Friday, December 19, 2014

Putin jumps the shark

Amid the occasionally rambling and bizarre comments from Vladimir Putin's annual press conference yesterday, a couple of critical points are rather obvious. 

Firstly, Putin accepts no responsibility for the crisis that has hit Russia, continuing to believe his own paranoid fantasy of Western economic destabilization.  

Secondly, he intends to double down and continue his aggressive and disastrous policies.

However, despite the current dead cat bounce in the Rouble, there are two things that could rapidly make the economic situation for Russia irretrievable. The first is in the small print of the Rosneft placement that triggered the deep crash in the currency. Essentially the Bank of Russia underwrote the placement of RUR 625 billion at 150 b.p. below Russian sovereign risk price- and since Rosneft had $7 billion to pay on 21st December, the whole placement went into the forex market. The implication is clear: The Russian central bank, in addition to being the lender of last resort to the banks- which are already under strain as a result of sanctions- is now being asked to take the burden of Rosneft debt too. 

The combined outstanding debt is over $300 billion- which commits substantially all of the Russian reserves to rescuing Putin's cronies- especially Sechin at Rosneft. That the Rouble crash has come despite the gigantic reserves nominally available to the Central Bank shows that the market totally understands the implications of the placement- the Rouble is not backed by anything like the reserves on paper. I think that never in human history has the reserves of such a large state been captured to support such a small group of individuals- it is Kleptocracy on an undreamed of scale.

The second problem is the banking sector. 

The spike in inter-bank rates shows that the Russian banks already scent the blood in the water- one or more of them is facing terminal levels of losses as a result of the market turmoil, breakdown of the oil price, liquidity strike, sanctions or all of the above. The Central Bank will be urgently trying to find the problem, but a systemic breakdown is now more than possible: the CBR is facing too many leaks in the dam and not enough fingers to plug them all. The liquidity crunch is exacerbated by the fact that it is the end of the quarterly tax period- and the reduced liquidity of this short run credit crunch could quickly lead to a credit shut down. The Russian banking system is now in a more dangerous state that it was in 2008-9.

So the Russian financial system is coming under severe pressure- the external Rouble crisis is rapidly turning into a domestic banking crisis- and the central bank, by being forced to bail out Rosneft does not have the firepower to stabilize the crisis. As the MICEX falls, and interbank rates rocket, the intervention to support the Rouble will peter out and the currency can only weaken again. The current mild winter may yet leave the demand for oil and gas at 2013/4 levels over the coming winter, meaning that from the demand side, the situation remains lacklustre- so there is no reason for any sustained increase in energy prices, given current supply. Therefore no help from the Rouble seems likely from that quarter, and if forecasts of $40/bbl for oil by the spring are born out, then the recession in Russia will be in double figures, not the c.5% fall currently forecast. 

So Mr. Putin's blithe assurance that Russia will recover in two years is -as usual with his statements- not supported by the facts. In fact for Russia, the economic crisis is set to take a step downwards within a pretty short order of time.

For as long as Russia has a President that listens more to the voices in his head than to his economic advisers, the economic position will continue to get drastically worse. The Russians are already voting with their feet or their pocket books and where they can they are getting themselves out of Russia and their money out of Roubles.

Meanwhile, almost unnoticed, the United States has authorized military assistance to Ukraine. Should the Ukrainians use this to begin to push back the Russian troops in Eastern Ukraine, then Putin will face a perfect storm of military defeat and economic collapse.

In the press conference he suggested that the bear would not "sit quiet", but "chase wild piglets", but what he may now discover is that some of these piglets are in fact wild boar, with some very sharp tusks. Now even Belarus is taking steps to protect itself from the Russian crisis. Should the Belarusian election go peacefully and political prisoners be released, then Lukashenka will have played a very subtle game indeed- and will be far less dependent on Moscow.  

In the summer, the cliche was that Putin was playing chess and the West was not responding. Now it looks like Putin is being forced to play in the Hunger Games- with an increasingly high risk of defeat. 

His performance yesterday gives no sign that he will back down, and his repeated references to nuclear weapons show how dangerous the situation is- and how detached from reality the Russian tyrant has become. Nevertheless, Putin himself remains responsible for the crisis and unless he deescalates, the game will continue to its logical and potentially grim conclusion.

Tuesday, December 16, 2014

The Dark Night of Russian markets

Yesterday the dam finally broke in the Russian markets: the Rouble had a heart attack and fell over 10%. The continued erosion of the price of oil down to $61 is placing Russian government finances in considerable jeopardy at a time when even a relatively small deficit is unlikely to be financed by Western lenders, and the increasing refinance risk on the existing debts of Rossneft and the banking sector is creating still further demands on the Russian public purse.

