Streetwise Professor

June 18, 2018

Putin’s Very Useful Idiots

Filed under: Politics,Russia — The Professor @ 2:28 pm

This article is of interest primarily because it represents an inversion of, a retreat from, and a repudiation of, the collusion narrative:

[Former CIA Moscow station Chief Dan Hoffman] points to the infamous 2016 Trump Tower meeting, which he says was a deliberately discoverable Russian operation.

“I think what Vladimir Putin was thinking is the best way to soil our Democratic processes, link the Trump campaign in some conspiratorial way, because it’s Russia, back to the Kremlin.”

Two years on from that meeting, President Donald Trump and his team are still being investigated over allegations of Russian collusion.

. . . .

Mr Hoffman says the Trump Tower meeting has the Russian President’s fingerprints all over it.

“It wasn’t meant to be a clandestine operation, that’s the last place he would ever do that. There’s too much security, too much press, too many people there,” he said.

“What I think Vladimir Putin was doing, was deliberately leaving a trail of breadcrumbs from Trump Tower to the Kremlin.

“I see the full spectrum of Russian intelligence operations and frankly, if the media can find something that Russia did, like the meeting at Trump Tower, then it was meant to be found.”

. . . .

Mr Hoffman believes Mr Putin’s intention was to spark a media frenzy.

“[It was] kind of like a poison pill. Eventually the media will expose them,” he said. [Emphasis added.]

In other words, the politicians and journalists (and special prosecutors?) who have freaked out about the Trump Tower meeting are the ones who fell for Putin’s machinations. It is the politicians and journalists (and special prosecutors?) who have been Putin’s instrument in destabilizing American democracy.  It is they who have been Putin’s pawns, not Trump.  In their unreasoning hatred of Trump, they fell right into a trap that Putin laid.

This was my first reaction to the Trump Tower meeting “bombshell” back in 2017.  It’s not that complicated to figure this out–there would have been no reason for the meeting if Trump had been colluding with Putin all along.  It is the allegations of collusion that have advanced Putin’s interest, not collusion itself–and setting up a meeting like that in June, 2016 was an obvious way of stoking those allegations.  But to see someone from the CIA endorse this rather obvious logic is quite interesting.  It signals that the collusion story is effectively dead, and never should have drawn a breath in the first place.

Von Mises (not Lenin) wrote that communists called western liberals who were “confused and misguided sympathizers” for the USSR “useful idiots.”  (This phrase is typically attributed to Lenin.) Today’s western media and establishment politicians are fully deserving of the epithet.  But they do the 1920s and 1930s-era unwitting dupes for Lenin and Stalin one better: rather than being sympathizers (confused or otherwise) they advance the objectives of someone they claim to despise in every way, and in so doing they damage the very thing they claim they are protecting. Given this, “useful idiot” seems rather generous, doesn’t it?

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June 6, 2018

Putting Germany First

Filed under: History,Politics,Russia — The Professor @ 1:24 pm

Angela Merkel is set to challenge Donald Trump’s America First agenda at the G-7, presumably to the strains of Deutschland über alles.

This is just another illustration of Germany’s utter lack of self-awareness, because criticizing America First is rather jarring coming from Merkel and her country’s political elite, which espouses Germany First in all but the slogan.  But actions speak louder than words.

Consider the record of the last few weeks.  The German elite threw an absolute tantrum at the prospect of an anti-EU government in Italy, and strongly backed the Italian president when he rejected such a government.  The German budget minister, Guenther Oettinger said “The markets will teach the Italians to vote for the right thing.”

This was yet further evidence of German tone-deafness, because the backlash against his remark, and the real possibility that the Italian reaction would be to have another vote that would strengthen the populists even more, unleashed another market meltdown. This forced the EU, led by Jean-Claude Juncker, to go into damage control mode and force Oettinger to apologize and to get German politicians to put a cork in it generally, lest they do even more damage.

Oettinger, in other words, had committed a gaffe.  That is, he said exactly what he really believed–and you know that the German establishment believes exactly the same.

