Streetwise Professor

April 13, 2019

The Russians Aren’t There to Spread Disorder; They are There to Maintain Disorder

Filed under: China,Commodities,Economics,Energy,Politics,Russia — cpirrong @ 4:41 pm

This headline in Bloomberg made me chuckle and think of a famous malapropism from Mayor Daley I: “The policeman isn’t there to create disorder; the policeman is there to preserve disorder.”

The Russians (and the Chinese) are not in Venezuela to create (or spread) disorder, the Russians are in Venezuela to preserve disorder. Quite literally. Because they are there to preserve Maduro, and Maduro has created such chaos and misery that “disorder” seems far too mild a word to describe it. So adapting Mayor Daley’s words to the Russians in Venezuela, it wouldn’t be a malapropism–it would be descriptively accurate. An understatement, even.

Yes, I understand that permitting foreign interference in the Western Hemisphere violates just short of 200 years of American policy, and this is not a precedent we want to set. But in comparison to say the French in Mexico in the 1860s, this is truly small beer.

And consider the fate of Maximillian et al. Not a precedent that the Russians or Chinese should want to emulate.

Venezuela is a disaster–the world’s largest tar baby (literally, in some respects, given the physical characteristics of Venezuelan crude oil). The Russians and Chinese are actually fools if they think that propping up this disastrous regime–which is on the verge of overseeing a record setting decline in economic output–will increase their odds of getting paid back the billions they lent. Every day that Maduro continues in power, and the catastrophe metastasizes, makes the prospects of recovering even a few kopecs all the more remote.

If recouping some of their debt is an objective, the Russians and Chinese would actually be far better off killing Maduro, overthrowing his thugs, and making a deal with the opposition. But Putin and Xi are doubling down on a regime that makes the phrase “failed state” seem like a compliment.

Putin also views an outpost in Venezuela as a military provocation to the US. Whatever. At over 5400 miles from Russia (and over 9000 miles from Shanghai), that outpost would be utterly unsustainable if push came to shove with the US. Russia has no ability to sustain it logistically over that distance–nor does China, really, even though its navy and sealift are not as decrepit as Russia’s.

Fools put bases in places they can’t support. Complete fools put bases in places that they can’t support AND which are located in places that are descending into a state that the creators of Mad Max would have found fantastical.

So let Putin add Venezuela to his collection of failed state allies. It will be an ulcer, not an asset.

Print Friendly, PDF & Email

April 8, 2019

CDS: A Parable About How Smart Contracts Can Be Pretty Dumb

Filed under: Blockchain,Derivatives,Economics,Exchanges,Regulation,Russia — cpirrong @ 7:04 pm

In my derivatives classes, here and abroad, I always start out by saying that another phrase for “derivative” is contingent claim. Derivatives have payoffs that are contingent on something. For most contracts–a garden variety futures or option, for example–the contingency is a price. The payoff on WTI futures is contingent on the price of WTI at contract expiration. Other contracts have contingencies related to events. A weather derivative, for instance, which pays off based on heating or cooling degree days, or snowfall, or some other weather variable. Or a contract that has a payoff contingent on an official government statistic, like natural gas or crude inventories.

Credit default swaps–CDS–are a hybrid. They have payoffs that are contingent on both an event (e.g., bankruptcy) and a price (the price of defaulted debt). Both contingencies have proved very problematic in practice, which is one reason why CDS have long been in such disrepute.

The price contingency has proved problematic in part for the same reason that CDS exist. If there were liquid, transparent markets for corporate debt, who would need CDS?: just short the debt if you want to short the credit (and hedge out the non-credit related interest rate risk). CDS were a way to trade credit without trading the (illiquid) underlying debt. But that means that determining the price of defaulted debt, and hence the payoff to a CDS, is not trivial.

To determine a price, market participants resorted to auctions. But the auctions were potentially prone to manipulation, a problem exacerbated by the illiquidity of bonds and the fact that many of them were locked up in portfolios: deliverable supply is therefore likely to be limited, exacerbating the manipulation problem.

ISDA, the industry organization that largely governs OTC derivatives, introduced some reforms to the auction process to mitigate these problems. But I emphasize “mitigate” is not the same as “solve.”

The event issue has been a bane of the CDS markets since their birth. For instance, the collapse of Russian bond prices and the devaluation of the Ruble in 1998 didn’t trigger CDS payments, because the technical default terms weren’t met. More recently, the big issue has been engineering technical defaults (e.g., “failure to pay events”) to trigger payoffs on CDS, even though the name is not in financial distress and is able to service its debt.

ISDA has again stepped in, and implemented some changes:

Specifically, International Swaps and Derivatives Association is proposing that failing to make a bond payment wouldn’t trigger a CDS payout if the reason for default wasn’t tied to some kind of financial stress. The plan earned initial backing from titans including Goldman Sachs Group Inc.JPMorgan Chase & Co.Apollo Global Management and Ares Management Corp.

“There must be a causal link between the non-payment and the deterioration in the creditworthiness or financial condition of the reference entity,” ISDA said in its document.

Well that sure clears things up, doesn’t it?

ISDA has been criticized because it has addressed just one problem, and left other potential ways of manipulating events unaddressed. But this just points out an inherent challenge in CDS. In the case Cargill v. Hardin, the 7th Circuit stated that “the techniques of manipulation are limited only by the ingenuity of man.” And that goes triple for CDS. Ingenious traders with ingenious lawyers will find new techniques to manipulate CDS, because of the inherently imprecise and varied nature of “credit events.”

CDS should be a cautionary tale for something else that has been the subject of much fascination–so called “smart contracts.” The CDS experience shows that many contracts are inherently incomplete. That is, it is impossible in advance to specify all the relevant contingencies, or do so with sufficient specificity and precision to make the contracts self-executing and free from ambiguity and interpretation.

