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08MOSCOW2514 2008-08-22 11:23:00 CONFIDENTIAL Embassy Moscow
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1. (C) The Federal Anti-monopoly Service (FAS) announced on
August 13 that it had found Mechel's coking coal operations
to have violated competition law through its monopolistic
domestic pricing practices. On August 19, FAS announced that
it would assess a $32 million fine, or 5 percent of the
firm's 2007 coking coal revenues. The FAS review also
ordered Mechel to reduce the price of its long-term coal
supply contracts by 15 percent. Mechel's "punishment" was
much less than many analysts had predicted. However, it has
troubling implications for the government's efforts to fight
inflation, confirming a preference for administrative
controls over market solutions. End Summary.


FAS Finds Against Mechel


2. (U) Mechel violated competition laws, according to the
Federal Antimonopoly Service's (FAS) review of the
steelmaker's coking coal operations. Based on an assessment
of the company's market share and the prices it charged
domestically for supplies of coking coal, FAS officials
determined that Mechel enjoyed and exploited near-monopoly
control of the coking coal market to raise prices beyond
"purely economic and commercial justification." FAS
representatives announced the conclusion of the Service's
review on August 13 and said that Mechel would be fined and
would need to lower the price of its long-term domestic
supply contracts. FAS officials noted at that time that the
company had cooperated with the investigation and hat this
would serve to mitigate the amount of the fine and the scope
of the reduction in contract price.

3. (U) FAS officials subsequently announced on August 19
that Mechel would have to pay a fine equivalent to $32
million, or 5 percent of the company's coking coal revenue
earned in 2007. The legislation governing FAS reviews
allowed fines ranging from 1 to 15 percent of a firm's
revenue; analysts hailed the level of the imposed fine as a
victory for Mechel. FAS also directed Mechel to make
long-term contracts available to other steel producers, such
as Novolipetsk-based NLMK, to which Mechel had previously
refused to sell. The directive also reduced by 15 percent
the per-unit price of coking coal that Mechel would be
allowed to charge in long-term contracts signed between
September 1 and the end of 2008.

4. (U) FAS Director Igor Artemiev also stated this week that
reviews of steelmaker Evraz and coal-supplier Raspadskaya
were near completion. He said that FAS would apply measures
to their coking coal operations similar to those assessed of


"It could have been worse"


5. (C) Standard and Poor's-Russia Metals and Mining Analyst
Andrey Nikolaev said that the result, on balance, was good
news for Mechel. (N.B. Mechel's stock price rose four
percent following the announcement.) The FAS elected to
focus its review on Mechel's coking coal business, which was
sizable but considerably smaller than Mechel's total
revenues. Nikolaev speculated that Artemiev asserted his
authority during the review process to "prevent the
punishment from turning into a feeding frenzy" That would
threaten the company's survival. He said that when Artemiev
presented his report, he received a "cool" reception from
Putin. He speculated that Putin was displeased that Mechel
had received such a "light sentence" from FAS.

6. (C) Deutsche Bank Metals and Mining Analyst Mikhail
Seleznev told us he agreed with Nikolaev's view that Artemiev
had resisted pressures to "apply more pain" to Mechel. He
attributed this more to Artemiev's "style" and interest in
avoiding further shocks to an already skittish market than to
a disagreement with Putin. Artemiev most likely supported

Putin's interest in using administrative means such as the
FAS to discipline "wayward companies" and enforce Putin's
view of competition. According to Seleznev, coal producers
were probably not the last targets in Putin's
"competition-promoting" sights.




7. (C) We expect that Mechel, Evraz and Raspadskaya will
probably be forced to keep their domestic coking coal
contract prices low past the December 31 expiration date of
the FAS decision. The effect on their bottom-line should be
relatively minimal since the bulk of their sales are exports.
It is also good news for Mechel's management and
shareholders that they were not "Yukosed," i.e. their assets
were not seized. However, the incident confirms the
government's inclination toward administrative measures to
control prices, which does not bode well for its efforts to
fight inflation. For its part, the FAS appears to now be the
weapon of choice against out-of-favor businessmen and their
enterprises, displacing the tax authorities, and we expect to
see it assume a higher profile in the near future.