The United States and Russia are at a potentially fateful crossroads in their relations. Twenty years after the end of the Soviet Union, the relationship features more elements of cold-war conflict than of stable cooperation. Still more, recent developments, including presidential campaigns and other political changes under way in both countries, may soon make relations even worse.

And yet, in the United States, there is virtually no critical discussion, certainly no debate, about American policy toward Russia. This failure of our own democratic process — particularly of our political and media establishments — is in sharp contrast to fierce debates over Russia policy that took place in Congress, the national media, academia, think tanks and even at grassroots levels in the 1970s and 1980s.

As a result, serious criticism of Washington’s policies toward Moscow that should be stated publicly — by Americans, not Russians — is not being expressed in our mainstream politics or media. I will state that kind of criticism here today — very briefly and bluntly. I do so as a scholar who has studied Russia’s history and politics for fifty years — and as an American patriot. Most of what I have to say is not a matter of personal opinion but of historical and political fact. It can be summarized in five major points.

First: Today, as before, the road to America’s national security runs through Moscow. No other U.S. bilateral relationship is more vital. The reasons should be known to every policymaker, though they seem not to be:

- Russia’s enormous stockpiles of nuclear and other weapons of mass destruction make it the only country capable of destroying the United States as well as the only other government, along with our own, essential for preventing the proliferation of such weapons.

- There is also Russia’s disproportionate share of the world’s essential resources, not only oil and natural gas but metals, fertile land, timber, fresh water and more, which give Moscow critical importance in the global economy.

- In addition, Russia remains the world’s largest territorial country. In particular, the geopolitical significance of its location on the Eurasian frontier of today’s mounting conflicts between Western and Eastern civilizations, as well as its own millions of Islamic people, can hardly be overstated.

- Not to be forgotten are Russia’s talented and nationalistic people, even in bad times, and their state’s traditions in international affairs. This too means that Russia will play a major role in the world.

- And, largely as a result of these circumstances, there is Moscow’s special capacity to abet or to thwart U.S. interests in many regions of the world, from Afghanistan, Iran, North Korea and China to Europe, the entire Middle East and Latin America.

In short, these inescapable realities mean that partnership with Russia is an American national security imperative.

Second: There is no real American-Russian partnership today. Nor has there been one since the Soviet Union ended in 1991, despite periodic (largely decorative) declarations to that effect in Washington. Indeed, there is less essential cooperation between Washington and Moscow today than there was during the late years of the Cold War under Presidents Ronald Reagan, the first George Bush and Mikhail Gorbachev. Still worse, important elements of cooperation that do exist — on Afghanistan, Iran and nuclear weapons — are fragile and may soon end.

In short, the United States is farther from a partnership with Russia today than it was more than twenty years ago.

Third: Who, it must be asked, is to blame for this historic failure to establish a partnership between America and post-Soviet Russia? In the United States, Moscow alone is almost universally blamed. The facts are different. There have been three compelling opportunities to establish such a partnership. All three were lost, or are being lost, in Washington, not in Moscow.

- The first opportunity was following the end of the Soviet Union, in the 1990s. Instead, the Clinton administration adopted an aggressive triumphalist approach to Moscow. That administration tried to dictate Russia’s post-Communist development and to turn it into a U.S. client state. It moved the U.S.-led military alliance, NATO, into Russia’s former security zone. It bombed Moscow’s remaining European ally, Serbia. And along the way, the Clinton administration broke strategic promises made to Moscow.

- The second opportunity for partnership was after 9/11, when the Bush administration repaid Russian President Vladimir Putin’s extraordinary assistance in the U.S. war against the Taliban in Afghanistan by further expanding NATO to Russia’s borders and by unilaterally withdrawing from the 1972 Anti-Ballistic Missile Treaty, which Moscow regarded as the linchpin of its nuclear security.

- Now, since 2008, the Obama administration is squandering the third opportunity, its own “re-set,” by refusing to respond to Moscow’s concessions on Afghanistan and Iran with reciprocal agreements on Russia’s top priorities, NATO expansion and missile defense.

In short, every opportunity for a U.S.-Russian partnership during the past twenty years was lost, or is being lost, in Washington, not in Moscow.

Fourth: How to explain, we must also ask, such unwise U.S. policies over such a long period? The primary explanation is a policy-making outlook, or ideology, that has combined the worst legacy of the Cold War with the worst American reaction to the end of the Soviet Union.

- Washington’s two most consequential (and detrimental) decisions regarding post-Soviet Russia have continued the militarized approach of the Cold War: to move NATO eastward; and to build missile defense installations near Russia’s borders.

- At the same time, Washington’s triumphalist reaction to the end of the Soviet state produced a winner-take-all diplomatic approach that has been almost as aggressive. Consider the three primary components of this so-called diplomacy:

1. Presumably on the assumption that Russia’s interests abroad are less legitimate than America’s, Washington has acted on a double-standard in relations with Moscow. The unmistakable example is that while creating a vast U.S.-NATO sphere of military and political influence around Russia, Washington adamantly denounces Moscow’s quest for any zone of security, even on its own borders.

2. Similarly, U.S. negotiations on vital issues have been based on the premise (called “selective cooperation”) that Moscow should make all major concessions while Washington makes none. And on rare occasions when Washington did promise major concessions, it reneged on them, NATO’s eastward expansion being only the first instance. (Can anyone who doubts this generalization cite a single meaningful concession — any substantive reciprocity — that Moscow has actually gotten from the United States since 1992?)

3. Meanwhile, presumably on the assumption that Russia’s political sovereignty at home is less than our own, Washington has pursued intrusive “democracy-promotion” measures that flagrantly trespass on Moscow’s internal affairs. This practice began in the 1990s with actual directives from Washington to Moscow ministries and with legions of onsite U.S. “advisers” and it continues today — recently, for example, with the American vice president lobbying in Moscow against Putin’s return to the Russian presidency and with the new U.S. ambassador’s profoundly ill-timed meeting with leaders of Moscow’s street protests.

In short, blaming Putin for anti-Americanism in Russia, as the U.S. State Department and media do, ignores the real cause: Twenty years of American military and diplomatic policies have convinced a large part of Russia’s political class (and intelligentsia) that Washington’s intentions are aggressive, aggrandizing and deceitful — anything but those of a partner. (In that context, part of the Russian elite has criticized Putin for being “pro-American.”)

Fifth: None of these unwise, counter-productive U.S. policies toward Russia since the 1990s have been specifically Democratic or Republican. They have been bipartisan, enacted and supported by Democratic and Republican presidents and congresses alike. They have been, that is, a fully bipartisan failure of American leadership and policymaking.

To which must be added the complicit role of the American media:

- Since the 1990s, mainstream press coverage of Russia has been woefully less professional than it was when the Soviet Union existed. It has been more ideological; less diverse in its sources and perspectives; less receptive to non-standard opinions; less observant of the necessary distinction between reporting and news analysis; and, worse yet, less factual and accurate.

- Press coverage has also been less independent of U.S. policy than it was in Soviet times. In the 1990s, the mainstream media narrative hardly differed from that of the Clinton White House, cheerleading for Russian President Boris Yeltsin. In recent years, the media narrative, like Washington’s, has been overwhelmingly anti-Putin.

- Indeed, press analysis of Russian politics has been all but replaced by reflexive Putin-bashing equating him with Saddam, Qaddafi and even Stalin, and based on a welter of non- factual or unsubstantiated allegations.

- For example, the dismantling of Russian democracy, the creation of a corrupt financial oligarchy (which is the main obstacle to democracy) and the killing of journalists did not begin under Putin, who assumed the presidency in 2000, but under Yeltsin in the 1990s. And there are no facts or logic to support standard U.S. press assertions that Putin was personally responsible for the murders of the journalist Anna Politkovskaya, the supposed KGB defector in London, Aleksandr Litvinenko or any of his other Russian political opponents.

Nor is this journalistic malpractice unrelated to U.S. policy-making. It has polluted American public discussion of Russia in ways that encourage the worst impulses of our politicians and that all but prohibit any reconsideration of U.S. policy.

Toward a New Russia Policy

Clearly, the United States needs a fundamentally different policy toward Russia. Given the right approach, partnership with Moscow is still possible, no matter who is in the White House or Kremlin after this year’s presidential elections. But the window of opportunity is closing, not only because of the factors I mentioned earlier but because Moscow is increasingly mistrustful of Washington and because Moscow no longer needs anything from the United States except military security. Everything else, including modernizing funds, technology and markets, Russia can get from its flourishing partnerships with China and Europe.

