Power Industry 2000-2004
The starting positions of RAO UES of Russia, the largest Russian power company, were quite good in 2000. The company accounted for nearly 70% of electric power production in Russia, and its financial indicators were already fairly stable by that time. However, no one expected any particular achievements from either RAO or its competitors, the main one being the Rosenergoatom concern. The primary objective of the state, which controls property, pricing, and the rules of the game on the Russian power market, was to prepare RAO and the entire market for reform, which in perspective should have made it possible to invest in the Russian power industry.
But even while undergoing reform, RAO was able to hold on to its market positions and increase power sales. Between 2000 and 2002, sales increased at the rate of 32-34% per year, and RAO's physical power sales, like the energy market volume, increased 5-6% in four years. Out of 915 billion kWh of electricity generated in Russia in 2003, RAO accounted for 635 billion kWh (about 600 billion in 2000). Finally, despite the opposition of many government structures, both RAO and Rosenergoatom reached a stable level of profitability. But all of these successes were owing to people whose main goal was to break up the Unified Energy System of Russia.
History: 2000-2004
RAO UES of Russia, the Russian electric power monopolist, has solved two contradictory problems. It had to prepare the market for a large-scale change of owners and rules of the game, but without giving up control over its own property. And although RAO's chairman, Anatoly Chubais, did not keep his promises to liquidate the company on March 31, 2004, on the whole these problems have been solved.
Reforming RAO
Anatoly Chubais has never hidden the fact that he came to the Russian power industry in order to demolish RAO UES and its market monopoly. The concept of competition assumes there are at least two answers to the question “Who owns the Russian power industry?” However, it was not Chubais but Minister of Fuel and Energy Viktor Kalyuzhny who first pronounced the phrase “power industry reform” in public. In February 2000, Kalyuzhny announced plans to proclaim a joint project for reforming the power industry developed by the Ministry of Fuel and Energy, the Ministry of Economics, and the Russian Academy of Sciences. Kalyuzhny added that RAO had a “special relation” to this project. On March 3, 2000, the acting president made it clear at a meeting on the fuel and energy complex held in Surgut that he was partial to Viktor Kalyuzhny's reform concept rather than Anatoly Chubais'.
The reform plan for RAO from the Ministry of Fuel and Energy and the Russian Academy of Sciences never saw the light of day. The birthday of reform should probably be celebrated on March 3, when the historic “duel” between Kalyuzhny and Chubais took place. Arguments over whether the reforms proposed by Chubais were good or bad broke out the very next day. And despite the fact that things have passed the “point of no return” and can no longer be stopped, the arguments over whether Chubais is leading the power industry in the right direction continue to this day.
Evgeny Nazdratenko, Governor of Primorye Territory, was the first to suggest amendments to the RAO reform plan in an open letter of March 4, in which he demanded Chubais' immediate resignation and proposed a transfer of the entire local power industry to the ownership of regional authorities. Meanwhile, the first reform program for RAO, which the governor had opposed (he was removed from office a year later, largely through the efforts of Chubais himself), was not discussed by the board of directors of UES of Russia until a month later – on April 4. The discussion took place in the Kremlin at the initiative of head of the presidential administration Aleksandr Voloshin; this was the first meeting of the company's board of directors ever held in the president's domain.
The reform plan taking shape behind the Kremlin walls changed considerably over the next four years. In 2001, the strategic reform program was called “three plus three” (“we're planning three years before reform plus three years after”), then “five plus five”.
The reform acquired its final shape in April 2003 after the State Duma passed the corresponding amendments to the legislation. The liquidation of RAO, which according to the reform plans was to be replaced by the Federal Network Company, System Operator, and 10 wholesale and 14 territorial generating companies (OGR and TGK), has been put off. But in principle, once the generating companies have been set up and sold at auction, most of the reform will be complete. The first regional power company (AO-energo) to complete its own division in the course of reform was Kalugaenergo, which did this on April 1, even before the president's inauguration. And Anatoly Chubais will be able to leave RAO with a light heart in 2008, the same year Vladimir Putin will leave the Kremlin.
However, in order to launch the reform RAO UES of Russia had to simultaneously solve a lot of problems relating to property on its books, to the development of RAO itself as a company, and to partners among the regional power companies and on the energy market. RAO's “side” work with respect to reform was almost as interesting as the reform itself.
Taming the Regional Power Companies
Starting in mid-2000, one of the most important tasks for the RAO UES team that was directly related to property management was getting enough control over regional power companies. The most serious battles in this area were not connected with companies in which RAO UES of Russia did not have a controlling interest but with companies that under Russian company law should not have been RAO's competitors. This primarily concerned AO Mosenergo, the largest and most highly capitalized company of the holding.
The dispute involving Mosenergo could theoretically have been predicted as early as the beginning of 2001. In March, Moscow mayor Yury Luzhkov publicly announced his rejection of the power industry reforms RAO was preparing. Luzhkov's position differed little from Evgeny Nazdratenko's invective. The mayor claimed that power-generating facilities in RAO's system did not need any privatization, since it would lead to a sharp increase in electricity and heating rates. However, one unusual moment in this speech came when Luzhkov remarked that, “Moscow, together with Mosenergo, is seeking for ways to develop the industry without privatizing power facilities”. This was in effect a direct challenge to Chubais' team: the mayor showed that he considered Mosenergo his company rather than the property of RAO, which owned a controlling interest in it.
Open conflict broke out around Mosenergo several months later, when RAO UES's audit committee discovered a number of financial violations in the company's operations. Mosenergo's general manager, Aleksandr Remezov, who made no secret of the fact that he supported Yury Luzhkov, refused to resign and resisted attempts by RAO to replace him by means of a shareholders meeting. The dispute was not settled until the end of September, when the newly elected general manager of Mosenergo, Arkady Evstafev, managed to reach the office following a raid organized by bailiffs. The mayor finally resigned himself to the loss of the “special relations” between Mosenergo and Moscow a year later, after agreeing to a new program of cooperation between the city and the company at a meeting with Chubais in summer 2002. Isolated recurrences of the antagonism still surface, although RAO UES of Russia has agreed in principle to give Moscow control over the network company in exchange for a share in the generating facilities.
RAO UES replaced disloyal directors at regional power companies in 1999, and most of the conflicts related to this were hidden from public view; however, the scandals sometimes became public, especially at companies where RAO did not have a controlling interest. For example, it took more than a year to dismiss the general manager of Novosibirskenergo, Vitaly Tomilov. This was followed by an absorbing two-year-long soap opera during which there were attempts to bankrupt Novosibirskenergo, its assets were seized, and criminal cases were initiated against former Novosibirskenergo managers and RAO.
Key actions in this area – getting at least relative control over Tatenergo and Bashenergo, the largest regional power companies that had not been part of RAO at the time it was set up – were accomplished almost without fight. It came down to a standoff between Chubais' team and the Federal Energy Commission (FEK) headed by Georgy Kutovoi (appointed in February 2001), one of the most influential opponents of power industry reforms “a la Chubais”. FEK considered it illegal to collect fees from Tatenergo, Bashenergo, and Irkutskenergo for transmitting power they had generated to consumers outside the region, which were going into RAO's investment programs. Hidden behind the disputes over license fees was the question of how dependent officially independent companies were on RAO. Three years later, RAO has clearly won this dispute, although it never received the fees (RAO never did manage to consolidate its hold on Irkutskenergo: in 2003, the company passed to the control of aluminum producers Rusal and SUAL).
Until 2002, the conflict with FEK and the system of regional energy commissions was extremely dangerous for RAO UES of Russia: the dispute over Kuzbassenergo nearly bankrupted the company, which could have resulted in RAO losing the largest power supply system in the region. This also concerned a number of Far Eastern power systems. Attempts to bankrupt not only regional power companies, but also power stations ended only in 2003. Despite this, RAO UES of Russia managed to avoid losing its assets and prevent competitors from getting ownership in the power industry. However, the appearance of new independent players on the power market was inevitable. And they were mostly hostile to RAO UES of Russia.
Power without Power Plants
Prior to the announcement of power industry reform, investments in most regional power companies, as in RAO itself, were by definition portfolio (indirect) investments: the state continued to control 52% of the shares of UES of Russia, while the company itself owned more than 50% of the capital in most of Russia's power supply systems. However, when the reforms were launched, owning the minority share blocks in RAO also made sense: these share blocks might be turned into shares of wholesale and territorial generating companies, which investors would control independently in future.
Purchases of regional power company securities reached a peak at the beginning of 2001. YUKOS acquired blocking share packages in Kubanenergo, Belgorodenergo, Tambovenergo, and Tomskenergo in summer 2001 for slightly less than $40 million. But the buyers kept a low profile. By summer 2003, the owners of at least blocking share packages, who regarded themselves as future strategic investors in the Russian power industry, had acquired no less than a third of the country's power supply system – all very promising from the point of view of developing the energy business of regional power companies. However, it is not easy to name them: most potential investors concealed themselves behind nominal shareholders and investment companies. Moreover, just like the owners of fairly large packages of UES of Russia, it is quite difficult to distinguish them from actual portfolio investors, who are mainly interested in profits from an increase in the rate of shares in RAO and its affiliated regional power companies. Finally, potential investors themselves do not see any essential boundary between portfolio and strategic investments.
