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[André K.]

Accounts Chamber throws doubt on Chubais legitimacy
The Accounts Chamber has set out results of its investigation of UES. The Chamber found illegality in a number of deals
connected with UES privatization. The Chamber has no specific complaints or accusations regarding management of the
company by Anatoly Chubais, but throws doubt on the legitimacy of his appointment.
The report of the Accounts Chamber, which is reckoned to
have a fair measure of independence from the Kremlin and
is partly answerable to the Duma, points to illegality in
nearly all sales of UES shares from state ownership, includ-ing
voucher privatization and issue of ADRs.
Chamber auditors insist that the sale in 1993-94 of 15% of
UES to Russian and foreign investors in exchange for priva-tization
vouchers was illegal, because it was implemented in
a way that contradicted a presidential decree from 1992.
The decree ruled that “not less than 20% of shares in UES
are to be sold to Russian citizens in exchange for privatiza-tion
cheques.” In fact, 17.25% were sold for vouchers
(cheques), including only 2.05% to Russian individuals,
10.38% to non-residents and 4.82% to legal persons. The
Chamber says that this caused “considerable financial injury
to the Russian people”, and estimates the “injury” at several
hundred million dollars.
The second accusation concerns the issue of ADRs on 7.5%
of UES stock in 1996. This issue was not approved by the
Russian Federal Securities Commission as required by the
law “On the Securities Market”, but was conducted on the
sole authority of the UES board of directors.
In the third place the Chamber claims that sale in early
1997 of 8.5% of UES stock to a consortium of Russian
banks, led by National Reserve Bank, was illegal since it was
ordered by the State Property Committee and not by the
government, as Russian legislation requires.
Following the meeting of the Chamber on September 1, at
which the investigation findings were revealed, its head,
Sergei Stepashin, said that a letter will be sent to the Prose-cutor’s
Office and the government requesting clarification
of all questions regarding UES privatization since 1992.
However, the CEO of the holding, Anatoly Chubais, says he
doubts that the Prosecutor’s Office will accept the Cham-ber’s
allegations. Otherwise the Office will have to make
court applications challenging all deals, which led to the
current ownership structure of the Russian energy sector,
and this would entail “complete destruction of the owner-ship
basis of Russian energy.”
Chubais also noted with satisfaction that “the Chamber
agrees that the allegations in question are not allegations
against the leadership of UES”, i.e. against Chubais himself.
Indeed, the Chamber did earlier make some accusations of
mismanagement of property and illegality in conduct of
bankruptcy by UES management. These accusations have
been dropped. It is also satisfying to note that the Chamber
judged the financial state of UES to be stable.
However, the Chamber’s findings do leave room for suspi-cion
that the whole investigation was instigated by politi-cians
in search of Chubais’s head. In particular, the Cham-ber
notes that abolition of the post of president of UES was
illegal, and the post should be re-established. This is a clear
challenge to the authority of Chubais. The Chamber refuses
to recognize the validity of a decree by Vladimir Putin ap-proving
Chubais as chief executive of UES (the decree was
issued in December 1999, when Putin was still the pre-mier).
Last year’s change in the UES charter requiring a ¾
majority of votes to secure dismissal of the CEO (proposed
by Chubais to protect himself any future hostility towards
him from the government) is also judged illegal by the
Chamber, since it contradicts a passage of the above-mentioned
1992 decree, which states that the company
chief is appointed by order of the Russian President until at
least 75% of its stock is out of state control.
What the Accounts Chamber has revealed about the priva-tization
history of UES could be revealed about any major
Russian company, set up in the early 1990s out of Soviet
industrial assets. What will be done with these “findings”
will depend on the attitude of the Kremlin towards Anatoly
Chubais and his UES restructuring plan. Some reaction
from the government or the Kremlin is bound to follow,
and there are grounds to think that Chubais has enemies at
the top. According to the business newspaper, Vedomosti,
the Kremlin chief of staff, Alexander Voloshin, has held up a
draft presidential decree, which would make the position of
Chubais as head of UES impregnable.

