Charles Duelfer | The Search For Truth In Iraq | Page 9

NSA Scutinized, Not FBI?

Posted on June 10, 2014 by Charles Duelfer

There has been much discussion about NSA and whether it is collecting too much data (especially on American citizens) and whether the procedures and authorizations by which it operates should be revised. This debate will not be resolved anytime soon for at least two reasons.

One is that we don’t know how big the threat is to the livelihood of the United States. When the Soviet Union was the primal threat, we could come up with analytic models to estimate of the size of the threat. Not so with terrorism. And frankly, how much money and privacy are we willing to give up to protect against attacks that may be horrible, but not really a threat to our national security? The Boston bombing was tragic, but how many more billions should we spend on intelligence and law enforcement as a result? Osama bin Laden bragged that he caused the United States to divert hundreds of billions of dollars as a result of his attack which cost less (much) than a million.

The second aspect of this debate is that while the focus has been on NSA, it is really the FBI that is the consumer and guide of domestic data. Their objectives and bureaucratic incentives have not been carefully reviewed, at least not publicly. People get put on no-fly lists and some are subject to other consequences. There is little or no review and no mechanism for an appeal. (I wonder if eventually we will all be on the no-fly list.)

No one in the system ever wants to make a decision to do less. Yet, at some point the cost in dollars and individual freedom must be taken into account.

Underlying all this is a suspicion that the government, even with good intentions, is prone to misusing any powers it has.

Maybe Vladimir Putin will bring back the old Russian threat which is easier to calculate and design defenses against.

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American Vulnerability – The Dollar

Posted on May 22, 2014 by Charles Duelfer

American media seems to be focused on domestic affairs while astonishing things are going beyond the borders—and we seem to stand by watching helplessly. The United States position of prominence is eroding.

Yesterday, at a summit in Shanghai between China’s President Xi Jinping and Russian President Vladimir Putin a massive 30-year natural gas deal was signed to provide Russian gas to China. The agreement has been under negotiation for years and its fruition is a big deal for energy markets and international politics.

Less noticed, but possibly even more interesting, was an agreement between Russia and China aimed at undermining the role of the US dollar as the base currency. The Russian bank VTB and the Bank of China signed an agreement in the presence of Xi and Putin to avoid using the dollar and conduct exchanges in domestic currencies. This is a really big signal.  The all mighty dollar may not always be all mighty.

Look at the world (or even just the United States) from the position of China. What makes America a super power? Is it the military? Partly. Is it nuclear weapons? Not so much. What really gives us leverage is the position of the dollar as the base currency. In the last financial crisis, we escaped largely by printing money. Other countries can’t get away with that without causing massive inflation. Sitting in Beijing, it could be seen as a financial attack—US Treasury printing tons on dollars that has the effect of exporting inflation to other countries.   We borrow money (by selling treasuries to finance our wars, debt, TARP, etc.) and then pay them off by, in essence, printing dollars.

The role of the dollar as base currency is a uniquely powerful lever. It is one that is rarely thought of in terms of national security, but nothing is more important. If we lose it, we will have lost our position as the last super power. Period.

Beijing, Moscow, and others are well aware of this. The role of the dollar also gives us the currently valuable tool of sanctions. If Washington decides to limit banking use of dollars for transactions with certain entities, e.g. in Russia or Iran, then we can impose our will on the international financial system. You can bet there is no higher strategic priority than to undermine that position.

We are blindly squandering this leverage from inattention and by our inability to control our appetite for printed dollars.  This is a national security issue, not just a budget issue.

Domestic politics may make it convenient to be staring at our navel while waiting for the next election.  However, the dynamics in the outside world and our shrinking position will effect our own standard of living here.

To see how the role of the dollar figures in international conflict, read James Rickards new book, “The Death of Money: The Coming Collapse of the International Monetary System.” While the title seems a little over the top, Rickards hits on some critical dynamics of an ongoing conflict that is not kinetic, but even more dangerous. There will be a moment when Washington wakes up. It’s only a question of when.

Posted in China, Financial Wars, Russia | 1 Comment

Syria CW – Success, but so what?

Posted on April 29, 2014 by Charles Duelfer

Syria has missed its latest deadline to finish removing Chemical agent and precursors from its territory.  However, they almost made it–about 92% done.  Bashar al-Assad clearly has moved to fulfill his obligation to get rid of his CW capability.  There is no reason to doubt that the last amount won’t be shipped.  In fact, given government successes in reclaiming territory from rebel groups, the shipment of chemicals to the port of Latakia where it is loaded onto ships has become easier.

Clouding this “positive” step by Assad, is the reported use of chlorine as a weapon.  Chlorine is a common but toxic chemical which was used in WWI.  It is a lousy weapon since it is relatively heavy and thus doesn’t disperse well in the atmosphere.  It also smells so you know where it is and can steer clear of it.  Nevertheless, it seems Assad’s forces dumped some amount for some unclear purpose.  Using Chlorine as a weapon is a violation of the Chemical Weapons Treaty that Assad just signed.  Stupid on his part it would seem since he is giving up his “effective” chemical weapons and can accomplish whatever terror or military purposes he may have with non-chemical weapons.  Assad would seem to be squandering whatever boost to his international reputation his divestiture of his real CW capabilities.  Go figure.

The international arms control/disarmament community should still chalk Syria up as a win.  They have pretty much gotten rid of everything.  Remaining inspections will check detailed compliance and there will be a debate over the destruction or “inactivation” of factories used to produce weapons.  And of course Syria has to ship out the last barrels of chemicals.  But it looks on course to complete the job and the OPCW/US destruction process on board the MV Cape Ray will proceed–probably meeting the next deadline of June.

In the meantime, Syria is still in flames.  The Russian role is even more complicated given the developments in Ukraine. And Iran is watching and calculating what to do regarding its negotiating deadline of July when either the negotiations have succeeded and sanctions are further reduced, or not.   This will be a really big deal though to regard American press, attention seems to be directed inward not outward.

Posted in Iran, Russia, Syria CW | Tagged , , , , , , | 1 Comment

The New Russian Threat: May be Good News for some

Posted on March 26, 2014 by Charles Duelfer

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?

Posted on March 13, 2014 by Charles Duelfer

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).

Posted in China, Cyber Threat, Intelligence, Terrorism | Tagged | Leave a comment

Malaysian Aircraft Cargo?

Posted on March 10, 2014 by Charles Duelfer

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.

 

Posted in China, Terrorism, Uncategorized | Tagged | Leave a comment

Ukraine – Dollar vs. Ruble

Posted on March 7, 2014 by Charles Duelfer

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.

Posted in Financial Wars, Intelligence, Russia, Ukraine | Tagged , , , | Leave a comment

Space Station and the Ukraine Crisis

Posted on March 5, 2014 by Charles Duelfer

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

Posted on March 3, 2014 by Charles Duelfer

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.

cray@omnisinc.com

 

Introduction

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

 

 

Conclusions

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?

Posted on February 5, 2014 by Charles Duelfer

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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