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Business Watch: April 29, 2003


29 April 2003, Volume 3, Number 15
ENERGY
MARATHON CLOSE TO ACQUISITION
U.S.-based Marathon Oil Corporation announced in a 22 April press release that it has sealed an agreement to acquire the Khanty Mansiisk Oil Corporation (KMOC) for $275 million in cash and assumed debt. Royal Dutch/Shell, which holds a 45 percent stake in U.S.-registered KMOC, has until 6 May to make a matching offer for the shares it does not own or approve the acquisition, RusEnergy reported on 23 April. Bank of America Securities analyst Tyler Dann told "The Houston Chronicle" on 23 April that the move is a "brave step into Russia" for Marathon, which is "not blessed with the best-performing assets, so they are trying to expand their presence into more attractive areas." Marathon's offer translates into $0.95 for each barrel of KMOC's reserves, which compares favorably to the $1.15 per barrel that British Petroleum (BP) paid in its recent deal with Tyumen Oil Company, "Kommersant" reported on 24 April. Maksim Shub, spokesman for Shell's Russian operations, told the newspaper that the company has not yet made a final decision on the Marathon offer. DK

FINANCE
RECORD-BREAKING RTS KEEPS RISING
The benchmark Russian Trading System (RTS) stock index notched a 6.85 percent gain for the week of 21-25 April to break a six-year record and close at 430.39, the RTS news service (rts.ru) reported on 26 April. Oil companies led the charging bull market, with the 22 April announcement of a Yukos-Sibneft merger adding fuel to the fire. Oil major Surgutneftegaz, currently the focus of speculation over a possible hostile takeover attempt, and utility Mosenergo were top performers, rising 9 percent and 12 percent, respectively, on 25 April alone. Gains have been so impressive that the Federal Securities Commission (FKTsB) has initiated an investigation to ensure that all of the exuberance has a rational basis, "Kommersant" reported on 22 April. Meanwhile, the RTS announced on 22 April that the exchange has introduced a new method for recording on-market and off-market trades, "Vedomosti" reported on 23 April. The issue has been the focus of a protracted squabble with regulators, who went so far as to threaten the RTS with the revocation of its license earlier this year. FKTsB First Deputy Chairman Vladimir Milovidov told "Vedomosti" that he will have to examine the exchange's new methodology before drawing any firm conclusions. DK

CHANGING OF THE GUARD AT MMVB
The Moscow Interbank Currency Exchange (MMVB) elected a new general director at its annual shareholders' meeting on 24 April, elevating Aleksandr Potemkin, deputy chairman of Rosbank, to the top post even as former Director Aleksandr Zakharov withdrew his candidacy, RBK reported the same day. Zakharov, who ran the MMVB for more than 10 years, was initially brought to the exchange by Potemkin, himself a key figure in the transformation of the state bank's currency exchange into the MMVB in 1992, "Vremya novostei" reported on 25 April. Zakharov's departure, officially described by Russian Central Bank Deputy Chairman Konstantin Korishchenko as motivated by an offer to work in "one of the main state banks," was widely seen as a dismissal. Observers offered various explanations for Zakharov's departure. "Gazeta" wrote on 25 April that "serious frictions" had arisen between Zakharov and the Central Bank, the MMVB's largest shareholder with a 28 percent stake. "Kommersant" wrote the same day that the "exchange's worsening financial indicators" sealed Zakharov's fate. According to "Vedomosti," Zakharov was in conflict with "Federal Securities Commission Chairman Igor Kostikov...over differing approaches to the regulation of the futures market." Still, not everyone saw the switch as a momentous event. A source at Brunswick shrugged off Zakharov's exit to "Nezavisimaya gazeta," remarking, "You don't ask why they've changed the janitor in your office." With trading volume of $117.3 billion in 2002, the MMVB is the largest exchange in Eastern Europe, "The Moscow Times" reported on 25 April. DK