Take the “must be a causal link between the non-payment and the deterioration in the creditworthiness or financial condition of the reference entity” language. Every one of those words is subject to interpretation, and most of the interpretations will be highly contingent on the specific factual circumstances, which are likely unique to every reference entity and every potential default.

This is not a process that can be automated, on a blockchain, or anywhere else. Such contracts require a governance structure and governance mechanisms that can interpret the contractual terms in light of the factual circumstances. Sometimes those can be provided by private parties, such as ISDA. But as ISDA shows with CDS, and as financial exchanges (e.g., the Chicago Board of Trade) have shown over the years in simpler contracts such as futures, those private governance systems can be fragile, and themselves subject to manipulation, pressure, and rent seeking. (Re exchanges, see my 1994 JLE paper on exchange self-regulation of manipulation, and my 1993 JLS paper on the successes and failures of commodity exchanges.)

Sometimes the courts govern how contracts are interpreted and implemented. But that’s an expensive process, and itself subject to Type I and Type II errors.

Meaning that it can be desirable to create contracts that have payoffs that are contingent on rather complex events–as a way of allocating the risk of such events more efficiently–but such contracts inherently involve higher transactions costs.

This is not to say that this is a justification for banning them, or sharply circumscribing their use. The parties to the contracts internalize many of the transactions costs (though arguably not all, given that there are collective action issues that I discussed 10 years ago). To the extent that they internalize the costs, the higher costs limit utility and constrain adoption.

But the basic point remains. Specifying precisely and interpreting accurately the contingencies in some contingent claims contracts is more expensive than in others. There are many types of contracts that offer potential benefits in terms of improved allocation of risk, but which cannot be automated. Trying to make such contracts smart is actually pretty dumb.


Print Friendly, PDF & Email

March 26, 2019

The NYT Figures Out That Putin Is Not An Omnipotent Dr. Evil. Well, I Guess 12 Years Late Is Better Than Never.

Filed under: Economics,History,Politics,Russia — cpirrong @ 6:35 pm

The image of Vladimir Putin as an all-powerful mastermind was central to the Russia Collusion Hoax. In this telling, the omnipotent and omnipresent Vova, secure in his lair in Moscow, could manipulate at will the electoral process in the most powerful country in history. His power, devious intelligence, and malign purpose made it especially reprehensible and dangerous for Trump to collude with him, and the image of the Putin evil mastermind made collusion with him a grave threat to the republic, in a way totally different from, say, assorted Chinese boodlers boosting Bill Clinton.

The entire Russian Collusion Hoax was farcical to me from the beginning, and this grotesque exaggeration of Putin’s power and influence was the most farcical part of the charade. It was particularly annoying to hear about it from idiots who hadn’t paid the slightest bit of attention to Russia since, well, ever, and who when they did weigh in on Russia it was to slam Mitt Romney for calling it a threat, and to chortle at Obama’s snarky response to Romney’s alarums.

Put simply, most of these people who have been running around with their hair on fire about Russia since, come to think of it, the minute that Hillary conceded defeat and needed an excuse, couldn’t find the place on a map, despite the fact it is the biggest country on earth. But all of a sudden they were experts on all things Putin and all things Russia.

Perhaps in a signal to the hysterics that they should back off, the NYT ran an oped titled “How Powerful is Putin Really?” The answer: pretty much the same one I gave 12 plus years ago, and repeatedly–not very. Because Russia is not that powerful, and because Putin’s main role is to be an intermediary in wars between completing clans in the security forces and business, rather than to be a grandmaster moving inanimate chess pieces around the board.

This is comic gold:

The gulf between what Mr. Putin says and what happens in Russia raises a fundamental question about the nature of his rule after more than 18 years at the pinnacle of an authoritarian system: Is Mr. Putin really the omnipotent leader whom his critics attack and his own propagandists promote? Or does he sit atop a state that is, in fact, shockingly ramshackle, a system driven more by the capricious and often venal calculations of competing bureaucracies and interest groups than by Kremlin diktats?

I won’t keep you in suspense as to the answer. Hell, if you have been reading here anytime since around 2007, you know the answer. But then again, if you read me you probably haven’t been drinking the NYT Kool-aid, and won’t need them to tell you the answer 12 years too late.

If you read the rest of the article, you will see a description that echoes exactly the one I first applied to Russia in April, 2007: “a natural state.” As I quoted North, Weingast, and Wallis:

natural state is a specific way of structuring political and economic systems so that the economic rents created by limited entry are available to secure credible commitments among politically powerful groups. Potential rivals in a natural state stop fighting (or fight less when the economic rents they enjoy depend on continued existence of the sate and of social order. Natural states limit economic entry to create rents and then use those rents to credibly commit powerful groups to support the state. In other words, natural states use the economic system as a tool to solidify the stability of the ruling coalition.

I also quoted Celeste Wallander:

Patrimonial authoritarianism is a political system based on holding power in order to create, access, and distribute rents. It is well known that Russia is deeply corrupt, but corruption in the Russian system of patrimonial authoritarianism is not merely a feature of the system; it is essential to the very functioning of political power. The political system is based on the political control of economic resources in order to enrich those within patron-client clans. The patron remains in power by rewarding clients, and the clients are rewarded by supporting their patron. The patron requires support from his clients, and he must access and distribute rents for that support. Without the creation and control of rents, political power disappears. At the top of the political system, Putin manages relations among competing patron-client clans headed by top government and business figures, such as Development and Trade Minister German Gref, Deputy Prime Minister and Gazprom chairman Dmitry Medvedev, Gazprom president Alexei Miller, and Igor Sechin, deputy head of the presidential administration and chairman of Rosneft. Each of these individuals in turn has his own set of clients, who are in turn patrons of their own clans, and so on, creating a complex web of relationships that sustain political power and distribute patronage rents.

