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The New Russian Threat: May be Good News for some

Putin may discover to his surprise that it is in many American parties interests to have Russia as an enemy.  It is not overly cynical to point out that, for many interests in Washington, there is a great need to have a clear enemy.  Of course there are real threats to the United States.  However, the kinetic conflicts of the last decade in Iraq and Afghanistan have all but ended.  And the war on terror is being dialed back.  Into this environment (call it a partial vacuum) steps Vladimir Putin.  He might ask the question whether more parties have a stake in his being treated as an enemy or as a competitor, or some other categorization. And what does that mean for him or Russia.

Compared with China, the US economy is not very dependent upon Russia.  Sure many companies have linked interests with Russian companies. Exxon has extensive arrangements with Roseneft for example.  But I don’t Exxon is going to be going public in defense of Putin.

Moreover, Russia as an enemy could satisfy a lot of needs for the defense budget, political debates, etc.  Who is going to say a good word about Russia during the next election cycle?  On the contrary, there is likely to be a competition to be tougher on Russia.  There is even a nostalgia for the US-Soviet days among defense analysts.  A unitary enemy was easier to analyze and construct a defense posture and strategy.  The past decade has only offered a very messy and difficult to quantify terrorist threat.

Putin may be calculating that the US will behave as a unitary actor that will maximize its interests.  But that analysis could crumble on two fronts.  One, politics causes the US to not act as a unitary actor.  And, it may cause the US to act in ways that are not in its self-interests (assuming you know what metric to measure self-interest–economics may be only one element).

Putin may have walked into a position where he satisfies a broad need for an enemy and that will make it very hard to reverse a trend of animosity from the US.  Watch in next few months how rationales for all sorts of things will be linked to new Russian threat.  Aircraft carrier and F-35 procurement, oil and gas development, space launch capacity, mid-term election speeches, arctic issues, the list could go on.

Of course, maybe this trend would work well for Putin domestically.  We’ll see, but I suspect we may be witnessing the beginning of a negative feedback loop that will be very expensive.

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MH370 – Hacking an Aircraft in Flight?

Another thing to think about besides whats in the cargo hold of your next overseas flight.  The general public is now becoming aware that modern jets have ongoing data feeds back to manufacturers.  This helps companies like Boeing and Rolls Royce know aircraft condition issues and be able to preposition spare parts or experts quickly to keep the aircraft in service.  That’s great except if you worry about cyber attacks.  If aircraft computers are putting out data related to critical systems, then they can, in principle, be hacked unless there is robust security.  Imagine the financial impact if it got around that one potential failure mode for the Malaysian flight was that its computers were hacked?  Why would anyone do that?  Well aircraft often are subject to random bullet fire from yahoos with rifles firing up at them.  Lasers have been used with the same careless abandon.  I would bet Boeing and others have cyber attacks on their list of things to run down (and treat confidentially).

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Malaysian Aircraft Cargo?

Scheduled airlines don’t just carry passengers.  They carry cargo–lots of it.  While there has been a release of the passenger manifest, there has not been a release of the cargo manifest.  The cargo manifest will be at least as interesting as the passenger manifest–for considering accidental or malevolent causes. Silence on this aspect by governments is beginning to seem curious.

In 1996 a ValuJet passenger flight crashed in Florida and the cause was linked to fire caused by oxygen generators that were being transported as cargo.  Pan Am 103 was destroyed in 1988 by a bomb in the cargo hold.  Also, bear in mind, had Pan Am 103 exploded a bit later, over the ocean, it is unlikely that the cause would have ever been determined since only by tracing small bits of luggage were investigators able to put the trail together.  Those bits would not have been recovered had the aircraft been over the ocean.  Malevolent actors are well aware of this.