CENTRAL BANK CHAIRMAN DECRIES CAPITAL-FLIGHT SCHEMES
Speaking at the 14th conference of the Association of Russian Banks (ARB) on 23 April, Central Bank Chairman Sergei Ignatev chided bankers for dubious schemes to move money abroad and warned that countermeasures are in the offing, RIA-Novosti reported the same day. According to Ignatev, Russian banks sent $5 billion abroad to pay for "marketing services," "Vremya novostei" reported on 24 April. The amount raised eyebrows because the entire Russian market for such services is significantly smaller. Noting that the bulk of the money moved through 20 banks, Ignatev added that the Central Bank is working with the Finance Ministry on measures "to make these operations disadvantageous." Experts queried by "Vedomosti" on 24 April were skeptical, noting that resourceful bankers have stymied past efforts by the Central Bank to prevent capital flight. Interfax Banking Department head Mikhail Matovnikov told the newspaper, "You have to combat the reasons for capital flight, not capital flight itself." Some bankers appeared ready to take up the cudgel themselves, however. Rosbank CEO Yevgenii Ivanov told "Gazeta" of 24 April, "This is a blemish on the reputation of all banks, and the healthy part of the banking community can condemn these actions and ostracize the banks that are involved in illegal operations." DK

REGULATION
IMPORT DUTY 'EQUALIZATION' TO HIT CONSUMERS
The Commission for Protective Measures in Foreign Trade headed by Finance Minister Aleksei Kudrin has recommended that Prime Minister Mikhail Kasyanov approve the equalization of import duties for used cars, "Vremya novostei" reported on 21 April. The equalization would translate into a net increase, since individuals who bring used cars into Russia currently pay less than organizations, spawning a booming business in individual imports. The commission's recommendations, which affect cars between three and seven years old, would establish a single scale of import duties based on engine volume. Sergei Alekseichuk, board member of auto dealer Avtomir, told "Kommersant" on 21 April that the change would translate into a $2,000-3,000 price hike on a used foreign car that now costs $10,000. Kasyanov told reporters on 22 April that fears of a tariff-fueled price increase were based on a misinterpretation of the measure, ABN reported the same day. Observers did not buy the prime minister's logic, however. Gazeta.ru wrote on 22 April, "Any reasonable person with a schoolboy's knowledge of arithmetic realizes that Kasyanov is contradicting himself." The tariff equalization is aimed at stimulating Russia's languishing automotive industry, which has lost considerable ground in recent years to used imports. According to "Kommersant," used car imports in the first half of 2002 totaled $1.97 billion, with 80 percent of the imports brought into the country by private individuals for subsequent resale. DK

COMPANIES
ALUMINUM MAGNATE BESTS GERMAN NEWSPAPER IN COURT
A Frankfurt court ruled in favor of aluminum tycoon Oleg Deripaska's Basic Element on 24 April in the company's defamation suit against the German daily "Frankf�rter Allgemeine Zeitung" (FAZ), RBC reported the next day. The suit was filed on 27 September to protest the article "Die Schlacht um den russischen Wald" (Battle for the Russian Forest), which appeared in the paper on 25 April 2002. The article detailed the struggle for control of Russia's paper and pulp industry and linked Deripaska with armed takeover attempts. The court deemed the article factually inaccurate and banned further citations from it. According to Marina Kaldina, head of Basic Element's legal department, the company did not insist on a retraction and did not request compensation, gazeta.ru reported on 25 April. Instead, the German daily will have to track down all citations of the article and provide Basic Element with a comprehensive list. The newspaper's official reaction is expected only after its receipt of the court decision by mail, which will take place no earlier than 28 April. DK

COURT LOCKS AEROFLOT INTO PLANE DEAL
A Moscow arbitration court ruled on 23 April that Aeroflot is legally obligated to abide by a 1999 agreement to lease six IL-96-300 aircraft from Ilyushin Finance Company (IFK), ABN reported on 24 April. Under the preliminary agreement, Aeroflot was to lease the planes for $350,000 each per month after receiving them in mid-2005. In November, IFK presented Aeroflot with a new leasing agreement for $500,000 per plane per month, claiming that improvements Aeroflot had request -- from more modern kitchens to satellite-phone hook-ups -- added $40 million to the total cost of the planes, "Kommersant" reported on 24 April. Leasing rates dropped by some 20-30 percent after the 11 September terrorist attacks, making the IL-96-300's pricier than some foreign competitors. Unhappy with the new terms, Aeroflot tried to opt out of the deal, but IFK filed suit in a Moscow arbitration court in December. A common shareholder could hold out the promise of a mutually acceptable compromise, however. The National Reserve Bank (NRB) owns a 41.4 stake in IFK and a 26 percent stake in Aeroflot. Lev Koshlyakov, deputy general director of Aeroflot, told "Vedomosti" on 24 April, "We're getting signals from our shareholder, who is the co-owner of Ilyushin Finance, that he's not going to insist on terms that are disadvantageous to Aeroflot." DK