The basic point of the analysis was that of course someone like Putin is powerful within such a system, but he is not all powerful. Further, his power derives from his ability to intermediate between independent sources of power within Russia. The main purpose of the state in Russia is to organize theft, and divide the spoils. The main purpose of Putin is to keep that process from devolving into violent chaos.

Put differently, I’ve often emphasized the deinstitutionalized, highly personalized nature of the Russian state. The personalism is a bug, not a feature, and inherently limits the power of the person at the top. It is a great mistake to confuse the prominence of the public face of a shambolic state with actual power. Institutions are necessary to generate national power, either domestically or abroad. The power of deinstitutionalized state is inherently constrained.

But especially post-8 November, 2016, the left and the media and Hillary needed a figure to personify evil, and to tie him to Trump, so the reality of Russia and Putin and Putinism–which is pretty plain to see if you actually look–was deliberately ignored, and in its place our “elite” became fixated on a cartoonish Dr. Evil figure in a way that would make the most crazed 1950s Bircher blush.

These are people who fell for the scary wizard and his pyrotechnics, and paid no attention to the little man behind the curtain. Some because they were fools. Some–the worst of them, and the most powerful–because it advanced their political agenda.

So I say to the NYT: Bravo! Better 12 years late then never! But this should be a lesson: don’t pay the slightest bit of attention to those Bozos, because their news and editorial “judgments” are driven by a political and ideological bias that is impervious to readily observable realities.

Print Friendly, PDF & Email

March 24, 2019

I Love the Smell of Napalm . . . Anytime–But the War Is Not Over, By A Long Shot

Filed under: Politics,Russia — cpirrong @ 5:33 pm

Watching the wailing, moaning, shrieking, rending of garments and gnashing of teeth emanating from people I despise following the release of AG Barr’s summary of the Mueller report brings to mind this epic scene:

I realize that the metaphor extends. Yes, Charlie got smoked here, but this is just one battle. He will be back. He will shift the fight to Congress in particular, and the media will continue its assault. But here I think Trump actually has some advantages. This will be a political battle, with partisans on both sides: it is no longer possible for the left/media/Democrats to hide behind the alleged impartiality of Mueller. (Indeed, I think this is another reason that Mueller’s report is a huge benefit to Trump: given the partisan makeup of his team, if even he can’t find collusion or obstruction of justice, it’s not there to be found.) In fact, this may redound to Trump’s benefit because even on his most unhinged day he will seem normal compared to Schiff, or Swalwell, or AOC, or “impeach the motherfucker” Tlaib, or Maxine Waters, or and on and on and on. He will have a surfeit of fools providing a surfeit of foils.

The left/media/Democrats are also holding out hope that some other authority–the US attorneys in the Southern District of New York (do they know it reports to Trump, which is the whole purpose of special counsels?), the New York AG, or maybe Officer Mcgillicuddy from Queens who saw Donald jaywalking as a youth–will take up the cudgels and find something to indict Trump for. But it won’t be collusion. Because get real, if after all this Mueller can’t find any evidence, the evidence ain’t there to be found:

When I witness these desperate, pathetic clowns pinning all their hopes on somebody, anybody, else in authority, this comes to mind:

I also find it infinitely amusing that they are channeling their inner Donald Rumsfeld, and flogging variants of “absence of evidence is not evidence of absence” for all it’s worth. The irony! Which is fitting, because the Russia conspiracy hoax will go down in infamy alongside WMD.

And there must be a reckoning. An incomplete list, but a necessary start:

  • The “leadership” of the FBI that started the whole counterintelligence operation against the Trump campaign, and once it was elected, continued it against the Trump administration, starting with James Comey. These were the people who were interfering with US elections.
  • Key figures in the Obama administration, notably Brennan, Clapper, and Rice . . . and then following wherever that leads.
  • The Hillary Clinton, and the Hillary Clinton campaign and its beard, the DNC, which concocted the Russia conspiracy hoax first as a campaign dirty trick, then continued it as an excuse for its loss and as a means of crippling the administration of the man who had the temerity to derail her coronation.
  • Hillary’s henchmen, especially the loathsome, beyond execrable Glenn Simpson and his tool, Christopher Steele. (One thing I would really like to know is what the Mueller report says about the farcical dossier.)
  • Last, but surely not least, the entire media establishment, not just in the US (the usual suspects, CNN, MSNBC, NYT, WaPo and on and on) but their foreign fellow travelers (esp. the FT, the BBC, and other supposedly reputable UK outlets).

There are many institutions in government and the media that deserve to be pulled out, root and branch. But of course they will fight, tooth and nail, hammer and tong.

Meaning that the smell of napalm might be sweet today, but many more strikes will be necessary before the war is over.

Print Friendly, PDF & Email

March 9, 2019

The Laundromat That Reveals Just How Dirty–and Doomed–Russia Is

Filed under: Economics,Politics,Russia — cpirrong @ 7:10 pm

The Troika Laundromat–a massive money laundering operation organized by the eponymous Russian investment bank–has been much in the news of late. Most of the coverage has focused on the western banks–including several in supposedly squeaky clean Nordic countries–that were the conduits for the money. But what is far more interesting to me about the story is what it says about Russia, and in particular how it illustrates with particular force what started me writing about Russia 12+ years ago.

Specifically, as a lower middle income country, with an educated populace and abundant natural resources, Russia should be a magnet for capital. Instead, it is one of the world’s all time greatest capital repellants. They say what happens in Vegas stays in Vegas: obviously, what is made in Moscow (and elsewhere in Russia) doesn’t stay, but gets out any way that it can.

So what overwhelms the forces that would otherwise draw capital to Russia?: the state, and the culture that supports it, and which it sustains. The predatory nature of the state, the predators the state protects, and the lack of basic legal protections make money vastly safer outside of Russia than in it. Put differently, although Russia is rich in human capital and resource capital, it is tragically poor in social capital. It is a low trust society, and one in which formal institutions do not compensate for the lack of trust, but exacerbate it.

