Streetwise Professor

October 27, 2008

Misery Loves Company

Filed under: Commodities,Economics,Energy,Politics,Russia — The Professor @ 8:37 pm

Ambrose Evans-Pritchard has a fascinating article in today’s Telegraph. It is fascinating on many levels.

For one, it helps explain why European banks have been battered even worse than American ones. European banks invested in made-in-America subprime (which suggests that Americans are not uniquely culpable for that problem), but they also plunged far greater sums into emerging market investments, all of which are plummeting in value. The travails of European banks, and the prospects of worse to come, also helps explain the dramatic weakening of the Euro, the pound, and the Swiss franc.

Although US subprime has attracted most of the attention, because it cratered first, it is clearly not the only source of toxicity in bank balance sheets. It is becoming increasingly evident that low interest rates, attributable in part to the Asian savings glut and partially to liberal US monetary policy (less so European directly, but in an open economy Europeans didn’t have complete control over their interest rates) that encouraged yield shopping in a big way, and yield shopping means “add risk” in any language.

For another, the article also has some interesting tidbits about Russia. To wit:

Russia too is in the eye of the storm, despite its energy wealth – or because of it. The cost of insuring Russian sovereign debt through credit default swaps (CDS) surged to 1,200 basis points last week, higher than Iceland’s debt before Götterdammerung struck Reykjavik.

The markets no longer believe that the spending structure of the Russian state is viable as oil threatens to plunge below $60 a barrel. The foreign debt of the oligarchs ($530bn) has surpassed the country’s foreign reserves. Some $47bn has to be repaid over the next two months.

As Michel pointed out in a comment to another post, the heavy indebtedness of the oligarchs presents the Russian government with several unpalatable choices (though DR does not find them as bad.) Bailing the oligarchs out of their foreign denominated debt would put a large dent in, and perhaps exhaust, the massive reserves that Russia has so assiduously accumulated in the past several years. Since most of the debt is collateralized by shares in companies, many of which are Russian (though, again per DR, some are in the US and Europe), oligarchic default would transfer large ownership positions in “strategic” Russian businesses to despised foreigners. Or, the Russian government could expropriate the oligarchs/nationalize their businesses, and hang the Western lenders out to dry. By so doing, they would keep their “crown jewels” out of the hands of foreigners (and, conveniently, in the control of the siloviki in the government), but (a) this would turn Russia into a pariah that would have acute problems accessing capital markets in the future, and (b) destroy value by concentrating even more control over enterprises in state hands, which distorts incentives and encourages rent seeking.

My guess is that in the short to medium term, the government will try to buy time and dole out financial support to the oligarchs in the hope that things will turn around. Only if the country’s reserves are depleted too rapidly, or the reserves fall to an uncomfortably low level, will the government contemplate something more extreme. And if it comes to that, I would wager that Russia would choose “pariah” over ceding substantial stakes in “strategic” businesses–even minority stakes–to foreigners. The latter option is too much at odds with the entire rationale for Putinism, and would drive the nationalist elements in Russia around the bend, thereby jeopardizing Putin’s domestic support. Given the choice between stickin’ it to The Man (i.e., foreigners) and living without foreign capital (who needs those bloodsucking bastards anyways?), and being labeled a traitor to the motherland, I think it’s pretty clear which way Putin would jump. But maybe he’ll get lucky, things will turn around, the price of oil will recover (along with the world economy) and Putin will never have to make that hard choice. That’s why buying time and spending the reserves makes sense in the near term.

But, suffice it to say, that the worm has truly turned in the last three months. During that short time, Russia has gone from globe straddling giant (in its own mind, anyways) to a gambler looking to survive by drawing an inside straight. Not that things are rosy in the USA, but as bad as things are here, I’d rather play our hand than Putin’s.

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  1. I am curious to know why a Professor from Houston is so obsessed with Russia. Is The Brattle Group paying you to write about Russia. Are the oil companies paying you to badmouth Russia so as to make their prospects better.

    Please tell us why you even care about Russia?

    Comment by David Jeffries — October 28, 2008 @ 12:30 am

  2. Please tell me why you care why I care. We all have our own interests. FYI, (a) I grew up during the Cold War, and went to the Naval Academy during its height, and that was the original source of my interest, and (b) became more interested when I took a course in Russian Civ at Chicago after leaving Navy. Due to my academic work on energy and institutional economics, my interest was rekindled several years ago, as Russia is (a) a major energy producer, and (b) a fascinating case study in various aspects of institutional economics. Satisfied now?

    Oh, and no, neither Brattle, nor any oil company is paying me jack to do this–believe me. As John Cleese once said, I am arguing on my own time.

    One final thing. Question marks are our friends.

    The ProfessorComment by The Professor — October 28, 2008 @ 7:14 am

  3. Classic case of attacking the messenger when you do not like the message. Rather than addressing the ideas, David tries to discredit you through innuendo.

