Op-Ed Contributor

Putin’s Crime, Europe’s Cowardice

By BERNARD-HENRI LÉVY

JULY 22, 2014



TANGIER, MoroccoIN eastern Ukraine, Vladimir V. Putin has been playing with fire.
He has mobilized the worst elements to be found in the region.

He has taken thugs, thieves, rapists, ex-cons and vandals and turned them into a paramilitary force.

He has permitted ad hoc commanders of separatist groups to kill or chase off intellectuals, journalists and other moral authorities in the cities of Donetsk and Lugansk.

He has watched as a vodka-soaked rabble army destroys or takes over public buildings, hospitals, schools and municipal offices of the country it is pretending to liberate.

He has allowed a veritable gang war to take holdwithout caring that he is losing control of the forces that he has unleashed, with rival bands pitted against one another and carving out fiefs amid the growing anarchy.

Most troubling of all: To this underworld without structure or discipline, to these undisciplined louts who know only the law of the jungle, to this new brand of fighting force that has only the dimmest idea of war and no idea, God knows, of the laws of war — to this motley collection Mr. Putin, the Russian president, gave a terrifying arsenal with which the amateur soldiers were unfamiliar and with which they have been playing, like kids with fireworks.

We know that Russia supplied vast quantities of heavy weaponry to the separatists and trained them to use the SA-11 surface-to-air missile system — the kind believed to have been used to bring down Malaysia Airlines Flight 17.

One can envision the victorious gang celebrating with its trophy, playing with it as if it were a toyone that can reach altitudes of over 70,000 feet.

One can similarly imagine Russian military officersnot so secretly assigned by the Kremlin to watch over the missiles and their use by amateur artillery crews targeting Ukrainian military aircraftbeing overtaken by events and seized with panic.

One can even imagine their consternation when Igor Strelkov, the self-proclaimed defense minister of the Republic of Donetsk, claimed responsibility for shooting down a Ukrainian military plane — which turned out to be Flight 17.

We know what happened.

Whatever the outcome of the eventual investigation — an investigation made well nigh impossible by these dogs of war who follow no creed and no law, who, as they horrified the world by leaving the bodies of their victims abandoned in fields or heaped in poorly refrigerated train cars, as they reveled in their 15 minutes of fame by deploring before the news cameras of the world that the 298 lost souls had had the bad taste to “land” on people’s houses or in reservoirs used for drinking water, were also purloining the plane’s black boxes, organizing the export to Russia of possibly compromising debris, and casually stripping the bodies of objects of valuewhatever the outcome of the investigation into all of this, an undeniable result was carnage, a war crime, an attack on Ukraine, the Netherlands and Malaysia all at once.

For all of these reasons, it was hard not to side with Ukraine’s president, Petro O. Poroshenko — who, it is worth noting, has shown in the terrible days since the crash the qualities of composure, dignity and authority that he exhibited during his campaign for officewhen he asked the international community to classify as terrorist organizations the “people’s republics” of Donetsk and Lugansk.

It is also hard not to agree with Mr. Poroshenko when, several hours after the tragedy, speaking unemotionally and with no trace of hate, he reminded France’s president, François Hollande, that Col. Muammar el-Qaddafi had been blacklisted by the world for his suspected involvement in a similar attack on a commercial airliner, Pan Am Flight 103, over Lockerbie, Scotland, in December 1988.

Faced with this new Lockerbie, will we in the West do no more than beg Mr. Putin to providefree and completeaccess to the crash site and offerfull cooperation” in the recovery of remains?

Have we not a moral obligation to draw logical conclusions about a crime for which, because of his incendiary and irresponsible policies, deeply unworthy of the president of a great power, Mr. Putin is, in the end, wholly responsible?

Under the circumstances — with Mr. Putin having not yet agreed to back off in Ukraine, much less in Crimeahow can France morally justify its plan to deliver to Russia two Mistral-class warships, now being fitted out in the western port of St.-Nazaire? Do we want them to become the crown jewels of a Russian fleet off Sebastopol and, perhaps, Odessa?

To see the European Union acting so pusillanimously is very discouraging. France wants to hold on to its arms contracts for the jobs they are supposed to save in its naval shipyards. Germany, a hub of operations for the Russian energy giant Gazprom, is petrified of losing its own strategic position

Britain, for its part, despite recent statements by Prime Minister David Cameron, may still not be ready to forgo the colossal flows of Russian oligarchs’ ill-gotten cash upon which the City, London’s financial district, has come to rely.

In European parlance, this is called the spirit of Munich appeasement. And it is a disgrace.




Smart Money

July 23, 2014 9:11 am

Long-term returns boosted by illiquidity

The less liquid a stock, the better it will perform over time



And then there were four. Followers of the dialogue between financial academics and investors will know there is agreement on three factors that cause stocks to outperform the market in the long term.

They are size (small stocks beat large one in the long run); value (cheaper stocks beat expensive ones); and momentum (winners tend to keep winning while laggards tend to keep lagging behind).


