Streetwise Professor

May 19, 2022

Z Is For Zugzwang

Filed under: Military,Politics,Russia,Ukraine — cpirrong @ 4:05 pm

Ten days ago Vladimir Putin gave his much anticipated “Victory Day” speech, and said . . . well, not much at all.

There was much anticipation and speculation in advance. He would declare war and full mobilization. He would declare victory, or announce some criteria for victory that even his shambolic military could achieve.

Instead, he basically affirmed the status quo. Russia would keep grinding away. It would not escalate. Nor would it de-escalate.

In other words, Putin tacitly admitted what I had asserted weeks ago: Putin/Russia are in Zugzwang: any move makes things worse, so Putin has basically chosen to do nothing, or at least to change nothing.

There has been much conjecture what the Z on Russian equipment means. Now you know. It means “Zugzwang.”

Things have gotten even worse for Russia since 9 May. Ukraine has mounted a modest counteroffensive (a real counteroffensive, not a local counterattack) north of Kharkiv, and pushed the Russian army back across its border in places. The Russian offensive in Donetsk and Luhansk is essentially stalled. Indeed, the Russians suffered a humiliating reverse in an attempt to mount a river crossing: an entire battalion tactical group and its equipment were destroyed, as was the bridging equipment.

Overall, Russian losses continue to mount, with nothing to show for it. The only simulacrum of an achievement is the surrender of the besieged and battered defenders of the Azovstal plant after weeks of relentless Russian assault and bombardment. But on net Ukraine gained far more from that battle by delaying and attriting Russian forces than Russia has by its ultimate capture of the facility.

And now the Russians appear to view their “triumph” as an excuse to commit a massive war crime by trying the captives as war criminals and threatening to execute the surrendered Ukrainians.

But of course they have to do that to justify their war propaganda that they are fighting Nazis. You know, act like Nazis to pretend they are fighting Nazis. But the Russian military and state are already so far down the war crimes road they won’t stop now, especially if this one provides something that they can use to sell this fiasco to the Russian public.

Now the battle resembles World War I far more than World War II. It is an artillery war being fought on a relatively static front. Even if Russia gains some local objectives, “the big push” and “breakthrough” are clearly beyond their capabilities.

Ukraine is clearly encouraged that it can win, with victory defined as pushing out Russians from all of Ukrainian territory. I think this is too optimistic, and even if it is realistic, the cost to Ukraine, let alone the world, is not worth it.

I understand the risk of leaving Putin/Russia with a rump of Ukrainian territory from which they can spin up a future justification for resuming hostilities once they’ve licked their wounds and convinced themselves that they have really fixed their military this time. But the pretext will exist, and in fact be even stronger, if Ukraine retakes the Donbas. For no doubt the Russians will claim that Ukraine is Nazifiing the recaptured Donbas if it retakes control, and this will be a future casus belli. Retaking it would alter the tactical situation somewhat in Ukraine’s favor for the next time, but not enough to change materially the probability of another Russian attempt. The war exists because Ukraine exists. Redrawing the lines of effective control in Ukraine won’t remove the Russian rationale for war. It is not worth it.

So the war will grind on, because Zugzwang Putin can’t admit he’s lost, and Ukraine believes it can win. Nothing good will come of that.

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May 13, 2022

Congresspeople, Being Idiots, As Always: Gasoline Price Edition

Filed under: Commodities,CoronaCrisis,Economics,Energy,Russia — cpirrong @ 6:28 pm

Mark Twain never grows old:

“Reader, suppose you were an idiot. And suppose you were a member of Congress. But I repeat myself.”

This came to mind when reading about the proposal of Rep. Katie Porter to impose some sort of price control on gasoline:

Since the beginning of recorded history–and that is not hyperbole–the stock government response to high prices is price controls. The Pharaohs. Hammurabi. Diocletian. And many other examples. And it continues through the ages to more recent history, e.g., rent control in NY starting in WWII, Nixon in 1973.

And the result is always the same: economic disaster. It is price controls result in real shortages: people standing in lines, empty shelves, etc.

Always. If price doesn’t clear the market, waste (e.g., time spent standing in line) will.

But politicians never learn.

Nancy Pelosi (who is old enough to remember gas lines–hell, she’s probably old enough to remember the Code of Diocletian, if not that of Hammurabi) is of course fully on board. Which is an illustration that the adage “those who don’t remember the past are condemned to repeat it” is wrong: many who can remember the past repeat its errors nonetheless.

Elizabeth Warren hasn’t weighed in on this yet, but you know she will, because she’s the main spokes-shrieker for The Gouger Theory of Prices.

The Gouger Theory is stupid on its face. Did oil companies wake up one morning and realize: “Whoa! We coulda jacked up prices and gouged the suckers! What were we thinking?” Did they have some sort of epileptic fit in 2020, when prices crashed? What were they thinking?

No. This isn’t gouging. This is-as it almost always is-fundamentals.

Oil prices are high. But in this week’s edition of “Find the Bottleneck,” that’s only one of the drivers (no pun intended) behind high gasoline and diesel prices. The bottleneck is in refining.

How do we know? Let’s look at the diesel crack:

It’s gone from around $22/bbl to as high as $70/bbl. (And the $22 is high compared to what it was a year ago). (Gasoline crack somewhat similar though not as bad–though it is likely to get so when the peak demand season kicks in.)

A high refining margin means that refinery capacity is constrained. And yes, it is constrained: it’s not as if refiners are exercising market power (i.e., gouging) by withholding output. Here is the capacity utilization in the US over time:

It’s running at pre-Pandemic levels.

And here’s another thing: post-Pandemic capacity is well below pre-Pandemic capacity:

That drop from pre-Pandemic levels is around 5 percent. That’s a lot.

So refineries are running flat out, and refinery capacity is down. What do you get?: big refining margins and high prices at the pump. Yes, it’s good to be a refiner now (though not so much two years ago). But it’s not good because you get to exercise market power. It’s because even under competition it’s highly profitable because of supply-demand fundamentals.