Thus, in 2003 and the beginning of 2004, experts estimated the size of MDM Bank's shareholdings in RAO UES at 11%. In their opinion, the bank and its affiliates were also using 3-5% of RAO's shares to speculate on the stock market; and a 5-8% block was regarded as a “strategic investment” needed to create a “bundle” out of Siberian territorial generating companies; certain wholesale generating companies; and Baikal Coal (Baikal-Ugol), the virtual monopolist in power-generating coal production in Russia and the coal division of MDM Group, which had close ties with the bank. MDM Bank itself did not deny that it owned shares of RAO; however, it did not disclose the exact size of the holding or the clients in whose interests it had bought the shares.
Determining exactly who in this structure is a potential investor in the power industry after reform and the scale of his ambitions in this area is not an easy task. For now, we can say with certainty that ten existing and fairly visible players are interested in the prospective wholesale and territorial generating companies.
These are mainly metallurgical companies. Structures of the Base Element (Bazovy element) group and Russian Aluminum (Rusal) and large-scale owners of Irkutskenergo make no secret of the fact that Evrosibenergo, which manages their power industry assets, regards itself as the next major power company on a liberalized market (however, their immediate interest appears to be in individual hydroelectric power plants). Another Irkutskenergo owner – structures belonging to SUAL – have also expressed an interest in the future of the industry. To all appearances, the Integrated Power Supply System (Kompleksnye energeticheskie sistemy) holding will represent them. Norilsk Nickel (Nornikel) and Interros have still not officially indicated their interest, but they should probably be regarded as players already in the field.
MDM Group is unlikely to abandon its plans; it owns important assets in the coal industry, which gives it the chance of becoming a key player on Siberian energy markets. Neither are oil companies, first of all LUKOIL and to a lesser extent Surgutneftegaz. Gazprom's future interest in power generation is also obvious. Finally, a number of smaller investors, including investment companies and investment banks such as Troika Dialog and Renaissance Capital, are interested in becoming “negotiators” and partners for large European sectoral investors in the power industry of the future, especially European power companies. The first alliance in this area has already been announced: Businessman Grigory Berezkin's ESN Group has become a partner with the Italian power company ENEL. In addition, a number of Ukrainian and Kazakh companies have a definite interest in becoming energy market players.
It is also evident that structures associated with Rosenergoatom, which fought with Anatoly Chubais' team in 2001-2003 for special operating conditions on the energy market, also want to diversify their presence on this market. Structures belonging to Rosenergoatom and Evrosibenergo already play the same role on the Russian energy market as independent gas producers play on the market controlled by Gazprom. At least during Vladimir Putin's first term, they had approximately the same relation to RAO as “independents” have towards Gazprom. In their opinion, UES of Russia is a cross between a monster, whose forced liquidation would not upset anyone, and a “big brother” who treats the younger ones badly but is also useful to them.
There are probably also a number of “dormant” players who will show some activity on the market towards 2005. Many of them are already operating on both the regulated sector of the Federal Wholesale Energy Market (FOREM) and the unregulated FOREM sector that opened up in November 2003 – the “5-15% sector” managed by the noncommercial partnership Trading System Administrator (Administrator torgovoi sistemy).
Expansion before Liquidation
Relations between the ten “pioneers” of the future energy market and RAO have had their ups and downs. In 2000 and even later, RAO never gave up hopes of completing the Boguchansk Hydroelectric Power Plant (Boguchanskaya GES) with the help of Russian Aluminum structures. However, the only large power facility the company put into operation during President Putin's first term was the Bureisk Hydroelectric Power Plant (Bureiskaya GES), which was built without outside participation, although there were proposals to shift part of the costs onto strategic investors. In general, transferring any UES of Russia facilities to the ownership or even to the management of outside structures has always aroused the opposition of the company's minority shareholders led by investment funds.