    Comment by Michel — October 28, 2008 @ 9:51 am

  4. A bit touchy there Professor. Did we hit a nerve.

    We don’t believe you. Your association with Mr. Amsterdam and “Ms.” La Russophobe leads us to believe that you are working as an informal partner in a smear campaign against Russia.

    Your are now officially a card carrying member of the Russophobe army. Go ahead, voice your opinions….. we are all interested to hear what you have to say… Professor.

    Comment by David Jeffries — October 28, 2008 @ 10:47 am

  5. David, Who is the “we” that you refer to in “We don’t believe you”?

    Comment by Michel — October 28, 2008 @ 11:06 am

  6. I have no association with anybody, son. Your paranoia and predilection for conspiracy theories makes you an honorary Russian, I guess.

    And, WTF is “we” and “us” anyways? Inquiring minds want to know. I work alone, but apparently you do not, unless you are royalty. And I will continue to say whatever I damn well please regardless of what you think, collectively or individually.

    Re touchy: I think my response was factual and informative. You asked, I told you. It’s just that people who can’t or won’t punctuate annoy me. And thanks for informing me of the nature of your interest. Duly noted and filed.

    Re touchy (con’t): Best friend, worst enemy.

    The ProfessorComment by The Professor — October 28, 2008 @ 11:16 am

  7. The reason that I ask is that your statement seems to imply that you are expressing the views of a large number of people. This would be called argumentum ad populum or the logical fallacy that implies that your argument appeals to a popular mass behind you. The first commment of course has a tinge of argumentum ad hominem or an attack against the person as opposed to the ideas.

    Comment by Michel — October 28, 2008 @ 12:10 pm

  8. There is a well organized campaign to smear Russia in the Western media and we don’t like it.

    We take him at his word (something which the Professor won’t do with Mr. Putin).

    We do want to know, however, does he, or does he not, know the identity of the people behind the hate blog, La Russophobe.

    We are a group of people, from around the world, who feel that Russia is unfairly targeted by many in the West. Therefore, we have an interest in understanding where Mr. Pirrong stands with respect to the other smear campaigns. We are glad to hear that Mr. Pirrong is a long wolf.

    Comment by David Jeffries — October 28, 2008 @ 1:47 pm

  9. Again, who is this mysterious “group of people”? ФСБ? David, I really want to know who this group is that you refer to in your comment.

    Comment by Michel — October 28, 2008 @ 2:00 pm

  10. Michel

    Save the drama for your Mama. FSB….. no my friend, hardly.

    I take Mr. Pirrong’s lack of an answer regarding which nut job think-tank is behind the “La Russophobe Project” as confirmation of his knowledge of its true identity.

    Let them come out first and then we’ll gladly fight fair. Until then, let the games begin.

    Comment by David Jeffries — October 28, 2008 @ 4:01 pm

  11. 1. “Long wolf”–what is that? Could you mean “lone wolf”? Haste makes waste.
    2. Re LR, am I ignorant or apathetic? Don’t know, and don’t care.
    3. I usually don’t stand on formality, but you can refer to me as Dr. Pirrong. I reserve that honor for only a chosen few.
    4. In your earlier comment you called me a liar, with absolutely no basis for doing so other than your fervid imagination. Profile in courage to do that virtually. Try it in person some time.
    5. Relatedly you asserted an “association” with Amsterdam & LaRussaphobe. What is your definition of an association? What is the basis for your assertion? Full disclosure: I have met Amsterdam once, he has linked to my site, he asked me to contribute a written piece, and his webmaster interviewed me once. Period. WRT LR, she’s linked to me and commented on SWP. Full stop. It’s a free country. Unlike some.
    6. The fact that people hold and express similar views does not imply coordination, cooperation, conspiracy, or the existence of a cabal. Those who infer the existence of coordination, etc., based merely on a correlation in views are revealing more about their own mental condition than about the motivation of the target of the allegation. You, on the other hand, have admitted your membership in a group pursuing a particular agenda.
    7. Hope I have satisfied your “interest,” but sorry I can’t help you on LR. I am sure that you will also be sorry to see that your endeavors will have absolutely no effect on me.
    8. Re “unfair”–I call ’em like I see ’em. You see things differently. Like I say, free country. The whole point of debate is to air opposing views and let the chips fall where they may.
    9. Your whole MO is attempting to discredit opinions by questioning motive. This is in fact a classical Soviet/Marxist tactic. As Michel notes, it is also logically fallacious. People with bad motives can be right on the facts; people with good motives can be wrong. I suggest that a more constructive approach would be to meet argument with argument, fact with fact, data with data. If you have specific arguments, facts, data, or information that might persuade me or another reader of this site to your point of view, feel free to weigh in.

