Monday, February 28, 2022

War in Ukraine takes a dangerous turn

With Russian President Putin asking his nuclear forces to go on high alert, the war in Ukraine has taken a dangerous turn. Putin's decision is not about threatening the West with nuclear weapons, as the Western media makes out. It is about keeping Russia in a state of readiness for any threat from NATO, given the belligerence shown by the US and NATO since the war erupted.

Various NATO members, including Germany, have made it clear that they will supply weapons to Ukraine. Significant sanctions against Russia have been announced. Turkey, a NATO member, has restricted Russia's access to the Black Sea. Russia sees itself as under serious threat. In putting nuclear forces on alert, Putin wants to prepare the country for the worst case scenario.

It is a pity that Western media propaganda is being bought wholesale by much of the Indian media. There is talk of invasion of Ukraine, Russia wanting to re-create the USSR, stories about death and destruction and the heroic resistance of the people of Ukraine. The suffering of Indian students stranded there has lent a desi dimension to the story. Ukraine is, regrettably, a war zone. War is suffering, it is destruction. It is important to ask: what led up to this situation? 

As I have been trying to highlight in my posts, Putin has made it clear time and again that he is not interested in absorbing Ukraine into Russia. His main demand is that Ukraine should not become a member of NATO and hence a base for nuclear missiles. The West and Ukraine have refused to concede this demand, which several sober politicians and analysts in the West think is eminently reasonable. Ukraine's President went further and declared that Ukraine retained its right to acquire nuclear weapons! 

Putin sees the continued expansion of NATO into its backyard as an existential threat. He will do what it takes to prevent that from happening. That is why Russia's  military operation in Ukraine has happened. The operation will not end until Putin's twin objectives are achieved: de-militarisation and de-Nazification of Ukraine. No sanctions, no UN resolution, no Western media propaganda can stop Putin from doing what he thinks is absolutely essential for the security of his nation.

I cannot do better than quote from an article veteran diplomat M K Bhadrakumar has written in

Russia is not at war with Ukraine, but is locked in an existential struggle to avoid the fate of Yugoslavia. Period. The spectre that is haunting Putin is NATO membership for Ukraine, which the Americans have been orchestrating.

Following the CIA-sponsored coup in Ukraine in 2014, an anti-Russian power calculus emerged in Ukraine. The US's point man for Ukraine in the Obama administration was none other than Biden himself. He made countless trips to Kyiv during 2014-2016 to fine tune that transition.....

The core issue today is not 'Russian invasion'. Putin has spelt out unambiguously that Russia does not intend to occupy Ukraine and that its objective is two-fold: 'Demilitarisation' and 'denazification' of Ukraine

The first one means dismantling the military infrastructure that NATO and has installed on Ukrainian soil right on Russia's doorstep. Ukraine's defence apparatus, including its command centres, are already hooked to the NATO system.

Putin has repeatedly warned that if the US instals missiles in Ukraine, Moscow would be within 5 minutes's striking distance. It is 'like a knife at our throat', he said on Thursday...

....Under no circumstances will Russia give up until the twin objectives are realised -- dismantling the offensive weapon systems installed by NATO in Ukraine and, secondly, scattering the Neo-Nazi forces that act as the US's cat's paw.

The Modi government has shown courage in abstaining from the Security Council decrying the Russian intervention in Ukraine. But many of our intellectuals and the Indian newspaper reading audience seem sadly disconnected from the tragedy unfolding in Ukraine. 

Thursday, February 24, 2022

Ukraine: Putin wrongfoots the West

Putin has announced a military operation in the two breakaway republics of Donetsk and Luhansk. The Western media calls this an invasion. As Putin was careful to point out in his last address, the Russian intervention is in keeping with the US charter. Donetsk and Luhansk have announced their independence and Russia has recognised them. Russia has a mutual defence treaty with both. Thus, the Russian intervention is comparable to its intervention in Syria.

The West thought that Putin would respond to Ukraine's provocations in the Donbass region through a direct assault on Ukraine. Putin has not done so. His troops have moved into the two breakaway republics. If Ukraine attacks Russian troops, Putin will retaliate.

