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Kremlin corporate crackdown sends markets tumbling

JP Morgan Chase & Co. downgrades Russian stocks as government looks set to nationalize private steel and oil companies.

By Correspondent of The Christian Science Monitor / July 31, 2008

RIA-Novosti, Alexei Druzhinin, Pool



Russian President Dmitri Medvedev says he wants to make Russia a leading global financial center. But a series of state crackdowns on private companies have plunged Russian markets into turmoil and sent foreign investors fleeing.

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Over the past week, Prime Minister Vladimir Putin has twice publicly slammed Russian coal-and-steel giant Mechel for alleged price fixing, tax evasion, and monopolization, causing the company's shares to shed nearly $8 billion in value on the New York and Moscow stock markets.

In another case, Robert Dudley, CEO of the joint Russian-British oil venture TNK-BP, hastily left Russia last week claiming his company faces "sustained harassment" from officialdom in an ongoing internal dispute over control with Russian partners. Nearly 150 foreign employees of TNK-BP have been forced out of Russia in recent days over visa difficulties.

On Tuesday, the investment bank JP Morgan Chase & Co. downgraded Russian stocks, warning that "non-conventional policy methods" were threatening the country's economic stability.

Analysts say this amounts to the latest chapter in a Kremlin campaign to impose order upon the commanding heights – strategic sectors – of Russia's economy, which began with the destruction of the Yukos oil empire and the arrest of its politically disobedient owner, Mikhail Khodorkovsky, five years ago. As usual, opinion is starkly divided over the government's intentions, with defenders arguing that the goal is to enforce the law in Russia's unruly business jungle. Critics, pointing to past cases, suggest that when the dust settles, assets formerly held by private interests are likely to be transferred to Kremlin-controlled companies.

"Based on my own experience, rule of law and property rights are almost non-existent in Russia," says Bill Browder, CEO of London-based Hermitage Capital, a leading investor in Russia. "Unless they can improve that, it makes no sense to invest there."

Mr. Browder, who has been unable to obtain a Russian visa for almost three years, recently charged that three Hermitage subsidiaries were targeted for takeover by corrupt officials of Russia's interior ministry, who obtained company documents and seals in the course of an official tax investigation. The seizures were thwarted, but he alleges that the officers subsequently used private company data to carry out a massive tax scam.

About 77,000 cases of such corporate "raiding" – illegal seizure of private assets, often carried out or abetted by corrupt police and state officials – occurred last year, he adds.

"It used to be oligarchs stealing from everybody, now it's law enforcement doing the stealing," Browder says.

Mechel, Russia's largest producer of coking coal, was accused at a meeting of business leaders last week by Mr. Putin of monopoly practices, including setting artificially high prices on the domestic market and exporting at unrealistically low prices to its own subsidiaries abroad in order to evade Russian duties. Putin chilled the nationally televised meeting with a veiled threat, noting that Mechel's billionaire owner, Igor Zyuzin, was absent due to sickness.

"Of course, an illness is an illness," said Putin, a former KGB agent, "but I think [Mr. Zyuzin] should get better as soon as possible, otherwise we shall have to send him a doctor to clear up all these problems."