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Russia: Electricity Market Faces Uncertainty

Russia's stock market battered shares in the country's electricity monopoly this week after the government unveiled changes in a controversial restructuring plan. The latest move would keep tight control over any market measures until after elections, following a pattern that has already been set for the gas and oil industries.

Boston, 24 January 2003 (RFE/RL) -- Investors punished shares in Unified Energy Systems (EES) and the entire stock market this week as lawmakers put off consideration of a restructuring plan for the second time.

EES shares dipped 7 percent on 21 January after the State Duma's supervisory council voted to delay a second reading of the reorganization package, which has been in the works for over a year. In October, the Duma passed an earlier version in first reading, but hundreds of amendments and government revisions have since transformed the bills.

It is unclear what investors liked less -- the postponement or the details of the government's new approach. But the reaction appears to have dragged the rest of the market down with it as the Russian Trading System (RTS) index dropped 3.4 percent. EES shares fell an additional 1.1 percent on 22 January, giving up all their hard-won gains since last fall. The power giant, which is Russia's biggest company, is 51 percent state-owned.

Investors have been hoping the EES plan will bring higher valuations to its worn-out assets, which are to be split up into separate generating and distribution units. EES chief executive Anatolii Chubais designed the original plan to attract $50 billion in investment and upgrade the system over a decade.

But "The Moscow Times" cited details of the government's latest revisions that suggest it will play a greater role in the future of EES than anyone imagined even one month ago. Perhaps most important to investors, the government dropped 2005 as the date for liberalizing the wholesale electricity market in favor of a region-by-region approval process that could give local officials a veto.

The move might calm voters' fears about higher power prices before this year's elections, but it may also send a signal to investors that they might as well come back later if they were counting on higher returns. Under the new plan, industry restructuring would be delayed until the process is completed in the regions.

Instead of setting firm dates, the government would also control long-term contracts and how much power could be sold at market rates for an indefinite period. "The Moscow Times" quoted Brunswick UBS Warburg analyst Fyodor Tregubenko as saying, "The new amendments cross out all the market principles of the reform."

The effect on the entire plan remains unclear. While the market has given the program bad reviews, the lower prices of EES shares might be spurring more buying among the rumored secret investors who have been snapping them up. The business daily "Vedomosti" reported this week that LUKoil has added a blocking stake in a Volgograd utility to several other power interests in its portfolio.

But fears that the process might lead to too much privatization under Chubais, who planned the notorious 1995 loans-for-shares scheme, might now be replaced by concerns that there will not be enough. The EES switch is only one of three examples in as many weeks of the government's turn toward more control of monopolies in the main economic sectors, after nearly three years of promoting market reforms.

This week, "Vedomosti" also reported that the government is trying to raise its stake in the Gazprom gas monopoly from 38 to 51 percent as a prelude to any restructuring or foreign trading of domestic shares. The government has already put off discussion of reform plans several times, most recently in December. Now there are concerns about what amounts to a reverse loans-for-shares scheme.

Under the plan reportedly proposed by the Duma's Audit Chamber, Gazprom would transfer up to 20 percent of its shares to the government in exchange for the tax breaks it has already received for building the Blue Stream gas pipeline to Turkey across the Black Sea. The author of the plan is said to have conceded that the after-the-fact swap would be "illegal," a troubling admission from the body that serves as the government's fiscal guardian.

At the least, the search for ways to boost government ownership of Gazprom seems to show little commitment to open markets. Almost unnoticed in the furor over EES, the foreign-traded shares in Gazprom plunged 8.5 percent the same day.

The moves on Russia's two main utilities come shortly after Prime Minister Mikhail Kasyanov vowed on 10 January to keep all of Russia's oil pipelines under the state monopoly operator Transneft. The statement came in response to complaints by private oil companies, which have been trying to develop independent export routes with new pipelines and ports. It now appears that the government has no intention of losing power over an industry that has accounted for Russia's greatest economic growth.

It is unclear that growth will continue at the same pace without incentives, but the government appears unwilling to start a process that it cannot control.