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By John Helmer in Moscow

The first time Vladimir Putin made the outhouse a lever of state policy was in 1999. Referring to Chechen secessionists and terrorists, he said: “If we can find them in the outhouse, we will whack them in the outhouse.”

On Friday, in Chelyabinsk, he did it again. Only this time the target was the governor of Chelyabinsk region, Mikhail Yurevich, and municipal officials. Microbial organisms are the governor’s specialty, for Yurevich made a fortune buying up much of the yeast production of Russia before serving terms in the State Duma, and then becoming Mayor of Chelyabinsk; he was elevated to the governorship early this year.

During his Chelyabinsk tour, Putin saw a lakeside beach under development. He then told Yurevich and the assembled regional and industry worthies: “The beach we saw might not be developed, but the City Hall should do something about it – at least install simple conveniences. I didn’t see a single vendor, and there were no toilets. Maybe there are some there, but I didn’t see them. Does the regional governor address these everyday issues? I hope mayors and governors will pay attention to these sorts of issues in other parts of Russia, too. Summer is hot, and people just need to relax. Because, you know, places like this are probably the inspirations for famous jokes like: “Have a dip, Grisha!” “Why, Mum? I can’t swim and I don’t need to take a wee right now” (official prime ministry translation).

This is how Putin started his second session this year on the state of the country’s steel business. If he intended his command of the country’s recreational toilets as a metaphor, the oligarchs he was addressing could afford to laugh. At least, two of them.

The official text of Putin’s opening and closing remarks indicate an effort on his part to promote the proprietors’ positive news. “Practically all our steel mills,” Putin said, “have launched ambitious investment programmes, investing roughly 900 billion roubles in modernising production within ten years. The industry is coming out of the recession. Output increased by more than 20% in the first six months of this year, and we do not intend to give up on modernisation.” Putin singled out Victor Rashnikov, owner of Magnitogorsk Metallurgical Combine (MMK), and Igor Zyuzin, owner of Mechel, for praise. Referring to his July 2008 attacks on Zyuzin, Putin said this time: “I can only regret that this caused the company’s capitalisation to fall by 20%, if I am not mistaken. Anyway, Mr Zyuzin, I want to thank you for everything you did and your continued respect for domestic consumers and Russian law.”

Putin also ignored the downturn in steel and raw material output, along with falling prices, which have been reported by the major producers since April. According to Putin, “on the whole, the situation is good, I think. The industry is developing at a good pace. We have seen today how many major, ambitious investment projects we have.” While emphasizing the priority of domestic investment, Putin did not refer to loss-making and indebted investments offshore.

Putin’s public remarks avoided criticism, and emphasized import substitution as a goal, especially in flat steel. “Much remains to be done. You know it better than anyone else, because your production facility still lags behind its competitors in labour efficiency and consumes 15% to 20% more electricity. All this, of course, is a legacy of the past, a legacy that is difficult to get rid of. You can’t undo everything in one fell swoop, but we are moving in the right direction. We need to start manufacturing the products where we still rely on imports, for example, high-quality automobile sheeting used in the production of new AvtoVAZ models and vehicles for foreign corporations operating in this country.”

In the closed section of the meeting the Federal Antimonopoly Service (FAS) head, Igor Artemyev, reportedly focused on evidence of transfer pricing within between the raw materials and steel production divisions of the vertically integrated Russian majors, warning that new investigations may be launched on top of those already under way. The FAS investigations under way include one against Evraz, Raspadskaya and Severstal concerning the coal market, and another against Evraz concerning steel products. FAS representatives said at the meeting that a new case may be brought against MMK and Severstal on steel pricing.

According to Putin, the solution is “orders supporting long-term contracts between the largest metal manufacturers and consumers…to establish a transparent and economically sound formula for determining prices for such contracts. This is the fairest way to distribute possible risks and benefits among contractors in the event of fluctuations on the world market.” Putin also warned against “uncivilised business practices such as the termination of supplies in case of disputes. Business partners should settle disputes at the negotiating table or, at worst, in court, and not by upsetting their partner’s operations and thus jeopardising entire communities.”

There was mixed reaction among steel analysts in Moscow. Barry Ehrlich of Alfa Bank warned that “the event will likely maintain the negative sentiment surrounding the sector.” Renaissance Capital told clients: “the news is positive for the Russian ferrous and carbon sector, in our view.” Dmitry Smolin, steel analyst at Uralsib Bank, said: “we believe the impact of the meeting with Putin is fairly negative for the sector sentiment and expect steel names (except Mechel and Severstal) to remain under pressure during the next two-three weeks before the completion of the FAS investigations.”

According to the latter’s report, Transneft, the state controlled pipeline company, called for higher taxes on steel industry profits and export duties on steel products and steelmaking raw materials. All Putin had to say was that he had “heard each other’s opinions, and people from the metal-processing industry have heard the desires of their main clients – to increase import duties on coke and all the rest, reduce import duties on finished metal products, streamline taxation on the industry and establish order in pricing.” The prime minister gave no indication that he has endorsed the trade protection measures.

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