Graham Stack in Moscow -

On July 1, Russia's electricity sectoral holding RAO UES will cease to exist, replaced by a host of privatised power generation companies and state-owned grid operators - thanks to the efforts of 'the great privatisator' CEO Anatoly Chubais. Although the unbundling and privatization of RAO UES has been hailed as a huge success, concerns remain - not least because Chubais will no longer be there to look after his baby.

In the RAO UES offices, the last post was sounded for the former blue chip company, and CEO Anatoly Chubais lowered the company flag. In its place, a battery of new flags was hoisted: those of the 24 successor companies: 6 wholesale generation companies, 14 territorial generation companies, the hydroelectric giant RusHydro, and assorted grid and distribution operators.

This was the culmination of a turbulent 10 years work for Anatoly Chubais. When Chubais moved from the government to UES in January 1998, his legion of enemies predicted it would be the death of the company. Ten years later, he has proved them right.

In 1998, RAO UES was in dire straits, caught at the centre of the Kafkaesque nightmare of arrears and barter payments that passed for an economy at the time. Chubais' reputation had taken a battering due to the scandals associated with privatisation, and suffered what seemed a terminal blow during the financial meltdown of August 1998. The ensuing economic rebound and the Putin presidency gave him a new lease of life as reformer - but made him no less controversial a public figure.

Flak from all sides

Chubais' reform proposals for the electricity sector attracted flak from all sides: from the Communists as a matter of principle, but also from Western analysts and investors who feared a repeat of the sweetheart privatization deals, and by fundamentalist liberals. His most committed opponents didn't stop at verbal attacks - Chubais was the target of an all-out mortar and machine-gun assassination attempt in 2005.

The protracted saga of RAO UES reform repeatedly seemed bogged down in parliamentary hearings and cabinet meetings - and yet it moved. Chubais has attributed this to direct support from President Vladimir Putin, "without whom none of this would have been possible."

The story then exploded in 2007, as the first wave of privatizations to strategic investors took place - for unexpectedly large sums and attracting major European energy concerns.

"The result of ten years of reform is a new structure based on private property and market principles," Chubais wrote in business daily Vedomosti, June 30th. "In the place of the RAO UES holding, new dynamically developing companies gave emerged - in generation and distribution, sales and service. A competitive market in electric power has been created in the country, and many billions of dollars in investment attracted giving a powerful boost to our country's economy."

"In the course of one and a half years," Chubais continued, "Russian and foreign private investors have invested almost RUB1 trillion in our power generation companies... The detailed investment plan 2008-2012 envisages RUB4.3 trillion to be invested, with 43,000MW of new capacity alone costing RUB1,798 trillion."

But, far from being dizzy with success, Chubais is aware of the considerable risks still facing the implementation of the reform.

Until only recently, one of the most serious threats to the reform came from Gazprom buying massively into power generation capacity, and looking set to dominate the market. Especially worrying were plans for Gazprom's power generation assets to merge with coal concern SUEK's, giving the joint venture a 15% share of total power generation, around 40% of fossil-fuel power generation, and almost a monopoly on supplies of gas and coal. Chubais himself referred to such plans as "the rebirth of state capitalism." Most analysts agreed with him, but viewed the development as inevitable: what Gazprom wants it gets.

Sensational

It was thus a sensation when on June 10th Gazprom recalled the deal from consideration by the Federal Anti-Monopoly Service (FAS) with woolly justification. Abstaining from the SUEK merger plan seems to show that new President Dmitry Medvedev is on the side of the liberals, and reinforces Chubais' reputation for beating apparently impossible odds - a reputation earned masterminding Yeltsin's reelection in 1996.

The most serious remaining risk, in Chubais' view, is solving the problem of cross-subsidisation of household tariffs by industrial customers, which he says totals RUB120bn per year. "Not one government resolution directed at ending this practice has been implemented over the last ten years," he complains in his article. "As a result, the structure of the retail market is inadequate. Because of artificially low rates for households, and inflated rates for industry, we had to create the institution of guaranteed supplier, which then restricts free competition... [and thus] lead to structural conflicts between distribution companies and sales companies."

The second serious risk, according to Chubais, is that of capex inflation pushing up prices. The huge capex programme in Russian power generation, has coincided with a doubling of costs for generation capacity on the global market over the last three years, and also with the current credit crisis increasing financing costs.

"All this will lead to a significant increase in the cost of investment programs, and... in the end prices charged to consumers," warns Chubais, who calls on the government to rely on the market and competition to keep prices as low as possible.

Both these factors highlighted by Chubais could lead to a sharp increase in prices for electricity at a time when inflation is already surging. Moreover, today's prime minister is a holy cow rather than a potential scapegoat, meaning that there will be political pressure to delay unpopular decisions.

Chubais nonetheless argues that price liberalisation is unlikely to be postponed. Standard and Poor's electricity analysts are less optimistic about this. "Reforms have been beset with delays and revisions that erode the nature of the ultimate plan's clarity," Elena Dubovitsjaya and Ekaterina Marushkevich warn in a report. "Tariff regulation, particularly in heat generation, remains opaque and politicised despite legal changes that were designed to create a more transparent regulatory framework. In this environment we consider power generation companies to be highly exposed to the risk of political interference, including implicit price controls."

The Standard and Poor's team, who focus on corporate governance risks, points to politically motivated decisions, inefficient government regulation and control, limited control of new owners over strategy and investment programs, and new state monopolisation in the form of Gazprom, as risks facing the new owners.

The recent departure of top management from generation companies due to generous golden parachutes has also raised questions about future managerial capacities.

Paradoxically, according to Standard and Poor's, one of the main threats to the reform results from another departure: "the liquidation of the fundamental ideologist behind the reform - RAO UES."

But RAO UES head Chubais feels his work has now been done - and says his future plans involve only "to sleep for six months."

Before going home for some well-earned kip, he left a farewell note on the RAO UES website:

"Thanks to all of you who accompanied us along the way - whatever side of the barricade you were on. We are leaving now. But the lights will stay on - because the building called the Russian power sector now has new owners."

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