Putinism has done nothing to encourage investment in social capital–the opposite is true. Yes, it arguably tamed the greatest excesses of the 90s, but this was essentially a matter of replacing roving bandits with a stationary bandit. An improvement, but hardly a launchpad for social and economic development.

This is a major reason why I consider all of the hyperventilating about the threat posed by Putin and Russia to be vastly exaggerated. It can raise Cain in its neighborhood, but beyond that the country suffers from debilitating weaknesses which are unlikely to change anytime soon. For all Putin’s strutting domestically, and on the world stage, to say that he (and Russia) have feet of clay is an extreme understatement. This is a country that is already far behind, and is doomed to fall even further behind with every passing year.

All the laundromats in the world cannot wash away that reality. Indeed, they are symptomatic of how filthy that reality is.

Print Friendly, PDF & Email

February 19, 2019

Whoops, They Did It Again

Filed under: Economics,Politics,Russia — cpirrong @ 7:27 pm

An American investor, Michael Calvey of Baring Vostok, has been arrested for fraud in Russia. It has been some time since something like this has happened, a fact that has been attributed to Putin’s direction that business disputes should not result in the imprisonment of any of the disputants. But when it comes to westerners, it just may be the case that there aren’t many of them around to be arrested.

The FT article reports a stunning statistic that speaks to this point. Foreign direct investment, which totaled $79 billion before Putin’s glorious triumph in Crimea, had fallen to $27 billion by 2017 . . . and a pathetic $1.9 billion in 2018. Less FDI, fewer foreign direct investors–and hence fewer to arrest.

Between sanctions, and the stultified (and risky–financially and personally) economic environment in Russia, foreigners have finally wised up. Once upon a time, the returns looked very appealing, and many were willing to take the plunge. Well, the returns were high for a reason–they were compensation for risk of expropriation, sometimes facilitated by, er “legal” means. And evidently, most have decided that the rewards don’t justify the risk.

I have some sympathy for Calvey, but not a great deal. He assumed a known risk, presumably thinking he would be able to manage it–or perhaps foolisly assuming that Putin really cared about trying to create a more hospitable investment environment. Further, no doubt that anyone who swam in those waters for as long as he did had more than a little shark in him.

The FT article is titled “Calvey’s arrest sends chills through Russia’s foreign investors.” To which I say: what foreign investors? The article includes this quote:


A person close to the Vostochny dispute said: “This is transformative. This kills FDI stone dead forever . . . This sends the message, can you use the security services against your business rivals over a few million dollars? Yes, you can.”

But (see above) FDI is already as dead as Monty Python’s parrot, and there was virtually no prospect for resurrection. As for sending a message: uhm, if you hadn’t gotten this message by now, you are a little slow on the uptake. A decade plus slow.

And that’s likely why Putin has said and done nothing about this. Kudrin may think this is “an emergency for the economy,” but Putin almost certainly recognizes that Kudrin is living in the past, and that the parrot is indeed dead.

Moreover, the last thing he would do now is take any action that would give the impression that he is kowtowing to the West. His political persona is now heavily invested in the image of a strong Russian leader standing up against a West–and an America in particular–that desires to subjugate Russia. He’s particularly unlikely to abase himself (in his eyes) before the US/West when he realizes that the payoff for doing so is negligible.

Michael Calvey was a fool who rushed in where angels fear to tread, and his arrest is more of an echo of the past, than a harbinger of the future. Certainly as long as Putin is around Russia will be largely isolated from the West, and will stagnate accordingly.

Print Friendly, PDF & Email

February 16, 2019

The Idiotic Freak Out Over Putin’s Middle East Diplomacy

Filed under: China,History,Military,Politics,Russia — cpirrong @ 8:59 pm

There has been a steady chorus of wailing about how the US “retreat” from the Middle East (which is at present limited to an announced intention to draw down in Syria) is empowering Russia, and that Putin is exploiting the “vacuum” left by Trump.* This WSJ oped is representative of the genre. Which is to say it is incoherent to the point of idiocy.

For one thing, this piece, and the entire genre, mirrors one of Putin’s most glaring intellectual failings: zero sum thinking. If Russia gains, the US must lose, right?

Wrong. The US has global interests, and does not have unlimited means to pursue them. Strategic prioritization–most notably, focusing on China–and redeploying resources to focus on the new priorities is vital and beneficial and advances US interests. Perhaps Russia gains in some ways from this, but those gains do not come anywhere near erasing the benefits accruing to the US of downplaying peripheral theaters and focusing on more important ones. Further, any local gains Russia may achieve in, say, Syria are almost certainly to be more than offset by the disadvantages of competing with a United States that has its strategic priorities straight. Putin–and other American adversaries/enemies, notably Iran–have exploited US misadventures in the Middle East. Focusing efforts and husbanding resources makes the US stronger, not weaker, both absolutely and relative to would be competitors–including Russia.

I have yet to see anyone make a remotely plausible case of why an enduring US role in Syria makes any strategic sense. As I’ve said from the very day that Putin put troops there–if he wants the shithole, let him have it. It has no strategic importance to the US, especially in its utterly wrecked current condition. We have far more important issues to deal with, China foremost among them.

The WSJ piece also provides room for considerable doubt about Putin’s prospects. Specifically, it inadvertently demonstrates the inherent contradictions in Putin’s policy. The author, Angela Stent, spends much of the piece fretting about the warming relationship between Russia and Israel. She also frets about the cooperation between Iran and Russia. Well, those policies are utterly incompatible, given that Israel and Iran view each other as existential enemies. The rapprochement between Russia and Saudi Arabia is similarly incompatible with a strong cooperative relationship between Russia and Iran. Something has to give.

