Streetwise Professor

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.

In earlier posts I pointed out a couple of loopholes in the sanctions related to derivatives. Derivatives were explicitly excluded from the mid-July US sanctions imposed on Rosneft and other companies.

One loophole is that US persons can effectively provide credit to Rosneft and other firms subject to US sanctions but not to sanctions by the EU (or other foreign jurisdictions) by selling credit protection on the sanctioned companies to non-US person financial institutions, who could then expand their lending to offset the effect of the inability of US financial institutions to lend directly.

The other loophole is that a sanctioned firm (even one sanctioned by the EU, because its sanctions will evidently include the same loophole) can synthetically create a long-term bond that it cannot issue directly due to the sanctions by borrowing for 90 days, rolling the borrowing, and entering into a payer swap. The swap would effectively convert the floating, short-term rate into a longer-term fixed rate, thereby substituting for a prohibited long-term loan or debt security.

Neither of these is perfect substitutes for the banned transactions, but they are fairly close substitutes.

According to Bloomberg, the US Treasury is considering adding derivatives and short term borrowings to the list of transactions prohibited under the sanctions:

The U.S. might move to limit derivatives trading and short-term loans with Russian companies if sanctions already imposed fail to sway President Vladimir Putin to end support for rebels in eastern Ukraine.

U.S. citizens and businesses are still permitted to trade in outstanding debt of any maturity and new short-term debt and derivatives with sanctioned Russian companies. Restrictions on money-market financing and derivatives could be imposed if tougher penalties are necessary, said a Treasury Department official who asked not to be named because further options are still being discussed.

These limits would close off the loopholes that exploit derivatives and short-term borrowing.

I wonder whether these moves had been considered all along, or whether UST learned that financial institutions and sanctioned companies were exploring those loopholes. Interesting development, regardless.

I’ve been meaning to write about how derivatives are treated in bankruptcy, but it’s a big topic and I haven’t been able to get my hands around it. But this article from Bloomberg merits some comment, because it suggests that market participants, led by ISDA, are moving to a partial change that could make things worse if the bankruptcy code treatment of derivatives remains the same.

Derivatives benefit from a variety of “safe harbors” in bankruptcy. They are treated very differently than other financial contracts. If a firm goes bankrupt, its derivatives counterparties can offset winning against losing trades, and determine a net amount. In contrast, with normal debts, such offsets are not permitted, and the bankruptcy trustee can “cherry pick” by not performing on losing contracts and insisting on performance on winning ones. Derivatives counterparties can immediately access the collateral posted by a bankrupt counterparty. Other secured debtors do not have immediate access to collateral. Derivatives counterparties are not subject to preference or fraudulent conveyance rules: the bankruptcy trustee can claw back cash taken out of a firm up to 90 days prior to its bankruptcy, except in the case of cash taken by derivatives (and repo) counterparties. Derivatives counterparties can immediately terminate their trades upon the bankruptcy of a trading partner, collect collateral to cover the bankrupt’s obligations, and become an unsecured creditor on the remainder.

It is this ability to terminate and grab collateral that proved so devastating to Lehman in 2008. Cash is a vital asset for a financial firm, and any chance Lehman had to survive or be reorganized disappeared with the cash that went out the door when derivatives were terminated and collateral seized. It is this problem that ISDA is trying to fix, by writing a temporary stay on the ability of derivatives counterparties to terminate derivatives contracts of a failed firm into standard derivatives contract terms.

That sounds wonderful, until you go back to previous steps in the game tree. The new contract term affects the calculations of derivatives counterparties before a tottering firm actually declares bankruptcy. Indeed, as long as preference/fraudulent conveyance safe harbor remains, the new rule actually increases the incentives of the derivatives counterparties to run on a financially distressed, but not yet bankrupt, firm. This increases the likelihood that a distressed firm actually fails.

The logic is this. If the counterparties keep their positions open until the firm is bankrupt, the stay prevents them from terminating their positions, and they are at the mercy of the resolution authority. They are at risk of not being able to get their collateral immediately. However, if they use some of the methods that Duffie describes in How Big Banks Fail, derivatives counterparties can reduce their exposures to the distressed firm before it declares bankruptcy, and crucially, get their hands on their collateral without having to worry about a stay, or having the money clawed back as a preference or fraudulent conveyance.