Another case in point.  Completely oblivious to the optics of Germany and Russia cooperating to benefit at the expense of the Poles (e.g., the three partitions, Molotov-Ribbentrop), Merkel and Germany are unwilling to give the time of day to the Poles’ objections to the Nord Stream II pipeline. Germany has also been extremely critical of Poland’s democratically elected government, and is leading the charge in the EU to cut aid to Poland (and Hungary) for “violating the rule of law.” Like the Italians, the Poles apparently just got it wrong when they voted and are in need to Teutonic guidance.

Altogether now: “Deutschland, Deutschland über alles, Über alles in der Welt . . . ”

I’ve already mentioned in a previous post the obliviousness of Germany’s anger at Trump for interfering with its ability to do business with a state that has vowed-repeatedly-to exterminate Israel.  Yes, Angela did criticize Khamenei’s characterization of Israel as a “cancerous tumor” that Iran would eliminate, but again, actions speak louder than words.  Germany’s preferred policy–a continuation of the JCPOA, with a bonanza of European (and especially German) investment in and trade with Iran-would do far more to assist Iran in realizing its objective than Merkel’s words will impede it.

Merkel is apparently of the belief that she’s not advancing German interests.  Oh, no! She’s the defender of the “liberal international order”:

Chancellor Angela Merkel of Germany told Mr. Obama that she felt more obliged to run for another term because of Mr. Trump’s election to defend the liberal international order. When they parted for the final time, Ms. Merkel had a single tear in her eye. “She’s all alone,” Mr. Obama noted.

What self-sacrifice!

Tell me: just exactly where does Iran fit into the “liberal international order”? Russia? China? All of these are avowedly opposed to that order, and say so at every opportunity.  All are clearly revisionist powers. But in her hatred for Trump (and likely for the US generally), Merkel is more than willing to reach out to them.  Subjectively, Angela is all about the “liberal international order.” Objectively, quite the opposite.

You may dislike Trump’s America First/MAGA agenda and rhetoric.  But it does have one thing all over Merkel’s: honesty.

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May 27, 2018

Alice in Swampland: Paging Lewis Caroll

Filed under: Politics,Russia — The Professor @ 6:02 pm

It is alternately amusing and nauseating to watch the shocked! Shocked! reactions to Trump’s accusation that the FBI (and likely the CIA and perhaps other tentacles of the octopus) spied on his campaign (i.e., on him).  Perhaps only Lewis Caroll could do justice to the verbal contortions:

 “I don’t know what you mean by ‘glory,’ ” Alice said.
Humpty Dumpty smiled contemptuously. “Of course you don’t—till I tell you. I meant ‘there’s a nice knock-down argument for you!’ ”
“But ‘glory’ doesn’t mean ‘a nice knock-down argument’,” Alice objected.
“When I use a word,” Humpty Dumpty said, in rather a scornful tone, “it means just what I choose it to mean—neither more nor less.”
“The question is,” said Alice, “whether you can make words mean so many different things.”
“The question is,” said Humpty Dumpty, “which is to be master—that’s all.”

Only to the Masters of the Word in the swamp could a counterintelligence operation, complete with a codename, NOT be considered “spying.” Further, it is clear that Trump was the target of this counterintelligence (i.e., spying) operation, rather than the beneficiary of its protection (as some of the swamp things would have us believe). If US intelligence believed that the Russians were running an operation against Trump, rather in league with him, they would have informed him.  They didn’t. Hence, they believed he was the enemy.  Not that complicated.

The most satisfying thing about all this is is that whenever anyone engages in such semantic pettifoggery, and obsesses over definitions rather than substance, it is an admission of defensiveness, the inability to win an argument on the merits, and indeed, guilt.

Basic facts are usually robust to variations in the words used to describe them–which is precisely why Trump can be persuasive to many people (most of whom do not live by words) despite his verbal imprecision.  If a particular claim can only be made by playing Humpty Dumpty, and making a simple three letter word like “spy” mean exactly what you want it to mean, that’s a pretty strong indication that your claim is wrong, and moreover, you are making it in extremely bad faith.

