Craig Pirrong's Blog

X follower A Roehart apparently not only knows me, but can read my mind:

I’m sure @streetwiseprof has written on the travails of the USN. Shocking.

— A Roehart (@JAH5198) November 27, 2025

I say read my mind because on today’s agenda was writing a post on this latest US Navy clusterfuck of a shitshow: the cancellation of the Constellation class frigate program with two ships partially completed.

Yes, I knew they were late. Yes, I knew they were over budget. What isn’t in the USN? But this made my head explode: “Weight growth reduced the speed to below 25 knots.”

25 knots? RUFKM?

I say again: 25 knots???

Great! They could keep up with battleships launched in 1912! A nuke carrier or an Arleigh Burke? Not so much.

To put things in perspective, a WWI era four stacker could make 35 knots with 300 psi boilers.

Who would even think about proceeding with construction of a ship class that is so overweight Ozempic couldn’t fix it?

The basic lesson here is that every aspect of Navy shipbuilding (and per A Roehart’s point, procurement generally) is broken, from design to construction.

The supposed genius of the Constellation program was that it would be based on a proven foreign design. Then the Navy would do a few tweaks to improve, and voila! A reliable class that could be churned out quickly and (relatively speaking) inexpensively.

But nooooo. Tweak was layered on tweak, which was layered on more tweaks, until the sleek foreign frigate became an American fatso frigate that gets out of breath when breaking 20 knots. And all that tweaking took time and money.

No doubt the Navy wanted the perfect frigate. But the perfect is the enemy of the good. And even a faulty frigging frigate is better than no frigging frigate at all. Which is what we have, after the expenditure of much treasure and time.

In WWII, the US was renowned for producing adequate but not stellar armaments, but doing so in huge numbers and low cost. In contrast, the Germans were renowned for producing state-of-the-art weapons in low numbers and exorbitant cost. Think of the M4 Sherman vs. the Tiger or Panther.

Remind me: who won?

The US has evidently adopted the German philosophy, and jettisoned its own. No more so than in the Navy.

Or put differently, as Stalin (supposedly) said “quantity is a quality of its own.” The US Navy needs hulls in the water. Functional, pragmatic ships (Nimitz always bridled at calling Navy ships “vessels,” which reminded him of chamberpots).

Moreover, since the dawn of naval warfare it has been recognized that the optimal fleet consisted of specialty types with relatively narrow functionality that performed complementary functions. A combination of high end and low end, with frigates (from the days of sail, for crissakes) being at the low end. The Oliver Hazard Perry class of FFGs introduced in the 1970s are an excellent example of this.

But the Navy has instead tried to create ships that do it all and end up doing nothing. Not least because they don’t get built.

Who is to blame? Everybody. Generations of Navy brass and civilian leadership, of course. But also Congress and the defense contractors.

How to fix it? With some accountability, to start with. Who has ever been held accountable for past fiascos, e.g., LCS or Zumwalt? Indeed, if anything there has been negative accountability. How many military officers or Pentagon bureaucrats have moved into cushy jobs at contractors?

The more this happens, the more attractive the Admiral Byng corrective (“pour encourager les autres”) appears.

If you deem that too extreme, then Commander Salamander’s suggestion of defenestrating everyone RADM and above, and their Pentagon civilian counterparts, is a good start. They are products of a diseased culture and the culture must be purged to be (in Sal’s words) “baseline reset.” Yes, it is collective punishment, but the collective is at fault.

I am ambivalent about Pete Hegseth, but one thing he has done that deserves support is his recent initiative to reform defense procurement. Alas, it is an initiative, not a fait accompli. Whether it is even possible to reform so thoroughly broken a system is, alas, highly uncertain.

Yesterday the Pentagon posted on X:

OFFICIAL STATEMENT:

The Department of War has received serious allegations of misconduct against Captain Mark Kelly, USN (Ret.). In accordance with the Uniform Code of Military Justice, 10 U.S.C. § 688, and other applicable regulations, a thorough review of these allegations…

— Department of War ?? (@DeptofWar) November 24, 2025

Interestingly, it does not specify what is alleged, and what is being reviewed. The use of “reviewed” rather than “investigated” is also of interest (The UCMJ section referred to just says retired personnel are subject to recall to active duty).

It certainly does not say anything about “sedition.”

In response, Kelly appealed to the authority of his military career:

When I was 22 years old, I commissioned as an Ensign in the United States Navy and swore an oath to the Constitution. I upheld that oath through flight school, multiple deployments on the USS Midway, 39 combat missions in Operation Desert Storm, test pilot school, four space… pic.twitter.com/jMAlYEozQ6

— Senator Mark Kelly (@SenMarkKelly) November 24, 2025

And that’s all it is. An appeal to authority, and wrapping himself in his uniform to assert that of course he could never do anything contrary to military or federal law. Which is a non sequitur.

