Cumbersome State Intervention Bludgeons Russia’s Markets

It’s a peculiar contrast: Americans are furious with the perceived recession in the economy, caused by bad mortgage debt, poor fiscal planning, high energy prices, and profligate government spending on war, among other factors. This week the Russian stock market is also experiencing a record-breaking crash, despite being based upon what are in my opinion rock-solid market fundamentals. Instead, these problems are being driven by completely avoidable state intervention and an arbitrary legal-regulatory environment. Which problem would you rather have to deal with? TNK-BP CEO Robert Dudley was forced out of Russia following “sustained harassment.” Will others follow? It’s been a pretty horrible week in business news over there, and a perfect storm of unrelated events has investors running for the hills.

First, one of the largest independent oil producers, TNK-BP, has been left without anyone in charge as CEO Robert Dudley was whisked from the country like the Saigon evacuation, following months of bitter fighting with Russian shareholders. Explaining that the withdrawal of Dudley was caused by “sustained harassment” and the inability of the government to renew the executive’s work visa, BP head Tony Hayward took the gloves off and said the company was “not going to be intimidated by strong-arm tactics.” This is quite a change for a person who just last year was paying homage to the court of Putin.There’s more: William Browder of Hermitage Capital, the one-time powerful Putin supporter, corporate governance reformer, and bullish Russia investor, is back in the news with a $230 million lawsuit along with HSBC claiming massive corporate identity fraud perpetrated with assistance from the Russian Interior Ministry. Browder, who was expelled from Russia and denied re-entry visas (just like me), says that during an unlawful tax inspection raid of the Hermitage offices, documentation was stolen to facilitate the “the falsification of evidence in court proceedings and manipulation of data” (a Hermitage employee was also severely beaten by the police during the raid, causing two weeks of hospitalization). Clifford J. Levy’s article about Browder in the New York Times this week is a must read … but I’m not sure if this means Putin will stop pretending that he has never heard of the guy.Lastly, completing the perfect storm trifecta of scary business news, was Vladimir Putin’s direct criticism of mining giant Mechel’s pricing policy, which sent shares tumbling by nearly 40% by the close of markets on Thursday. According to analysts at Alfa Bank, Putin’s criticism of Mechel stems from their refusal to agree to long-term coal contracts in Russia, as well as their hold on deliveries to NLMK. However after getting hacked for $5 billion worth of market value thanks to just a handful of sentences from the prime minister, Mechel executives are desperately seeking dialogue to assuage their difficulties with the Kremlin.In short, the confluence of these three events are a powerful reminder that Russia, in its current state, is not a normal, rule of law country where any business, foreign or domestic, can presume the regular functioning of the courts or regulatory agencies. The Kremlin’s failure to take any action to resolve these issues, along with the legal black hole of the Mikhail Khodorkovsky / Yukos case, represents a serious challenge to President Dmitry Medvedev’s stated plans to eliminate legal nihilism, as well as his bullish pitch to investors that Russia represents a “safe haven” from the global economic slowdown.I find myself in agreement with the ubiquitously quoted analyst Chris Weafer: “The last train carrying the optimists out of Russian equities has just left the station,” he said. “Let’s hope it’s just for a vacation rather than emigration.”Perhaps this unfortunate series of events can prompt some positive action.