At 1 am the Russian central bank raised rates by 6.5% to 17%.

Moscow has made a choice to attempt to defend the Rouble from collapse, but the price of that choice will be a deep recession as the economy digests the rate rise shock.

In fact this could prove to be a catastrophic decision.

Russia urgently needs investment capital in order to modernize and diversify its economy: this has been true for some time. It is also recognized by the authorities as a strategic goal. Indeed the decision to impose sanctions on foreign food imports was explicitly in order to promote import substitution. Unfortunately, even in basic agriculture the historic lack of investment has created significant capacity problems, and so the result of these sanctions has been a sharp rise in inflation. At every level, even agriculture, the Russian economy lacks capacity to fill the demand of their own internal market, still less to export.

The economic illiterate in the Kremlin believes that by squeezing demand he can strengthen the domestic economy. In fact this attempt at North Korean autarky is more likely to cause a final economic breakdown. Failing to use the competitive advantage offered by imports will make the already inefficient Russian economy even more unable to deploy investments in a timely and efficient manner. Inflation will take off and with it the final death of the hard earned credibility of the Rouble. The return to dollarization is the only logical response - and the authorities are trying hard to stop this. Yet without the effective safety valve of "equivalent units" it is quite likely that the Rouble will go into hyperinflation- again.

The meltdown in the Rouble on Monday was matched by similar falls in the Russian markets. Tim Ash called it "Red Monday", but despite the drastic falls in asset prices, there remain few buyers. The buyers strike continues and from the market perspective only the end of Russian aggression and a complete U-turn in the Kremlin is likely to change things.

The bond market may yet claim another political victim.

However in this emerging economic death spiral, the Putinist lie machine is still searching for a way out that can allow Russia to make a judo throw. We are entering even more dangerous ground.

The next few days will see of economic stability can be recovered. However as yet another civilian jet had a near miss with a Russian military plane with its transponder switched off over the Baltic sea, and as green men are rumoured to be gathering in Belarus, there is as yet no sign that Russia is changing its course of confrontation with the West.

Putin seems determined to consign Russia to an economic and political Gotterdammerung. 

Wednesday, December 10, 2014

The unfit leadership of Edward S. Miliband

To say that Ed Miliband does not have a particularly compelling personality is a statement of the obvious. His non-political hinterland is small and mostly pedestrian. The only remotely interesting thing about him is the brutal ambition that led him to betray his brother David- until then widely seen as the more gifted of the two- and drive him out of politics.

Nevertheless his clumsy geekiness could be sold as some kind of a positive- you may not have picked him for your playground football team, but maybe, at least, he has some kind of intelligence.

Not any more.

His latest declarations on the so-called "war on drugs" are not merely pathetically banal, they are almost entirely- indeed dangerously- wrong. They fact that he has only "read about cannabis" marks him out from the large majority of his generation who certainly have inhaled: so indeed the playground geek does actually live up to his stereotype. Despite this lack of knowledge, however, this has not prevented the Labour leader from suggesting that the failed war on drugs should nonetheless be continued, because to abandon it "sends the wrong signals to young people"

As police forces across the country facepalm themselves in contemptuous amazement, it is worth taking a step back and thinking about, you know, actual evidence rather than "wrong signals".

In report after report, from pressure groups, concerned worthies and the law enforcement officers themselves, it is crystal clear that the criminalisation and prohibition of many narcotics has not only become totally counter-productive, it has created even greater social ills than the simple use of the drugs themselves would have caused. The costs rank in in the billions of dollars and have caused untold human misery.

For Ed Miliband to dismiss the urgent need for wholesale reform of legislation as it concerns illegal drugs "because it sends the wrong signals" is the ultimate in contemptible gesture politics: to fail to do the right thing, because it might look bad.

Ed: not only are you a shit, you are an incompetent and unworthy shit too. 

For this alone you are not fit for public office.        

Friday, December 05, 2014

Tony Blair... Moral vacuum

Yeah I know, I know, British right wing newspaper tries to stitch up Tony Blair saying he would be happy to work for Vladimir Putin. 

He did not say that, but he hardly said that he would draw the line either.

The idea that Blair had actually done a real job before entering politics is a bit of a rib-tickler too. Being a Barristers Clerk is not exactly the kind of executive experience you really need when your next job is being an MP, then... Prime Minister.

Blair is emerging as one of the most astonishingly un-self aware figures in British political history, the Mr. Pooter of politics.

Tragic, what a missed opportunity. We are still counting the cost today.

