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Russia: Chubais Tries To Jolt Electricity Sector

Syktyvkar, 29 June 1998 (RFE/RL) -- Northern Russia - The new headquarters of Komienergo, the regional electricity company in Russia's Far North, seems extravagant for a company saddled with debts and struggling to make ends meet.

The word on the streets of Syktyvkar, about 1,100 kilometers from Moscow, is that the company must be doing well if it can afford such swank offices, complete with glass brick walls and high-tech security. But the company's management said looks are deceiving.

Ivan Medvedev, Komienergo's financial director, says: "We built this place through barter."

With Komienergo collecting only 10 percent of its bills in cash, building a new headquarters through bartered goods made sense in a strange sort of way. The local timber mill couldn't pay its electricity bill in cash, but had plenty of wood to spare. Cement and other construction materials acquired through creative barter transactions also were used.

Although the building continues to raise eyebrows around town, it stands as a symbol of Russia's cashless economy which has given rise to inefficiencies and financial abuses. It is also a symptom of the company's messy financial state where barter reigns supreme and debts pile up. Komienergo's accounts receivable as of June 1 stood at a staggering 1.700 million rubles ($280 million), or about half of total sales, with federal and local budgets the biggest debtors by far. But the company owes almost as much to its suppliers and to the government in taxes.

Like many in Russia, managers at Komienergo are counting on the country's best-known reformer, Anatoly Chubais, to pull out his financial wand and make their problems go away.

After quitting his post as deputy prime minister in March, Chubais was appointed in late April to take over as chief executive of Russia's giant electricity company Unified Energy Systems (UES), which owns a controlling stake in Komienergo and almost all of the country's regional utilities, known as energos. The appointment came after months of behind-the-scenes wrangling and intense opposition from the State Duma, which balked at Chubais running a company that allows him to wield political influence over the regions in the run-up to parliamentary elections.

At the helm of Russia's largest company by sales and its most traded stock, Chubais would seem to have his hands full. But Russia's financial crisis has pulled him back into the government yet again to negotiate an emergency stabilization loan from the International Monetary Fund (IMF).

The job of running state-controlled UES puts Chubais at the center of the biggest structural problem facing the Russia: non-payments. UES is at the hub of a vicious circle of unpaid bills worth an estimated $96 billion which is choking the economy and putting a break on investments. UES and its subsidiaries are owed roughly $21 billion, including massive unpaid bills by government-funded organizations. It in turn has built up unwieldy debts to state budgets and suppliers, such as gas monopoly Gazprom.

The power sector is blamed for holding back economic growth by overcharging industry in order to subsidize Russian households, which pay just a fraction of their income for electricity. One of the biggest challenges facing Chubais will be to reduce tariffs for industry and encourage market-based competition among energy suppliers. UES currently owns the national electricity grid, operates 34 power plants and holds controlling stakes in 70 regional utilities which have a monopoly on local distribution. Under reforms outlined in a presidential decree, Russia's power generating facilities will be separated from transmission, but Chubais has said the transformation will take two to three years.

For now competition is being smothered. Instead of independent power stations competing to supply power on a national grid, prices are set by local regulators. While a wholesale market for power exists at the national level, regional utilities often block industries from tapping other cheaper sources of electricity by charging high transmission fees.

Beneath this lies a web of opaque financial deals carried out in barter and unregulated promissory notes, known as veksels. The top priority for Chubais is sorting out the company's financial mess and making UES more transparent.

If Chubais cleans up UES, it could help spur economic growth. In his words: "All transformations in UES will directly affect the Russian economy as a whole." If he fails to make headway at UES, economists say, Russia is more likely to remain stuck in first gear, dragged down by insolvent companies that cannot pay their bills.

Chubais is relying on devising a new strategy for implementing a restructuring plan that languished under his predecessor, Boris Brevnov, who was pushed out by the company's Soviet-era directors after less than a year on the job. As he puts it: "The problem is not what should be done, but how it should be done."

Analysts said that unlike Brevnov, Chubais has the political muscle to push through reforms, such as raising electricity tariffs for households, breaking up regional monopolies and turning off non-paying customers. While many of the proposals are not new, Chubais has for the first time outlined a blueprint for restructuring the electricity sector and distributed it to investors and regional leaders seeking comments and suggestions.

His strategy to implement the plan relies heavily on the political and administrative skills he honed in the government. Using both a carrot and stick, Chubais has said he will force the federal government to pay its bills to local energos that agree to implement tough reforms.

Boris Sinegubko, an analyst with Brunswick Warburg in Moscow says: "It is very important that Chubais has one foot in UES and his other foot in the government. He can promise that the federal government will start paying on time."

Given Russia's overall economic difficulties, the task is huge and time is short. Prime Minister Sergei Kiriyenko has given Chubais until autumn to make palpable improvements at UES. Most analysts said he can't be expected to turn around the lumbering electricity giant in six months.

Sergei Bubnov, a utilities analyst at CS First Boston says: "Everyone is expecting immediate improvements on the financial side. That's what he'll be judged on."