The West has responded with sanctions that even the Western media finds trifling. Harsher sanctions may follow. The West must understand that sovereign states will be willing to put up with sanctions of any order where they believe national security is threatened. North Korea has done that. So has Iran. The West has been unable to cripple them militarily whatever the economic price they have paid. With Russia, the West has an even lesser chance.

What we are seeing is a Russian attempt to redefine international relations. No longer is Russia willing to allow the US to lay down the law- at least where Russia's immediate periphery is concerned. The US and NATO will not be allowed to station missiles in Russia's periphery and threaten Russian security. Period. If any nation in the Russian periphery does not accept this position and plays along with the West, it will pay the price. That is what Ukraine is learning the hard way. Putin has made it clear that Russia has no interest in re-absorbing Ukraine or any  the other erstwhile republics into itself as long as Russian security is not threatened.

The West refused to buy this. It has sought to portray Putin as an aggressor who wants to recrate the Soviet empire. Just three days ago, economist Jeffrey Sachs made an impassioned plea for the West not to mis-represent Putin's position and to guarantee that NATO enlargement would not include Ukraine or other states in Russia's periphery:

Many insist that Nato enlargement is not the real issue for Putin and that he wants to recreate the Russian empire, pure and simple. Everything else, including Nato enlargement, they claim, is a mere distraction. 

This is utterly mistaken. Russia has adamantly opposed Nato expansion towards the east for 30 years, first under Boris Yeltsin and now Putin. Before that, the Soviet Union largely opposed Nato expansion, too. 

It is easy to understand why. The US would not be very happy were Mexico to join a China-led military alliance, nor was it content when Fidel Castro’s Cuba aligned with the USSR 60 years ago. 

Neither the US nor Russia wants the other’s military on their doorstep. Pledging no Nato enlargement is not appeasement. It does not cede Ukrainian territory. It does not undermine Ukraine’s sovereignty. It would in fact help to secure it. Ukraine should aspire to resemble the non-Nato members of the EU: Austria, Cyprus, Finland, Ireland, Malta and Sweden.

The West refused to give the necessary guarantees. It was willing for more talks of the sort that have led nowhere for the past eight years. It underestimated Putin's resolve.

Will there be a full-blown conflict? Not if the West concedes Putin's point and lays off. If the West chooses to interfere in Ukraine and provoke further conflict, all bets are off. 

Tuesday, February 22, 2022

NSE affair: hold board members and regulators accountable


My article on the NSE affair in the Hindu. I say that board members and regulators must be held accountable in a way that is not happening today.


Saturday, February 19, 2022

NSE affair: board lapses

In an earlier post, I had referred to the lapses on the part of the board of NSE. What precisely were these lapses? 

One, the Board was alerted to the irregularities in the appointment of the Anand Subramanian as Chief Strategic Adviser  and, subsequently, as Group Operating Officer. The matter was discussed by the Board and a decision was to taken to remove the person but the discussions were not minuted, citing confidentiality and sensitivity of the matter. This was a shabby attempt at a cover-up.

Two, the board had earlier delegated substantial powers to Subramanian when he was designated consultant and without looking into his suitability for being delegated substantial powers.

Three, the Board came to know that Chitra Ramkrishna, the MD, had shared confidential information with an outsider. They, nevertheless, allowed Ramkrishna to resign citing personal reasons, gave her a generous severance package and recorded a glowing appreciation of her services. 

Four, the Board failed to respond quickly enough to various queries sent by SEBI. 

In short, the Board seemed interested more in protecting Ramkrishna than in protecting the institution.

M Damodaran, former SEBI Chief, documents    some of these lapses. So does Hemindra Hazari  who also provides a list of the board members at the time these decisions were taken.

The NSE board was as distinguished as a board might be. How did such a distinguished board allow such an appalling state of affairs to continue for so long? 

Well, I have long contended that the effectiveness of a board has little to do with the presence of luminaries. Quite the contrary: the effectiveness of a board is inversely proportional to the luminaries present on it. That is because most luminaries think that, having lent their names to the board, they have done their jobs. They cannot be troubled with the nitty-gritty of things, such as going through the agenda papers, raising tough questions and getting matters rigorously minuted.