To see why, now do Benedict Arnold. I’m serious. Prior to his defection to the British, Arnold was the most distinguished, capable, and arguably heroic officer in American service. Leading the harrowing march to Quebec, where he was badly wounded in an attack on the city (delivered in a blinding snowstorm). Delaying the British move down Lake Champlain at the Battle of Valcour Island. Playing the decisive role in the victory at Saratoga–the pivotal battle of the war–where he was once again badly wounded.

The lesson: past distinguished service–more distinguished than Kelly’s, in fact–does not preclude treachery.

You could do the same with other famous American military figures, including virtually every Confederate officer who served in the antebellum army, especially those who fought in Mexico and/or on the frontier. Robert E. Lee comes to mind. (The 6 senators and representatives in the video are members of a party that strongly believe Lee and other Confederate officers were traitors, previous distinguished service be damned).

Meaning that Kelly’s past service is utterly irrelevant when evaluating his recent actions. It is not a get-out-of-jail-free card.

Although I would say that it is relevant in that it makes Kelly’s current conduct look far worse. Because as a long serving officer in the Navy he knows that obedience to orders is paramount, and that undermining the culture of obedience is extremely prejudicial to good order and discipline, and therefore the ability of the. military to perform its vital functions. These weren’t the words of some gasbag who never wore a uniform. They are the words of a gasbag who wore one for decades, and who therefore knows the implications of what he said.

All of the TikTok 6 appealed to authority, which is a logical fallacy. Kelly is taking the appeal to an extreme, and in so doing highlights, rather than mitigates, the gravity of his offense.

For reasons practical and legal, it is highly unlikely that the Pentagon will charge Kelly with anything as remotely grave as sedition or mutiny. For one thing, sustaining such charges would require proving intent. That’s always a challenge, and in this instance Kelly and the other weasels were sufficiently vague in their insinuations and their recommendations to members of the military that it would be very hard to prove that they had seditious or mutinous intent.

Again, in my mind that actually makes things worse. Sea lawyers/shithouse lawyers are contemptible, and calculated evasions reveal bad intent, even if not being sufficient to serve as proof in a court martial or trial. They put the “wily” in “wily agitators.”

The marked inability of any of these clowns to identify any illegal order that Trump has issued–under the skeptical questioning of CNN(!) and the like, no less–further demonstrates their despicable motives. Their rhetoric is on a par with “so, when did you stop beating your wife?”

The catch phrase in the video “Don’t Give Up the Ship” is particularly malign. It is a phrase famous in US Navy history, uttered by Captain James Lawrence, whose ship USS Chesapeake was attacked, boarded, and captured by the HMS Shannon during the War of 1812. So the use of this phrase in the context of the Kelly et al video clearly insinuates that the US military is under attack, and in particular, under attack by the commander in chief, and its use is an encouragement US military personnel to resist that attack.

Again, just slippery and weaselly and indirect and metaphorical enough to make legal establishment of motive difficult. But we all know that’s what they meant.

And that, in my opinion, is sufficient to sustain lesser, though still serious charges, such as conduct prejudicial to good order and discipline. And the Pentagon should seriously entertain blowing through Kelly’s chest-thumping bluster and appeal to authority, and bringing such a charge against him.

Last week’s edition of Trumpsteria involved the leak of a 28 point peace plan hashed out between Russia and the US. The plan represented something of a retreat from Russia’s maximalist position, but still imposed major concessions-specifically territorial ones-on Ukraine.

The provenance of the plan is murky. It first emerged on Telegram, in Russian. Trump said it was The Plan. Later, according to statements from some senators briefed by Marco Rubio, it wasn’t The Plan. But then it was.

In any event, at the outset Trump sure made it sound like The Plan when he demanded that Ukraine accept it, in toto, within a week or lose all US support.

This all of course led to a rush to the fainting couches. All around knob and former Putin punching bag Michael McFaul’s take was typical: “Trump is once again acting as Putin’s agent.”

Zelensky’s reaction was subdued, rather than defiant. He said Ukraine faced a choice between humiliation and loss of an essential ally. But he didn’t say no.

And then, just like that, a Ukrainian delegation met in Geneva with Rubio. The Secretary of State waxed optimistically about the talks, calling them the most constructive ever.

And what emerged was another plan, this one consisting of a mere 19 points.

So what to make of all this? I, like everyone else, is akin to the denizens of Plato’s cave, just viewing shadows on the wall. (One difference between me and McFaul and his ilk is that I admit it). So everything is speculative and conjectural.

But one way to reconcile these seemingly contradictory developments is as follows. The US is basically engaged in shuttle diplomacy. Since the parties won’t meet directly, the US is negotiating with each and securing proposals that move the parties closer together.