Thursday, December 04, 2014

By the River of Death

"What is the name of this place,
I asked him.
Valerik, he answered me.
And translated into your language,
That would be... River of Death."

Lermontov

In a short while Vladimir Putin will make his state of the nation speech in the St. George's Hall of the Kremlin.

Perhaps in the chandeliered magnificence of this room, the Russian President may feel safe. He may make a rousing and grandiloquent speech making the case for Russian greatness. Perhaps he might offer an olive branch to the West that he has spent the past year excoriating, more likely he will add to the litany of grievance and envy he clearly feels.

Perhaps in the end it might not matter.

A few hours ago Chechen militants launched an attack against local police in Grozny. This is the second attack in a couple of months, but it comes at a very significant time for the situation in Chechnya.

Several of the most prominent figures in the ISIS rebellion in Iraq/Syria are of Chechen origin. There are swirling rumours about flights from Russia that came to Arbil with several of these fighters on board- the implication being that they came with the tacit blessing either of the Kadyrov faction in Grozny or even with the approval of Moscow. Certainly the seizure of the Bank of Iraq reserves from Mosul, which has largely financed the ISIS movement, was a very professional job.

The Putin government regularly expresses a sense that whatever the United States may do, or be rumoured to do, then Russia has the right to match. Thus when Kremlin supporting websites suggest that the US supported the Chechens in order to destabilise Russia, then Russia has the right to destabilise, for example, Iraq, in order to upset Western interests. The fact that they may loudly deny this, should leave one counting the spoons, given the topsy-turvy nature of current Russian propaganda.

Certainly there are wide rumours about what ISIS truly is, and who may be covertly backing them. One thing is not in doubt, Chechens are heavily involved. As ISIS comes under pressure from the US, and even from Iran, some pretty far-fetched alliances are clearly already in place.

Any blowback from the ISIS war would place Ramzan Kadyrov in a very dangerous position, and severely raise the temperature in the North Caucasus. 

Yet another headache for Putin to contemplate from his gilded podium in the Kremlin. 

Wednesday, December 03, 2014

Russian meltdown

I make little apology for returning to the subject of Russia. The crisis in Ukraine is rapidly becoming a crisis in -and for- Russia.

The third term of Vladimir Putin, began with a constitutional sleight-of-hand to allow the job swap between Dimitri Medvedev and Putin to take place- and we can date the breakdown of Russia quite precisely from the announcement of this cosy arrangement on 24th September 2011.

Since that time the political atmosphere has darkened dramatically. As I have noted several times, Russia has already fallen 61 places in Transparency International's Index of corruption perceptions since the beginning of Putin's first term, but the breakdown of all rule of law has been confirmed by a series of extra-legal decisions taken in the past few months. The gap between rich and poor is now on most measures the widest in the world, and the ruling elite now comprises merely a few ten of individuals wielding astonishing power and wealth against an increasingly impoverished mass society.

Earlier this year, as the Russian intervention in Ukraine began, I was interviewed on BBC Radio, and the presenter seemed surprised when I described Russia as a fundamentally very weak economy. At that time the Russian economy was roughly the size of Italy.  

Now it is the size of Spain. 

The collapse of the Rouble is now well advanced, and the almost total buyers strike by potential investors in Russian bonds or equities is leading to astonishingly low valuations for the Moscow Stock exchange. Yet even the current valuations may be too high: The Rouble collapse could quickly lead to hyperinflation, and the breakdown of the Russian banking system. 

In short the crisis that might have come late next year if a bank had failed to roll over its debt is happening now, because oil continues to trade at levels which destroy the Russian state budget. 

Meanwhile, the mass exit of all the most creative and innovative minds in Russia- the latest is Pavel Durov- is dismissed because moronic politicians, like Vitaly Milonov can say things like: 

"Russia won't lose anything if the entire so-called creative class leaves. What's the creative class anyway? For me a woman who gets up at 5AM to milk a cow is creative because she produces something. Not some guy with a stupid haircut who sits in a cafe all day writing his blog". 

Not surprisingly the Russian brain drain is now almost as astounding as its capital flight. Thousands of the best educated are leaving, billions of dollars are leaving, and the trend has accelerated since the brutal annexation of Crimea.

The absurd pit bulls of Putinism continue to bark at the wrong target: at the responsible, but increasingly desperate Central Bank of Russia, for example, which Evgeny Federov- almost the definition of of a political dinosaur- claimed was run by a "liberal-feminist cabal"- presumably because the intelligent governor of the bank, Ksenia Yudaeva,  is a woman. Now there seems little doubt that Putin will try to impose capital controls, and the consequences of this fatal misstep could lead to the total collapse of the currency and with it the banking system. The fact is that there wasn't enough money in Russia to satisfy the investment needs of the economy before the crisis. Now there is barely enough to satisfy the current spend requirements. It is a meltdown on a truly spectacular scale.

