China Imports Putinism in Rio Tinto Case

When the Russian state laid siege to Yukos and imprisoned Mikhail Khodorkovsky, many things were accomplished:  state officials behind Rosneft and Gazprom illegally became overnight billionaires, energy resources were sharpened into an even greater political weapon, and the key proponent of transparency and funding to the opposition was jailed.  Oddly, the oft-cited accomplishment of “reigning in the influence of the oligarchs” has most certainly not been accomplished, as the rich are using the Kremlin for their business ends like never before.

But perhaps the most important asset to come out of the Yukos affair was a quasi-legalistic model which allows governments to steal from the private sector with greater ease and a somewhat nice looking paper trail (good enough for an IPO and auctions to Italian state firms, at any rate).  We’ve seen it applied to many other properties in Russia, and now, with this Wall Street Journal editorial, it looks like the Yukos theft model is being adopted by Beijing in the case against Rio Tinto.  For some time we’ve followed this case closely, and recommend that you do the same.

This kind of capricious interference of the state in private business smacks of Vladimir Putin’s Russia. Consider the way Moscow leaned on Royal Dutch Shell from 2006 to 2007 until the company was forced to sell a majority stake in its prized Sakhalin Island project–the largest foreign investment in the country at the time–to state-owned Gazprom. That inquisition also saw the arrest of an employee for alleged espionage, along with a host of other alleged regulatory wrongdoings. Gazprom got its prize, while the rest of the world took the lesson that Russia was a dangerous place to invest.

China has largely avoided the thuggish behavior of its neighbor, but now Beijing is sending similar smoke signals. The Rio executives have been in jail for more than a month without being formally charged. Chinese officials have said they may be tried under China’s state secrets law–meaning information about the trial could also be classified as state secrets. Meanwhile, annual negotiations on iron-ore contracts drag on between Rio and China, making China the only major iron-ore importer in the world not to have settled its contract prices this year.