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Financial Times (UK)
February 17, 2003
Moscow paves the way for power sector change
By Rafael Behr and Andrew Jack in Moscow

The Russian parliament has approved long-delayed legislation on reforms to the country's power sector, paving the way for the liberalisation of the electricity market in coming years.

After changes designed to meet concerns over price rises and security of supply, the Duma passed the critical second reading by 260 votes to 159, sending a sign of continued willingness to pursue sensitive economic reforms despite elections at the end of this year.

Under the proposals, UES, the state-controlled power company, will be split between a transmission system and a series of competing generation and distribution companies, replacing price regulation and opening the sector to fresh investment.

However, amendments to the law introduced by centrist parliamentary factions will add safeguards to support consumers on lower incomes, and shift initiative for implementation of liberalisation to the federal government and regional authorities, to take place no sooner than July 2005.

UES welcomed the passage of the bill as conserving a free market with liberalised prices, while adding a greater social dimension to the original plans.

The second reading - which may still be subject to amendment during a final reading as soon as this month - also includes scope for the government to split up companies that take too dominant a share of the market, and ensures minimum supplies during a transitional period. Some minority

UES investors were concerned the reforms risked selling power assets cheaply and diluting the value of their investments. Bill Browder, head of Hermitage Capital, a specialist Russia fund, said on Friday: "This reform is two steps forward and one step back."

It enshrined in law guarantees that minority interests would be protected because they would receive "pro rata" shares in all the distributed assets ahead of their sale, but the value of those assets would still decline until price liberalisation took place.

A fragmented UES would leave only a few unreformed energy companies, chief among them Gazprom, the state-run natural gas monopoly.

But prospects for imminent Gazprom reform similar to the UES project receded on Friday when President Vladimir Putin made clear his reluctance to see the company move out of state control.

"As the main Gazprom shareholder, the state will insist on lower costs and greater efficiency, but will not support any plans for dismemberment or division," Mr Putin told Gazprom employees on Friday.

Russian voters are sceptical of large-scale reforms. Opposition to the UES bill reflected personal animosity to the company's chief executive, Anatoly Chubais, the architect of mass privatisations in the mid-1990s, when lucrative state assets went to influential business oligarchs at knock-down prices. "This is an election year," one populist deputy told Duma deputies during Friday's debate.

"The people hate Chubais, and if you vote for this bill they will remember it."

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