Kasyanov Signs Off On UES Revamp

Prime Minister Mikhail Kasyanov signed a plan on Wednesday for an overhaul of Unified Energy Systems, one of the key reforms he and President Vladimir Putin have promised to carry out.

But questions remained over exactly what form the restructuring of the world's largest electricity company Ч in terms of capacity and sales Ч would take.

Kasyanov had promised in an interview with Reuters Television to sign the plan on UES, headed by Yeltsin-era reformer and UES chief executive Anatoly Chubais, on Wednesday. Kasyanov's press secretary said hours after the interview he had done so.

Market analysts expect UES, a stock market minnow compared with other international companies despite its gargantuan production levels, will be turned inside out by having its power generation units spun off and then consolidated.

They also expect the grid to be kept in state hands and current shareholders to be given holdings in new companies created by the revamp in proportion to current stakes held in UES.

The aim of the restructuring is eventually to introduce competition into the power market. However, minority shareholders had criticized earlier proposals, alleging they opened the way to asset stripping and deprived them of their rights.

Putin's own economic adviser, Andrei Illarionov, has also joined in public disputes with Chubais, saying plans so far proposed would lead to more monopolies and not competition.

"The main thing is to see what is in the document," said Dmitry Vinogradov, analyst at Brunswick UBS Warburg. "Now we have certainty the document is signed, but on the other hand there is uncertainty over the implementation of the plan."

Shares in UES ended down 5.8 percent at $0.1154, although dealers had said Kasyanov's announcement had helped cut some of the intra-day losses.

Kasyanov was vague in his interview about one of the key aspects of UES restructuring Ч raising Russian electricity prices, which are much lower than in the West.

Analysts have said few investors would like to put their money in a firm that virtually subsidizes most of the economy.

"Raising tariffs is not a target [in itself] but it is necessary to do this from time to time," Kasyanov said.

"We will continue to monitor the situation so that investors would look favorably to invest in the future in this sector which is very important for us."

Eric Kraus, chief strategist at NIKoil, said that without a clear plan for raising prices the power reform could be stalled.

"The essential point is that tariffs be reformed and Kasyanov struck me as a little bit iffy about that," he said.

"He did not necessarily give the full emphasis we would like to see on bringing Russian gas and electricity tariffs up to international levels, which would make the reform possible."

However, traders were optimistic about the future UES share price.

"UES has very limited downside potential: everyone who wanted to sell, did, but there are buyers," said Alfa-Bank trader Oleg Martynenko.

"But UES has a big growth potential compared with other papers [shares], for instance, oil. That is why the market is ready to take any UES news as positive."