Thus, staying derivatives in a bankrupt firm, but retaining the safe harbor from preference/fraudulent conveyance claims, gives derivatives counterparties an incentive to run earlier. Under the contracts with the stay, they are in a weaker position if they wait until a formal insolvency than they are under the current way of doing business. They therefore are more likely to run early if derivatives are stayed.

This means that this unbalanced change in the terms of derivatives contracts actually increases the likelihood that a financial firm with a large derivatives book will implode due to a run by its counterparties. The stay may make things better conditional on being in bankruptcy, but increase the likelihood that a firm will default. This is almost certainly a bad trade-off. We want rules that reduce the likelihood of runs. This combination of contract terms and bankruptcy rules increases the likelihood of runs.

This illustrates the dangers of piecemeal changes to complex financial systems. Strengthening one part can make the entire system more vulnerable to failure. Changing one part effects how the other parts work, and not always for the better.

Rather than fixing single parts one at a time, it is essential to recognize the interdependencies between the pieces. The bankruptcy rules have a lot of interdependencies. Indeed, the rules on preferences/fraudulent conveyance are necessary precisely because of the perverse incentives that would exist prior to bankruptcy if claims are stayed in bankruptcy, but creditors can get their money out of a firm before bankruptcy. Stays alone can make things worse if the behavior of creditors prior to a formal filing is not constrained. All the pieces have to fit together.

The Bloomberg article notes that the international nature of the derivatives business complicates the job of devising a comprehensive treatment of derivatives in bankruptcy: harmonizing bankruptcy laws across many countries is a nightmare. But the inability to change the entire set of derivatives-related bankruptcy rules doesn’t mean that fixing one aspect of them by a contractual change makes things better. It can actually make things worse.  It is highly likely that imposing a stay in bankruptcy, but leaving the rest of the safe harbors intact, will do exactly that.

ISDA appears to want to address in the worst way the problems that derivatives can cause in bankruptcy. And unfortunately, it just might succeed. ISDA should stay its hand, and not derivatives in bankruptcy, unless other parts of the bankruptcy code are adjusted in response to the new contract term.

This story from the Independent has gone viral, and for understandable reasons: it claims that Germany and Russia are negotiating a scurrilous deal behind Ukraine’s back.

More controversially, if Ms Merkel’s deal were to be acceptable to the Russians, the international community would need to recognise Crimea’s independence and its annexation by Russia, a move that some members of the United Nations might find difficult to stomach.

Sources close to the secret negotiations claim that the first part of the stabilisation plan requires Russia to withdraw its financial and military support for the various pro-separatist groups operating in eastern Ukraine. As part of any such agreement, the region would be allowed some devolved powers.

At the same time, the Ukrainian President would agree not to apply to join Nato. In return, President Putin would not seek to block or interfere with the Ukraine’s new trade relations with the European Union under a pact signed a few weeks ago.

Second, the Ukraine would be offered a new long-term agreement with Russia’s Gazprom, the giant gas supplier, for future gas supplies and pricing. At present, there is no gas deal in place; Ukraine’s gas supplies are running low and are likely to run out before this winter, which would spell economic and social ruin for the country.

As part of the deal, Russia would compensate Ukraine with a billion-dollar financial package for the loss of the rent it used to pay for stationing its fleets in the Crimea and at the port of Sevastopol on the Black Sea until Crimea voted for independence in March.

However, these attempts by Ms Merkel to act as a broker between President Putin and the Ukraine’s President, Petro Poroshenko, were put on the back-burner following the shooting down of the MH17 plane in eastern Ukraine.

But insiders who are party to the discussions said yesterday that the “German peace plan is still on the table and the only deal around. Negotiations have stalled because of the MH17 disaster but they are expected to restart once the investigation has taken place.”

Pretty explosive stuff. So explosive, in fact, I have a difficult time accepting that the story is anywhere near true, at least insofar as the implication that this is Merkel’s plan is concerned.

If it was true, and Merkel were indeed negotiating a deal along these lines, she would indeed deserve the Frau Ribbentrop epithet that has been hurled at her, especially after her chumminess with Putin in Rio.

There are so many issues here.