INVESTMENT
TEMPLETON BUYS INTO RETAILER PEREKRIOSTOK
Retail chain Perekriostok announced in a 23 April press release the sale of a 7.7 stake in the company to Templeton Strategic Emerging Markets Fund. According to the press release, the parties estimated the company's value at $240 million, suggesting that the stake cost Templeton $18.5 million. Perekriostok board Chairman Lev Khasis told "Kommersant" on 24 April that the deal is part of a larger plan: "It's important because we're planning an IPO [initial public offering]." Troika Dialog analyst Andrei Ivanov told "Vedomosti" on 24 April, "An investor with a name like Templeton will increase the retailer's chances of conducting an IPO in the next year and a half." Templeton Managing Director Mark Mobius expressed his satisfaction with the arrangement, explaining that "the deal is an advantageous investment into one of the most dynamically developing Russian retail chains," "Vremya novostei" reported on 24 April. Templeton manages a $252 billion portfolio, including $280 million invested in Russia. Perekriostok, part of Alfa-Group's holdings, owns 46 stores in Moscow and St. Petersburg. According to "Vedomosti," the company's 2002 revenues were $333 million. DK

COMMUNICATIONS
VIMPELCOM MAY SELL OFF D-AMPS NETWORK
Cellular operator Vimpelcom is considering selling exclusive rights to its D-AMPS network in Moscow to alternative operator Corbina Telecom, "Kommersant" reported on 25 April. The network, which handled all of Vimpelcom's traffic in the early 1990s before the company switched to GSM technology, is currently running at less than one-fourth of capacity with only 155,000 subscribers. Alternative operators Corbina Telecom, Sovintel, and Combellga currently offer services through the network. According to "Kommersant," Vimpelcom wants $20 million for the D-AMPS network, which brings in $2 million-2.5 million in revenues each month. If the deal goes through, Sovintel and Combellga could be left out in the cold, however, as their current contracts with Vimpelcom, which require only one month's notice for cancellation, would have to be renegotiated with Corbina. Sovintel Sales Director Svetlana Kostyukova told "Vedomosti" on 25 April, "For now, the [Vimpelcom-Corbina] contract's not signed. When it's signed, we'll think about it." Combellga's Olga Guskova seconded her colleague, telling the newspaper, "We took a conscious risk." Although D-AMPS networks are slated to be phased out entirely by 2010, they still offer good quality and coverage. DK

AROUND THE CIS
GAZPROM, NAFTOHAZ AGREE ON DEBT AMID CONSORTIUM TALKS
Naftohaz Ukraina CEO Yurii Boiko announced on 21 April that his company will transfer $1.4 billion in Eurobonds to Gazprom by 1 July as payment for Ukraine's gas debt, Interfax reported the same day. Gazprom will also pay $180 million in annual transit fees in the form of gas shipments. With the debt issue resolved, talks proceeded on 23 April in Kyiv between Russian, Ukrainian, and German representatives on the future of an international gas consortium the three countries agreed to form in June 2002, AP reported the same day. The consortium, which could be expanded to include France, Italy, and Turkmenistan, is intended to revamp Ukraine's aging pipeline system in order to maintain a steady supply of gas to Europe. Ukrainian Deputy Prime Minister Vitaliy Haiduk announced on 23 April that further study of key issues is required and Ukraine and Russia have decided to postpone a discussion of the consortium's business plan until June, "Vremya novostei" reported the next day. Sources in the German consulate told the newspaper that "substantive talks" will take place at a future meeting between heads of state. Viktor Nebozhenko, former director of the analytical department in Ukraine's presidential administration, told "Kommersant" on 23 April that the current talks focus on "trivial" technical issues, while the real issues are political. Nebozhenko noted that the consortium's creators "thought they were creating a structure that would become an instrument for solving geopolitical problems; instead, the consortium became captive to those problems after Germany, France, Italy, and Turkmenistan expressed a desire to join Russia and Ukraine." DK

IN FOCUS
OIL, OIL EVERYWHERE...
Dark, viscous days have come to the Russian economy.