The crucial issue here is how this will play with the public.  My inclination–and perhaps this is wishful thinking–is that most Americans are like Alice, looking askance at swamp-dwelling Humpty-Dumptys.

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May 24, 2018

Gazprom and Its Connected Contractors: The Credit Mobilier Scheme, With Russian Variations

Filed under: Commodities,Economics,Energy,History,Russia — The Professor @ 6:05 pm

A couple of SWP friends were kind enough to send me a copy of the swan song of one Alex Fak, an erstwhile senior analyst at Sberbank.  Alex lost his job because he committed a mortal sin: telling the truth, in this instance about the monstrosity that I have savaged for years–Gazprom.

Alex said that the oft-heard question “why does Gazprom do such stupid things?” is off base because it presumes that the company is run in the interest of shareholders: if it were, its unmatched record of value destruction would indeed be stupid.  However, Mr. Fax opined that the company’s actions over the decades are definitely not stupid if you evaluate them from the perspective of its contractors, who make massive amounts of money building obscenely negative NPV projects.

Why does this persist, in the Putin era, which allegedly cracked down on oligarchic thievery? Well, one reason is that the biggest contractors happen to be owned by–wait for it–the two biggest friends of Vova: Gennady Timchenko (a hockey buddy) and Arkady Rotenberg (a judo buddy).*  Putin did not eliminate oligarchs, so much as replace them with his cronies.  Calling out such connected men by name is no doubt why Mr. Fax is an ex-Sberbank analyst.  And saying this kind of thing puts him at risk of being an ex-person.

The Gazprom MO described by Mr. Fak  represents a continuation of, and a mega-sizing of, the bizness model of the 1990s, when the “red directors” of state-owned firms tunneled out huge amounts of funds by having their firms buy supplies and services at seriously inflated prices from firms owned by their relatives.

Indeed, in the pre-Cambrian days of this blog–2006(!)–I hypothesized that Gazprom and its contractors were in effect a Russian version of Credit Mobilier, the construction firm that the Union Pacific hired to build the railroad.

The WaPo article also mentions that Gazprom’s pipeline construction costs are two to three times industry norms. To me this suggests a Credit Mobilier-Union Pacific type situation, where inflated prices for materials and equipment flow into the pockets of companies owned by Gazprom managers. Just thinkin’.

Thomas C. Durant was the president of the Union Pacific–and the major shareholder in Credit Mobilier.  The UP paid Credit Mobilier around $94 million, and Credit Mobilier incurred only about $50 million in costs to build the UP.   The Gazprom arrangement is somewhat different given that neither Timchenko nor Rotenberg are executives at the Russian gas giant, but the basic idea is very similar. (I also noted early on that Transneft, the oil pipeline monopoly, operates on the same model.)  Gazprom and its contractors operate on the Credit Mobilier model, with Russian variations.

Once upon a time Gazprom CEO Alexei Miller boasted that he would make Gazprom the world’s first trillion dollar company.  Today it’s market cap is south of $55 billion.  Hey! anybody can be off by two orders of magnitude, right?

This is not surprising, because maximizing value to shareholders is not, nor has it ever been, the objective of Gazprom.  The objective is, and always has been, to divert resources to the politically connected via wasteful capital expenditures (that happen to be the revenues of the likes of Timchenko and Rotenberg).  Alex Fak understood this, and paid the price for shouting that the emperor had no clothes.

Both Gazprom and Rosneft are world leaders in destroying value, rather than creating it.  But this is a feature, not a bug, given the natural state political economy of Russia, which prioritizes rent creation and redistribution to the elite. And this is precisely why Russia’s pretensions to great power status rest on economic quicksand.  That should be blindingly obvious, and I am sure that Putin understands this at some level.  But revealed preference suggests that he values enriching his friends more than implementing the economic changes that would make his nation economically and militarily competitive.

*The sums tunneled from Gazprom to Timchenko make me laugh when I think about the oft-repeated allegation that oil trader Gunvor (half-owned by Timchenko) was a source of massive personal wealth for Putin (via Timchenko).  There was much more money to be made much closer to home, and completely outside the scrutiny of bankers and regulators.

