Thursday, August 28, 2008

Russia’s Georgian Adventure: Whither an Economic Cold War?


I remember the arcane science of ‘Kremlinology’; sifting through the tea leaves in an attempt to understand the USSR’s objectives and motivations. An East – West studies major at the end of the Cold War at Georgetown’s School of Foreign Service, we were still very much focused on such matters. Within a year of graduating, the paradigm had begun to drastically change with the break-up of the Soviet Union and Warsaw Pact. Within four years, Your Genteel Moderator was writing speeches for pro-market economy politicians in formerly Communist controlled countries and working to acquire privatized companies in Poland, Hungary, [then] Czechoslovakia, the Ukraine, and Russia. The latter was open for business and despite the enormous difficulties of doing business there, from legislative uncertainty to serious issues with currency, foreign direct investment was flooding in at the multi-billion dollar level. One theory, much touted by the Clinton Administration and one of my former professors of “Kremlinology”, Secretary of State Madeleine Albright, was that such investment would so entwine Russia in the global economy as to ensure its commitment to the principles of free-market democracy. I must say, I was dubious after spending time in Russia (including a forced stay in Moscow during the aborted Coup d’Etat in the summer of 1991) and dealing with the Russian government.


Fast forward through the chaos of the Yeltsin years when “bizness” generally meant the expropriation of any state assets one could lay hands on and the swelling of numerous Swiss bank accounts. Pass more slowly through the pendulum reaction of the Putin Presidency when the supremacy of the State, and the Head of State, were reestablished creating an “etatist” economy that closely entwined government, political cronies, and economic strategy, fueled (literally) by ever increasing oil and gas revenues. Arrive at the farce of “President” Dimitry Medvedev’s election and subsequent appointment of Vlaidmir Putin as “Prime Minister” with a substantially increased portfolio of overt powers to bolster his continued de facto control of the State. Russia is a powerful, re-armed, aggressive regional power with substantial wealth, and major leverage (in the form of natural gas sales) over Germany and other Western European nations. Rightly or wrongly perceiving NATO expansion into Central Europe and potentially further east (Georgia’s abortive candidacy was ill-advised to say the least), Russia is using US preoccupation with Iraq (and irony of ironies) Afghanistan to reassert its political and military hegemony over the former USSR states. It certainly doesn’t appear that investment by US and Western European companies has entangled Russia in the global economy to the extent necessary to force more responsible and less hostile activity. The question one has to ask is whether substantial investment in Russia and its littoral states has in fact diminished the US and Western European appetite for confronting such aggression and reverting to a traditional policy of containment?


Despite protestations from both Russia and the West that we are not seeing a return to the Cold War, it is very hard to view this in any other light. Reemerging from a period of military and political weakness Russia perceives the West (and particularly the US) pursuing a policy of encirclement. Its old nemesis NATO is on its western and southern borders with a vastly diminished ring of “buffer states”, the US military is conducting extensive operations along its soft southern underbelly, and a US anti-ballistic missile system threatens to neutralize its strategic nuclear threat. The West is no better. Viewing the inevitable return of authoritarian government in Russia (who could imagine anything else?) as necessarily a threat to security and stability in Europe and Central Asia (granted, with good reason), it has put the boot in with abandon wherever it could from the Ukraine, to former client states like Tajikistan, Turkmenistan, and Kazakhstan, and finally to its courtship of Georgia, all the while decrying the conduct of the Russian government domestically. For Russia, expansion and the creation of buffer states has been an historic imperative from a security standpoint. For the West, containing that expansion and mitigating Russia’s (in whatever guise) influence and power farther afield has been a basic policy since the mid 19th century. Re-emergent Russia means resuscitation of containment in one form or another.


There is however a major twist in this emerging Cold War: a global economy. In the old Cold War, the economic doctrines of Marxist/Leninist Communism in Russia meant that the USSR and its Warsaw Pact satellites were not integrated into an economy that had become increasingly global in scope in the forty some years after the close of WWII. While East – West Trade existed, it was almost always subservient to the political strategies and interests of either party. After 1990, the growth of trade, the substantial inflow of foreign direct investment to Russia, and the substantial capital flight from Russia to investment opportunities around the world contributed the rapid acceleration of Russia’s involvement and participation in the global marketplace. Rising fuel costs in the middle of this decade (driven in part by Russia’s partial success in developing its own economy and, to some extent, by the large expansion in disposable income for a segment of Russian society) have given the country economic muscle and the wherewithal to rebuild its military. Not only has Russia’s emergence as a player in the global economy been one of the forces driving current pressures on commodity and fuel prices, but its control over substantial volumes of commodities as well as its own oil and gas reserves have provided it with leverage over the likes of Germany that even batteries of medium range nuclear missiles couldn’t deliver in the 1980s.