The country's top business story in 2002 was arguably the privatization auction of state-owned oil company Slavneft. Analysts wracked their brains and battered their keyboards for months trying to figure out who would take part in the auction, and how much they could, would, and should wager on the 74.95 percent stake in Slavneft. A firm representing Sibneft and Tyumen Oil Company (TNK) won on 18 December with a $1.86 billion bid -- only a few measly million more than the $1.7 billion starting price -- in a five-minute auction that featured few bidders and fewer bids. As pessimists launched into a sullen chorus of "La plus ca change..." and regaled each other with memories of rigged auctions past, optimists pointed to the fact that the state at least received billions for selling off its asset and claimed progress.

In February, British Petroleum (BP) made the Slavneft deal look like chump change when it announced it would fork over $6.75 billion for half of TNK. With "foreign investment" suddenly the new watchword, ecstatic optimists looked ahead to a bright future of strategic partnerships and oil flowing in tandem with international capital (if not always in the same direction). The few Russian pessimists were left grumbling into their vodka about the ongoing sell-off of the motherland; equally scarce foreign pessimists saw a multinational buying local muscle to do "biznes" without undue risk.

On 22 April, the plot thickened further with the announcement that Yukos will acquire Sibneft to create Russia's largest oil company. The resultant monster will be worth $35 billion, command the largest reserves in the world (19.4 billion barrels), and produce the fourth-largest amount of oil (2.3 million barrels a day). With its formation, YukosSibneft sent out one message loud and clear: Russia has jumped into the global energy sandbox to play with the big boys.

The mechanics of the deal are relatively straightforward. Sibneft's main shareholders will sell a 20 percent stake in their company to Yukos for $3 billion. They will then exchange the remainder of their shares by year's end for shares in the new company -- for now called YukosSibneft -- at a ratio of one share in Sibneft for 0.36126 shares in YukosSibneft. Sibneft's minority shareholders, who control some 8 percent of the company, will receive a "fair offer," according to a 22 April Yukos press release on the company website (http://www.yukos.ru). Sibneft's main shareholders will hold a blocking stake in YukosSibneft; Yukos's main shareholders will hold a controlling stake. Sibneft President Yevgenii Shvidler will become chairman of the board at YukosSibneft; Yukos CEO Mikhail Khodorkovskii will retain his position at the helm of the new company.

Khodorkovskii made no secret of his ambitious plans for YukosSibneft, announcing on 22 April that the company's strategic goal is to become "a leader on the global energy market," Ggazeta.ru reported the same day. Russia's top oil man also noted that the new company's heft will make it easier to pursue the "large and complex" projects in Eastern Siberia and the Far East that will be crucial to maintaining dynamic development when existing wells run dry.

(One should note that Yukos and Sibneft have already been to the altar once: A merger was announced to considerable fanfare in late 1997; "Yuksi" lasted only half a year before collapsing back into its component parts for reasons that have never been entirely clarified.)

A firestorm of punditry broke as soon as the initial press conferences were over. Gazeta.ru opined on 22 April that the state's eye might alight on YukosSibneft as a "readymade ministry of oil." "By placing such a company under its control," the newspaper continued, "the authorities could instantly solve a number of problems, from supplying the country's boiler rooms with heating oil to equipping individual officials with everything they need for pre-election PR."

Alfa Bank analyst Konstantin Reznikov told "Vedomosti" on 23 April that Yukos's decision to pay a 17 percent premium on Sibneft's market price made sense in light of the company's growth potential and financial health. Troika Dialog analyst Valerii Nesterov suggested that Yukos chose not to haggle over the price in light of potential takeover bids by Western competitors.

"Izvestiya" reported on 22 April that Sibneft's Shvidler and Roman Abramovich, officially governor of Chukotka and unofficially Sibneft's largest shareholder, had discussed the upcoming deal personally with President Vladimir Putin in order to "save" the company from being acquired by foreigners.

