Mechel bashing

tauringhuang.

Jul 31st 2008 | MOSCOW
From The Economist print edition

Vladimir Putin’s attack on a mining company shows that nothing has changed

Illustration by Claudio Munoz
EVER since Dmitry Medvedev became Russia’s president and Vladimir Putin assumed the role of prime minister, Russian businessmen and foreign investors have wondered who is really in charge and whether anything would change. Mr Putin visited factories and farms, chatted with workers and lambasted an odd minister, but he looked distinctly bored. Was he loosening his grip? In the past few days Mr Putin has delivered a thundering answer.

To assert his supremacy Mr Putin chose Mechel, a steel giant listed in New York, with a market value of $15.2 billion. On July 24th Mr Putin publicly accused Mechel and its main shareholder, Igor Zyuzin, of selling its coking coal abroad more cheaply than at home and dodging taxes. He was particularly irritated that Mr Zyuzin, who was summoned to a government meeting, was said to be ill. “Of course, illness is illness, but I think he should get well as soon as possible. Otherwise, we will have to send him a doctor and clean up all the problems,” said Mr Putin. Perhaps the prosecution office and anti-monopoly service should investigate, he added.

Mr Putin’s medical advice had an immediate effect: Mechel’s share price plummeted, wiping some $5 billion off the firm’s value and prompting a dramatic fall in Russia’s stockmarket. The episode stirred memories of Yukos, once Russia’s largest oil company, which was destroyed by crippling claims for back taxes. Mikhail Khodorkovsky, Yukos’s former boss, is still in jail and his assets are now part of Rosneft, a state-controlled oil firm chaired by Igor Sechin, Mr Putin’s trusted aide. The sense of déjà vu was enhanced by the fact that it was Mr Sechin who apparently briefed his boss about Mechel’s behaviour.

Mr Putin’s attack seemed to take Mr Medvedev and his circle by surprise. A senior adviser to Mr Medvedev tried to calm nerves, noting that Mechel was co-operating with the anti-monopoly investigation, which would strictly obey the rule of law. “We should be especially careful about our market, which is becoming important for ordinary people who invest their money in shares and bonds,” he said.

But Mr Putin would have none of it. A few hours later he told his ministers, in front of television cameras, that Mechel fixed prices, evaded taxes and pushed up inflation, harming the Russian people. This stirred memories of Stalin’s denunciations of “saboteurs” and knocked another third off the company’s value. The next day an explosion in one of Mechel’s mines injured 17 people, and the environmental agency launched an investigation.

Russian businessmen have been trying to work out what provoked Mr Putin. Unlike Mr Khodorkovsky, Mechel’s owner, a former miner, steered clear of politics and shunned publicity. “It shows that the Yukos case was not unique and it could happen to anyone,” says one observer.

The favourite theory so far is that the attack on Mechel was instigated by one of its customers or competitors, who complained to Mr Sechin that Mechel was abusing its monopoly position in coking coal. A second theory is that Mechel will be taken over by a state corporation run by one of Mr Putin’s former secret-service colleagues. Igor Shuvalov, Mr Putin’s deputy, has said that Mechel is unlikely to go down Yukos’s path, but acknowledged that “in life, no possibility can be excluded”.

Mechel’s story offers several lessons so far. It shows that the legacy of Yukos is strong, institutions are weak and Mr Putin’s whims take precedent over legal decisions. It demonstrates that Mr Putin feels invincible and nobody, including Russia’s new president, has any power over him. And it shows that Mr Putin has little interest in nurturing a good investment climate.

This may also explain the rough treatment BP, a British oil giant, has received in Russia. On the day Mechel was being castigated, Robert Dudley, the embattled chief executive of TNK-BP, BP’s joint venture in Russia, left the country citing “uncertainties surrounding the status of my work visa and the sustained harassment of the company and myself”. His visa has expired and so, say Russian shareholders who want him out, has his contract.

The conflict at TNK-BP remains a dispute between private shareholders. The Kremlin has not interfered directly, but it has not prevented the use of official agencies in the fight, nor has it done anything to help BP protect its investment. “Tread with caution,” was the advice of Tony Hayward, BP’s chief executive, to companies thinking of investing in Russia.

Perhaps one reason why the Kremlin is so complacent about foreign investors is that it has never paid the price for destroying Yukos. Rising oil prices, strong global growth and booming capital inflows meant that investors soon forgot about the affair. BP itself happily took part in Rosneft’s initial public offering, which legitimised its murky and controversial takeover of Yukos’s assets.

Today the outlook is less radiant, argues Rory MacFarquhar, chief economist at Goldman Sachs in Russia. Economic growth is expected to slow, inflation is in double digits and oil production is falling. Last year imports grew almost four times as fast as exports in real terms. Russia still had a current-account surplus last year, but if oil prices continue their recent decline, the balance of payments will soon look less healthy and the need for foreign investment may become more urgent. It is not just foreigners who should be worried about Russia’s investment climate—so should Russians themselves.