S&P’s downgrade of Polish debt: sounds familiar


January 31, 2016 by AK

For those willing to read beyond the first paragraph, S&P provided a detailed list of Poland’s fiscal risks in their downgrade note (linked by Puls Biznesu).

The nationalists’ fiscal preferences have already begun to show, according to Moody’s:

Moody’s has warned that Poland’s incoming bank tax threatens the profitability and credit ratings of the country’s lenders.

Fitch analysts are also warning against fiscal self-indulgence:

Fitch analyst Arnaud Louis told reporters that he expects Warsaw to keep the deficit below 3% of GDP in 2016 and 2017… However, evident relaxation of fiscal policy has shifted the “balance of risks to the negative side,” he added.

This said, Poland’s credit rating remains high for a second-world country: still two notches above the lowest S&P investment grade, BBB-. Before the downgrade, it was on par with Latvia, Lithuania, and Slovenia, although below Estonia, Czech Republic and Slovakia. Now, it is the same as Spain’s and above Italy’s – and way better than Hungary’s BB+, the highest of junk-bond ratings. Hungary lost its investment-grade rating in 2011, under the stewardship of Viktor Orban, reportedly a role model for Poland’s Law and Justice.

Poland’s current BBB+ rating equals Russia’s best-ever, in place in 2006-8, in better times. S&P downgraded Russian Eurobonds to junk last January after a decade of investment-grade ratings. At BB+, Russia finds itself down there with Hungary, Croatia, Bulgaria, Turkey and Brazil.

There was much talk about creating a national rating agency back in 2014-15 to spite those Russophobic Soros-backed capitalists but the funding must have gone the way of the oil price since. Evil Wall Street, devious Sorosians against nationally-minded Main Street capitalists: we’ve heard all that, nothing to see here, give us something new, Beata & Jaroslaw.

S&P’s downgrade of Poland was well-founded


January 30, 2016 by AK

There has been much wailing from certain quarters that S&P’s January 15 downgrade of Polish foreign-currency debt from A- to BBB+ was motivated by “politics” and had nothing to do with Poland’s economy.

This argument does not make sense, and would still make none if “politics” were magically divorceable and insulable from “the economy” in the real world.

A credit rating is principally a risk assessment. Trust in a country’s government bears on the risk of lending to it. A one-party cabinet that started out by meddling with the constitutional court and seizing control of state media cannot be trusted to prudently run the state’s finances. It is particularly relevant when the ruling party has the irrepressible instincts (if none of the looks) of a Big Spender, even though it’s more likely a Tax-and-Spender than a Deficit-Spender.

In other words, if Kaczynski, Szydlo and Duda think nothing of breaking the constitution, what’s there to stop them from breaking the 3% deficit rule? Their other shenanigans – for instance, president Duda’s legally dubious pardon to Mariusz Kaminski, convicted of corruption and now heading Poland’s police and intelligence services – are merely business as usual in Eastern Europe. Challenging the separation of powers is not.


Wilderness and civilization in the Ombrone valley


January 27, 2016 by AK

Tuscany has been settled for thousands upon thousands of years and civilized through and through, yet it is still teeming with wild animals:

…[T]he Tuscan authorities say there are just too many animals in the region, largely because of plentiful forest and wild mountain ranges.

They estimate that there are around 200,000 wild boar and 300,000 deer roaming the countryside, with many more in neighbouring regions such as Umbria.

Despite the darkness of the name, Umbria is hardly a jungle either – the country of Assisi, Perugia and Spoleto. A great share of these wild boars are recent immigrants:

The Tuscan wild boar is a cross between native stock and eastern European boars introduced several centuries ago. They were hunted to the point of extinction by the early 1900s, but numbers exploded during the 1990s, thanks to boars migrating from the war-torn Balkans and the impressively productive breeding capacity of feral pigs, which can have up to two litters a year.

