Good Theater Is Bad for the Stock Market

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Prime Minister Vladimir Putin's invective last week against Mechel sent shares in the coal and steel major tumbling. The immediate fallout from the prime minister's public accusations of price fixing saw the value of Mechel's capitalization plummet by $6 billion.

And Mechel didn't suffer alone, as the RTS fell to a six-month low on Friday, after Putin called for an investigation of charges it sells coking coal on the domestic market for twice its export price.

He also warned Mechel owner Igor Zyuzin, who was being treated in a Moscow cardiology clinic, that he would send a doctor to "clean up all the problems" if Zyuzin didn't get well and deal with the issue.

Mechel management seems to have taken the warning to heart, issuing a statement Friday that it was ready to cooperate with the authorities. Combined with assurances from senior government officials that Mechel was not marked out as the next Yukos, this helped Mechel ADR's and the RTS begin to rebound on Monday -- only to have Putin renew his attack. This time, he went into detail, explaining that he believed Mechel was dodging taxes through a transfer-pricing scheme to send profits to offshore companies.

This public bashing smacks of the old planned economy, where the Party boss would berate company directors. It is clearly not standard behavior for a head of government in what is claimed to be a market economy to go on a verbal offensive against a publicly traded, private company. If that company has violated price-fixing rules, it is the responsibility of the legal and regulatory authorities, such as the Federal Anti-Monopoly Service, to investigate.

But in the Russian reality, the service is toothless -- as seen in the existence of an ever-expanding behemoth like Gazprom or the fact that domestic jet fuel prices are higher than on world markets -- and only goes after big companies when it receives the order from the prime minister or president of whom to target next.

And when it does move on a big company, especially after a public command from the prime minister, it's hard to blame analysts -- or the markets -- for speculating that one or another politically connected giant is eyeing the "guilty" company's assets.

The Anti-Monopoly Service should follow institutionalized guidelines in going after anti-market behavior without needing the political go-ahead. Political leaders, meanwhile, should eschew these theatrics. As the reaction of the RTS -- not just Mechel's shares -- demonstrates, this kind of behavior is anti-market in its own right.

Bravado like this might help him score points with the public, but it won't do anything to change investors' perceptions that the big names in government can do as they please with private companies that fall out of favor.

Fair or not, Yukos will always be the first name on everyone's lips.