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#16 - JRL 7070
Financial Times (UK)
February 18, 2003
Russian power game

The past week has been a good one for Russia. First, BP announced it would spend $6.75bn (4.19bn) to establish a joint venture with TNK, the country's third largest oil company. This decision by the UK oil major to make the biggest foreign direct investment in recent times amounted to a vote of confidence in Russia's prospects. Then came a significant sign that such confidence may be warranted. Showing a willingness to approve a politically sensitive reform even in an election year, the Duma, Russia's lower house of parliament, approved a much-delayed plan to liberalise the country's electricity sector.

Russia's electricity sector is run almost entirely by one vast and partly privatised company, UES. The key proposal in the new plan is to hive off UES's high-voltage transmission grid into a state company, and turn its 70-odd regional generation and distribution arms into independent companies. This follows the increasingly standard practice around the world of separating transmission from power supply so that rival generators of electricity get equal access to the grid and can compete fairly with one another for customers.

The Duma has diluted some of the original free market plans of Anatoly Chubais - the head of UES and past architect of the pell-mell privatisations of the Yeltsin era - particularly on price controls and the pace of liberalisation. But they are still recognisable.

Yet President Vladimir Putin has dashed any prospect of similar moves in the gas sector. Parallel liberalisation, as elsewhere, would be desirable since gas generates much of Russia's power. But Mr Putin said he had no plans for the "dismemberment or division" of the state-controlled Gazprom. One reason why Gazprom can keep its monopoly and be lukewarm to foreign partners is that, unlike UES, it still makes enough money on exports not to need private finance.

BP was lucky with TNK. The latter is the only Russian company controlled by financial investors more than professional oilmen and so perhaps readier than others to involve a foreigner. But BP is still taking a gamble. The willingness to settle for a 50/50 joint venture with TNK reflects its awareness that even a foreign company of its size needs a Russian hand to steer it through the country's political, bureaucratic and judicial labyrinth.

Unfortunately, the government seems to believe a single BP swallow heralds summer. It has now suggested it might scrap so-called production sharing agreements that are stalled in the Duma, on the ground that they were unfavourable to Russia. Many western companies have been waiting for Duma approval of these accords before committing money to Russia.

Russia badly needs foreign direct investment for the management and technical knowhow it brings as much as the money. And it can probably get this in its rich energy sector. But it makes no sense for the government to keep some of its energy assets off-limits to foreign investment, and to rewrite the rules in others.

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