The US is an interesting case due to the fact that some vestiges of federalism remain. The median preference varies across states, and most police powers inhering in the states, individual states have adopted different policies. Compare say Texas and Florida with California and New York. This reduces the likelihood of a large minority holding intense preferences that differ substantially from the median in the polities that exercise police powers.

There is one important question to consider when evaluating this distribution-of-preferences-based story: what drives preferences?

In the case of COVID and the policy responses thereto, it is abundantly clear that government information operations, often facilitated by private corporations, have played a decisive role in shaping those preferences. The fomenting of fear, bordering on panic. The concerted efforts to quash any dissenting views–to the point now where in the US the Department of Homeland Security proclaims that opinions–and indeed, facts–contrary to official government pronouncements are “misinformation, disinformation, and mal-information” (including regarding COVID in particular) are tantamount to terrorism. Twitter and Facebook in particular have been enthusiastic handmaidens of government efforts to control the narrative. Efforts that are first and foremost directed at shaping preferences and combatting the formation of dissenting preferences and beliefs.

The DHS announcement also claims that what it asserts to be misinformation, disinformation, and mal-information–but which is increasingly clear is truth and fact–is dangerous because it “undermine[s] public trust in government institutions.” This betrays a sacralization of the state–which, perversely ironically, is also a primary objective of Putin’s policies, including his concerted efforts to control public discourse in Russia.

During the Cold War it was sometimes observed that the USSR and the west came to resemble one another in many ways. I think it is fair to say that is much more true today, with respect not just to Russia but China as well. 

Some people are more amenable to government propaganda than others. So one impact of domestic information warfare is to exacerbate divides between the median and large minorities. Further, those who are less vulnerable to information warfare and coercion, but recognize that they happening, are often outraged by it. This intensifies their preferences and makes them more militant.

I think the above is an accurate model of the trajectory of western societies in the past two years. The median has been manipulated by relentless government information warfare that played on fear. This has made it politically possible for ostensibly representative governments to impose draconian measures. But these measures have elicited intense opposition from those who have been resistant to–or repelled by–the measures themselves, and the propaganda used to promote them. The result is protests, and crackdowns thereon.

The one thing that will change this current equilibrium is an evident divide between government-driven panic narratives and the empirical reality that people experience: this would tend to move the median. That seems to be occurring now. In the US, some states are relaxing restrictions and changing their messaging when the latest scariant turned out to be largely benign–clear indications that the median is in fact moving.

We have experienced two years of the tyranny of a manipulated median. One big issue is whether there will be a widespread recognition of this fact, and whether this will engender a backlash. One thing is likely: governments fear this, and for this reason, they will continue and indeed amplify their manipulative information operations. And ironically, although the government believes that waging war on what it characterizes as misinformation etc. is necessary to maintain trust in government institutions, in the end nothing is more corrosive of trust than those very measures. The government has met the enemy, and it is them.

When playing Spin the Bottleneck with my students I say to look at what lies between the price of a transformed and untransformed commodity to identify the bottleneck. In my earlier post on the gaping spread between European (and Asian) LNG prices and the price of US gas (which is on the margin for both destinations) I noted two possible constraints: shipping and liquefaction capacity.

Well, it ain’t shipping.

There is a surfeit of LNG shipping capacity. So much that LNG shipping is effectively free between the US and Europe (down from $273K/day in December). Yet the spread remains very wide. So the binding constraint is definitely liquefaction capacity, in the US in particular. Those who have the rights to that capacity–notably firms that entered into contracts with the likes of Cheniere or Freeport that buy gas at the US price and pay a contractually fixed liquefaction/tolling fee–are coining it. They capture the bulk of the existing spread between TTF or UK Balancing Point prices and Henry Hub. (The LNG companies are benefitting only to the extent that they reserved some of their capacity for their own trading, which is rather de minimis).

So in the short run liquefaction capacity is quite valuable. The question is what will its value be over the longer term? Will current events convince enough financiers to provide capital for a large expansion of US capacity? Given the long gestation period of these projects it is a hard issue for banks and equity to analyze.

One thing to note. Another thing I discuss extensively in my classes is the importance of government/regulatory bottlenecks. Such bottlenecks may be a constraint on expansion of US LNG capacity. Many of the projects under development do not have the requisite federal permits. The Biden administration is unlikely to grant more. Thus, like taxicab medallions in NYC, existing permits likely have a substantial scarcity value–thanks to a government-created bottleneck.

