A CLOSER LOOK AT RUSSIA'S MECHEL INCIDENT

C O N F I D E N T I A L MOSCOW 002270 SIPDIS STATE FOR EUR/RUS, EEB/IFD TREASURY FOR TORGERSON DOC FOR 4231/MAC/EUR/JBROUGHER NSC FOR WARLICK E.O. 12958: DECL: 08/05/2018 TAGS: PGOV ECON PREL RS SUBJECT: A CLOSER LOOK AT RUSSIA'S MECHEL INCIDENT REF: MOSCOW 2201 Classified By: Acting DCM Alice Wells, Reasons 1.4 (b/d). -------------- Summary -------------- ¶1. (C) Putin's sharp attack against steelmaker Mechel on July 24 and the nature of the Kremlin's response has created a spasm of new assessments and commentary during Moscow's usual dull summer vacation season. The Mechel incident (reftel) has provided a prism to critically assess the effectiveness of the Medvedev-Putin "tandem." The incident sheds light on gaps between Medvedev's capacity for developing ideas and his ability to set the agenda, and it generated unusual criticism of Putin. While Putin's hands-on approach -- to Mechel and to campaigning against inflation -- has generated speculation about a substantive rift, this may be more accurately characterized as a stylistic difference, which may subside as Medvedev adapts to his leadership role. In addition, the incident suggests the new government has yet to resolve the central conundrum in its economic policies, namely, how to create an innovation economy given the governing elites' penchant for top-down solutions and their economic self-interest (septel). In any case, Mechel suggests that we are in for an interesting autumn as Medvedev and Putin continue their historic "tandemocracy." End Summary. -------------- No Daylight Between Them on Policy -------------- ¶2. (C) The consensus among political analysts and observers remains that only the protagonists themselves know the division of labor between Putin and Medvedev. Former Prime Minister Gaidar predicting to the Charge on July 31 that it would be months before the historically "new construct" could be analyzed properly. The Mechel incident, however, has been seized on as the first example of a tandem crash landing. In an August 1 meeting, the reflexively pro-Putin Director of the Foundation for Effective Politics Gleb Pavlovskiy offered unusual criticism of the Prime Minister, noting that Putin's comments on Mechel must have been "unwelcome and unexpected" by Medvedev. It was less the absence of a clear-cut division of labor, Pavlovskiy argued, than Putin's slow learning curve in the White House that had contributed to his financially costly verbal foray. �A;¶3. (C) Pavlovskiy charged that, sometimes, Putin "still acts like he is President." For instance, Putin's suggestion that the Investigative Committee of the General Procuracy initiate an investigation against Mechel was the President's, not the Prime Minister's, prerogative. Rather than issuing exhortations or condemnations, Pavlovskiy noted, the Prime Minister should be staffing the solutions to the problems facing Russia. Putin had yet to organize himself effectively at the White House, Pavlovskiy maintained, and "the adequacy of his deputies is questionable." Noting contradictions between the White House and MFA, Pavlovskiy concluded, "we can't really praise his administration yet." ¶4. (C) According to Pavlovskiy, Mechel was more about the effectiveness of the tandemocracy, than about any principled differences between Medvedev and Putin. The discrepancies between Putin and Medvedev's messages had produced a lack of confidence in the economy and country, which Pavlovskiy argued the leadership would have to analyze, since "it says something about the current construct." Putin, he reiterated, was still too involved in policy formulation, rather than implementation. Although Mechel was not blameless, and games were being played at the government's expense, Putin's comments were not effective policy. (Note: Other analysts stress that while Putin has damaged Russia's external image and created uncertainty in elite ranks, he has not takena hit in domestic political terms. Soaking the rich -- and it's Russia's fat cats who own Mechel and other stocks -- remains an effective populist tactic. End Note.) ¶5. (C) Nevertheless, Pavlovskiy ruled out any cardinal division between the President and Prime Minister, stressing that Medvedev knew his legitimacy was derived from Putin. If Putin were to leave office suddenly, Pavlovskiy said (referring to focus groups and polling conducted at Kremlin and ruling party expense),Medvedev would have to fight for legitimacy in the eyes of 50 percent of the population. Medvedev, Pavlovskiy stressed, needs results, particularly in the area of inflation, which has generated a "wide circle of concern" among the political elite. ¶6. (C) Nezavisimaya Gazeta owner Konstantin Remchukov, who had recently spent several hours in informal discussions with Medvedev and other journalists, couched the incident as illustrative of the gap between Medvedev's capacity for developing objectives and his ability to set the agenda. Medvedev, he said, was smart, but an inexperienced and abstract "assistant professor" to Putin's assertive, operational "CEO." Medvedev's team, Remchukov explained, was "not deep enough" and lacked the means to move from idea to implementation. The appearance of a rift between the two owed more to Medvedev's underdeveloped sense of initiative than to substantive disagreement with the Prime Minister. Remchukov cited Medvedev's reaction to New York Times coverage