As for Trump’s apparent ultimatum to Ukraine, my guess is that when presented with the Russian plan in private Zelensky balked and vowed to make no concessions. In response, Trump made his public demand. This got Zelensky’s mind right, which led to the talks in Geneva, where Ukraine budged off its previous positions. Which led Rubio to praise the talks and Ukraine.

In other words, classic bad cop (Trump), good cop (Rubio).

Throughout, Trump has been putting pressure on both sides. On Russia mainly via sanctions; on Ukraine mainly via threats of withdrawing US support. Said threats causing the McFauls of the world to damn Trump as a Putin puppet.

It’s a painfully slow process. Will it work? Perhaps not, but I see nothing better on offer. And when it comes down to it, something along the lines of the plan first mooted is the only thing that is feasible. Ukraine will have to give up territory, and won’t be in Nato. The only question really is how much territory, and what non-Nato security will Ukraine obtain.

Yes, that will be deemed capitulation to Putin by McFaul et al. In fact, it is capitulation to the reality of the battlefield. Ukraine can’t roll back Russia’s gains, and would almost certainly lose the land sacrificed in The Plan in time. The only difference being the cost that Russia has to pay to get it–and the cost that Ukraine has to pay to defer the inevitable loss.

As Zelensky’s former spokesperson said, Ukraine is bleeding out.

Every subsequent deal for Ukraine will only be worse — because we are losing. We are losing people, territory, and the economy.
The EU (which by the way has paid Russia more than €311 billion for energy and goods since February 2022) has no real strategy, no way to stop fueling… pic.twitter.com/zx8lBKQn7X

— Iuliia Mendel (@IuliiaMendel) November 22, 2025

Continuing the bleeding is not only futile (because it will not change the ultimate outcome), it is counterproductive (because it will make Ukraine more vulnerable in the future).

So Mendel is right. Maybe this deal is bad–but it is the least bad of any feasible alternative. If Trump’s shuttle diplomacy can secure Ukraine a few concessions, Zelensky should be grateful. And the Ukrainian people even more so.

Even in our degraded, hyperpartisan political culture I cannot recall seeing anything as outrageous and repulsive as this:

We want to speak directly to members of the Military and the Intelligence Community.

The American people need you to stand up for our laws and our Constitution.

Don’t give up the ship. pic.twitter.com/N8lW0EpQ7r

— Sen. Elissa Slotkin (@SenatorSlotkin) November 18, 2025

This is an outright call for disobedience–indeed, mutiny–made by representatives and senators who apparently believe their prior service grants them the authority to do so. The irresponsibility and hubris is off the charts.

A military can function only with strict obedience. Presumably these people believed that when they were in the military. (Though maybe they only believed that their subordinates had to obey them, not that they had to obey their superiors. I can see that).

They probably believe it now–it’s just that they are willing to jettison those beliefs in order to obstruct the policy of the duly elected commander in chief. That is, purely unprincipled partisan opportunism wrapped in a Constitutional gauze.

There is so much wrong with this. But two things stand out.

The first is the insinuation that domestic deployment of the military “against US citizens” is illegal and unconstitutional. This is false. The president has the authority to do so under certain conditions that are broadly subject to his judgment as to whether the conditions apply.

Many idiots say “but but but the Posse Comitatus Act!!!” False. The Act confers the power to deploy the military domestically on the president, and the president alone. Prior to the passage of the Act, local officials (e.g., US marshals) could employ military personnel and units as part of a posse.

Which leads to the second major problem, which is indeed the more serious in my mind. These legislators are conveying the impression that it is totally OK for a member of the armed services to make a judgment of their own whether the president is lawfully exercising his authority to deploy the military “against US citizens.”

In fact, it’s an open question as to whether even the courts have the power to make that judgment. But it is clearly outside the ken of any private, seaman, or airman–and indeed, any general or admiral–to make it.

But these . . . people . . . [channeling Robert E. Lee there] are suggesting that this is totally OK, and indeed, a duty. And the danger is that some kid will believe them, disobey orders, and end up breaking rocks in Leavenworth.

The UCMJ makes things crystal clear. Article 90: “An order requiring the performance of a military duty or act may be inferred to be lawful, and it is disobeyed at the subordinate’s peril. This inference does not apply to a patently illegal order, such as one that directs the commission of a crime.” These people are encouraging individuals, many who might be quite naive and believe they are doing the right thing, to put themselves in peril by challenging orders that are anything but patently illegal.

The illegality of an order is a defense against a charge of disobedience. It is also a defense that is almost certain to fail in cases other than, say, an order to rob a bank.

The main protection offered by the concept of illegal order is to those who obey, not those who disobey. Unless “the accused knew the orders to be unlawful or a person of ordinary sense and understanding would have known the orders to be unlawful,” he cannot be found guilty at a court martial for obeying it. It is to protect subordinates from the illegal actions of superiors, not to give subordinates the power to challenge their superiors.

