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. Last Updated: 07/27/2016

Chubais Offers Sales Advice, Not Dividends

Itar-TassVoloshin, left, and Chubais attending a UES shareholders meeting Tuesday in Zelenograd, in the Moscow region.
ZELENOGRAD, Moscow Region -- In what has become an annual face-off, Unified Energy System head Anatoly Chubais was confronted Tuesday by those same people he turned into shareholders in the 1990s.

Chubais, who was the architect of the voucher system that transferred thousands of state-owned companies into private hands, was accused of greed after the state electricity utility failed this year to pay out dividends for the first time in its history.

The exchange, which took place at the annual shareholders' meeting, highlighted the complex and ongoing struggle for shareholders' rights -- still a nascent concept in the Russian business world.

Although UES' net income amounted to 745 billion rubles ($29 billion) in 2006, most of it came from the growing market value of its holdings, and only 40 billion rubles from actual cash flows, according to the company's annual report.

Sergei Dubinin, UES' chief financial officer, told the roughly 120 shareholders assembled that paying dividends, therefore, would have emptied the company's coffers and "almost completely undermined our investment program."

Due to be broken up into smaller units next July, UES is following an investment program to at least lay the ground for the installation of some 40 gigawatts of new capacity by 2012 -- equivalent to the output of 15 regular power stations -- in order to meet the country's growing demand for energy.

The crowd seemed unmoved by these goals, however. "This is a scam," one woman shouted at Chubais.

Most of the shareholders in attendance received their shares in exchange for privatization vouchers after the fall of the Soviet Union, and had no other experience as investors. This lack of awareness has prevented many from selling their shares and cashing in on the stock's growth. Most have been content to simply collect the dividends deposited annually into their bank accounts.

But the company's record regarding dividend payments has been poor since the financial crisis of 1998, when the total dividends paid out remained practically the same as the year before in nominal ruble terms, but the value of the ruble itself plummeted to less than a quarter of its earlier value. Although the nominal value of dividend payments had been gradually rebounding, it still reached just 5.7 kopeks, or a fraction of a penny, per share in 2006.

This year, the board of directors decided to pay no dividends at all.

After one woman stood up and shouted that she counts on the dividends, and did not have enough money to buy sandwiches, Chubais invited her backstage. After their discussion, the woman, who refused to give her name, explained that he had told her he would arrange it so that she could cash the shares in immediately.

As the shares have seen a fivefold growth in value since January 2005, selling might not be a bad idea.

"Sell my shares," answered Galina Tubol. "Who will buy them?"

Tubol said she owns about 40,000 rubles worth of shares, which she received in exchange for two privatization vouchers in 1995. But the suggestion that she could sell them through a broker brought little solace.

"I'm a pensioner, I don't know how these things are done," she said. "They promised us the dividends, and that's all I know."

Tubol was even more concerned about how her income would be affected by changes in the company's structure.

"At least at this meeting we still have the redhead and we can grab him and shake him for some money," she said, referring to Chubais. "But when UES is broken up, there will be 20 Chubaises scattered about the country ... What will we do then?"

In a year's time, when UES assets are spun off into independent companies, Tubol and thousands of individual shareholders like her will receive pro-rata stakes in each of the new entities. Private investors own 3 percent of UES, a stake worth almost $1.5 billion.

After the annual report was delivered, three shareholders were invited to the podium from the crowd, which was made up mostly of pensioners and at first had the atmosphere of bingo night in a crumbling Soviet-era hall.

The first to speak was Vladimir Luchayev, an elderly man with Coke-bottle glasses who denounced the reforms outright. "To hand over to the country's electricity assets to the private sector is ruinous," he said.

He raised the example of the California energy crisis of 2000 and 2001, in which power stations and grids were all privatized. The new owners -- including now-infamous Enron -- used their dominance of the market to limit supply in order to raise prices, ultimately causing the rolling blackouts that brought the state's economy to a halt.

"It is very possible that we could suffer this fate, too," Luchayev said.

During the speech, Chubais often smiled and joked with board Chairman Alexander Voloshin, or put his face in his hands and wearily rubbed his eyes.

Luchayev also complained that UES profits had been calculated according to Russian, not international accounting standards.

"We don't really know how much they made," he said.

But as with most others in the hall, his biggest gripe was over dividends.

"I challenge you, Mr. Chubais and Mr. Voloshin, to turn such profits next year and pay such dividends that no one will label them small," Luchayev said.

Voloshin switched on his microphone to interject: "Money isn't everything. Health is more precious."

The challenge to increase profitability is a tall order since its revenues are determined by state-set electricity prices. The government has agreed to a gradual rise in prices, which are not scheduled to reach market levels until 2012.

Even given the price restraints, Chubais defended the company's performance.

"You accuse us of pathological greed, and say we have given you nothing," he said in answer to Luchayev. "But the value of your own shares has grown from $2,000 to almost $11,000 in the years we've been meeting. ... Name me one other company that can say it has delivered that."

n At the meeting, UES announced its new 15-member board of directors, the last before the utility ceases to exist.

As was widely expected, the government consolidated its position to better control the final phase of the reforms, voting in Andrei Sharonov, deputy minister of economic development of trade.

One Gazprom-friendly board member, Gregory Beryozkin, who heads ESN group, lost his seat, while another, Vladimir Rashevsky, general director of the Siberian Coal and Energy Company, won a seat. Andrei Akimov, head of Gazprombank, ran for the position but failed to secure enough votes.