This has interesting implications for financing of US LNG projects. Financiers of a given project face less risk of a glut of capacity coming online in a few years, and this should make them more willing to finance already permitted projects. But, of course, they are taking on political risk by doing so: might a new administration change course post-2024? Or might political pressure induce a change in course by the current administration? There are already a lot of political risks in investing in anything fossil-fuel related (attributable to climate hysteria). This is a US LNG-specific risk.

The Canadian regime’s response to the truck-o-lution continues to amaze and disgust. And yesterday its fundamentally fascist–in the strict, not rhetorical sense–nature was revealed.

Yesterday Ottawa Police announced that it was going full China social credit system to investigate the truckers:

Enhanced intelligence operations and investigations: National, provincial and local intelligence agencies have increased efforts to identify and target protestors who are funding/supporting/enabling unlawful and harmful activity by protestors. /11

— Ottawa Police (@OttawaPolice) February 4, 2022

You should really read the entire thread. The “intelligence operations” involve collecting “financial, digital, vehicle registration, driver identification, insurance status, and other related evidence that will be used in criminal prosecutions.”

Thoroughgoing domestic surveillance, in other words. One example of the literal fascism.

And no doubt the “authorities” (read “authoritarians”) have infiltrated the truckers. (Maybe carrying suspect flags. Just sayin’!) But governments never infiltrate and manipulate protest movements, right? Who would even suggest such a thing!

And the media–not just Canadian, but US and world media–have reliably functioned as an echo chamber and amplifier of Canadian government propaganda that labels the protestors as fascists, Nazis, white supremacists, racists, misogynists and every other kind of baddie you could name.

Based on what evidence exactly? They oppose the government, and its COVID-related policies in particular. QED! After all, only fascists, Nazis, white supremacists, racists, misogynists and every other kind of baddie you could name would hold such retrograde anti-social(ist) opinions.

The other “evidence” is the few flags and the supposed desecration of a war memorial. About the flags: who was carrying them? Putting aside the obvious logical problem with extrapolating the views of 10s of thousands of individuals from those whom Three Finger Brown could have counted on one hand (with a finger left over), how can anyone be sure that those carrying the flags were part of the protest at all? And numbers matter: Canadian flags outnumber dodgy ones by orders of magnitude. About the memorial: First, interesting, isn’t it, that leftists are suddenly so solicitous of the sanctity of monuments, especially to white war heroes? Second, it was hardly defaced, in the way that say statues of Grant, Lincoln, or others like Hans Heg were defaced–destroyed, actually. It was festooned with a hat and a sign. Oh! The humanity!

In sum, the “evidence” is non-existent. Instead, the Canadian regime and its media lackeys are engaged in mass ad hominem attack and guilt by assertion and association (where the association isn’t even proved!)

Lockstep media repetition of regime propaganda–check another fascism box.

The third box is the fusion of state and corporate power. Yesterday, GoFundMe (GoFuckMe would be more accurate) not only terminated the truckers’ fund raising through GFM, it seized the nearly $10 million already raised, and said it would redistribute the money to other charities. The basis for this action? “Evidence” allegedly supplied by Ottawa Police showing that the protests weren’t protests dontcha know, but were an illegal occupation. So, the cops make an allegation, and GFM acts as judge and jury, and basically implements civil asset forfeiture. AKA state sanctioned theft.

So far, the iron triangle of regime, media, and corporations has not broken the will of the protestors. Indeed, the Prairies are also on fire (in freezing temperatures), and the governments of Alberta and Saskatchewan have announced termination of COVID mandates. Truckers are also gathering in Quebec and moving on Quebec City. Farmers are joining in.

This will no doubt spur the regime into taking more active–and violent–measures. It is crucial that the protestors not take the bait and thereby validate the government narrative. Civil disobedience. If the authorities want a Selma in the snow, turn the other cheek.

It is ironic that the Canadian regime is so vocal in its support for Ukraine, but is freaking out over its own Maidan. And who knows, maybe it could turn into Bucharest circa December, 1989. But that would require the little Castroite (and maybe Castro!) to make a public speech to the crowd. And L’il Justin is still in hiding so that ain’t happening.

What is going on in Canada is the most visible symptom of the conflict between the ruling class and those they presume to rule. Why it is occurring in Canada is an interesting sociological question which I hope to explore in future posts. But the divide revealed in Canada is present throughout the world, so I doubt this will be the last such confrontation. And the sooner the better.

