“Inspections and various kinds of harassment for commercial reasons have pestered the life out of [businesspeople],” Medvedev said. “In short, our law enforcement agencies and government authorities need to stop causing nightmares for business.”

“We need to create a normal investment climate in our country.”

Medvedev’s statements sounded like soothing words for investors after a verbal assault on one company by former president and current Prime Minister Vladimir Putin sent Russia’s stock market tumbling last week. Putin, who hand-picked Medvedev as his successor to the presidency, criticized Mechel, a coal and steel company, for tax-evasion during a televised meeting. His statements, which he reiterated Monday, dropped Mechel’s capitalization by some 8 billion dollars, and shook investor confidence in the Russian market.

Medvedev also announced that he had signed a new plan for battling corruption. According to the effort, which will be spearheaded by the head of the presidential administration, Sergei Naryshkin, a federal law on combating corruption must be enacted by October 1st.

Russia has lost ground in recent years in international corruption rankings. According to Transparency International, an independent watchdog of global corruption, Russia has become one of the most corrupt countries in the world, slipping to 143rd place out of 160 countries surveyed.

“Signals hold a very important meaning in our country,” Medvedev said. “Consider that this signal has been given. There is a law on this topic, and we will enact supplemental documents. But the most important thing is that there be an understanding of what shouldn’t be done.”

Since Latynina’s article was published, Putin has reiterated his comments, raising the pressure and sending Mechel’s stock on a continuing downward tumble. In line with Mechel’s collapse, much of the Russian market has fallen, as investors reassessed the risks of doing business in Russia.

As of July 28th 2008, Mechel had lost some 8 billion dollars net worth. Latynina’s article first ran in the Yezhednevny Zhurnal online newspaper.

Has the Doctor Been Called?
Yulia Latynina
July 28, 2008
Yezhednevny Zhurnal

Last week, at a meeting in Nizhny Novgorod, Prime Minister [Vladimir] Putin came down hard on a company which was damaging Russia’s economy with its work.

It turned out this company was by no means Baikalfinansgrup, which bought Yuganskneftegaz at a non-competitive auction on credit provided by the government. And it wasn’t the Gunvor group, which belongs to a friend of premier Putin and receives 70 billion dollars annual income from the export of Russian oil. And not RosUkrEnergo, whose right to deliver gas to the Ukraine using non-transparent arrangements is whole-heartedly defended by Russian bureaucrats at the highest level.

It turned out to be Mechel, condemned for selling coal abroad at prices two times lower than domestic ones. The company’s owner, Igor Zyuzin, did not appear at at the meeting, citing illness. “Of course, illness is illness,” premier [Putin] said, then recommending a speedy recovery for Mechel’s owner. “Otherwise we’ll have to send him a doctor to clear out all these problems.”

Putin’s promise to send Zyuzin a doctor cost Mr. Zyuzin 5 billion dollars — it was exactly this amount by which Mechel’s market capitalization collapsed that evening on the New York exchange.

The reason why Mechel in particular dissatisfied the premier was such: The largest Russian metallurgical giants, including the Novolipetsky [NLMK] and Magnitogorsky metallurgical complexes, buy up coal on the side, and as a consequence, are interested in long-term contracts for coal delivery during times of sharp price increases.

Mechel, which supplies them with coal, is a coal extracting company, and is accordingly interested in spot contracts for coal delivery, which allow it to maximize sales profit; And, should the opportunity arise, to use the deficit of coal as a lever to gain control over small factories (Gubakha, for instance).

It is clear that giants like NLMK and Magnitka are much closer to the Kremlin, and especially to Vice-Premier Sechin, who now oversees industry. It was precisely Sechin, who, with active participation of the metallurgical giants, prepared the report that has raised so much attention.

It sticks out like a sore thumb that this is already Premier Putin’s second attempt at direct interference in the economy. A week ago, high prices for jet fuel elicited his discontent. If earlier, during his presidency, President Putin underscored in every way that “the Yukos affair” was an exception, then now, it seems Premier Putin is making it clear to everyone that he is intent on directing the economy by hand.

Mechel, which was worth around 15 billion dollars just last week, recently laid out around 2.5 billion dollars for a controlling stake in two large coal companies –Yakutugol and Elgaugol –and in doing so, beat out the state-run ALROSA. Yakutugol has been online for a long while. Elgaugol is simply a section of taiga, and several billon dollars are needed to develop it.

It is obvious that in the near term, it will be hard for a company that paid money for non-operational assets in an open auction to raise the means to develop them. If Mechel goes bankrupt, and its assets are sold for peanuts, Mechel’s shareholders (I’ll remind you that the company had its IPO and lists its shares on the New York Stock Exchange), may well file against Premier Putin in the New York City court.

And if the Yukos shareholders, in filing their corresponding lawsuit, expect to prove that precisely Vladimir Putin or Igor Sechin are guilty for their misfortunes, then everything is available right here. It is hard to imagine George Bush, threatening to “send a doctor” to Bill Gates. One doesn’t speak to businessmen this way in the free world. Crime bosses speak this way to an out of line merchant. Usually, proof of these threats is obtained in a strategic way, wrapping oneself in microphones. Here the threats sounded right on the television.

