Streetwise Professor

July 31, 2010

Confirmation Bias, SWP Edition

Filed under: Economics,Military,Politics,Russia — The Professor @ 8:02 pm

A couple of articles echoing SWP themes.  This one is a case study of the dangers of being a foreign investor in Russia.  The moral  (or should that be “immoral”?) of the story: as a foreign minority investor in Russia, the law is more likely to be used as a sword to attack you than a shield that defends you:

In March 2008, Kores Invest, controlled by Federation Council Senator Leonid Lebedev, bought majority control of TGK-2 during the final privatization auctions. Kores was required under mandatory laws to offer to buy out minority shareholders at the same price. PCM tendered its shares, along with other minority shareholders. But by the time the proceeds were due, prices had fallen significantly because of the economic crisis. Ever since, Kores has created legal diversions to avoid meeting its obligations.

Kores owes PCM and other minority shareholders more than $300 million. But Kores effectively sued itself, obtaining an injunction blocking the previously agreed buyback. Appeals have since been repeatedly adjourned on flimsy technicalities.

Kores also prevented Sberbank from meeting a guarantee to pay buyback receipts to TGK-2 minority shareholders if the principal owner failed. Sberbank’s involvement would have amounted to official recognition of Kores’ default. So Kores obtained a second injunction.

Kores then opened up a third front of legal obfuscation, claiming that the buyout obligation was invalid under the country’s strategic investment law — a connection it made based on TGK-2’s small involvement with the treatment of radioactive material. This is clearly an arbitrary application of the law.

The article points out some implications of a judgment supporting Kores’s arguments:

Many leading Russian companies, including Gazprom, Rosneft and Novotek, have offshore affiliates. All these firms, of course, are treated as “domestic” for the purposes of the strategic investment law. If the Supreme Court fails to overturn successive rulings in favor of Kores, many of Russia’s most important commercial entities will be in breach of the law. Some of the most significant transactions in Russia’s recent history could be rendered null and void.

Ah, but remember what Fitzgerald wrote: “The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function.” And by that definition, the Russian legal system is filled with Real Men of Genius.

The second story relates to Russia’s military manpower woes:

Russia’s attempts to build a modern military have run into a roadblock: there are not enough conscripts to fill the ranks. In the fall of 2008, the Russian military was a reservist/mobilization force. According to the Chief of the General Staff and First Deputy Defense Minister, Army-General Nikolai Makarov, “83 percent of the army” had only officers and weapons and required reservists to fill the ranks that “would have required a lot of time” (, February 17).

The Kontraktniki approach has been written off as a failure.  Russia had “several frontline all-contract airborne and army units, but now they have been disbanded.”  Given that the airborne troops have been the most reliable units in the Army since late-Soviet times, that hardly provides confidence that the country has a dependable rapid reaction force:

Following the introduction of one year conscript service the airborne forces formed five “first use battalions” with 70 percent of contract soldiers “most of whom have combat experience” (RIA Novosti, May 26). These battalions (around two thousand men in total) seem to be all the combat ready forces Russia has today for possible offensive action.

I’ve mentioned the over-officered nature of the Russian armed forces before.  It has gotten better due to some recent reforms (which basically turned many officers and their families into borderline-homeless), but it is still pretty amazing:

In 2008, there were 1,130,000 active service personnel in the armed forces with about half a million of them officers and praporshiki [warrant officers].

That’s about 45 percent, for those scoring at home.  Like I’ve asked before: what were they all doing?  Keeping control of the barracks was obviously not it.  (Although Moscow Mayor Yuri Luzhkov claims that “the threat of hazing is practically nonexistent”!)

The Russian military recently completed its Vostok 2010 exercises, getting some good reviews from some people who are not always members of the pom-pom squad.  But I find it hard to believe that a military so dependent on scraps of Russian manhood, who barely serve long enough to learn the location of the latrine, and who, Luzhkov notwithstanding, spend a large part of their time either suffering beatings or in fear of suffering beatings, is capable of carrying out complex, combined arms operations.  So color me skeptical.

I’m sure you’re shocked.

Print Friendly, PDF & Email


  1. […] This post was mentioned on Twitter by Craig pirrong, Craig pirrong. Craig pirrong said: Updated my SWP blog post: Confirmation Bias, SWP Edition ( ) […]

    Pingback by Tweets that mention Streetwise Professor » Confirmation Bias, SWP Edition -- — July 31, 2010 @ 8:25 pm

  2. Professor, I can’t believe you missed this!

    Comment by So? — August 1, 2010 @ 5:34 am

  3. “getting some good reviews from some people who are not always members of the pom-pom squad.”

    On the matter of “missed,” Russia and cheer leading material:

    Sexist Russia: Part of a Social Disgrace

    Comment by Siegfried — August 1, 2010 @ 7:23 am

  4. @Siegfried–the pom-pom video was very disturbing. Too much time on your hands? This was my daughter’s suggestion.

    The ProfessorComment by The Professor — August 1, 2010 @ 9:19 am

  5. Thanks Professor and daughter.

    I connected that video to your pom pom comment and a 1980s era reunion I just attended.

    Comment by Siegfried — August 1, 2010 @ 6:13 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress