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Financial Times (UK)
June 2, 2003
UES chief puts his faith in capitalism
By Arkady Ostrovsky

"We are building communism," read a slogan on a photograph of a power plant that decorated the walls of the giant Soviet Palace of Culture where shareholders in Unified Energy System, gathered on Friday for their annual general meeting and to hear more about the restructuring plan of Russia's energy monopoly.

What shareholders heard from Anatoly Chubais, the head of UES, could be better described as: "We are building capitalism."

After three years of intense political fighting and fierce manoeuvring among Russia's financial and industrial groups, shareholders in Unified Energy System have agreed the mechanism for breaking up the country's electricity monopoly.

UES, Russia's energy monopoly and the sacred cow of Soviet central planning, will cease to exist by 2008, to be replaced by privately held generation companies competing for customers plus a state-controlled grid.

This move is being seen as the most significant restructuring of a natural monopoly in Russia, and a benchmark for a shake-up of Gazprom, Russia's gas monopoly, and other industries.

"This plan fits in with the logic of everything I have been doing over the past 15 years: to break up state enterprises and create a free market," says Mr Chubais, the main architect of privatisation in the 1990s.

"The fight for restructuring is over. The market and the business community have accepted the logic and mechanism of the UES restructuring. Now there is no way back," Mr Chubais, told the Financial Times.

This plan had been fiercely criticised by communist members of Russia's parliament, who accuse Mr Chubais of squandering state assets, and by some foreign shareholders, who feared that Mr Chubais' restructuring would lead to a repeat of the early 1990s sale of assets to a group of insiders.

However, in a rare moment of unity the UES board, which includes representatives of the state and private shareholders, last week unanimously approved a plan that would allow shareholders to swap their stakes in UES for shares in operating companies.

The key element that persuaded minority shareholders to vote for Mr Chubais' plan was a promise to distribute UES generating assets proportionately among existing shareholders. UES is planning to create four or five wholesale generation companies, each comprising about 10 power plants and generating 10MW of electricity - enough to supply a city of 5m people.

The government, which controls 52.5 per cent of UES, will not participate in the swap and its shares in generation companies will be auctioned among existing private shareholders.

This would bring private capital into generation while allowing the government to increase its stake in the transmission grid.

Mr Chubais says the best testimony to the markets' confidence in his plan is a dramatic rise in the share price, which has pushed the market capitalisation of UES from about $3.5bn in September 2002 to almost $10bn.

"Shareholders have voted with their money for the restructuring of the company. Now there is no way back," says Mr Chubais.

The most active buyers of UES shares have been Russian industrial and financial groups. Among them is MDM group, which controls about 50 per cent of Russian coal production supplied to electricity companies.

Sergei Popov and Andrei Melnichenko, business partners in MDM, have spent $600m over the past year buying 8 per cent of UES shares as well as direct stakes in regional plants. Both Mr Popov and Mr Melnichenko were elected to the new board of UES last week.

"We believe that the price of UES shares is far below the value of the company, which generates 70 per cent of all electricity in Russia," says Mr Popov.

Another new member of the UES board is David Geovanis, managing director of Basic Element, a company owned by Russia's powerful aluminium baron Oleg Deripasko. But unlike MDM, which has been buying UES shares in order to gain seats on the UES board, Mr Geovanis has been buying shareholder votes, according to several market participants.

As a result he has gained more than 9 per cent of shareholders' votes, while the stake held by Basic Element is estimated at about 2 per cent of UES shares.

"This is new practice, even by Russian standards," one analyst said. Mr Geovanis refused to comment on his tactics. Aluminium is one of the most energy intensive industries and some minority shareholders fear that Mr Deripasko will use energy assets to supply cheap electricity to his smelters.

David Herne, a minority shareholder in UES and a former member of the board, says: "What the sector needs is private owner-managers. What it does not need is owner-managers with interests in related industries."

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