The negative image of power industry reform in Russia is a consequence of the absolutely unthinkable activity of these structures by Western criteria. The names of head of the Prosperity Capital investment fund Aleksandr Branis, director of corporate research of Hermitage Management Vadim Kleiner, and managing director of Halcyon Advisors David Herne are inscribed in the history of Vladimir Putin's first four-year term. These are mainly the names of people who at first glance were overly opposed to any threat to the rights of minority shareholders in power monopolies. However, in many respects RAO UES is indebted to them for the fact that in the last four years the company has not only been engaged in reform, but is also actively developing.
On the eve of its imminent demise, RAO UES managed to turn itself into an attractive company for investment; at least it has never left the blue chip list for even a day, despite the scandals around the reforms and all the conceivable and inconceivable accusations hurled at the heads of RAO's managers. The development of UES of Russia's international projects is a typical example.
As Vlast has repeatedly written, as the height of the arguments that RAO UES of Russia should cease to exist, the company made a number of important foreign acquisitions. For example, RAO gained de facto control over the energy sectors of Georgia and Armenia, entered the energy markets of Kazakhstan and Tajikistan, made a foray into Ukraine (such that the country's president, Leonid Kuchma, now sees actual nationalization of the power industry and a rejection of the benefits of local market liberalization as the only defense against “foreign expansion”). The success of Inter RAO UES in selling power in CIS countries and a significant increase in exports to Finland in early 2004 led to new complaints from minority shareholders: they want to get their share of Inter RAO UES when RAO is divided. Of course, RAO UES of Russian did not only expand outward, but also did a great deal within the company. In the past four financial years, RAO's management team have been doing their utmost to ensure that there will be fundamentally new answers to the question “Who owns Russia's power industry?” at the end of Vladimir Putin's second presidential term.
by Dmitry Butrin
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People Who Have Arrived on the Scene
Mikhail Abyzov
Despite his youth, vice chairman of the board of RAO UES Mikhail Abyzov came to the power industry slightly earlier than Anatoly Chubais. Even in the mid-1990s, Abyzov's companies had great influence on Novosibirskenergo's business; and in 1998, he was a member of Krasnoyarskenergo's board of directors. Structures belonging to Abyzov, who graduated from the applied mathematics department of Moscow State University (MGU) in 1993, traded in energy resources in a number of Russian regions. At UES of Russia, the young manager very quickly turned into the “chief trader and negotiator”, who settled most of RAO's business disputes. Today, Abyzov is responsible for one of the most prospective business units – the territorial generating companies of Northwestern, Central, and Southern Russia and wholesale generating companies unrelated to hydroelectric power.
Vladimir Avetisyan
Regional businessman Vladimir Avetisyan is one of the most unconventional figures on Anatoly Chubais' team. In fact, no one could have imagined that the chairman of the board would entrust a major part of RAO – the Volga power supply system – to someone with a reputation as a regional oligarch, who moreover was connected by business and career with Gazprom structures. Nevertheless, in 1999, Avetisyan became general manager of Samaraenergo, and his career took off from there. At the end of 2000, he became head of the first management company, SMUEK, which controlled four Volga power supply systems. Then in spring 2004, Avetisyan became vice chairman of the board of RAO, with responsibility for a third of all existing territorial and wholesale generating companies.
Grigory Berezkin
The appearance of Grigory Berezkin, general manager and chairman of the board of ESN Group, is an unusual story. ESN's interests were primarily in the sphere of crisis management and attracting investments. Until 1999, ESN, formerly known as Evroseverneft, managed the company KomiTEK and arranged for its merger with LUKoil. ESN came to the power industry as a management company for AO Kolenergo in Murmansk (RAO owned 49.2% of the shares; and Norilsk Nickel, 19%), which was virtually bankrupt. Kolenergo emerged from the crisis three years later, and its management contract with ESN was terminated at the end of 2003. But Berezkin and ESN had no plans to get out of the power industry. The group owned a sizable block of shares in UES of Russia and was intent on an alliance with the Italian company ENEL that would make it one of the largest players on the power market. The alliance has already acquired its first asset. ESN-ENEL won a tender to manage the Northwestern Heat and Power Plant (Severo-Zapadnaya TETs), one of the largest power facilities in the Northwestern region of Russia.
Andrei Rappoport
The name of Andrei Rappoport, another vice chairman of the board of RAO UES, is usually spoken in the Russian power industry elite with the same veiled respect and odium as the name of his colleague Mikhail Abyzov. Before coming to RAO, Rappoport worked in the Alfa Group, at YUKOS, and with oligarchical structures such as the Russian Jewish Congress. When he first arrived at RAO, he was involved in direct power sales; i.e., he was the “natural opponent” of all structures that bought electric power from RAO or competed with the company on that market. Today, Andrei Rappoport is occupied with what will be left of UES of Russia after reform: the Federal Network Company, interregional network companies, power exports and imports, and foreign assets. This gives him the chance to maintain his position on the market even after RAO is liquidated.
