Streetwise Professor

December 16, 2009

The Sisyphus Update

Filed under: Commodities,Derivatives,Economics,Military,Politics,Russia — The Professor @ 7:33 am

Sorry about the lack of posts.  I’m in Rio de Janeiro for a conference jointly sponsored by Columbia Law School, a Brazilian think tank FGV, and the Brazilian securities regulator that ended yesterday. (I was going to say “blame it on Rio” but that would be lame:)  Good conference, though tiring as all the Brazilians gave their talks/comments/questions in Portuguese, with simultaneous translation, which takes concentration to follow–although I can only imagine how how it is to do.  (Interesting socio-political question as to why the conference was, unlike most, bilingual.)

Anyways, several things have caught my eye in my glances at the news.  The Russian items resonate with a theme often expressed/discussed on SWP–the repetitive, Sisyphus-like nature of Russian life.  Fighting the same battles, again and again.

1. Yegor Gaidar passed away.  The controversial architect of many of the Yeltsin reforms, he was ultimately disillusioned by Russia’s path under Putin.  I reviewed his book here.  Here’s the opening line of the review, which can serve as an epitaph:

Cassandra was the Trojan woman whom Apollo gave the gift of prophesy-and the curse of never being believed. Yegor Gaidar sees that Russia’s future depends crucially on coming to grips with its past, but present events make it clear that his prophesies, like Cassandra’s, fall on deaf ears.

In his new book,  Collapse of an Empire, Gaidar has a pressing purpose: to alert Russians-and the world-to the dangers denying the real reasons behind the collapse of the USSR. Gaidar has a strong historical sense (which is often absent among economists, alas), and from his understanding of history (most notably, of Weimar Germany and post-Hapsburg Austria-Hungary), he knows that imperial collapse can be disorienting and dispiriting to the empire’s subjects, even if the empire brutally repressed them. He also knows that demagogues and revanchists can exploit this disorientation and depression to achieve power. Those suffering from post-empire depression are very susceptible to demagogic myths that imperial glory was destroyed by “stabs in the back” from enemies foreign and domestic, and that restoration of this glory requires the people to unite behind an authoritarian leader who will ruthlessly pursue traitors at home and take revenge on foreign foes.

But he foresees that this is ultimately the road to disaster.

2. Medvedev is aiming to reduce Russia’s “colossal” drinking problem by cutting alcohol consumption by 72 percent.  All I can say is: Good. Luck. With. That.  Here are the grim statistics:

Medvedev in June told Health Minister  Tatyana Golikova that Russia’s alcohol consumption is “colossal” and asked the government by today to find ways to fight excessive drinking and bootlegged vodka production. Illegal spirits make up about half of total alcohol consumption in Russia, lawmaker  Viktor Zvagelskiy said yesterday in an interview in Moscow.

“More than 23,000 people are dying from random [actually sounds kind of systematic] alcohol poisoning currently in Russia,” the market regulation service said in the plan. “More than 75,000 people are dying from illnesses caused by excessive drinking.”

Gorbachev attempted an aggressive anti-liquor campaign that succeeded in reducing substantially alcohol related problems–but which also wreaked havoc on the Soviet budget, given the importance of alcohol taxes as a source of revenue.  (Thus, it is ironic that this news came out on the same day as that of Gaidar’s death, for he wrote about that episode in his book.)  Gorbachev’s campaign also spurred dramatically the production and consumption of illicit alcohol.  (I remember reading that it was common for Russian military pilots to claim that they were experiencing icing and had to de-ice even when this wasn’t true, so they could siphon off the de-icing fluid to drink.  I’m sure that did wonders for military preparedness.  No surprise, then, that Matthias Rust was able to fly a small plane unmolested to land in Red Square).

The Bloomberg article suggests that Medvedev/the government recognize this, and are going to try a simultaneous battle against licit and illicit alcohol by (a) enforcing minimum prices on vodka sales, (b) raising beer taxes, and (c) cracking down on moonshine.  This is very ambitious, and almost certainly doomed to failure.

This presents another wonderful corruption opportunity for those responsible for enforcing the new restrictions.  It is very difficult to see how any enforcement efforts can succeed in a country so riddled with corruption.  The cynic would say that the announcement of such efforts is just a way to increase the take of the “enforcement” bodies and their employees.

3. Apropos the recent “It Blew Up Real Good” post of last week, Russia has announced that it is delaying construction of the fourth Borei class SSBN.  Although the article suggests that this delay is connected with the problems with the Bulava missile, if true that would suggest that the Russian navy is very, very pessimistic on the missile’s prospects.  There are 2 Boreis under construction.  The fourth would not be ready for some years even if it were laid down immediately. If the navy thought that the Bulava problems are fixable, given the lead time on sub construction it would not make sense to delay due to the recent spate of test failures.  However, if the Bulava program is in serious jeopardy, it would make sense to delay construction, perhaps to re-design the Borei to carry a different missile.  Thus, if there is any connection between this announcement on the delay of the sub construction and the Bulava problems, the inference would be that the Bulava is unsalvageable.

The delay could just indicate budgetary issues, however, so one cannot be too sure about this inference.

4. One non-Russian item.  Mark Roe of Harvard Law School has written an interesting piece on the privileged status of derivatives under bankruptcy law.  (I was quoted on this subject in The Economist last month.)  Mark’s argument is a very interesting one: namely, this contributes to systemic risk by reducing derivatives traders’ monitoring of the creditworthiness of their counterparties.  He argues that since they don’t have to worry about fraudulent conveyance claims, derivatives traders can enter into deals in the confidence that they can get what failing counterparties owe them, and let the devil take the hindmost.  The fact that they are first in line reduces the incentive of derivatives counterparties to pay close attention to the financial condition of those they trade with.

This argument has some attractions, but I’m not sure I buy it completely; even if derivatives traders have lower incentive to monitor, other creditors’ incentives increase, so it’s uncertain whether the total amount of monitoring, or the pricing of credit risk at the margin, is affected by this particular choice of priority rules.

I’ll give it some thought.  On the beach 🙂  More later . . .  amanhã . . .    maybe.

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  1. Nice post. The link to Mark Roe’s article appears to be broken.

    Comment by Highgamma — December 16, 2009 @ 8:05 am

  2. Thanks, HG. Roe link fixed.

    The ProfessorComment by The Professor — December 16, 2009 @ 3:18 pm

  3. Germany did come pretty damn close to winning. Rust’s small plane was tracked several times. The Jihadi’s big planes weren’t.

    Comment by So? — December 16, 2009 @ 8:07 pm

  4. A critical view of Gaidar:

    Comment by jojo — December 23, 2009 @ 7:05 am

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