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. Last Updated: 07/27/2016

Samaraenergo: Playing by Free Market Rules




SAMARA, Central Russia -- When regional power provider Samaraenergo gave Siberian Aluminum Group a 50 percent discount in February, the deal was seen as an attempt by Anatoly Chubais - head of national energy grid operator Unified Energy Systems - to help counter tycoon Boris Berezovsky's attempt to grab some 60 percent of the country's aluminum industry.


Berezovsky had just helped the Kremlin engineer a surprise victory in State Duma elections; and his media empire had been busy praising acting President Vladimir Putin - heir apparent to President Boris Yeltsin - in the run-up to March presidential elections.


Berezovsky and his allies - acting through the financial-industrial group LogoVAZ that the tycoon founded and oil major Sibneft, which Berezovsky reportedly controls with Roman Abramovich - suddenly moved in to the aluminum business in a big way on Feb. 11, announcing they were buying the giant aluminum smelters at Krasnoyarsk, Bratsk and Novokuznetsk from the fading Trans World Group, a British-based metals trading conglomerate.


At the time, Berezovsky's gambit struck a major blow to rival oligarch Oleg Deripaska, head of Siberian Aluminum - previously the country's largest aluminum producer - and his ally Chubais. Samaraenergo's price cut was seen by many analysts as a way to help Deripaska gain a competitive advantage, allowing the company to increase output by as much as 40 percent, since electricity bills make up 15 percent of overall aluminum production costs.


However, while the above account sounds plausible - and dovetails neatly with the general perception of the mixture between business and politics in this country - it is simply not true, says Samaraenergo chief Vladimir Avetisyan.


"Chubais was very surprised when journalists in the know asked him about [the discount deal] during a news conference," Avetisyan said in an interview. "The discount had nothing to do with Chubais and nothing to do with politics."


Rather, said Avetisyan - a long-term ally of Deripaska in his own right - the deal to cut rates to Siberian Aluminum was a regular business transaction. The deal called for the aluminum company to purchase and restructure Samaraenergo's debts to gas company Gazprom over a period of 18 months. Samaraenergo has not disclosed the sum, but Interfax put the company's debts to the gas provider at 1.79 billion rubles ($279 million). "The deal meant 100 percent profit for us," Avetisyan said.


His claim would seem to check out, if only because Samaraenergo has shown a very businesslike insistence that the aluminum holding keep up its end of the bargain. This month, Samaraenergo ended its discount and threatened to cut all power supplies to Siberian Aluminum by June because the company has failed to carry out its obligations.


The news not only shows that the company is serious about playing by market rules, but attests to the ability of regional industrial groups - such as the one of which Samaraenergo is a part - to form their own power bases; ones that owe little to the Moscow infighting that dominates most observers' view of the nation. Avetisyan is also director of regional gas company Volgapromgaz, and is closely connected to local financial powerhouse Gazbank, which is run by Alexei Titov, son of former Governor Konstantin Titov, widely billed to win re-election in a landslide when voters go to the polls in elections set for July 2.


Restructuring Plans


Sitting in his super high-tech, tightly guarded chrome-and-leather Volgapromgaz office, Avetisyan speaks in a way that is more reminiscent of that liberal "bible," The Economist, than of a classic company director from the nation's rusty and often red heartland. Lauding President Vladimir Putin's decision to appoint reputedly radically liberal Andrei Illarianov as an economics adviser, Avetisyan has little but scorn for the old-guard bureaucrats who want to continue the energy sector's politically expedient policy of subsidies and absurdly low, profit-crippling power rates.


"The market is the only way out," Avetisyan said of Samara's economic problems.


It is no mistake, then, that the Volgapromgaz chief was tapped as Samaraenergo director last year. His appointment was part of moves by UES to push forward attempts to run Samaraenergo and several other regional power suppliers as for-profit companies, rather than cogs in the intricate, command-economy web left over from the Soviet era.


Last year, UES announced its intention to create subsidiaries in which investors would be able to buy shares. Samaraenergo was among the regional power companies selected for the restructuring program under a plan advocated by the World Bank.


Avetisyan said Samaraenergo will map out its restructuring plans by June 1. The process is expected to take at least one year and involve the setting up of a wholly owned subsidiary. Further plans involve the creation of either a unified company or a number of separate enterprises running each of Samaraenergo's eight electricity-generating stations.


The latter sale of shares is expected to bring in strategic investors and facilitate the formation of joint distribution companies with local enterprises such as automaker AvtoVAZ, oil company Yukos and Siberian Aluminum.


The chief goal is to raise funds to invest in physical infrastructure. "Energy companies don't have money for investment in rebuilding and maintenance," Avetisyan said.


The main problem, Avetisyan said, is opposition to these liberal policies from the energy sector's old cadres. "People are either completely for or against it," he said. "People who think along the old lines say someone will come into the government and wave a magic wand. But we tried that over the last 10 years with no success."


The Bottom Line


Avetisyan said that low energy charges also create a massive burden on the sector. "The tariff policy is fatal," he said. "Prices don't reflect expenses."


The average consumer pays about 1 cent per kilowatt hour, an eighth of U.S. rates. Samaraenergo has taken the initiative by pushing for hikes. It recently succeeded in raising tariffs to 1.2 cents per kilowatt hour, just getting in under the wire before an informal, Kremlin-mandated pre-election price freeze.


Samaraenergo has also followed a strict policy of making their customers pay, a policy that drew warm praise from Marina Oganesyan, a power analyst at Aton brokerage. "That's exactly what's needed," said Oganesyan. "Companies won't pay until someone bangs a fist and demands payment."


Avetisyan said Samaraenergo has already cut supplies to companies, including Siberian Aluminum, which has outstanding debts of 16.87 million rubles (just under $600,000), according to Samaraenergo. However, the aluminum producer, which recently joined forces with Berezovsky's aluminum holdings, has denied the claim in a statement to Platt's Commodity News.


Samaraenergo is also rare for having used the regional courts to press some of its claims. The company initiated bankruptcy lawsuits against Kuznetsov Research Complex and Strommashina, among others, AK&M News financial news agency reported.


The policy has achieved results. Industrial customers have paid Samaraenergo 95 percent of the amount they owe this year, Oganesyan said. Moreover, the company said 70 percent of that amount has been in cash, well above the average of 58 percent for power companies across the country.


And the results can be seen in Samaraenergo's bottom line. The company's pre-tax profits soared 260 percent in ruble terms last year to 610 million rubles ($22 million), from 170 million rubles in 1998 (worth $17 million according to the average ruble rate for that year). Production in the first quarter of this year rose 2 percent year-on-year, although the company plans to reduce output this year by 14 percent from 1999 to a total of 12.67 kilowatt hours, Interfax reported.


This good news means Samaraenergo has paid all of its bills to gas monopoly Gazprom this year - and 40 percent of that amount in cash. As a result, the company enjoys good relations with the gas company and was not affected by a standoff this spring between Gazprom and UES over nonpayments.


The decision to give - and withdraw - discounts to Siberian Aluminum testifies to Avetisyan's ability to act independently from central mandates.


"Avetisyan is very influential as a director and an authority in the region," Oganesyan said. Despite the obvious benefit to the local elite, that is also key for helping move toward market liberalization. For one, Avetisyan can use his additional role as head of Volgapromgaz to force chemical companies connected to the gas provider to pay their electricity bills.