But no doubt if anyone follows the siren call of these . . . people . . . and gets sentenced to hard time, said . . . people . . . will say: “You fucked up! You trusted us!”

It brings to mind Civil War Congressman Clement Vallandingham, who along with others encouraged Union troops to desert. Lincoln lamented: “”Must I shoot a simple-minded soldier boy who deserts, while I must not touch a hair of a wily agitator who induces him to desert?” (Vallandingham was convicted by a military court and sentenced to prison for the duration of the Rebellion. Lincoln eventually commutated his sentence to banishment to the Confederacy).

And it goes without saying that our latter day wily agitators threaten the good order and discipline of the military by raising doubts about whether orders must be obeyed, and who has the right to make that determination. That’s no way to run an army, navy, air force, or marines.

Is there anywhere we can banish these people? Which fate would be in fact quite generous given what they really deserve.

I vacillate between calling Germans the world’s dumbest smart people or the world’s smartest dumb people. Whichever way you look at it, however, it is abundantly clear that a people that has produced amazing scientists, engineers, philosophers, and writers has a penchant for self-destructive stupidity, e.g., starting world wars that they have no hope of winning that result in national destruction.

Germany’s recent idiocies fortunately have been more contained in their effects, and have been especially concentrated in energy policy that has wreaked havoc in Germany itself. Energiewende. An obsession with renewables in a climate where the wind often stops blowing and sunshine is extremely limited for months at a time. Closing nuclear power plants. Carbon neutrality. Dependence on Russian gas.

The result of these combined acts of self-harm has been very high energy prices. These high prices have exacted a heavy toll on German manufacturing. Which is kind of a bad thing when manufacturing is your comparative advantage.

The resulting economic malaise has spurred the government into action. Prices to high? No problem! Impose price controls!

Because price controls always work, right? Right?

To illustrate just how dumb smart people can be, I give you this:

In this case, high prices are the result of insufficient supply (capacity). Indeed, high prices are a signal of scarce capacity, and provide the incentive to invest in capacity.

Capping prices distorts the signal, and eliminates the incentive to add capacity. Capping prices ensures that new capacity will never materialize, let alone materialize quickly. Meaning that the policy will inevitably have the exact opposite of its intended effect.

The caps might lead to increased industrial production, and thus increased consumption of electricity by manufacturers. But since prices are high because of inadequate capacity, where is the electricity output supposed to come from? It will have to be diverted from other consumers. Who will have to pay a higher price either directly in the form of higher prices, or in the form of reduced quality (e.g., lower reliability), or indirectly via taxes, and through lower consumption.

I’m sure they’ll be pleased. But that assumes that they realize the connection, because the government has every incentive to hide the higher cost. But a higher cost there will be.

Alas, the Germans are not unique in seizing on price controls to combat high prices. (Yeah, Mamdani–I’m looking at you). This despite the fact that at least since the time of Diocletian, the results have been the same–bad. Very bad.

In many cases–and I believe this to be so with Germany today–it is because the high prices complained of are the result of government policies, and rather than admit failure/error and undo the destructive policies, governments seize on a known nostrum that will inevitably fail. But in the meantime the government will have kicked the can down the road and claimed to have done something. The lag between doing something and the reckoning with what has been done gives it time to come up with new excuses, and new bad policies.

So enjoy, Germans. You are like the Delta guys in Animal House, intent on futile and stupid gestures. Except without the charm.

The FT has a long article about the aborted Gunvor purchase of Lukoil International. It adds a few interesting details.

For one, the orders to squelch the deal came from the upper levels of the Treasury, most likely Scott Bessent himself: “As Gunvor’s offer inched through a half-functioning bureaucracy [due to the shutdown], the decision to kill it came down from high up in the Treasury, according to two people familiar with what happened.”

No doubt because the structure of the deal made it look for all the world like Gunvor was merely a straw buyer, or a parking spot: “A banker briefed on the Lukoil proposal said Gunvor planned no upfront payment and did not need additional financing. Instead, profits would be placed in escrow until sanctions were lifted.”

Uh-huh. The company would remain intact, managed by another company without the expertise or experience to do so (even “Törnqvist admitted Gunvor might not be the natural owner for such a wide portfolio”), with the profits socked away until the day sanctions disappeared. Totally makes sense!

So what was in it for Gunvor?

And the company could be sold right back to Lukoil when sanctions disappeared. Oh yeah, Törnqvist insisted “there was no path for Lukoil to buy back assets spanning the globe that it had spent decades acquiring.”

