Kremlin corporate crackdown sends markets tumbling

Russian President Dmitri Medvedev says he wants to make Russia a leading global financial center. But a series of state crackdowns on private companies have plunged Russian markets into turmoil and sent foreign investors fleeing.

Over the past week, Prime Minister Vladimir Putin has twice publicly slammed Russian coal-and-steel giant Mechel for alleged price fixing, tax evasion, and monopolization, causing the company's shares to shed nearly $8 billion in value on the New York and Moscow stock markets.

In another case, Robert Dudley, CEO of the joint Russian-British oil venture TNK-BP, hastily left Russia last week claiming his company faces "sustained harassment" from officialdom in an ongoing internal dispute over control with Russian partners. Nearly 150 foreign employees of TNK-BP have been forced out of Russia in recent days over visa difficulties.

On Tuesday, the investment bank JP Morgan Chase & Co. downgraded Russian stocks, warning that "non-conventional policy methods" were threatening the country's economic stability.

Analysts say this amounts to the latest chapter in a Kremlin campaign to impose order upon the commanding heights – strategic sectors – of Russia's economy, which began with the destruction of the Yukos oil empire and the arrest of its politically disobedient owner, Mikhail Khodorkovsky, five years ago. As usual, opinion is starkly divided over the government's intentions, with defenders arguing that the goal is to enforce the law in Russia's unruly business jungle. Critics, pointing to past cases, suggest that when the dust settles, assets formerly held by private interests are likely to be transferred to Kremlin-controlled companies.

"Based on my own experience, rule of law and property rights are almost non-existent in Russia," says Bill Browder, CEO of London-based Hermitage Capital, a leading investor in Russia. "Unless they can improve that, it makes no sense to invest there."

Mr. Browder, who has been unable to obtain a Russian visa for almost three years, recently charged that three Hermitage subsidiaries were targeted for takeover by corrupt officials of Russia's interior ministry, who obtained company documents and seals in the course of an official tax investigation. The seizures were thwarted, but he alleges that the officers subsequently used private company data to carry out a massive tax scam.

About 77,000 cases of such corporate "raiding" – illegal seizure of private assets, often carried out or abetted by corrupt police and state officials – occurred last year, he adds.

"It used to be oligarchs stealing from everybody, now it's law enforcement doing the stealing," Browder says.

Mechel, Russia's largest producer of coking coal, was accused at a meeting of business leaders last week by Mr. Putin of monopoly practices, including setting artificially high prices on the domestic market and exporting at unrealistically low prices to its own subsidiaries abroad in order to evade Russian duties. Putin chilled the nationally televised meeting with a veiled threat, noting that Mechel's billionaire owner, Igor Zyuzin, was absent due to sickness.

"Of course, an illness is an illness," said Putin, a former KGB agent, "but I think [Mr. Zyuzin] should get better as soon as possible, otherwise we shall have to send him a doctor to clear up all these problems."

This week, Russia's Federal Anti-Monopoly Service said it would probe Mechel, and another steel company, Evraz, on the price-fixing allegations. Experts say that's the normal procedure for policing the market, but Putin's comments were completely out of the ordinary.

"I think authorities want to beef up efforts in dealing with monopolism, and this [Putin's attack] might give that a boost," says Yaroslav Lissovolik, chief economist for Deutsche Bank in Russia. He says huge monopolies dominate Russia's economic landscape, and whittling them down to size is necessary to clear space for small and medium businesses, a key goal of Mr. Medvedev.

He says Putin may be trying to bring down inflation, which is spiking at nearly 10 percent this year, by forcing big companies to lower their domestic prices.

"Putin knows what he's doing," says Galina Kovalishina, an analyst with the independent Institute of Financial Studies in Moscow. "He doesn't care about the capitalization of any individual company, no matter how big it is. I think his main concern is the transparency of Russian business and ensuring the legal character of their dealings."

But critics point out that the government report indicting Mechel was prepared by deputy prime minister Igor Sechin, the same man who, as a Kremlin aide, oversaw the attack against Yukos. In that case, the private firm was assailed by criminal charges and back tax assessments, and in the end its assets wound up mostly in the hands of the state oil firm Rosneft.

Experts point out that Mechel is a politically obedient company, and its owner is a regular contributor to the pro-Kremlin United Russia party. "There isn't a political dimension here, as there was in the Yukos case, but it's quite likely that Mechel's coal business could be taken away and given to another company," says Alexei Mukhin, director of the independent Center for Political Information in Moscow. One possible recipient of Mechel's assets, he says, is RusSpetsStal, a specialty steel producer founded by Russia's state-owned arms export corporation, Rosoboronexport.

During recent months TNK-BP, which is a 50-50 venture between BP and four Russian billionaires, has been hit with environmental inspections, back-tax claims, espionage charges against one of its employees, and mass visa suspensions for its foreign workers. The affair remains murky, but many experts suspect that a big state firm, such as Gazprom, is waiting in the wings to pick up the pieces if the company is torn apart by the shareholder dispute. This week, the British government took the unusual step of formally complaining that Russian state agencies were piling onto TNK-BP in an apparent effort to hasten the company's demise.

"The way shareholders have manipulated elements of the Russian state bureaucracy and the way that has been allowed to continue is very disappointing," a British Embassy spokesman told journalists in Moscow.

Some experts suggest that these may be the first signs of a split between President Medvedev, who appealed for market calm on Tuesday, and his predecessor, the still-powerful Prime Minister Putin.

"Putin may have some purely political reasons," for weighing in on the Mechel affair, says Olga Kryshtanovskaya, a sociologist who studies Russia's political elite.

"Medvedev's image has been strengthening lately, so Putin may want to show who's master in the house. He gets a lot of PR points inside Russia, by playing to the part of the population that dislikes big business," she says.