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May 19, 2018

Step Right Up! See the Amazing Anti-Trump Contortionists Defy the Laws of Anatomy and Reason!

Filed under: Politics,Russia — The Professor @ 4:46 pm

If you’ve been asking yourself where all the carnival barkers and side-show contortionists have gone, wonder no longer! They have joined the elite media and vast swathes of the US bureaucracy, especially intelligence and federal law enforcement.

The examples are uncountable, but two are of particular moment today.  The first relates to Operation Telling the Truth Slowly (Very Slowly), which relates to a counterintelligence operation mounted against the Trump campaign.  You’ll remember that the original response, 14 months ago, to Trump’s allegation that he had been “wiretapped” was outraged denial.  Said denials no longer being plausible have required massive contortions to create a new narrative.  The barkers at the NYT are promoting the show, based on leaks from US law enforcement and intelligence.   Well, yes, a US intelligence asset located in Britain was sent out to contact Carter Page and George Papadopolous, because of their suspect Russian ties.  Michael Flynn was also targeted because despite his vitriolic anti-Russia rhetoric in a book, he shared a table with Putin once at an RT function.

But this wasn’t a campaign directed at the Trump campaign! Oh–quite to the contrary! According to the whatever-is-worse-than-execrable-and-then-whatever-is-worse-than-that James Clapper, with the WaPo serving as chief barker now, this was intended to PROTECT Trump from insidious Russian influences.  Which of course had to be accomplished by never telling him that his hangers on were being investigated.

There is widespread speculation about who the individual pointed at Page and Papadopolous was.  The Republicans in Congress are demanding to know the name, which has sent the deep staters and their barkers (e.g., Ben Witless, I mean Wittes) into paroxysms of rage.  Krugman went so far as to assert that demanding the revelation of this name is treason.

Um, the NYT article has released leaked information about just about everything about the guy but his shoe size.  (That’s probably tomorrow’s exclusive.) . Certainly every intelligence agency in the world from whom we would want to protect his identity already knows who he is–and did so probably even before the leaks.  So it is beyond superfluous to conceal his identity–except to buy the FBI and CIA and others some time and perhaps the chance to cover their sorry asses.

I actually take comfort in their rage.  It means they are very, very afraid.

What is interesting is Carter Page’s silence.  All he has to say is: “I met the following people”–and let the frenzy begin!  He wouldn’t be disclosing any intelligence, because he would not represent, nor would he know, who was a US source.  That he remains silent suggests he is scared.

Or of course some intrepid journalist could ask him (perhaps dropping a name like, I dunno, Stefan Halper)!

I know.  I’m so droll.

One last thing on this.  The conventional reporting, especially on the pro-Trump side, is that there was a spy in the campaign.  This is misleading (based on what we know) and they should stop saying so NOW to avoid providing a convenient straw man for the anti-Trumpers to knock down.

I think what happened is more analogous to The Sting, or another classic con.  Someone was sent to set up a mark.  In this case, the marks were Page and Papadopolous,  After they were set up, they could serve as a pretext to mount a counterintelligence operation that wormed into the Trump campaign via their communications, and the communications of everyone they communicated with.

The second contortion act, involves yesterday’s meeting between Merkel and Putin.  Now,  non-contortionists with a modicum of sense of shame and intellectual consistency would blast her for meeting with their alleged arch enemy, whom they claim happens to be the root of all evil in the world.  But, what is clear is that despite all of their ravings about Putin as part of their jeremiads against Trump, that in their minds Trump is the arch enemy and the root of all evil in the world.   Putin is just a convenient stick to beat him with, and when that stick doesn’t work, they will pick up another.

But instead she is being lionized, and being credited for reasonably working with Putin to oppose Trump’s anti-Putin measures (such as threatening to block Nord Stream) and Trump’s move on the Iran deal.  FFS, if Trump had met with Putin the anti-Trump lot would be barking that  it is because he was selling out the West, and that he is the equivalent of the South Seas Cannibal.  Merkel is making cooing noises at Russia and Putin–primarily out of her narcissistic pique at Trump–and saying how important it is for Germany to have a good relationship with Russia.