What does this mean for “Western” companies with investments, affiliates, joint ventures, etc., in a Russia that appears set on a course for confrontation with the West? Risk. And risk management. The first thing that any high profile companies with transparent investments in Russia and listings on Wall Street needs to do is take stock of its political entanglements in Russia. Despite the Foreign Corrupt Practices Act (FCPA) and the best of intentions in adhering to it, nobody has been doing large-scale business successfully I Russia without some sort of political entanglement. If confrontation escalates or, perhaps, as conflict escalates between the West and Russia, those entanglements – silent partners, minority JV partners, counselors, “friends”, whatever one is calling them these days – will be the cause of pressure. Whether that pressure is from the West over revelations of such entanglements or through them from the Russian government, now is the time to be cutting them loose or distancing the company from that exposure. As time goes by, this will get harder and the cost of doing so will be higher.
Next, take the “New York Times test”. What will the nature of any transactions, investments, or entanglements look like printed on the front page of the New York Times or Wall Street Journal when the next act of Russian aggression or Western provocation results in something more serious than the annexation of unpronounceable territories at the back end of nowhere? Develop scenarios. Will there be a share-price impact? Will such revelations negatively impact business development efforts elsewhere? Finally, develop contingencies and exit strategies starting now – quietly. Better to run the risk of unnecessary planning now than face the Board’s question as to why you weren’t prepared for this later.


The Bleeding Heart does not share Your Genteel Moderator’s gloomy forecast. Over the phone from Denver, sounding like a teenager on ecstasy at a rave, he assured me that all would be well come November. “When Obama is elected, this gloom and doom atmosphere is going to rapidly change. There will be a new optimism in this country and a new respect for America abroad. He’s going to be able to work with the Russians and others because he believes that talking and negotiating are the way to get things done, not unilateralism and provocation. Investment in Russia has been a good thing and has helped to tame Putin’s more aggressive tendencies.” The Bloated Plutocrat was somewhat less optimistic. “The only thing worse than Godless Communism is Russian Capitalism. My family lost a lot when Russia went Red in 1917 and while I have made a good deal of money through investments and transactions in Russia over the last 15 years, I am divesting rapidly. Whether this President or the next does something stupid to set them off is irrelevant. The rules have never been fair and the market has never been free in Russia, but with the return of increasing political and security tension on the geo-political level as well as the significant economic risks, the costs of doing business there are simply going to be too great in the not so distant future”.


To be sure, in any time of political uncertainty there is money to be made. That will be true in Russia for the foreseeable future. What many need concern themselves with is that there is also a great deal to be lost, and it will be the re-emergence of the dialectic between Russia’s urge to expand and the West’s perceived need to contain, with a new global economic twist, that will govern the risk/return ratio in Russia and Central Asia for some time to come.
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Tuesday, August 12, 2008

Cheaper Invasions?

You are of course well aware of those “evil foreign dictators”, whose “monopoly” control over our oil imports threatens our national security. You must be aware of them, every member of Congress, the Presidential candidates, their operatives, the pundits, and the media meat puppets are constantly talking about them. Sen Chuck Schumer (NY) was going to sue them if his co-sponsored Consumer-First Energy Act was passed back in June. It certainly is an issue of concern: these undemocratic, foreign potentates in distant lands whose nefarious plans to exploit US energy needs threaten the future of the nation. You know: “them”.

“They” are also a threat to our national security not only because of their “near monopoly powers”, but because of their support for terrorist organizations and the unremitting oppression of their own people, which encourages further resentment and terrorist action against the US. Indeed, their profiteering and price gouging is a major cause of the current economic recession and constitutes a virtual act of war by other means against the country. In fact, as Paul Wolfowitz (subsequently US Deputy Secretary of Defense and a leading “Neo-Con”) noted in 1994, “The United States and the entire industrialized world have an enormous stake in the security of the Persian Gulf, not primarily in order to save a few dollars per gallon of gasoline but rather because a hostile regime in control of those resources could wreak untold damage on the world's economy, and could apply that wealth to purposes that would endanger peace globally.” As of May of this year, the United States had imported 398,714,000 barrels of oil. Indeed, with daily US oil production at just over 5 million barrels/day and it’s oil needs at just over 19 million barrels/day, imports will remain critical for the economy.

The situation is very clear. Foreign control of oil necessary for the economic well-being of the United States represents a clear and present danger to the national security of the country. The only possible response should be the invasion of those countries that pose such a grave threat to the US and the confiscation of their oil resources. But wait, Iraq is only contributing about 600,000 barrels/day of the nearly 14 million barrels/day in imports required by the US – at market prices. There has to be a better solution. From where does the US get most of its foreign oil? Well the top three despotic, monopoly suppliers of oil are: Canada, Saudi Arabia, and Mexico. Saudi Arabia has many of the same problems as Iraq. It’s far away, hot and dusty, and full of people that despise America and aren't opposed to a dynamite vest for the cause. Next on the list is Venezuela at roughly 1 million barrels/day of oil exports to the US. So, Canada, Mexico, and Venezuela combined make up about 3 million barrels/day of US energy needs. Hmmmm….