First, it is not Germany’s place to negotiate a deal that binds Ukraine, even as a broker that intends to present the deal to Ukraine for its approval later. That would rightly be seen as a stab in the back. Germany’s imprimatur on such a deal-and the fact that it negotiated the deal would inevitably lead people to conclude that Germany vouches for it-would be perceived by Ukraine as a betrayal and abandonment, and an exertion of tremendous pressure to capitulate by a country that it had counted on to be a supporter.

Second, no Ukrainian government could possibly accept these terms. So Merkel is either delusional to think that they would, or she is setting up the Ukrainians to take the blame for rejecting a chance at “peace”, thereby allowing her to wash her hands of the situation and let Putin do as he will. Delusional or Machiavellian manipulator. Quite the choice.

Third, the recognition of Russia’s theft of Crimea, even if compensated by thirty pieces of silver in exchange for lost rent on Sevastapol, would completely undermine a fundamental principle of the modern international order, namely that the border of no state should be changed by force. For a country like Germany, which portrays itself as a Rechtsstaat on international as well as domestic matters, this would be an amazing and despicable action. The precedent would be very ominous indeed. It is hard to imagine anything more threatening to peace and stability as such an endorsement of revanchism, irredentism, and the dominance of might over right.

Fourth, the US and UK, and perhaps other countries, would in no way countenance such an outcome, in part because of the dangerous precedent it would set.

Fifth, Ukraine is looking to free itself from abject dependence on Russian gas, rather than to cement that dependence into the distant future.

These considerations are so grave that I cannot believe that Germany would be doing what the Independent alleges.

So what is the real story here?

The Independent is owned by Alexander Lebedev, an ex-KGB officer and ex-billionaire. He has had a fraught relationship with Putin. He co-owns, along with Gorbachev, the opposition paper Novaya Gazeta. On the surface he is not an obvious Putin shill, and may be an opponent: maybe he ran the story to torpedo a deal that Putin wants. But he could be under pressure. Or he could be wanting to curry favor in Moscow, and thinks this would help him do so. So maybe the story has its roots in the murky world of Putin and rich Russians.

The story paints Merkel in a very bad light: maybe it has been leaked (and slanted) by one of her foes, domestic or foreign. Or maybe someone thinks that she will have to distance herself from the allegations of treachery by becoming more stern in her stance against Putin.

Or maybe this has been planted by the Russians. It could be their statement of the terms they are willing to offer, and to accept. Perhaps Putin even presented it to Merkel, and maybe more than once. Perhaps Merkel rejected it, or she presented a counterproposal and continues to talk, which could be twisted by the Russians to suggest that she has endorsed the basics of the proposal.

I don’t know. But I do know one thing. It is precisely this sort of story, and the possibility that it has its roots in the truth, that makes it imperative that the United States collect intelligence on Germany, German leaders, and German dealings with foreign governments-especially governments like Russia’s. This is exactly why we spy, and why large and important countries that endeavor to exercise their sovereign right to craft and implement an independent foreign policy, are legitimate targets of spying. Germany pursues its interests, and in that pursuit, it might seriously damage American interests. Thus, it is in our vital national interest to know what Germany is up to.*

That’s the price you pay when you want to be an independent actor on the world stage, so Germans from Angela on down can spare us their outraged protests at American espionage.

* Which suggests yet another explanation for the Independent story. Namely, the source is US (or UK, or Ukrainian, or . . . even German) intelligence, which is leaking it to torpedo a perfidious Merkel deal.

I owe the Euros an apology. It turns out that they did implement most of the sanctions recommended in the “non-paper.” So it proved to be more than an orphan straw man.

That said, upon further consideration, there is less here than could have been hoped for. Indeed, these sanctions will impose little real damage on Russia.

There are three major pieces of the new European sanctions. First, Europeans (including foreign subsidiaries and branches of non-EU banks) are prohibited from buying new equity or debt with maturity of greater than 90 days from Russian banks with more than 50 percent state ownership. Second, there is a ban on the sale of oil technology and equipment. Third, there is an arms sales ban.

The US has implemented similar measures, with one peculiar exception: Sberbank is not included in the US sanctions, though it is in the European sanctions.