Merkel says to applause that good relations with Russia are important to Germany.  Which is exactly what Trump has said about Russia and the US–only to have this thrown back in his face as evidence of his being Putin’s pawn.

If Trump said or did any of these things the barkers would be screaming. SELLOUT.  TRAITOR. COLLUSION. IMPEACH HIM–THEN BURN HIM AT THE STAKE!

And tell me: how is Making America Great Again anti-western?   If anything, it is a muscular assertion of Western primacy by a Gulliver who is unwilling to be tied down by Europutians.  I would argue that in fact, Germany is far less part of the West than the US, and has been since before Arminius slaughtered three Roman legions in the Teuteborg Forest.  (I may well write a post on this.  Suffice it to say that German thought has always been decidedly opposed to Anglo-Saxon, French, and Italian thought, and two world wars show exactly how and why.) Meaning that making America great again is far more pro-Western than Making the EU Great ever will be, given that it is a crypto-socialist Trojan Horse for German ambitions.

I also note that Merkel is–get this–reaching out to Xi as an ally on free trade.

No, really.

This is such utter bullshit that even my 800 SAT score scatalogical vocabulary is utterly inadequate to do it justice.  Yet all of the carnival barkers not only eat it up, they regurgitate it.  (This also happened in spades at Davos.)

So we see why all the contortions are necessary.  Every argument must be bent and twisted and contorted in order to support the anti-Trump crusade, even though doing so violates the rules of logic, the rules of evidence, and basic human decency.

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May 17, 2018

Rosneft: The Farce Continues

Filed under: Commodities,Economics,Energy,Russia — The Professor @ 7:22 pm

Remember when the Russian government said it was going to privatize a piece of Rosneft? Hahahaha. That is so 2016–please try to keep up!  In its announcement of “Rosneft 2022” the company proposes to buy back about $2 billion in shares, which is just about 20 percent of the piece sold off in 2016–no, wait–2017–no, wait–2018.  Adding even more hilarity is that the buyback plan was apparently at the insistence of Qatar, the last buyer standing which agreed to buy most of the shares initially privatized, much to the relief of the banks (Intesa and unnamed Russian ones) who were wearing a big piece of the risk.

I’m guessing that this was one of the terms Qatar laid down to absorb the entire hand-me-down stake for the original 2016 price, even though in Euro terms Rosneft’s shares are substantially lower today (despite a rallying oil price!)

Quite the vote of confidence there, eh?  Well, not that that’s surprising.  The conspicuous failure of any Chinese buyer to step into the shoes of disgraced CEFC tells you just how much confidence Rosneft inspires these days.

I am hard pressed to recall such a farcical series of events involving a major company.  If this one of  Russia’s state champions, just think of the shape the palookas are in!

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Today’s Adventures in Trumpland

Filed under: Economics,Energy,Politics,Russia — The Professor @ 6:38 pm

The WSJ reports that the Trump administration has told Germany that the US would restart talks on a trade deal with Europe if Germany pulls the plug on support for the Gazprom-led Nord Stream project.  I find the linkage rather odd, but we’re talking the Trump administration here, and moreover, it may well be a brushback pitch after all of the German-led Eurowhining about the US: “Think it’s bad now? Let’s see what it’s like when I put my mind to it.”

One EU official responded as follows:

“Trump’s strategy seems to be to force us to buy their more expensive gas, but as long as LNG is not competitive, Europe will not agree to some sort of racket and pay extortionate prices,” an EU official said.

I could perhaps take this seriously, were it not for the fact that Germany forces its own citizens to pay “extortionate prices” for power produced by outrageously uncompetitive means as a result of its idiotic energiewende policy.

How extortionate? How uncompetitive? The article claims that US LNG would cost about 20 percent more than Russian gas.  Well, Germans pay approximately 50 percent more for power than the average across the EU, and EU-wide average prices are about double the US average.

In other words, Europe has its own energy extortion racket in place, and doesn’t want to let in any Americans.