Now it appears there is a fourth: liquidity. The less liquid a stock is, the better it will perform in the long run, compared with more liquid stocks.

The financial academic community has given this notion its imprimatur. This week, the Graham & Dodd prize (named for the academics who founded value investing) for the best 2013 article in the Financial Analysts Journal went to Yale’s Roger Ibbotson, one of the best-known finance researchers, for what may become a seminal article laying out why liquidity should join size, value and momentum.

Readers of a practical bent should not switch off - for decades, breakthroughs in academic finance have driven financial innovation in the real world, both for good and badHuge sums of money are managed based on the three factors already acknowledged. For good or ill, Mr Ibbotson’s article is likely to spur a boom in investing in illiquid stocks. So it is vital to understand his insight, and how it might be put into practice.


Lower turnover



Liquidity can be measured in many ways. The measure Mr Ibbotson and his colleagues chose was turnover – the proportion of a stock’s market capitalisation that changed hands on any given day

They then ranked 3,500 US stocks by their turnover and ranked them into four quartiles. This showed that the least liquid quartile, from 1972 to 2011, returned an average of 16.38 per cent, compared to 11.04 per cent for the most heavily traded stocks, and 14.46 per cent for the universe of stocks under control.

How much does this mean? In practice, this means that liquidity tends to overlap with “newsworthiness” or “popularity”. Stocks at the centre of attention like Google or Facebook are highly unlikely to show up as low-turnover stocks for many years to come. Stocks that are neglected and ignored will be relatively illiquid.

That sounds as though low-liquidity investing might just be value investing in a different guise. But Mr Ibbotson and his colleagues performed the same exercise of ranking and producing quartiles for all the other recognised styles. This found the liquidity style is indeed positively related to value. They do have overlaps. But the researchers examined the performance of illiquid stocks that could be explained by stocks’ cheapness – and found there was still significant outperformance by illiquid stocks that could not be explained that way, and which remained statistically significant.

Overall, it found the difference between high- and low-liquidity stocks was similar to the difference between highest and lowest stocks when ranked by the other styles. Low-liquidity stocks tend to stay illiquid, meaning there is no need to keep trading in and out of stocks over time. And over the full 1972-2011 period, illiquid stocks fared better than small stocks and high-momentum stocks.

Higher transaction costs


Why should this be so? The most logical answer would have to do with risk. We need to be compensated to take extra risk.


As illiquid stocks should be harder and more expensive to trade, it becomes harder for share prices to readjust smoothly, creating volatility. But in practice, the experience of the 2008 crisis was exactly the opposite.

Daniel Kim, one of the co-authors and research director for Zebra Capital Management in Connecticut, reports that illiquid stocks suffered far lower drawdowns during the most dramatic days of heavy selling. That was because, in an emergency, people sold whatever they could, so liquid stocks were sold first.

Over the four decades of the research, liquidity was inversely related to risk – the lower the liquidity, the higher the return and the lower the risk. Its performance is asymmetrical; it tends to underperform slightly on the way up, but strongly outperform during sell-offs.

Why should illiquid stocks return a premium? It is clear from other asset classes that extreme illiquidity carries a premium. 

Yale University’s endowment under David Swensen has spent many years harvesting exactly this premium by investing in highly illiquid assets such as forestry. So something similar might be at work within the public equity market.

Do the extra transaction costs negate all the benefits? That problem is most easily solved by holding stocks for a long time, and waiting for the proportionate weight of the transaction costs slowly to reduce.

Will the illiquid stock anomaly persist now that it has been spotted and people are beginning to try to take advantage of it? Quite possibly not. But a lot of money will need to move into illiquid stocks before the anomaly is eliminated.


Copyright The Financial Times Limited 2014.


July 23, 2014 7:31 pm


Ukraine crisis: Fears rise of Russia-fuelled arms race

By Sam Jones

GRABOVO, UKRAINE - JULY 22: Pro-Russia rebels guard the area around the wreckage of Malaysia Airlines flight MH17 during monitoring by investigators from Malaysia and the Organization for Security and Co-operation in Europe on July 22, 2014 in Grabovo, Ukraine. Malaysia Airlines flight MH17 was travelling from Amsterdam to Kuala Lumpur when it crashed killing all 298 on board including 80 children. The aircraft was allegedly shot down by a missile and investigations continue over the perpetrators of the attack. (Photo by Rob Stothard/Getty Images)©Getty


Though barely a week has passed since MH17 was shot out of the sky over Eastern Ukraine, an aggressive anti-aircraft campaign is still in full swing above the territories controlled by pro-Russian separatists.

On Wednesday, Ukraine’s defence ministry said two Su-25 fighters had been blown up by surface-to-air missiles, bringing the count of downed planes, not including MH17, to 14. The incident underscores a stark truth for the international community: the separatist insurgency is armed with an arsenal of growing size and sophistication. The question is: where has it come from?


When rebel brigades and units of Cossack volunteers sprouted in Crimea and eastern Ukraine this year, Russian president Vladimir Putin shrugged off questions about the source of their arms. Shops, he suggested.