The bank sanctions are getting the most attention, but they are hardly devastating. I only had enough time today to look at the international borrowings of Sberbank, VTB, and VEB. Sberbank’s foreign debt borrowings total only about 4 percent of its total liabilities, and only a small fraction of those mature in the next year. Therefore, the sanctions put no immediate pressure on Sberbank, especially since it still can borrow from US persons. VTB’s foreign debt with maturities in 2014 and 2015 is no more than 6 percent of its total liabilities: I can’t be more precise because its financial statements only report broad maturity categories. VEB’s total Eurobond issues are about 8 percent of its liabilities: again, only a fraction of these are due in the next year or so.

Loss of this funding would be something of a strain, but the sums involved could readily be replaced by drawing on Russian foreign reserves and borrowing from non-EU and non-US banks.

What’s more, a little financial engineering permits these institutions to circumvent the effect of the sanctions. It seems that they can still enter into derivatives trades: derivatives are explicitly excluded from US sanctions. Since under the sanctions the banks can still borrow with 90 day maturities, they can create a synthetic long term loan with a fixed interest rate by borrowing for 90 days on a rolling basis, and enter into receive floating-pay fix swaps. Yes, there still is some risk here: if sanctions are extended to prevent even short term borrowings, the banks following this strategy would have a short swap position and no offsetting floating rate borrowings.

In brief, the sanctioned banks aren’t heavily dependent on European or US debt markets for their funding; the Russian government has the resources to cover this funding gap; and there is a somewhat riskier alternative (borrow short-term and hedge via swaps). Thus, although it would be unfair to say that the financial sanctions merely damage a few capillaries, it is definitely the case that they don’t come anywhere close to striking at Russia’s financial jugular. They are annoyance, and no more.

It is also important to note that the European sanctions do not target Rosneft. So the Russian oil company still has access to European (and Asian) debt and equity markets. As I noted before, this significantly cushions the blow on the Russian firm.

Insofar as the weapons ban is considered, it is largely symbolic because Russia builds most of its own weaponry. Predictably, existing deals are exempted. Meaning that France can continue with its sales of Mistral assault ships.

A bigger threat to the second Mistral sale is yesterday’s arbitration verdict in the Yukos litigation. If Russia doesn’t pay the $50 billion by January-a metaphysical certainty-the winning claimants can move to seize non-diplomatic Russian government assets in countries that are signatories to the New York Arbitration Convention. Conceivably the claimants could attempt to seize the second Mistral-the Vladivostok, ominously slated for service in the Med and Black Seas-while it is still in France. But no doubt the Russians and French could circumvent this by transferring ownership only after the ship had sailed to Russia. (As an aside, the main effect of the arbitration verdict will be to ensure employment of large number of lawyers for years, because the Russians will fight every attempt to enforce the award by seizing government assets abroad tooth and nail. It is a welcome verdict, but its immediate financial impact on Russia will be pretty much nil.)

The sanctions on oil equipment will have little impact in the near term, and since the European sanctions are time limited, their effect will be diminished even further.

In sum, the new sanctions are far beyond what had been imposed before, but they are still not that damaging to Russia. Putin can legitimately say “’tis but a scratch,” and not in the Black Knight, Monty Python, I’m not going to admit I’m wounded sense.

The United States in particular still has the power to leave Putin financially limbless and bleeding, pitifully claiming his invincibility. But that would require hacking away with a real banking broadsword: cutting off Russian access to dollar markets altogether. But there is no appetite to do this in the west: the Europeans had to screw up their courage to the sticking place to implement even these limited sanctions. And Obama has little appetite for this either: his sanction announcement today was delivered in a listless, phone-it-in fashion, before he ran off to fly to Kansas City for some silly event involving meeting people who had written him letters. He is obviously not engaged in this at all.

The Europeans and Obama believe that they are engaged in a nuanced strategy of graduated escalation that will convince Putin that continued attempts to subvert Ukraine through force will eventually result in Russia incurring unbearable financial costs, and that this will deter him from going further.

Ask the shades of LBJ and McNamara about how hardened dictators interpret graduated escalation. They interpret it as a signal of weakness, not resolve. If anything, it urges them to go further. I would anticipate that this will be true today, with Putin.