I also fail to see why having Russia and Israel on good terms is a bad thing, especially in light of the fact that the Soviet Union was Israel’s arch-enemy (except for a brief, historically miraculous moment in which Stalin thought supporting Israel–and arming it–advanced Soviet interests), and armed its enemies (including Syria) throughout the Cold War. This was a major reason why the US had to take substantial risks to defend Israel in the Cold War–and why some said this risk wasn’t worth it, and that the US should jettison its support for Israel. Indeed, Soviet support for Arab states waging war on Israel brought the USSR and the US to the nuclear brink in 1973. A Russia that values its relationship with Israel is more likely to put a brake on Israel’s enemies with whom it has influence (notably Iran and Syria). That reduces the likelihood of conflict in the Middle East, and reduces a source of friction between the US and Russia.

Tell me why this is a bad thing.

And don’t forget–it takes two to canoodle. Here Putin is canoodling with Benjamin Netanyahu, who is (a) extremely hawkish, and (b) recognizes that Israel’s security depends crucially on the US. If Netanyahu believes there are gains to trade to be realized from dealing with with Putin, it is likely that the US is a gainer too.

Having Russia on friendly terms with Israel enhances the Jewish state’s security, and thereby advances American interests. And if in the end Russia chooses Iran and Syria over Israel, the pearl clutching about a budding Russian friendship with Israel will look rather foolish, no?

The friendliness between Russia and KSA can be analyzed similarly. The contrast with the Cold War again deserves comment. The inflection point in US involvement in the Middle East generally, and KSA in particular–the Carter Doctrine–was a response to the perceived Soviet threat to seize the Arabian Peninsula. Although the military threat ebbed with the collapse of the USSR, a KSA with fewer enemies and threats requires less US protection.

Here it should be added that the main reason for KSA and Russia to cooperate now is oil. But this in many respects is a confession of weakness, not strength. The resurgence of US as a major oil producer has undercut the market power of the Saudis and Russia, and their cooperation is largely defensive, rather than offensive.

Those who are paying attention, moreover, realize that there is considerable disagreement within Russia about the desirability of cooperating with OPEC (which, in effect, means with KSA) on oil output. In particular, my old buddy Igor Sechin is lobbying hard against continued cooperation, claiming it is a strategic threat to Russia:

“The participants of the OPEC+ agreement have actually created a preferential advantage for the USA – that sees raising its own market share and the seizure of target markets as its primary task – which has become a strategic threat to Russia’s oil industry development,” the letter [from Sechin to Putin] seen by Reuters says.


“The key strategic challenge which the domestic oil industry is faced with today is the further decline in Russia’s market share, despite the availability of quality recoverable oil reserves, necessary infrastructure and personnel,” it said.

Here Sechin is actually expressing some economic reality. Given its market share, Russia’s–and Rosneft’s–demand elasticity is substantially greater than one, and restricting its output reduces its revenues/income. Russia/Rosneft would likely be better off with a lower price and higher output–which is precisely why for years it abstained from cooperating with OPEC.

This internal discontent among extremely powerful players–and Sechin is arguably the most powerful player in Russia after Putin–sharply limits the potential for enduring cooperation between Russia and the KSA. Again, the fears are vastly overblown.

In sum, freaking out over greater Russian diplomatic efforts in the Middle East is totally unjustified. Russia’s gains are not America’s losses–the world is not zero sum. There are inherent contradictions in Russian efforts that will inevitably force them to make choices that limit their influence. And some Russian initiatives could actually serve to reduce the likelihood of major conflicts that would harm US interests.

I can’t write about this subject without mentioning today’s remarks by the most annoying leader in the world today. And no, I don’t mean Putin–I mean Angela Merkel. At the annual security conference in Munich, Frau Merkel chastised the United States for its plans to draw down in Syria and Afghanistan:

German Chancellor Angela Merkel has warned that a hasty U.S. pullout from Syria runs the risk of strengthening the roles of Russia and Iran in the Middle East.
Speaking at the Munich Security Conference on February 16, Merkel questioned whether the planned U.S. withdrawal was “a good idea.”
“Will it once more strengthen the capacity of Iran and Russia to exert their influence?” she asked.
She also cautioned against a premature U.S. withdrawal of forces from Afghanistan, saying that NATO’s Resolute Support mission in that country was dependent on the U.S. military’s commitment.

Well, for starters, lady, if you are so convinced of the need for military engagement in Syria and Afghanistan, why don’t you order your pathetic military to pick up its broomsticks and take the lead in the fights there? Oh. I forgot. You are the leader of the biggest free rider in Nato, who constantly lectures everybody else about global responsibilities, but who never puts her money–or the lives of German soldiers (assuming they still have any) where her fat mouth is. Until you do, you can kindly STFU.

The outrageousness of Merkel’s bloviation is even more remarkable given that in the very same speech called Russia a “partner” and “made a robust defense of Germany’s foreign trade relations and ties with Russia during her speech.”

Why, some might call that collusion!

So which is it? Russian influence is something to be contested, or embraced?

Merkel has also been a robust defender of the nuclear deal with Iran, and critical of the Trump administration’s withdrawal from it. German has led efforts to circumvent US sanctions on Iran–which are intended precisely to limit Iranian influence. But then she tells us we have to garrison Syria to fight Iranian influence.

Square that circle for me.

Angela cannot go away soon enough. But alas, no doubt she will be replaced by someone equally annoying. Germany is not America’s friend. But it is probably too much to expect that those who are demented by Trump hatred will understand that, just as it is too much to expect that said demented people will recognize that some modest Russian diplomatic achievements in the Middle East do little harm to the US, and indeed, may actually redound to our benefit.

