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. Last Updated: 07/27/2016

Mosenergo Warns of Power Politics

The final bill in the fiercely fought legislative package that will transform the electricity sector cleared the upper house of parliament Wednesday while industry watchers were across town getting the first detailed glimpse of the future -- and they didn't like what they saw.

Mosenergo, the city's power monopoly and the crown jewel in the empire of Unified Energy Systems, warned its minority shareholders that a political deal struck between Mayor Yury Luzhkov and UES CEO Anatoly Chubais is hampering the utility's restructuring and jeopardizing their money.

"The process of restructuring is highly politicized and fraught with risks," Dmitry Vasilyev, Mosenergo's deputy general director and the former head of Russia's stock market watchdog, told shareholders and market analysts at a meeting organized by the Association for the Protection of Investors Rights, which he founded.

"The problem is to find a maximum compromise between different shareholders [and] this will be hard," he said.

Ahead of the crucial second reading of the bills needed to break up UES, Luzhkov vowed to use his Fatherland-All Russia faction in the State Duma to vote them down unless City Hall got control of the transmission companies that will be created during Mosenergo's own restructuring.

In a last-minute deal brokered by the Kremlin, Chubais promised Luzhkov that the city, which owns less than 3 percent of Mosenergo, would eventually get control over electricity and heat transmission assets.

Vasilyev said Wednesday that the deal, which he said he has never seen but "exists on paper," would be honored.

At the end of Mosenergo's restructuring, which is expected to take up to three years, City Hall will get no more than 30 percent of transmission assets. To get a controlling 51 percent the city would either have to buy shares in an additional share issue or trade plots of land, he said.

The Association for the Protection of Investors Rights plans to challenge the agreement, but first it wants to get a copy of it.

"Under current legislation such an agreement cannot be legitimate," said the head of the association, Sergei Generalov.

Perhaps more worrying is Chubais' new so-called 5+5 plan, which details how UES wants to distribute its assets -- the major worry of minority shareholders, who fear Chubais will repeat his loans-for-shares privatization scheme of the mid-1990s and sell prized assets for a song to a chosen few, instead of distributing them to shareholders pro rata.

UES refuses to disclose the details of 5+5 or even comment on the plan at all, but parts of it were leaked to Vedomosti this week and Vasilyev publicly confirmed for the first time that it involves sell-offs. "The 5+5 plan envisages asset sell-offs, and Mosenergo is not excluded," he said. He did not elaborate.

Vasilyev said he would insist that UES, which owns 51 percent of Mosenergo, keep direct ownership in the company or companies that will be formed from Mosenergo's most valuable assets -- power generation.

"This would reduce the risk of UES's stake being sold to oligarchs," he said.

Mosenergo's financial position has been deteriorating steadily. Its net profit fell last year from 2 billion rubles in 2001, to 646 million, about half that of much-smaller Lenenergo in the St. Petersburg region, and posting a profit at all this year "will be tough," Vasilyev said.

The company's assets are estimated at $3.2 billion, while its market capitalization is $1.5 billion.

Vasilyev said most of the $300 million the company expects to spend on restructuring over the next three years will go to registering its property with City Hall. The company found in a recent inventory that it owns but does not have legal title to some 30,000 pieces of property in the city worth up to $50 million. The company is negotiating with the city to pay a lump sum to register all of its properties, but so far City Hall has the upper hand.

If the property isn't registered, the company cannot be restructured, and if restructuring isn't completed by Jan. 1, 2005, minority shareholders will have no say in the company's overhaul. According to the sector reform bills, which still need President Vladimir Putin's signature to come into effect, all decisions regarding restructuring at any company in the industry will require only a simple majority, which in most cases means UES management will be able to do what it wants.

"After Jan.1, 2005, a different game will start with different characters -- UES management and the oligarchs," Vasilyev said.