The other interesting aspect to this story is that it is yet another example (I’ve lost count of the number) of the alleged Putin pawn Trump taking a major shot at the Russians.  The Russians are not pleased:

The Kremlin shot back immediately as spokesman Dmitry Peskov called the U.S. efforts “a crude effort to hinder an international energy project that has an important role in energy security.”

“The Americans are simply trying crudely to promote their own gas producers,” he said.

All I can say is that if Trump was bought, he sure as hell didn’t stay bought.  Not that any of those who have invested their entire being in the Trump-Russia collusion narrative will bother to notice.

Speaking of the obsessed and delusional, yesterday represented an all time low in the dishonesty of the inveterate Trump haters.  In a meeting with law enforcement officers, Trump called members of the brutal Salvadoran gang MS-13 “animals,” but the media and many politicians widely asserted that he was referring to immigrants as a whole.  If you read the transcript, it is clear that only someone who is deeply and deliberately dishonest could make such an assertion.

The fallback position of these reprobates is that well, MS-13 members are people too, so it is wrong to call them animals.

All right, if that’s what you think–prove it.  Invite a few to move in with you, and you can discuss the nuances of “kill, rape, and control” (“mata, viola, controla“) which just so happens to be the MS-13 motto. (Some say that “rob” is part of the motto too.)  If you’re real nice, they just might honor your request not to bring those icky guns into your house, and will just bring their machetes instead.  After a few verses of Kumbaya, I’m sure that your common humanity will shine through, along with some light illuminating the hole in your neck where your head used to be.

Of course, that will never happen.  Those who are preening and posing would never dare even enter the neighborhoods where MS-13 and similar gangs operate, let alone invite them into their houses.

Further: by defending these beasts, our better thans are condemning decent and innocent people whom they claim to care about to their depredations.

This is the worst kind of moral posing by the worst kind of poseurs.  These are twisted partisan hacks pretending to be moral titans. To let their rank partisanship utterly blind them to the reality of evil, and to ignore those who will have to suffer from that evil, is appalling beyond words.

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May 4, 2018

Stick a Fork In It: It’s Done

Filed under: Commodities,Economics,Energy,Russia — The Professor @ 10:02 am

Glencore has just announced that the deal to sell Rosneft shares to CEFC has been terminated.  Furthermore, the QIA-Glencore consortium is being wound up, with virtually all of the shares going to QIA:

The members of the Consortium have agreed to dissolve the Consortium originally put in place in December 2016 for the purposes of acquiring a 19.5% stake in Rosneft and will take direct ownership of the underlying Rosneft shares.  In connection with that, the Consortium has today entered into an agreement to transfer a 14.16% stake in Rosneft to a wholly owned subsidiary of QIA (the “Transaction”) the consideration for which will to be used for the settlement of the Consortium’s liabilities. This agreement will become effective on 7 May 2018.

On completion of the Transaction, the Consortium will be wound up and the margin guarantees provided by Glencore will be terminated.  At that point, Glencore will retain an equity stake in Rosneft shares commensurate with its original equity investment announced in January 2017, which amounts to 0.57%, and QIA will hold an equity stake of 18.93%.

Meaning that in reality, as I noted at the outset of the deal, Glencore was basically a straw buyer–a beard–to provide the appearance of western corporate participation in the deal.

The price is also interesting:

The consideration for the Transaction attributable to Glencore’s interest in the Consortium (being 50% of the consideration for the Transaction) is approximately EUR 3.7 billion.

Well, the original December 2016 price was EUR 10.2 billion, meaning that this price is at a 25 percent discount from the original deal.

Who ate this difference?  Glencore?  I doubt it, but if it did, it would raise huge questions about its disclosures (or lack thereof) at the time of the original deal.  Regardless, this is yet another example of Glencore playing with fire.  What comes after trifecta?

I further note that whereas it was rumored that a Chinese state company would step into the shoes of CEFC, this hasn’t happened.  Yet, anyways.

Some state champion, that Rosneft, eh?