Obviously, the Balkan boars wouldn’t have stayed in central Italy if they hadn’t found a suitable habitat there. (Il cinghiale, it is said, is a Tuscan mascot.) Only twenty miles in a direct line from Siena, one of the birthplaces of modern banking, the countryside feels like wilderness. The slow train from Siena to Grosseto travels through primeval, deeply rural parts, yet palaces of Etruscan princes once stood on those hills.

Isabella Dusi writes in Vanilla Beans and Brodo: Real Life in the Hills of Tuscany:

If you were to arrive at Montalcino from the coast, through the Ombrone valley… you would find yourself winding through an entirely different terrain: the dense thickets and low bushes of the hunting woods to the west. This approach may be interrupted by the crack-crack-crack of rifle fire. Sunday is a popular hunting day when gunfire echoes over the village; often, standing along the wall, I hear the Sabbath fusillade in the Ombrone Valley coinciding with the joyful ringing of the church bells to bring the faithful to Mass.

Montalcino (of Brunello wine fame) is five miles away in a straight line from the Murlo station on the old Siena-Grosseto line, which runs along the Ombrone river (another dark name), nine miles from the Etruscan Antiquarium, 19 miles to the southeast of Siena.



January 22, 2016 by AK

Ten years ago – yes, eight days short of ten years! – Donald Pittenger ran this memorable post at 2Blowhards about the Russian artist Valentin Serov (1865-1911):

Serov was an extremely talented painter. His abilities were apparent in childhood. And his blazing debut in his early twenties was noted above.

On the other hand, Serov was never an innovator of art movements unlike Manet, Monet or Picasso. This, plus the fact that he practiced in distant (from Paris) Russia, probably accounts for his footnote-status in art history.

Definitely not so in the history of Russian art: Serov is the author of the near-iconic Girl with Peaches and The Abduction of Europa.

…I tend to look [at] a painting from a technical perspective, having been an art student as an undergraduate… I’m less likely when seeing a masterpiece to say “Oh wow!! What an experience!” than I am to think “Oh wow!! Look how he painted that silk gown!”

Pittenger was particularly impressed by Serov’s treatment of gradations in skin color:

…Serov varied his coloration treatment of faces, hands, and so forth from painting to painting to fit the color key while keeping the flesh colors realistic. Possibly these color differences were simply what he found in the various sittings. Perhaps he was trying to stretch his already formidable skills by setting up challenges to resolve. Or maybe he simply sought different color keys in order to amuse himself…

It makes me wish I had a wall covered with Serov originals to serve as inspiration and guides the next time I try doing a portrait.

Fast forward to January 2016.

Today, The Associated Press reported from Moscow:

Russians wait hours in freezing weather to see art exhibit.

An English-language Russian news site has more details (The Moscow Times also has a video):

Visitors excited by new exhibition break down door at the Tretyakov.

The artist is Valentin Serov; the exhibition marks his 150th birthday. It’s not at the central Tretyakov Gallery complex but in the Krymsky Val building, the usual venue for modern (20th-century and later) art events.

I have no clue what caused such inordinate interest in Serov’s work: a fair number of his paintings are always on display both in Moscow and St. Petersburg. Two years earlier, a major exhibit of Natalia Goncharova‘s works loaned from all over the world was not nearly so well attended.

The fact that Putin visited the Serov event earlier this week may have turbo-charged its appeal but abnormally long queues had already been reported for weeks.

The Kremlin’s Polish frenemies


January 22, 2016 by AK

When I got back to Moscow after the winter vacation earlier this January, one of the first things I had heard (on the boring but, at least, non-government-owned FM station that pretends to focus on “business” but mostly babbles amateurishly about financial markets) was news from Poland.

The Kremlin seems to influence the choice of subjects covered by private news outlets. Reports of any discord within the EU are music to certain ears in Moscow. The tiniest disagreements there get magnified to grotesque proportions in the Russian media.

