Government Hopes to Boost Energy Investment with UES Restructuring - International Law Office

The government of the Russian Federation and RAO Unified Energy Systems (UES) are continuing with their efforts to restructure UES and sell off certain of its assets. UES is considered by most observers to be burdened with problems stemming from non-payment for electricity, obsolete equipment and lack of profitability. The current rash of power outages in the Russian Far East has highlighted these problems, which have been developing over several years.

Last year, several plans for restructuring and reforming UES were drafted. However, due to an inability among shareholders, management and authorities to agree on the strategic goals of restructuring, none of these plans were approved by the government. Moreover, a draft plan developed by UES management, which was presented to the government and UES shareholders, was heavily criticized, because it was perceived to "strip the most valuable assets of UES" and to deprive shareholders of control over the company. In fact, many opponents of energy reform in Russia insist that reform should not take place at all, as it could potentially jeopardize the already weak Russian energy sector.

The business community would welcome news of any progress in this important area. Therefore, it was with great interest that investors anticipated a meeting of a special working group held by the government on December 15 2000. Participants included Anatoly Chubais, chief executive officer of UES, Andrey Illarionov (economics adviser to President Putin), and former Prime Minister Viktor Chernomyrdin.

The results of that meeting, as detailed in the Minutes of Meeting 42 of the Russian Federation Government, represent the latest official effort with respect to restructuring UES. The minutes reiterate that the restructuring should take place, and that the power and energy sectors require private investment. Among other concepts, the government reconfirmed its intentions to:

• create a regulatory framework for restructuring UES;
  
  
• liquidate gradually the system of crossover subsidization of energy between regions and energy consumers;
  
  
• preserve and develop a single, unified infrastructure of electric energy, including main networks and control systems;
  
  
• create an attractive investment climate in the power sector, in order to modernize and reconstruct the sector, including replacing generating capabilities; and
  
  
• develop an efficient mechanism of cost-saving in energy generation, transformation and distribution, and improve the financial statements of entities in the energy sector.

At the same time, in connection with these concepts, the government made the following resolutions:

• The Ministry of Economic Development, the Ministry of Energy and the Ministry of Nuclear Energy must develop and present to the government by June 1 2001 amendments to current corresponding legislation;
  
  
• An international consultant with at least two years' experience in consulting other countries on similar project finance issues will be retained to advise on the reforms;
  
  
• The Ministry of Economic Development, the Ministry of Energy and the Ministry of Nuclear Energy must develop a complete restructuring programme, taking into consideration the results of December's meeting, the participants' comments and proposals, and the comments of the international consultant;
  
  
• By December 25 2000, the Ministry of Economic Development and Trade must decide on terms for a tender to retain a project finance consultant, who should be retained in January 2001; and
  
  
• A completed draft of the restructuring programme must be presented to the government by March 1 2001.

There have been mixed results in fulfilling these resolutions. Less than one month after the meeting, the government adopted Resolution 32-R, which requested the Ministry of Economic Development and Trade to create a scope of work for the international consultant, and to provide, by February 1 2001, a tender to select this consultant. Apparently, according to a government report made public, the international consulting firm Arthur Andersen was selected. In addition, JP Morgan was contracted to consult UES on the restructuring process.

The key for the working group is to decide how to carry out the restructuring. Obviously, western investors would prefer a system that would allow for the acquisition of the most valuable and profitable assets and operations of UES, as well as protection against potentially adverse changes in Russia.

In this regard, news in February that, during a meeting to discuss the restructuring plan, Chubais and Illarionov clashed over the basic tenets behind the plan was distressing for many observers. Chubais maintained that an agreement was reached on the need for large-scale investment, while Illarionov countered that such a consensus had not been reached. He stated that the working group would consider plans for restructuring based on the recommendations of the Ministry of Economic Development and Trade, UES itself, the Ministry of Energy, the Ministry of Nuclear Power, the National Investment Council, the Academy of Science, Russian Aluminum, and the heads of the National Reserve Bank and Prosperity Capital Management. At this point, it became clear that the restructuring programme would not be ready in time for the March 1 deadline which the government had established, and discussion began of an April 15 deadline to present the restructuring programme. Another meeting of the working group was scheduled for March, at which the group was to refine the restructuring programme ahead of this April 15 deadline.

Of course, the business community is hoping that this scheduled March meeting will be held, and that the April 15 deadline will be honoured. Chubais, in a recent meeting with the foreign business community in Russia held by the American Chamber of Commerce, said that approximately 150 people at UES are currently working on the restructuring plan, and he reaffirmed that the plan will be submitted to the government by April 15. The government is scheduled to discuss the plan on May 16. He further claimed that the "real restructuring" will begin this summer. He estimated that between $30-$60 billion must be invested in the sector in the next 10 years. Moreover, he stressed that the restructuring should involve not only generation but also distribution. However, given the magnitude of the proposed restructuring, another year may be spent on debating proposals, with implementation beginning only in 2002.

For further information on this topic please contact Laura Brank at Chadbourne & Parke by telephone (+7 095 974 2424) or by fax (+7 095 974 2425) or by e-mail (lbrank@chadbourne.com).

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