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. Last Updated: 07/27/2016

Loans for Shares, This Time With UES?

Is former privatization tsar Anatoly Chubais doing it again?

Is he orchestrating, like he did in the loans-for-shares scandal in 1995 and 1996, the looting of highly coveted assets for the benefit of a handful of powerful industrial groups at the expense of the government -- and this time 500,000 Unified Energy Systems shareholders as well?

The evidence suggests that the answer is yes, and a growing number of critics are calling for the electricity monopoly chief to be reined in.

One need only look at the numbers, President Vladimir Putin's top economic adviser, Andrei Illarionov, told the World Economic Forum's European summit in Salzburg, Austria, this week.

Since last summer, when Prime Minister Mikhail Kasyanov signed a largely Chubais-inspired government decree on reforming 52 percent state-owned UES, "the government has lost close to $4 billion in assets [due to] complete mismanagement," he said. "The developments show that I was right and Chubais was wrong."

Indeed, increasing anxiety over Chubais' handling of the company have dragged down the power grid's share price 60 percent since the start of the year, erasing nearly $2 billion in market capitalization. UES shares lost 5 percent of their value Wednesday and another 3 percent Thursday to close at a 52-week low of 76 cents.

Compounding the panic is Chubais' reluctance to assuage investors' fears. He has made few public remarks about the share plunge and reportedly doesn't plan to do so until the issue is addressed by the UES board of directors at its monthly meeting Sept. 27.

In the meantime, Illarionov and others are turning up the heat. At an investment forum in Irkutsk on Thursday, Illarionov called for Chubais to quit.

"In any other country, the management of a company that proved itself similarly inefficient would resign the day after results were tallied," he was quoted by news agencies as saying. The way UES is being run is a "disgrace for the country. ... It is a great misfortune and a threat to national interests."

Illarionov's sentiments are echoed in a new research paper by Hermitage Capital Management, which is thought to control between 1 percent and 2 percent of UES.

In its report, which was issued this week, Hermitage urged the government to freeze the reform process immediately to keep Chubais from inflicting more damage on the nation's economy.

Hermitage accused Chubais of circumventing government resolutions and pursuing a personal agenda that is reckless and costly to all shareholders but beneficial to insiders and major financial industrial groups like Russian Aluminum and Yukos.

The author of the report, Hermitage CEO Bill Browder, noted that Chubais has already proposed several deals to UES's board that would let major industrial groups snap up electricity assets for a fraction of their worth, indicating the former deputy prime minister has no intention of following the government restructuring plan.

"So, our estimate is that if he carries on doing this, he is going to force the government and shareholders to give away assets at an 86 percent to 99 percent discount to comparable Western companies," Browder said. "That could work out to a future loss to shareholders in the tens of billions of dollars."

If the numbers seem high, just look at Chubais's track record in the loans-for-shares scheme -- he orchestrated a plan through which the government sold assets that are now worth more than $25 billion for just $1.2 billion, Browder said.



And now he is doing it again, he said.

In the past few months, Chubais proposed a number of preliminary agreements with strategic investors who have blocking stakes in UES subsidiaries, known as energos. The agreements effectively structure the planned sale of the energos' assets in a way that makes the current strategic shareholder the most likely winner, while UES, in exchange, receives support for its restructuring plan for the particular energo. Strategic investors have already accumulated blocking stakes in 16 energos, according to Vedomosti.

Under the title "Chubais' Mission: Giving Assets Away," Hermitage identifies various ways major assets will be stripped -- in violation of a government decree -- if the agreements go ahead:

• The Boguchansk power station could be lost to Russian Aluminum through a "loans-for-shares scheme" by which RusAl lends the station $10 million in exchange for a chance to take over a huge plant in which UES has invested more than $1 billion.

• The prized assets of Kuzbassenergo, under a "secret agreement" with investment bank Renaissance Capital, will be sold through "a fake tender," whereby the favorite buyer will have at least 50 percent control over the process and be given the exclusive right to match the best bid and win.

• Tomskenergo's best assets will be spun-off and sold to Yukos.

• A "management company" will be appointed to allow for "greater flexibility in the disposal of generating assets" and be given the option to purchase up to 50 percent of these assets.

Hermitage concluded that Chubais isn't worried about the company's depressed share price because "meager valuations only help him sell assets cheaper."

"Similar types of problems existed in the other countries like America and Brazil. For example, when AT&T was broken up, they didn't let the CEO sell Bell South to some of the good-ole-boys down in Atlanta," said Browder. "Selling assets makes no sense for UES, no sense for the government, no sense for the 500,000 shareholders and most importantly no sense for the citizens of Russia."

"Only in Russia can a hired manager like Chubais be allowed to direct reforms of such importance," said Viktor Kudryavy, vice president of the Russian Union of Producers and a former deputy energy minister and UES board member.

UES board member Andrei Trapeznikov said it's not easy to deal with shareholders who have blocking stakes and are pursuing their own interests. He said that after Chubais presented the board with the proposals, minority shareholders were outraged.

"There was only one way out -- to make minority shareholders in UES and the energos sit down and negotiate among themselves," he said.