Journalist Yuliya Latynina, a canny observer of Russian business, gave her interpretation of the deal in a 22 April commentary on ORT. She saw a foreign investor waiting in the wings: "Yukos and Sibneft will sell half of the new company's shares to foreigners. This is the best defense in a country where the main threat to business is not a competitor, but the state. It's also a chance to bring together big Western money and Russian administrative resources." (The phrase "administrative resources" in modern Russian political and business parlance generally means "the ability to get the bureaucracy -- any bureaucracy -- to do what you want.")

"The Moscow Times" reported on 24 April that the deal could further Khodorkovskii's political ambitions. The newspaper quoted a source "close to Yukos" as saying that the merger would strengthen ties between the Yukos CEO and "the Family, the clan of businessmen and politicians that rose to power under Boris Yeltsin with the help of [Boris Berezovskii], and is said to include Abramovich, Prime Minister Mikhail Kasyanov and metals tycoon Oleg Deripaska."

"The Economist" wrote on 25 April that YukosSibneft still has work to do before it can translate its vast reserves into corporate muscle: "[I]t will be no match for firms such as BP and ExxonMobil that are much more diversified, both in business and geographical terms. YukosSibneft will still make most of its money from pumping crude.... Both firms could arguably have done better by joining forces with a globally integrated foreign firm than with a Russian one." "The Wall Street Journal" reacted similarly, writing on 23 April that YukosSibneft "has the heft but not the diversification of its international competitors."

Other opinions were diametrically opposed. A 23 April op-ed in "The Wall Street Journal" compared YukosSibneft to BP's recent deal with TNK, claiming that "there should be more synergies from a merger of Yukos and Sibneft (although the two companies have said little about these so far)." "The Moscow Times" drew the opposite conclusion from the same comparison the same day: "But while the BP-TNK merger earlier in the year had clear business synergies, such synergies are far from obvious in this deal, as the two companies' assets don't seem particularly complementary."

France's "Le Monde" contributed perhaps the most extravagant reaction on 23 April, describing the deal as "the most important since the birth of the market economy in Russia" and dubbing YukosSibneft a "mastodon" (presumably with the emphasis on the beast's size rather than its impending extinction).

Whatever its equivalent in the animal kingdom, YukosSibneft represents a remarkable mix of money, image, and influence. The company's reserves should ensure a steady stream of currency into the coffers, especially if greater diversification adds safeguards against dips in the oil price cycle. Khodorkovskii has made heroic efforts in recent years to turn Yukos into Russia's standard-bearer of corporate governance and position himself as the poster boy for post-robber-baron capitalism. And if Abramovich -- charmingly described by "Izvestiya" on 22 April as "discretely hidden among the journalists" at the press conference to announce the merger, precisely the role he is likely to maintain in the company -- is even a fraction as influential as his reputation, and some of Sibneft's successes, suggests, blessings will surely accrue.

The merger raises a host of questions that only time will answer: Will a foreign investor join the party? Will YukosSibneft try to gobble up Surgutneftegaz? Will Khodorkovskii use the new company as a springboard for a post-Putin presidential bid? For now, we limit ourselves to the modest prediction that YukosSibneft will throw its lobbying clout and financial muscle behind a concerted effort to expand Russia's export capacity through the construction of new pipelines. Khodorkovskii has repeatedly stressed the need to boost export capacity, and recent official hints indicate that the state might be willing to reconsider its policy of maintaining total control over pipelines, opening the door to private-sector funding.

Above all else, what YukosSibneft drives home is Russia's transformation into its own OPEC -- the oil producing and exporting country par excellence. Just as the transition to its own brand of market economy dominated Russia's last decade, the decidedly mixed blessing of an oil economy seems poised to play a crucial role in the decade to come. DK

GAS FIX
The old saw that warns against the futility of carrying coals to Newcastle emphatically does not apply to gas and Gazprom. In fact, the world's largest natural-gas company has a rather pressing need for more gas. Gazprom currently exports 135 billion cubic meters (bcm) of the stuff each year. By 2008-09, shipments to Europe will grow to 180 bcm, "Vedomosti" reported on 11 April. Domestic consumption is on the rise as well. But the gas deposits that could save Gazprom from a deficit are locked away in gallingly arctic regions that require vast sums to develop. Meanwhile, the company's debt load stands at some $15 billion.

