Kremlin’s heavy hand triggers foreign exodus
By Ambrose Evans-Pritchard
Foreign investors have become extremely wary of the Russian stock market after the Kremlin moved yet again to tighten its noose around the country’s energy and mining sector, launching anti-trust probes against London-listed Evraz Holding and Raspadsky Coal.
The move follows last week’s assault on steel and coal giant Mechel for alleged overpricing of raw materials and using off-shore trading to cut its tax bill.
Moscow’s RTS stock market index has fallen by 25pc since May on fears that premier Vladimir Putin is once again using probes or other heavy-handed methods to reorder the strategic landscape.
The bare-knuckle fight for control over BP’s Russian TNK-BP has deeply shocked investors in the City and New York. The joint venture had been launched in 2003 with the personal blessing of Mr Putin, making it quite different from the foreign resource grab during the Yeltsin era that so enrages Russian nationalists.
“The market is panicking and foreign investors are pulling out of equities,” said Michael Ganske, a Russia expert at Commerzbank.
“People fear that the rule of law is breaking down. I think this is an overreaction, but the Russian government has to be careful in the way it uses rhetoric in this investment climate,” he said.
Mr Putin has already pre-empted the findings of the Mechel investigation, accusing the company of engaging in illegal price-gouging and abuse of the tax system by selling to their off-shore companies at a “quarter” of the world price. “This is a reduction of domestic taxable income. This is tax evasion,” he claimed.
Mechel’s share price has fallen by half since the Federal Anti-monopoly Service (FAS) knocked on the door last week, shedding $8bn of market value. The company insists that it merely took advantage of uneven pricing at home and abroad in the coal-coking market and has done nothing illegal.
The FAS is now investigating whether Evraz – part-owned by Chelsea proprietor Roman Abramovich – and Raspadsky Coal have abused their “dominant position” in the coking sector. The two companies declined to comment. Along with Mechel, they control half the Russian market.
Investors are watching with a jaundiced eye, alert to the “Yukos risk”. The Yukos oil group was hobbled by tax probes and effectively expropriated by the Russian government in 2004. Its former chief, Mikhail Khodorkovsky, is serving an eight-year sentence in a Siberian prison. The trial was widely criticised as a mockery of justice.
Robert Amsterdam, Mr Khodorkovsky’s lawyer, said there is probably an ulterior motive behind the latest wave of probes. “We have reached a point in Russia where nothing can be treated as a one-off affair. There is a systemic raiding-mechanism directed by the top,” he said.
“These types of attacks are usually combined with ‘short-trading’ by people inside the government, or they are a hard-ball tactic for extracting contracts. More broadly, I think foreign investors need to ask themselves whether they can trust the audited books of any company in Russia. It is impossible to conduct an independent audit,” he said.
Mr Putin appears to view the resource companies as prime villains behind Russia’s spiralling inflation, now nearing the danger level of 15pc. Most economists say the real cause is failure to stem overheating caused by the commodity boom.
The government let rip on fiscal spending at the top of the cycle to ensure the election of President Dmitry Medvedev this spring. The central bank has held interest rates below the inflation rate, leading to a surge in credit growth.
JP Morgan said it has downgraded Russian stocks, citing “the risk that non-conventional methods may be used to control inflation”.
Mr Putin has repeatedly interfered with market forces over recent months, freezing food prices over the winter. Less clear is whether he aims to bring all the strategic sectors of the Russian economy under the direct control of the state.
Elena Shaftan, emerging Europe chief at Jupiter Asset Management, said its group had cut exposure to Russian oil and steel companies, and was monitoring the Mechel case “very closely”, but insisted that the broader case for investment in Russia “remains intact”. Those who took flight after the Yukos affair missed a threefold rise in the Moscow bourse.