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. Last Updated: 07/27/2016

UES Defends Its Plan at Kremlin Meeting

Unified Energy Systems met with a top Kremlin official Wednesday to defend its revised sell-off plan, a day after CEO Anatoly Chubais reached a key deal with Gazprom to ensure gas supplies for the utility.

Although Wednesday's meeting between Kremlin chief of staff Sergei Sobyanin and UES officials was not likely to force a change in UES policy, it did shed some light on the tangle of political alliances involved in drawing up the long-awaited electricity reforms.

Since 2003, UES has been pursuing a plan to break up its own monopoly and introduce competition into the sector, which needs an estimated $120 billion of upgrades to avoid a supply crunch amid a rapid growth in demand.

Under the new plan adopted by the UES board last week, stakes in power generation assets will no longer be sold directly to investors but will be transferred for an "interim phase" to two state-owned companies, the Federal Grid Company and the hydropower producer Hydro-OGK, which will then be in charge of selling off these assets to fund their own development.

The proposal gained widespread support from investment banks, which said the plan was good for UES minority shareholders.

UES board member David Herne said UES had explicit support from the Kremlin when altering the reform plan.

The state owns 52 percent of UES, so about half of the board members represent various government interests.

"The government representatives voted 'yes,' which means that the directive said to vote 'yes,'" Herne said. He added that the directive was sometimes signed sometimes by First Deputy Prime Minister Dmitry Medvedev and sometimes by Economic Development and Trade Minister German Gref.

Gref reassured investors Tuesday that no fundamental changes would be made to the new plan.

Herne said there could have been "someone in the Kremlin who was upset that no one came and talked to him."

"Government cancellation of the reform is a risk that has always been there, and it remains," Herne said. "But it has always been unlikely, and it remains unlikely."

Alexander Branis, another UES board member and head of Prosperity Capital Management, said: "I don't expect any serious points of contention with the Kremlin."

The main opponent of the new UES reform plan was Gazprom, which owns a 10.5 percent stake in UES and is represented on the board by two votes -- those of Gregory Beryozkin, president of close Gazprom ally ESN Group, a possible bidder for Yukos assets, and Kirill Seleznyov, head of Mezhregiongaz, Gazprom's transport arm. Both men voted against UES' proposal last week.

Chubais and Gazprom CEO Alexei Miller signed a broad cooperation plan Tuesday on reforms and providing fuel supplies to the power sector.

This year another Gazprom ally, Vladimir Rashevsky, head of the Siberian Coal and Energy Company, or SUEK, is expected to join the UES board. SUEK and Gazprom announced last month that they were pooling their power generating assets, forming the sector's biggest holding company by far. The Federal Anti-Monopoly Service has said it may block the deal if it poses a threat to competition.

Analysts said the apparent state infighting over the new plan would not sit well with investors.

If the Kremlin forces UES to amend or repeal the decision of its board, "it will increase political risk assessments," said Alexei Solovyov, electricity analyst at Metropol.

Solovyov pointed out a contradiction in the state's approach to the reforms.

With the elections approaching, the Kremlin is intent to show that when it comes to strategic assets like electricity, "there will be no weakness," he said.

Yet "a delay of the reform could raise the risk of the power plants breaking down next winter, and a breakdown right before the elections would be terrible for public opinion," Solovyov said.

Spokespeople from UES and the Kremlin declined to comment.