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Mechel and TNK-BP Finish Off Save Haven

The Moscow Times

Mechel and TNK-BP Finish Off Save Haven

Monday, 28 July 2008

By Tai Adelaja / Staff WriterThe RTS Index plunged into bear-market territory Friday, falling the most in six months as investors took fright a day after Prime Minister Vladimir Putin’s stinging censure of coal and steel producer Mechel’s pricing policies.

Adding to the nervousness were the hurried departure from Russia of TNK-BP chief Robert Dudley, also on Thursday, prompting fears that BP’s investment in the country could be in jeopardy and further falls in global oil prices.

Russian stock indexes were hit hardest of all global markets Friday, with the RTS falling 5.6 percent to close at 1,951.29 — a drop of 22 percent since May 19 — and the MICEX falling 5.5 percent to 1,487.10, its lowest level since November 2006.

Mechel, the country’s largest coking coal producer, fell 33 percent Friday on the RTS, adding to its 38 percent fall that wiped $6 billion off of its New York-traded American Depositary Receipts on Thursday. In his criticism of the company and its majority shareholder billionaire Igor Zyuzin, Putin called for the authorities to probe purported price-fixing on domestic coking coal prices, which he said were higher than export prices in the first quarter. 

Analysts saw in Thursday’s events worries for the investment case in the country.

In a note to investors Friday, Roland Nash, head of research at Renaissance Capital, said the TNK-BP and Mechel events, combined with the falling oil price, had “finished” Russian equities’ “reputation as a safe haven.” 

A cautiously worded statement by Mechel late Friday promising cooperation with the government helped to lift its ADRs in New York by $3.36 to close at $26.20, but earlier in the day other Russian steelmakers and coal producers felt the effects of the fallout. 

Evraz, the country’s second-biggest steelmaker, part-owned by former Chukotka Governor Roman Abramovich, dropped 14 percent to $78 in London trading, while Severstal, the biggest steelmaker, owned by another Putin ally, Alexei Mordashov, fell 53 rubles, or 12 percent, to 405.60 rubles on the MICEX exchange.

Putin’s comments compounded an already lackluster trading week, battered by falling oil prices and the dismal situation in global markets. 

“Investors confidence was shaken if not shattered,” said Marat Gabitov, a metals analyst at Aton UniCredit. “The mood out there is quite negative, and the expectation is that Mechel’s slumping stocks would drag down the whole market.”

Analysts said Mechel’s pricing policies, already subject to an investigation by the Federal Anti-Monopoly Service, and the worsening TNK-BP saga could trigger a decline in investor confidence and destabilize the stock market. 

TNK-BP said Thursday that Dudley had left the country because of what it called “sustained harassment of the company” by BP’s Russian partners, billionaires Mikhail Fridman, German Khan, Viktor Vekselberg and Len Blavatnik.

Dudley’s departure after an acrimonious battle over investment strategy has fueled speculation that TNK-BP’s Russian shareholders could now completely take over the company. 

While the British-Russia joint venture said last week that it had doubled its first-half profit to $4.7 billion and has increased dividends, the example of a showcase British investment in Russia gone awry could make investors worry about doing business here, analysts said. 

Nash, of Renaissance Capital, said the TNK-BP dispute would “likely become even uglier now that the remarkably composed Mr. Dudley has left Moscow,” adding that it would probably require the government’s intervention to be resolved.

New York oil futures appeared to have stabilized Friday, settling at $126 a barrel — down 13 percent from their July 3 high. 

The falling global oil prices made their mark on Rosneft, which declined 4.9 percent Friday to 228.20 rubles, making for a weekly loss of 9.9 percent. 

Global banking stocks bounced temporarily on the positive news that the U.S. Congress agreed to bail out the embattled U.S. mortgage giants Fannie Mae and Freddie Mac. President George W. Bush waived his veto over the weekend, allowing the rescue package to be put into effect.

In Russia, Sberbank slid 8.9 percent. The bank said net income in the first quarter climbed 16 percent to 31.1 billion rubles ($1.33 billion).

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