Sorry, but “no path, swearsies!” doesn’t cut it. If there was a path to sell it kit-and-kaboodle, and it remained intact kit-and-kaboodle in the Gunvor parking lot, there would be a path to buy it back kit-and-kaboodle.

The US’s action has also cast a taint on Gunvor that will hang over it for the foreseeable future. One bank (Santander) withdrew from participating in a financing facility for Gunvor. Others are sticking, but one told the FT that it would “review new financing in a way we wouldn’t have previously.” I bet they will. In fact, every bank will look at Gunvor with the understanding that Uncle Sanctions is looking over their shoulder.

And no doubt that is part of Treasury’s plan. To put the squeeze on Gunvor, presumably because it views the company as Putin’s cat’s paw as long as Törnqvist is in charge.

The FT says “At Gunvor, the shock of the past week has given way to ‘serious self-reflection’ according to one person with knowledge of the situation.” There’s a lot to reflect on.

Törnqvist had to know the risks he was running. That given the structure of the deal, with all the profits going into escrow, there was little in it for his company, and this would be evident. Yet he did it anyways. Which suggests that he was effectively compelled to do so.

The vibe I get comes from the Godfather, with in the role of the undertaker Bonasera and Putin playing Don Corleone:

Due to the US sanctions on Lukoil, that day came. But Gunvor could not provide that service, because an even more powerful Godfather stood in the way.

At the front end of a trip to speak at a conference at Nantes University (a talk titled “PLUS ÇA CHANGE, PLUS C’EST LA MÊME CHOSE–Manipulation Through the Ages”) I did a day trip to see American World War I battle sites along the Marne and in the Argonne.

With the exception of Belleau Wood, where German positions are still visible, for the most part there’s little physical evidence of the titanic battles. However, in the aftermath of the war the United States (and several individual states) created truly stunning, massive monuments, and the US established beautiful and haunting cemeteries.

Here are some photographs of them from my trip.

Chateau-Thierry is the biggest:

Chateau-Thierry was the site where the US Third Infantry Division (“The Rock of the Marne”) helped stop a German offensive in the Second Battle of the Marne.

Montfaucon:

Montfaucon was a dominating German position that was the objective for the American attack on the first day of the Meuse-Argonne offensive. It was taken, but at heavy cost.

Belleau Wood–a small memorial, but evocative.

This is where the Marines won eternal fame, and earned from the Germans the epithet “Devil Dogs.” In the background you can see captured German field pieces, displayed like trophies.

As for the cemeteries, here’s the chapel at Aisne-Marne. (All of the American cemeteries have elaborate chapels).

The chapel at the biggest cemetery (bigger than Normandy, in fact), the Meuse-Argonne Cemetery in Romagne.

It’s a challenge to photograph these edifices because they are all so damn large.

Chateau-Thierry and Meuse-Argonne have very tasteful and informative museums. Chateau-Thierry’s tells the story of the entire war, with a focus on the US involvement. Meuse-Argonne is more focused on the offensive bearing that name. Both are definitely worth spending a good amount of time at.

All of the monuments and cemeteries are in immaculate condition. The stone looks like it was quarried and finished last week. No graffiti or other defacements. They are very fitting memorials to those who fought. The American Battlefield Monuments Commission, established in the 1920s and responsible for stewardship of the sites to this very day, has done and continues to do a remarkable job to preserve and manage these edifices.

The US was heavily engaged in WWI for a matter of mere months. Virtually all US casualties were incurred between late-May and 11 November, 1918, a period of less than six months. This is quite remarkable when you consider the US total deaths in WWI were about 1/4th of those sustained in WWII, despite the facts that the latter war lasted over 7 times as long; US population was significantly smaller in 1918 than 1941-5; and that WWII casualties occurred across the globe, whereas those in WWI were concentrated in an area that I traversed by car in a couple of hours.

The casualty rates were sobering. The Chateau-Thierry memorial states that the US casualty rate in the Second Battle of the Marne was 33 percent. That is high for an individual regiment or division. It is extremely high for an entire army.

America was–for a time–proud of its contribution and its accomplishments, and deeply mourned its dead, and therefore found it fitting an necessary to honor its soldiers in stone. Hence these incredibly moving and imposing monuments and cemeteries. They dwarf anything the US did after WWII.

Thus, the monuments are as interesting as sociological and historical statements as they are as records of deeds that are, alas, largely long forgotten. They are a testament to American attitudes and beliefs in the era when the nation truly emerged on the world stage. The 1920s were an era of unbounded optimism and national pride, and 100 years later these monuments testify to that fact.

I also visited the area where one of my heroes, Alvin York, performed his incredible deeds during the Meuse-Argonne offensive in October, 1918. I took the “Alvin York Trail” leading from Chatel-Chéhéry. This trail purports to follow York’s route when he killed 28 Germans and captured 132 more.