[André K.]

UES seeks reconciliation but insists on restructuring
UES management plans a series of meetings with Russian and foreign shareholders to develop a dialog on its restructur-ing
plans. As a first step, UES top executives Vyacheslav Sinyugin and Alexander Kolesnikov are taking part in a CS First
Boston conference and holding a series of meetings with interested parties in New York.
It is urgent for UES to find common ground with foreign
shareholders, who have been alarmed by restructuring
plans of Anatoly Chubais, since foreign investment is the
only possible source for investment of around $150bn,
which the Russian power sector will require over the com-ing
15 years. It is estimated that facilities at ordinary heat
and power stations are currently 20% exhausted and facili-ties
at hydro stations are 40% exhausted. The main bone of
contention between UES and its foreign shareholders is the
separation of assets into those, which are potentially profit-able
(transport), and those which will need to remain under
natural monopoly control (generating). Shareholders are
worried that value will be removed from their assets.
Meanwhile, Chubais has insisted that he will not be bullied
into compromise against the interests of the company, even
by foreign shareholders. He said last week in St Petersburg
that “the opinion of two tenths of major foreign sharehold-ers
is not decisive for us. Their opinion will be taken into
account, but the process of restructuring cannot be
stopped.”
Chubais also noted that the pace of energo reform in Rus-sia
is lagging that in other CIS countries. For example,
Azerbaijan and Armenia have already separated transport
and generating assets, Moldavia is attracting investments for
generating assets and even Belarus is looking at separation
of transport and generating.
Energo restructuring was due to be discussed at a meeting
of the board of directors, which includes top state repre-sentatives,
at the end of August, but the discussion was
postponed until the end of September. This may be to give
heads of energos time to talk with their own minority
shareholders, as they have promised to do, and it will also
give extra time to talk with the disgruntled UES sharehold-ers,
who attempted to force and extraordinary sharehold-ers’
meeting during to Summer to challenge Chubais head
on.
In an effort to win favor with foreign shareholders Anatoly
Chubais has sent a letter to Mikhail Kasyanov proposing an
application to the Constitutional Court for cancellation of
the law, passed by the last Duma but never implemented,
which limits the foreign stake in UES to 25%.
UES has also denied that it requested the Federal Securities
Commission and NAUFOR to investigate possible market
manipulation by Brunswick Warburg, the company which
led the campaign to organize an extraordinary shareholders
meeting to counter the Chubais restructuring plans. UES
now says that it only asked for investigation of media re-ports
that Brunswick may have used its stance against re-structuring
in order to carry out market manipulation.
Fuel bills could quash profits in H2
UES is expected to receive payment of R315bn for heat and
power supplies in 2000, up 33% from 1999. The cash share
should increase to 62%. Spending on fuel will represent 35% of
sales revenue.
Fuel costs are 36% of total costs on average for Russian en-ergos,
although they exceed 50% for a number of compa-nies,
including Kamchatkaenergo (RTS ticker KCHE), Ark-henergo
(RTS ticker ARHE), and Khabarovskenergo (RTS
ticker HBEN). Tariffs in the first half of 2000 provided
profit margins of 29% on average for power and only 3%
for heat, Several companies made a loss on their power
generating activities, including an 8.5% loss for Altaienergo,
and a 10% loss for Dalenergo. More companies showed
losses for heat generating, including Arkhenergo (7%), Al-taienergo
(4%), Dalenergo (9%), Sakhalinenergo (14%), and
Khabarovskenergo (17%).
It is probable that there will be significant rises in fuel prices
in the second half of the year, and fuel spending by energos
may exceed the planned level of R100-110bn. In that case
many more companies could fail to make a profit.

[André K.]