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Ukraine – Dollar vs. Ruble

Looking ahead at the conflict between the US and Russia over Ukraine,  it may turn out that this could become a financial war rather than a kinetic war.  The US has an enormous strength irrespective of our military–the US dollar.  Putin and his wealthy colleagues will be acutely aware of the effects on the Russian ruble and virtually all other Russian financial instruments.  Their wealth dropped radically after last weekend.  But, stay tuned.  Russia has great talent in the cyber world and the US financial system has demonstrated its weaknesses at various points.  Remember Target?  If I were in Putin’s place I would be thinking of ways to cause some pain to the US financial markets.  I would hope our national security leadership is keeping a watch out for this.  The difficulty, like so many things in the cyber world, may be establishing attribution.

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Space Station and the Ukraine Crisis

The international space station is currently occupied by a crew of six.  There are three Russians, two Americans and a Japanese member.   The commander is a Russian.  Presumably they all get along and are bonded by their collective mission.  Nevertheless, you have to imagine conversations may be a bit difficult.  Or they may rise above the difficulties and personalities of leaders on the planet below them.

But if they did not, imagine banning Russians from the American part of the station or vice versa.  What role would the Japanese astronaut play? Maybe if the US administration and congress establish sanctions, the US astronauts will have to cut off oxygen or power to the Russians.  Which side will the Japanese scientist take?

Oh, and by the way, the only way for the Americans to get back home is on the Russian Soyuz spacecraft.  If there is a sanctions regime in place what happens then?

Not sure what this microcosm illustrates, but messing with the international system either by invading a country or creating sanctions gets real complicated very quickly.  Unintended consequences can quickly dominate events.  Ambiguity about US and/or Russian intentions or will can be consequential.  On the 100th anniversary of World War I, it is worth keeping this in mind.



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Russia in Ukraine and Market Predictors

No one should have been surprised by Putin’s actions regarding Ukraine after the Olympics.  While Americans may have a short memory, that is generally not said about Russians.  Putin would have learned from Brezhnev’s experience that it is better to invade a country after you host the Olympics, not before.  He might also have learned to pick your country and limit your goals.  He has been pretty successful so far.

However, there was a range of behaviors that would have been a very strong predictor for the tough Russian actions this past weekend–market behavior, or MARKINT.  Financial markets  are strong indicators of where people think prices are going.  I co-authored an op-ed in the NYTimes (with Jim Rickards) which ran on 21 December 2008 that suggested that plumbing market data for intelligence related information would be extremely useful.  This was before the wave of interest in using “big data” for predictive purposes.  Omnis Inc, (a consulting firm I am associated with) has been developing this notion extensively.  Christina Ray who boasts a strong “quant” background in the financial community has cross fertilized this experience with intelligence questions.  If you happened to be watching markets and in particular certain segments of the markets, you would have seen some strange things last Friday.  I copy an analysis by Ray below.  Suffice to say that if you believe that information travels among senior Russian politicians and investors (sometimes they are the same person) then you might expect them to take positions in the market knowing in advance of actions that will move markets over the weekend.

Preliminary Analysis of Ukrainian Events

As of 3 March 2014 10:30 EST

Christina I. Ray

Omnis, Inc.



The events in the Ukraine have had a substantial impact on global markets over the last few trading days, but have especially affected markets this morning (3 March 2014). The nature and magnitude of absolute and relative market movements are particularly meaningful for three reasons.

First, consistent with the principals of Market Intelligence (MARKINT), behavior both prior and posterior to the weekend events may provide some predictive indicators of Russian intent.

Second, more specific market behavior (e.g., the performance of Russian Aerospace and Defense stocks relative to their global peers) might provide some insight into whether substantial military action is anticipated by those either privy to such information or with expertise on this subject.

And third and perhaps most importantly in this case, since the US’s and others’ response to the Russian actions is primarily economic and financial (e.g., freezing assets, embargos), the magnitude of expected effect on market may very well be an input into Russian decision-making on next steps.

Please note that these analyses are only rough and preliminary, but can serve as a quick recap of market consensus opinion.

Effect on Global and Russian Markets

The effect on Russian markets is very significant. Figure 1 below compares the relative behavior of a number of major global indices to that of the Russian MICEX stock market index. (The time series show intraday price behavior at a 3-minute frequency).The price behavior for each time series is normalized to a percentage of its initial price three trading days ago (i.e., 27 Feb 2014).