Update.  Some arithmetic.  The sums disclosed by today’s announcement basically indicate that Qatar assumed all but Glencore’s sliver at an amount equal to the original amount of the deal agreed to in December, 2016–including the mystery €2.2 billion which pretty much everybody but me and Ivan Tkachaev at RBC missed.  Qatar originally put up €2.5b, Glencore €.3b, and Intesa €5.2b, which adds up to €8b, or €2.2b short of the announced €10.2b.  The difference apparently came from as yet unnamed Russian banks, this in spite of Putin’s claim that Russian banks would not provide financing for a Rosneft “privatization.”

Today Qatar agreed to pony up €7.4b.  Add to that its original €2.5b and Glencore’s €.3b, and voila!, you have . . . €10.2b.  Miraculous, no?  Everybody remains whole!

Here’s the problem though.  Rosneft has been trading pretty much flat in RUB.  On 9 December, 2016, its share price was 370.8 RUB.  Today, it is 386.75 RUB, about 4 percent higher.  However, the RUB has depreciated about 12 percent against the EUR, going from 65.9707 to 75.155RUB/EUR.  So, in EUR terms, Rosneft is worth about 8.5 percent less than in December, 2016, but Qatar is paying the same price today as was agreed to then.

Why would Qatar do this?  Yes (as Ivan T points out to me) ~€1b is pocket change for the QIA, which has a $320b portfolio.  But still, you don’t get rich by gifting ~10 percent of deals.  So is there a side deal?

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May 2, 2018

When You Play With Fire, Eventually You Get Burned–Even if You are Glencore

Filed under: Commodities,Economics,Politics,Regulation,Russia — The Professor @ 6:10 pm

Even by the standards of the commodity business (and the commodity trading business in particular) Glencore is known for its appetite for political and legal risk, and its willingness to deal with sketchy counterparties.  It does so because by taking on these risks, it gets deals at good prices.  But the bigger the appetite, the greater the indigestion when things go wrong.

In the past several weeks, Glencore has hit the going wrong trifecta.

It has a longstanding relationship–including marketing deals and equity investment–with Rusal, entered when the Russian company’s reputation was particularly dubious in the aftermath of the aluminum wars, and its owners were involved serial litigation.

We know what happened to Rusal–it is in dire straits because of US sanctions.  Yes, the Treasury has indicated that it will take Rusal’s case on appeal, but there is no guarantee that it will grant a stay of execution when the appeal process is completed.

Glencore also partnered with very dubious Israeli businessman Daniel Gertler in the Democratic Republic of the Congo (DRC).  Gertler was sanctioned by the US government in December for a history of corrupt dealings in that country.  Glencore bought out Gertler in 2017.  After the sanctions were imposed, Glencore stopped paying Gertler royalties, but now Gertler is suing for $3 billion in royalties that he claims Glencore owes him.

Also in the DRC, Glencore is in a dispute with the government’s mining company, which claims that a Glencore subsidiary operating in the country is undercapitalized.  This is really a battle over rents: in essence, the government claims that foreign miners (including Glencore) overburden operating subsidiaries with debt in order to reduce dividend payments to the government (which is part owner).  The government has moved to dissolve the Glencore subsidiary.

I don’t know enough to comment on the substance of the various legal disputes in Africa.  But I can say that the risks of such disputes are material, and that they can be very costly.

In some respects, the Glencore political/legal risk strategy is like a short vol trade.  It can be a money printing machine when things go well, but when it goes bad, it goes really bad.

In a way Glencore is lucky.  It can withstand these hits now, having clawed its way back from its near death experience in the fall of 2015.  If these hits had occurred back then, well . . .

In sum, when you play with fire, eventually you are going to get burned.  Even if you are Glencore.

PS. The tumult in the Congo could disrupt cobalt supplies.  This would put pressure on one of my fave targets–Tesla–which is already in a parlous state.  Elon gave a crazed performance at today’s Tesla earnings call.  To me it came off as the meltdown of a narcissist who is facing failure and cannot handle being questioned.

I’ve been biding my time on some additional Tesla posts.  The time may be near!

