Wednesday, August 13, 2008

Russia Declares War on . . . Itself?

Putin Power Punting Prosperity

I’ve seen a couple of good editorials in the Wall Street Journal this week with back stories about Russia in the wake of its military action against the Republic of Georgia. In addition to Bonapartist ventures beyond its borders, the Russian government has been harassing domestic businesses again. Check out this editorial from the August 11 Wall Street Journal:

The story revolves around Russian coal and steel company Mechel, which is publicly listed on the New York Stock exchange. On Friday the firm said it was going to postpone a preferred share placement in the wake of a battering its shares took from the volatile Mr. Putin.

Late last month, Mr. Putin accused the company of price gouging and tax evasion and warned of investigations to follow. He also got personal after Mechel CEO Igor Zyuzin failed to show up to a meeting the prime minister was holding with business leaders. "The director has been invited, and he suddenly became ill," said Mr. Putin, according to the Moscow Times. "I think he should get well as soon as possible. Otherwise, we will have to send him a doctor and clean up all the problems." Mr. Zyuzin had been hospitalized a day earlier with heart problems.

Coming from Mr. Putin, such talk is nothing short of terrifying: Consider the fate of former Yukos CEO Mikhail Khodorkovsky, now in jail in Siberia while Yukos's assets were gobbled up by state-owned oil company Rosneft. Investors swiftly took note: Mechel's stock dropped by more than 33% in a day, while the Russian exchange fell by 9%.

Interestingly, exchange-traded funds related to Russia have plunged since the beginning of June. The Market Vectors Russia ETF Trust (NYSE: RSX) fund is down close to 30% since that time, with some deep declines in the past week or so. Harassment of the free market is never a good thing in any country!

The Journal’s Holman Jenkins also chronicles Russia’s (and particularly Prime Minister Vladimir Putin’s) mad drive to control energy supplies.

Western governments and Western oil executives have played an unwise role in Mr. Putin's plan. No amount of contract abrogation, outright seizure of property or subsidiary mayhem by Russian authorities seems able to dissuade them from throwing good money after bad in pursuit of Russian resources. Western minority shareholders in Yukos were wiped out with nary a peep when the Russian government seized the oil company on tax charges. There's been virtually no official pushback as environmental offenses were alleged as a reason to squeeze Western partners out of various drilling and pipeline projects after billions of dollars were committed.

Indeed, with what breezy confidence Mr. Putin must have turned Western oil companies into his political punching bags, knowing that back home Western politicians (Nancy Pelosi, Byron Dorgan, Dick Durbin, etc.) were doing exactly the same in pursuit of their own narrow and shortsighted political quests.

Jenkins makes some devastating statements about the consequences of not standing up to this state-sponsored bullying as well as the vapid view on energy of Congressional Democrats (and their 2008 presumptive Presidential nominee).

There is a certain irony in the similarity of the Democrats’ and Putin’s worldview. In each case, government control and power grabs seem to be motivating factors. Both have strong opposition to assertiveness on behalf of freedom and free markets. And both are, in the end, quite destructive with their policies.

I am glad to read that President Bush is starting to take more assertive action against the Russians. From everything we have seen, John McCain understands this whole situation inside and out, while Barack Obama is still trying to figure out if the Florida, South Carolina, or Tennessee National Guards would be the most appropriate to send. The initial reaction of many Democrats, to engage in blame, or even open sympathy to the Russians, is very telling. Reminds me of another decade, say, 30 years ago.