As shown in Figure 1, the Russian MICEX index is down to 86.84% of its value just three trading days ago, or a very substantial decline of 13.16%. Conversely, although all the major indices are down, the magnitudes of the declines are far less, ranging from a decline of 3.26% for the German DAX index, 1.80% for the UK FTSE index, 2.14% for the Japanese Nikkei 225 Index, and only 0.18% for the US S&P 500 index (although the one-day changes are something greater).

Moreover, as the patterns over time indicate, although the non-Russian indices exhibited roughly similar behavior over time (during those periods when their trading hours overlapped), this was not true for the Russian index. It is typical for most major indices to exhibit somewhat correlated behavior, because in general systemic economic conditions drive all stocks. When one or more indices exhibit anomalous behavior relative to their global peers, this may be indicative of idiosyncratic factors affecting the country or region.

This appears to be the case over the last few days. Note the time period just before 08:00 on 28 February. While the non-Russian indices are trading higher, the Russian MICEX index is trading lower, and generally losing ground relative to its global peers. This may reflect the influence of informed trading: either inside information about Russian intent over the weekend, or expert opinion by those familiar with likely outcomes and who are willing to make market bets to profit from their insight.


Figure 1: Comparison of Major Stock Market Indices to Russian MICEX Index

In general, many investors execute a so-called “flight to safety” when events of such international significance are occurring. The US dollar is one such haven, as is the Japanese yen and gold. Given that the US is more embroiled in this particular event than is Japan, an examination of Japanese market behavior may be particularly illuminating.

Figure 2 specifically exhibits the relative behavior of the Japanese Nikkei 225 index to the Russian MICEX index over the last seven trading days.(Please note that the straight connecting lines connect periods where trading hours do not overlap). Over this time period longer than that of Figure 1 (and one which included earlier, provocative events), the MICEX declined 14.32% while the Nikkei actually advanced 1.80%. And, much of that difference occurred over the weekend.

Figure 2: Comparison of Japanese NIKKEI and Russian MICEX Stock Market Indices

Effect on Foreign Exchange Markets

We can also examine the behavior of the foreign exchange markets, again focusing on the relationship between the yen and the ruble. In Figure 3 below, the top graph shows the yen/ruble cross rate over the last two trading days. (The blue “N” markers are showing important news events as included in Bloomberg’s archived news.)

Take particular note of the spike just before 14:57 on 28 Feb. There is an anomalously rapid rise in the cross rate (indicating weakness in the ruble relative to the yen). This timing is significant, in that many futures markets close in the US at 15:00 hours, or just three minutes later. This may indicate new positions taken in a hurry in expectation of weekend events. (Certainly anyone who made such a bet at this time made a great deal of money by Monday morning).

Also note the cross rates of the yen and the ruble relative to the US dollar, as shown in the middle graph of Figure 3. The yen strengthened 0.7% relative to the US dollar over the two-day time period, while the ruble weakened by 1.41%[1].

And as shown in the bottom graph of Figure 3, two general global threat metrics –the price of spot gold (XAU) and the price of crude oil futures (CLA), appreciated significantly over the same time period, rising 2.42% and 1.41% respectively.

Figure 3: Behavior of Japanese Yen and Russian Rubble Exchange Rates and Other Threat Metrics

Stock and Sector-Specific Behavior

Finally, we might examine sector-specific behaviors. Figure 4 below shows a comparison of a custom index of the four largest Russian Aerospace and Defense contractors relative to the broad MICEX index over the last 10 trading days[2].

Note that there is very little difference in the relative behavior of A&D companies versus those in the broad index; although the A&D stocks are down a bit less than the broad index, the magnitude is not particularly significant, and may indicate that there is little expectation of large-scale military action in the coming months. In other words, this may be a case of the dog that didn’t bark in the night.

