#8 - JRL 6586
Moscow Times
December 4, 2002
Oligarchs on the Charge
By Yulia Latynina

The State Duma vote on reforming Unified Energy Systems won't take place until Dec. 18, but the favorable outcome of the vote is already known. Russia's two most aggressive industrial groups -- Russian Aluminum and MDM -- are suspected of buying up shares in UES and its subsidiaries. According to various estimates, their total investment to date could top $600 million.

Some analysts reason that Russian Aluminum and MDM began buying up the undervalued stock in advance of UES restructuring with an eye to selling the stock at a profit afterward. These analysts have clearly confused RusAl's Oleg Deripaska with George Soros, and UES with the pound sterling. Russian oligarchs don't play the stock market; they control industrial empires.

UES shares are clearly undervalued, of course, and buying them up is the most cost-effective way to participate in the privatization of the company. The restructuring of UES will probably entail converting shares in UES proper into shares in generating companies. In other words, your 5 percent stake in UES after restructuring will be translated into control of a group of power plants.

MDM and RusAl both have a fundamental interest in electricity. MDM is busy building up the Siberian Coal Energy Company Baikal-Ugol, or SUEK, the nation's top coal producer. It's clear that coal reserves are just half of SUEK's assets. The other half consists of the power plants that will burn the coal. Why buy up coal in the Far East? Because there's no natural gas there, and there never will be.

RusAl's interest is just as clear-cut: The production of aluminum consumes enormous amounts of electricity. Deripaska has tried on more than one occasion to reach a mutually beneficial arrangement with Anatoly Chubais, but his strategic initiatives have come to nothing because of their common need to pick the other guy's pocket. As both parties are extremely skilful pickpockets, they have repeatedly walked away from the negotiating table with hurt feelings -- and the other guy's wallet.

What's happening with UES today is basically no different from what happened in the petroleum and metals sectors about seven years ago.

The first foreign shareholders in UES were investment funds, just as happened in the case of Russia's newly privatized metals industry. The funds bought up a small share in UES in the hope that Russia would one day become a normal country and UES a normal company, and that the stock price would go through the roof.

Naive investors in UES were subjected to a Saint Bartholomew's Day-style massacre followed by restructuring. Foreign investors figured out too late that the word restrukturizatsiya is best translated into English as "getting completely shafted." They panicked and began dumping their stock.

Now UES has found a normal investor, in the sense that a normal Russian investor, as cynical as this might sound, doesn't give a damn about the stock market. He has no need for 1 or 2 percent. He needs a controlling stake in a vertically integrated company. He has no use for shareholders or dividends, but he does require intelligently pilfered financial flows, real investments and excellent management.

Western investment funds are pulling out of UES. Russian oligarchs are taking their place.

Professional minority shareholders like Bill Browder and Alexander Branis have long accused Chubais of all the deadly sins, the seven canonical ones plus an eighth -- violating shareholders' rights. Branis' efforts have earned him a good reputation and contributed to the devaluation of UES stock.

I'd give a lot to see how Branis defends minority investors' rights after the stock conversion -- in a coal and power company owned by MDM. It would be a lot like watching a squirrel defend his rights to his share of a bear's lair. And it would make clear to foreign investors that they can run into things a lot more scarey than Chubais.

Yulia Latynina is author and host of "Yest Mneniye," on TVS.