Putin Turns the Screws on Russian Steel, Coal and Aluminum Producers

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Commodities, Global Trade

This is Part One of a Two Part Series… 

It would seem old habits die hard in Russia. As BP are forced to withdraw their CEO (before he is arrested on cooked up charges of working with an invalid work permit) ” a situation engineered by BP’s Russian partners in BP-TNK their joint venture Russian oil venture, Russia’s own steel mills (particularly Mechel) are warned publicly by Vladimir Putin that they had better cooperate in creating price stability for coal and steel products or face criminal proceedings. Apparently Mr Putin wants the steel mills to grant quarterly or better still annual contracts to consumers to contain rising prices. His timing may not be good though. Inprom, one of Russian leading steel service center operators believes prices will come off 8-10% in the 4th quarter. In an interesting article today, the Economist made the following highly critical observation about Putin’s interference in business ” Mechel’s story offers several lessons so far. It shows that the legacy of Yukos (the oil giant that was seized by the government from shareholders and given to a state competitor) is strong, institutions are weak and Mr Putin’s whims take precedent over legal decisions. It demonstrates that Mr Putin feels invincible and nobody, including Russia’s new president, has any power over him. And it shows that Mr Putin has little interest in nurturing a good investment climate.

Much as Russia likes the rise in living standards that capitalism brings, the reality is there are two fundamental failings that may hinder the development into a true capitalist society. First, the rule of law, particularly commercial law is not enforced to anywhere near the level necessary in a modern commercial market. There was hope that Putin’s protégé Dmitry Medvedev, a lawyer by training, would tackle the issue in the early stages of his presidency but so far there has not been much evidence he intends to act. The second is the government cannot help interfering in the economy. Russia is still largely run by the old school, Putin himself is an ex KGB officer, they were raised in the culture of centralized state control and although the billionaire businessmen have clearly embraced the worst principals of the robber barons, the ruling clique still display a worrying tendency to slip into centralized autocracy given the slightest provocation. Until Russia can rely on a robust and independent judiciary to manage the business world, Russia will remain an uncertain place to do business, relying more on personal relationships and allegiances than sound business ethics.

–Stuart Burns

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