Figure 4: Behavior of Russian Aerospace and Defense Contractors Relative to Broad MICEX Index

And finally, we can specifically examine those companies most likely to be affected by the Ukrainian events relative to their peers. News stories indicated that Chevron is one of the companies whose revenue is most likely to be affected by the events in the Crimean, as shown in one news story published by Bloomberg news as an update on 3 March 10:53.

Figure 5: New Story (BN 3 March 2014 10:53:47)


Consistent with this story, Figure 6 below illustrates the behavior of Chevron (CVX) relative to its peer set of energy companies included in the S&P 500 index (X5ENRS) for the last three trading days.

The top graph shows the individual behavior of Chevron and the energy index (again, normalized to 100 at the start of the period), and illustrates the rapid intra-day decline in Chevron’s price relative to its peers. (This methodology normalizes for common drivers of all energy companies, and helps to identify the idiosyncratic drivers of Chevron). The middle graph shows the ratio of the two prices.

Naturally, other companies and commodities that can be identified to be particularly sensitive to events in the Ukraine might be similarly examined.


Figure 5: Behavior of Russian Aerospace and Defense Contractors Relative to Broad MICEX Index




Monitoring changing market prices may well provide some indications of Russian intent. Metrics created from market prices may provide either predictive indications of interest, and concurrent metrics whose magnitude may provide indications of changing strategic intent. And as previously mentioned, there may very well be a feedback loop here: Russian actions affect market prices, and market prices affect subsequent Russian responses.

This last point is somewhat bolstered by the timing of Russia’s actions. The timing of its actions (late Friday night in the US, and after markets closed in Europe and Asia) may be some indication that Russia wants to mitigate the effect of the invasion on its stock and foreign exchange markets. Therefore, one might conjecture that the huge impact on market prices being observed this morning is a consensus view by market experts that Russia’s actions may seriously impact its economy.



[1] Note that a lower value indicates a stronger currency in this graph; for example, one gets fewer yen and more rubles per US dollar at the end of the time period.


[2] Some of the large spikes in the A&D index may be due to price reporting errors, which greatly influence the price of an index with only four members.

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Olympic Sport – CW Racing? And Snowden?

Snowden Lighting the Olympic Flame?  I bet someone in Moscow has considered it.

The Olympics in Sochi are getting to be a test of political skill as well as athletic skill.  President Vladimir Putin clearly has Russia’s reputation, and more importantly his own reputation, on the line.  This presents the opportunity to promote a wide range of issues on Moscow at a time when Putin is forced to care about his international appearance.

The United States seized this moment with respect to re-motivating Bashar al-Assad to get his CW materials out of country.  Bashar al-Assad, seems to have began thinking he could derive another bit of political benefit by slowing compliance with this last stage of the UN mandated process in the context of the Geneva talks.  (It is worth remembering that Syria has already destroyed its capabilities to use and manufacture CW so Syria has already lost any military utility of its CW.)  He missed the two deadlines to get the chemicals out of country—while the international flotilla gathered to move them steams around in circles.

Washington raised this in a public way saying (correctly) that this was a problem Russia could solve.  With the Olympics coming up, I can just imagine the message from the Russians to Damascus…”move it….now!”

Damascus now says (according to Russian media) that it will be getting the chemicals out by the end of the month.

After the Olympics, my guess is Putin will be looking for opportunities to repay the favor.  In fact during the Olympics, I could see Putin offering a prominent seat to Edward Snowden (lighting the Olympic flame would be too much). 

Watch AT&T.  AT&T is making a prominent point about the LGBT issue, condemning the position of Russia.  This is quite brave.  AT&T is very vulnerable to international business damage rippling out from Snowden.   I cannot help but imagine Russia publicly and quietly spreading the image that US firms are dangerous business partners with substantial financial consequences.  Stay tuned.

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Syrian CW – The Slow Road to Latakia

Syria has will miss both target dates to remove its chemicals.  The most toxic amounts were due out at the end of the 2013 and the less dangerous components due out February 5th.   Security is not an excuse for the minimal progress so far.  And this is a strong reversal from the full compliance with earlier deadlines to eliminate munitions, production equipment and other CW facilities.