Vyacheslav Sinyugin
In contrast to the other members of Anatoly Chubais' team, vice chairman of the board Vyacheslav Sinyugin is probably the most underestimated figure at RAO UES. He came to the company from a regional office of the Federal Securities Commission (FRTsB) in 2000. Sinyugin has never been especially noticeable among his outwardly more brilliant colleagues. Nevertheless, he was the one who fulfilled the most difficult tasks relating to reform (e.g., convincing the State Duma of the need to pass a set of laws on power industry reform in spring 2003). Today, Sinyugin is in charge of the most disputed sphere – the wholesale generating companies formed on the basis of power generation and new power plant construction projects. In effect, he is responsible for the confrontation with Russian Aluminum.
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People Who Have Left the Scene
Valentin Zavadnikov
As a vice chairman of the board of RAO UES of Russia, Valentin Zavadnikov should have been one of the key managers of power industry reform. Well-known among the “young reformers” as director of the Nakhodka Free Economic Zone (SEZ Nakhodka) in 1992-1994, a pilot privatization project in Russia, he came to the company at almost the same time as Anatoly Chubais. Zavadnikov was actually one of the developers of the first versions of the reform concept. But in 2001, he went to the Federation Council as the representative of Saratov Region. It is still not known what motivated him to quit his job – disagreements with colleagues, attempts at criminal prosecution by the authorities of Primorye, or something else. However, Senator Zavadnikov remains one of the pillars of reform of natural monopolies in power structures even after his exit from RAO.
Viktor Kudryavy
Deputy Minister of Energy Viktor Kudryavy was not the Chubais team's most dangerous opponent, but he was probably the most consistent and implacable. This is probably because his views on how the reform of RAO should be carried out (e.g., the company should remain a monopoly and the power market should not be liberalized) were so all-encompassing. Thanks to this consistency, Kudryavy got away with a lot. For example, in March 2002, he managed to block the formation of the Federal Network Company and the System Operator for several months simply by not obeying the government's directive to vote “yes”. Mikhail Kasyanov finally fired him in August 2003. But even after his dismissal he went to court to try and get Chubais fired and put an end to the reforms. Without success.
Georgy Kutovoi
Head of the former Federal Energy Commission Georgy Kutovoi was the third member of the Kudryavy– Kutovoi–Illarionov trio of chief critics of reform of RAO in government structures and the most contradictory figure. Just what Kutovoi had against the reform process is unknown. Viktor Kudryavy was simply an advocate of the socialist model, while presidential advisor Andrei Illarionov criticized the reform program for not being liberal enough. Duma deputies tried to dismiss one of RAO's three “dear enemies” from the Fatherland-All Russia (OVR) alliance in the belief that his “anti-Chubais activities” made him unworthy of being considered their ally. However as head of the FEK, he was a natural check on RAO's appetites by using all possible means to control power rate increases and demanding that RAO structures cut expenses. Kutovoi retired after his commission was eliminated, and RAO lost an opponent who had kept UES of Russia in fighting form from 2001 to 2003.
Leonid Melamed
Leonind Melamed, who came to RAO from the position of executive director of Rosenergoatom, held the number two position – first vice chairman of the board in charge of the company's finances – after Chubais at RAO UES of Russia until spring 2004. The fact that RAO UES of Russia became one of the country's most profitable companies and very quickly rid itself of the legacy of former RAO chairman Anatoly Dyakov (this was mainly the result of using barter and bills for power payments) is a tribute to Leonid Melamed. Melamed left the company for the most ordinary reason – he explained that his mission at UES of Russia was accomplished and there was no more room to grow.
Evgeny Nazgratenko
The ex-governor of Primorye was never officially in the power business; however, Nazdratenko's ideological influence on the power industry (especially in relations between power companies, local authorities, and power consumers) was enormous. Hardly anyone was interested in the fact that the power supply system of Primorye Territory was different from all other Russian systems. Nazdratenko was a symbol of regional authorities who did not want change in the power industry. He tried to turn every energy crisis in Primorye not only into political, but also cash dividends (through fuel deliveries to the crisis area). This script finally failed to work in January 2001: Nazdratenko's latest anti-Chubais campaign ended in his dismissal from office. We note that this was the last large-scale energy crisis in Primorye.
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All the Article in Russian as of June 14, 2004
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