The Russia policy America urgently needs requires at least four fundamental changes, each based on new thinking. Again, briefly stated:

1. The policy must be de-militarized in favor of political diplomacy. And the guiding diplomatic tenet must be recognition of Russia’s parity with the United States as a sovereign nation and legitimate great power. This means, in particular, that the same rules of international behavior apply equally to Washington and Moscow and that negotiations require reciprocal concessions, as befit partners. Such a U.S. approach would almost certainly lead to new and expanded areas of cooperation.

2. Vital cooperation will not be possible (or stable), however, as long as Washington continues to promote NATO expansion along Russia’s borders. This must stop, which means no longer encouraging membership for Georgia or Ukraine. Membership for either would cross Moscow’s declared “red lines.” The proxy American-Russian war in Georgia, in August 2008, which risked a nuclear confrontation like the 1962 Cuban Missile Crisis, was an unmistakable warning. (Russia has a right, as the United States asserted for itself in that crisis, to be free of menacing foreign military bases near its territory.)

3. But the thirteen-year expansion of NATO to Russia’s borders has already institutionalized the worst geo-political, and potentially military, U.S.-Russian conflict. The new NATO members cannot be expelled, but Washington should now honor its promise, also broken, that those countries would not host any NATO or U.S. military installations. Honoring that pledge would, in effect, de-militarize NATO expansion and considerably lessen Moscow’s anxieties, resentments and resistance to new forms of security cooperation, including on missile defense and deeper nuclear reductions on both sides.

4. Finally, “democracy-promotion” measures inside Russia also must stop. Many proponents of this two-decade U.S. policy sincerely believe in it, but it is wrong on all counts:

- We, the United States, do not have the right, wisdom or power to intervene so directly or deeply in the internal workings of another great nation, especially one whose history is older, different and no less proud than our own. (Russians have shown they know how to democratize their country. To suggest that they do not is contemptuous and an ethnic slur.)

- Here too the proof is in the factual record. Since the 1990s, U.S.-sponsored “democracy-promotion” inside Russia has done more to undermine democratic prospects there than to promote them.

- Even worse, “democracy-promoters” and leaders of opposition groups they sponsor are moving in a profoundly reckless direction. Increasingly, they speak of “delegitimizing” and “de-stabilizing” Russia’s political system, even of a “revolution,” but without asking what that might mean for a vast state with uncertain control over its enormous, sprawling quantities of devices of mass destruction. When the Russian state suddenly disintegrated in 1991, this kind of catastrophe was averted. But miracles rarely, if ever, happen twice.

The policy changes I propose are, of course, unlikely to be adopted. After twenty years, many powerful American interests are invested in the existing policy, however badly it has failed. But it is not enough to blame the U.S. political and media establishments. American critics of Washington’s longstanding approach to Moscow also bear some responsibility: They have not fought for the nation’s best interests.

This too was different forty years ago, when there was such an organization, The American Committee on East-West Accord. Based in Washington, with a Board composed of CEOs of major corporations, academics, policy intellectuals, nuclear scientists, journalists and representatives of grass-roots movements, the Committee fought our cold warriors of that time on many fronts, from Congress to the media. In the end, the struggle helped to make possible the historic breakthrough achieved by Reagan and Gorbachev in the 1980s. Where are such Americans and organizations today, when perhaps the last chance for a U.S.-Russian partnership is being lost?

This post is adapted from remarks by Stephen F. Cohen to the World Russia Forum in Washington, DC on February 27, 2012.

Original article posted at: http://www.huffingtonpost.com/stephen-f-cohen/us-russia-policy_b_1307727.html

One of the wonderful things about living in Russia is the number of times one can celebrate the same holiday. The glorious October Revolution occurred in November, while the Orthodox Christmas and New Year occur some two weeks after their Western counterparts. Typically disinclined to miss any excuse for a party, the Russians manage to combine two New Years and one Christmas in a single alcoholic blurrrrr – stretching from late December well into the second half of January.

Thus, the present opus was intended for the Dec 31 “European” New Year; due to factors totally beyond our control it was delayed until the Orthodox New Year on January 7; we are now struggling to finish in time for the Chinese New Year.

Happy Year of the Dragon (and shed a tear for St. George!)

Several of our readers have complained that, of late, we were neglecting Russia as we focused on the havoc in the West – they will be happy to know that the current issue is almost entirely devoted to our adoptive homeland. We will here seek to answer a few of your most pressing questions including: who murdered Litvinienko? (almost certainly Boris Berezovsky); which Westerner is doing the most to crush the freedom of the press as regards Russia? (William Browder); whom is Navalny really working for? (damned if we know – but we will venture a guess); what is the true significance of the recent Duma elections? (Russian governance moves towards the socialist/nationalist camp); and what are Prokhorov’s presidential chances? (those of a snowball in hell!).

Any reader interested solely in filthy lucre (given all the moaning we hear about the “crisis of capitalism”, apparently only a small minority) will wish to have a look at “How to Trade It”, where we temporarily shift to a more bullish stance while staying with the same asset classes which afforded us a reasonably profitable 2011.

So, if the gentle reader has not suffered enough New Year’s self-inflicted abuse – here is one last toast!

T&B

For the latest newsletter – in FULL (the above was just the entrée) – click on the link below:

T&B – Enter Dragon, Smoking

T&B is gratified that our most recent opus triggered a bit of controversy, with an outpouring of correspondence – mostly favourable, but a few very critical. This signifies that we are doing our job – provoking discussion and undermining the unthinking consensus.

Here we make some follow-up points in light of issues raised by our readers.

T&B

Please click below:

T&B – Follow-on to the Facebook Revolution

T&B is always amazed at the ability of Westerners to see what they wish to see in Russia, whether or not it is actually there: The field of dreams!

Tarkovsky’s Solaris – the planet where one’s innermost thoughts, deepest fears, most painful memories take physical form and walk (T&B’s favourite movie, bar none!).

The “10 Days that Shook Facebook” anti-government demonstration last Saturday proved a damp squib.

Sorry. That is just how it is.

T&B has seen the aerial photos and the estimate of 25,000 demonstrators seems extremely generous – perhaps when you count the tourists and the vendors and journalists… But, okay, today we are generously inclined and so will grant you 25,000 – that accounts for 0.1% of Moscow’s population.

Quite fortunately, the authorities had the brains to step back and avoid gratuitous provocation, so it all passed off very peacefully.

A gaggle of Western hacks went home feeling that they too had finally gotten a chance to participate in history – press coverage will largely reflect their dreams of heroism.
One of our friends, on the Russia sales desk of a major Western institution, has just got back from marketing in the United States and tells us that 100% of the American accounts expect an imminent revolution in Russia…

Yes, we knew that marijuana has been essentially legalized in California, however we had not realized that its use was quite that widespread, nor that it had so affected the ability to process information.

The decline in the level of political discourse is truly appalling – given that a major US presidential candidate has been pushed out of the race, not because he demonstrated breathtaking ignorance by cautioning that “China was trying real hard to go nuclear” (something which actually happened in the late 1950s…) but because he (oh–my-god) had affairs!

The dumbing down of the American media, and the take-over of the mainstream press by major financial interests, has had a predictable effect; to expect rational analysis of complex foreign political issues is thus a bit too optimistic.

So all is well in Russia? Not really…

The elections represented not just protests against corruption, deeply uninspiring politics, bad weather, and a slowdown in economic growth (to a still respectable 4% per annum), but also far more importantly, a sharp reaction against the liberalizing, pro-Western line embraced by President Medvedev. We remind the reader that the liberals of Yabloko took a thumping 3% of the vote – the Communists and Hard-Line Nationalists a combined 33%. This is no Orange Revolution…

Russian politics is about to become a lot more “interesting”. “Democracy” requires that the government respect the wishes of the electorate, and the KPRF/LDPR electorate does not wish to cuddle up to NATO, render Ayn Rand obligatory reading in high-schools, privatise Gazprom, nor allow the West a free hand in the CIS. Quite frankly, it represents an aspect of the Russian body-politic which T&B would rather forget – as would most of our readers, even those who disagree with us most strongly regarding the rest.

Investment implications are pretty much nil – much ado about very little. One can expect a somewhat more stimulatory fiscal policy, with a shift towards a more statist model.

Given our (once again, verified) bullish call on oil, there is no threat to Russian macroeconomic stability within the foreseeable future.

That said, the mood among foreign investors will be sour, leaving the less excitable among our readers the opportunity to pick up some cheap assets. For now – given the havoc in Europe – T&B will stick to the bonds.

Happy FB Posting!