One question –how much will this affair cost Mechel? Although in my opinion, something else is far more interesting –how much will it cost the Magnitka and Lipetsky [metallurgical plants]. What has happened comes out as the classic illustration of the proverb: don’t call a wolf to help you with the dogs. The metallurgical giants turned to Vice-Premier Sechin, to help him fight with inflation by forcing Mechel into long-term contracts. The general fall of the market has already cost Russia’s steel sector far more than the losses from spot contracts, by which Zyuzin sold coal. After all, zealous bureaucrats will now be checking everyone, not just Mechel. It is always this way with chekists and bandits: if you ask them for a favor, it’s uncertain if they will accommodate it or not. But you’re still certain to owe them.

But the most interesting part –how much will this affair cost Premier Putin? It isn’t a question of whether business will start to speak up in Mechel’s defense –no one has any illusions here. Business will be tearing chunks out of Mechel, and its mouth will be busy. But then Mechel will likely run for protection to President Medvedev, and there aren’t any reasons why President Medvedev wouldn’t provide it with protection. If nothing happens with Mechel, and prices for airline tickets don’t fall, this will mean that Premier Putin can’t regulate the prices of either jet fuel, or coking coal.

And this is very bad, when the premier sends a doctor every week, and the doctor just doesn’t arrive. This way one can quickly tumble down to the level of Premier [Mikhail] Fradkov, who every week would loudly censure [German] Gref, or [Alexei] Kudrin. But for some reason, he could never do anything to them.

translation by theotherrussia.org

Russian President Vladimir Putin has signed a law that puts caps on foreign ownership of companies in dozens of Russian industries, Reuters reports, citing the Kremlin press-agency.

The legislation first passed the State Duma, Russia’s lower house on April 2nd. It was adopted by the Federation Council, the upper house, on April 16th.

The new law has defined 42 sectors of the economy as “strategic,” and will require foreign investors to obtain permission from a government commission if they wish to obtain a certain stake of a Russian company. A foreign individual or firm will need approval before becoming a majority (over 50%) shareholder in most of the sectors. In companies that are involved in areas important for national defense, such as federally important mineral resources (including oil fields or other valuable subsoil resources), permission will be needed if more than a 10% share is desired.

Foreign governments wishing to invest in any of the industries face even stricter oversight, and need approval before obtaining more than a 25% share in any sector, or more than 5% in a sector using federally important resources.

Some investors are concerned about the new rules, and what they see as a re-nationalization of energy and mineral resources under Putin. Notably, Gazprom, Russia’s natural gas monopoly, has been accused of pressuring foreign investors into giving up majority shares in major development projects.

In total, 42 industries have been termed “strategic,” including mining, fishing, television and radio broadcasting, publishing and typesetting production, the manufacture of metals and alloys used in armaments and military technology, space technology, the production and testing of aviation technology, and the nuclear industry. Companies that hold a dominant position in providing internet and telephone service are also included.

In order to receive permission, foreign investors will need to file an application with a new commission comprised of officials from the government and security organs. Russia’s Federal Security Service (FSB) will then decide whether the ownership poses a threat to national security and will investigate the entities involved. The whole process is expected to take from 90 to 180 days.

Read the full details of the new law from the Prime-Tass News Agency (RUS).

Several recent articles review this ongoing disaster, including this one by Daria Solovieva at the World Politics Review. The New York Times had a long piece on oligarch playboy Mikhail Prokhorov and how he was reigned in by the Kremlin after one of his disgustingly ostentatious parties in the French Alps drew the attention of the police to possible prostitution charges. Prokhorov was punished by being forced out of his stake in Norilsk Nickel, where Vladimir Potanin, one of Putin’s favorite oligarchs, now dominates.

Rather than expropriating assets outright, Mr. Putin’s government has exploited minor legal infractions at the target companies to force sales. Either government-controlled companies, or companies run by men seen as loyal to Mr. Putin’s Kremlin, are the beneficiaries.

In 2003, for example, prosecutors went after Mikhail B. Khodorkovsky, chairman of Yukos Oil, then Russia’s largest private company, on accusations of tax evasion. Mr. Khodorkovsky was sent to a Siberian prison, and Yukos went bankrupt. The state company Rosneft later acquired most of Yukos’s assets. Last fall, it was environmental infractions in pipeline construction that forced Royal Dutch Shell and Japanese partners to sell a controlling stake in their $22 billion Sakhalin II oil and gas development to Gazprom, the state gas monopoly.

Then, this June, BP’s local joint venture, TNK-BP, sold its share of a huge gas development after regulators threatened to revoke the license because the field was developed too slowly, which was a technical violation of the terms of TNK-BP’s license. Gazprom, again, was the beneficiary.

This is what Putin called “the ideal environment for foreign investment.” Ideal for the bank accounts of the Kremlin insiders, perhaps.