Help arrived in Moscow recently in the person of Turkmenistan President Saparmurat Niyazov, the self-styled "father of the Turkmen," or Turkmenbashi. Central Asia's most domestically ubiquitous leader is also the region's gas king. A 2002 article in "Oil & Gas Journal" put Turkmenistan's proven gas reserves at 2.9 trillion cubic meters; Russian sources give numbers as high as 22.5 trillion.

On 10 April, Gazprom CEO Aleksei Miller signed an agreement with Niyazov to buy gas from Turkmenistan up through 2028. Under the agreement, Gazprom may buy 5-6 bcm of gas at $44 per 1,000 cubic meters in 2004, 6-7 bcm in 2005, and 10 bcm in 2006, "Kommersant" reported on 11 April. The amount purchased will spike to 80 bcm by 2009. After 2007, the price will depend on a formula linked to world oil prices. Until 2007, Gazprom can pay for up to half of the gas in "equipment for the development of the gas industry in Turkmenistan," gazeta.ru reported on 10 April.

Though some analysts grumbled that the price was high, reactions to the deal as a purely economic transaction were guardedly positive. In the end, Gazprom sells gas to Europe for roughly double the $44 per 1,000 cubic meters it will pay Turkmenistan.

The deal's perceived political component was received with considerably less enthusiasm. "Nezavisimaya gazeta" set off a small scandal with a 10 April article alleging that Turkmenbashi wanted from Russia in return for his gas the extradition of former Central Bank chief Khudaiberdy Orazov and former Ambassador to Turkey Nurmukhammed Khanamov. Now Russian citizens, the two have been sentenced to life in prison in Turkmenistan for their supposed role in an attempt to assassinate Niyazov. The article goes on to charge that Russia will pay for half of the gas with arms shipments. A Kremlin source denied the allegations and questioned the authors' patriotism, Ria-Novosti reported on 10 April: "You cannot respect the president, but how can you not love your own homeland?"

In a 13 April column in "Izvestiya," Andrei Kolesnikov, who two days earlier had written a tongue-in-cheek account of Niyazov's visit to Moscow for "Kommersant," saw in the gas agreement a broader symbol of dependency and decline:

"We're forced into a passionate embrace with the tyrants who inhabit our geopolitical 'underbelly' because we depend on their natural resources. We cannot call a dictator a dictator and conduct an appropriate policy toward him. Our economy is so addicted to the energy sector that without a 'fix' of Turkmen gas, the country is afraid it might not survive. Which only makes the humiliation worse." DK

5 + 5 = ?
Despite the abiding faith that dominated medieval life, theologians must have suspected occasional worldly influence on debates over pirouetting angels and overcrowded heads of pins. Our secular era prides itself on its skepticism, yet our debates maintain the tension between abstract faith and material concerns. Like the theologian of the past, the analyst of the present must sometimes make a pious show of attention to theory even as she privately presumes the far greater importance of practice.

The theory in question is that of electrical energy reform in Russia. Unified Energy Systems (EES) kicked off the latest round of discussions on the topic on 9 April, when it posted on its website its "Draft Concept" of the company's strategy for 2003-08 (the English text can be found at http://www.rao-ees.ru/en/show.cgi?info/draft.htm). The document is entitled "5 + 5," as it covers the initial five-year period of Anatolii Chubais stewardship from 1998 to 2003 and goes on to detail reforms planned for the period up through 2008.

Shareholders have until 25 April to leaf through the program, which was developed in conjunction with consultants from Alfa-Bank and Merrill Lynch, and contribute their own comments. With cabinet resolutions required to implement some of its proposals, a commission on energy reform headed by Deputy Prime Minster Viktor Khristenko will meet in late April to consider a fine-tuned version of the strategy. The EES board of directors will review a final version of the document in May. A "source close to the [strategy's] developers" commented on 10 April to "Vedomosti" that "there won't be any radical changes; the document will just put some 'meat on its bones.'"

