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Gazprom vs. Liberalization in Russia

The announcement this weekend that Gazprom will be taking over majority stakes in two critical power generation entities of UES as part of an asset swap marks a disturbing setback in the reform plans to liberalize the sector. Following these acquisitions, Gazprom will become the largest owner of power generation assets in Russia, putting them in an influential position to control pricing, management and investment in the grid.

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According to coverage in the Moscow Times, this move is not getting a warm welcome from all parties:

Alexander Branis, a member of the UES strategy and reform committee, said in an e-mailed response to questions that he hoped there would still be room for Western investors in the power sector. “We don’t like acquisitions by Gazprom, as Gazprom is a very inefficient and corrupt company,” Branis said in his response. … Ahead of the UES board meeting, Renaissance Capital on Wednesday attacked the proposed stake swaps, saying they were “not market-friendly,” and “operate to the disadvantage of other UES minority shareholders.” “The message possibly to be gleaned from Friday’s UES board meeting is not whether power sector reform is beginning to lose its market credentials … but how seriously,” the bank said in a note to investors.

It is difficult to overstate the negative impact that Gazprom’s enlarged role in electricity will have on Russia’s energy security, and the enormous burden this will put on the public. For one, UES desperately needed to sell those shares in OGK-2 and OGK-6 to raise funds of $120 billion to modernize infrastructure and improve efficiency (with Gazprom’s asset swamp, UES won’t take in a ruble), two, Gazprom has shown little interest in making these similar kinds of investments in the gas sector, and lastly, this increased presence in electricity will allow for the abuse of state subsidy, as the energy behemoth finds itself in a situation of selling natural gas to its own combine-cycle plants, while at the same time they could decide one day that they no longer feel obligated to pay for electricity at all their plants. This asset swap is the latest exchange in a long-running struggle between the controversial head of UES Anatoly Chubais and Dmitri Medvedev of Gazprom – a dispute which reaches the highest levels of political intrigue in Russia. Chubais has reportedly been making aggressive moves to keep UES in control of the power sector and maintain the state-ordered cheap gas rates to the generation facilities. Gazprom, on its behalf, has made no secret about its desire to gain controlling interests across all energy sectors. But the president and other parties may be willing to support Chubais’s initiative if only to maintain a balance of powers. This new foray by Gazprom shows once again that Europe and Russia are headed in diametrically opposed directions in regards to regulation of the energy sector. In contrast, just today in Europe the antitrust authorities opened an inquiry into E.ON and Gaz de France for market coordination – not to mention Neelie Kroes’s ongoing concerns over the “unbundling” of production and distribution companies. While these efforts are aimed at improving competition and efficiency and preventing abuse by monopolies, the Russian authorities actually seem to prefer to punish competition and market forces with a Stakhanovite level of zeal, and force the installation of politically convenient monopolies. Example? Look no further than today’s news that Russneft CEO Mikhail Gutseriyev is being forced to step down and sell his massive oil company to Oleg Deripaska. All of these events taken together, combined with the rapid swelling of the state corporatist (or “command”) economy in Russia, and we can see that the abusive methodology first used to destroy Yukos has become an expertly franchised modus operandi of the Kremlin. Once the bureaucrats got their first taste of energy rents, gluttony soon followed.