“Canada's trade surplus widened for a second straight month in June as exports of energy products such as crude petroleum and natural gas surged and car shipments rebounded.

The surplus widened to C$5.76 billion ($5.41 billion) from a revised C$5.22 billion in May, Statistics Canada said today in Ottawa. Exports and imports both rose to records in June, gaining 3.1 percent and 2 percent respectively, and the trade surplus with the U.S. was the widest since January 2006.”

Hold on. Canada has been a steadfast ally of the US ever since the last time the US tried to invade them in 1812. They are the US’ leading trading partner and a part of the North American Free Trade Agreement (NAFTA). And while they do tend to be a little goody-goody and socialist, ruthless oppressors and supporters of terrorism, they are not. There’s always Mexico. Almost every night, CNN anchor Lou Dobbs, that paragon of intellect, is on television urging that the US go to war with Mexico, right after the hundreds of millions of illegal Mexican immigrants (most of whom are saboteurs infiltrated by the Mexican government) are gathered up in concentration camps. Mexico is currently good for almost 1.5 million barrels/day and, under occupation, they could certainly be counted on for up to 5 million barrels/day without truly undue suffering by the civilian population. And there is a history of invasion and successful annexation of Mexican lands between the US. The problem is that not only is Mexico a member of NAFTA and, Lou Dobbs aside, a friend and ally, they are rather fond of their independence. And, as General Pershing noted following his 1915 invasion of Mexico, the Mexicans are rather good insurgency fighters.

Ah, Venezuela. In 2007 it averaged 2.4 million barrels/day production and should be relatively easy to bump up above the 3 million barrels/day mark. Lead by the loveable Hugo Chavez, the Neo-Communist and attempted dictator-for-life who aspires to Fidel Castro’s mantel, here is a country whose leadership does indeed oppress its people, that certainly supports organizations with a professed antipathy to the United States, and whose arms dealing with Iran might be stretched to support for terrorism. Certainly, with a little creative writing by the intelligence community, Chavez could be shown to be in search of WMD. Chavez’ relationship with Iranian President Mahmoud Ahmadinejad, himself involved in nuclear arms proliferation, would certainly lend credence to any such claims, while the fact of his conventional arms build-up, his aggression toward US ally Colombia, and his support for allegedly socialist but clearly anti-US political movements across Latin America and the Caribbean, all help make the case.

So, Venezuela it is! Or….perhaps there are some things that might be considered before such an invasion to alleviate the energy crisis and improve the US economy. Maybe some improved deficit management to strengthen the dollar? Maybe some diminished government expenditures? Maybe steps towards a realistic alternative energy policy based on rewards for sustainable energy alternatives to oil imports (as opposed to incentives to pursue energy objectives and strategies set by Congress). Food for thought?

The Bleeding Heart thinks so. “Hugo Chavez is the replacement for an ailing, and possibly already dead, Fidel Castro in the iconography of Neo-Con ‘boogey-men’ created by this administration. The real issue is not how to get cheap oil by invading yet another country, but how to reduce dependence on imported oil, whether imported from friend and ally or foreign despot. The market simply doesn’t work and Congress needs to be allowed to deveolop an effective energy policy that incentivizes sustainable types of energy production.”
The Bloated Plutocrat is less certain. “Congress is the last refuge of the scoundrel and the incompetent. Their idea of energy policy is to spin the ‘wheel of populist nonsense’ and see where the dart lands – that’s the new energy policy this week. The market does and will work. If Congress wants to break with tradition and do something useful, providing tax credits and other rewards for initiatives that provide measurable, sustainable offsets against oil imports may be helpful. Mostly, they can stop talking nonsense about the price of gasoline being the result of oil company speculation.”

Let us hope that further military adventure is not seen by this or coming administrations as a viable mechanism for alleviation of the so-called energy crisis. Perhaps the market can find solutions. This, for example, may not be the answer, but at least someone is thinking: http://www.pickensplan.com/


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NOTE: Your Genteel Moderator apologizes for the dearth of postings in recent weeks but work, travel, and holiday schedules have made coordination with the Bleeding Heart and Bloated Plutocrat impossible. Now, your Genteel Moderator himself heads to Portugal’s beautiful Algarve for several weeks and will not be available to write. Please enjoy the last of our summer weeks and look forward to new and more consistent posting in September.
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