I say “purports” because there is a bitter dispute over where he actually fought. Two teams have excavated the hills near Chatel-Chéhéry, and claim to have found evidence (e.g., cartridge cases, US unit badges, German unit badges) showing that THIS was where York was–but the sites are some distance apart.

Overall, I think that the claim of the Tennessee team, described in this book, is the more plausible. Unfortunately, the trail was marked by the other team, led by LTC (Ret.) Douglas Mastriano, and there is no equivalent route to the Tennessee team site.

But I can say that I was definitely in the neighborhood, and in the walk from Chatel-Chéhéry I could get an idea of the terrain traversed by the attackers from York’s 82nd Infantry Division, and a sense of the strength of the German position.

World War II eclipsed World War I in the American memory, albeit understandably. But it is good to remember America’s role in the Great War, and it is a blessing that it is possible to do that in the confines of a short November day in France, due to the monuments that a grateful nation erected in an effort to see that we would never forget.

I’m baaaccckk. Posting pause due to travel (which I’ll write about in my next post) and a pressing expert report deadline.

The biggest news event of interest to me during the hiatus was the agreement for Gunvor to buy the non-Russian assets of the just sanctioned Lukoil, and the early term abortion thereof, with Treasury Secretary Scott Bessent administering the abortifacient. Sort of a reverse of the Anchor Man meme:

It was surprising, not to say shocking, to read of the announcement of the Gunvor-Lukoil deal. It raised many questions.

For one thing, this was a minnow trying to swallow a whale. With a book value of around $6.5 billion, Gunvor was trying to acquire assets worth between 3 and 4 times as much.

Which meant that Gunvor would have needed to raise substantial financing. When the deal was announced, no mention was made of this.

And seriously, what non-Russian bank would want to touch this? Or was it thought that some Middle Eastern SWF be willing to step up? Even that is a stretch. Nobody wants to attract the attention of a sanctions-happy US.

Strategically it would have created a beast somewhat unique in the energy trading world. Lukoil, with significant upstream and downstream assets as well as a largish trading operation, is more analogous to Shell, BP, Total, and the like than it is to a trading firm. Yes, trading firms (e.g., Vitol, Trafigura) have become asset heavier, but the contemplated acquisition would have turned Gunvor into a privately owned, very asset heavy company very different from its peers. There would have been a serious mismatch between ownership structure, capital structure, and asset structure.

There’s also a serious question about the ability of Gunvor to manage such an enlarged, and much more complicated, organization. Torbjörn Törnqvist has not demonstrated that expertise, and in any event, he is 72 and a management transition is on the horizon. He is trying to groom his son for the role, but he obviously has even less experience.

Given all the very serious questions about the deal, one is led to wonder why it was even attempted. The most benign interpretation is that it matched a desperate seller to an opportunistic buyer wanting to do something unprecedented.

A less benign, and probably more accurate, interpretation is that Törnqvist was acting as the Kremlin’s cat’s paw. That is, Putin wanted to retain control over the assets, and therefore wanted them to go into friendly hands that he could control, at least to some degree.

Gunvor’s Russian roots are well known. The sanctions against Gennady Timchenko, former co-owner of Gunvor, in 2014 created an existential crisis which Törnqvist successfully navigated. (Though the details of how he did so remain obscure). With the exception of the Ust Luga port asset Gunvor had shed its Russian assets. The company claims complete independence.

But there is a history of deep connections. And Törnqvist’s second (current) wife is Russian, and continues to operate an environmental NGO in Russia. Further, given the opacity of the commodity trading world generally, and the Russian commodity trading world specifically, it is always reasonable to suspect that subsurface connections still remain, and that Russia has leverage over Gunvor and Törnqvist.

The US Treasury Department certainly thinks so, and said so bluntly when it torpedoed the deal.

President Trump has been clear that the war must end immediately. As long as Putin continues the senseless killings, the Kremlin’s puppet, Gunvor, will never get a license to operate and profit.

— Treasury Department (@USTreasury) November 6, 2025

“Kremlin’s puppet.” Brutal. And “Never” seems pretty final.

I laughed when I read that. No bureaucratic doublespeak. Just a right cross to the jaw. (Which Bessent is apparently quite capable of throwing. As Elon).

Of course, the US has far more information about Gunvor and its doings than a mere blogger. You can bet its communications are surveilled, and it is likely that the US has human assets working in the company, and in Lukoil too. Meaning that allegations of puppetry are likely grounded in hard intelligence.

So, whither Lukoil? Well, it will be more like wither, Lukoil.

The trading operation has to be totally shtuped. Trading lives on credit and they won’t get it. And any buyer will feel Uncle Sanctions looking over their shoulder.

Bulgaria is planning to nationalize the Lukoil refinery there. Romania is likely to do something the same with the refinery in its country.

