Russia’s Bad News Bears

bad_news_bears_ver2.jpgIf you were worried about what Mechel means for Russian business, this was the last piece of news you wanted to hear: government officials are working hard to soothe fears of the company’s collapse, and promising that Mechel will not suffer the same fate as Yukos. Presidential aide Arkady Dvorkovich has saidWe consider it a positive signal that the company has all these weeks been co-operating with the anti-monopoly services,” and that the Federal Anti-Monopoly Service will conduct its probe with the full compliance of the law. With trading drying up faster than desert rain, it seems that the “Bad News Bears” isn’t just a awful American movie anymore. A denial of an attack from the state is in my opinion the worst news you could hear, meaning that Mechel’s fate is sealed. For years I have been called crazy (and a variety of other colorful titles) for arguing that the methodological treatment given to Yukos and Mikhail Khodorkovsky by judicial and regulatory authorities had created a well-oiled mechanism for the exercise of arbitrary power in the business sector, one that would soon claim many new victims. With regard to the aggressive comments against Mechel, one editorial has pointed out “Fair or not, Yukos will always be the first name on everyone’s lips.” Per the Yukos experience, we on the defense team came to regard the assurances from the state as veiled threats of opposite intentions. If you consult our White Paper on the case, we provide a long list of the instances in which government officials promised that nothing would happen to Yukos (see the PDF for the footnoted citations):

• On November 5, 2003, President Putin stated: “The state surely does not want to destroy [Yukos].”• On November 29, 2003, the Russian Minister of Economic Development and Trade, German Gref, stated: “The nationalisation of Yukos is not an issue.”• On June 17, 2004, President Putin stated: “Russian authorities, the government, and the economic officials of our country are not interested in seeing Yukos go bankrupt.”• On July 21, 2004, Rosneft press spokesperson Alexander Stepanenko stated: “[Rosneft is] not planning any asset acquisitions in the near future. None.”• On September 6, 2004, President Putin stated: “I don’t want to bankrupt Yukos…Give me the names of the government officials who want to bankrupt Yukos and I’ll fire them.”• On September 24, 2004, President Putin stated: “[T]here was no, and there will be no plan for nationalisation of Yukos or the state assuming control of it…The state did not set before itself the task to nationalise this company or lay hands on it. And there is no such aim now.” The President also asserted that any Yukos asset sales would abide by Russian law: “We shall do this in strict accordance with the law. I want to stress it – in strict accordance with the law.”

The Mechel affair is also not just a parable to Yukos, or some sort of partial reenactment of Russia’s famous innovations in expropriation. There are indications of direct connections to the very same individuals who were known to have orchestrated the legal assaults which ended with Rosneft absorbing the country’s most well-managed oil company while keeping its CEO behind bars on recycled false charges. My Kremlin confidant shared with me yesterday that everyone he works with believes that Igor Sechin’s fingerprints are all over this move, a theory which was further bolstered by comments from Oleg Mitvol. The Moscow Times has corroborated this scoop in a valuable new article, which explains that the main pressure may be coming from steel producers Novolipetsk and MMK, who were seeking to use Sechin’s influence to force Mechel into selling coal in long-term contracts for below-market values.If this is indeed the case, then it is possible that Dmitry Medvedev, Arkady Dvorkovich, and First Deputy Prime Minister Igor Shuvalov are being sincere when they say that they are trying to protect Mechel from the wolves of the siloviki … but can the young presidential administration pull enough weight to stop Sechin and the steel industry’s onslaught?A particularly lucid piece from the article frames how ridiculous the situation has become:

If Mechel’s share price drops much further — or worse, the company is forced into bankruptcy — its ADR shareholders would have sufficient grounds to sue Putin in a New York court. Yukos’ former owners made a similar claim against Putin, but they would have had a tough job proving in court that Putin was liable for Yukos’ bankruptcy.It would be hard to imagine U.S. President George W. Bush saying on television that he will “send a doctor” to “help” Bill Gates solve the anti-trust issues facing Microsoft.In the free world, government leaders do not speak that way to businesspeople. Putin’s threat sounds more like what a Mafia don might say when his underlings step out of line. Usually, we learn about these kinds of threats only with the help of hidden microphones (or with microphones that leaders mistakenly think are turned off), but in this case, Putin sent the message to the whole world loud and clear on national television.

I don’t know what is going to happen here with the Mechel affair, but at the end of the day my gut instinct tells me that this one may provide a stinging lesson to those who didn’t want to believe that Russia is broken, as well as some murmurs of reconsideration that Putinist capitalist authoritarianism is all that great, given the collateral damage to so many other innocent businesses, investors, employees, and consumers from these high drama antics.We are dealing with some very fundamental questions of what happens when power is left unchecked by law, and then takes an interest in the markets. Again, we should look to the past for the best indication of government thinking on the RTS. Prime Minister Putin once audaciously proposed that energy revenues held by the government be invested in domestic securities to help “prop up” the market – a suggestion that even prompted Finance Minister Alexei Kudrin to publicly contradict the former president. There are many other examples of surprisingly archaic financial authoritarianism measures – such as probing jet fuel prices, freezing food prices, and a variety of forced measures to battle inflation.It is in moments like these that can make observers seriously question the long term sustainability of these kinds of power structures, where people, ideas, and capital are not allowed to compete in a fair, rule-based environment.