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Earnings

Russian PM attacks Mechel, Kremlin urges caution

MOSCOW (Reuters) - Russian Prime Minister Vladimir Putin made a new attack on Mechel MTL.N on Monday, saying the country's largest coking coal miner had evaded taxes by selling products through offshore companies at vastly reduced prices.

Russian Prime Minister Vladimir Putin speaks during a government meeting in Moscow July 28, 2008. REUTERS/RIA Novosti/Pool

A senior Kremlin aide, however, adopted a more conciliatory stance when urging anti-trust authorities to uphold the rule of law when investigating the New York-traded miner, which lost a third of its value after Putin’s first comments last Thursday.

Arkady Dvorkovich, chief economic aide to President Dmitry Medvedev, said he hoped the Federal Anti-Monopoly Service probe into Mechel’s pricing policy would be “fully in compliance with the norms of law”, a clear departure from Putin’s harsh words.

Mechel lost over $5 billion in a single day last Thursday when investors dumped its stock on fears the company would fall victim to a state campaign. The sell-off was prompted by Putin’s accusations it had exported coal at well below domestic prices.

The stock recovered much of the loss on Friday and Mechel has since said it shares the government’s concerns and would cooperate in any investigation. It has also begun setting long-term coal supply contracts with key customers.

“We consider it a positive signal that the company has all these weeks been co-operating with the anti-monopoly services,” Dvorkovich said.

But Putin reinforced his criticisms at a government meeting Monday. Shown live on the domestic NTV channel, he said Mechel had sold coal to offshore companies at a quarter of the domestic price, before selling it on at world prices.

“It will not do. It means a decline in the taxable base within the country and tax evasion,” said Putin.

“The budget does not get these funds. There is a deficit of products in the domestic market, and that means a rise in prices in the metallurgical industry.”

Mechel declined to comment on Putin’s remarks on Monday.

DIFFERENT APPROACHES

Putin's comments revived memories of attacks on YUKOS, once Russia's biggest oil company, which collapsed under massive back-tax bills and saw most of its assets pass into the hands of state-run Rosneft ROSN.MM in what many saw as a Kremlin-orchestrated campaign.

Putin has won popularity at home after presiding over uninterrupted economic growth in his eight years as Russian president. But critics say his presidency was also marked by heavy Kremlin involvement in the economy.

Medvedev, Putin’s close ally, took office in May promising to ensure a “rule of law”, which he believes is needed to make the Russian economy more sustainable and flexible.

Dvorkovich, speaking to reporters, said the Mechel case would be particularly important in establishing this precedent.

“This will serve as one more testimony that the practice of state regulation of the market becomes subordinate to law and that we can count on such future actions being carried out exclusively within the framework of law,” he said.

“We should be especially careful about our market, which is becoming important for ordinary people who invest their money in shares and bonds,” Dvorkovich said. “Any actions by companies or authorities affect market quotes and thus people’s well-being.”

Putin singled out Mechel’s raw materials pricing policy as detrimental to the national interest on Thursday. It has been under the scrutiny of the anti-monopoly service (FAS) for the past few weeks.

Dvorkovich said FAS had a legitimate right to punish Mechel if it found any wrongdoings in its operations.

The Kremlin aide also said he believed the Russian economy would withstand this blip in investor confidence following the Mechel investigation and a separate dispute between BP BP.L and its Russia-connected partners at oil producer TNK-BP.

“We believe there are no reasons for healthy fundamentals -- which positively affect the economy -- not to prevail,” he said.

“In our view the capitalization of the Russian market will rise over the next weeks and months.”

Additional reporting by Guy Faulconbridge; Writing by Robin Paxton

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