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. Last Updated: 07/27/2016

Chubais Under Attack At UES

Just days after Vladimir Putin's victory in the presidential polls, influential tycoon Boris Berezovsky looks to be moving against arch rival Anatoly Chubais, head of national power grid operator Unified Energy Systems, as part of a rhetorical battle for control over the country's so-called natural monopolies.

The respected and influential Kommersant newspaper, which Berezovsky bought last year, published an article Tuesday reporting that the Federal Commission for Securities, or FSC, has written a letter calling for foreign investors' stakes in the company to be diluted.

However, observers said the FSC letter was simply a response to a Feb. 15 government inquiry into the matter, and that news of its release did not come as a surprise. The government also sent inquiries on the matter to the Justice Ministry and the State Property Ministry.

"The issue is about the manifestation of the government's desire to strengthen its control over the economy," said Sergei Markov, director of the Center for Political Studies.

UES issued a written statement saying the rights and interests of foreign shareholders in the company were not threatened. "The FSC document is part of an intergovernmental correspondence, which has no 'political' meaning that would regard the essence of the [1997] law as contradicting the Constitution," the statement said.

In the FSC letter, published on the commission's web site, commission chief Igor Kostikov outlined several possibilities in which foreign stakes in the company, now amounting to approximately 33 percent, could be diluted to 25 percent. That would bring the number down to the figure set as the limit for foreign shareholders by a federal law passed in 1997, but since ignored.

The 25 percent level is important because, under UES's company charter, the firm's director can only be replaced if shareholders representing 75 percent of the company's equity vote in favor of the move. Chubais has overwhelming support from foreign investors who hold UES stakes, and who would almost certainly block any move to sack him.

At the center of the debate over UES is the fate of the country's notorious financial and industrial "oligarchs," one of the key question marks about the future of Putin's administration.

After Berezovsky helped to force Chubais and many of his allies from the government in March 1998, the former first deputy prime minister moved to create a new power base at UES - an enormous holding that has major stakes in almost all of the country's regional power suppliers as well as running the national power grid.

The rivalry between the two figures has never fully died down. Berezovsky, seen as a top Kremlin strategist, appears to have come out on top in recent months. Companies controlled by him recently bought 60 percent of the country's aluminum industry. Increased government control over UES could benefit his aluminum holdings by supplying cheap energy.

Berezovsky is also seen as having been a key figure in the pro-Putin Unity party's agreement with the Communists in the State Duma to appoint Communist Gennady Seleznyov speaker and shut "minority" parties out of committee chairmanships. That included the Union of Right Forces, a bloc of ex-reformers founded and funded by Chubais, which had expected to work closely with Putin.

In another move that seems to favor Berezovsky, prosecutors in the Siberian region of Krasnoyarsk on Tuesday arrested former State Duma deputy Viktor Gitin, a Yabloko party member. Gitin is seen as an opponent of Krasnoyarsk Governor Alexander Lebed, whose gubernatorial campaign was partially financed by Berezovsky and who reportedly helped Berezovsky acquire aluminum holdings in the region.

Berezovsky is also close to Fuel and Energy Minister Viktor Kalyuzhny.

"The Fuel and Energy Ministry demands that the state strengthen its role in running UES," Yury Korgunyuk of the INDEM think tank said. "And the ministry represents a large number of government bureaucrats out to get Chubais, who has talked about foreign investment as the only way to help UES."

Markov said the debate over UES indicates the company is more important politically to the government than economically. "The government, in the attempt to wrest control from regional leaders, is trying to get out of the situation in which Chubais has emerged as the unremovable UES chief amid the country's chaos."

Chubais came under pressure in February, when Putin criticized the company's plan to raise electricity rates, saying there would be no need to do so if the company were run more efficiently. Fuel and Energy Minister Kalyuzhny followed up by saying Chubais spent more time wooing investors abroad than managing the company effectively at home.

According to the FSC, one of two most likely possibilities to sideline foreign investors would be to dilute their stakes with new emissions of equities. The second is to buy back foreigners' shares.

But observers dismissed such possibilities, saying publication of the letter in Kommersant was a political ploy.

"The [FSC] letter is probably another arrow shot by Berezovsky at Chubais," said Dmitry Vinogradov, associate director Brunswick Warburg brokerage, one of UES's main foreign investors.

Vinogradov added that the letter is no threat to foreign investors. "We believe it's highly unlikely the government is behind the document," he said. "Enforcement [of the law on foreign investment] is not in the government's interests."

FSC chief Kostikov issued a written statement Tuesday saying the commission's letter did not mean its position regarding foreign shareholders of UES stock has changed.

"The FSC's position is that application of the [1997] law [on foreign investment] ... will create the possibility that shareholders' rights and lawful interests will be violated, that is why the current law needs to be re-examined."

However, Kostikov's predecessor, Dmitry Vasiliyev, said Tuesday that the FSC had altered its position on UES.

"The letter said nothing about investors' rights and the need to take the matter to the Constitutional Court," he said. "It only talked about how to dilute foreign investors' shares."

Kostikov added that according to the commission, the number of foreign shareholders in UES should at the very least amount to those holding equity in the company in 1997, when the law was passed, addressing critics who say the law attempts to limit foreign shareholders retroactively.

Moreover, the government would have a difficult time coming up with the roughly $500 million needed to buy back enough shares. "The government just hasn't done that before," said Andrei Abramov, an analyst at NIKoil brokerage.