A variety of factors have contributed to this. The loss of a good chunk of Russian oil output is keeping the price of oil up, but the loss of Russian diesel supplies to Europe is probably a bigger factor. The US is to a large extent filling the gap, to the extent it can, by exporting.

But no matter how you break it down, it is clear that this is fundamentals driven. It is not gouging. And capping prices on the delusional belief that it is gouging will wreak economic havoc.

Which has never stopped the Democrats before, I know. (And Republicans too, e.g., Nixon).

One thing here does deserve emphasis. The decline in capacity is directly attributable to the Pandemic. Correction: it is directly attributable to the horrible policy choices that politicians and bureaucrats forced on us in the name of the Pandemic. The lockdowns in particular.

Like many, many things going on in commodity world right now, the current spike in product prices overall, and relative to crude, is yet another baleful consequence of completely mental decisions to shut down economies and crater the economics of producing and processing commodities.

In other news of economic-related political hysteria, there is also a lot of finger pointing going on about baby formula. I don’t have the information at hand to analyze in the same way as I can refined petroleum prices, but I can say what it isn’t. It isn’t “oligopoly.”

But again, those educated in politics (did I really use “educated” and “politics” in the same sentence?) and not economics immediately seize on this as an explanation.

Er, the baby formula business was an oligopoly a year ago. And a year before that. And a year before that. So . . . why all of a sudden did they supposedly decide to create a shortage? And pray tell–how do you make money if you aren’t selling stuff?

So whenever Congresspeople, or people who buzz around them like insects (yeah, I’m looking at you, journalists) come up with some economic brainstorm, remember Twain. They’re idiots. Dangerous idiots.

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May 3, 2022

Pace MacArthur, There Are Substitutes for Victory, When Victory is Too Costly

Filed under: Energy,History,Politics,Russia — cpirrong @ 12:03 pm

Its unexpected success on the battlefield has convinced Ukraine that it can achieve victory. And by “victory,” I mean driving Russia out of Ukraine altogether, including Donetsk, Luhansk, and yes, Crimea.

This is very disturbing. Defending against a shambolic attacking army with horrible logistics and a pathetic operational plan is one thing. Attacking–even against a shambolic army–is another. This is particularly true given that the Russian army was designed and trained to stop a Nato offensive (as ludicrous as that idea is), and has massive amounts of artillery that would make any attack a nightmare: if it was doctrinally unsuited for offense, and adopted a terrible offensive plan, that does not imply that it cannot defend (and against an army that has itself taken serious casualties in personnel and materiel). And all of the tactics that allowed the Ukrainians to blunt the Russian attack, notably ATGM ambushes and attacks on lengthening supply lines, could be turned against them. Ukraine would be giving up all the factors that have worked to its advantage, and would be courting all of the factors that contributed to Russia’s disaster.

The last time the Ukrainian army got the bit between its teeth, in Debaltseve in 2014, it did not turn out well. Yes, the Ukrainian army is far better now, but fools rush in.

Worse, the US appears to be encouraging this. And in an unbelievable and inexcusable error, the administration–SecDef Austin in particular–have publicly announced that the US objective is to weaken Russia. Even if this is the objective, and that would be defensible, it is not defensible at all to make it public. It only validates the Russian narrative that it is at war with the West, thereby bolstering Russian popular support for the war, but it encourages Ukraine to run risks that it should not.

What is the alternative? Alternatives have to be evaluated in terms of the ugly facts.

The war is exacting a horrific toll on Ukraine. Its people, its infrastructure, and its economy. Tens of thousands dead. Millions of refugees. Devastated cities. A ruined countryside.

But more, it is exacting an awful toll on the world, through its extraordinary disruptions of agriculture and energy markets. All the more because Russia appears to be exacerbating deliberately these impacts. This is not merely a matter of comfort and ease. It is a matter of survival for the world’s poorest.

Given this reality, a less than ideal, and likely temporary, resolution is preferable. Something that gives Putin (or whoever is really in charge) a pretext to cease hostilities, and leaves Ukraine not in control of all the territory within its official boundaries. Edward Luttwak suggests legitimate (emphasis on legitimate) plebiscites in various Ukrainian regions.

The downsides are apparent. Putin/Russia could come back for more in time: maybe “will” is the better word, because no deal with Putin/Russia can be considered binding. Such a deal would represent major concessions on fundamental principles.

But it would stop the slaughter and mayhem for a time. It would allow time to build up Ukraine, and to permit a development of a longer term strategy to deal with the Russia Problem. And it is a big problem.

Remember. There are no ideal “solutions” in foreign policy. There are only shitty options. Statesmanship is the ability to choose the least shitty, and make it reality. Neither Ukraine nor the US (nor Russia) is demonstrating such statesmanship.

One can understand, on a human level, the Ukrainian reaction. The US does not have the same excuse. It is a time for realism, realistically pursued with cold eyes. It is not the time for Wilsonian impulsiveness. That has never turned out well.

MacArthur said “there is no substitute for victory.” This was an absolutist statement that violated fundamental principles of choice. Substitutibility depends on relative costs. Victory–e.g., expelling Russia from all of Ukraine–would be very costly, if is achievable at all. Given such cost, there are substitutes, MacArthur notwithstanding.

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April 20, 2022

Moskva Update. (It’s still on the bottom)

Filed under: Military,Russia,Ukraine — cpirrong @ 11:18 am

The early Russian story regarding the Moskva’s fate was that it sank in “stormy seas” or “heavy seas.” Well, pictures have emerged that show . . . now brace yourselves for this! . . . that the Russians are full of shit.

The sea is like glass. Other reports (including those from the US) said that bad weather obscured satellite and aerial imaging. Well, there is high overcast, but nothing that would prevent real time observation of the aftermath of the strike.

From the images, it does not appear that the P-1000 Vulkan ASM mounted so prominently on the deck were hit, or exploded. The hits appear to have occurred on the superstructure, although the list could have been due to a waterline hit. Alternatively, the list could have been due to the explosion of ammunition stowed in the magazines below deck.

