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Russia: Law Caps Foreign Investment In National Electricity Company

Moscow, 23 April 1998 (RFE/RL) -- In a blow to the rights of foreign investors, Russia's upper house of parliament, the Federation Council, has overruled a presidential veto and passed a law that will sets a 25 percent limit on foreign ownership in national electricity company Unified Energy Systems.

The law directly challenges the rights of foreign investors, who currently hold more than 28 percent of UES shares. It also intensifies the political battle between President Boris Yeltsin and both houses of parliament over the formation of a new government.

Under the constitution, President Boris Yeltsin is required to sign the law within a week, but he is expected to challenge the content of the law in the Constitutional Court.

Yeltsin's representative to the Federation Council, Anatoly Silva, condemned Wednesday's vote. In his words: "The law will retroactively limit the participation of foreign investors, which will undermine their confidence in the Russian stock market." He added that the bill would be difficult to enforce because it offers no mechanism for compensating foreign investors.

The market, however, brushed off the tussle over foreign ownership in the company, with UES share prices rising 3.16 percent. But the UES dispute was diluted by an overall market rally Wednesday as many investors anticipate that parliament will confirm Prime Minister designate Sergei Kiriyenko on Friday.

Foreign ownership has been limited in other Russian companies, such as gas monopoly Gazprom and national savings bank Sberbank, but in each case the caps have been well above current levels of foreign share holdings.

Yeltsin first vetoed the bill last summer, but the lower house of parliament, the State Duma, overruled him last week in the midst of the political standoff between parliament and the president. Regional governors who make up the Federation Council had been expected to follow suit, partly because the law would increase their control of the electricity sector.

In addition to capping foreign ownership in UES to 25 percent, the bill requires the government to hold on to 51 percent and calls for 33 percent of the state's shares to be handed over to regional administrations.

The government, which currently holds 52.7 percent of UES, had been planning to reduce its stake to 50 percent plus one share, selling part of its stake through a convertible bond issue in an effort to raise cash for the financially-strapped budget.

The moves by both houses of parliament to restrict foreign investment in UES is also seen part of an ongoing political battle over who will be appointed to replace Boris Brevnov, the company's young chief executive officer who stepped down earlier this month.

Former First Deputy Prime Minister Anatoly Chubais has been favored to take the reins at UES, but he is fiercely opposed by opposition deputies.

Duma Speaker Gennady Seleznyov Wednesday urged Yeltsin not to nominate Chubais to head UES, saying :it would be a shameful decision."

Analysts said the bill restricting foreign investment in UES was also part of political bargaining over who will be appointed prime minister. The Duma has rejected Kiriyenko twice, but a third vote is scheduled for Friday.

Legislators approved the bill in an act of defiance, as they come under increasing pressure to approve Kiriyenko or face new parliamentary elections.

The legal wrangling over the bill could be protracted. Sergei Bubnov, an analyst at CS First Boston in London said Yeltsin could challenge the constitutionality of the law because it requires parliamentary approval for the sale of state shares in UES. Under the constitution, the government has the right to manage state property. If the Constitutional Court rejects the law, it would have to be amended by the Duma.

The chairman of the UES board of directors, Viktor Kudryavy, has said the bill infringes on the rights of shareholders and would be impossible to enforce.

It is unclear how foreign ownership in the company could be reduced to comply with the law. The government is unlikely to shoulder the cost of buying back shares from foreigners.

Viktor Ishayev, governor of the Khabarovsk region, said foreign ownership could be diluted by issuing new shares in the company. But analysts said such a dilution without the consent of all shareholders would violate current Russian law.