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Russia: Government Plans Reform For Electricity Monopoly

After a year of debate, the Russian government has decided to proceed with the restructuring of the state electricity monopoly. But questions remain about the pace of investment and reform. Our correspondent Michael Lelyveld reports.

Boston, 22 May 2001 (RFE/RL) -- In seeking a compromise, the Russian government has approved a reform plan for the power sector that may come under fire from all sides.

On 19 May, the government cleared the plan for restructuring the EES electricity monopoly after studying it for over a year.

The move marks a partial victory for EES chief executive Anatoly Chubais, who has sought since April 2000 to sell off Russia's generating companies, leaving the state to control the power network.

The basic scheme has survived months of controversy, but it is less clear that its purpose will be served.

The idea of the breakup plan is to save the entire system from collapse. Chubais has successfully argued that the rickety electricity sector needs at least $50 billion in funding over the next decade to avoid a breakdowm.

The only way to attract the money is by putting the generating companies in 89 regions up for sale, opening the doors to privatization and all that it entails, Chubais has said.

For millions of Russian consumers, that means higher tariffs. On 19 May, Trade and Economic Development Minister German Gref said that electricity rates will be doubled under the plan by 2004, when restructuring begins.

The startup date is one of the compromises that followed protests when the government first approved outlines of the plan six months ago. The reforms will be implemented over a decade with the gradual withdrawal of state price controls.

Despite the delays, all sides may find something not to like about the plan. Chubais is reportedly displeased that prices will not be liberalized at a faster pace starting next year.

Foreign shareholders, who own about one-third of EES, have objected that the government would sell Russian power companies too cheaply, probably to insiders. Because most of the companies desperately need new equipment, the plan may amount to selling at the bottom of the market.

Presidential economics adviser Andrei Illarionov has echoed that sentiment, calling the plan "a handover of enormous portions of state property to God knows whom at giveaway prices," the Associated Press said. The state currently owns 52.5 percent of EES.

On 20 May, Communist leader Gennadii Zyuganov called the government program "criminal," the Interfax news agency reported. He said that it "has opted for a destructive way and is under the thumb of those who have been tormenting, humiliating, and ruining the country."

Although they come from opposite ends of the reform spectrum, both Zyuganov and Illarionov are suspicious of any plan involving Chubais, who created the infamous loans-for-shares scheme.

The privatization plan in 1995 traded options on state-owned enterprises for what later turned out to be pitifully small amounts of cash. The sales to insiders, who backed former President Boris Yeltsin's re-election, made billionaires out of many and gave reform efforts a lasting black eye.

That experience might have been enough to exclude Chubais from any future program that involves privatization of a state asset as vast as EES. At times, the debate over the past year has seemed to be more about Chubais and the protection of shareholder rights than the economics of what will work for Russian consumers of electricity.

As the debate has developed, the government has had to forge compromises, but it seems to have largely worked from the blueprint that Chubais first laid out. While EES will cease to exist as an entity in 2004, Chubais could continue to guide the process through a successor company, such as the new AO Energo.

The confines of the controversy seem to have limited the government's scope. Basic questions about the program appear to be unresolved.

Is there a market for old power plants that need new equipment in regions that may be unable to pay higher rates? Will Russian incomes rise fast enough to support the price hikes?

It is also unclear how the EES restructuring will fit into a broader energy sector plan. Regional power companies will depend on fuel supplies. But it is not certain how soon there will be a free market for fuels.

Last December, Energy Minister Alexander Gavrin said the government's energy strategy would require between $500 billion and $700 billion in investments over the next 20 years, more than ten times the amount needed to save the electricity system alone.

So far, Russia has attracted only a small fraction of that huge amount in its history. Unless it can rise above history, the EES plan may have little chance of success.