The biggest asset is Lukoil’s big stake in an Iraqi oil field. Likely the other partners will continue operations, and the US will probably acquiesce, not wanting to see a hit to world oil supplies. Revenues can be escrowed, and conceivably Iraq could nationalize it.

Moldova is trying to obtain the Lukoil storage assets located there.

Lukoil stations in Finland, the US, and elsewhere are already having problems getting supplied with fuel. Those could be pieces that other entities, including trading firms or NOCs (note that Kuwait Petroleum operates Q8 gas stations) could snap up.

Meaning that the likely outcome is that rather than being bought in one piece, as Gunvor had proposed, pieces of Lukoil will be seized, sold, or shut down.

One issue I haven’t seen addressed is that of Lukoil International’s creditors, and how that will be handled. A subject for another day.

For now, suffice it to say that the Gunvor Gambit–and arguably the Putin Gambit–was shot down in flames by the United States, and there appear to be no survivors.

The severity of the US action, and the in-your-face explanation thereof, have a clear geopolitical subtext. Trump has had it with Putin. He offered Putin all sorts of off ramps, face saving deals, and the like. But an alternately smirking and snarling Putin refused to budge an inch on Ukraine.

So Trump tightened the sanctions screw, not just on Lukoil but on Russian oil sales generally, and these are having an effect. And he wasn’t about to give Putin a workaround on Lukoil via a transaction with a potentially friendly or even controlled buyer.

The cancellation of a mooted meeting in Budapest between Putin and Trump further demonstrates that Putin has exhausted Trump’s patience. (This cancellation sparked a rejuvenation of Kremlinology. The meeting was cancelled after a phone call between Russian Foreign Minister Lavrov and US SecState Marco Rubio. Lavrov was missing from some subsequent Kremlin meetings, leading to speculation that the failure of the call has led to his being disgraced, and to suggestions he stay away from windows).

But maybe Vova doesn’t care. He appears more than willing to spend another million lives to seize shreds of blasted territory in Ukraine rather than make any concessions whatsoever. Sad. And sick.

A week ago Friday (10/10/25) there was a crypto crash. Not huge, but not small. Bitcoin:

Ether was also hit.

The proximate cause was the most recent Trump tariff spasm. But that was just the spark. The initial down move triggered classical self-reinforcing crash dynamics. And the crypto market structure is arguably uniquely vulnerable to such events.

As I’ve written for years and years, (a) tightly coupled systems are vulnerable to catastrophic collapse, and (b) a wide variety of factors produce tight coupling in these markets. The most important of these factors is marking to market and variation margin.

And this dynamic is particular fraught in crypto. Positions are marked to market at a very high frequency. Moreover, the resulting margin calls occur at the same frequency. That frequency is so high that margin breaches result in liquidations of positions (“auto liquidations”) because there is no time to replenish collateral. These liquidations exacerbate price movements, creating a positive feedback mechanism–and positive feedback is almost always a bad thing in financial markets.

But it gets better! Risky positions are sometimes collateralized with . . . risky collateral! Specifically so-called “stablecoins.” I say “so-called” because stability is aspirational rather than real, especially for a new variety of “stablecoins” implicated in the 10/10 event, like USDe.

Whereas traditional stablecoins like Tether are supposedly backed by high quality, low-risk dollar assets (and the recent “Genius Act” will reduce any uncertainty about that), USDe is “backed” by both dollar assets and–wait for it–crypto. So what is the lithium that keeps USDe “stable”? Hedging using perpetual futures.

No. Seriously. Yeah, because hedges are always perfect, right? Here’s the only perfect hedge I’m aware of:

So in reality the “stablecoin” has basis risk, the basis being the difference between the price of the crypto collateral and the perp futures.

Arbitrage is supposed to keep the basis small with little volatility. However, if you look at data, e.g., the spread between BTC and BTC perp futures on Coinbase, you will see that there are frequent and large basis movements, often as big as 1 percent.

Moreover, USDe is traded on multiple exchanges, and the prices can diverge. Again, arbitrage is supposed to keep those divergences small and of short duration, but the market moves faster than arbitrage: given the frequent revaluing of positions and collateral, even a very brief price divergence can trigger a self-reinforcing spiral before arbitrage can close the gap.

On 10/10, Coinbase used the price of USDe on its platform to market collateral to market. But that exchange is not the primary USDe platform, and is therefore relatively illiquid. So forced liquidations of positions on Coinbase due to the price move and marking to market led to liquidations of USDe collateral which pushed downward pressure on the Coinbase USDe price which led to more positions being undercollateralized which led to those positions being liquidated. And this all happened faster than the speed of arb. Rinse, wash, repeat.

Can you say wrong-way risk? I knew you could.