Better to have competent persons  with the right credentials who fall short of being luminaries. There is a better chance, then, that governance will happen.

Thursday, February 17, 2022

Ukraine: what exactly is going on?

Western governments and the Western media have been screaming for over a week that a Russian attack on Ukraine is imminent. Russia denies any plans to invade Ukraine. The President of Ukraine has asked Western governments to tone down hysteria over a Russian invasion: he doesn't think one is imminent. 

So, what exactly is going on?

Well, it is fair to say that Russia has no interest in absorbing Ukraine. It was interested in maintaining its access to the Black Sea. That objective was achieved when the Crimea was absorbed into Russia. Putin insists that Russia's interest in Ukraine is limited to ensuring it does not become a base for NATO missiles by becoming part of NATO.

Ukraine and some Western governments have indicated that there is little chance of Ukraine becoming a member of NATO. That requires the unanimous approval of all NATO countries. There is no way that such unanimity will be achieved in the foreseeable future. No European country, other than the UK, would like to incur the wrath of Russia in the cause of making Ukraine  a member of NATO- it's just not worth the trouble. What Ukraine and the West are reluctant to do is to concede Putin's demand for iron-clad guarantees that Ukraine will never become a member of NATO. 

If Ukraine becoming a member of NATO is a non-issue for now, why has Russia massed troops on the border with Ukraine? A plausible reason could be that it fears Ukraine will allow itself to be used by the West to launch a major assault on Donbas whose Russian population has been facing attacks from Ukraine for quite some time. Russia cannot be passive spectator to such an assault. It is, therefore, keeping its troops in readiness.

Why would the West want Ukraine to provoke Russia? Well, the speculation is that the US wants an excuse to get the West to impose sanctions that would include a ban on the Nord Stream 2 project that involves the supply of Russian gas to Germany. The US does not want Europe to be depend on Russia for its energy. Germany has been reluctant to buy the US line because it can use Russian gas supplies. Creating a ruckus over any Russian action against Ukraine would provide the basis for sanctions that cover Nord Stream 2. 

Another American objective could be tying down Russia in its immediate vicinity so that it does not attempt far away adventures such as the one in Syria. 

Putin has made it clear that he will not allow the countries in its periphery to be used a base for missiles that threaten Russia. He has declared that he has no interest in re-creating the erstwhile Soviet Union. If the West cannot accept this position, the world is in for serious trouble.

NSE affair: question marks over the role of board and SEBI

Corporate shenanigans have failed to surprise. But the National Stock Exchange (NSE) story is in an India-class of its own. Former NSE MD Chitra Ramkrishna, according to a SEBI order, shared confidential information about the exchange and took instructions or guidance from an anonymous email id whom she ascribed to a Himalayan yogi. 

The guru syndrome is all too common in India. As long as this is about one's personal issues, nobody can have a serious quarrel. But the notion that NSE board papers, financial data, performance appraisals and appointments could be shared with a yogi has people shaking their heads in disbelief.

NSE MD Vikram Limaye is set to have met Finance Ministry officials in connection with the SEBI order against NSE, Chitra Ramkrishna and others. This is the surest indication that the Ministry is not convinced that matters can be left to SEBI and the board any more.

The board was made aware of the blatant nepotism implicit in Ramkrishna's appointment of Anand Subramanian as Chief Strategic Officer and, later, as Group Operating Officer, on a stratospheric salary. It was also made aware of her sharing confidential information with somebody who, she claimed, was a Himalayan yogi. Yet, instead of acting against Ramkrishna, the Board allowed Ramkrishna to resign and, that too, with generous payments. This is certainly a serious lapse on the part of the board.

Even earlier, there must have been plenty of talk within NSE about Subramanian's role. It is hard to believe that the board did not pick it up. And if it did, why was there no response? NSE is a public institution. Using NSE to confer pecuniary rewards on an individual, without adequate basis, is abuse of office and misuse of public resources. I am not competent to say so but, perhaps, it could attract the provisions of the Prevention of Corruption Act.