UES's restructuring committee is working on developing principles of cooperation with regional energo minority shareholders, Trapeznikov said.

Despite increasing pressure, however, Trapeznikov defended the performance of UES's management, although he admits that some mistakes have been made.

"We admit that management has made some miscalculations in dealing with minority shareholders," said Trapeznikov. "That's why we got independent consultants [Alfa Bank and Merrill Lynch] and now meet with them regularly."

Trapeznikov also said that UES's technical and financial operations were sound and dismissed Illarionov for being "incompetent on the subject."

Another factor contributing to the uncertainty surrounding the world's largest electricity system is the raft of reform bills lawmakers must pass to move restructuring forward.

The government's plan is to liberalize the market by 2004 and attract strategic investors. To do this, UES is to restructure all of its subsidiaries, including 72 regional energos and more than 30 wholesale power plants.

Under the current plan, UES will eventually be broken up into 10 wholesale generation companies and a holding company to manage stakes in the regional generation and distribution companies that are to emerge from the transformation of regional energos. Additionally, new companies -- such as the Federal Grid Co. and the System Operator -- have been created to take over some of UES's functions.

And at the end of it all, according to government decree, current UES shareholders are supposed to receive stakes in all the new companies on a pro-rata basis.

The Duma rejected the first draft of the bills -- authored by Chubais and submitted by the government at the end of the spring session -- and demanded hundreds of changes.

"When deputies heard that the bills were written by Chubais, they immediately started pulling out their hair," said Yury Lipatov, deputy chairman of the Duma's energy committee.

Since then, a conciliation commission comprised of government representatives, deputies and senators has hammered out a compromise version, but the issue still looks set to be one of the most hotly debated in parliament in the coming weeks and months.

Lipatov said the revised bills are much improved and now have a good chance of being passed in the first reading, which will likely be in the first half of October.

The government's pointman on the project, Deputy Economic Development and Trade Minister Andrei Sharonov, said this week that the government had to agree to "serious changes" to get the bills back in the Duma.

For example, he said the Federation Council got what it wanted most, which was saving the regulatory role of the regions, despite government insistence that all regulatory functions be concentrated at the federal level.

And Duma deputies, he said, won concessions on letting vertically integrated companies operate during the transitional period of reform.

Sharonov said that most of the debate on the 370 amendments to the original bills will take place after the first reading, which he expected deputies to pass without much fuss.

Others, however, are less optimistic.

Valery Rezansky, deputy head of the Fatherland-All Russia faction, which the government needs on its side to have a majority in the Duma, said that even after all the compromises achieved by the conciliation commission, too many negative or unclear elements remain.

"We have not received an answer regarding how it will work to have regional energy commissions depend less on governors and more on the federal center," Rezansky said.

He said his faction is demanding that tariffs for electricity use by individuals be controlled by the federal government. If not, he said, electricity bills would jump sixfold. Fatherland-All Russia also wants tariffs to be set one year in advance to give businesses a chance to plan, he said.

Oleg Morozov, the leader of the coordination council of four centrist parties -- Unity, Fatherland-All Russia, People's Deputy and Russia's Regions -- said Tuesday that these and other unresolved issues mean that there is less than a 50 percent chance of the bills passing in the first reading.

"The government is proposing jumping out of the frying pan and into the fire," said Anatoly Kuzovkin of the Industry, Science and Technology Ministry's Institute of Macroeconomics.

"The government is proposing destroying the regional energy system, but in reality when Sharonov or Chubais are asked who will be obliged to provide the electricity on some definite territory -- they don't know," Kuzovkin said. "As a result of this kind of reform, GDP growth will end."

"There hasn't even been an analysis conducted of the social and economic consequences of the reform," said Russia Regions Deputy Yaroslav Shvyryayev, who has authored alternative bills on UES reform. He said he understands the utility's actions, which he said are based on its own corporate interests.

"But I can't understand the position of our own government."

Neither, apparently, does the government itself.

At a roundtable Monday attended by supporters and opponents of the government's UES plan, Sharonov got up and left before question time, leaving his colleague, Vyacheslav Kravchenko, to deal with dozens of irate scientists, experts and deputies.

Kravchenko, head of the Economic Development and Trade Ministry's department of restructuring natural monopolies, failed to answer scores of questions and stormed out in the middle of a heated debate.

Even the Moscow City Duma has jumped into the fray, voting Wednesday to officially appeal to the president, prime minster and Federation Council to halt UES reform.

The plan "will inevitably lead to muddle, anarchy and a loss of the responsibility for stable energy supplies," the appeal said, adding that reform should be delayed until 2004 to carry out an additional study on its impact with the participation of "subjects of the federation and foreign and domestic experts."

The City Duma also insisted that UES "transfer" a controlling stake in Mosenergo to Moscow.

In the past week, several major brokerages have downgraded UES shares over fears of continued asset-stripping.

The most aggressive was National Reserve Bank, which owns 4.5 percent of UES and was quoted Thursday as saying that the uncertainty surrounding the company could cause its share price "to fall between four and eight times in the coming months."