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Beware The Russian Bear Market

  • Brian Whitmore

A Western oil executive flees Russia as his company faces multiple investigations and official harassment. Prime Minister Vladimir Putin issues a thinly veiled threat against the CEO of a major coal and steel company.

Just two more examples of the tried-and-true Kremlin method of taking control of major corporations through intimidation, analysts say. But this time there's a twist: the hardball tactics are coming with a cost, with Russian stocks tumbling, nervous investors fleeing, and fears of an impending economic downturn rising.

"When people come and ask me, should I invest in Russia, what I say is: How quickly would you be able to sell whatever it is you invest in? Because if you cannot sell it quickly, you could end up losing it. I would not advise anybody to become a direct investor in Russia," Bill Browder, head of Hermitage Capital Management, told RFE/RL's Russian Service in a recent interview.

Once one of Russia's biggest portfolio investors, Browder was barred from the country in 2005 after repeatedly criticizing the corporate governance environment. He later accused corporate raiders of taking control of three of his companies, and then embezzling $230 million, with the assistance of the Russian state. He says the investment climate today is the worst Russia has seen since the early 1990s.

Corporate Raiders

Browder says the ongoing conflict over control of the Russian-British oil joint venture TNK-BP is reminiscent of his own battles with Moscow's political and corporate elite.

On July 24, the TNK-BP joint venture's CEO, Robert Dudley, slipped out of Russia and went into hiding after authorities refused to renew his visa. The company, meanwhile, is under pressure from numerous investigations by Russian law enforcement.

"Somebody is trying to raid his company, whether it is his business partners or whether it's the state," Browder said. "The fact that there has been something like 14 different law-enforcement investigations into TNK-BP and Dudley over the last few months, suggests that somebody is behind it. I can't say who is raiding, but I can definitely say you can call it raiding."

It is widely believed by Russia-watchers that BP's Russian partners -- a group of companies controlled by Kremlin-friendly oligarchs Mikhail Fridman, German Khan, Viktor Vekselberg, and Len Blavatnik -- are trying to force the British major out. The end goal is for it to be taken over by either the state-controlled oil giant Rosneft or the natural-gas monopoly Gazprom.

The Russian partners accused BP of treating the venture like a subsidiary and ignoring their interests.

BP wants to expand the venture and raise production, while its Russian partners are more interested in running the operation for cash. The two sides have been sparring over issues ranging from the number of foreign employees allowed to work for the joint venture in Russia to the disbursement of dividends.

Most analysts see these smaller battles as part of a larger struggle for control of the company.

Market Jitters

The same day that Dudley fled Russia, Prime Minister Vladimir Putin rattled Russia's markets with a broadside against one of the country's leading industrial giants.

Speaking at an economic forum in Nizhny Novgorod, Putin went to great lengths to call out Igor Zyuzin, owner of the coal and steel company Mechel, accusing him of price-fixing.

"There is a respectable company called Mechel. We invited the owner and chief executive of that company, Igor Vladimirovich Zyuzin, to today's gathering, but he suddenly got sick," Putin said. "Well, in the first quarter this year the company exported raw materials at half the domestic market price, that is, the world market price. And the margin is where? In the form of taxes to the state? Illness of course is illness. I think that Igor Vladimirovich needs to get well soon. Otherwise we'll have to send him a doctor to clear out all these problems."

TNK-BP CEO Robert Dudley
The bureaucracy wasted little time springing into action. The Antimonopoly Service had already started formal antitrust case against Mechel and the Investigative Committee of the Prosecutor-General's Office said on July 28 that it was considering bringing additional criminal charges. Two days later, the Antimonopoly Service announced antitrust probes into two more coal producers, the Evraz Group and Raspadskaya.

Markets also reacted quickly to Putin's verbal assault on Mechel. The company's stock fell sharply, shedding 49 percent of its value by the close of business on July 29.

Russia's two main stock markets, the ruble-denominated MICEX and the dollar-denominated RTS, also initially fell as nervous investors fled.

"Why did this have such resonance? Because in the first place, the market as a whole is not in the best shape. And such harsh remarks tend to cause a strong reaction on nervous markets," Sergei Danskoi, an analyst with Troika Dialog, said the markets, told RFE/RL's Russian Service.

After seven straight days of losses, both the MICEX and the RTS indices recovered some ground by July 29, posting modest gains.

Nevertheless, Russian shares have been falling steadily since May, when they hit records high. The RTS is down 15 percent on the year and 22 percent from their May highs -- putting the index in "bear market" territory.

Yukos Redux?

Some analysts say Putin's broadside against Mechel is a continuation of a campaign by the so-called "siloviki" clan -- the KGB veterans who make up Putin's inner circle -- to seize control of the commanding heights of Russia's economy.

Some pointed out parallels with the case of Mikhail Khodorkovsky, the jailed former CEO of the Yukos oil company who was arrested in 2003. After Khodorkovsky's arrest and imprisonment, Yukos's assets were taken over by state-controlled Rosneft.

Speaking to RFE/RL's Russian Service recently, opposition politician Boris Nemtsov said that while Khodorkovsky angered the Kremlin by financing the political opposition, the Mechel case appears to be all about business.

"This doesn't resemble the Khodorkovsky case. Zyuzin isn't interested in politics, he has never engaged in politics, and isn't Putin's political competitor," Nemtsov said. "But he is Putin's business competitor. Putin is a businessman. He is the boss of a large Chekist business empire."

Meanwhile, President Dmitry Medvedev, who has said he wants to turn Moscow into a major financial center, tried to calm jittery markets by claiming that Russia remains a safe haven for investors amid the current global turmoil. At a televised meeting with government officials on July 31, Medvedev went even further, saying, "our law-enforcement and state institutions should stop terrifying business."

Browder, for one, said he isn't buying it:

"BP thought that they owned and controlled their company, and all of the sudden they discover that they don't control it. I would guess the next step is that they find out that they don't own it," Browder told RFE/RL's Russian Service. "This says something very profound about property rights and it says something very profound about the rule of law -- which is that property rights and the rule of law don't exist in Russia."

RFE/RL's Russian Service contributed to this report