Russia: Presidential Economic Adviser Illarionov Cites Reasons for Opposing YeES Energy Reform Plan
CEP20021121000363 Moscow Vedomosti in Russian 21 Nov 02
[Interview with Russian Federation Presidential Economic Adviser Andrey Illarionov, conducted by Boris Grozovskiy: "Interview: Andrey Illarionov, Economic Adviser to President of the Russian Federation;" date and place not given--taken from html version of source provided by ISP.]
[FBIS Translated Text]
Andrey Illarionov: "This is not a scandal, but a minor provocation with distortion of the facts."
Last week, Russian Presidential Economic Advisor Andrey Illarionov returned to his "favorite" pastime. At the Harvard Investment Symposium, he criticized the reform of the electrical power industry as proposed by Chairman of the Board of RAO [Russian joint-stock company] YeES Anatoliy Chubays so severely, that Illarionov's opponents were shocked. Even quite recently, it seemed that Chubays had practically gained the upper hand. But even before the presentation at Harvard, deputies had applied the brakes to the energy draft laws. A and Illarionov, in an interview with Vedomosti, said that the fact that the reform proposed by Chubays had been approved by the government certainly does not mean that it cannot be stopped.
[Correspondent] The debate with the managers of RAO YeES at the Harvard Investment Symposium gives one the feeling of déjà vu: Even if the content of the discussion is changing, it is rather slowly. Was the fierce battle in Boston planned?
[Illarionov] Let us clarify. First of all, strictly speaking, there was no debate or discussion, of which you speak. There was a presentation by the representative of RAO YeES, and there were questions posed to him. My presentation was given the next day, and there were questions for me.
[Correspondent] That is, the scandal occurs exclusively because the RAO managers misunderstood what you wanted to say?
[Illarionov] If there is a scandal, it consists of the fact that the country has already incurred huge losses. And alas, they may be greater still in case of implementation of that variant of reform which the RAO management is trying to push through. And as for Boston, this is not a scandal, but a minor provocation with distortion of the facts. I regret to say that the comments [of deputy chairman of the board of RAO Sergey] Dubinin regarding my speech, which were disseminated by a number of mass media, do not correspond to reality. According to these comments, I supposedly "called upon foreign investors not to invest money into the Russian economy," "not to engage foreign firms working in the power industry as management companies in RAO YeES," and also compared their methods of activity with the "methods of the well-known entrepreneur Boris Berezovskiy." All these affirmations are Mr. Dubinin's fantasies. There were around 100 participants in attendance at the roundtable on investments into the Russian power industry, and they heard very well who in fact said what.
[Correspondent] What happened the next day?
[Illarionov] The next day, I gave my presentation. It was devoted to questions of investing into the Russian economy. The speech was entitled, "Where to invest?", and began as follows: "For the people who have gathered in this auditorium, the question of 'to invest or not to invest in Russia?', does not exist. For the people who have gathered in this auditorium, this question has been decided--to invest." But investments are made, as a rule, not into countries in general, but into specific projects and companies. Therefore, today another question appears on the agenda: Where specifically to invest? The presentations of a number of Russian regions and numerous Russian companies which have already been given, and the ones planned for tomorrow, convincingly demonstrate that there is somewhere to invest. However, investments into Russian companies (as into any others, for that matter) present not only great opportunities, but also certain risks.
For example, an investor who decided to invest $100,000 into the YUKOS company in March of 2000 would get $1.1 million in November of 2002--an 11-time increase in his investment. An investor who had decided to invest $100,000 into Sibneft would have received $450,000, and into Severstal--$300,000. An investor who had decided to invest not in some individual Russian company, but into the country as a whole--for example, into the RTS [Russian Trading System] index, would have received $185,000--an increase of 85 percent in dollar expression in 2.5 years. This despite the fact that, in certain other countries, the dynamics of the stock indices were somewhat different.
However, if the investor had invested $100,000 into the RAO YeES company, today he would have received only $52,000--48 percent less than his initial investment. Since, in appraising investment projects, it is the cost and effectiveness of alternative investments that is important, in comparing investments, say, into RAO YeES, it is necessary to keep in mind the alternative yield which the investor could have received if he had invested in the national index. In that case, the discount on investments into the RAO in relation to the RTS index increases to 72 percent. Finally, if we consider the fact that Russian prices on electrical energy in the dollar equivalent grew one-third faster than on the average throughout the country during this period (including also oil prices), then the discount on investments into the RAO in relation to alternative investments into the national RTS index increases to 80 percent.
[Correspondent] What are the reasons for your dissatisfaction with the work of the RAO leadership?