*The whole idea of a US “retreat” in the Middle East is so completely unmoored from reality that anyone who uses this term, or similar expressions, should be ignored and mocked. The US is still in Iraq. It has actually increased its involvement in the Persian Gulf, most notably in its confrontation in Iran. It supports the Saudi’s fiasco in Yemen. It periodically bombs Libya. Support for Israel is at unprecedented levels. Egypt’s military government is getting military and political assistance from the US. If this is retreat, I’d hate to see an advance. Reducing involvement in what is arguably the least important country in the region–Syria–when its whole reason for being there (the presence of ISIS as a territorial entity) is strategic rationality, not a retreat.

Print Friendly, PDF & Email

January 16, 2019

Don’t Bother Me With the Facts! I Have a Narrative I Need to Flog!

Filed under: History,Military,Politics,Russia — cpirrong @ 7:20 pm

US ambassador to Germany Richard Grenell recently tweeted that the Trump administration had been tougher on Russia than any of its predecessors. The reflexive anti-Trumpers wouldn’t stand for this. Not for a second.

NYT columnist Bret Stephens leaped into the lists to tilt at Ambassador Grenell:

And let’s play no word games about the difference between USSR and “Russia.” Putin’s Russia is the USSR reborn under the exact same management.

That’s what’s called “projection”, Bret, for you are playing word games by transmogrifying Putin’s Russia into the USSR.

Today’s Russia “is the USSR reborn” only in Putin’s wildest dreams. By any objective measure, Russia today pales in comparison to the USSR as a threat to the US (or the West generally). From 1945 through 1991, the Soviets had millions of men and thousands of tanks poised on the borders of western Europe. Today the men do not exist and the tanks are rusting away in storage–and all are hundreds of miles to the east of the Elbe. The Soviet Union had a very credible navy: Russia’s navy is back from the utter decrepitude of the 1990s and early 2000s, but is still a pale shadow of what it was under Admiral Gorshkov. Whereas the Soviet Union posed an extreme conventional threat to the US and the west, Russia poses no threat at all.

Oh, by the way Bret–where is Putin’s Warsaw Pact? Oh, that’s right–they are all Nato members.

The USSR was also a formidable ideological adversary, and its ideology was aggressive and expansionist. Especially prior to the 1980s, the Soviet ideology had substantial international appeal, especially in the Third World. The Cold War was as much intellectual and ideological, as it was military and economic.

Putin tries on new ideologies like a teenage girl tries on new clothes. But his ideological fashion choices are primarily for domestic political effect, and have no appeal outside Russia’s borders. Zero. Zip. This is in large part because most of Putin’s ideologies are nationalist and insular. His embrace of Russian Orthodoxy is a particularly telling in this regard. It only has very limited appeal even within Russia, and none whatsoever outside it.

Russia is not an ideological nation. It is a kleptocratic regime.

Yes, Putin laments the demise of the USSR. But his efforts to rebuild it are pathetic in the extreme. In his nearly 20 years in power, his efforts to reconstitute the USSR have succeeded in reclaiming–wait for it–Abkhazia and South Ossetia, and some rather decrepit bits of Ukraine. These are the offal of the USSR. He is now putting the squeeze on Belarus–but Lukashenko has no desire to go back to the Soviet Union.

And even these “accomplishments” have succeeded primarily in isolating Russia, with one of the consequences being economic stagnation that leaves Russia even further behind the US in the wellsprings of military power. After a brief splurge in defense spending, the realities of Russia’s parlous economic condition have forced Putin to cut back again, and announce new weapons with great fanfare–but not to produce them in meaningful numbers. Potemkin revisited.

In sum, Putin’s Russia is at best a pitiful simulacrum of the USSR. To equate the two, as Stephens does, is beyond farcical.

So after dispensing with Stephens’ sleight-of-hand turning 2019 Russia into 1979 USSR, let’s evaluate Ambassador Grenell’s statement on the merits, administration by administration post-USSR.

The Clinton administration was all in propping up Yeltsin. When Yeltsin shelled the Duma in 1993, Clinton said: “I guess we’ve just got to pull up our socks and back Ol’ Boris again.” When Yeltsin was in grave peril of losing the 1996 election, Clinton said: “I know that means we’ve got to stop short of giving a nominating speech for the guy. But we’ve got to go all the way in helping in every other respect.” (Can anyone say “interfering in an election”? I knew you could.) The Clinton administration also supported Russian policy in Chechnya.

Bush II famously gazed into Putin’s eyes, and his administration got on rather well with Russia. Even the 2008 invasion of Georgia did not trigger a vigorous response.

And Obama. Where to begin? Of course there’s the Reset, complete with Hillary grinning like a buffoon standing next to Lavrov, holding an idiotic button (mislabeled in Russian, no less). Then there was Obama paling around with Medvedev–they were burger buddies, remember? Oh–can’t forget the hot mike statement that Medvedev should tell Vladimir to be patient, as Obama would have more flexibility after the 2012 election. In the 2012 campaign, Obama mocked Romney saying that Russia was a threat.

Given this, it’s not surprising that Putin smelled weakness, and that his peak aggressive phase occurred during the Obama administration.

Obama’s response was 90 percent petulance and condescension about Putin not following the arc of historical progress, and 10 percent rather ineffectual measures.

It is against this standard–not that of Cold Warriors facing an existential threat–that the Trump administration should be measured. And as Grenell said, by this standard Trump has indeed been far more robust. He has provided Ukraine with weapons (which Obama steadfastly refused to do). He has embarked on rebuilding the US military. He has implemented more vigorous sanctions than the Obama administration. And the US military smoked 200+ Russians who tried to throw their weight around against US forces in Syria.

Further, look at other news involving Grenell. The Germans are in apoplexy over Grenell’s threat to sanction any company that cooperated with the Nordstream II pipeline that will bring Russian gas to Europe. Merkel’s party spokeswoman huffed: “The American ambassador operates in a, shall I say, somewhat unusual diplomatic manner. He’s shown that not only through this letter [on Nord Stream 2 sanctions] but also from when he took office.”

And this is not a new thing. Trump has been bashing Nordstream since he took office–and the Germans have been reacting with outrage every time.