T&B

To read the article click on the link below:

T&B – Russian Duma Elections Desk Note

As a strategist, one can no longer assemble a coherent world view without taking a view on China – not just the world’s second largest economy, but the world’s first-largest source of economic growth and commodity demand.

The secular rise of China has radically changed the rules of the game. Had it not been for China, the American crisis of 2008 would most likely have eventuated in a global economic depression; if the current, European, phase of the credit crisis does not lead to global economic collapse, the worst shall again be avoided largely thanks to rapid Chinese growth.

Were tales of the impending Chinese implosion to have any validity, investors would be well-advised to look at interplanetary opportunities – virtually no market on earth would be spared. Fortunately, like the reiterated warnings of a collapse in post-crisis Russia, these can be safely discounted.

For one used to the lies of the sleazy British financial press as regards Russia, the sheer volume of misconceptions regarding China seems oddly familiar.

After almost a month in China, we are frankly awed, cognizant of the fact that we have barely begun to scratch the surface. Basically, our observations were very much in keeping with the previous views expressed herein – confirming our scorn for the doomsayers, we found a country of almost inconceivable dynamism, in the midst of a transformation from quasi-medieval peasant economy to the predominant power of the 21^st century; yet the impact of actually seeing China in motion surpassed anything we had been prepared for. Long discussions with local players regarding of the strengths and frailties of the banking sector, regional financial montages, the capital and real-estate markets, as well as the upcoming renewal of the Politburo, with the succession of Wen and Hu, were fundamentally reassuring. There are substantial problems (where are there not?) but, also, China has both the means and the drive to resolve them.

Thus, rather than yet another discussion of the Chinese banking system, local finance entities, the appropriateness of capital allocation, and the sustainability of the current manufacturing model, all of which have been handled far more competently by some of our peers – notably Jonathan Anderson of UBS – we have thought long and hard about what China tells us about our own models – Russian and “Western” and the implications for the West.

As the New Chinese Century gets underway, we have sought to meet and understand the dragon in its own environment – fully cognizant of the enormity of the task before us – while seeking to avoid the caricatured misconceptions encountered in the media, where each of the proverbial blind men reports the nature of the elephant he believes he has encountered.

T&B

For the latest newsletter – in FULL (the above was just the entrée) – click on the link below:

T&B – Of Blind Men & Elephants

Every so often, one of my readers enquires as to why I do not write a book. The answer seems obvious enough: it has already been done. The libraries are groaning under the weight of millions of them – in our native France, everyone who can manage rudimentary verb conjugation feels compelled to bequeath his opus to an expectant world. With that many writers, who has the time to read? And besides, it has all been said already – and better – by Proust, by Borges, by Kafka, by the Great Russian classic authors of the 19^th Century. What could I hope to add?

Yet when invited to contribute a chapter to a book being put together by one local financial institution, collectively authored by 20 (ah… make that 19…) of that first generation of expats involved in the creation of Russia’s first approximations to a capital market, and who were then mad enough to stick around as it all unravelled, crashed and burned (but to reincarnate in something rather less surrealistic), it seemed a very worthy undertaking.

I did caution them that my chapter was likely to be rather spicy; one of the wonderful things about Russia is that total absence of political correctness which we enjoy.

The story recaps some of the highlights of my 15 years before the mast – amidst the madness that was early post-Soviet Moscow, or at least what I can remember of it (no one who fully participated in the Great Party at the Edge of the Apocalypse made it out without sacrificing a few brain cells along the way…).

While I had imagined that I could jot it all down in an afternoon, I ultimately spent days, weeks, writing and re-writing what was meant to be an intensely personal account… an ego trip if you will, but that is what was requested of me. All in vain! My foray into the literary world was to fall victim to the very cowardice and group-think I have long decried in the Western media.

To make a long story short – while the initial drafts were received with great enthusiasm by the Moscow sponsor, when they forwarded the finalized version to London, the response from the publisher neatly summarized everything that is corrupt, cowardly, bent and cloyingly hypocritical about British Media and their coverage of Russia.

According to the UK publisher, to refer to convicted criminals – as “criminals”; to bent ministers – as “bent”; to purported journalists engaged in nothing more than propaganda-for-pay – as “propagandists” (thus avoiding a more colourful term) detracted from the credibility of my story.

In short, he demanded that my baby be gutted like an eel! Excerpts from his reptilian letter (highlighting is my own):

“… I am now attaching an edited version of the chapter by Eric Kraus. As discussed, as well as a more general edit, I have toned down the accusations and removed names where I think there might be problems. I believe the substantive points being made by the author are still there. More importantly I believe that the points being made are clearer and stronger for having been made less personal and more impartial.

… Being sued for libel is perhaps unlikely… What is much more likely is not being taken seriously – and that would be a pity because this chapter has the potential to make a valuable contribution with its first-hand/inside knowledge. Why might it not be taken seriously? Because personal accusations, whether true or not, will diminish the authority of the work (and of the book as a whole). There is no need to name names in quite the way that is proposed here. The same substantial points can be better made without this…”

Needless to say, T&B cleans such folk out from between his toes. I certainly do not intend to be censored by some pitiable denizen of a dying civilization that still imagines itself to rule the (air)waves. He – and his ilk – are fated to drown while clinging desperately to the status quo, as it disappears beneath the waves of history.

But – dear reader – let it be you who draws their own conclusions as to what adds – and what detracts – from the story! I have restored the London redactions, highlighted in blue. Do please tell whether you think it better with or without!

In fact, I would recommend that you buy the book, print my chapter, and just paste it in. I would be deeply gratified to find my little literary cripple in the company of the stories of my peers from those best – and worst – of times.

Given the effort which went into this Quixotic undertaking – I would strongly encourage all to forward around the present message to anyone who might be interested/amused/outraged – or best, some combination of all three.

To read the chapter click on the link below:

The Missing Chapter

A guest of T&B’s provided this recent anonymous view on potential Republican presidential nominee, Mitt Romney, and his stance vis-a-vis Russia:

I think Romney is just a sellout Establishment RINO who thinks somehow the U.S. foreign policy was stronger or more credible in the wake of supporting a client state’s useless assault on a Russian exclave in August 2008. It wasn’t, and no Republican other than Ron Paul is going to admit that our ‘reset’ with Russia was mainly about the fact that we had no other credible options AND had become massively in debt to foreign countries, led by China, but were also going begging hat in hand to Russia to keep putting money into Fannie, Freddie, and U.S. steel mills from 2007 on.

See: http://www.theamericanconservative.com/larison/2011/10/07/showing-strength/

And of course, there’s also the incoherence of saying the Turks are increasingly going ‘Islamist’ and ‘anti-Israel’ under Erdogan but we want to invest hundreds of millions at least on putting highly sensitive missile defense radars and interceptors in their country. Seems those two notions are incompatible as well.

See: http://www.theamericanconservative.com/larison/2011/10/07/more-on-romneys-serious-speech/

“Does Romney have any comment on the missile defense sites that are being installed [by the Obama Administration] in Romania, Poland, and even Turkey? I realize that he likes his talking points from 2009, but he might want to look into what has happened since then. If Romney still believes New START puts the U.S. at a disadvantage, is he proposing that the U.S. withdraw from the treaty? Given that Romney’s understanding of the issues related to the treaty is shoddy at best, I’d be interested to see him answer that question. Does Romney know what the word annexation means? If he did, he wouldn’t apply it to what Russia is doing in South Ossetia and Abkhazia right now. They do have de facto control in these areas, and they have recognized the nominal independence of the separatists to keep them as Russian satellites, but there are no other examples of the empire-building that Romney thinks is going on. Perhaps Romney agrees with the slogan that ignorance is strength? “

T&B rides again!

We are living in exceedingly interesting times, and T&B has recently enjoyed a role as spectator to the ambient madness. That said, the plethora of truly clueless commentary in the media has spurred us once again to put fingers to the keyboard. Be it the culpable dishonesty of the British press or the apparent death-wish of the European political leadership – fiddling as Athens burns – the existence of intelligent life on earth desperately requires supporting evidence.

One of the most terrifying features of the current crisis has to be seeing Mrs. Merkel blithering about her steadfast refusal to “bow to the diktats of financial markets” – analogous to a farmer refusing to bow to the imperatives of the weather. It is perhaps brave, even noble, but equally, it is totally insane… the hurricane cares not who bows before it, who stands fast – it uproots trees and swamps buildings, it will not be denied.

We are finalizing the present note at the brilliant VTB Capital conference – where we got to ask a few questions of a man we continue to view as Russia’s saviour – Vladimir Putin, as well as attending a breakfast with Alexei Kudrin, someone we would still expect to see in the prime-ministerial office sometime in the coming two years. Rather than rewriting the present note, we will issue a special Russia report, hopefully early next week. For now, we would like to urge all of our readers to open up accounts with VTB Capital!