Going back to the original round of sanctions, I have been arguing that the terms of US sanctions have been left deliberately vague in order to make  banks and investors very cautious about dealing with sanctioned firms. Spreading fear, uncertainty, and doubt-FUD-leverages the effect of sanctions.

When I read the last round of sanctions, I had many questions, and hence many doubts about actually how far the sanctions would reach. I was not alone. Professionals-lawyers at banks and Wall Street law firms-are also uncertain:

But compliance officers at some U.S. banks and broker-dealers say the sanctions, issued by Treasury’s Office of Foreign Assets Control (OFAC), are not clear enough. That has left financial institutions guessing, in certain instances, at how to comply. They worry they are vulnerable to punitive action by U.S. regulators.

Fear, uncertainty, and doubt, all in one paragraph. The fear part is particularly interesting, and quite real, especially in the aftermath of the truly punitive action by U.S. regulators in the BNP-Paribas case.

OFAC-The Office of Foreign Asset Control, which is in charge of overseeing the sanctions-is in no hurry to clarify matters:

Another senior compliance officer at a major U.S. bank said bankers “are frustrated that OFAC is not providing more guidance.”

The day after the sanctions were issued, OFAC held a conference call with hundreds of financial services industry professionals in an effort to answer concerns. Although some issues were cleared up, others were left undecided, said two sources who were on the call.

Dear Mr. Senior Compliance Officer: that’s on purpose. Believe me.

A new round of sanctions may be imminent. I am hoping to be proven wrong in my forecasts, because reports are that the Europeans are going to do something serious. Add serious doubts to serious action, and American and European banks won’t touch most Russian banks or major companies with a 10 foot pole while wearing a hazmat suit. That will cause some major economic problems for Putin and Russia. Not 1998-magnitude problems, but maybe something bordering on 2008 problems, although a $100+ oil price will help contain the damage, despite the added difficulties that sanctions will create for the Russians to cash the checks for that oil.

Then it will be Vlad’s move. What that move will be, I do not know.

The NYT ran a long article yesterday describing the administration’s Hamlet-like agonizing over whether to provide Ukraine with real time intelligence useful for targeting rebel forces. (For the record, I called for this in the immediate aftermath of the flight of Yanukovych. It should be an easy decision.)

One part jumped out at me:

“We’ve been cautious to date about things that could directly hit Russia — principally its territory,” but also its equipment, the official said. A proposal to give the Ukrainians real-time information “hasn’t gotten to the president yet,” the official said, in part because the White House has been focused on rallying support among European allies for more stringent economic sanctions against Moscow, and on gaining access for investigators to the Malaysia Airlines crash site.

There in a nutshell is the passivity of this president, and his negation of executive leadership.

An active and engaged leader would not be waiting for things to reach him. He would be demanding that a full range of options be presented to him immediately, if not sooner. This situation has been metastasizing for months. What’s more, in the aftermath of the MH17 atrocity, and the rebels’ ongoing use of artillery and MLRS systems against civilian targets, the suppression of their weapons systems is both a military and humanitarian imperative. The time for action passed long ago, but it is incomprehensible that 10 days after MH17 that Obama has personally avoided considering, let alone ordering, a reasonable, measured US action that would materially assist Ukraine to defend itself, and which would not put one US serviceman or woman at risk.

Also look at the excuse: he’s focused on the diplomatic channel. This is particularly rich a week after Obama flacks in the administration and media responded to criticisms about his fundraiser-dominated schedule by saying that he can multi-task. So, he can’t simultaneously push the Europeans and evaluate steps to aid the Ukrainian government? What happened to that vaunted multi-tasking capability?

Further, military and diplomatic measures are complementary, and need to be processed in parallel rather than serially.

Another thing that stands out in the article is the hand-wringing about “provoking Russia”:

“The debate is over how much to help Ukraine without provoking Russia,” said a senior official participating in the American discussions.

Look. To Putin, anything short of outright capitulation by Ukraine, and the complete abandonment of Ukraine by the US and the EU is a provocation. Let’s not forget what “provoked” this crisis in the first place: Ukraine’s temerity in moving to sign a trade deal with the EU. Continued Ukrainian resistance is all the provocation Putin needs. Anything the US or EU does will have the merest of effects on Putin’s insatiable desire to subjugate Ukraine.