But tanks cannot be bought in shops. Nor can anti-aircraft missile batteries of the kind that probably blew Malaysia Airlines flight MH17 out of the sky last week.

Dozens of online imagesseveral of them with location tags in rebel territory and checked by the Financial Times with imaging software to ensure they are recentconfirm large amounts of such equipment now in rebel hands and in use in the fighting in eastern Ukraine.

The Kremlin has repeatedly denied providing arms to the separatists and using undercover operatives on the ground. But western intelligence chiefs say they have little doubt about the origin of the weaponry. The downing of MH17 was achieved, they allege, with sophisticated Russian arms and expertise as part of a smuggling programme directed by Russian military and intelligence officials that has seen materiel moved over Ukraine’s border in ever-larger amounts in recent months as Kiev’s fightback has grown in intensity.

Among the equipment US intelligence officials believe Russia has supplied are dozens of T-64 battle tanks, Grad rocket launchers, 2S9 Nona self-propelled guns, artillery, BMP-2 infantry combat vehicles with automatic cannons, armoured troop carriers, small arms from semi-automatic weapons and mines, and sophisticated anti-aircraft systems.

“The overall strategythat has been missed by many in the west – has been to create a proper army,” said Jonathan Eyal, international director at the Royal United Services Institute, a military and strategic think-tank. “It is not to create a guerrilla organisation. It is not a resistance movement. Russia is trying to create a proper military force.”

The numbers of weapons coming into eastern Ukraine – and their capabilitiesappear to be anything but small. In the months before the downing of MH17, Russian armament supplies amounted to dozens of vehicles in any given week, according to a Nato intelligence briefing.

The weekend before the Malaysian airliner was shot down, killing the 298 people on board, US intelligence officials said they detected a convoy of “up to 150 vehiclescrossing the border to separatist positions.

Most of Ukraine’s border controls have simply melted away,” said Mr Eyal. Russia has been transporting weapons across on the back of trucks as if it was in the middle of Russia.”



Against such a backdrop, the US is releasing few details however. Satellite images released by the US and Nato allies have been commissioned from private sector companies, so as not to give away details of high-resolution imaging and tracking capabilities.

In private, officials are less guarded. There is a stealth war being waged,” said one senior Nato official. “Russia is covertly arming the rebels en masse to specifically make these ambiguous attacks possible. And it is accelerating.” 

Such is the flood of weaponry that anti-Kiev forces have a shortage of skilled technicians, drivers and engineers to operate it. In Lugansk and Donetsk last month, they distributed leaflets looking for tank drivers.

Some of the equipment in use has been captured from Ukrainian forces. Eastern Ukraine is the centre of the country’s large armaments industry and some Ukraine military installations and arms caches have been over-run.

But such an explanation only accounts for a small number of arms, military experts say.
In addition, the markings on the tanks and armoured vehicles pictured in use by the rebels across social media are not consistent with those of the Ukrainian military.

Most are not marked at allechoing the sudden appearance of unmarked vehicles in Crimea before Russia annexed the territory this year.

Much of the equipment also tallies with models known to be part of Russia’s mothballed armoury of weapons. Russia has 2,000 spare T-64 tanks, for example, which have officially been earmarked for destructionpart of an 18,000 tank stockpile of equipment phased out in recent military reforms.

On June 27, Ukrainian forces, after over-running a rebel position near Artemivsk, captured a T-64BV battle tank, and with it, documentation. The serial numbering of the tank shows it was manufactured in Kharkov Tank Factory in 1987, Ukrainian military officials said, and was stationed in the Russian city of Budenovskiy with Russia’s 205th infantry brigade until being recently taken out of service. The tank had been fitted with batteries and other parts recently made in St Petersburg, they added.

The means by which such equipment has reached rebel hands is less clearly documented but there is circumstantial evidence.

Satellite imagery compiled by Nato intelligence services seems to show defunct Russian military equipment being shipped to Ukraine in convoys.

Snizhne – the town from where Ukraine’s security service, the SBU, believes MH17 was shot down – is one of the first stopping points on what Nato intelligence officials say is one of the main routes for illicit arms into the country from Russia.

Nato images from late June, for example, show T-64 tanks being loaded on to transporters in Novocherkassk, about 50km from the Dolzhansky border crossing southeast of Snizhne, in what it has identified as a base – a previously little-used military site – for a logistical campaign to get heavy arms into Donetsk and Luhansk.

The questions that remain unanswered, however, concern exactly who is controlling such an operation.

So far, Moscow has denied strenuously that it has supplied the anti-Kiev insurgents with weaponry. But the Kremlin has also skirted proposals for international observers from the Organisation for Security and Co-operation in Europe to be sent to border crossings.

Obviously, you can’t just hand over these weapons systems without authorisation from high up,” said Keir Giles, an associate fellow and Russia expert at Chatham House in London. “There has to be significant military and intelligence authority to make this happen. Nobody is going to be doing this without authority from an extremely high level.”


Copyright The Financial Times Limited 2014.