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Russia: Government Trying To Transform Energy Sector

Russian deputies have given initial approval to a power-sector restructuring plan. The move may mark the first major commitment to break up the country's natural monopolies, but doubts remain about how the government's program will work.

Boston, 16 October 2002 (RFE/RL) -- Russia has taken a step toward transforming its mighty monopolies with preliminary passage of a power-sector reorganization plan. But analysts remain uncertain about what the changes mean for the country's Unified Energy System (EES) and its controversial chief executive, Anatolii Chubais.

On 9 October, the State Duma approved a series of bills on first reading to break up the EES electricity giant, which is 52 percent state-owned. The vote by a margin of 261 to 152 followed forecasts of failure and hundreds of amendments to win deputies' support. Some lawmakers warned that they would vote against final passage unless even more changes are made.

But the complex plan is the first to gain even initial Duma approval for restructuring a "natural monopoly." The process could spur similar efforts for Russia's gas mammoth Gazprom, the Railway Ministry, and eventually the oil pipeline system Transneft.

Anders Aslund, senior associate at the Carnegie Endowment for International Peace in Washington, told RFE/RL: "Before [EES] is done, nothing will be done about Gazprom or the rest. In other words, it's very important to reform EES first."

The program would split the faltering system into a Federal Grid Company and regional generators. The country's 72 regional utilities would be spun off and possibly consolidated into groups of five. EES would form a holding company to merge and manage stakes in distribution and generators that fail to consolidate. EES stockholders would get shares in the companies on a pro rata, or proportional, basis.

The idea of the reshuffling is to draw investment into the system by offering opportunity and the incentive of a market system with deregulated rates. But the first steps by Chubais have already sparked so much suspicion that the entire plan was nearly lost.

Last month, the former privatization minister was forced to halt asset sales before the start of restructuring because of a deal to give Russian Aluminum control of the $1 billion Krasnoyarsk power plant in exchange for a $10 million loan.

Critics accused Chubais of replaying his infamous 1995 loans-for-shares privatization, which turned the nation's best assets over to a new class of oligarchs. Although transfers of EES holdings have stopped, industrial groups are reportedly continuing to line up blocking shares in the regional utilities for takeovers when the program opens up.

Despite the initial passage of the government's plan, the criticism of Chubais has continued.

Last week, the Reuters news agency quoted Yabloko leader Grigorii Yavlinskii as saying during the Duma debate: "Do we need to reform the electricity sector? Do we ever. But instead they have offered us an unspeakable mess. It is unacceptable from a social, political, and economic standpoint. It will create the political basis for economic and corporate totalitarianism."

In a statement issued by EES, Chubais called the comments "a shame," saying, "It is very sad when a person speaks on the subject he knows nothing about." But distrust of Chubais and his plan go far beyond Yavlinskii.

Marshall Goldman, associate director of Harvard University's Davis Center for Russian Studies, told RFE/RL: "Everybody assumes that it can't be straightforward. That's what people think because he has such a bad track record."

Other analysts say that the backing of President Vladimir Putin has given the plan greater legitimacy. Clifford Gaddy, a fellow in economic and foreign policy studies at the Brookings Institution in Washington, said: "I don't think this is something coming only out of Chubais's head. This isn't something done behind anyone's back. It's with the encouragement and approval of Putin."

Ironically, fears of asset stripping may have prompted the Duma's action to prevent industrial groups from grabbing up the indebted regional utilities.

Anders Aslund said: "They will get them through the bankruptcy courts if things don't move fast enough. If nothing is done fast, lots of assets will disappear."

But a combination of doubt and distrust convinced deputies to delay implementation for one year until mid-2005, along with the major step of freeing electricity tariffs. The tariff issue may require the biggest leap of faith, since the government insists that competition will result in lower rates rather than price hikes.

Deputy Economic Development and Trade Minister Andrei Sharonov said, "We would be right to count on tariff decreases for end users in those areas where competition is possible when these laws are brought into effect." But the Fatherland-All Russia party has vowed to vote against the plan in second and third readings if households are not protected from tariff rises, Reuters reported. The stand could kill the bills.

Without tariff increases, there may be little incentive for investment. The alternative would be to sell assets at giveaway prices, as Chubais's critics fear.

So far, the government has found it hard to raise tariffs without triggering inflation. Next year, rates have already been limited to a 14 percent rise, leaving little net gain over budgeted inflation of 10 to 12 percent. Last week, the Central Bank of Russia conceded that this year's inflation will rise above the target of 14 percent.

The government also expects only gradual declines in inflation of 2 percent per year through 2005, RBC News reported last week, and it is already planning for maximum increases in electricity rates of 14 percent in 2004.

The careful balancing act may set the stage for a competitive market in 2005, but the outcome of the experiment remains unpredictable.