|BUSINESSWEEK ONLINE : DECEMBER 18, 2000 ISSUE|
|INTERNATIONAL -- EUROPEAN BUSINESS
The Battle for Russia's Electricity Giant (int'l edition)
Investors are scrutinizing the breakup of an electric monopoly
In one corner, there's Russia's erstwhile reform champion, Anatoly B. Chubais, 45. In the other: shareholder-rights firebrand Boris G. Fyodorov, 42. Both were top economic policymakers in Boris N. Yeltsin's Kremlin. Now, they are locked in a fight over the restructuring of one of Russia's biggest companies and its most widely held stock--national electricity monopoly Unified Energy System (UES). On Dec. 14, the Russian government will meet to consider Chubais' controversial plan to break apart the 53% state-owned company. Fyodorov, representing minority shareholders, is vowing to block the breakup until Chubais guarantees he will protect their interests.
This battle is about far more than kilowatts, or even personalities. At stake are assets worth potentially tens of billions of dollars. And how the government decides to restructure UES will signal just how seriously shareholder rights will be taken in President Vladimir V. Putin's Russia. ''It's a test case for foreign-investor confidence in the market,'' notes William Browder, director of Hermitage Capital Management in Moscow, a venture fund with shares in UES. ''If the interests of the last group of holdouts are ignored,'' he warns, ''that's hardly going to send the right message for the future.''
SCARED OFF. Breaking up UES and deregulating the electricity market are also crucial to making the sector attractive to long-term investors, who could bring much needed funds for renewing Russia's aging electric-energy infrastructure. UES should be a top pick of foreign investors, a proxy for Russia's recent economic growth. But investors have been scared away by the company's massive losses--partly a result of a low electricity-tariff regime imposed by the government. UES also has trouble collecting much of the cash it's owed by near-bankrupt industrial companies. It's expected to lose $1 billion this year on revenues of $7 billion. Investor fears over the restructuring have caused UES's shares to slump from 21 cents last March to 8 cents today.
Everyone agrees that Russia's electricity industry needs a drastic overhaul. The question is how Chubais should do it. He wants to merge hundreds of local power stations to create 10 to 15 competing regional generating companies. UES would continue managing the nation's electricity grid, while gradually selling off its stakes in the new power businesses.
That's where the fight starts. Fyodorov, a UES director, wants to ensure that shareholders have a say in how the sell-off is carried out. That's key, he says, to preventing the sale of assets to company insiders in a way that could dilute or shrink the value of shareholders' stakes. Fyodorov wants an iron-clad stipulation that management win approval of two-thirds or 10 members of UES's 15-member board before selling assets worth more than 4% of the company's total value.
That might sound like a reasonable request from a shareholder in the U.S., but in Russia, it's a radical demand--and Chubais rejects it. Under his plan, the sell-off of stakes in regional companies will be approved by the boards of the local companies--not UES. The reason: Russian law doesn't require it. ''It's clear that the greater the transparency and the greater the support from the board of directors, the more chances we have of success,'' Chubais told BUSINESS WEEK. ''But this plan to sell off stakes in [subsidiaries] does not enter into the UES board's sphere of authority. This is not an issue.''
That stance nonetheless riles crusaders like Fyodorov. ''Chubais is ignoring shareholders' rights. It's very bad for Russia when a reformer starts acting like an oligarch,'' he says. Minority shareholders are also voicing concern about a pilot project for restructuring that's now under way. Under this deal, UES management is consolidating three regional generating units under one corporate umbrella. But the UES board has no say in hiring the team of managers that will take over decisionmaking at the new company. That team will be led by a regional gas and banking baron, Vladimir Avetisyan.
Minority shareholders are worried that Avetisyan could use the umbrella company to supply electricity to his own gas operation at cost, thus draining value from UES's stake. Avetisyan has installed his bank, Gazbank, as the authorized handler of one of the regional company's accounts--a move that, though legal, raises questions among shareholders. Avetisyan denies he will misuse the electricity company. ''It is my job to act in the interests of shareholders,'' he says.
Meanwhile, UES shareholder complaints have managed to capture the attention of Igor Kostikov, the new head of Russia's Federal Securities Commission. Appointed by Putin, he is drafting a new corporate-governance code. ''If we're talking about the transfer of major assets, the board of directors as the shareholders' representatives should have the right to approve sales,'' he says.
So why doesn't Chubais give in? After all, this is the man who, in the early 1990s, was a leading advocate of free-market principles. One theory is that he sacrificed his beliefs in the mid-1990s when he became, in effect, Yeltsin's political power broker, allowing tycoons such as Boris Berezovsky to buy state assets on the cheap in return for supporting Yeltsin. Fyodorov suspects that Chubais may want to parcel out stakes in UES at low prices to insiders, who can then pocket profits when UES' share price recovers. Other shareholders suspect funds may already be flowing from UES to promote the Union of Rightist Forces, a political party co-founded by Chubais last year. Lending credence to that notion is UES's recent $33 million purchase of a Moscow television station, Ren-TV, which could prove a useful propaganda tool for Chubais and his party.
A ''NOBLE AIM.'' Chubais, however, will only concede that Ren-TV may be handy in spreading the word about his UES restructuring plan. He denies that he is using UES to further his political fortunes and rejects accusations he might sell assets cheaply to insiders. Indeed, he believes he's pursuing a noble aim of freeing Russia from vestiges of Soviet-style management. ''Deregulation is a historic task for the country,'' he says. Moreover, he argues that his plan for deregulating Russia's electricity sector ''is the only way of bringing in investment so urgently needed [before] current capacities are exhausted.'' At least $50 billion is needed over the next five years, Chubais says, to revamp the industry.
Investors will be watching anxiously on Dec. 14, when Putin and his government meet to review Russia's energy policy. If Putin doesn't side with Fyodorov on the issue of UES board approval for asset sales, the shareholder-rights activist is threatening to sue UES in Western courts and so expose Chubais to the glare of negative publicity. ''Russia has to be seen to be acting in the interests of minority investors,'' urges Fyodorov. The ball is now in Putin's court.
By Catherine Belton and Paul Starobin in Moscow
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The Battle for Russia's Electricity Giant (int'l edition)
TABLE: The Chubais-Fyodorov Face-off
ONLINE EXTRA: Chubais: "My Position on This Is Very Pragmatic"
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