Putin's $6Bln Lecture Tames Mechel

Embattled coal and steel major Mechel, which had $6 billion wiped off its stock price after being accused by Prime Minister Vladimir Putin of price-fixing, on Friday said it was ready to cooperate with the government.

In a terse, conciliatory statement, the company said it agreed to help the government in combating rising prices, though it stopped short of promising to cut its coking-coal prices outright.

"Mechel is ready for cooperation with federal authorities of the Russian Federation and, if required, will provide complete information on any arising questions," the statement said. "Mechel shares the [government's and industry's] concerns ... in regard to the recent growth in prices for steel products and raw materials."

Putin's comments, in which he called for a special investigation of Mechel and appeared to chastise the company's owner, billionaire Igor Zyuzin, for his absence from a metals industry meeting, led some observers to draw parallels with the case of Mikhail Khodorkovsky's oil firm, Yukos. The company was bankrupted, and Khodorkovsky jailed after he publicly challenged Putin over corruption and pipeline routes.

But Putin's spokesman, Dmitry Peskov, on Sunday dismissed the comparison, saying the government was satisfied with Mechel's conciliatory stance and had no conflict with the company beyond wishing to see it fix anti-monopoly violations.

"No Yukos parallels are relevant with Mechel," Peskov said. "Yukos was charged with lots of criminal cases. … [The] measures against Mechel are taken not because it is Mechel as a concrete company, but just because the company committed violations.

"We are satisfied with Mechel's intentions to cooperate with the state," Peskov said. "But everything will depend on how this cooperation will develop in practice now."

Government ministers said Putin's comments on fighting price-fixing would lead to changes in the metals industry.

Deputy Economic Development Minister Andrei Klepach on Friday said: "Serious decisions would follow. … This is a turning point for the development of Russia's metals market."

On Saturday, Industry and Trade Minister Viktor Khristenko said he hoped that the dispute would be settled soon.

"I think the situation will be solved soon, after all the participants of this chain — suppliers and consumers — will build normal relationships based on long-term contracts," Khristenko told Channel One television. "It is not politics, it is just a situation in which the anti-monopoly bodies had to react on the statements of the metal producers about the incompetent actions of a resources supplier."

In Moscow on Friday, Mechel's shares on the RTS plunged 33 percent as both local bourses fell more than 5 percent.

Putin's comments on Thursday, which came amid soaring metals prices, inflation and demand for construction materials, sent Mechel's New York-listed American Depositary Receipts down 38 percent, as jittery investors feared that the company could face further sanctions.

In a curious development, two hours before Mechel made its statement Friday evening, RIA-Novosti quoted from what it said was a Mechel statement, but the company denied issuing it.

The RIA-Novosti report acknowledged that there was a gap between Mechel's export and domestic prices and promised that Mechel would never sell coal abroad for less than domestic prices.

Mechel spokesman Ilya Zhitomirsky dismissed the RIA-Novosti report as "nonsense" that had nothing to do with his company.

Mechel shares briefly surged 21 percent to $27.40 in New York after the RIA-Novosti report, but ended the day back at $26.20 after Mechel's denial.

At his meeting with metals tycoons in Nizhny Novgorod on Thursday, Putin said the Federal Anti-Monopoly Service and maybe the Investigative Committee at the Prosecutor General's Office should look closely into Mechel's pricing policies.

The firm was earlier this year selling coking coal, one of the materials used in steelmaking, to domestic customers at double the price it was selling it for abroad, Putin said.

Putin also appeared to take a sideswipe at Zyuzin, who was absent from the meeting due to ill health — and said he should get well soon "or we will have to send him a doctor to clean up all these problems."

RIA-Novosti reported that Zyuzin was admitted to a Moscow cardiology clinic on Wednesday and was undergoing treatment.

Troika Dialog said in a note to investors Friday that Mechel's problems stemmed "largely from the company's aggressive marketing strategy, which alienated some of its Russian customers and exposed it to charges of abusing its market position."

Mechel preferred to sell most of its output on the spot market, rather than sign long-term supply contracts, Troika said.

"This was perfectly reasonable from a commercial viewpoint ... though it also made the company stand out among other major Russian coal producers, which had mostly abided by the established contractual system," Troika said.

Some analysts said one or more of Mechel's competitors on the metals market, such as Novolipetsk Steel, majority-owned by Vladimir Lisin, could have urged Putin to express his displeasure.

Speaking in Nizhny Novgorod after Thursday's meeting, Lisin told reporters that Mechel would be fine "if it behaves correctly on the market," Interfax reported.

Lisin said the pricing policies referred to by Putin were "an isolated case … when someone strays from the generally accepted lines of behavior for the market or business community."

According to a price-fixing complaint by the Federal Anti-Monopoly Service against Mechel earlier this month, the company had without good reason stopped supplies of coal concentrate to Novolipetsk and refused to sign a supply contract.

Mechel "told us they had stoppages in production, but they continued undisrupted supply to their own plants and abroad," a source close to Novolipetsk said Friday.

A source at Mechel said Friday that he did not understand why Novolipetsk should be angry with them "as all the contracts had in fact been fulfilled."

One market source confirmed on Friday that other metal companies had indeed been unhappy with Mechel's pricing policies and the priority it gave to exports over the domestic market.

"The fact that Vladimir Lisin so quickly supported Putin's stance does give credibility to [the idea he] was pushing for that rebuke," the source said.

Sergei Markov, a United Russia State Duma deputy, said the metals tycoons had complained about Mechel's behavior to Deputy Prime Minister Igor Sechin, who oversees the industry, and that he had brought the problem to Putin's attention.

Putin's comments were "understandable," Markov said.

"He could have discussed the problems with Igor Zyuzin over a cup of tea, but the businessman did not show up — a sign that he had something to hide or be afraid of. So Putin had no choice but to do what he did," Markov said.

Markov described the slump in Mechel's share price as "no drama — it can rise as it fell."

Mechel, as one of the biggest corporate sponsors of the ruling United Russia party, "may have thought … it had immunity," said Dmitry Oreshkin, an independent political analyst. "But if you work on the Russian metals market, that's not nearly enough. You have to be friends with the man in charge — Igor Sechin."

"Mechel's statement on Friday evening was for the investors, not for the government," Markov said. "The company just had to calm down the investors who began to panic after Putin's statements. Believe me, Putin doesn't care about what Mechel says in its press releases. Now concrete steps have to be taken."

Chris Weafer, chief strategist at UralSib, agreed that it was "not at all in the government?s interest to have another Yukos case."

"Essentially, what Putin is saying is that he expects big business … to support the state's key investment objectives, rather than solely to take advantage of them to maximize profits," Weafer said.