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May 1, 2018

Rusal: Premature Celebration

Filed under: Commodities,Derivatives,Economics,Politics,Regulation,Russia — The Professor @ 9:31 am

Rusal shares rose sharply and aluminum prices fell sharply on the news that the US Treasury had eased sanctions on the company.  The concrete change was an extension in the time granted for those dealing with Deripaska-linked entities to wind down those dealings.  But the market was more encouraged by the Treasury’s statement that the extension was being granted in order to permit it to evaluate Rusal’s petition to be removed from the SDN list.  It is inclusion on that list that sent the company into a downward spiral.

Methinks that the celebration is premature.  Treasury made clear that a stay of execution for Rusal was contingent upon it cutting ties with Deripaska.  Well, just how is that supposed to happen? This is especially the case if any transaction that removes Deripaska from the company not benefit him financially.  Well, then why would he sell?  He would have no incentive to make certain something–the total loss of his investment in Rusal–that is only a possibility now.

Of course, Putin has ways of making this happen, the most pleasant of which would be nationalization without compensation to Deripaska, perhaps followed by a sale to … somebody (more on this below). (Less pleasant ways would involve, say, Chita, or a fall from a great height.)

But if the US were to say that this was sufficient to bring Rusal in from the cold, the entire sanctions regime would be exposed as an incoherent farce.  For the ultimate target of the sanctions is not Deripaska per se, but the government of Russia, for an explicit foreign policy purpose–a “response to the actions and polices of the Government of the Russian Federation, including the purported annexation of the Crimea region of Ukraine.”

Deripaska didn’t personally annex Crimea or support insurrection in the Donbas.  The Russian government did.  The idea behind sanctions was to put pressure on those the Russian government (allegedly) cares about in order to change Putin’s policies.  They are an indirect assault on Putin/the Russian government, but an assault on them nonetheless.

So removing Rusal from the SDN list because it had been seized by the Russian government would make no sense based on the purported purpose of the sanctions.  Indeed, under the logic of the sanctions, the current discomfiture of the Russian government, facing as it does the potential unemployment of tens of thousands of workers, should be a feature not a bug. The sanctions were levied under an act whose title refers to “America’s adversaries,” which would be the Russian state, and were intended to punish said adversaries.

Mission accomplished!  Which is precisely why the Russian government is completely rational to view the Treasury announcement “cautiously,” and to view the US signals as “contradictory.”  The Russians would be fools to believe that nationalization and kicking Deripaska to the curb would free Rusal from the mortal threat that sanctions pose.

Perhaps Treasury has viewed the market carnage, and is trying to find a face-saving way out.  But it cannot do so without losing all credibility, and appearing rash, and quite frankly stupid, for failing to understand the ramifications of imposing SDN on Deripaska.  Also, doing so would feed the political fire that Trump is soft on Russia.

Further, who would be willing to take the risk buying Rusal from Deripaska either directly, or indirectly after nationalization?  They would only do so if they had iron clad guarantees from the US government that no further sanctions would be forthcoming.  But the US government is unlikely to give such guarantees, and I doubt that they would be all that reliable in any event.  Analogous to sovereign debt, just what could anyone do if the US were to say: “Sorry.  We changed our mind.”?

Indeed, the Treasury’s signaling of a change of heart indicates just how capricious it can be.  Any potential buyer would only buy at a substantial discount, given this massive uncertainty.  A discount so big that Deripaska or the Russian government would be unlikely to accept.

And who would the buyers be anyways?  Glencore already has a stake in Rusal, and a long history of dealings.  But it is probably particularly reluctant to get crosswise with the US, especially given its vulnerabilities arising from, say, its various African dealings.

The Chinese?  Well, since China is already on the verge of a trade war in the US, and a trade war involving aluminum in particular, they would have to be especially chary about buying out Deripaska.  Such a deal would present the US with a twofer–an ability to shaft both Russia and China.  And perhaps a three-fer: providing support to the US aluminum industry in the bargain (although of course harming aluminum consuming industries, but that hasn’t deterred Trump so far.)

So short of the US going full Emily Litella (and thus demolishing its credibility), it’s hard to see a viable path to freeing Rusal from SDN sanctions.  Meaning: Put away the party hats.  The celebration is premature.

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