[Illarionov] They lie primarily in the dynamics of the company's market capitalization. In May of 1998, when the current management came to it, the company cost $13.6 billion. Today, it is worth $4.7 billion. In this same time, the RTS index (which includes the RAO YeES, among others) increased by 12 percent. In the 4.5 years of work by this team, the value of the company has dropped by two-thirds--and this despite the significant growth in [value of] the shares in the past 2 months. Thus, instead of attracting tens of billions of dollars in investments, the company's shareholders have lost $9 billion to the present day. Over half of this amount--around $5 billion--was lost by the state, the company's main shareholder. Since the national stock index had grown during that time, such a decline in capitalization cannot be written off to any country-related risks. That means the reason lies in the activity of the management.
[Correspondent] Why has the capitalization of the RAO dropped so greatly?
[Illarionov] Evidently, there are several reasons for this. They include the production and financial activity of the company, the quality of the corporate management, the attitude of the company's management toward its owners and their property, the true meaning of the proposed model of reform of the electrical power industry, and the methods used for its implementation.
First about production activity. The results of the RAO's work appear unimpressive on the background of what is going on in the Russian economy as a whole. This year, the RAO will produce around 610 billion kW/hr of electrical energy--i.e., around the same as in 1997, on the eve of the current management's arrival at the company. During that time, production of electrical energy in the country as a whole increased by 6 percent (including by 21 percent at Irkutskenergo and by 31 percent at Rosenergoatom). On the whole in the country, industrial production increased by 29 percent during that time. In many companies, it increased by tens of percentage points (in YUKOS--by 50 percent, in Vimm-Bill-Dann [Wimbledon] it doubled). On the background of significant growth of production in the country as a whole, it turned out that we in fact have one large company where production did not grow over the past 5 years, and even declined by almost 3 percent as compared to last year.
At the same time, employment increased in the RAO YeES holding (according to official reports of RAO YeES compiled in accordance with Russian standards of bookkeeping and accounting--from 662,000 in 1997 to 664,800 persons in 2001. According to international standards of financial reporting, it increased from 660,000 persons in 1998 to 685,000 persons in 2001. According to data of Goskomstat RF [State Committee on Statistics of the Russian Federation] on the number of persons employed in the electrical energy sector, [employment] increased from 340,000 in 1997 to 396,200 persons. At the same time, the number of persons employed in Russian industry as a whole for 1997-2001 declined by almost 2 percent.
As a result of stagnation of production and growth in the number of employed persons, labor productivity in the RAO declined. Specifically, production per person employed in the "electrical energy" sector declined in the company by 11.5 percent, and by 8 percent in the electrical power industry as a whole. In Rosenergoatom, it increased by 7 percent, and in Irkutskenergo--by 14.4 percent (in Russian industry as a whole, growth of labor productivity in 1997-2001 comprised 26 percent).
While in Russian industry as a whole, investments increased by 20 percent in the past 4 years, in the electrical power industry they declined by 38 percent, and in the RAO--by 48 percent. Considering the large relative importance of the RAO in the electrical power industry, it is not difficult to see that the overall decline in investments into the electrical power industry took place primarily at the expense of the RAO. The reduction in the volume of investments in Irkutskenergo comprised 25 percent, while in Rosenergoatom they increased by 78 percent. Thus, the regular statements of the management about the need to increase investments are in contradiction with its actual activity. Especially on the background of the ever-increasing volume of financial resources which it has at its disposal.
Matters are no better also in the sphere of export of electrical energy. For several years, one of the officially proclaimed goals of the company's management was to increase export of electrical energy. The authorities and the public were triumphantly informed of numerous projects on electrical power export to Europe, Turkey, China, and Japan. Most of the competitors had been edged out of this business: The relative share of RAO YeES in export of Russian electrical energy increased from 60 percent in 1998 to 92 percent in the first half of 2002. What happened as a result? In 1997, Russia exported 22 billion kW/hrs of electrical energy, in 2001--less than 20 billion kW/hrs, and this year, evidently, it will not even be 15 billion kW/hrs--a decline of more than one-third. The sums which the country receives from export of electrical energy have dropped by more than two times--from $525 million to less than $250 million. Export prices have also been reduced by almost two times: From 2.9 cents to 1.7 cent per 1 kW/hr.
At the same time, two facts have become apparent. First of all, already in 1998, export prices of the RAO and other Russian exporters of electrical energy in fact did not differ. The RAO exported energy at 2.5 cents, while the average export price throughout the country comprised 2.6 cents. However, in the first half of 2002, the average export price throughout the country comprised 1.7 cents, while the export prices of the RAO proved to be almost one-fourth lower--1.3 cents. Secondly, the two-time decline in export prices of the RAO--from 2.5 cents to 1.3 cents for 1 kW/hr--was accompanied by a doubling of domestic tariffs for the end consumer: From 1 cent to 2 cents. Thus, we constantly hear that domestic Russian tariffs must continue to grow, because they are lower than in other countries. But, on the other hand, export prices of the RAO are falling, and even faster than at other Russian exporters of electricity.
[Correspondent] How can this be explained? Perhaps a large amount of energy is being supplied as offset of the sovereign debt? Supposedly, the Falkon firm had planned to take up this matter...