UES will sell power to Turkey
Talks in Ankara last week between the Russian prime minis-ter,
Mikhail Kasyanov, and the Turkish energy and natural
resources minister produced an agreement on direct sup-plies
of Russian power to Turkey via Georgia
The agreement will end the current arrangement, by which
Georgia itself buys Russian electricity and sells it on to Tur-key.
A tripartite deal between power industry representa-tives
of the three countries, under which Georgia will play a
purely transit role, was already signed a month ago. Turkey
expects to have a power deficit of 7 billion kWh this year,
and Russia will supply 100-110 million kWh each month to
be paid at a rate of $0.05 per kWh (far higher than Russian
domestic tariffs).
Despite the high price, the deal has some drawbacks for
UES. Firstly, Turkey is aiming to become self-sufficient in
energy three or four years from now and therefore refuses
to enter into a long-term agreement. There are also doubts
about the cost of building new transmission infrastructure
to deliver the power, and fears that Georgia may download
transitting power without payment.

[André K.]

Creation of power reform working group undermines Chubais.
Vladimir Putin has ordered creation of a new working group, to develop power sector restructuring plans. The group will
be attached to the State Council, set up last year, which unites Russia’s regional governors. Putin has ordered the group
to consider a variety of restructuring plans, suggesting that the Chubais version has lost its assumed priority.
The working group is headed by Viktor Kress, governor of
the Siberian region of Tomsk, with the Trade and Devel-opment
Minister, German Greff, and presidential economic
advisor, Andrei Illarionov, as his main deputies. Other
group members include UES chief executive, Anatoly Chu-bais,
the UES board member, Boris Fedorov, and the dep-uty
energy minister, Viktor Kudryavy.
UES has declared that it is “prepared to work with repre-sentatives
of the working group on all questions regarding
power sector reform”. But creation of the group actually
represents a serious setback for the Chubais restructuring
blue-print. This is evident from a number of facts. First,
Vladimir Putin has requested the group to present its con-clusions
by April 15, overruling a recent statement by Chu-bais
that a finalized plan must be presented before the start
of the Spring. Secondly, the President’s brief clearly implies
that the group should consider alternative restructuring
plans, and not only the Chubais version. Finally, creation of
the group means that the pro-Chubais Trade and Devel-opment
Ministry no longer has sole responsibility for
power sector reform. Illarionov and Kudryavy, who will
clearly have major influence in the group, are both com-pletely
opposed to the Chubais approach to power sector
reform.



Energos raise tariffs
Increases in natural gas prices, in UES charges for transmis-sion
line use, and in the price of energy from the national
grid are already provoking tariff increases by regional ener-gos
The Federal Energy Commission has approved an 18% in-crease
in the price of natural gas for Russian industrial cus-tomers
from January 20, and a 25% increase in prices for
households from March 1. At the same time the Commis-sion
has approved an increase of 20% in the price of energy
downloaded from the national grid. Finally, UES has raised
its charges to regional energos for use of transmission lines
by 20% to R40.45 per 1000 kWh.
These cost increases are already forcing increases in tariffs
by regional energos. The regional energy commission in St
Petersburg has approved higher tariffs for Lenenergo to
compensate the higher price of grid energy. Urban house-hold
users are to pay an extra 20% from January 1. A
smaller increase has been imposed on non-urban house-holds.
Prices for industrial and budget-funded users are to
be reviewed at the end of January.
Tariffs in the Rostov region were increased by an average
21% from January 1. The higher tariff levels in the region
are also a direct result of the new higher prices for grid
power. The regional utility, Rostovenergo supplies 80% of
the needs of its customers using power that is downloaded
from the national grid.
Planned tariff increases by Mosenergo in January are mainly
due to higher prices for its main inputs - gas and coal.
Spending by Mosenergo on all types of fuel input (gas, coal,
fuel oil and turf) represent 52% of total spending by the
company. Higher fuel prices are also the main reason for
New Year tariff increases by Ulyanovskenergo, the power
utility in the region of Ulyanovsk. Meanwhile, Sverd-lovenergo,
which supplies the Urals region around Ekater-inburg,
has increased power tariffs for non-household cus-tomers
by 20-30% as from the start of the year.
We expect the combination of price increases for fuel, grid
power, and line use to force further tariff hikes by regional
energos in the near future.