If, in fact, a meatier, yet essentially unchanged, "5 + 5" emerges from the gauntlet of commissions and committees, it could bear fruit as early as June, "The Moscow Times" reported on 10 April. While the plan postpones the liberalization of the market for electrical energy until 2006-08, "5 + 5" would start out by dividing up local energy companies' power generation, sales, and distribution. Within the first year and a half, the Federal Grid Company would be split off from EES and divided proportionally among EES shareholders. Additionally, one of EES's 10 wholesale generating companies (OGK) would also be spun off. According to "Vedomosti," the independent OGK would consist of five federal thermoelectric power stations (in Perm, Nevinnomyssk, Refta, Sredneuralsk, and Konakovo).

Initial reactions to "5 + 5" focused on the mechanism for splitting up EES assets among shareholders. According to the English translation of "5 + 5" posted on the EES website, "The basic split-off mechanism for RAO UES [EES] of Russia will be proportionate distribution of shares. Other mechanisms (including sale through tenders) can also be used in splitting off companies and assets." Minority shareholders, who fear that valuable assets could be sold off under the guise of reforming EES, had supported a moratorium on asset sales. As the previous passage from "5 + 5" makes clear, they did not get their way.

The National Reserve Bank (NRB), a minority shareholder in EES, responded immediately to "5 + 5" with a 9 April official statement posted on the bank's website (http://www.nrb.ru/index.phtml?q=601&ncode=1049874659). The key paragraph in the statement reads:

"One notes that the document interprets freely the principle of pro rata and proportional division of shares in companies created in the course of reform. Despite the fact that this is termed a basic principle, an allowance is made for the possibility of using 'other mechanisms in splitting off companies and assets.' In a number of cases, this proposition could lead to pervasive 'exceptions from the rules.' It should either be removed from the text or formulated more clearly."

EES representatives insist that a moratorium on asset sales could tie management's hands in situations that require creative solutions. The Solikamsk power plant, for example, was sold to its largest customer, paper and pulp company Solikamskbumprom, in August. EES managers feared that the plant would be rendered superfluous if Solikamskbumprom were to build its own facility, "Gazeta" reported on 10 April. A source in regional power company Permenergo appeared to support this version, commenting to "Vedomosti" on 9 August that the power station was about to become a losing proposition, since Solikamskbumprom had announced its intention to build its own facility.

NRB head Aleksandr Lebedev ridiculed the example, telling "Gazeta" that argument boiled down to: "If you don't give it up for three kopecks, I'll build my own facility for 100 million." In fact, Solikamskbumprom paid $14 million for the Solikamsk power station in an auction (albeit with only two participants) that started at $11.95 million, "Ekspert" No. 30 reported on 19 August. According to "Vedomosti," Solikamskbumprom paid $130 for each kilowatt of generating capacity, while a kilowatt of generating capacity in EES as a whole was worth $50 (based on the holding company's then-current capitalization). But Lebedev's point is not without merit. Aleksandr Branis, who represents minority shareholders on the EES board, told "Vedomosti" in the wake of the Solikamsk sale that until reform creates a genuine market for electrical energy, generating assets are by definition undervalued and any sales premature.

The fears of an asset sell-off that ring out so clearly in criticism of the "5 + 5" program are a leitmotif in discussions of electrical energy sector reform. We might soon find whether those fears are justified. When EES shareholders come together on 30 May, the annual meeting will include such new faces as leading coal producer MDM Group and number one aluminum producer Russian Aluminum. Both are profoundly interested in the future of EES, albeit from opposite angles -- MDM's coal is burned to generate the electricity that Rusal's factories gobble up to produce aluminum.

No one knows exactly how much of EES the captains of industry have bought up in the past few months. A 6 March article in "Gazeta" estimated that MDM Group, which has nominated two candidates to the EES board of directors, could own as much as a 17 percent stake in the company. The influence of investors with an interest in the outcome of reforms now appears destined to affect the composition of the board of directors charged with overseeing those reforms.

Analysts who have retained their faith in the gospel of reform will find much to ponder in the "5 + 5" program. Those who see less noble aspirations in the works of men might recall the words of South Africa's Bishop Desmond Tutu: "When the missionaries came to Africa they had the Bible and we had the land. They said 'Let us pray.' We closed our eyes. When we opened them, we had the Bible and they had the land." DK

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