After reading up on the Polish developments, I realized they were under- rather than over-reported.  I’m not even talking about their media law passed this month. I’m talking about the Polish parliament’s assault on the constitutional court, which Martin Schulz, the president of the European parliament, has likened to a coup d’état.

What happened in December 2015 looked very much like a coup, with the parliament – with assistance from the president – usurping absolute power by emasculating the constitutional court (and all the judiciary). In particular, no parliament should be able to staff the highest court of the land with loyal members at will, bypassing the required hearings, or to interfere with the decision-making procedure at the top court.

Schulz has warned against the “Putinization” EU politics, but openly breaking the constitution is not Putin’s style. Compared with his devious Moscow cousins, the little man pulling the strings in Warsaw is a straight walker. The big man in Minsk seems more like his role model:

Professors Łętowska and Zoll compared the President’s acts to that of President Lukashenko of Belarus, who in a similar way, invalidated the appointment of a constitutional judge in 1993.

Not that Poland is going to be “punished”: Hungary has been denounced for similar shenanigans but otherwise let be. Maciej Kisilowski explains why the Kaczynski government had to resort to such ugliness:

Abortion or gay marriage are often the first issues that come to mind when we talk about constitutional courts. But the Polish court is already highly conservative in that respect. A much more plausible explanation is that the government needs the court’s acquiescence to pass the sweeping and costly economic reforms that Law and Justice promised during its political campaign.

The Law and Justice party (PiS) are socially conservative statists:

Just the flagship pledge to offer each family approximately €100 a month for its second and third child could increase the budget deficit above the 3 percent level accepted by the EU. And there is more: Law and Justice has promised a higher threshold for the zero income tax rate, a lower retirement age (as early as 60 for women), subsidies for coal mines, and a vast increase in defense spending.

The constitution sets the government debt ceiling at 60% of the GDP. Is the PiS desperately trying to bypass this restriction? Not necessarily: Kisilowski rejects this straightforward explanation:

…the new spending will have to be covered by unorthodox taxes, perhaps announced on short notice or even retroactively.

The retroactive Hungarian-style golden parachute tax has already been passed.

It’s a tax on severance payments to managers of state-controlled companies. Not necessarily a bad idea by itself – unless retroactive.

As George Soros reminds us, Putin wants the EU to collapse. I don’t think Kaczynski wants the same: Poland has benefitted enormously from being a member. But his conviction that a country can reap the perks of membership without playing by the rules of the club places him, in an odd way, on Putin’s side.

We have other fish to fry


January 21, 2016 by AK

At least at a cursory first glance, Judge Owen has produced a well-reasoned, detailed report on the Litvinenko murder. That’s what one expects from an experienced British judge: the nation can still rely on its judiciary in spite of its occasionally disastrous errors. As the distinguished historian Robert Service noted, “One thing the inquiry shows is the autonomy of the judicial process.” Top people in Moscow probably lack the imagination to comprehend this autonomy.

Sir Robert Owen’s report, the outcome of a public inquiry, should carry far more weight that merely the UK cabinet’s opinion. But – unsurprisingly – no action is being taken by the UK government aside from freezing Lugovoy’s non-existent UK assets. These days, Syria must be closer to Westminster than Mayfair:

We have quite important other fish to fry with the Russians. They are very important in carrying the Iran de-nuclearisation through, they are absolutely crucial in sorting out the mess in Syria.

Interestingly, Labor frontbenchers are more hawkish on this than Team Cameron, and The Guardian‘s view is hardly conciliatory.

Ghawar and the IPO


January 19, 2016 by AK

More than ten years ago, in 2005, the late investment banker Matthew Simmons published Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. It’s sitting on my shelf but I have not gotten very far reading it, I must admit. Simmons tried to show that Saudi Arabia’s fields, most importantly the giant Ghawar field, were on the verge of production decline or had starting declining. Oil output from Ghawar is a state secret (!) so it’s hard to assess Simmons’ claim in its regard, but the Saudis have launched two large fields since 2005 to keep up their production capacity.

