Putin's $60Bln House Call

On Thursday, Prime Minister Vladimir Putin heaped criticism on a company for activities that he said were harmful to the country's economy.

The company turned out to be Mechel, which Putin accused of selling raw materials to overseas customers at half the price it charges on the domestic market. Because of bad health, the company's owner, billionaire Igor Zyuzin, did not attend the meeting with other leaders of the metals industry. "Of course, an illness is an illness," the prime minister said, and advised Mechel's owner that he should recover quickly "or we will have to send him a doctor to clean up all these problems."

Putin's threat cost the ailing oligarch nearly $6 billion -- the amount Mechel's American Depositary Receipts fell on the New York stock exchange on Friday, the day after Putin's statement.

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One of the reasons Putin has expressed dissatisfaction with Mechel is because the coal producer prefers to sell its products on the spot market to maximize short-term profits during periods of rising coal prices. But with prices rising as much as they have over the past year, Mechel's largest buyers -- steelmakers Novolipetsk and Magnitogorsk Iron & Steel Works, or MMK -- seek long-term contracts with the coal supplier in order to lock into lower, fixed coal prices.

It is not surprising that Novolipetsk and MMK, which are the two leading giants in the country's steel industry, are much closer than Mechel is to the Kremlin and to Deputy Prime Minister Igor Sechin, who now oversees this industry. It was Sechin, apparently at the urging of the steel giants, who prepared the incriminating report to Putin about Mechel's purported price-fixing.

This is Putin's second recent attempt as prime minister to intervene directly in the economy. On July 11, he ordered the Federal Anti-Monopoly Service to "wake up" and find out why domestic jet-fuel prices are higher than on global markets. If as president Putin claimed that the Yukos affair was an exception, as prime minister it would seem Putin is determined to control the economy with his own hands.

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.

One question is, How much will this conflict ultimately cost Mechel? But the more interesting question is how much it will cost Novolipetsk and MMK? These events are a classic illustration of the old saying that you shouldn't call a wolf to protect you from a mad dog. The steel-producing giants seemed to have called on Sechin to help secure long-term coal contracts with Mechel at fixed, low prices.

But the subsequent overall decline in Russia's stock market, which fell by $60 billion the day after Putin's statement, has already cost the country's steel industry far more than the losses it would have ever incurred from Zyuzin selling coal through the spot market.

Yulia Latynina hosts a political talk show on Ekho Moskvy radio.