That’s not quite true, actually. Continued passivity, and waiting for the USPS to deliver military options to POTUS, encourages Putin’s aggressiveness. Weakness and passivity are extremely provocative to Putin.

As to another objection-that disloyal individuals in the Ukrainian leadership will provide the information to Russia: this is a non-issue. Yes, such leaks could undermine the effectiveness of the intelligence, by permitting the rebels to move to avoid a strike. But if they are moving, they aren’t shooting. What’s more, given the realities of communication, it is highly unlikely that  truly real-time information useful for targeting could make it to the rebels before it reached the Ukrainian air or artillery units tasked to strike them. Further, attempts by disloyal elements to communicate with the rebels could actually facilitate their discovery, especially if the information is tightly compartmentalized.

As for the Ukrainians getting to rambunctious if they have better information, the US has the option to cut off the information at any time, and to place conditions on its use. If anything, provision of this intelligence will focus Ukrainian military efforts leading to less risk of misguided strikes on civilians or Russia.

In sum, this should be about as easy a decision as a commander in chief should have to make. But because he has clearly signaled that he wants to distance himself from serious involvement with the Ukrainian military efforts against insurrectionists, subordinates and bureaucrats are consciously choosing not to present him with the options that a real leader would be demanding from them.

Tomorrow is the 150th anniversary of the Battle of Ezra Church, the third of Hood’s assaults against Sherman’s army that attempted to stop the encirclement of Atlanta.

The story of the battle is relatively simple. After cutting the rail line leading into the city from the east, Sherman moved in what has been characterized as one of his whip-like movements to cut the line running in from Macon to the west. As always, the Army of the Tennessee was the tip of the whip. As it moved south to the west of the city, Hood moved Stephen D. Lee’s and Alexander P. Stewart’s corps out of the city’s defenses in the hopes of surprising the Army of the Tennessee (now under the command of very Eastern general Oliver O. Howard, much to the chagrin of very Western general John A. Logan). But the Union troops anticipated the attack, deployed from their marching formation and formed a V-shaped line. Like veterans on all fronts by the summer of 1864, they immediately started to dig in. Not so much dig, really as collect logs, lumber, and even the pews from Ezra Church, which they piled up to form a makeshift breastwork. Here are some contemporary woodcuts that show the impromptu entrenchments:

The battle itself was never really in doubt. The Confederates gained ground on the Union right flank, but Logan (back in command of the XVth Corps) led a counterattack by two regiments (the 40th Illinois and 6th Iowa) which drove off the Rebels. The Iowans lost Major Ennis, a beloved officer who had served since Shiloh.

The 46th Ohio fought at Ezra Church. One of its members, Sergeant Harry Davis, won the Medal of Honor by advancing in front of the lines to wrest a flag from its dying bearer, as illustrated here in another contemporary print:

Other than the fleeting success on the Union right, the Confederate assaults made no progress. The casualties tell the tale. The Union lost about 650 men, the Confederates almost 5 times as many. Of the three assaults in July, this was the one with most disparate losses and the least tactical success. Whereas the Confederates did achieve some local successes at Peachtree Creek and Atlanta. They achieved none at Ezra Church.

The responsibility for actually carrying out the attack lies with Stephen D. Lee. Hood was performing the role of army commander, remaining at his headquarters in Atlanta.

Speaking of Hood, my Battle of Atlanta post generated several thoughtful comments about him. Serendipitously, this weekend I saw a program on CSPAN3 (yes, I am that much of a geek about this stuff) in which a biographer of Hood, Stephen Hood (a distant relation) made a pretty persuasive case that Hood has been unfairly maligned. He presented evidence that many of the anecdotes told at Hood’s expense were specious. He was particularly critical of historian Wiley Sword (whom I know some) for distorting the evidence in his savage attacks on Hood’s generalship, his humanity, and indeed his mental health. He further claims that there is no evidence that Hood actually used opiates, though of course absence of evidence is not definitive evidence of absence.

Overall, his defense was somewhat persuasive, though it cannot and did not answer the brutal facts of Franklin and Nashville. When time permits, I might dig into the sources cited by Hood and Sword to see who gets the better of the argument. Maybe I’ll have a chance to do that by the end of November, when the sesquicentennial of Franklin rolls around.