Matthew Simmons was a peak oiler, a perfect object for ridicule nowadays. He did not live to see the full extent of the shale revolution. Despite being in the business of arranging deals between North American oil companies, he did not anticipate that horizontal drilling and multistage fracking would transform America’s oil sector. But his points about Ghawar may still be valid, even if he misjudged the timing of the production decline he prophesied.

Now that Prince Muhammad has hinted that Saudi Aramco could go public, an independent reserve audit would seem a prerequisite for the IPO. That’s one of the reasons why the Saudi Aramco placement seems like something out of this world: not only would its accounts be published, but a Miller and Lents or a DeGolyer and MacNaughton would finally shed light on the great mystery of Ghawar.

Money talks, that’s it


January 16, 2016 by AK

“Father of politically active Koch brothers built a refinery for the Nazis,” The Washington Post tells us, and so do a number of other newspapers and e-zines. Reviewing a new book on the Koch family by Jane Mayer,  Tom Hamburger explains:

It has long been known that Fred Koch made part of his early fortune working in Stalin’s Russia… Mayer, for the first time, describes the early effort to land a refinery construction deal that was ultimately blessed personally by Adolf Hitler. In 1934, Mayer reports, Fred Koch’s firm provided engineering plans and began overseeing construction of a massive oil refinery near Hamburg…

“Long known” does not mean “universally known.” To put things in context, it bears repeating that Winkler-Koch, an upstart engineering firm from Kansas, developed (yet another) method for thermal oil cracking in the 1920s but got sued by Big Oil for patent infringement. Besieged by the lawsuits, Winkler-Koch was unable to license out its technology in the US. The Soviets recognized an opportunity and placed a major order. From what I’ve seen so far, Moscow paid $5 million to get 15 cracker units installed at refineries in Grozny, Batumi, Baku, Tuapse and Yaroslavl.

Not bound by patent limitations, Soviet engineers soon copied and modified the technology, leaving Winkler and Koch to look for new markets. The firm moved on to Europe in search of new customers. When Nazi Germany became interested in their technology, Winkler and Koch did not shy away from the new opportunity: the Great Depression was far from over yet. It is not surprising they found something to admire about German industry: in terms of brutality, Germany had yet to catch up with Soviet Russia in 1934.

Commenters keep bringing up Henry Ford’s support for Hitler and for pre-WWII Nazi Germany. However, Ford did not build Germany’s automotive industry: it was German engineers who had put together the first automobile twenty years before the first Ford T was manufactured. The country where Ford Motor Company did build the first mass production car and truck plant was the Soviet Union.

“Gas-rich” describes Qatar better than “oil-rich”


January 15, 2016 by AK

Canadian journalist Mohamed Fahmi writes in an op-ed in The New York Times:

Qataris who seek greater freedom of expression and more democracy in their oil-rich nation face disappointment, and perhaps worse.

I wouldn’t call Qatar oil-poor: it produces about 700,000 barrels per day (bpd) for a population of 2.2 million. For comparison, the much-discussed oil output from ISIS-controlled areas seems to be less than 50,000 bpd while their population is estimated at 2.8 to 8 million people.

However, if I were to describe Qatar as rich in some natural resource, I would definitely name gas rather than oil. According to the US Energy Information Administration (EIA):

Qatar was the world’s fourth-largest dry natural gas producer in 2013 (behind the United States, Russia, and Iran), and it has been the world’s leading liquefied natural gas (LNG) exporter since 2006, with 31% of market share in 2014.

In terms of barrels of oil equivalent per day (boepd), Qatar’s dry gas output was about 3 million boepd in 2013. A further 1.4 million bpd was provided by various liquids that are by-products of gas output and processing, such as condensates, natural gas plant liquids, gas-to-liquids plant output and others. Add the 0.7 million bpd crude production, and total liquids output becomes 2.1 million bpd. This is the number the EIA cites as Qatar’s “total oil supply,” noting that crude oil “represented 35% of petroleum and other liquid production in Qatar in 2014, down from 44% in 2010.”