Within NSE staff itself, did anybody protest? Did any of the top officers, including the HR head, raise questions? Unlikely. In the authoritarian world of corporates, serious dissent is unthinkable. 

SEBI's role has also left much to be desired. According to media reports, SEBI was alerted to Subramanian's appointment by whistle-blowers. It should have investigated the matter and taken action. It did not. Besides, imposing fines and barring people from the market is just not enough in this situation. 

As many have pointed out, after the emails with the yogi became known, SEBI should have made every effort, through the cyber police, to track down the identity of the yogi. Since confidential information involving a public institution was shared with an unauthorised individual, it should have filed a complaint with the police. It should have hauled up the then board members for the lapses pointed out above. There is a case for naming and shaming individuals in such instances and there is also a case for barring individuals from holding board positions. Today, board members can fail to  discharge their fiduciary responsibilities and just get away with it. SEBI needed out to send out a message that this can't go on.

At the time of writing, there are reports of an Income Tax raid on Ramakrishna and Subramaniam. This does suggest that the government does not intend to let matters rest with the SEBI order. Sadly, the government has to intervene because neither the board nor SEBI is seen to have done the needful. This highlights a basic fact of governance: Governments are subject to a modicum of democratic accountability in a way in which boards and regulators are not.

Monday, February 14, 2022

Government soft pedals privatisation

The government's target for privatisation in its Fy 22-23 budget is exceedingly modest- Rs 65,000 crore. This has disappointed many. They see this as timidity on the part of the government after the repeal of the farm laws. Well, it's not timidity, it is plain good sense. Privatisation on a large scale is hard to bring off and, if bungled, can prove politically costly.

For most of the two decades or so that disinvestment or privatisation has been attempted, the government has failed to meet targets. It has come close in some years through the ruse of getting one public sector undertaking to acquire stakes in another. This is not because of opposition from vested interests, whether amongst politicians or in the bureaucracy. The process of privatising a PSU is inherently time-consuming if you wish to get it right- in terms of getting multiple bidders, setting a proper reserve price, strengthening the PSU before offering it for sale and, most importantly, getting the valuation right.

If the government sells an important PSU or a public sector bank on the cheap and to the wrong buyer, hell will break loose. Job losses consequent to privatisation are certainly an issue. The first thing a private buyer will do is to cut the work force and cut benefits. This benefits shareholders but it leaves a large number of workers jobless. The private buyer benefits but there are costs to the government of the day. The government antagonises PSU employees and PSB employees. Central government employees, state government employees, railways' employees all feel a certain kinship towards public sector employees. So, there is significant chunk of the electorate that the government runs the risk of alienating. The benefits, whether in terms of revenues from privatisation or improved efficiency, are relatively negligible.

It makes sense to get rid of basket cases such as enterprises with long-running losses. But handing over a well-run PSU to a private entity- such as BHEL, Concor or BEML- is a different cup of tea altogether. In deciding to go slow on privatisation, the present government realises the political (and, perhaps, economic) costs outweigh the claimed benefits. The political leadership has chosen to listen to its instincts, instead of being guided- or misguided- by "experts".

More in my BS column, A change of course on privatisation.



A change of course on privatisation

 The modest targets reflect a welcome embrace of pragmatism in the govt’s economic policy

India’s Budget for FY 22-23 has signalled that the government will proceed cautiously on privatisation. Would-be reformers will denounce the change of course as a huge setback to reforms. It is, in fact, a move that acknowledges the realities of India’s political economy.

The Budget sets a modest target for privatisation of Rs 65,000 crore. This is way below the target of Rs 1.75 trillion for FY 21-22. Receipts for FY 21-22 are expected to be Rs 78,000 crore, much of which will be accounted for by disinvestment in LIC. It will not come from privatisation or the transfer of ownership and control, which the budget for FY 21-22 had emphasised and for which it was lustily cheered. There is no mention in this year’s Budget of the privatisation of two banks or one insurance company, which were talked about last year.

Privatisation enthusiasts will see this as a serious let-down after the successful privatisation of Air India this year. They overlook the fact that Air India’s privatisation was initiated in 2018 and took four years to conclude.