The fire appears to have been very severe, and was obviously not extinguished before the ship was abandoned. The smoke appears even heavier in other images. (Helluva lot of good those two water cannon are doing there.)

Of course it is impossible to judge the condition of the inside of the ship from these photos in order to determine whether it should have been possible to save it. The external view shows less apparently less damage than on the USS Stark, which was also struck in the superstructure. (And to correct my earlier post, the Stark was hit by two Exocets, which BTW had warheads about 10 pct larger than the Ukrainian Neptunes.) So the inability to save the Moskva remains something of a puzzle.

Not that we will ever get the straight dope from the Russians on this.

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April 15, 2022

It Sank

Filed under: History,Military,Russia,Ukraine — cpirrong @ 3:10 pm

In a rather amazing development, the Russian cruiser Moskva was hit by two Ukrainian Neptune surface-to-surface missiles, caught fire, and experienced a major munitions explosions. It subsequently sank, allegedly while under tow, although that is according to the Russian side which (as will be seen) was even more deceptive during this incident than it has been in the rest of the war–which is saying something..

Perhaps some latter day Larry King can get Putin on his show and ask him what happened to the Moskva:

Somehow I doubt Putin would be so smug now.

Would that the sinking of two major combatants provide the bookends to Putin’s malign reign.

This episode was even murkier than the rest of the war. The Ukrainians almost immediately claimed that they had struck the ship. The Russians merely acknowledged that it had experienced a severe fire and an ammunition explosion, but that the entire crew had been evacuated.

These things did not hang together. Fires and explosions sufficient to sink a ship with no casualties? Or had the crew failed so miserably in fighting fires that the captain ordered abandon ship before the fires triggered the ammunition explosion? And if there was no missile, what could have caused such a devastating fire, and the failure of the crew to be able to control it?

The missiles that allegedly hit the Moskva are powerful, but not that powerful. Far smaller ships, e.g., the USS Stark, a frigate that displaced about 1/3rd of the Moskva, was hit by an Exocet (which had a bigger warhead than the Neptunes) and survived–though only after heroic efforts by the crew (as an exhibit at the UNSA Museum documents). The HMS Sheffield, which was only slightly larger than the Stark, was hit by Exocets. It eventually sank under tow, but only after several days. The bigger Moskva should have been able to absorb these hits.

Perhaps they were very lucky hits. But hits devastating enough to put such a large ship in mortal danger would have almost certainly killed large numbers.

My guess is that Russian damage control was very poor. Damage control is a war winner, and a force multiplier. It was the US Navy’s saving grace throughout WWII in the Pacific, and has also proved invaluable in later conflicts, e.g., the fires on the carriers Oriskany, Forrestal, and Enterprise during Vietnam. (When I was at Navy we had to watch a film about the Forrestal fire as part of our education on the importance of damage control. Pretty sobering watching.) If Russian damage control was poor, either due to bad training, bad doctrine, or bad equipment (e.g., DC gear being stolen, or not maintained) that would explain fires getting out of control and forcing abandonment of the ship, and a subsequent explosion.

There is also the issue of whether the ship should have been struck in the first place. Apparently its primary role in the Ukraine war was to provide air surveillance and defense for other Russian fleet units operating in the Black Sea. It had a rather extensive suite of long range and short range air defenses, including point defense systems that are intended to take out threats like the Neptunes. So why did it fail so spectacularly to defend itself?

One story circulating is that the ship was “distracted” by several Turkish made drones. Really? That shouldn’t happen. If true, that smacks of lack of situational awareness and target fixation. Or a smug confidence that the Ukrainians had nothing that could hit them. It also suggests that the drones have taken up residence in Russian heads.

The US contributed to the fog of war. Initially the US said that it could not confirm that missiles had struck the ship, or that it was in a sinking condition, or had sunk. Then today the US said yes, it was able to confirm that Ukrainian missiles had taken it out.

I find this purported ignorance to be implausible. The Black Sea has to be blanketed with US surveillance and reconnaissance assets, in space, in the sky, on land, and in the ether. The US is likely sucking up visual, photographic, and electronic information (radar emissions, communications intercepts) at a prodigious rate. The very fact that the Moskva’s electronic emissions would have largely disappeared when it was in extremis would have been one clue that it was hors du combat. And no doubt all all Russian fleet radio transmissions were sucked up and analyzed in near real time. It’s plausible that the US Navy was more informed about developments than the Russian.

This would explain the pains to which the American went to appear mystified by what was happening with the Moskva. “Hey, we can’t see nothin’. Big mystery to us!” In reality the US sees a lot. A lot. Ex ante and ex post. Those ex ante observations, if provided to Ukraine, could have made possible a strike that Ukraine could not have carried out on its own.

And here’s another thing. The Moskva was hit relatively far offshore–approximately 100 kilometers, or well over the horizon. Over-the-horizon target acquisition is not easy. (This might be another reason the Moskva felt secure.) Did the Ukrainians have the requisite targeting capability, or did a little birdie tell them? That is, one very plausible hypothesis is that the US fed Ukraine the necessary targeting information, again relying on the extensive array of sensors upon which the US can call.

If Ukrainian assets targeted the Moskva, that would only raise other issues. Why didn’t Russia take them out over the past 6 plus weeks? Again, US doctrine prioritizes going after the eyes. It’s a lot easier fighting a blind enemy.

What are the broader implications of this sinking. It is unlikely to have a first order effect on the fighting. It does make an amphibious assault less likely, but I always thought that was a remote prospect in any event.

Its main impact is most likely psychological. A fillip for Ukraine, a humiliation for Russia. And in particular humiliation for one specific Russian–Vladimir Putin. No doubt this will stoke even further his incandescent rage against the Ukrainians–and his own military. It will represent yet another ignominious defeat in a litany of ignominious defeats to be avenged. That bodes ill for any prospect of seeing this war end soon.