Trump’s notorious criticism of Nato is also hardly pro-Russian. His main criticism is that Nato countries–especially Germany–don’t do enough to counter Russia, but expect the US to do it for them.

This is not a hard call. The Trump administration has objectively been far harder on Russia than its predecessors–including most notably its immediate predecessor, whom people like Bret Stephens now lavish praise on. It isn’t even close. To claim that US policy towards the USSR is the appropriate yardstick by with to measure US policy towards the decrepit, dissolute successor state of Russia requires breathtaking intellectual dishonesty. But Bret Stephens is obviously up to the task

Print Friendly, PDF & Email

December 22, 2018

Given the Realm at Stake, Why Play This Game of Thrones?

Filed under: China,History,Military,Politics,Russia — cpirrong @ 2:57 pm

The most recent shrieking emanating from DC and its various satrapies is the result of Trump’s decision to exit Syria and draw down forces in Afghanistan, with the clear implication that the US will leave there too in due course. The conventional wisdom is almost universally against him, and as usual, the conventional wisdom is flat wrong.

In evaluating any policy or operation, the first question to answer is: what is the objective? In Syria, is it a limited one–the defeat of the rump of ISIS? Or is it a more grandiose, geopolitical one–to control the outcome of the Syrian civil war and determine who rules there?

Trump has made it clear that his objective is limited and tactical. He has apparently decided that although ISIS has not been extirpated in Syria, it has been so attrited that its remaining enemies can contain it, or finish it off. And there is a Machiavellian aspect to that: why not let American adversaries, Russia and Iran, spend their blood and treasure dealing with the dead enders that remain? You wanted Syria, Vlad–have at it!

The conventional wisdom embraces the more grandiose objective. Perhaps this is purely self-aggrandizement, and lets them resume their college dorm games of Risk for real. Issues of motive aside, it is beyond cavil that those who want the US to remain in Syria, and indeed, to become more heavily involved there want to commit the country to being a player in a Game of Thrones that puts the fictional version to shame.

And that is why the conventional wisdom is wrong. For what does the survivor who sits on the throne rule over? A country that was a largely irrelevant shithole even before seven years of internecine warfare that utterly wrecked and largely depopulated a nation that was already pitifully poor and weak before the war began.

Congratulations Bashar! Congratulations Vladimir! Congratulations Ali! Behold the spoils of your victory! And indeed, spoiled is the right word for it.

And again, from a Machiavellian perspective, tell me why it isn’t smart for the US to let Russia and Iran plow resources into rebuilding a devastated nation? If they do so, these are resources they can’t use against the US elsewhere. Furthermore, even if Russia gains a presence in the country over the longer term, it is an isolated and completely unsupportable outpost that (a) could not provide a base for power projection in the event of a real great power struggle, and (b) could be cut off and destroyed in a trice by the US. Let the Russians put their very limited resources into a strategic dead end.

As for the Iranians, yes, their presence in Syria poses a challenge to Israel. But (a) I am highly confident that the Israelis can handle it, and (b) it’s far cheaper for the US to support their efforts to do so with material support for the Israeli military. And just as is the case for Russia, for Iran Syria would be utterly unsupportable in the event of a real confrontation between Iran and Israel.

The principle of economy of force–something that the policy “elite” in DC appears never to have heard of–applies here. One implication of the principle is that you should concentrate your resources in decisive sectors, and not fritter them away in peripheral ones. For the US, Syria is on the periphery of the periphery. In any geopolitical contest with Russia and Iran, our resources are far better deployed elsewhere.

What’s more, despite the obsession of the foreign policy elite with Russia and Iran, they are secondary challengers to the US. China is far more important, and poses a far more serious challenge. Throwing military resources into Syria is to waste them in a peripheral theater of a secondary conflict.

When I first read of Trump’s decision, I turned to a friend and said: “I wonder what this means for Afghanistan.” And indeed, hard on the heels of the Syria announcement the administration stated that it would draw down forces in Afghanistan, with the clear implication that US involvement there would wind down fairly quickly.

All of the considerations that make Syria a strategic backwater for the US apply with greater force in Afghanistan. The country has spent over 17 years, the lives and bodies of thousands of soldiers, sailors, and Marines, and trillions of dollars on a country that is the poster child for shitholes. Yes, it was the refuge of a particular terrorist threat 17+ years ago. And yes, if we leave it will likely continue to be the cockpit of vicious civil war. Just like it has for the past two plus millennia. It was barely tractable for Alexander, and the British and Russia found it utterly intractable in their 19th and 20th century wars there. We’ve arguably done better, but not much. And again: what’s “winning,” and since the demise of the Silk Road, what in Afghanistan has been worth winning?

The war in Afghanistan has proved a sisyphean task. Sisyphus didn’t have a choice: the gods condemned him to roll the rock up the hill, only to watch it roll down again. The US has been engaged in that futile task by choice, and Trump has evidently decided that he doesn’t want to be Sisyphus anymore. (My skepticism about US involvement in Afghanistan also dates to years ago–as indicated by this post from almost exactly 9 years ago.)

One of the administration’s most important, and largely ignored, decisions has been to reorient US efforts away from conflicts against terrorism in isolated, poor, and peripheral places towards recapitalizing the military for peer conflict against China and Russia. This is the right choice, and long, long overdue. (I wrote a post in 2007 that expressed concerns about prioritizing anti-terror over conventional warfare capability.)

Alas, God will not restore the years the locusts have eaten in the Hindu Kush or on the Euphrates. But sunk costs are sunk. Looking to the future, the right strategic choice is to continue the pivot away from peripheral conflicts to focus on central ones.

