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Moscow Tribune
February 21, 2003
Elections, electricity and pensions
By Stanislav Menshikov

When the government recently increased pensions by 30 roubles a month per person (the equivalent of less than $1) quite a few old aged people wired the money to Vladimir Putin's attention with uncomplimentary comments: inflation was much higher than the miserly "compensation". Putin publicly blamed his ministers for "inattention" to the needs of the people. New figures promptly emanated from the bureaucracy promising average pension boosts of 150 and even 265 roubles. However, statistical averages are one thing and reality is very different.

In a year preceding his re-election, Putin has to be good to the electorate. The poor third of the population that votes for the communists could easily grow. But he also wants to be nice to the rich who control mass media and provide finance for the campaign. The other day, the Russian Union of Industrialists and Entrepreneurs proposed an increase of the minimum pension age to 65 instead of the current 60 for men and 55 for women - as a way to reduce the Unified Social Tax paid by business for hired labour from 35 to 24 percent. Because average life expectancy in Russia is 65 years and even less for men, that would mean cutting off most old people from their only source of survival. The government reacted negatively. But the matter is far from closed.

Then Putin made an angry speech to a meeting of local lawmakers from around the country demanding a severe cut in social obligations prescribed by law but not duly budgeted. He meant cutting tax and other exemptions and subsidies provided for veterans, invalids, children in large families, and generally for low income people. He all but threatened to reduce federal transfers to local budgets for such purposes. Many saw it as a gesture to the rich - a demonstration of understanding of their desire for lower taxes.

The prime minister, Mikhail Kasyanov, found himself in a similar pickle on a recent visit to the Duma where the normally pro-government majority was reluctant to pass legislation authorising the reform of the electric power industry. The reform is extremely unpopular due to the general conviction that electricity tariffs would be raised two- or even three-fold once the electricity market is set free. The parliamentarians stalled for months in the hope that the government backs off in view of the coming December elections. Some 2,000 amendments were proposed to minimise the expected price shock. When Viktor Khristenko, deputy premier in charge of energy, Anatoly Chubais, head of the electric monopoly and lesser government officials came in to try to soothe the deputies, the Duma refused to listen and demanded the appearance of the premier in person.

Then a funny thing happened. Kasyanov assured the deputies that he would personally see to it that no harm is done to the consumers. And, on his word of honour, they approved the amendments in a matter of hours. What seemed to be an impasse turned out to be an easy ride. How come?

As mentioned in a previous column, privatising the electricity industry is a key demand of the oligarchs. They see it as the first, but decisive step in opening up government monopolies, i.e. natural gas, oil and gas pipelines, railroads, to inroads by private capital. The diamonds and armaments industry might well follow, and the last vestiges of government property in the economy would fall. A delay in the electricity reform would be a major setback to the whole plan.

And privatising electricity is not simply pie in the sky but something that is already happening. While 51.6 percent of RAO UES, the electric power holding company, is held by the government, an estimated 12 percent has been bought up by the MDM financial group, another 10 percent or more by the Deripaska-Abramovich aluminium group. The Bank of New York with 10.6 percent and the Deutche Bank with 5.5 percent represent foreign investors. In addition, oil companies Yukos (Khodorkovsky) and Sibneft (Abramovich), Potanin's holding company Interross and his Nornikel concern, investment banks Renaissance Capital and Baring Vostok, as well as aluminium, steel and other businesses have silently acquired blocking shares (from 25 to 45 percent) of major regional electricity generation concerns subject to full privatisation in the course of the reform. They are waiting for the green light to be able to rush in and push electricity prices up.

When Kasyanov gave promises in parliament, Duma members believed he had until 2005 to remain in control of electricity tariffs. As it turns out, his word of honour costs very little even today. The federal government has prohibited tariff raises this year in excess of 20 percent but regional energy committees are authorising hikes of 50 percent and more. In the Rostov region, prices were raised 40 percent for individual consumers but only 4 percent for industry.

Being between the oligarchic hammer and the public hard place is not exactly an envious situation for Putin and Kasyanov. Apparently, they hope to win the elections despite antagonising the electorate. They are running a high risk.

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