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April 9, 2022

What Ukraine Needs

Filed under: History,Military,Russia — cpirrong @ 6:45 pm

The prospect that the war in Ukraine will drag on for some time has rendered urgent the question of how the west can support the country militarily. Specifically, what weapons can and should the west supply?

Retired General Barry McCaffery recommends supplying the full panoply of an American force–armor, air defense, aircraft. This is unnecessary, and unrealistic.

The immediate answer to the question hinges on the nature of the battle, the time frame, and the ability of the Ukrainian military to absorb and use equipment.

The nature of the battle is now clear: Ukraine is fighting a defensive battle, and will almost certainly do so on a relatively restricted front in the eastern part of the country.

The time frame is compressed. Although it will take some time for the Russians to generate sufficient combat power in Donbas given the necessity of reconstituting units devastated by the last six weeks of combat, Putin is clearly impatient and needs to demonstrate progress soon.

Military hardware can be complex and require considerable training to use effectively. Ukraine doesn’t have the time to train on unfamiliar equipment.

Given these realities, what are the priorities?

Number one, clearly: artillery. Artillery. More artillery. And lots of ammunition. Given that Ukraine is defending, towed tube artillery would do just fine, although self-propelled guns would have some benefits. Also, rocket artillery (MLRS) would be extremely useful.

Ukrainian troops could readily employ conventional artillery and it could play a decisive role in smashing any Russian advance. The stocks of European countries and the US should be adequate to provide a healthy upgunning of Ukrainian forces in relatively short order.

Relatedly: equipment to leverage the effectiveness of artillery. Specifically, counter battery radars (of which the US has already supplied some) and drones (for reconnaissance and battle damage assessment as well as for carrying out precision strikes).

Number two: air defense weapons, especially longer range SAMs. This could be something of an issue. The Ukrainians are trained up on Soviet/Russian weapons (e.g., S-300). It would take time to get them up to speed on western equipment (e.g., Patriots). Further, the US has legitimate security concerns about supplying these weapons, due to the risk of capture and reverse engineering.

A stopgap would be more MANPADs. The Ukrainians have made good use of those, and to the surprise of virtually all, have prevented the Russians from achieving air superiority, or even executing an effective air campaign.

Number three: more artillery.

Armor would be nice, but not necessary. The Ukrainians have already demonstrated a remarkable ability to defend against armor using ATGMs. So more of those, please. A Ukrainian armored assault is not in the offing, which reduces the need for more tanks beyond the T-62s, T-64s, T-72s already in its arsenal. (Not to mention captured Russian armor.). They likely have enough for the local counterattacks that they will need to execute as part of an active defense.

Aircraft would assist Ukraine in denying Russia air superiority, but it is uncertain how many decent pilots Ukraine has, and they would be limited to ex-Soviet aircraft types. Further, the bases would be vulnerable to Russian missile strikes. I doubt they would be decisive.

Get them the big guns, and the shells to feed them. That’s the priority. They would prove essential in a defensive battle.

Although Russia already has its hands full in Ukraine, and has proved to be a military paper tiger, amazingly it is looking to pick other fights. Latvia (the least anti-Russian of the Baltic countries) had the temerity to announce a commemoration of Ukrainians killed by Russians during May, the holy Victory Month. Which caused the Russians to lose their shit (I know, it’s a day that ends in “Y”, but still), and call the Latvians Nazis (of course!) and make threatening noises.

On cue, Russia state television trotted out a mouth breathing ex-military type to lay out how Russia would (and by implication, should) invade not just the Baltics, but Poland and Sweden (specifically Gotland):

Pointing a the map, Colonel Igor Korotchenko [Ukrainian name, interestingly], formerly of the Russian General Staff and air force and currently a reserve officer, said at the start of the invasion ‘a massive Russian radio-electronic strike is inflicted’ as ‘all Nato radars go blind and see nothing’, according to the Sun.

This was how the scenario for capturing the countries might look, he added.

Sweden has been politically neutral throughout its recent history, but Russia’s invasion of Ukraine brought the prospect of the Nordic country joining NATO to the fore of political discussion.  

Russia has threatened Sweden and Finland over NATO membership repeatedly since the invasion began.

‘At this time, on the Swedish island Gotland, Russian military planes land, delivering S-400 anti-aircraft missile systems, and Bastion coastal anti-ship systems,’ said Colonel Korotchenko. 

In the video, a border area labelled the ‘Suwalki gap’ is shown – the gap between Belarus and Russia’s Kaliningrad exclave, a leftover territory annexed from Germany after the Second World War.

Colonel Korotchenko explained how Russia would push up from Kaliningrad towards the Suwalki corridor separating Poland and Lithuania, blocking NATO reinforcements from the West.

Is this guy Ripski Van Winkle? Has he been asleep the last 6 weeks? Russia has not been able to blind Ukrainian radars, FFS. It’s vaunted electronic (and cyber) warfare capabilities have proved to be as Potemkinesque as its armored and air forces. And as if Russian transport planes would get anywhere near Gotland: they would all go down in flames due to Nato (and Swedish) SAMs and AAMs. And has Col. Korotchenko noticed that the airborne units that would necessarily spearhead such a mission (a) failed to achieve a similar mission outside Kiev on the opening day of the invasion, and (b) have been torn to shreds in the subsequent combat.

Gotland is an island, you know. Amphibious assault? The Russians haven’t had the stones to do that against Odesa or elsewhere, and the odds of pulling it off in the Baltic are far longer. Ain’t happening.

As for tearing through the Suwalki gap, the Russians haven’t torn through anything in Ukraine. And they could pull this off logistically how, Colonel? Your army has no clothes. Literally, in some cases.

This is the best part:

‘The astonished West and NATO will know that Russia declares a no-fly zone of 400km,’ added the enthused Colonel.

The only thing that is astonishing is that Russia has not been able to create a no-fly zone in Ukraine.

One would have to think this has to be for domestic consumption, to feed the image of a Russian juggernaut capable of taking on Nato to Russia’s northwest, thereby to distract the nation’s attention from the reality of its abject failure against Ukraine to Russia’s southeast. They really can’t be thinking of doing this, can they?