In privatising Air India, the government moved the airline’s land and building to a special purpose vehicle. It took the unusual step of taking over nearly 75 per cent of Air India’s debt of Rs 61,000 crore. Employees were guaranteed their jobs for one year and no more. The airline was sold to a respected business group, Tata. Replicating this level of attention to detail to numerous other public sector undertakings (PSUs) would not only be time-consuming, it may be virtually impossible to accomplish.

The government’s decision to de-emphasise privatisation reflects three realities. One, the Indian state lacks the capacity to execute privatisation on a large scale. Two, botching the sale of public assets can prove costly in both political and economic terms. Three, it is not helpful to turn privatisation into a benchmark of overall economic performance. 

Executing privatisation correctly is a challenge that not even advanced economies have managed well enough. Privatisation is intended to bring about more efficient utilisation of assets. It is also intended to fetch the government appropriate revenues. For these twin objectives to be met, the government must get the valuation right. 

That is not easy. The timing of the sale must be right— in a depressed market, the chances of the asset being under-valued are higher. Often, the firm needs to undergo a certain amount of restructuring before it is offered for sale so that it attracts the right suitors. There must be multiple bidders. Ensuring these and other conditions for an efficient auction are satisfied is not a simple matter —and few governments the world over have got it right. 

The worst thing a government can do is to rush the process by setting stiff targets. When that happens, privatisation is likely to be botched and controversy is inevitable.

It has been nearly two decades since Hindustan Zinc Limited was sold. The sale has come back to haunt its authors, with the Supreme Court asking the Central Bureau of Investigation to conduct an enquiry into the transaction. HZL was not a very significant PSU and yet its strategic sale is mired in controversy. Think of the furore that would erupt when large, well-run PSUs are perceived to have been sold cheaply or to the wrong buyer. 

If the sale of large, profitable PSUs can prove contentious, the sale of public sector banks (PSBs) presents challenges of a different order altogether. We need to clear as to who the potential buyers might be. The larger private banks in India have created formidable branch networks and are unlikely to have any appetite for the legacy issues that go with a PSB. Foreign banks have been conserving capital for their home markets since the global crisis. They are also not keen to come into India by setting up a wholly-owned subsidiary, as the Reserve Bank of India (RBI) wants, given the onerous governance conditions stipulated by the RBI.  

Selling to a dispersed group of foreign institutional investors risks creating a governance vacuum at a PSB. Citing the case of Axis Bank is not helpful at all.  Public sector entities had a significant stake in the erstwhile UTI Bank when a large stake was sold to FIIs and they continue to hold a significant stake in Axis Bank. It is not as if Axis Bank was handed over on a platter to institutional investors. 

The economic and political consequences of a privatised bank going the way of Yes Bank are terrifying to contemplate. A bank failure that imperils the savings of millions of ordinary depositors would be labelled “the scam of the century”. It would set in motion the depressing sequence of events that one associates with scams— disruptions in Parliament, a paralysis of the administrative machinery and negative media coverage. 

According to reports in the media, the government has decided to hasten slowly (make haste slowly?) on bank privatisation. It is said to be thinking of keeping a 26 per cent controlling stake for itself.  It will consult the RBI on “fit and proper” criteria for potential buyers. This is not a lack of reformist ardour; it is desirable prudence. 

It also does not help the government to let privatisation become a benchmark for economic performance.  In the weeks preceding the Budget, the media runs stories about how the privatisation target is likely to be missed. After the Budget, this theme is again played up. Failure on privatisation tends to overshadow all other reforms and initiatives of the government. Pundits and investors are quick to pronounce judgement, “This government too lacks the appetite for big bang reforms”. Setting a modest target for privatisation is sensible. It would be even better not to set any target at all and to use disinvestment and privatisation receipts as a balancing item in the budget. 

The government showed courage in not heeding calls for massive fiscal spending in the wake of the pandemic and focusing instead on liquidity support. It showed courage again in deciding to repeal the farm laws in the face of determined opposition from a disaffected group of farmers. Likewise, its retreat on privatisation is a welcome embrace of pragmatism in economic policy.