We return to watching our Bloomberg screens with rapt attention, and much fear and trembling. One tends to forget the extreme fragility of the hugely complex financial system which underlies our current prosperity and the decades of peace enjoyed by the developed countries. Watching the European policy makers, T&B gets the feeling of watching happy children, delightedly tossing about a live hand-grenade. This could end badly – mais le pire n’est jamais certain (the worst possible outcome is never certain) and all men live in hope!

Happy Hoping!

T&B

For the latest newsletter – in FULL (the above was just the entrée) – click on the link below:

T&B – Death Wish II

Why didn’t Ben Bernanke signal a third round of quantitative easing on Friday at the long-anticipated Jackson Hole summit? After all, at the same event last year, the US Federal Reserve chairman made it pretty explicit another funny money missile would be launched.

I have always believed that the “tandem” is not an optimal arrangement – for reasons that seem obvious to me. To be credible, a leader of a country must possess – and be seen to possess – the ultimate and unambiguous responsibility for key state functions. Even where competences are not always precisely defined (as is the case in Russia, where the constitution does provide for a powerful prime minister), there must be only one supreme leader, otherwise there will be no clarity over who is really in charge.

In Russia, this supreme official is the President, who, according to the constitution, determines the “basic objectives of the internal and foreign policy of the state”. The President also appoints the Prime Minister. While obviously there will always be turf ambiguities and some overlap, the supreme responsibility clearly lies with the President. This was certainly the case under Putin’s presidency.

Some commentators have argued that Greece should emulate Russia, saving itself by default, devaluation and restructuring — assuming that, like Russia, Greece would quickly rebound, benefiting from a suddenly competitive currency, debt relief and even the renewed ability to borrow in international financial markets. In fact, such advice is almost comically misguided, based upon a failure to appreciate the fundamental differences between the two countries.

Like Russia in 1998, Greece is currently faced with a debt crisis, an inflexible currency regime and a largely unreformed economy with a dysfunctional tax system. The similarities, however, end there. Russia had a population 15 times that of Greece, as well as a legacy of Soviet industrial infrastructure almost entirely autonomous from the West. Following the 1998 devaluation and default, the plunging ruble rendered Soviet-era industry suddenly competitive as imports were squeezed out, with Russia benefiting from a deep internal market and complete self-sufficiency in vital resources, in particular energy.

Following the 1998 crisis, as foreign products were priced out of the domestic market, import substitution fueled growth in industrial output. Then a surge in oil prices coupled with the economic orthodoxy of Vladimir Putin’s government resulted in the “twin surpluses” — both the budget and the current account swung into huge surplus as the state wrested a lion’s share of oil export revenues from the oligarchs.

Vitally, Russia never defaulted on its eurobonds. The 1998 default was limited to domestic ruble debt; the eurobonds were faithfully serviced — even during the depths of the crisis. As a result, there were few if any investor lawsuits attempting to seize Russian foreign assets. Contrast this with Argentina, which has been hamstrung by court actions conducted by the holdouts who have refused to accept the debt restructuring. Eight years after its own default, Argentina is still precluded from issuing foreign debt by the fear of seizure of the proceeds by New York courts.

Greece, of course, has no “local currency” debt to default on — it is all bonded debt, and any failure to pay would cause a cross-default of all Greek assets. Greece lacks any substantial consumer goods industry, natural resources or the ability to simply close the borders and function on the basis of domestic resources alone. Greece must continue to import energy and vital foodstuffs, and thus requires access to global markets. With a population of just 10 million, it is no more likely to suddenly show a surge in industrial production than it is to miraculously develop Russia’s massive hydrocarbon reserves or Argentina’s rich agricultural lands and massive soya exports.

While unarguably entertaining, the blame game is singularly useless. Greece was for all intents and purposes a Third World economy as late as the 1980s, but its accession first to the EU and then to the euro zone led to an explosive increase in apparent wealth without corresponding structural reforms. Adopting the euro in 2000 allowed Greece to embark on a wave of borrowing, essentially at German interest rates, funding explosive growth in imports of consumer goods and military hardware, again largely from Germany. During a recent visit, I found the Athens taxi fleet more modern than Frankfurt’s — comprised largely of late-model Mercedes. The Siemens scandal demonstrated payment of tens of millions of dollars in bribes to facilitate some of these sales (story).

Like Russia, Greece has a history of resisting the tax collector during a Muslim domination and like Argentina, a political system based upon clientelism, nepotism and ”Peronism” — the purchase of social peace via generous government employment. With Russia and Argentina, Greece shares a serious problem of corruption. Greece has little industry, limited agricultural land, and gross domestic product is based on tourism, shipping and services, none of which would see much benefit from a devaluation.

While the Russian default ultimately proved less devastating than predicted, the global financial system was far less closely interconnected at the time. Even so, it triggered the collapse of the hedge fund Long Term Capital Management. Only the rapid intervention of the New York Federal Reserve prevented the sort of crisis seen a decade later when Lehman Brothers went to the wall. While bailing out Lehman before the fact would have been expensive, the price would have been trivial by comparison with the ultimate costs of repairing the damage — costs that will continue to be paid for years to come.

A default by Greece would be more damaging to the global economy than was Lehman’s. The reason stems not so much to the magnitude of the Greek debt — a manageable 312 billion euros, or slightly less than the amount the United States has written off on the bailouts of mortgage giants Fannie Mae and Freddie Mac — but to that bane of modern finance: the contagion effect. Were Greece to default on Monday, by Wednesday Ireland and Portugal would have joined it and by Friday the barbarians would be storming the gates of Madrid. Those who imagine that the havoc would be confined to Europe would have a nasty surprise. Much as the European finance sector was devastated by the 2008 U.S. subprime crisis, the United States is now at the mercy of events in the Old World. According to Fitch Ratings, fully 50 percent of the assets of U.S. money market funds are held in the commercial paper of European banks, while the credit default swap exposure of U.S. banks is estimated at $1.5 trillion.

Germany and its northern neighbors face two alternatives: an expensive bailout, or a far more expensive split of Europe into two broken moieties. Although the German popular press is replete with invective about the Greeks partying thanks to German largesse, the truth is more nuanced. The major beneficiary of the euro was Germany itself, which in a model akin to the Chinese vendor-finance of debt-fueled U.S. consumption has benefited from a large European market for its industrial exports. If a deep and prolonged recession in Southern Europe would indeed be damaging for German industry, a disorderly exit from the euro would prove ruinous.

With the wisdom of hindsight, it is obvious that the inclusion of Greece in the euro was an expensive error motivated by misplaced ideology. Monetary union without fiscal and economic integration is destined to fail. Thus, Europe faces a stark choice: either an inexorable drift into financial crisis and a breakdown, or a gradual move toward greater federalism. Despite the obvious political difficulties, there can be no question but that the second option will prevail.

This is fortunate for the Greeks. In the aftermath of a default, Greece would be Russia without the oil and resources, or, perhaps more accurately, Argentina without the soya bean crop. The Greek banking system would be wiped out, the country would be unable to pay for vital imports, and given that Marxism has not been discredited in Greece as it has been in Europe or Russia, the political outcome would be unpredictable. From a global perspective, the primary difference is that while both Russia and Argentina could default with limited impact upon the global financial system, a Balkan country of some 10 million inhabitants now credibly threatens the world with a resumption of the 2008 meltdown. For the EU to simply pay down Greece’s debt would be cheaper than trying to repair the damage. And yes, once the firemen leave, the architects may wish to get to work restructuring a global financial system now best described as an accident going somewhere to happen.

This article first appeared in The Moscow Times:

http://www.themoscowtimes.com/opinion/article/why-greece-shouldnt-look-to-russia-for-advice/439612.html

How bad is the job market? Tom Weber chronicles the lowest hourly wage that Americans, and others around the world, will accept for an hour of work.

How much would I have to pay you to listen for an hour while I recite, in monotone, about a half-century-old Richard Nixon speech? Ten bucks? Twenty? At the least, the minimum wage provides a federally mandated floor; and in many prosperous regions, even the most menial task commands a good deal more.

But with unemployment overall sticking stubbornly around 9 percent—and even that figure grossly underestimating the number of Americans who want work but can’t get it—there are also workers willing to settle for less. Far less.

To find out this country’s real minimum wage—the market-proven low that U.S. workers will accept for an hour’s work—The Daily Beast designed an experiment. Over several weeks, we used Mechanical Turk, an online marketplace for freelance work operated by Amazon.com, to post simple, hour-long jobs to see how much or how little we’d need to pay workers.