    The ProfessorComment by The Professor — October 28, 2008 @ 4:10 pm

  12. Having received hate mail quite a few times from rabid Russophobes, with allegations of being in the pay of the FSB (I wish!), the Kremlin or whatever, I somewhat sympathize with SWP’s position despite our many profound disagreements (of course, the fact they’d smear me for airing views contrary to their own also puts in perspective their allegations of Kremlin control of the media – if they define anything they don’t like as under the control of something sinister, how much credibility do they retain?).

    For the record if I had to guess I’d say SWP is the lone information warrior. On the other hand, I strongly suspect La Russophobe is in someone’s pay. The obsession with anonymity, the sheer amount of time she devotes to propagating her blog and denouncing her opponents, etc. Still, their arguments should be demolished on their own (de)merits rather than attacking their associations.

    Comment by Da Russophile — October 28, 2008 @ 5:13 pm

  13. “Lone Information Warrior”–LOL. Mind if I steal that? May use it as my masthead:) Actually, perhaps I’ll rework it given my affinity for a show I saw on re-re-re-runs when I was growing up: “Information Lone Ranger.” And maybe, God willing, someday soon I’ll be able to say “My work here is done” and ride into the sunset. (After all, he was a TEXAS Ranger, no?)

    More seriously, if you look at my CV, you’ll see that virtually all my work (especially in the last 14 years) is single-authored. This is very rare in economics/finance these days. It is an independent, and credible, indicator that I do tend to work alone and go my own way. Or maybe it’s just that I don’t play well with others, or a manifestation of only-childness. Who knows? But anybody who DOES know me, knows that I am a contrary cuss, and don’t take direction well. The reasons I left the Navy are (a) that I found that I just didn’t like taking orders, and (b) the Navy doesn’t like opinionated people who express those opinions and ask questions. I often say that I went into the Navy thinking I was conservative, and came out knowing I was a classical liberal. So any suggestion that I am anybody’s boy or carrying anybody’s water just shows that the suggester doesn’t know me at all.

    The ProfessorComment by The Professor — October 28, 2008 @ 6:47 pm

  14. +++The obsession with anonymity+++

    Sorry for chiming in, but isn’t there the founder’s real name on La Russophobe site? Like it or hate it, but I find the notion of anonymity a bit misplaced.

    Comment by LL — October 28, 2008 @ 8:21 pm

  15. LL–The allegation is that “Kim Zigfeld” is a pseudonym. Like my point 2 in comment #11, don’t know, and don’t care, and to be honest, don’t know why anybody would. Anonymity is a choice, and there are potentially good and bad reasons for making it. Richard Fernandez (“Wretchard” from Belmont Club, a great blogger) was anonymous for a long time. After his identity was revealed, he wrote a thoughtful piece about the pros and cons of anonymity. His best point was (as I recall) that he wanted people to focus on the arguments, and not on him. Since I think that the arguments/facts/evidence brought to bear are the important thing, there’s a lot to be said for that. As I hope I made clear before, one should meet argument with argument, fact with fact. All this conjecturing about identity, motive, etc., is infantile.

    So, I definitely agree with your “misplaced” diagnosis.

    Thanks for joining the comments.

    The ProfessorComment by The Professor — October 28, 2008 @ 9:24 pm

  16. David, re your comment #10. I have no idea of what think tank, nut job or otherwise, is behind LR. Or even if there is a think tank behind her/him/it. Nor, as I made clear in my #11, do I give a damn. That’s your obsession dude, not mine. Get a grip, and get a life. If you want to debate real issues, come on down, jock it up, and join the party. Your fixation on trivialities is laughable.

    And this “I’ll show you mine if you show me yours” tack (“Let them come out first and then we’ll gladly fight fair”) is juvenile. If you believe that anonymity is wrong in principle, then you are a hypocrite to criticize LR for obscuring her connections while refusing to disclose yours. If transparency is right for her, it should be right for you. If LR doesn’t do the right thing in your view, why should you imitate her? What’s right is right. (Come to think of it, your approach has a lot in common with Putin’s/Medvedev’s/Lavrov’s approach to S. Ossetia/Kosovo: recognition of Kosovo is wrong, but if they’re going to do it, we’re going to do it too. Hardly a principled approach.) This is the two wrongs make a right approach. And what’s to hide? If you are, as you suggest, just a group of concerned citizens outraged at unfair treatment of Russia, what’s to be feared by saying who you are?

    And, to close, since you are a little slow on the uptake: For the last time, I don’t know squat about LR. Your continued insinuations otherwise, with the associated implication that I am a liar, are baseless. If you have evidence, bring it on. Since you don’t–and metaphysically can’t, because it doesn’t exist–do us all a favor and put a cork in it.

    The ProfessorComment by The Professor — October 28, 2008 @ 9:42 pm

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