of the TNK-BP dispute as an example which underscored that Medvedev had not fully taken on the mantle of leadership. Medvedev did not realize his statement on TNK-BP, that the matter was a private affair among investors, had been interpreted as a signal to observers and investors that the administration's modernizers had decided to sit this one out. Against this backdrop, the Mechel incident put Medvedev's inexperience on public display, according to Remchukov. -------------- Good Cop - Bad Cop? -------------- ¶7. (SBU) Tatyana Stanovaya of the Center for Political Technologies made perhaps the most succinct assessment of the mixed messages emanating from the Kremlin and White House about the Mechel case. Writing on the Center's website, she argued that either Medvedev and Putin are cooperating in a well orchestrated "good cop/bad cop" routine or there are some very different approaches between President and Premier on how to handle the issue. Presidential economic advisor Arkadiy Dvorkovich's reassuring comments on July 28 that the administration would pursue the charges against Mechel in a "civilized manner" and Deputy Premier Shuvalov's July 29 statements that Mechel was "not Yukos" appeared to many here as surrogate statements for Medvedev's more measured approach to dealing with the company. ¶8. (SBU) Medvedev himself has not directly addressed the Mechel case, but some saw his July 30 comments to Sberbank President German Gref in defense of Russia's stock market - battered by Putin's assault on Mechel -- and his July 31 speech on small and medium business, calling for law enforcement and other authorities to stop "creating nightmares" for small business, as a quiet reproach of Putin's heavy-handed tactics. Of note, Medvedev in both speeches commented that business too had a role to play by paying taxes and acting as good corporate stewards, suggesting that the President may not oppose Putin's determination to "get" Mechel but merely the tone and approach that the Premier had chosen. -------------- -------------- Is It "Just Business" or Is It "Business as Usual"? -------------- -------------- ¶9. (SBU) Stanislav Belkovskiy, writing on the Political News Agency website, linked Putin's attack on Mechel as stemming from the Premier's business interests, rather than any political drama. Belkovskiy saw Putin as a sort of "general manager" of the powerful state corporations, working closely with Deputy Premier for energy and industry Igor Sechin to protect the interests of particular companies - Rosneft, Gunvor, Rostekhnologii, and others -- controlled by top silovik players. He alleges that Sechin approached Zyuzin on July 20 with a proposal to purchase part or all of Mechel, but was rebuffed. The attack on Mechel on July 24 was the silovik camp's response. Belkovskiy notes that Putin's behavior in this, including the use of state institutions (notably the Federal Antimonopoly Service and Investigative Committee of the General Procuracy),follows the raiding techniques used by other business magnates to gain control of particular assets, such as the pressure campaign brought by the Russian partners in the TNK-BP imbroglio against their western partners. ¶10. (C) Belkovskiy predicts that Mechel will be incorporated into a new, metallurgical giant, based on Norilsk Nickel and incorporating some aluminum production and coal companies. Already, Potanin and Usmanov are in discussions with Oleg Deripaska about creating such a firm. Belkovskiy sees the appointment of Putin pal and confidant Vladimir Stzhalkovskiy as Norilsk Nickel's new general director as evidence of the premier's direct involvement and personal interest in the creation of a new, consolidated metals company. Others, including Remchukov and political observer Vadim Berlov of Skandaly.ru, posit that other players are behind Putin's attack, particularly the head of the ever-growing state company Rostekhnologii (Rostekh) Sergey Chemezov. Berlov claims that RusSpetsStal (a subordinate of the predecessor to Rostekh, Rosoboroneksport) had been involved in talks with Mechel last summer, but their offers had been spurned. ¶11. (SBU) Aleksey Makarkin of the Center for Political Technologies sees a less sinister cause for Putin's attack. Writing in Nezavisimaya Gazeta, Makarkin argues that Mechel's contract network, particularly with defense industries, offered a good target of opportunity for Putin, who sought to address the concerns of oil and gas industry officials about the rising costs of pipe and machinery. Just as the oilmen blamed the metals magnates, the steelmen blamed the coal producers. Mechel, without the political cover that other coal producers enjoy (such as Evraz Group's Roman Abramovich),provided a convenient whipping boy. The vindictiveness of Putin's attack against Zyuzin -- including his snide comments about sending a doctor to "clean him up" -- probably reflected Putin's pique about Zyuzin's failure to attend the meeting, according to Makarkin. -------------- Comment -------------- ¶12. (C) Regardless of their motivations and regardless of the root cause, whether inexperience or a dysfunctional set-up, the "tandem" has made a mistake in the Mechel case. As Talleyrand said, a mistake is worse than a crime. This mistake continues to roil the markets and, along with TNK-BP and the lack of progress on the government,s reform agenda, is undermining confidence in the Russian economy. RUBIN