Court Reverses Major Power Plant Privatization

The Sayano-Shushensk hydro-electric plant, on the mighty Yenisei river in the Siberian republic of Khakasia, is the jewel in the crown of the national electricity company United Energy System. The plant, the fourth largest in the world, produces US$3 billion worth of power a year (5.5 percent of UES’s national output), at very low cost – less than 1 cent per kWh. Most of its electricity (75 percent) is used by the adjacent aluminum smelters of Oleg Deripaska’s Rusal, the world’s second largest aluminum producer.

On April 12 the East Siberian Federal Arbitration Court ruled that President Boris Yeltsin acted illegally when he signed decrees in 1992 and 1993 that turned the plant into a private corporation 79 percent owned by UES. On April 28 Deputy Prime Minister Aleksandr Zhukov ordered economy minister German Gref to implement the court’s decision. This could be tricky, since stripping the shares from UES will reduce the state’s stake in UES below the 51 percent threshold laid down by law.

While most regional governments were given some shares in their electricity utility upon privatization, Khakasia was not given a stake in Sayano-Shushensk. Instead the republic was promised that it could buy electricity at a bargain rate (currently, 3.2 cents per kWh) for ten years.

In 2003 the ten years expired, and Khakas President Aleksei Lebed (brother of the late Aleksandr Lebed) asked UES for an extension of the deal. UES head Anatoly Chubais refused, so Lebed went to court. He lost the case in the republic court, but won on appeal to the Federal District court.

The court decision comes at an awkward time. First, given the ongoing Yukos affair (see preceding article), investors are nervous that Putin’s new government may be intent on a wholesale reversal of the privatization of the mid-1990s. The nationalization of Sayano-Shushensk would be a major victory for the advocates of such a policy.

Second, UES, Russia’s largest company, is in the middle of a complex and controversial restructuring that began back in 2001 and is only now being implemented. The corporation will be broken up into distribution and generation companies that will then be auctioned off to privatize investors. That should enable a competitive market for electricity generation to emerge, providing an incentive for power companies to cut costs and invest in new plant.

The deprivatization of Sayano-Shushensk would make foreign investors in particular skeptical of the security of their property rights in the new companies. The day after the government announcement UES shares fell 9 percent. It would also embolden regional governors and their business allies across the country, who are trying to influence UES plans to carve up local plants into companies for privatization. For example, Chubais is engaged in another fight with Deripaska for control over the unfinished Boguchansk hydroplant. UES has already sunk US$1.5 billion into the project, and another US$800 million is needed for completion.

It is possible that the court decision will be reversed on appeal, or that the government will find some other way to finesse the decision. Either way, the episode is a reminder that politics is a messy and unpredictable business, and that for all the talk of autocracy and centralization the Putin administration can still be caught by surprise by a regional court decision.

It also suggests that the Russian state apparatus is still in too debilitated a condition, administratively and legally, to push ahead with the ambitious structural reform programs that Putin has laid down as the main task of his second administration (Vedomosti, April 30; Kommersant, Gazeta, April 29).