Although conditions have eased somewhat, Europe’s energy situation is still fraught. It has experienced a winter of extremely high power prices and natural gas prices. Some luck with weather in January brought some relief, but who knows what the next months have in store.

As if demand and non-Russia supply fundamentals didn’t pose enough difficulties, Russia has proved a gas supply riddle, mystery, and enigma. The Ukraine situation has only made the situation more fraught, with a prospect that things could get very cold in Europe if the conflict between Russia and Ukraine goes hot.

In anticipation of this, the Biden administration has played its by now familiar role of supplicant, appealing to major LNG suppliers–notably Qatar–to increase output and divert supplies to Europe, and to major buyers (e.g., Japan) to direct supplies to Europe.

Good luck with that. There is nothing that can be done to augment global supplies in the short run, let alone by enough to address a material loss of gas from Russia.

The world LNG industry is operating at effectively full capacity. Although supplies produced anywhere can physically go anywhere, there are no more additional supplies to be had. So if Russian gas exports decline, LNG cannot fill the gap.

This is illustrated by the US, which recently became the world’s largest supplier of LNG. Note how US exports have remained essentially constant (at about 300 bn cubic feet/month) since around March 2021, despite skyrocketing prices for gas:

There’s another way to see that liquefaction capacity is the bottleneck. This is the spread between the price of LNG in Asia (JKM) and Henry Hub NG:

My teaching mantra (repeated last night to my Energy Derivatives students!) is that spreads price bottlenecks in the transformation process. The spread depicted here captures two potential bottlenecks in transforming US produced gas into gas delivered in Asia (or Europe): US liquefaction capacity and shipping costs. Shipping costs have increased, but not nearly enough to explain the rise in the spread in 2021, especially the explosion starting in mid-September. This is a clear indication that US liquefaction capacity is a binding constraint. The extreme volatility in the spread also demonstrates this. Shocks to demand in Europe or Asia can’t be accommodated by adjustments in supply, so all the burden falls on the spread. Thus, even slight demand shifts can lead to big spread moves.

As for reallocating supplies between Europe, Asia, and South America, Mr. Market can handle this, and is indeed handling it to a considerable degree. As the demand balance shifts between Asia and Europe, LNG carriers are changing destinations in mid-voyage. In an extreme case a ship that had already transited the Panama Canal en route to Hawaii reversed direction, transited the canal eastbound, and delivered its cargo in the UK. In short, what is going on is a classic example of how the price mechanism allocates resources to their highest value use, and how commodity traders optimize flows. (It also largely validates the predictions of my 2014 white paper on LNG.)

The main impediment appears to be contractual. Specifically, destination clauses in legacy contracts, specifically those for Qatar Gas. These clauses prevent the buyer from reselling the cargo to other markets.

Perhaps the administration was begging Qatar to relent on these, but if so, their appeals appear to have fallen on deaf ears (despite the US promoting Qatar to “major non-Nato ally). Qatar says it views its contractual commitments as sacrosanct:

“Keeping our contractual word is sacrosanct in Qatar,” said Kaabi, implying that it will not be possible to divert to Europe gas shipments already contracted for delivery to other countries without their consent.

This smacks of dishonesty. It is not the buyers‘ consent that matters here: if the price is right, Asian buyers would be happy to ship contracted gas to Europe if the price is right. And it appears that the price is right: the “arb” between Asia appears open (i.e., the TTF price is above JKM by more than the cost of shipment). So what’s stopping it from being closed? Almost certainly Qatar’s failure to consent to waiving the destination clauses (in its supersekret contracts). (Destination clauses limit the ability of the buyer to divert cargoes to other locations, and are basically a means of price discrimination.)

Relatedly, Qatar has said it is willing to sell gas to Europe . . . as long as the Europeans consent to destination clauses. Oh, and Qatar is exploiting Europe’s straits by demanding Europe “resolve a long-running EU probe into Qatar’s long-term gas contracts, for the EU to be less dependent on spot sales and more on long-term contracts to boost its energy security.”

Kind of Russian, when you think about it. When you have them by the short ones . . . . With “allies” like these!

In brief, Europe is SOL, especially if there is a material disruption in Russian gas supplies. The world capacity of LNG is maxed out and cannot fill any supply void. The market is working to allocate supplies efficiently, but that process is impeded by an opportunistic actor that really doesn’t want the spot market to work.

Meaning that the best that post-religious Europe can do right now is pray for balmy weather, high winds, and Russian forbearance. Good luck with that.