Publication: Monitor Volume: 6 Issue: 118

The foreign shareholders of United Energy Systems (UES) are not persuaded by these arguments, however. The basic problem is that, in current Russian conditions, there are few credible buyers for Russia’s power generating companies. UES, the energos, the FEC and the regional energy commissions (the RECs, which set electricity prices for local users) all have an influence on the determination of wholesale and retail electricity tariffs. A web of political and economic factors has caused these tariffs to decline sharply (relative to other prices) since Russia’s August 1998 financial crisis. While these declines help restore many manufacturing companies to profitability, they have decimated the electricity sector’s financial position and undermined its attractiveness to foreign investors. So have the continued unclear and overlapping regulatory jurisdictions of the FEC, the RECs, and other federal and regional government agencies.

This suggests that the fuel suppliers to which UES is most indebted–primarily Gazprom and various coal companies–could use the divestiture of UES’s generating plants to acquire these assets via debt-for-equity swaps. Regional governments, which exercise a great deal of influence over UES via their control over the RECs and their equity stakes in the energos, could also benefit from UES’s sell-offs. Plans to sell UES’s equity stakes in 10 regional energos during 2000-2001, in order to raise cash for the federal budget, have heightened investor concerns about a potential hijacking of UES’s sell-off by the regional authorities.

Chubais has responded to these concerns by claiming that the sell-offs would occur through the issuance of new stock, rather than via the divestiture of existing assets. But in addition to marking a retreat from the goal of UES’s competitive restructuring, issuing new stock would dilute existing shareholder value. This approach seems unlikely to mollify Chubais’ erstwhile allies among the foreign investment community.

The controversy over Chubais’ restructuring program seems premature in any case. Chubais announced last week that the implementation of his program requires passage of at least four new laws, as well as changes to the civil code and other existing legislation. UES’s lawyers are unlikely to finish drafting these changes before September. Moreover, since the federal government holds a 52 percent equity stake in UES, opposition from any number of domestic sources–both in Moscow and the regions–could bring Chubais’ plans to naught. If nothing else, the latest controversy at UES shows that–despite Russia’s economic recovery and President Putin’s rapid consolidation of power–Russia remains light years behind the leading transition economies in terms of structural reform.