The industry cope is to say “well ackshually if Coinbase had used the USDe price on more liquid exchanges as its USDe ‘oracle’ this wouldn’t have happened.”

Maybe. But irrelevant. What happened on 10/10 was a “normal accident.” Normal accidents result from a sequence of events in a tightly coupled. complex system. Accidents are “normal” in such systems because there are many, many, many possible sequences that can trigger accidents. Meaning that even if this particular sequence is eliminated by referencing prices from the most liquid exchange, many, many, many other such sequences will remain.

The underlying “cause” of such events is the very nature of the system itself. The reason crypto is particularly susceptible is the tight coupling due to frequent marking to market and high leverage. Those factors remain.

The crypto system is acutely vulnerable due to another structural factor–the fragmentation of trading. As I’ve frequently written, crypto market structure is puzzling. The centripetal force of liquidity typically results in the concentration of trading on a single platform. Crypto, in contrast, is traded on multiple exchanges, with several have a fairly large market share.

This fragmentation increases the number of connections and therefore the number of possible paths by which a destabilizing shock can spread. And referencing prices from other exchanges to value positions or collateral on a given exchange creates more such interconnections.

In brief, a shock–a price shock, or an operational shock–on one exchange can impact other exchanges. These shocks can trigger the destabilizing auto liquidations.

“Too big to fail” is not the right description of the crypto market. Instead, “too interconnected and tightly coupled and complex to succeed” is more accurate.

It must also be noted that the factors that make the crypto market systemically fragile make it unduly susceptible to manipulation which can in turn trigger systemic crises.

One of the oldest strategies in the book is “gunning the stops.” The play being that if you force prices to hit stops order triggers, that will induce trades that move prices further in the same direction.

In crypto, the game is “gunning the liquidations.” The idea is the same. Trade like a whale to push the price in a particular direction. If the move is big enough, that will trigger liquidations that move the price further in that direction. And since some collateral is risky, there is another way to manipulate–bash the collateral.

Given the high leverage and high frequency marking to market, the necessary push isn’t that big–maybe a dolphin can do it. And as shown on 10/10, and as discussed above, once the price moves begin they can trigger a crash.

It is also disturbing that crypto exchanges can profit from liquidations. Conceivably this could provide an incentive for the exchanges to manipulate themselves. But even if that’s not the case, the fact that they can profit from destabilizing manipulations, and instability generally, means that they have a weaker incentive, and perhaps a positive disincentive, to prevent/deter manipulations or big price moves.

In sum, crypto market structure is crapto. It has all of the inherent vulnerabilities of markets, but on meth. Supposed “innovations”–like near continuous marking to market and unstablecoin collateral–exacerbate these vulnerabilities. As does the fragmentation.

All meaning that it is inevitable that you will see this movie again.

In my recent post on Don Wilson and GPU trading, I expressed skepticism at the prospects for such trading based primarily on market structure issues. Specifically, a commodity futures market can thrive if the underlying product has a highly intermediated value chain, but that vertical integration or long-term contractual relationships between producers and ultimate buyers is inimical to their success. Further, I surmised that transactions costs considerations would lead to long-term contracts and/or vertical integration dominating the GPU sector.

And indeed, that outcome is becoming clearer by the day. OpenAI (it of ChatGPT) has agreed to a massive chip purchase from AMD and has also bought a 10 percent stake in the chipmaker. OpenAI has also entered into a five-year deal with Oracle to buy “computing power.”

There is also increasing verticality in power supply arrangements. (Apparently the new industry buzzword is “circularity” but we are really talking about vertical relationships here, so I’ll stick with traditional IO speak). Example: AI firms building gas-fired plants in Texas. Musk’s xAI building a gigawatt scale plant in Mississippi to power a data center outside Memphis.

Microsoft has entered a 20 year deal with Constellation Energy to restart–believe it or not–a unit at Three Mile Island. And on and on.

It’s somewhat amusing to me. Years ago Paul Joskow wrote a seminal article about coal mine mouth power plants in which he showed that this co-location led to long term contracts or vertical integration. We are now seeing data center mouth power plants.

The economics are basically the same. It makes sense to locate something that consumes as much (or more) power than a generator can produce to economize on transmission costs and enhance reliability. However, this creates bilateral monopoly driven transactions costs issues that lead to vertical integration and long term contracting.

Going back to GPUs, there is no reason for colocation, but economies of scale on both sides of the market–huge consumers operating data centers, and a small number of GPU producers–create similar bilateral monopoly opportunism risks, which in turn are leading to the implementation of traditional responses to these risks–tight vertical connections between producers and consumers.

This market structure is inimical to the development of a thriving derivatives market. So I wouldn’t be surprised to see the launching of GPU futures contracts, but I fully expect them to sink faster than a Nork destroyer after launch. But unlike the Nork ship, GPU futures would not be refloated.