Putin Accuses Mechel of Tax Evasion

ReutersPrime Minister Vladimir Putin speaking at the Presidium meeting Monday, at which he accused Mechel of evading taxes by transfering profits abroad.
Prime Minister Vladimir Putin on Monday fired a new broadside at Mechel, saying the coal and steel company had evaded taxes by selling products at bargain prices through offshore companies.

Putin's attack, coming four days after he censured Mechel and its billionaire owner, Igor Zyuzin, over purported price-fixing, prompted bewildered selling by investors. In New York, another 28 percent was wiped off Mechel's shares, while in Moscow the MICEX sank 2.2 percent to its lowest level since 2006.

The pressure on Mechel was ratcheted up further Monday evening, as the Investigative Committee at the Prosecutor General's Office said it was considering bringing criminal charges against the company, in addition to charges of price-fixing already levied by the Federal Anti-Monopoly Service.

Speaking at a meeting of the government Presidium, Putin said Mechel was guilty of profiteering through selling its products to offshore companies it controlled in Switzerland.

"I already mentioned at the meeting [on Thursday] that one company was exporting its product at a fraction of the domestic market price. The domestic price was 4,100 rubles ($176), and they were selling it to themselves, across the border, for 1,100 rubles, and then sells the product for $323," Putin said in televised comments.

"It is a reduction in the tax basis inside the country. It's not paying taxes, it's creating a shortfall on the domestic market, which means an increase in the cost of metals production," he said.

Putin insisted the state "should be absolutely neutral to all the market players and should not allow any administrative privileges. The rules should be clear, transparent and understandable for all."

Mechel's spokesman Ilya Zhitomirsky declined to comment Monday.

The severe tone of Putin's comments contrasted with those of President Dmitry Medvedev's adviser Arkady Dvorkovich, who earlier Monday said Mechel was cooperating with the anti-monopoly service in its price-fixing probe.

"A positive signal is that Mechel has been cooperating with the Federal Anti-Monopoly Service all these weeks, providing all the necessary information," Dvorkovich said.

"We hope that these events will be a lesson for everybody, not just Mechel but every company, and we will act in the most civilized way," Dvorkovich said.

The company's American Depositary Receipts sank 28 percent as of 11:39 a.m. in New York, Bloomberg reported.

Mechel's Russian shares, which trade in small numbers on the RTS, fell 34 percent to $17 following Putin's statement.

The ruble-denominated MICEX fell 2.1 percent to 1,456.16, while the dollar-denominated RTS Index dropped 1.2 percent to 1,928.74, its lowest since February.

Other metals companies were hit by the fallout, with Norilsk Nickel, the country's largest mining company, falling 7.7 percent on MICEX.

"Our clients were going crazy today, shouting over the phone — they were absolutely outraged," said an equity trader at a Moscow-based investment bank, who spoke on condition of anonymity because he is not authorized to speak to the media.

"A couple more such statements, and Russia can forget about its aim of becoming a world financial center. Officials have called the country a save haven from the world crisis, but [we've] got a different problem affecting the stock markets — Vladimir Vladimirovich Putin."

Putin's spokesman, Dmitry Peskov, shrugged off the market's reaction, saying investors had misread Putin's comments.

Investors "reacted too emotionally," Peskov said. "The real meaning of [Putin's] statement was actually positive, not negative."

"Putin mentioned Mechel just as a flagrant example of violating the law," Peskov said. "[His] real message for business was: We will create the most favorable environment for all of you, which you will be able to use provided that you don't break the law."

"When investors understand the real meaning of Putin's words, stock markets will cheer up," Peskov said.

Putin did not seem to very much care about the market, said Masha Lipman, a political analyst at the Carnegie Moscow Center.

"The prime minister behaves like a player that does not see any hurdles on his way and makes statements without minding the consequences," Lipman said.

"It may cause some discomfort for Medvedev, as he is ruling a country in which [another politician] can change anything he wants at will."

Peskov denied there was any rift between Putin and Medvedev over how to deal with Mechel. "The president and prime minister work in a well-coordinated way … in a united front," Peskov said.

A source close to Mechel confirmed Monday that Zyuzin, who missed Thursday's meeting with Putin as he was in a Moscow hospital, has heart problems. "The problems appeared long before Putin's statements," the source said.

In its statement Monday, the Investigative Committee said it was "examining Mechel's activity in cooperation with the other law-enforcement and controlling agencies."

"We are now checking the situation around the company [to see] whether there are any criminally punishable actions in its work," the statement said.

Federal Anti-Monopoly Service chief Igor Artemyev said in an interview with Vesti-24 television on Monday that other metals companies could face price-fixing investigations too.

"The price situation in metals is out of control," Artemyev said. "Mechel is not the only candidate for punishment over monopoly pricing."

Artemyev said his service would hear Mechel's case before Aug. 26. "We want to examine this case as quickly as possible in order to end uncertainty on the stock market," he said.

"We have gathered enough evidence. One must not blackmail steel plants, threatening to recall trainloads of coal in order to win a doubling of the price. The price [of coal] must be lowered and deliveries resumed."

Marat Gabitov, a metals analyst at Unicredit Aton, said the situation was now bleak for Mechel's owner Zyuzin.

"Zyuzin is now left with two choices — Siberia or London. As we understand now, the situation will not get better for the company."

Gabitov said Mechel looked "very attractive for a number of strong market players.

"Russian Technologies' Spetsstal would like to get hold of steelmaking assets, and the Novolipetsk Steel and the Magnitogorsk Iron & Steel Works, which lacks raw materials, would like to get Mechel's coking coal assets," Gabitov said.

"A better variant for Zyuzin would be just to face tax claims or something, sell the company [at a lower] price and leave the country. The worst scenario involves the criminal charges and the arrest of the businessman," Gabitov said.