UES Appoints Deutsche Bank as ADR Custodian
UES has appointed Deutsche Bank as custodian for its ADRs in place of the Bank of New York. The change may be con-nect
with recent Russo-German discussions on swapping Soviet debt for equity in Russian companies.
Transfer of ADRs from BONY to Deutsche Bank is ex-pected
to take 8-10 weeks. A UES press-release says that
Deutsche Bank was chosen as the result of a tendering
competition, and that the change was due to the need for
“a higher quality of back-up for the ADR program, including
information provision, cooperation with ADR owners and
company shareholders, contact with potential investors,
and the necessity for understanding of the aims and proce-dure
of company restructuring by the custodian bank.”
However, it is doubtful that the BONY service was as defi-cient
as the press-release suggests. Indeed, the nature of
the agreement with BONY allowed UES management to
vote shares of ADR holders at annual meetings, which was
much appreciated by the company.
The change of custodian seems to make more sense for the
state, which is the main shareholder of UES. Under plans
put forward at the end of last year, part of the ex-Soviet
debt, which Russia owes to the Paris Club of lender na-tions,
could be transformed into equity in Russian compa-nies.
Germany is the biggest holder of Paris Club debt and
UES is one of the companies which could offer equity under
the deal (such a development would require abolition of
the law, which limits foreign ownership of UES, but such
abolition is likely in the near future). Transfer of ADR cus-todial
functions from a US to a German bank could be part
of this larger plan.

[André K.]

UES plans to boost sales and profits by over 30% in
2001
The UES board of directors approved financial targets for
2000. Non-consolidated net sales are targeted at
R29.562bn, up 32% from preliminary 2000 results of
R22.366bn. Similar increases are anticipated in costs and
profits, which are expected to increase by 31% and 33%
respectively. The transmission fee, which is by far the larg-est
single source of cash for UES, was increased by 5 rubles
to R40.45 per/1000 kWh at the beginning of the year and
UES plans further rises. Dividend payments in 2001 are
scheduled at R613m. Payments to the accumulation fund,
which contains cash for capital construction and renova-tion,
should increase by 61%.







UES board meeting may call extraordinary
shareholders meeting
UES directors are likely to discuss alleged law violations at
last year’s AGM when they meet on January 26. In Decem-ber
the Federal Securities Commission ordered UES to
correct violations of the law “On joint-stock companies”
that arose when some company shareholders were given
more than one voting paper while others were instructed
to vote jointly on a single paper at the shareholders meet-ing
on June 30, 2000. The Commission has set a deadline of
March 9, 2001, for an extraordinary shareholders meeting
to correct these errors. If UES obeys the Commission or-der,
an EGM will likely be called near this date.






Ukraine stops UES participating in power sector pri-vatizations
The Ukrainian government has blocked UES participation in
the sale of Sevastopolenergo, a regional utility in the Cri-mea,
using the same pretext as last year when UES was
kept out of bidding for a stake in the Kiev region utility,
Kievoblenergo. The Ukrainian State Property Fund said that
UES fails to meet contest rules requiring three consecutive
years of profitability. A bidder must also undertake to main-tain
energy supply volumes to existing customers, which
was not guaranteed by UES officials. Last year Ukrainian
generators produced 170 billion kWh of electric energy,
equal to 19.4% of volumes generated in Russia.








Government chooses consultant on power sector re-structuring
The Russian government has laid down conditions for in-ternational
consultants wishing to participate in develop-ment
of power sector reforms. Some 10 companies were
included in the list of candidates and a final decision is ex-pected
by February 1, when the ministries of Economic De-velopment,
Energy and Nuclear Energy will hold a closed
contest. It has been decided that candidates must have al-ready
consulted governments on power industry restruc-turing
at least twice and have a representative office in
Moscow (or be ready to open such). The winner will be
paid $1 million of Russian budget money. It is highly possi-ble
that companies that have already consulted UES on re-structuring
will not be listed among candidates. The deal as
such may have a beneficial effect on the Russian power sec-tor
by clarifying restructuring plans.