KGB humour will not reassure foreign investors

In a major speech last Thursday in NizhnyNovgorod Vladimir Putin accused the coal and steel company Mechel of price-fixing. In a phrase which reverberated round the world, he hoped its absent chief, Zyugin, would get well soon ‘or we will have to send him a doctor to clean up all these problems’. On Friday, a third of the value was knocked off Mechel’s shares, and the RTS fell by 5 per cent.

So much we know, but what lies behind Putin’s speech? It can be read –and this is the official line – as a statesmanlike pronouncement on the Russian economy, which drew attention to the problem of inflation, and the contribution of metal companies to rising prices (metal prices have jumped 50% since the beginning of the year), citing Mechel as an example of a company which sells abroad at half the price it charges in the domestic market. ‘In this sphere’, Putin said, ‘a lot is under the influence of criminals. For export they use ‘grey’ schemes and ‘one day companies’. He promised action to ‘decriminalize’ the industry, and concluded that Russia needed to shift metal exports from bulk commodities to finished higher value-added products.

Putin may have exaggerated the problem of price-fixing, transfer-pricing, and tax avoidance in the metal industries: only an investigation will show widespread these ‘grey’ practices are. But there is nothing here that should have alarmed investors in general; rather the reverse. Putin and Medvedev have been laying a lot of stress on the rule of law and need for clear rules of the game for large businesses, and Putin’s latest speech is part of this encouraging litany. For this reason the theory that it was intended as a ‘challenge’ to Medvedev, to which the President must respond or lose credibility, is implausible.

Equally implausible is the notion that the speech was deliberately intended to depress Mechel’s share price as a prelude to the redistribution of its assets among Kremlin ‘insiders’. Putin has publicly said that he wants Mechel to pay its taxes, so it will be difficult for the ‘siloviki’ to ‘steal’ the company from its shareholders. Russia needs to create checks to the abuse of state power, and public pre-commitments to specific anti-corruption measures may be one of them.

It is different with the unfolding saga of TNK-BP. What investors should find worrying is Putin’s insistence that this is a purely private quarrel between two groups of shareholders, which has nothing to do with the state. It is indifference of the state, not state intervention, which sets in motion the ‘administrative measures’ leading to sales at knockdown prices. It seems possible that AAR or BP will have to sell its share in the consortium to Gazprom or Rosneft. This, and not the threats to Mechel, would be the real successor to Yukos. In fact the TNK-BP imbroglio is the single worst piece of news Russia has had since the Yukos affair. Had the state intervened to extend the work permits of BP employees, much of the damage could have been avoided.

One thing is clear. Putin’s outburst about doctors and illnesses was undisciplined. Russia needs to create a secure expectational structure for private investment, especially foreign investment. With investors already jittery-and Russia not immune to the effects of a global recession –this is not the moment to insert KGB humour into economic pronouncements, however well it may play with Russian voters.

This suggests a larger truth. Contrary to Marx, business does not control the state, the state controls business. The reason was given long ago by Stalin in his famous question: how many divisions has the Pope got? Business has no divisions. Its only weapon is the capital strike –withdrawal from investment. Is that what Prime Minister Putin really wants?