Six weeks ago I would have thought not. Now I am not so sure. The detachment from reality in Moscow is palpable. Ironically, the failure in Ukraine appears to have made the Russian leadership and the Russian people more delusional, not less. The shocking reality has led to denial, and a desperate need to fantasize about military glories to be won elsewhere to compensate for the fact of devastating losses in Ukraine.

Meaning Nato has to be ready for anything. They are just crazy enough to try it.

And in the meantime: send artillery to those who can use it.

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April 5, 2022

Vlad the Accursed

Filed under: History,Military,Politics,Russia — cpirrong @ 6:25 pm

Apologies for the hiatus. Was traveling in Europe for my annual teaching gig in Geneva. Other than the unseasonably cold weather in Geneva it was a great trip.

And now that I am pretty much recovered from the travel, some new material:

Vladimir Putin no doubt imagines a sobriquet being attached to his name. You know, like “the Great,” as in Peter the Great or Catherine the Great, or Vladimir I the Great. He probably wouldn’t even mind “Grozny,” as in Ivan IV Grozny–under either of the offered translations of “Formidable” or “Terrible.”

What are some other possibilities that would appeal to his penchant for history?

Well, I think we can definitely rule out “the Humblest” (Alexei Mikhailovich). We can also clearly rule out “the Peacemaker” (Alexander III).

Putin no doubt views himself as “the Liberator” like Alexander II, who earned that nickname not for freeing the serfs, but for freeing the Balkans: Putin thinks he is liberating Russians in Ukraine and Georgia from a foreign yoke, and no doubt yearns to do the same in the Baltics. He also no doubt dreams of being known as “the Blessed” after Alexander I, who defeated the hated westerners (namely Napoleon), enforced autocratic rule in eastern Europe, and made Russia a world power.

But the trajectory of events suggests that other historical sobriquets are more likely to stick. “The Bloodstained” (Nicholas II) is certainly in the running. But I think that the best candidate is . . . “the Accursed” (after Sviatopolk, a Kievan prince, ironically).

Yes, Putin is riding a wave of popularity in Russia right now. But he is clearly cursed in Ukraine, the rest of eastern Europe, and much of the world. And I think that once the propaganda fueled euphoria fades, and reality intrudes, Putin will be known as The Accursed in Russia as well.

The invasion of Ukraine is a bloody fiasco. Stymied on the battlefield, Russia is resorting to indiscriminate bombardment. In the wake of its withdrawal from the Kievan front, evidence of atrocities is mounting. And just as the Soviets responded to German announcements of the discovery of mass graves at Katyn by claiming that the Germans were the actual murderers, the Russians claim that the mass graves and civilian corpses littering the streets of places like Bucha were not their doing, but the Ukrainians’, thereby proving Russia to be the true successor state to the USSR–and wrecking even further Russia’s already dismal credibility.

Russia had become a pariah state before these revelations. Russians going all Russian has made it even more of one, and it will always remain such as long as Putin is in power. This will relegate the country to persistent penury that propaganda will not be able to paper over for much longer. To maintain his stubby little fingers’ hold on power, Putin will resort to even more draconian measures and oppressions. Defeat (or even Pyrrhic victory), poverty, isolation, and oppression will, sooner or later, make Putin Vladimir the Accursed even in his own land.

As for the military situation, Russia has clearly experienced a major defeat in the north, to the west, north, and east of Kyiv/Kiev. It is withdrawing post haste from those areas, leaving the Ukrainians in control–and allowing them to uncover and broadcast the evidence of Russian atrocities.

One narrative is that the withdrawing units will be redeployed to the Donbas front, and bring a victory there by Victory Day (May 9). Quite frankly, this is delusional bullshit. Claims of redeployment are as convincing as Michael Palin’s insistence that the dead parrot is merely resting.

Units that have been as thoroughly thrashed as those around Kyiv/Kiev take weeks, if not months, to regenerate. And doing so requires a stream of men–which Russia does not have. (Note the extreme difficulty that the US had in keeping infantry units up to strength in the ETO during WWII.) No doubt Putin will find some way to circumvent the legal obstacle against deploying conscripts outside of Russia (e.g., by dragooning them into “volunteering” as kontraktniki, or claiming that Donbas is really Russia), but the new lot of conscripts are just being called up, and it will take them months just to figure out how to put on their gear and find the latrines. And once they are integrated into these units, why should it be expected that they will be any more militarily competent than their predecessors who died in droves while accomplishing nothing? Indeed, the experience of their predecessors means that they will no doubt start out with morale at rock bottom levels, even before they see any of their comrades incinerated by a Ukrainian ATGM. And their training will be, frankly, shit. They will be missile fodder, and nothing more.

Further, there are stories that replacement stocks of equipment are largely unusable. Not that that really matters, I guess, given how ineffective the front line equipment has proved to be. The best stuff blowed up real good. Just think what’s in store for the not so good stuff.

Moreover, if the Russians can redeploy, so can the Ukrainians now that the threat to the north has been reduced. And they can do so with less attrited units, and on interior lines. Adding more mass to the Donbas front–especially given the low quality of the mass to be added–will just add to the body count.

Putin’s alleged focus on 9 May/Victory Day is pathetic, and illustrates Marx’s maxim about history repeating, first as tragedy, then as farce. Even if by some miracle the Russians achieve some simulacrum of a tactical victory in Donbas . . . it is still Donbas, not Berlin–or even Kyiv/Kiev. A farcical achievement, at best.

So Putin is doomed to either a humiliating climb down (which I doubt he will choose, precisely because it would be humiliating), continuing a grinding, pointless battle that will kill thousands of Russians and Ukrainians (and bring more atrocities in its wake), or heaven forbid, escalating with nuclear or chemical weapons.

Whatever option he chooses, he will be cursed for it. By virtually the entire non-Russian world certainly, and eventually in the Russian world as well. He is deserving of the sobriquet The Accursed, but what death and destruction and poverty he will cause in order to well and truly earn it.