Specifically, we offered to hire people who would listen to a one-hour recording of me reading snippets from old articles along with an excerpt from Nixon’s “Checkers” speech. The recording was sprinkled with repeated instances of unusual key words, such as “polyunsaturated” and “knuckleduster.” The proposition to our potential workers: Download the audio file, listen to the hour long recording and count the instances of a key word we specified, and get paid.

Each time a worker accomplished the task, we reposted the job at a lower wage, and repeated as necessary until we found the absolute bottom price that gave us takers. To make sure that one particularly desperate person didn’t skew the results, we would only consider a bottom wage that had three different workers who accepted and completed the task (we checked their results for accuracy to make sure they definitely completed the assignment). Finally, in this age of global outsourcing, we repeated this process in a dozen countries—Mechanical Turk lets you specify the nation you hire from, and confirms residence by requiring tax information—to see how the U.S. stacks up.

While every country’s workers came in well under the U.S. minimum wage, there were major fluctuations. The three most expensive countries ($5 an hour) were Italy, the Netherlands—and Egypt. The latter result surely had two factors: First, we were only hiring people technologically sophisticated enough to know about and use Mechanical Turk, and proficient enough in English to make sense of my sonorous podcast; second, while we targeted countries with a critical mass using Amazon’s system, the total numbers competing for work (Egypt was on the low end, and America appeared to have the most, by far) drove supply and demand.

That said, we were able to find tech-savvy Germans keen to work for $3 an hour. Workers in Pakistan and the Philippines who endured my voice for $2.50 and $2.25 an hour, respectively. And residents of industrialized giants like Australia ($2), the U.K. ($2), and Canada ($1.25) who would work for an hour and not even earn enough for a cup of coffee.

At a buck an hour each, India and Romania brought up the rear. And the cheapest of all labor markets? The United States of America, where we were able to hire three workers to do our job for a shockingly low figure: 25 cents an hour.

Perhaps these were 13-year-olds sneakily trying to supplement their allowance (Mechanical Turk, which serves as a middleman for the transaction, doesn’t clue you in on your new employee’s identity). Perhaps some people thought ticking off words from my greatest hits might actually be like getting paid for entertainment. But both of those factors could have been true for the other countries, all of which had enough Mechanical Turk devotees to matter. Bottom line: For those running digital sweatshops, American labor proved the cheapest around.

This article first appeared on The Daily Beast:

http://www.thedailybeast.com/articles/2011/06/22/americans-will-work-for-25-cents-an-hour.html

Regarding the editorial on Russia in the Wall Street Journal by Anne Jolis (“Khodorkovsky heads back to Siberia” June 15th), I could not help but notice the significance of the date. Exactly 13 years ago today, on June 15^th, 1998, the mayor of the Siberian oil city of Nefteyugansk sent a letter to Boris Yeltsin and nine of the top officials in the Russian government. The mayor, Vladimir Petukhov, used the letter to assail the “murderous policies” carried out by Khodorkovsky’s YUKOS group in his city, and demanded a tax and criminal investigation into that group and various related (and named) shell companies. In his closing, instead of using the typical “with respect”, he uses the less typical phrase “with hope!” Eleven days later, on Khodorkovsky’s 35^th birthday, Petukhov was shot to death on the street outside his office. Alexei Pichugin, the head of security for YUKOS, reporting to Mikhail Khodorkovsky, was found guilty in 2007 of organizing the murder.

I thought that since today is June 15^th, you might like to see the letter—it is translated into English below. Does the letter constitute legal “evidence” against Khodorkovsky? No. Is it possible that Petukhov had lots of enemies? Yes. Is the letter even real? I cannot be sure; all I can say is that a copy of the “original” in Russian was faxed to me in late June 1998 by . . . a reporter at the Moscow bureau of the Wall Street Journal. I would be happy to fax it back if you would like to see it. I’m sure that if you asked Petukhov’s widow she could confirm or deny its legitimacy. Certainly, no one at the time considered it to be the sharp end of a conspiracy against Khodorkovsky that would bear fruit 7 years later. In general, people took away a different message from the episode.

I mention Al Capone in the subject heading above, because at one point this was an explanation used by the Russian government in reference to the Khodorkovsky case. After howls of derision from the western press, they abandoned this line and adopted the more typical response of Russian bureaucracy:  silence. Not great PR, but I think their comparison has some merit. Why did Al Capone spend 10 years on Alcatraz? Because he cheated on his taxes? Did any other tax cheats (who offered to repay their back taxes, as Capone did) receive such a sentence in the 1930’s? Al Capone went to jail on tax charges because no one was willing to testify against him for murder. Any potential witnesses were either dead or afraid, and he was smart enough not to leave enough evidence sitting around to convict him. The Russian legal system is not perfect, and in many ways is more imperfect than that of the US. However, it seems to me that the approach of the Wall Street Journal (and New York Times) op-ed page has become myopic and hysterical on the topic of Mikhail Khodorkovsky.

Best regards,

Steven Allen

Moscow, Russia

—

To:

President of the Russian Federation (RF), Yeltsin, B.N.

Prime Minister RF, Kiriyenko S.V.

Chairman of Federation Council RF, Stroyev Ye.S.

Chairman of State Duma RF, Selyeznyev G.A.

General Prosecutor RF, Skuratov Yu.I.

Head of the Federal Tax Inspectorate (GNI) RF, Fedorov B.P.

Chariman of the Federal Security Service (FSB) RF, Kovalyev N.

Governor of Tyumen Region, Roketski Yu.Yu.

Governor of Khantii Mansiisk Autonomous Region, Filipenko A.V.

Chairman of Khantii Mansiisk Duma, Sobyanin S.S.

I, the head of the city of Nefteyugansk Petukhov V.A., protest against the cynical actions  and murderous policies carried out by the oligarchs from OAO ‘RospromYUKOS’ and bank ‘Menatep’ in the Nefteyugansk region.

In protest against the inaction of the government of the RF and the policies of suffocation of opposition to the team of Khodorkovsky M.B., which in my opinion leave no other path, I announce an indefinite hunger strike and make the following demands:

1.  To initiate a criminal case based on the fact of large-scale under-payment of taxes by Rosprom-YUKOS in the years 1996 – 1998;

2.  To remove from his post the head of the GNI [State Tax Inspectorate] in the city of Nefteyugansk Naumov L.E., and the head of the GNI of the Khantii-Mansiisk Autonomous Region Efimov A.V., and to unite the tax organs of the city of Nefteyugansk and the Nefteyugansk region;

3.  To activate an investigation of criminal activity surrounding the fact of the swindling of the sum of 450 billion roubles in old prices by the firms ‘Rondo-S’ and ANK ‘YUKOS’, and also the swindling by use of false promissory notes of the firm ‘Eltem’ in the sum of 100 billion roubles which were issued by Rosprom-YUKOS;

4.  To pay off the accumulated tax arrears, interest, and penalties of Rosprom-YUKOS in the amount of 1.2 trillion un-denominated roubles to the city of Nefteyugansk, using financial resources, crude oil, and oil products;

5.  To put an end to the interference by the oligarchs from Rosprom YUKOS Menatep in the activities of the organs of local self-governance;

6.  To conduct the process by which will be annulled the unlawful auction in the purchase of ANK ‘YUKOS’ by Rosprom-YUKOS, and the transfer of the government’s share holding in OAO ‘Yuganskneftegaz’ in exchange for debts to the city of Nefteyugansk, the city of Pyt’-Ykhu, the Nefteyugasnk region, and the Khantii-Mansiisk Autonomous Region;

7.  To restore the economic independence of OAO – production association ‘Yuganskneftegaz’.

With hope!

Head of the city of Nefteyugansk,

Kandidat Texnicheskii Nauk [PhD]

V.A. Petukhov                                   15.06.98

Oil prices pushed up last week, back towards $120 per barrel. Brent crude is now 25pc more expensive than at the start of the year.

The OPEC oil exporters’ cartel, meanwhile, has just failed to agree an official boost to output. And oil markets are getting tighter, as global petroleum demand reaches levels that quite simply have never been seen before.

Prices pressures rose last week after the OPEC summit in Vienna ended with the twelve-member group in discord. Saudi Arabia had led an effort to raise production quotas. But Iran, Venezuela, Iraq and three others refused. Ali Naimi, the veteran Saudi Oil Minister, long-accustomed to getting his own way, called it “one of the worst meetings we have ever had”.

Speculation ahead of the summit suggested the cartel would raise its output quotas from the current 26.2m barrels daily, perhaps by another one of two million. In the event, a renegade group blocked the increase, a position the cartel now says it won’t review for another three months.

