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. Last Updated: 07/27/2016

Sechin's Ax

When examining the Mechel scandal, you can detect several symptoms of a larger, systemic malaise in Russia's economy.

  From the administrative point of view, it is a sign that Igor Sechin is strengthening his control over the metals industry after Prime Minister Vladimir Putin gave him these responsibilities in May, when Sechin was appointed first deputy prime minister. When Putin gave Mechel and its owner, Igor Zyuzin, a sharp rebuke on July 24, he articulated everything Sechin had accumulated against Mechel in terms of incriminating material. Sechin wants big business to jump at every wiggle of his finger, just like when army privates snap to attention for their commanding officer. This is how Sechin defines law and order.

This episode underscores the growing misunderstanding between ruling clans loyal to Putin and those close to President Dmitry Medvedev. The president's economic aide, Arkady Dvorkovich, was rightfully worried after the Russian stock market plummeted by $60 billion the day after Putin's televised rebuke to Mechel. With the hope of limiting the damage, Dvorkovich promised on Monday that Mechel would get off with only a fine of 1 percent of its annual income.

But the same evening, Putin turned up the heat when he repeated the tax-evasion allegations and accused Mechel of selling its raw materials on overseas markets for one-fourth of the domestic price -- not one-half, as he initially claimed. In his second scolding of Mechel, Putin sent a clear message to Medvedev and his aides: They should hold their tongues when the prime minister takes such a strong position on an issue. And Medvedev got the message loud and clear. In his role as a loyal Putin protege, Medvedev referred to the rosy prospects of Russia's stock market during a meeting on Tuesday with Sberbank chief German Gref. This gave everyone yet another chance to see who is calling the shots in Russia.

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In stock-market lingo, Mechel fell under "Sechin's ax," something that stock brokers and shareholders remember all too well from the Yukos affair. In both cases, authorities slam a company with accusations of tax evasion and price-fixing and the share prices plummet. After this, officials give optimistic reports that everything is fine because the company is "very willing to cooperate with law enforcement authorities." Just as the market recovers, more bad news comes, to be followed by more optimistic reports from reliable sources. During the attack on Yukos, that pattern repeated at least five times, and no one knows how much money inside traders earned in the process.

In macroeconomic terms, the Mechel case means that the government -- while talking about lowering taxes for the oil and gas sector, which is controlled by Putin's allies -- is shifting the tax burden to the coal and steel industries, which the government hopes to control more tightly. In terms of regional politics, it is a sign of the gathering storm clouds over Kemerovo Governor Aman Tuleyev and generally over the "Kuzbass clan," which includes the Evraz Group. This is when a company is visited by a new criminal group that announces, "You now have a new krysha!" while intellectuals refer to it as raiding a company. A powerful interest group -- often with government backing -- goes after a profitable company, kicking out its management and owners and expropriating its assets. In the language of populism and public relations, the state is "protecting its interests by enforcing law and order." Meanwhile, voters cheer from the sidelines. "Putin is a real tough guy," they say. "He's given another corrupt fat cat exactly what he deserves."

In legal terms, Putin's attack on Mechel is a clear demonstration of Medvedev's "legal nihilism." No formal claim against the company was ever made, nor was there a court verdict, but Mechel has already been pronounced guilty, discredited and almost destroyed after its stock price dropped by nearly $6 billion in one day. Once again, we see that Medvedev's lofty, flaccid words mean nothing in light of Putin's strong-armed tactics.

Looking at the long-term picture, this story demonstrates that under Putin's rule, Russia is inevitably headed toward chaos. The economy is not guided by the rule of law, property and investor rights or transparency. Putin's supporters speak of the need of having a firm decision maker at the top to manage the economy.

Those who favor a more Western model, however, claim that the institutions designed to protect elements of a free market economy are being crushed. For example, the Federal Anti-Monopoly Service is powerless to act on its own against the country's largest price-fixers. But the moment Putin and Sechin decided to target Mechel, the main antitrust watchdog is released from its leash and given the command "Charge!"

Meanwhile, the whole country is rightfully worried about inflation. But when so many politically connected monopolies are allowed to flourish, it is no surprise that inflation is spinning out of control. The occasional public flogging -- in this case, with Mechel as the whipping boy -- makes for good PR but does little to solve the systemic problems with the economy.

In the end, this means that Russia will become locked into a vicious cycle in which authorities issue countless directives from above and use their administrative resources to break the back of businesses that don't fit into Putin's model of state capitalism. This leads to a decrease in initiative and productivity on a nationwide scale. Just like in the Soviet period, as the economy gets worse, the number of government directives grows proportionally.

This economic model might have worked when the prices of natural resources were skyrocketing on global markets, enabling Russia to become another Saudi Arabia. But it looks like the wave of good fortune that Moscow had been riding with impunity is now starting to ebb.

Dmitry Oreshkin is a Moscow-based political analyst.