It appears that decisions in Damascus about CW are being taken in context of other issues—particularly the discussions in Geneva with Lahkdar Brahimi.  While Bashir al-Assad ponders his next moves, Norwegian, Danish, Russian and American ships will continue to steam around the Mediterranean waiting for Bashir to move forward.  Bashir al-Assad is expending whatever international credibility he accrued by agreeing to accede to the Chemical Weapons Convention and moving smartly this past fall to comply.

The Russians, who have been arguing Bashir’s case, will be having fits.  But unless the US and others raise the specter of doing something in response, then even Russian influence over Damascus regarding CW will be minimal.

Of course, the real problem now is not Syrian CW.   The real problem is the complete chaos with not path ahead for the Syrian conflict and its ripples beyond.  For the most part, the risk posed by Syrian CW is greatly diminished by the actions already taken.  However, as has always been the case, there are plenty of ways to kill civilians without chemical munitions.

The US may raise Syrian CW compliance in the UN Security Council shortly.  If they do, the question of “enforcement” action will be debated either openly or not.  Russians will oppose, but the Administration will find itself once again in a position where domestic pressures to “do something” will grow as they did in September when the President made his speech to the nation asking Congress for its agreement to conduct a limited military strike on Syria.

The President is planning travel to Saudi Arabia next month.  What does he want to be able to say?  Does he want to say we are thinking or doing something, or that we did something?  Bear in mind that the fact of the trip will also be a motivating factor for other parties—Israel, Al-Qaeda, Russia, Iran, Bashir al-Assad, and the US Congress.

I think the crews on the ships in the waiting to lift and destroy the Syrian chemicals may have a long deployment.

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Iran Nuclear Talks – Progress?

The announcement of the new elements coming from the talks with Tehran represents progress of a sort.  Basically there is a trade between Iran’s ongoing ability to enrich uranium (and produce plutonium) that could be used in a weapon and unblocking funds (and backing off on some sanctions for Iran).  Whether this “walks back” the Iran program significantly remains debatable.

Bear in mind, Iran can build a nuclear weapon.  It’s just a question of how long it would take.  Iran clearly has the intellectual capability and, currently, it has the industrial infrastructure to produce the specialized enriched nuclear material for a bomb.  They also have the ability to launch a weapon on their existing ballistic missiles.  The goal of those seeking to thwart an Iranian nuclear weapon has been to stop their progress towards a weapon and make the lead-time longer.  The recent agreement moves in the direction of lengthening the time it would take Tehran to accumulate the enriched nuclear material for a weapon.  It also improves the ability of IAEA weapons inspectors to detect cheating or a breakout by Iran.  Still we don’t know how long it would take Iran to build a weapon if it decided to.  The reason is we don’t know how much work Iran has done to design and test a weapon. They have refused to discuss this despite long efforts by the IAEA to engage them on this critical point.

This is the vital gap in the ongoing negotiations.  Until we know how far Iran has progressed in the design and testing of an actual bomb we have not succeeded.

A nuclear weapon requires enriched uranium or plutonium, but to make a weapon requires a very sophisticated design to cause compress and “ignite” the nuclear core.  This requires a lot of testing and very fine fabrication.  The international community does not have a good window into this.  The IAEA has been seeking access to facilities and individuals (particularly the Parchin facility) where substantial evidence points to Iranian “weaponization” development.

In essence, we can’t tell how far Iran is from a bomb because they have blocked—and still block—access to this data.    If the international community does not get a clear verifiable understanding of what progress Iran has made in “weaponization,” then sanctions and other measures should be swiftly reinstalled.

From Tehran’s perspective, if they come clean, they risk an international reaction that could block progress in sanctions relief.  Particularly if they have done significant weapons design testing.  It will be a tricky decision for Iran to make.

However, unless President Obama or Secretary of State Kerry can at some point stand up and say categorically that Iran has declared their full program, including its “weaponization” development (and describe publicly what it is/was) then no one should expect sanctions to be lifted.