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March 24, 2022

Stalemate . . . And Then What?

Filed under: Civil War,History,Military,Politics,Russia — cpirrong @ 3:36 pm

The Russian invasion of Ukraine has ground to a shuddering halt. Not that it was ever that dynamic, but with the exception of meager gains achieved at great cost in Mariupol, the Russian army is not advancing. Indeed, in crucial sectors, including Kiev and Mykolaiv it is giving ground in the face of local Ukrainian counterattacks (not a counter offensive–that’s something different) and digging in. For now, at least, Russia has shot its bolt. And that bolt did not travel far.

Some of the stories that have been reported are rather remarkable. Most come from Ukrainian sources, so they must be taken with some skepticism, but given the situation on the ground, and a knowledge of the nature of the Russian military they are plausible. For example, desertions of large numbers of soldiers; orders to shoot deserters and malingerers (a tradition dating back to the Russian Civil War and World War II); large numbers of frostbite casualties; appalling medical care; failures to recover the dead; killing of officers (including one story of a tanker driving his vehicle over the legs of his commander in a unit that had suffered 50 percent casualties). Even discounting the most lurid of these stories, this is a picture of an army on the verge of collapse (if not past it). This would be consistent with the near cessation of offensive operations.

Perhaps the most remarkable data point is the largely confirmed (including by official Russian sources in some instances) spate of fatalities among generals and colonels. A handful of generals (including a lieutenant general) have been killed, and many handfuls of colonels are also apparently dead.

These are American Civil War rates of casualties among army, division, brigade, and regimental commanders–and those guys were on horses on the front lines under fire from massed musketry from a hundred or two yards away. Modern warfare has (until now) much safer for colonels and generals.

The explanation being floated by Ukrainian and western sources is that a breakdown in communications has forced these officers to go right to the front to get things under control, where they get taken out by snipers. Well, I’m pretty sure that communications have something to do with it, but I doubt it’s that simple: if it were, casualties among the rank and file would be greater than the (already appalling) 20-25 percent that has been estimated by US and UK sources.

My conjecture is that the communications problems (which I alluded to in earlier posts) have allowed the Ukrainians (likely with US help) to hack and monitor Russian communications, allowing them to target the Russian commanders. In other words: hack them, track them, and whack them.

Regardless, this has to be very demoralizing to both officers and enlisted alike. Further, it exacerbates the command and control problems that the communications issues already created.

So what next? Most likely stalemate, and increased Russian reliance on indirect fire–including most horribly largely indiscriminate shelling and bombing of urban centers, notably Kiev, in an attempt to break the as of now unshaken will of the Ukrainian people and government. The Russians do not have the manpower to mount serious infantry and armor attacks into the cities. They have already taken appalling casualties (human and materiel), and urban combat is a notorious consumer of men and machines.

The biggest potential for a dramatic change in the battle is if the Russians are able to break through on one of the shoulders of the salient in eastern Ukraine, thus allowing them to trap large numbers of the Ukrainian army. This is something I’ve warned about in previous posts. Western military sources have expressed a similar concern lately.

I suspect the Americans and Nato militaries have been telling the Ukrainians about this, but they are reluctant to leave. Hence, “defense officials” are making these concerns public in order to pressure the Ukrainians.

Giving up territory would be a bitter pill to swallow, especially given the success that Ukraine has had on the battlefield. But a flexible defense that trades space for time is advisable if the Russians threaten the bases of the salient. Withdrawal under pressure is difficult, and requires skill. But with well-timed counterattacks and indirect fire to interfere with Russian attempts to press the retreat, the demonstrated inability of the Russians to advance rapidly and to coordinate the movements of their various units, and the lengthening of Russian communications that the Ukrainians have already proven adept at attacking, a withdrawal that takes a far bigger toll on the attackers than the retreaters is very achievable.

So what next, if indeed a stalemate emerges? For better or worse, the initiative is in Putin’s hands. He can choose to accept defeat, fight it out by shelling Ukraine back into the stone age, or escalate in some way. Any escalation (e.g., use of a nuke, tactical or otherwise, attack on a Nato country–such as an attempt to build a corridor between Russia and Kaliningrad, or an attack on staging areas for supplies going to Ukraine) would be a horrible prospect, but cannot be ruled out.

The tone emanating from Russia is increasingly hysterical. Dmitry Medvedev’s recent diatribe on VKontakt is an example. Medvedev claims that the US wants to end “our Motherland,” and

“This means that Russia must be humiliated, limited, shaken, divided and destroyed,” Medvedev wrote, saying if Americans succeed in that objective, “here is the result: the largest nuclear power with an unstable political regime, weak leadership, a collapsed economy and the maximum number of nuclear warheads aimed at targets in the US and Europe.”

One interpretation of this is that Medvedev views the war in Ukraine as being an existential issue for Russia, and merely a battle in a Manichean struggle between the US and Russia, defeat in which would represent the end of the Russian state. Put this together with Kremlin spokesman Peskov’s statement that Russia would use nuclear weapons if the existence of the state is threatened, and the potential for nuclear escalation is very real.

Is this a bluff? Do we want to find out?

The US and Nato have to walk a fine line here, between concessions that could encourage Putin to pocket gains today and seek more tomorrow (and not just in Ukraine) on one hand, and an aggressive response that leads a paranoid, bitter, aggrieved Putin to play Sampson.

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March 11, 2022

A Nickel is Now Worth a Dime: Is the LME Too?

Filed under: China,Clearing,Commodities,Derivatives,Economics,Energy,Regulation,Russia — cpirrong @ 12:18 pm

If you use the official LME nickel and copper prices from Monday, before the exchange stopped trading of nickel, you can determine that the value of the metal in a US nickel coin is worth a dime. As the shutdown lingers, one wonders whether the LME is too.

The broad contours of the story are understood. A large Chinese nickel firm (Tsingshan Holdings, largest in the world) was short large amounts of LME nickel, allegedly as a hedge. But the quantity involved seems very outsized as a hedge, representing something like two years of output. And if the position was concentrated in nearby prompt dates (e.g., 3 months) it involved considerable curve risk.