I had a few ideas about what I was going to write next year as the inevitable liquidity crunch began to cause real damage to the Russian economy. Now the scale of the damage caused by the collapse in oil is an order of magnitude greater than I had forecast and the outlook which was one of stagnation is now one of breakdown.

Although some- including John Kampfner- think Putin has several years before he faces his doom, I think it quite possible that the situation for the regime could become irretrievable surprisingly quickly.

In the short term that might make Putin even more aggressive, yet every day that passes is draining a little more of the life-blood of his regime. The West has begun to answer the Russian challenge, and the Kremlin may already be ruing the day that a relatively weak country decided that it still wished to act with the impunity of its former Imperial shell. The Imperial Overstretch that has been created may not merely bring down the incompetent, corrupt and brutal Putin regime, but Russia itself. 

Tuesday, December 02, 2014

The SNP have Forgotten Nothing and Learned Nothing

On September 19th 2014- a scant two months ago- we learned that Scottish voters had voted to reject the idea of Scotland as "an independent country" by a margin of well over 10%.

Apart from Vladimir Putin who, to be fair knows a thing or two about ballot rigging, the vote was universally recognized as a free and fair expression of the will of the Scottish people.

The result came after an extremely heated and divisive debate, with accusations of bias and corruption on both sides.

To my mind the No vote came from the result of many factors, but the most important was that the economic argument made by the separatists was so weak.

There might be a case for establishing Scotland, like Estonia, as an ultra-nimble free market economy; however the argument made was the exact opposite: that Scotland could only preserve its bloated and inefficient state sector through separation. This argument was self-evidently untrue, and as it became clear that separation would indeed require major economic shifts- to a new currency not least, so the Nationalist protests that little would change were exposed as wishful thinking at best and at worst... deception.

Bluster and Bullshit in the end did not cut it for the majority of the Scottish people.

Now, according to the latest opinion polls, the hard core 30-40% Nationalist coalition has crystallized into support for a single nationalist party: the SNP. The Nats, despite their defeat on the only issue that truly matters to them, may now end up gaining substantial support for the next Westminster elections. Since the other parties all face their own troubles, it is even possible that the SNP will end up as the largest party elected from Scotland at Westminster.

What bothers me now, though is the absurd, even dangerous attempt by the Nats to re-write history and put their referendum defeat down to bad faith and double dealing by those they deem to be their opponents, not least "the biased BBC". The relative surge of SNP support at the polls is taken to be proof positive that the SNP "we wiz robbed" position is actually true.

Although I have little doubt that some people may now feel able to vote SNP, since they may think that the party must now work solely within the UK system. In fact I am now more convinced than ever that in the longer term the SNP will never gain majority support at an independence referendum and that even if the large gains the polls predict for the May 2015 election do in fact take place, then this will be the last hurrah for the nationalist cause.

The fact is that within an astonishingly short period of time, the entire basis of the nationalist economic case has been blown away. As Brent crude touches $65/bbl the idea of relying on oil to ease the transition into the cold reality of separation is revealed as so much nonsense. 

The entire SNP white book is now revealed as a ground zero of economic failure and wishful thinking.

The poisonous and divisive atmosphere that has grown in Scottish politics of late is entirely down to the misguided, indeed wholly wrong, ideas of old fashioned nationalism and misguided populism that the SNP as espoused. "UKIP in a Kilt" is not a face of modern Scotland that any of us should support. The cybernat trolls, notably the foul mouthed rants of "Wings over Scotland", remain unassuaged. The deeply nasty, visceral hatred present in the SNP seems still undaunted by the implosion of their constitutional dream.

The time has come to ask the SNP what their vision is within the UK, which is the road that the majority of the Scottish voters have endorsed. Otherwise a vote for the SNP at Westminster is simply a vote for backward looking failure built on very dodgy sums and fairy dust.

The SNP, like the reactionary Bourbons of the 19th century, have forgotten nothing in their bile and resentment and learnt nothing from the defeat they deserved at the time and now in retrospect deserve even more.

Now, and perhaps more to the point, given that the Kremlin has now been proven to have been financing various political parties across the EU, can the SNP give the Scottish people assurances that the close relationship between the Russian-born former owner of Hearts football club, Vladimir Romanov, and the former first minister, Alex Salmond, did not include financial support or assistance of any kind.

For it would be something of an irony if we found that such links were deliberately left unchecked by the BBC in order to avoid yet further allegations of bias.