And these costs are not purely monetary. Last night, due to a travel nightmare, I ended up returning to Houston on a flight that landed at 0230. On the plane were a half dozen young Marines heading home for the holidays. There were also two men, in their late-20s or early-30s, with prosthetic legs. They almost certainly lost them to IEDs in some godforsaken corner of the Middle East or Central Asia. With Trump’s decision in mind, I thought: what is the point of turning more young men like the fit and hearty 19 or 20 year old Marines into mutilated 30 year olds in places like Afghanistan and Syria? I certainly can’t see one.

I’m not a peacenick or a pacifist, by any means. But I understand the horrible cost of war, and fervently believe that it should only be spend on good causes that advance American interests. I cannot say with any conviction that this is the case in Syria, or in Afghanistan, 17 years after 911. Indeed, I can say the opposite with very strong conviction.

At the risk of stooping to ad hominem argument, I would make one more point. Look at the “elite” who is damning Trump’s decision in Syria. What great accomplishment–let alone accomplishments plural–can they take responsibility for? The last 27 years–at least–of American foreign policy has been an unbroken litany of bipartisan failure. The people who scream the loudest now were the architects of these failures. Not only have they not been held accountable, they do not even have the grace or maturity to admit their failures. Instead, they choose to damn someone who refuses to double down on them.

The biggest downside of Trump’s decision is that it apparently caused Secretary of Defense Mattis to resign. I hold General Mattis in the highest esteem, and believe that if he could no longer serve the president in good conscience, he did the right thing by resigning. But if he decided that Syria and Afghanistan were (metaphorically) the hills to die on, for the reasons outlined above I respectfully but strongly disagree.

My major regret at Mattis’ departure is again completely different than the conventional wisdom spouting elite’s. They lament the loss of an opposition voice within the administration. I cringe for reasons closely related to my reason for supporting a major pivot in US policy: I think that Mattis was the best person to oversee the reorientation of the Pentagon from counterinsurgency to main force conflict. We desperately need to improve the procurement process. We desperately need to focus on improving the quality and number of high end systems, and raising the availability of those systems we have: the operational availability of aircraft and combat units is shockingly low, and Mattis has prioritized increasing them. He has made progress, and I fear that a change at the Pentagon will put this progress, and the prospect for further progress, at risk.

Listening with dismay at the cacophony of criticism from the same old, failed, and tired “elite” reminds me of Einstein’s (alleged) definition of insanity: doing the same thing over and over, and expecting different results. The “elite” is invested in the same thing, and changing the same thing is a not so implicit rebuke for their failures. Until they can explain–which I know they cannot–why doing the same thing has led to such wonderful outcomes in the past quarter century, they should STFU and let somebody else try something different.

Description

Print Friendly, PDF & Email

December 3, 2018

Robert Mueller Deals More Collusion Crack to the Desperate Media Addicts

Filed under: Politics,Russia — cpirrong @ 7:35 pm
Last Friday, the Russia collusion crack addicts took another hit, supplied by their main source, Robert Mueller.  The Special Counsel announced a plea deal with Michael Cohen, in which the disgraced Trump fixer admitted that he had lied to Congress about his contacts with Russia regarding a potential Trump business deal.  According to the plea, Cohen was reaching out to the Russians well into 2016, after the time when Trump’s nomination appeared likely.

OMG!!!! THIS IS IT! TRUMP IS DONE! COLLUSION HAS BEEN PROVED! HE WILL HAVE TO LEAVE OFFICE! TOP OF THE WORLD! THERE IS A GOD! I CAN SEE HIS FACE!

Dudes, put down the pipe and check into rehab. Though to be honest, there’s nothing that can fix your addiction.  You don’t have a monkey on your backs: you have Bushman.

As is almost always the case with these pipe dreams, the media hot take is 180 degrees from reality.  Rather than showing Trump’s deep connections with Russia, and his obligation to Putin, it shows the exact opposite. Namely, it demonstrates that even as late as 2016 Trump had absolutely NOTHING going on in Russia, but was still begging for the opportunity to talk about business opportunities. (Or at least, his flunkies were.)

Indeed, to indicate just how  how much nothing he had going on, Cohen sent an email with an offer to Putin’s PR flack, Dmitri Peskov.  But wait! It gets better!  Cohen didn’t even have Peskov’s private email address, so he sent it to the address used for general press inquiries.  And to add insult to injury Peskov didn’t respond.  In fact, nobody responded, not even an intern saying “Thank you for your inquiry.”

In other words, Cohen rated the same response as Peskov probably gave to Nigerian princes offering the opportunity to make a vast fortune, in exchange for a little help.  That being no response at all.  He might have even given offers from Nigerian princes more thought.

Just as the Trump Tower meeting demonstrate beyond cavil that Trump had no deep connections in Russia, this farce demonstrates that Trump was not even remotely a player.  To use a Rumsfeld category, this represents evidence of absence.  Overwhelming evidence. If Trump was in deep with Putin prior to January, 2016, one of his flunkies wouldn’t have been sending plaintive pleas to a public email address.  And if Putin was hot to collude, there would have been an answer.

It’s not that complicated.  But then again, I’m not on crack.

Further, to the extent that Trump encouraged the outreach: (a) it’s kind of embarrassing, and (b) it’s hardly the actions of a man who thought he had the remotest chance of becoming president.  In fact, it screams the opposite.

If Cohen and the other person involved in attempting to gin up Trump business in Russia were acting on their own hooks, it would suggest they didn’t rate The Boss’ prospects too highly either.

The worst thing about this entire affair is that Trump relied on low-lifes like Cohen and Sater.  This hardly speaks highly of him.

So yet again, Mueller has delivered the collusion junkies a short term high in the form of a guilty plea to a process crime that does not get him any closer to proving that Trump colluded with Putin (or anyone else in Russia), let alone proving that he committed a crime (collusion per se not being illegal).  Indeed, this latest  “bombshell” merely proves yet again that when it comes to Donald Trump and Russia, there’s no there there.

Print Friendly, PDF & Email

Next Page »

Powered by WordPress