What was significant about Vienna wasn’t so much the differences in opinion. The likes of Venezuela and Iran have protested against production hikes many time before. The new development was that the “hawks” were so strong a camp, so galvanized, that Saudi Arabia, the cartel’s largest producer and most dominant decision-maker, couldn’t enforce its point of view.

Before examining the supply-side implications of events in Vienna, it is worth taking stock of the extent of global oil demand. For this is a subject, amidst all the intrigue, drama, conflict and high-politics that surrounds oil extraction, that generates surprisingly little attention. The reality is, though, that worldwide oil consumption is escalating far faster than is commonly understood. The numbers are actually rather shocking.

Global demand in 2011 will go above 90m barrels per day for the first time in history, according to the International Energy Agency, the Western world’s oil think-tank. That would top the previous record-high of 87.4m, set in 2010. Having fallen slightly in 2008 and 2009, crude demand surged last year and in 2011 is surging again.

This is happening even though the Western world is in the economic doldrums. For while oil demand in the OECD “industrialized nations” rose only 0.9pc last year, across the non-OECD nations it rocketed 5.5pc. The emerging markets, including the fast-industrializing giants of the East, are clearly now making the economic weather. And this has major implications on global energy markets.

China and India between them are home to a third of the world’s population. Even in 2009, when the world economy was on its knees, these emerging Asian giants grew 8.7pc and 6.6pc respectively. Last year, almost in defiance of still sluggish Western export demand, China and India expanded by almost 10pc.

As they grow, these countries are investing massively in infrastructure development – roads, buildings, machinery. This is highly energy-intensive. In conjunction with this, their vast and fast-growing populations are becoming wealthier, acquiring cars and consumer goods for the first time, while switching to protein-rich diets.

In 2010, Chinese oil use grew by an astonishing 15pc year-on-year, with the People’s Republic now burning more than 10m barrels daily. And China’s per capita oil usage still remains only at a fraction of Western levels. As incomes grow, in the decades to come, Asian crude use will not only keep rising, but could well accelerate.

New estimates by BP suggest that by 2030 the world will be consuming 40pc more energy than it does today. That’s like adding two more current-day Chinas to global energy consumption. This will happen partly due to on-going industrialization in the East, but also population growth. Almost all the rise in energy use over the coming two decades – no less than 93%, says BP – will come from emerging economies such as China, India, Indonesia, but also the nations of South America and the Middle East. So, even if America and Western Europe manage to conserve energy, and Western demand is flat, global energy demand is still on an upward mega-trend.

In 1970, the OECD countries accounted for around 70p of world energy use. Today the split between “the West and the rest” is more like 50:50. By 2030, BP expects that non-OECD countries will account for two-thirds of total energy consumption. I don’t think that’s right. The more likely date, in my view, is 2020.

We can talk about renewable energy. The emerging markets, particularly the Chinese, also won’t hesitate to burn more of their still-abundant coal. But the world economy, and particularly the West, must brace itself anyway, for previously unheard of levels of global oil consumption, driven up by the emerging markets.

Against this strong demand backdrop, turmoil in the Middle East has sparked immediate supply-side fears. OPEC has lost nearly all output from Libya, which was pumping 1.6m barrels back in January, before its descent into civil war. Given that, there was a widespread expectation in Western capitals, which now looks like wishful thinking, that Saudi would go to Vienna and, as usual, order the rest of OPEC to push up production quotas.

Yet that is to under-estimate the severity of Saudi Arabia’s acute dilemma. Many leading oil producers have been forced to spend more on social programs to placate their restless populations. Saudi’s current “break-even” oil price, at which its domestic budget balances, is now $85/barrel, according to the Washington-based Institute of International Finance, up from $68/barrel in 2010.

As recently as 2003, Saudi break-even was only $30/barrel. The IFF estimates break-even prices for Bahrain, Oman, UAE, Qatar and Kuwait, while having risen less than in Saudi, have also more than doubled over the same period. Demographic pressures mean the Saudi figure will spiral to $110 by 2015, says the IIF.

The mighty Saudi Arabia is also subject to production constraints. Riyadh’s Al-Hayat newspaper just reported that production will rise to 10m barrels daily next month, up from 9m today – despite OPEC’s Vienna tantrum. Yet Saudi also recently announced a 30pc increase in its new rig order book for 2011/2012 simply “to maintain production”.

This is part of a broader pattern among oil producers, namely an increasing reliance on smaller wells. New oil fields brought on stream over the last 3 years have averaged only around 20m barrels of reserves. Back in the 1960s and 1970s, the era of the “giant finds”, the average newly-commissioned well boasted over 520m barrels.

Industry estimates point to a global production decline rate of almost 7pc per annum among existing fields – suggesting reliance on smaller wells will intensify. Such wells, of course, require more rigs, labour, infrastructure and other inputs per barrel of oil produced. In other words, in the face of rising medium-term demand, crude is becoming more difficult and costly to extract.

The Western world used to benefit of a vital economic safety value. When our economies slowed, that would have a decisive impact on global energy demand, causing oil prices to fall back. OPEC’s raison d’etre, back in those days, when they controlled around 40pc of global production, was to stop that happening by attempting to limit supplies.

Today OPEC’s market share is much lower. Oil demand is soaring and will continue to do so whatever the Western world does. The main economic influence on global oil prices is no longer “OPEC-induced supply constraint” but “rampant demand”. OPEC can still drive a headline, and matters at the margins. But when it comes to the long-term trends, the Vienna summit meant nothing.

Liam Halligan is chief economist at Prosperity Capital Management

This article first appeared in The Sunday Telegraph:

http://www.telegraph.co.uk/finance/comment/liamhalligan/8570394/Opecs-Vienna-summit-meant-nothing-for-long-term-oil-price-trends.html

In our last paper, we suggested a few fairly opportunistic trades, including a long gold/short silver idea which worked out nicely indeed – alas, between the start of the drafting, and the time we finally managed to release the report, the price of silver tanked by about 35% meaning that it was a little late to position – and the expression “about as useful as the teats on a bull” comes to mind!

We hurry to issue because – in addition to our usual positioning – there are now some potentially lucrative opportunities in the crisis economies of the West: About a month ago, having followed it for almost a year awaiting a good entry level, we turned bullish on Greek debt, and we are here reiterating that view, assuming that the Northern Europeans simply cannot afford to allow a true debt crisis in the Eurozone.

The potential weak point in our logic is the dysfunctional Greek political system; one simply cannot rescue a drowning man who is intent upon drowning. Our working assumption is that cooler heads will prevail.

As of this writing, T&B finds ourselves in one of the bicycle-republics of Northern Europe – Stockholm to be exact. Like Singapore, Sweden is one of those irritatingly happy countries. Wealthy, secure, predictable – compared with the last time we drifted through seven years ago, Stockholm appears to have enjoyed something of a renaissance – the upmarket restaurants and hotels are booked solid, the shops have been upgraded, the currency is continuing to appreciate, unemployment is low, and there are none of the visible signs of the sort of social marginalization (people sleeping in doorways, an atmosphere of insecurity) that we encounter further south.

What is most extraordinary is that, according to the currently dominant economic ideology – the Neoliberal Dogma – the Swedish success story should never have happened. Taxes are outrageous, regulation is all-pervasive, equality is the watchword, with conspicuous consumption frowned upon. Security is truly cradle-to-grave, and bankers iron their own shirts. The incentives are all wrong – free market mechanisms are gamed, enterprise should be strangled by taxation… but, against all expectations, there can be no arguing with the fact that objectively it does in fact work. Indeed, Denmark which has considerably lower taxes and less regulation is currently mired in recession – while Sweden is growing strongly.

The key is obviously one of sociology. An economic system which would be catastrophic in the more anarchic and individualistic Southern European countries works impressively well in the context of a Lutheran social-ethic, great social homogeneity and the high degree of socialization with a widespread sense of ownership deeply rooted in Swedish society. A seventy-year history of socialism and democracy has ironed out all the wrinkles – people willingly pay taxes, seek to live precisely as well as their neighbours, and show a good-humoured tolerance for regulations and tax burdens which would be considered unacceptably onerous anywhere else. Tax evasion is NOT a national sport. Swedish workers are highly productive and responsible because of their sense of being stakeholders. Would that Russia could be just a trifle more like Sweden – not, please dear God, politically correct, de-sexed, or boringly egalitarian, but just a bit more civic-minded, law-abiding, and cooperative…

It may happen, but not this week – and we miss the Russian surrealism already. There is one strategist we know keenly looking forward to the Aeroflot flight back to the ambient madness which is Moscow!

