Medvedev Tries to Reassure Investors

Five days after a first state salvo against Mechel sent Russian stocks diving and stirred memories of the Yukos affair, President Dmitry Medvedev sought on Tuesday to limit the damage with assurances that the stock market remained attractive to investors.

But storm clouds continued to gather over the embattled coal and steel giant. A methane blast rocked one of its Siberian mines on Tuesday, causing no deaths but prompting a fourth federal agency to open an investigation into Mechel.

Mechel has seen about half of its stock value, or $8 billion, wiped out amid stinging criticism from Prime Minister Vladimir Putin. On Thursday, Putin accused the company of evading taxes by selling coking coal at bargain prices through offshore companies. He repeated his criticism on Monday.

Medvedev moved to calm jittery investors, saying during a meeting with Sberbank chief German Gref that the Russian stock market "is one of the most attractive in the world right now" because of "the crisis on world financial markets and clear problems with liquidity."

He offered no hint that the Mechel case would be quickly resolved, urging companies to join the government in developing the stock market "so that their activities meet high corporate standards, are transparent and make sense to the market, and prevent the manipulation of stock prices.''

Investment bank JPMorgan downgraded Russian stocks, saying "economic momentum is slowing" and the government was struggling to control inflation.

JPMorgan also said Putin's criticism of Mechel's pricing policy "introduces the risk that nonconventional methods may be used to control inflation."

The MICEX fell 1.2 percent, losing 12 percent over the last six days, while the RTS Index sank 1.7 percent.

Mechel's shares shed a further 14.2 percent to $16.73 in New York before rebounding to $18.45 at 1:30 p.m., a 68 percent decline from a May 30 high. The bulk of the company's shares are traded as ADRs in New York.

Mechel's shares on the RTS, however, jumped 10 percent, apparently spurred by conciliatory comments by First Deputy Prime Minister Igor Shuvalov.

Asked whether Mechel was a repeat of the Yukos case, Shuvalov said, "I consider this a most unlikely scenario, but in terms of probability, we can't exclude anything," Interfax reported. "The most likely scenario is that the company will cooperate with the state authorities."

Mechel's general director, Igor Zyuzin, who provoked Putin's outburst by failing to meet him last week because of heart problems, checked out of a Moscow hospital Tuesday and flew to the scene of the explosion in the Kemerovo town of Mezhdurechensk, Mechel said in the statement.

A total of 41 people were underground when the methane explosion ripped through a mine shaft 310 meters beneath the surface, the company said. Seventeen of them were hospitalized with burns and other injuries.

Rostekhnadzor, Russia's technological safety watchdog, said it would investigate Mechel's mines, joining the Federal Anti-Monopoly Service, the Investigative Committee and the Prosecutor General's Office in opening inquiries into the company since Thursday.

The tax evasion accusations and accompanying probes are raising concerns of a repeat of the 2003 crackdown on Yukos and its former CEO, Mikhail Khodorkovsky, now serving an eight-year prison term. Government insiders and analysts differed over whether the two cases were similar but concurred that the Yukos case had much stronger political overtones.

Unlike Yukos, which ignored several state salvos in 2003, Mechel was quick last week to promise to cooperate with federal agencies.

Analysts said that unlike with Khodorkovsky, Putin did not appear to be targeting a potential political rival but rather was trying to boost his image as a tough administrator and hoping to shift possible blame for economic problems from his Cabinet onto big businesses, which are generally disliked by ordinary Russians.

Unlike Khodorkovsky, Zyuzin has never given any money to opposition parties, contributing only to Putin-led United Russia, said Alexei Mukhin, an analyst with the Center for Political Information.

Both cases, however, raise questions about selective justice, because both Yukos and Mechel have been singled out for alleged wrongdoing, practiced by many companies, and publicly scolded, analysts said.

Mechel was singled out because it has relatively weak political ties to the Kremlin, said Mukhin and Alexei Makarkin, an analyst with the Center for Political Technologies.

"Mechel and Zyuzin have never been part of the Kremlin's political projects, so by selecting them, Putin attempted to downplay the political component," Mukhin said.

Olga Kryshtanovskaya, who studies the Russian elite at the Russian Academy of Sciences, said state companies could profit from the Mechel affair, just as they did from Yukos. Yukos assets have been snapped up by government-controlled Rosneft and other companies close to the Kremlin.

"Let us see which Kremlin-connected companies will benefit from the Mechel's problems," Kryshtanovskaya said.

First Deputy Prime Minister and Rosneft chairman Igor Sechin, who prepared materials on Mechel for Putin's meeting on Thursday, was accused by Khodorkovsky of spearheading the Yukos onslaught.

RusSpetsStal, a state-controlled holding that Putin's close ally and Russian Technologies head Sergei Chemezov has attempted to use to consolidate companies producing special steels and alloys, has considered acquiring some of Mechel's assets, including Chelyabinsk Metallurgical Plant.

It remained unclear Tuesday how far the Mechel crackdown might go. If Mechel agrees to compensate clients for damages incurred by its pricing policy, it faces a fine of up to 1 percent of its yearly turnover, Igor Artemyev, head of the Federal Anti-Monopoly Service, said Monday.

Separately, Artemyev said Tuesday that his service was also investigating the pricing activities of steel giant Evraz Group. The company could not be reached for immediate comment.

Despite the continuing slide in the Russian stock market, some experts said it remained unclear whether investors would only stay away.

Andrew Somers, head of the American Chamber of Commerce in Russia said he had received worried calls from potential U.S. investors after a "series of events," which apart from Mechel included the TNK-BP affair and the return of the Hermitage Capital case.

"There certainly is a perception of concern here," he said.

At the same time, he said, he also was receiving many calls from people interested in investing in Russia.

Deputy Prime Minister Alexander Zhukov told reporters that he did not expect Mechel would hurt the investment climate. "I hope everything will even out soon," he said.

Investors are cynical people, and they are ready to tolerate political risks as long as Russia's stocks offer high profits, said Stanislav Belkovsky, head of the Institute of National Strategy. "After all, none of them went out to support Khodorkovsky but all took Putin's side," he said.

Staff Writer Nikolaus von Twickel contributed to this report.