CHUBAIS FACES INVESTOR REVOLT AT UES.

Anatoly Chubais, chief executive officer of Russia’s United Energy Systems (UES) electricity monopoly, is facing a revolt among the foreign investors who supported his appointment at UES last year. According to his critics, Chubais’ program for restructuring UES by selling off the company’s power generating assets will destroy shareholder value and is responsible for the sharp dive UES share prices have taken since March. A closer look at electricity-sector trends, both in Russia and internationally, suggests that Chubais’ predicament is more complicated, and more difficult than the criticisms imply.

Chubais is often regarded as one of the foreign investment community’s best friends in Russia. He played a key role in Russia’s privatization program during 1992-1996, and was Moscow’s negotiator with the international financial institutions during the 1998 financial crisis. Foreign investors–who hold a 33 percent equity stake in UES–generally cheered Chubais’ appointment to head the company in 1999.

The applause has now stopped. “Chubais stubbornly sticks to a plan which destroys the value of the shareholders. Liquidating the company to local investors is not a real restructuring,” Bill Browder, manager of the US$450 million Hermitage Fund, told the Moscow Times on June 7. According to Browder, Chubais’ restructuring program “is using various good words like ‘restructuring’ to justify a horrible destruction of value for shareholders.” According to James Fenkner, an equity strategist at the Moscow-based brokerage firm Troika Dialog, “There is a significant group of investors who believe the restructuring is not being run in their interests” (Bloomberg, June 6). Criticism of Chubais’ restructuring program also came from Federal Securities Commission head Igor Kostikov, who in early June wrote a letter to Prime Minister Mikhail Kasyanov calling for significant changes to Chubais’ program. “It is clear that during a sale at such prices, the interests of shareholders, including the main shareholder, the government, would suffer,” Kostikov said. The Moscow Stock Exchange, on which UES shares constitute one of the largest and most liquid stocks, apparently agrees with these sentiments. The value of UES shares has fallen by about a third since late March, when discussions of Chubais’ restructuring program first began. This fall has reduced UES’s market capitalization by some US$3 billion, and depressed what has otherwise been a bull market due to Russia’s economic recovery and President Putin’s election (Bloomberg, June 7).

WHAT WOULD CHUBAIS’ PROGRAM ACTUALLY DO?