In other words, Qatar’s total hydrocarbons output was 5.1-5.2 million bpd in 2014, with dry gas accounting for 58-59% of the total, gas-related or gas-derived liquids for 27%, and crude oil, for the remaining 13-14%. Gas-rich is the right term, especially if you must only use one.

The $15 billion question


January 8, 2016 by AK

The Guardian did a great job reporting on the Pussy Riot and Arctic 30 cases, and has covered the war in Ukraine in a balanced and honest way. The paper’s US coverage, in contrast, is often distorted by its ideological biases. Still, its on-the-ground reporting from the US can be second to none. When it comes to business and finance, especially the energy sector, The Guardian‘s standards allow for amateurish ignorance and worse.

The latest example is this piece on TransCanada’s two challenges to Obama’s denial of a trans-border permit for the Keystone XL pipeline: a forthcoming complaint to a NAFTA arbitration body and a lawsuit filed with a US district court in Houston. The Guardian reports:

TransCanada Corporation said it was looking to recover an estimated $15bn it spent over many years trying to win approval for the pipeline.

Did TransCanada really say this? $15 billion spent on a lobbying effort? Seriously?

This is what the company actually released to the press:

Through the NAFTA claim, TransCanada will be seeking to recover more than US$15 billion in costs and damages that it has suffered as a result of the U.S. Administration’s breach of its NAFTA obligations.

Likewise, TransCanada’s letter of intent (to sue the US in a NAFTA tribunal) only mentions

damages of over US$ 15 billion arising from the United States’s breach of its NAFTA obligations.

I have no way of telling what exactly the $15 billion is made up of, but sunk construction costs and lost future revenues are major contributors. From TransCanada’s complaint filed with the US district court:


123. Defendants’ actions giving effect to the denial of the permit authorizing 
TransCanada to build, own, or operate the portion of the Keystone XL Pipeline that crosses the  U.S.-Canada border would prevent the construction and the operation of the portion of the  Keystone Pipeline XL Pipeline extending from Hardisty, Alberta to Steele City, Nebraska.

124. If TransCanada is precluded from constructing and operating the Keystone XL  Pipeline from Hardisty, Alberta to Steele City, Nebraska, it will be unable to provide oil transport services demanded by shippers and their customers for oil from Alberta and Montana destined to points in the United States, will lose the value of the capital expenditures made and expenses incurred in preparing to build that portion of the Keystone XL Pipeline, and will be unable to profit from providing those services. TransCanada has expended billions of dollars in preparation for constructing the portion of the Keystone XL Pipeline extending from Hardisty, Alberta to Steele City, Nebraska.

125. Portions of the originally proposed Keystone XL Pipeline, including the Gulf 
Coast Pipeline and the Houston Lateral, have been completed or are nearing completion and are or soon will be in operation. Those facilities were designed and constructed to provide services to shippers including those that sought to transport oil from Hardisty, Alberta and the Bakken formation in Montana to destinations near Gulf Coast refineries in the United States. If TransCanada is precluded from completing and operating the portion of the Keystone XL Pipeline from Hardisty, Alberta to Steele City, Nebraska, it will be unable to provide the  anticipated levels of service over the Gulf Coast Pipeline and the Houston Lateral. As a result, the revenues it will secure from operating the Gulf Coast Pipeline and the Houston Lateral will be significantly reduced, and TransCanada will be unable to recover a significant portion of the expenses associated with constructing and operating those facilities.

The Guardian‘s reader is left with the impression that the $15 billion TransCanada wants in damages is more or less equal to the amount it has spent on lobbying and PR in the US. Clearly it is not the case – at best, it is an unfounded and bizarre conjecture.


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