Happy Trading

T&B

For the latest newsletter – in FULL (the above was just the entrée) – click on the link below:

T&B – Greek Crockery

T&B’s Eric Kraus debates it out on RT – on the topic of Dutch Disease and other aspects of Russia and Russian energy!

Christine Lagarde is in poll position. Having put her name forward last week, the silver-haired French finance minister may well become the new managing director of the International Monetary Fund (IMF).

Lagarde has, with a depressing inevitability, secured the backing of most European countries. The UK was among the first to endorse her. There are rumours the mighty US could soon throw its weight behind Lagarde – making her bid a fait accompli.

Europe seems determined to retain its prerogative of appointing the boss of the world’s most important financial watchdog.

Throughout the IMF’s 65-year history, all 11 bosses have been from Western Europe. In return for allowing this stitch-up, America has traditionally provided the IMF deputy, while securing the top spot at the World Bank.

Amid such blatant favouritism, there have been promises to make such selection processes more “transparent” and “merit-based”. But Europe is saying “not yet”. IMF voting weights remain so skewed that the US and European Union together – with only 10pc of the global population – can still out-gun the rest of the world combined.

The question of who runs the IMF usually interests financial and economic nerds. Yet huge speculation surrounds the identity of the next Fund boss. One reason is the salacious nature of the previous managing director’s fall. Dominique Strauss-Kahn, while protesting his innocence, remains embroiled in a lurid New York sex scandal. No wonder the current contest has leapt from the business press on to the world’s front pages.

There are bigger reasons, though, why the name of the next IMF chief matters. For one thing, this crucial institution needs to reflect the extent to which the world has changed since it was launched from the ashes of the Second World War.

In addition, global markets could now be teetering on the brink of another “Lehman moment”, similar to that which struck in the autumn of 2008. If ever there was a time for the right person to be in charge of monitoring the global economy, that time is now.

I have previously argued it would be “a historic mistake” if the new IMF boss was a European. I robustly maintain that view. After all, the emerging markets now account for four-fifths of the world’s population and almost half of global GDP. Since 2008, they have also commanded a higher share of world trade than the West.

After years of economic out-performance, these countries now have around three-quarters of the world’s currency reserves and, in stark contrast to debt-mired Western countries, generally boast healthy sovereign balance sheets.

The IMF specializes in fiscal bail-outs. Putting fairness and morality aside, it should be heavily influenced, and regularly run, by well-qualified nationals of the countries with the most fiscal strength. However much we deny it, and whatever the extent to which our ratings agencies are cowed by politicians, that seriously undermines the case for a Western candidate.

When the IMF began, the West perhaps had much to teach the rest of the world about running a capitalist society – and the fiscal muscle and moral authority to impose our will. Those days have gone. Several of the big Western nations are now bankrupt in all but name, their sovereign debt markets reliant on printed money. Commercially, we are losing ground and our moral authority is depleted. We are showing the world how NOT to run a capitalist society. Yet our leaders sail on, oblivious to such realities, claiming the top jobs almost as their birthright.

This week I want to stress that the next IMF boss, while not hailing from the West, also shouldn’t be a politician. Many argue that the case for a politician, especially a European politician like Lagarde, is currently very strong. For the first time ever, much of the IMF’s lending is in Europe – given the continent’s disgraceful sovereign debt crisis. So, we are told, the new Fund boss must understand and pay due deference to the nuances of European politics, in order to defuse the EU’s fiscal time-bomb – a bomb that could easily explode, sending shockwaves across the world.

Such reasoning is the basis of claims that Strauss-Kahn, impeccably connected across Europe and a political animal manqué, was a “superb” IMF boss. Yet such reasoning is absurd. The IMF works properly not when it is loved by the countries it is lending to, but when it is banging political heads together to get myopic, economically illiterate politicians to face up to fiscal realities. Unless the IMF is seen as tough – even unreasonably tough – then it isn’t doing its job.

An IMF that colludes with the political classes isn’t enacting reform. It is simply helping the politicians bury their mistakes and kick any problems into the long grass where they will fester. The IMF should be respected – even feared. It is for the politicians to stand up and face the political music – explaining to their electorates why harsh actions are needed and why nations can’t go on living beyond their means.

Perhaps the most dangerous type of politician to run the Fund is a politician still hankering after high office. Strauss-Kahn, of course, was using the post and the influence it bestowed over trillions of dollars of bail-out cash, as a platform for a French presidential bid. As such, he turned the IMF into a soft-credit society for the eurozone’s periphery nations, holding the single-currency together for the benefit of his Franco-German friends.

Strauss-Kahn’s continued insistence on “just one more bail-out”, rather than forcing Greece, Portugal and the rest to face up to genuine debt-restructuring, also made sure that the losses stayed with plebian taxpayers, rather than being shifted on to Europe’s banks. He could have called in the favour, no doubt, when the need came to finance his campaign for the ultimate prize.

It was not to be for Strauss-Kahn, of course. But what is to stop Lagarde following the same route? She now has that most precious of political factors in her favour – momentum, or “the big mo”. And with only one other candidate in the ring for the IMF job – Mexican Central Banker Agustin Carstens – no wonder she is still odds-on favourite.

Lagarde’s spin doctors are now working overtime. The Indian press is reporting her IMF campaign tour starts on Monday in Delhi – “given her long association with India”. The Brazilian press, meanwhile, is gushing that her first stop will actually be Rio. A future IMF boss shouldn’t be indulging in such “image making” and giving “my life as a mother” interviews. All this reveals how much see craves public acclaim – the kiss of death for someone in line to run a hard-headed institution.

If she lands the IMF job, which seems likely, Lagarde will be well placed, if she can avoid her own judicial pitfalls, to run for the Élysée in 2017. This will be on her mind every single day she spends at the helm of the Fund – which is precisely why she’s unsuitable. Running the IMF, now more than ever, requires economic expertise, massive intellectual authority and a willingness to be deeply unpopular – particularly, if you are a European, on your home turf.

The emerging economies need to stop moaning, put their differences aside, and set their combined authority behind a world-class economic policy-maker to run the IMF. Such nations should be doing everything in their power to wrestle control of this pivotal institution from a Western political elite that is not only intellectually inadequate, but which seems determined to compound the world’s economic problems. The deadline for nominations is June 10.

Liam Halligan is chief economist at Prosperity Capital Management

This article first appeared in The Sunday Telegraph:

http://www.telegraph.co.uk/finance/comment/liamhalligan/8543964/Why-Christine-Lagarde-should-never-be-head-of-the-IMF.html

It is getting harder, politically. Finland and Germany have approved the bail-out of Portugal. But it is not clear whether both will vote in favour of the second Greek loan package, due this autumn. I still think they might, but it is not hard to imagine some political accident, in Berlin, in Athens, in Helsinki, in all three or somewhere else.

Pressure for a Greek default inside the eurozone is growing in Germany. Most policymakers and economists agree that Greek debt is not sustainable. Some commentators in British and US newspapers have even been advocating a Greek exit from the eurozone. The European Central Bank rejects both these suggestions. It even rejects a voluntary restructuring of debt. We are at a political impasse in the resolution of the Greek crisis. There is a little time left to take decisions, but the European Union is running out of options. So where next?

The original €110bn loan envisaged Greece returning to the capital markets in 2012. This is, of course, unrealistic. The next goal is to tide Greece over until 2013, when the new European stability mechanism (ESM) will kick in. That would require approximately another €50bn, but this supposes that the Greek economy turns the corner in 2012, and that the Greek government, in a triumph of hope over experience, can implement a much larger privatisation programme than it currently proposes. The new Greek loan programme will be much less than €50bn; my understanding is that it will be a little over €30bn, shared as usual between the EU and the International Monetary Fund.

The gap is to be financed by proceeds from privatisations. Another option would be collateralised loans issued by Greece. The idea is that the Greek government could issue bonds backed by state-owned assets, including assets earmarked for privatisation at a later date. There is a fundamental problem with collateralised lending, in that it would automatically subordinate existing creditors. But this is a debate of degree, not principle. The IMF tranche in the Greek credit programme is already super-senior. And the market prices for Greek debt securities already have much worse scenarios priced in.

From the perspective of a member of a national parliament, the real-world choice will not be whether they wish to bail out Greece or not. Of course, they do not. The choice will be between a costly bail-out and a costly default. Letting Greece default, whether inside or outside the eurozone, would require a fiscally crippling re-capitalisation of the European Central Bank, or a monetisation of Greek debt, and possibly more support for the financial system. A default may be inevitable at some point, but I doubt that it can, or should, happen before 2013 at the earliest.

