Criticism from the government
Russian Prime Minister Vladimir Putin sharply criticized Mechel management at a government meeting in Nizhniy Novgorod on July 24, 2008, which focused on ongoing troubles in the steel industry. Putin accused Mechel for exporting raw materials for steelmakers at prices about half the domestic level (which could be a sign of tax avoidance).[14][15] After Putin's accusations, Mechel's stock dropped 37.6% on the New York Stock Exchange, while the Russian Federal Antimonopoly Service launched investigation into Mechel's practice of raising domestic coking coal prices far above the export price levels.[16][17]
On the following day, July 25, the company issued a contrite statement promising full cooperation with federal authorities,[16] while share values rebounded by nearly 15 percent. However, Vladimir Putin once again criticized Mechel's management on July 28 during a government meeting on transfer pricing, narrowing down his complaint:When the domestic price is RUB 4,100 [per ton], they sell the [raw materials] to themselves, to their own offshore subsidiaries, in this case to Switzerland, at RUB 1,100 [per ton], which is only one-quarter the domestic price. [18]
After this, the stock price (which had recovered a little over the previous days) collapsed by another 33.85% (producing a combined decline of 60%).[19][20] The company's market capitalization in August 2011 was still half its value in July 2008.[21]
In mid-August 2008, the Federal Antimonopoly Service found Mechel guilty of violating Article 10 of the Competition Law by causing the domestic price of coking to rise, imposing a relatively small fine for this violation, equivalent to 5% of the group's annual sales, or RUB 790 million. In addition, FAS recommended that Mechel should reduce the domestic price of coking coal by 15%.[22] This caused an additional weakness in the stock price.[23]
In the wake of these events, Mechel announced on August 8 that a preferred share issue, previously planned for placement on August 11, was to be postponed indefinitely.[24] This essentially closed the door to equity finance for Mechel, restricting its financing options to debt.
Vladimir Putin expressed regret over his own comments at a steel industry meeting in Chelyabinsk on July 26, 2010:
How can Mechel organize normal, decent, fair business operation? I remember [my] diatribe against Mechel, and I can only regret that it led to a more than 20% decline in the company's market capitalization. I want to thank Igor Zyuzin — he did everything we spoke about, and he has been on the best, fair behavior[25]