I look forward to seeing a full public briefing of the Iranian nuclear program, to include details of it’s implosion design, triggering mechanism, fusing for use on a ballistic missile, etc. It may be embarrassing to Iran (and potential its supporters who may have assisted it).  

I also look forward to hearing how elaborate a future monitoring regime will be going forward.  If Tehran is earnest on these two points, then they should have an on-ramp back to the international political and financial community.  If not…


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Syrian CW – The Next Stage

OPCW head Mehmet Uzumcu announced today that the initial removal of some chemicals from Syria had taken place today.  Chemicals in their specially designed and built containers were loaded onto the Danish ship Ark Futura at the port of Latakia.  OPCW said some materials from 2 (of 12) locations were loaded.  Presumably the ship will go back out into the Mediterranean and sail around in circles until the next batch is ready to pick up. That’s not exciting.

Hold your breath though because insurgents could easily decide to hit a convoy headed to Latakia with an IED attack.

Starting the process to whittle done the stocks of mustard agent and sarin nerve agent chemical “precursors”  is good, but not amazing.

Bashir made his big decision in September and the guts of the Syrian CW facilities have already been demolished.  The Big decision now is whether insurgents will decide to attack.  They can if they want to.  Attacking convoys with IEDs was a specialty in Iraq.  The same guys who trained and taught those skills there are in Syria now.

Focus on the slippage in the UN’s own schedule (the target date was to have all these high priority chemicals out of Syria by 31 December) was overblown.

There are a lot of moving parts and a lot of chaos in Syria (and the UN).

Consider a partial list:

Russian trucks, Chinese monitors, US containers, UN staff supervisors, Syrian army staff, Norwegian and Danish ships, Russian ships, Chinese ships, Russian security at Latakia, US ship-borne destruction vessel (MV Cape Ray), clearance at an unnamed Italian Port for cargo transfer, secure (unannounced) ground transportation, 15-members of the Security Council who think they are important, a Nobel Prize-winning Chairman of OPCW who never expected to be doing any of this, etc.

Sergei Lavrov said to me in the mid-1990’s when he was Russia’s ambassador to the UN that American criticism of the UN was too harsh.  We focused on UN inefficiencies.  He said there was a Russian expression along the lines that, “It’s not that dancing bears dance well, but that they dance at all.”

The Remaining Risks.

Getting the chemical stocks to Latakia is the key risk.  Secrecy about the movements is a good thing—but probably hard to achieve on the ground.  There are 12 sites and the footprint of the convoys of armored trucks will be large.  An IED attack along one of the obvious routes has to be a major risk.  Surveillance of the routes by drones and electronic measures can mitigate but not eliminate such risks.  Intelligence about insurgents will be coming from a mix of sources and channeled to Syrian/Russian officers coordinating the convoy movements.  I doubt it will be very clear cut.  Again, the same guys who taught Iraqis how to make very effective IEDs (and rockets) are active in Syria. There is a lot of wisdom floating around about how to do these attacks. The US never solved that problem.

On the other hand, there is almost zero risk of back-sliding by the Damascus regime on its commitment to get rid of its CW.  Bashir has no use for CW now.  It may have served its purpose in deterring some actions by Israel, but in Syrians current circumstances its greatest utility is in the international legitimacy Bashir gets by ridding himself of it.  And Bashir made his tough decision back in September.

One other risk is the process of moving and destroying the chemicals once they leave Syria.  This is quite small.  The hype over the danger of accepting “chemical agents” into countries for destruction was way overblown.  Most of the chemicals are precursors to the final agent.  It sounds glib, but if they were just dumped in the ocean, it would not be a big deal—environmentally.  Politically, it would be a disaster or course.  Certainly countries have done that before on a vastly bigger scale.

Getting rid of Syrian CW is great.  We are doing it in a complicated way, but that’s international politics.  The real mess in Syria is not chemicals.  It’s a regional conflict that keeps getting worse.

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