This post is a guest contribution by John S. Boyd, writer of the BlindReason blog.

Russian markets are tumbling with comments on Mechel Steel's pricing policy. Here is a good summary of what happened and the specific comments that have put markets in an "antsy" state:

    At a meeting with metal producers in Nizhny Novgorod, Putin accused Mechel of selling raw materials for twice the price at home as it does abroad, the Interfax news agency reported.

 

    Interfax quoted Putin as saying he wanted Russia's antitrust regulators to pay "special attention to this problem."

 

    Putin also noted that Mechel's biggest shareholder and chief executive, Igor Zyuzin, had been invited to the session, but had fallen ill. He urged him to get better soon. "Otherwise, we will have to send him a doctor to get rid of all these problems," Putin said, according to Interfax.

I love the gallows humor as much as anyone but am I the only one who is wondering if Putin was only half kidding? Or if maybe he might have used that strategy before to solve a "problem"?

I bet the CEO of Mechel won't be accepting any invites from old friends for tea. Would you like some tea with your Polonium-210 Sir?

In addition, today you have more comments from Putin citing "Tax problems" which is exactly the same method he used to strangle Yukos. Link to that article here.

If you'll remember, Putin used tax authority to force Yukos into bankruptcy and seize the assets and eliminate a political rival. Now with the BP/TNK CEO leaving Russia like it was the fall of Saigon in 1975, it underlines Putin's willingness to over reach and test limits.

One also has to wonder with all these confiscatory acts, how much of the wealth is going into Putin's pockets. There are rumors of Marcos style secret accounts and direct/indirect ownership of substantial Russian companies.

I don't know if the Mechel issue has to do with long term contract prices vs spot pricing or some other mechanism but this is all serving to push the Russian markets past 6 month lows in a bull market for energy and raw materials.

What's the bottom line for me? Well, the questions about some sort of more prevalent Yukos type power play by the Kremlin causes anxiety for any investor in Russia and in the end I think makes it harder for them to attract capital and solve some of these oil scarcity problems through new investment. Russian oil production forecasts for this year are dropping, not rising despite record oil prices as the foreign oil companies with the technology need to exploit Russia's vast oil reserves hesitate.

More broadly however, I think Russia's early experience with democracy was clouded by rock bottom oil prices. One could argue it was a primary contributor to the collapse of the Soviet Union as they had difficulty supporting their military while feeding their people at the same time.

Unfortunately, the low oil prices lasted well into Russia's early experiences with democracy under Yeltsin. So what do Russians see and experience? Around the time they got a more Czarlike government with power centralized in the Kremlin their economy began to expand rapidly and political stability returned albeit under an iron fist. But Putin's rise more closely correlates with a rise in the price of commodities rather than any efficiency of government or sound policies.

What did they have under Yeltsin with an attempt at a liberal Democracy? Chaos, unemployment, Weimar Republic level inflation and geopolitical calamity. So it follows logically that the Russian appetite for democracy is relatively low and their love of the Czarist tradition and what they see Putin has brought back to Russia as more valuable. I also wouldn't be surprised to see many Russians view democracy as having an inverse relationship with economic and political stability. Russia has a very complicated history to support that viewpoint--we could go pretty far back in history to the Mongol invasions to support all sorts of theories that underpin the Russian tolerance for dictatorship.

The Russians recently went online to pick the top two Russian hero's of all time. At the top, none other than Czar Nicholas and Stalin.  Neither of which are known historically as big thinkers on individual liberty and freedom.

What are the implications? Well energy prices have too much of a sway on politics here and creates all sorts of distortions, not just economic ones. The centralized lock down of Kremlin power, his ability to appoint governors now directly, and its tendency to over compensate for weakness in the Yeltsin years may cause a lot of artificial political and military conflicts inside and outside of Russia.

It's just one more reason why investments in new energy technologies, fuels and coherent policies are important.

In short, the world, Russia and its quick experiment with a true democracy was an unlucky one. Not just unlucky for Mechel Steel shareholders either.

Look at Eastern Europe and their movement towards democracy. Why are those countries integrating so well economically and politically but Russia drags on estranged without rule of law and a Czar like government structure that never met an election it could lose.  Does it have to do with the factors in this piece...or is it something else? 

You can reach John for comments as johnspencerboyd@gmail.com