[Illarionov] In recent years, Russia has not provided electrical energy to the Czech Republic. I cannot say whether this is technically possible today.
Another reason for the decline in value of the RAO is its financial activity. In accordance with the RAO report according to MSFO [International Standards of Financial Reporting] for 2001, out of a gross profit of R60 billion, only 18 percent, or R10.9 billion, constitutes profit from production activity.
The rest is the effect from the change in the purchasing capacity of the ruble and the profit from various operations, primarily with the Russian budget.
[Correspondent] What operations?
[Illarionov] This is profit from the deal with the so-called "Czech debt," and from restructuring of taxes and creditor indebtedness.
[Correspondent] Perhaps this is only to the credit of the company's management, if it knows how to extract benefit from interaction with the state?
[Illarionov] Perhaps the management should be proud of this, but this is not so much its merit as it is the result of the special attitude of the authorities. At least, I do not know of any other Russian company which would get a gift of a half billion dollars from the budget, as the RAO did in the Czech deal.
The next point is the reform program.
First of all, instead of de-monopolization in the electrical power industry, it presumes the creation of a grid super-monopoly, which must unite not only the main grids, but also--judging by the results of the "Czech deal"--the distribution networks as well. According to this model of reform, the creation of alternative power grids is in fact prohibited. And then not only business, but even the very existence of all electrical energy producers and all energy traders, would depend exclusively on the presence or absence of uninterrupted access to the power grid. Then any companies operating in the country and most regions may end up as debtors of this super-monopoly's management. And the fact that the current management of RAO YeES is not neutral in its sympathies and antipathies, to put it mildly, need not be proven.
Secondly, this model of reform violates the synchrony of transition to market relations on the wholesale and retail electrical energy markets. As the experience of the California crisis has demonstrated, such a procedure of market deregulation inevitably leads to the fact that possible growth of prices on the wholesale market, with regulated prices on the retail market, may lead companies engaged in middleman operations to bankruptcy. Such a variant of development of events is in fact predetermined in our country--in implementation of another administrative increase in gas prices.
[Correspondent] How can the RAO hinder independent producers? Today, only Rosenergoatom and Irkutskenergo are complaining about it.
[Illarionov] And isn't that enough? This is enough to become convinced that the monopolist is not neutral. Many investors would gladly undertake construction of electrical transmission lines. But they have been refused in this. Many regions and power stations are ready to build transmission lines from energy-surplus regions to regions of energy shortage.
[Correspondent] Can you name such projects?
[Illarionov] The currently effective legislation does not permit this. The proposal to reject this prohibition in favor of unlimited construction of electrical power grids was thoroughly besmeared by the RAO management at all stages of preparation of the reform program. The possibility of such construction was left only in the case when new grids--regardless of who built them--go under management of RAO. Thus, an artificial barrier has been erected in the path of investments into a segment [of the economy] which is critically important to the Russian electrical power industry.
[Correspondent] Nevertheless, large power consumers are actively building generating capacities.
[Illarionov] Many large companies, having encountered the growth of energy tariffs and monopolist behavior, have begun to change over to the acquisition and construction of generating assets. As a result, the relative share of energy and the capacities generated outside the RAO are gradually increasing. However, the effectiveness of such production is significantly lower than in specialized companies. Nevertheless, for many of them, such an approach is perceived less painfully than the threat of ending up as the debtor of a grid monopolist. Naturally, it is necessary to draw off part of one's own resources for this, which leads to a decline in the potential effectiveness of these companies, as well as the national power industry and the economy as a whole.
[Correspondent] Perhaps there will really be de-monopolization of the power industry?
[Illarionov] Except that the price for it will be very high. And it will take quite a bit of time. And if large companies partly safeguard themselves, what are the others to do? Companies, regions and the population?
Then what kind of economic growth and improvement in the well-being of the population should we speak of?
Finally, the mutual relations of the company's management and its shareholders. In 4.5 years, the owners of the company have lost 2/3 of the RAO's value. Not one of the "promised" strategic investors has yet come to the company. Among the broadly publicized "seven steps of management," there is a "temporary moratorium on sale of profile assets until such time as their 'fair price' is determined." First of all, the world has not yet thought of anything "fairer" than market prices. And secondly, assets, whatever they may be--of profile description or non-profile assets--do not belong to the management. They belong to the owners of the company. It turns out that, by its activity, the management--which was hired by the owners to preserve and increase assets--has not only already led to the squandering of a considerable portion of these assets, but is promising to continue to do so--now at "fair" prices.
Alas, it is not the pronounced words and not the PR-campaign, but the real activity of the current management of RAO YeES that is leading not to attracting investors, but to pushing them out the company, out of the Russian power industry, and out of the entire Russian economy.
[Description of Source: Moscow Vedomosti in Russian -- Business paper published jointly with The Wall Street Journal and Financial Times; reportedly friendly with Kremlin.]