The Russian invasion juiced the price of nickel, not surprising given Russia’s outsized presence in that market. That triggered a margin call (allegedly $1 billion) that the firm couldn’t meet–or chose not to. That led its brokers to try to liquidate its position in frenzied buying on Monday evening. This short covering drove the price from the close of around $48,000 to over $100,000.

That’s where things got really sick. The LME shut the nickel market. It was supposed to reopen today, but that’s been kicked down the road. But the LME didn’t stop there. It decided that these prices did not “[reflect] the the underlying physical market,” and canceled the trades. Tore them up. Poof! Gone!

Now in a Back to the Future moment echoing the 1985 Tin Crisis, the LME is trying to get the longs and shorts to set off their positions. “Can’t we all just get along?” Well likely not, because it obviously requires agreeing on a price. Which is obviously devilish hard, if not impossible given how much money changes hands with every change in price. (In my 1995 JLE paper on exchange self-regulation, I argued that exchanges historically did not want to intervene in this fashion even during obvious manipulations because of the rent seeking battles this would trigger.)

So the LME remains closed.

Some observations.

First, told ya. Seriously, in my role as Clearing Cassandra during the Frankendodd era, I said (a) clearing was not a panacea that would prevent defaults, and (b) the clearing mechanism was least reliable precisely during periods of major market stress, and that the rigid margining mechanism is what would threaten its ability to operate. That’s exactly what happened here.

Second, clearing is supposed to operate under a “loser pays/no credit” model. That’s really something of a misconception, because even though the clearinghouse does not extend credit, intermediaries (brokers/FCMs) routinely do to allow their clients to meet margin calls. But here we evidently have a situation in which the brokers (or Tsingshan’s banks) were unwilling or unable to do so, which led to the failure of the loser to pay.

Third, by closing the market, the LME is effectively extending credit (“you can pay me later”), and giving Tsingshan (and perhaps other shorts) some time to stump up some additional loans. Apparently JPM and the Chinese Construction Bank have agreed in principle to do so, but a deal has been hung up over what collateral Tsingshan will provide. So the market remains closed.

For its part, Tsingshan and its boss Xiang “Big Shot” Guangda are hanging tough. The company wants to maintain its short position. Arguably it has a strong bargaining position. To modify the old joke, if you owe the clearinghouse $1 million and can’t pay, you have a problem: if you owe the clearinghouse billions and can’t pay, the clearinghouse has a problem.

The closure of the market and the cancelation of the trades suggests that the LME has a very big problem. The exact amounts owed are unknown, but demanding all amounts owed now could well throw many brokers into default, and the kinds of numbers being discussed are as large or larger than the LME’s default fund of $1.2 billion (as of 3Q21 numbers which were the latest I could find).

So it is not implausible that a failure to intervene would have resulted in the insolvency of LME Clear.

The LME has taken a huge reputational hit. But it had to know it would when it acted as it did, implying that the alternative would have been even worse. The plausible worst alternative would have been a collapse of the clearinghouse and the exchange. Hence my quip about whether the exchange that trades nickel is worth a dime.

Among the reputational problems is the widespread belief that the Chinese-owned exchange intervened to bail out Chinese brokerage firms and a Chinese client. To be honest, this is hard to differentiate from intervening to save itself: the failure of the brokerages are exactly what would have brought the exchange into jeopardy.

I would say that one reason Xiang is hanging tough is that the CCP has his back. Not CCP as in central counterparty, but CCP as in Chinese Communist Party. That would give Tsingshan huge leverage in negotiations with banks, and the LME.

So the LME is playing extend and pretend, in the hope that it can either strongarm market participants into closing out positions, or prices return to a level that reduce shorts’ losses and therefore the amounts of variation margin they need to pay.

I seriously wonder why anyone would trade on the open LME markets (e.g., copper) for reasons other than reducing positions–and therefore reducing their exposure to LME Clear. The creditworthiness of LME Clear is obvious very dodgy, and it is potentially insolvent.

Fourth, in an echo of the first point, this episode demonstrates that central clearing, with its rigid “no credit” margining system is hostage to market prices. This is usually presented as a virtue, but when markets go wild it is a vulnerability. Which is exactly why it is–and always was–vain to rely on clearing as a bulwark against systemic risk. It is most vulnerable precisely during periods of market stress.

All commodity markets are experiencing large price movements that are creating extraordinary variation margin flows, potential positive feedbacks, and the prospect for troubles at other clearers. Further, the broader economic fallout from the Ukraine war (which includes, for example, a large recession resulting from the commodity price shocks, or a Russian debt default) has the real potential to disrupt equity and bond markets. This would put further strains on the financial markets, and the clearing system in particular. Central Banks–notably the Fed–had to supply a lot of liquidity to address shocks during the Covid Panic of March 2020. Two years later, they may have to ride to the rescue again.

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March 6, 2022

Putin in Zugzwang

Filed under: History,Military,Politics,Russia,Ukraine — cpirrong @ 7:13 pm

A chess player is said to be in zugzwang when he has to make a move, but any available move worsens his position. I think it is fair to say that Putin is currently in zugzwang in Ukraine due to the myriad operational, tactical, logistical, and intelligence failures of his invasion forces.

What are his available moves?

One would be just call the whole thing off, withdraw to Russia, and say “never mind.” That would represent an admission of humiliating failure, which would be not just completely out of character, but an act that usually seals the doom of autocrats. And it would probably not result in a return to the status quo ante: Russia would still be a pariah, and subject to myriad non-military punishments.

The other is to forge ahead. But that will almost certainly entail protracted battles on urban terrain, especially Kiev. (I seriously doubt Russia has the wherewithal to fight simultaneous city battles in Kiev, Kharkov, Odessa, etc.) Urban battles are notorious consumers of men and materiel. Given Russia’s manpower limitations, the most likely approach will be to utilize massive quantities of artillery, turning cities to rubble while killing countless civilians. To paraphrase French General Koechlin-Schwartz speaking to Patton about American infantry in WWI: “The poorer the infantry, the more artillery it needs; the [Russian] infantry needs all it can get.” Further, Putin evidently has no scruples about employing the firepower against civilians.