Eurosceptic but risk-averse German or Finnish members of parliament might reluctantly vote in favour of a moderately sized rescue package, but a few things will still have to fall into place for that to happen. For example, there must be a plausible growth strategy for Greece. I doubt that MPs will vote for a loan package that relies on austerity alone. This has already failed. Any new package would have to focus on reforms in addition to continued austerity. For these reforms to work, they will have to be supported by the EU. And they will have to challenge powerful vested interests in the recipient countries. I would not rule out a token participation by the private sector, but there could be nothing resembling a debt restructuring.

Two big policy errors have aggravated the situation, both at the behest of Angela Merkel. The first was the German chancellor’s promise that there would be no default on existing bonds until 2013, the second was the decision to rule out secondary market purchases by the ESM and, by extension, the current rescue umbrella as well. The combination of those two pledges logically implies that the EU has only a single policy tool at its disposal until 2013: continued bail-out linked to continued austerity.

It is not hard to foresee political resistance to such a strategy. My hunch is that Europe’s policy elites will prevail, for a while at least, but the strategy is extremely risky, and dangerous, and prone to a large political accident.

The costs of crisis resolution could have been much lower if the German chancellor had sought better advice on the financial realities of the eurozone crisis. To satisfy the rule-based dogmatists in her party, Ms Merkel made promises she cannot conceivably deliver, a deceit that has already caught up with her. The dogmatists are now saying that Greece did not fulfil the conditions and that a new loan is thus unacceptable.

The one piece of good news from the eurozone is the exceptional growth performance of France and especially Germany during the first quarter of this year. But in terms of crisis resolution, this cuts two ways. It might increase the capacity and willingness of Germany and other northern European countries to help the periphery. But it might also lead to a much faster rise in interest rates, which would be a problem for Spain in particular.

I would still bet that the eurozone will muddle through this – defaulting eventually into a fiscal union with a common eurozone bond. It is either that, or a very messy break-up.

This article first appeared in the Financial Times:

http://www.ft.com/cms/s/0/764c59aa-7f1e-11e0-b239-00144feabdc0.html#axzz1MXJqy8au

One of the great Statesmen of the 20th Century, Lee Kwan Yew interviewed by (the rather pedestrian) Charlie Rose:

http://www.charlierose.com/view/interview/11573

They cannot even organise a private meeting. How, then, can they solve a debt crisis? The bungling of a not-so-secret gathering of finance ministers in Luxembourg on Friday night provides an object lesson in how the politics of eurozone crisis resolution is going wrong.

We learnt this from a leak to Spiegel Online. The German news site’s story said Greece was considering leaving the eurozone, and that finance ministers were holding a secret meeting to discuss the issue. The story also offered the intriguing detail that Wolfgang Schäuble, the German finance minister, had a report in his briefcase warning him of the prohibitive costs of a Greek exit.

Earlier that Friday evening, the spokesman for Jean-Claude Juncker, the prime minister of Luxembourg who also has responsibility for finance, flatly denied that the meeting was taking place at all. That statement was obviously untrue. The meeting ended on Friday night with the announcement that there was no discussion on a Greek exit or a Greek restructuring. I very much doubt that this statement – or indeed any official statement on the eurozone crisis – was true either.

It is my understanding that this meeting, and numerous others preceding it, discussed the whole gamut of options, including, of course, a restructuring of Greek debt. But the fact that options are being discussed does not mean they are being pursued. I am fairly sure that Greece is not preparing to leave the eurozone, and that the European Union rejects an involuntary debt restructuring – for now that is.

The reason for the frantic diplomatic activity is that the eurozone is running out of easy options for dealing with Greek debt. There are valid objections to every proposal. An exit is too risky. A haircut – a loss for creditors on the outstanding principal – would kill the country’s banking system and land the European Central Bank with losses approaching €100bn. A voluntary restructuring would not do enough to reduce the net present value of Athens’ debt to a sustainable level.

I understand collateralised lending – swapping old Greek bonds into new collateralised debt at a discount – has also been discussed. This would subordinate every Greek bondholder, including of course the ECB. The option to swap bonds of the European financial stability facility, the rescue umbrella, into peripheral bonds has been explicitly rejected by Berlin. This would probably have been the cheapest option but Germany wanted to nip in the bud anything that smells of a eurozone bond.

The core issue in the eurozone crisis is not the overall size of the peripheral countries’ sovereign debt. This is tiny relative to the monetary union’s gross domestic product. The area’s total debt-to-GDP ratio is lower than that of the UK, US or Japan. From a macroeconomic point of view, this is a storm in a teacup.

The problem is that the eurozone is politically incapable of handling a crisis that is now contagious and has the potential to cause huge collateral damage. The “grand bargain” – a series of institutional agreements on eurozone sovereign debt by the European Council in March – did not address the resolution of the current crisis. That process is starting only now. Those responsible have realised that, no matter which debt management option they choose, it will cost taxpayers hundreds of billions. It is highly unlikely states will accept fiscal transfers of such a size without imposing extreme conditions on one another.

The political reason this crisis goes from bad to worse is an unresolved collective action problem. Both sides are at fault. The tight-fisted, economically illiterate northern parliamentarian is as much to blame as the southern prime minister who cares only about his own backyard. The Greek government played it relatively straight but Portugal’s crisis management has been, and remains, appalling.

José Sócrates, prime minister, has chosen to delay applying for a financial rescue package until the last minute. His announcement last week was a tragi-comic highlight of the crisis. With the country on the brink of financial extinction, he gloated on national television that he had secured a better deal than Ireland and Greece. In addition, he claimed the agreement would not cause much pain. When the details emerged a few days later, we could see that none of this was true. The package contains savage spending cuts, freezes in public sector wages and pensions, tax rises and a forecast of two years’ deep recession.

You cannot run a monetary union with the likes of Mr Sócrates, or with finance ministers who spread rumours about a break-up. Europe’s political elites are afraid to tell a truth that economic historians have known forever: that a monetary union without a political union is simply not viable. This is not a debt crisis. This is a political crisis. The eurozone will soon face the choice between an unimaginable step forward to political union or an equally unimaginable step back. We know Mr Schäuble has contemplated, and rejected, the latter. We also know that he prefers the former. It is time to say so.

This article first appeared in the Financial Times:

http://www.ft.com/cms/s/0/3eb6bbc8-796c-11e0-86bd-00144feabdc0.html?ftcamp=rss#axzz1LsxTbJwm

Whenever one of our peers declares that he is “at a loss for words” you can be certain that a veritable torrent of verbiage is set to pour forth. We – on the other hand – have more words than we can possibly find a home for. Speechless readers are welcome to borrow some of ours…

What we have not lost is the capacity for awe… We are awed at the idiocy of the respectable consensus, at their inability to spot fundamental shifts in the world around us, at their reliance upon ideologies which have repeatedly been shown to be bankrupt, at their expectation that tomorrow is going to be just like today, only better. Quite fortunately, the occasional bouts of hysteria to which our peers are prone allow those with a modicum of common sense – and the willingness at least to consider the possibility that the emperor is quite naked – to do very well trading against the consensus; think risk assets in October 2008… think Russia throughout most of the decade…

Thus, the present issue is intended as a statement of the obvious – an “obvious” which apparently continues to elude a large proportion of the chattering classes. We shall risk ruffling a few feathers to outline our views regarding the fundamental drivers that lurk in the background, somewhere behind our Bloomberg screens.

As always, we briefly outline our trading views – still constructive on the risk assets, but with the proviso that we are getting very late in the day for the global reflation trade, and that payback time is coming – the question of just how soon it will be remains a matter of conjecture.

Finally, we plant a couple of banderillas in the necks of a couple of the sacred cows still grazing amidst the truly dire Russia coverage by the Economist and the FT. Animal rights activists or believers in the Washington consensus as it applies to Russia may wish to skip this section altogether.

As we go to press, the market is correcting quite fiercely… typical!

T&B has butterflies – we could either go back and re-write the entire issue, a dreadful prospect given how long it takes us to write anything at all, or we can grit our teeth and assume that this is yet another head-fake and that markets will snap back. We shall go with the latter, and would expect to see some good buying opportunities after another day or two.

If we are correct (and our degree of conviction is necessarily only moderate), then besides providing some nice entry levels, the relative dislocation of asset prices we are now seeing will be a useful indicator of what to expect the day that the bear does finally lumber out of his cave and start slashing people. We are all living on borrowed time.

T&B

For the latest newsletter – in FULL (the above was just the entrée) – click on the link below:

T&B – The Idiots Issue