More on Private Armies

I remarked on Gazprom's having a private army. Joel responds:

...I've 'always' held that multinationals have armies (or more accurately police forces).

Copy that, but the closer you look at the issue, the more complicated it gets. No doubt a Henry Ford had a crowd of heavies ready to help with "labor relations," heh heh. And we've all seen a hundred movies where Big Evil has a bunch of suave and tactful minions (or the occasional Churck Norris clone) ready to put away the bad guys. Joel remembers how Ross Perot sent in his own team to rescue a couple of employees from a throng of angry Iranians (and provided the plot for Ken Follett's Wings of Eagles).

But there must be a lot of subtleties in degree. I suspect that the more rudimentary the local police force, the more naturally you wind with your own. Or you simply take over the local police force and run it as if it is your own. Or you do as we seem to be doing now--let the taxpayers pay for the training, and then cherry-pick the good ones for your private force.

Then there is the flip-side issue of the sovereign enforcer who gets too big for the sovereign. Don't even think about parkng in a free spot on West 10th Street in Manhattan--those spots belong to the Sixth Precinct. Meanwhile, whom did American pols fear more --Harry Truman or J. Edgar Hoover? Rewrite that previous sentence with "Russian" and "Joseph Stalin" or "Lavrenti Beria"--well, I suppose that one might be a push. Inside Hitler's Germany, Heinrich Himmler ran a full-bore state within a state. The Turkish military has long felt free to tell the Turkish government what to do.

Wheels within wheels: compare Japan, where the Yakuza operates as a semi-authorized private adjunct to the police, doing the jobs that are politically untenable for the police to do.

So, what's special about Gazprom? Maybe nothing, except possibly the fact that Gazprom is the only case I can think of where the private entity gets its private army by explicit government authorization.

Today, Nadym-Pur-Taz, Tomorrow the World

Here's one that passed me by: Gazprom, the great bloated Russian tumor on the energy market, has a private army (so also Transneft, the pipeline monopoly). Or at least I think it does; there were a bunch of stories in the foreign press back in 2007 saying that the Duma was authorizing it; later references are more sketchy. Indeeed the only reason I have to doubt it is that it so obviously should be true--which is basis enough, I suspect, to be taken by surprise.

In a narrow sense, there may be less here than meets the eye. Gazprom's primary area of operation is around the Gulf of Ob in the frozen wasteland on Russia's northern border. It's a space peopled by a thin scattering of indigenous peoples and perhaps a larger cohort of Gazprom employees and you can be sure that Gazprom would run all the policing in that area even if it were nominally public. The more interesting question is how far Gazprom's military force engages in foreign adventures, as Gazprom continues to insinuate itself into energy enterprises around the world.

Private armies anywhere are enough to scare any thoughtful observer, and Gazprom in particular has a growing rep for being a corporate bad boy. The flip side is that to all appearances Gazprom is so corrupt and inefficient that it is hard to imagine getting an army right. Of course, as in corrupt and inefficient nations, it may be the army that finally steps into management as if to set things right.

H/T Edward Lucas.

On Privatizing West Point, etc.

I have been wondering—do libertarians favor the privatization of West Point? It sounded like a silly idea to me when I first thought of it, but if all we are doing is training people for their real careers at Blackwater, It seems to me that it is worth considering.

One difficulty is that it would limit education to the rich, and we know the rich aren’t really interested in getting shot at. But I think I may have thought up a way around that. The thing is, the military may have become too workmanlike and bureaucratic—too much like, say, accounting.

The point that libertarians may miss here is that men aren’t really motivated all that much by wealth per se. They’re much more concerned with status. They’ll take a job like, say, drug runner, even though it pays less than MacDonald’s because it is so much more cool than McDonald’s. This trait seems to be hard-wired. Anthropologists say that in primitive societies, men would go hunting even though it yielded less food than hoeing the beans, because hoeing the beans was the iron age version of McDonalds. No matter that it cost you more energy than it yielded; think how nifty it would be to tell the chicks you took down a wooly mammoth.

And think of status relationships in ancient societies. In Greece, you wanted to be a hipparch; in Rome, an equestrian. In each case, note the root “horse.” In each case, you were a special kind of guy guy if you could had enough money to fit out your own battle horse. People clawed each other's face off for the opportunity. A status game.

It might be starting already. My friend Scott tells me he knows a guy who claims title to the world’s largest privately-owned collection of surplus Army tanks. Just today, I saw that Hummer is already advertising that you ought to buy one of their urban attack vehicles so you can help rescue people next time there is a hurricane. With your own time. And risk and money. A status thing again. Like I say, wiring.

Ought to be even easier with airplanes. What if the young George Bush, instead of being forced into a plane owned by the state of Texas (or Alabama) had had to show up with his own equipment--with, I assume, his own name festooned on the side (and, I suppose, his own crew, chosen from out of his posse) You wouldn’t have been able to pry him out of the cockpit. And just think how different our history might have been. No, on second thought, don’t. Bad idea. Sorry.

State Capitalism: Trumping Privatization?

Brad Setser highlights a topic that I haven't given any thought to before. It's on his list of top macro and financial stories of the year (link):

5. Wall Street embraces state capitalism. Privatization: Over. The really big money is now to be made from cross-border nationalization. Transparency, at least from governments with rapidly growing assets: over-rated. Funds that don’t have to disclose their total assets, let alone report to pesky, risk-adverse parliaments are far more fun -- and certainly far more willing to snap up big stakes in distressed banks.

The story of 2007 though isn’t the scale of the increase in the size of sovereign wealth funds.

As of now, the $1 trillion annual increase in the assets of sovereign wealth funds is just a forecast, unlike the $1 trillion plus annual increase in central bank reserves.

Sovereign wealth funds did probably add about $250b to their assets in 2007, but that total is somewhat deceptive. It seems likely that China shifted a bit over $100b from the PBoC's account at SAFE to the CIC's account at SAFE in late December. Without that influx, sovereign wealth funds wouldn't be growing all that much faster in 2007 than in 2006 or 2005. Moreover, about $100b of the overall increase comes from funds that are still managed fairly conservatively: Norway is the most obvious example, but Kuwait has also stayed out of the headlines -- at least so far. Some recent press reports suggest that the KIA now has deal-envy. Almost all the excitement came from the roughly the more aggressive management of the roughly $50b going into the funds of Qatar, Abu Dhabi and Dubai (money that is often leveraged), the redeployment of some of the accumulated profits of Singapore's GIC and Temasek and a couple of small deals from the CIC and two Chinese state banks …

Rather the story is how quickly the Street and the City jumped on the sovereign wealth fund bandwagon -- without the agonizing of say Tyler Cowen, let alone Larry Summers. The world's biggest deal-makers are now convinced that the governments of emerging market economies – along with cash-rich state-owned enterprises -- are the natural owners of a host of US and European financial assets, whether US banks, global securities firms, European toll roads or Australian mining companies.

Remember, Morgan Stanley, Blackstone, Barclays and Standard Bank together account for only about 3% of the total increase in the foreign assets of China's government. The redeployment of China's financial firepower outside the bond market has hardly started.