So which of these two bad options will Putin choose? From Putin’s perspective, the second is decidedly superior. He is willing to fight to the last Ukrainian, his paeans to the unity of the Russian and Ukrainian people notwithstanding. Moreover, he can see some prospect of “victory” from this approach: if terror breaks the will of the Ukrainian government or the Ukrainian people, they will capitulate to his demands, and he will achieve his stated objective of subjugating Ukraine and removing it from the Western orbit.

This means that to Putin, the center of gravity of this conflict has now become the Ukrainian people and government. But history and operational realities are not on his side. Throughout the 20th century in particular, campaigns designed to win victory through terror (e.g., the London Blitz, the Allied bombing campaigns against Germany and Japan) have not broken the will of the enemy populace, and have often strengthened it. If Ukrainian will holds, Putin is unlikely to succeed. Given his limited numbers, their demonstrated tactical incapacity, and his army’s appalling logistics, the voracious maw of urban battle will consume the Russian army. All of his paper advantages–especially air power (not that he has utilized it effectively–are largely negated once the battle moves to the streets. Then it becomes war to the knife. Thus, Putin’s odds of taking control of Ukraine are low, but they are not zero. So it the best of his bad options.

It is important that the Ukrainians avoid a mistake that would help Putin redeem his currently grim prospects. In particular, their forces in the east are vulnerable to an attack breaking out of the Black Sea coast. They need to be willing to trade space for time and withdraw if that flank appears at any risk of cracking (assuming that they can manage the logistics of a withdrawal, and Russian air power does not exhibit a competence that has been lacking so far). Politically this is challenging because it sacrifices territory to a hated enemy: even an autocrat like Alexander I faced bitter criticism when employing it. But it has proved time and again the best way to prevail–eventually–against an invader on the steppes. As Russians have showed on multiple occasions. And I would argue that it is likely to be particularly effective given the Russians’ obvious logistical deficiencies: a withdrawal would extend their already groaning supply lines, and make them even more vulnerable to a variety of different kinds of attack (drones, guerrilla raids).

Ironically, Putin’s center of gravity is the same as his enemy’s: his population. Putin can continue a murderous campaign as long as the Russian people support it. At present, it appears that scattered protests aside, that flank is secure. Chauvinism combined with propaganda and a ruthless control of the information that Russians receive mean that at present there is either broad support for, or at least not broad opposition to, his invasion.

Severe economic distress resulting from sanctions is the most likely threat to this support. No doubt Putin’s regime will portray any such distress as evidence that Russia’s enemies truly intend to destroy it, and this will resonate with many Russians. But perhaps enough will realize that he is consigning them to misery for no prospect of real gain that Putin’s center of gravity will begin to crack.

Given all this, I estimate that the most likely outcome is a protracted, bloody stalemate lasting for months on the streets of Ukraine’s cities. If it could be guaranteed that the conflict would remain conventional, Nato intervention (through air power alone) could be decisive in days. But Russian doctrine has a low threshold for the employment of nuclear weapons, and that threat has to be taken very seriously. Thus, it is likely that Putin will grind on, under the cover of his nuclear shield.

Not a pretty prospect, but it’s hard to see Putin choosing differently.

Finally, a comment on some domestic US effects of this conflict. It is a depressing picture. Those on the Trump right detest Ukraine for its involvement with various efforts to undermine–and indeed, unseat–Trump. As a result, they are are clearly anti-Ukraine, and in many cases pro-Putin.

It must be said that Ukraine did make some horrible misjudgments. Thoroughly enmeshed in the US foreign policy establishment (Victoria Nuland, anyone?) and the Democratic Party (Hunter Biden, anyone?), and buying into the narrative that Trump was Putin’s puppet and therefore inimical to their interests, Ukraine played a part in the anti-Trump campaign that consumed his administration.

For that they are paying a price. Indeed, their fate would almost have certainly been better had Trump been reelected: it clearly could not have been worse. A Russian reporter friend asked me if this would be happening if Trump were still president. I cautioned against putting too much credence in alternative history, but made one observation. Putin’s ambitions haven’t changed, but his actions have.

Regardless of the folly of Ukrainian involvement in US politics, they do not deserve their current fate. They made a miscalculation about the best way to protect themselves against Putin, but it was clearly not wrong to seek desperately such protection–as current events bloodily demonstrate.

There is a single individual responsible for the current calamity: Vladimir Putin. Even if some Ukrainian actions enabled him, that does not mean that they deserve their current miseries. It is therefore beyond disgusting that a clique of Trump right chatterers cheer on Putin and fight against efforts to aid Ukraine.

And insofar as American interests are concerned, Putin’s public statements make it clear that subjugating Ukraine is not the limit of his ambitions. He has demanded the abandonment of everything east of the Elbe to Russian domination. Ukraine has laid bare his inability to achieve that using conventional military force, but that should hardly be consoling, given the only alternative available to him. He must be fought in Ukraine, and since direct US and Nato involvement is extremely risky due to the nuclear threat, that means finding all means to support a war of attrition in Ukraine. Ukraine has demonstrated its will to fight that grim war, and interest and compassion compel the US to support them.

It is important to avoid false choices. (I consider it ironic that the anti-Ukraine right in the US constantly offers false choices–e.g., “how can you defend the Ukrainian border when you don’t defend America’s?”–given that Obama was the master of the false choice. Imitation is the sincerest form of flattery.) It is possible to deal with those in the US whose misjudgments and manipulations greatly contributed to the current situation at the proper time while making the best choices on how to proceed from where we are–even if where we are is largely the product of those misjudgments and manipulations.

You have to play it as it lies. Sunk costs are sunk. The current lie is hardly ideal, the product of locust years, but the best play is not to abandon Ukraine and embolden Putin. The reverse is true.

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