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Moscow's power struggle over the power grid

A plan to reform the state electric monopoly fits the Kremlin agenda, but risks making California's mistakes.

By Scott Peterson Staff writer of The Christian Science Monitor / May 24, 2001



MOSCOW

On the face of it, Californians and Russians have little in common.

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But power outages that have left millions in the dark and reforms that send electricity prices soaring are bringing complaints that could ring as easily from Sunset Boulevard as from Tverskaya Street.

Russia, analysts warn, is trying to solve a severe electricity crisis with a plan that would repeat many of the same mistakes California made, with potentially far more serious consequences in an oft-frozen nation of 146 million that depends totally on its decaying electricity grid.

"This is critical," says Ben Slay, a senior economist at PlanEcon, a Washington-based consultancy. "People will scream and yell, and - let's be blunt - people might actually die, because prices will go up and things that used to work won't work.

"But if nothing is done, three years from now, all of Russia might go black. And how many people will die from that?"

Few question the need for drastic reform, after years of undercharging for electricity and a decade without investment or upkeep, which has left the world's largest power grid in tatters.

But at its heart, Moscow's sweeping reform plan for its giant electricity monopoly - tentatively approved on Saturday by the cabinet - is also a power struggle over power.

"You have to place this electricity battle in a larger political context," says Robert Orttung, editor of the Russian Regional Report for the New York-based East-West Institute. "It's a battle between [President Vladimir] Putin and the regional governors.

"Maybe the plan doesn't make sense economically, but it's rational if you are a former KGB officer and want to impose control over the regions," he says.

Mr. Putin has vowed to make reform of the state-controlled Unified Energy System (UES) a key economic aim this year. After months of controversy, a compromise plan will break up UES and its 80-odd regional subsidiaries that deliver electricity to virtually every Russian home.

In a bid to introduce competition, energy production, and marketing units are to be split off and privatized - as in California - while the fraying high-voltage transmission grid is to be consolidated and kept firmly in government hands. Prices for consumers will double, at least.

The state owns 52 percent of UES, but other shareholders - more than half of them foreign - have voiced anger that the value of assets may be undermined. UES chief Anatoly Chubais, architect of discredited, asset-grabbing privatizations of the 1990s, is the main author of this plan.

Brokers reported low investor confidence on Tuesday, as money shifted sharply out of UES.

The overall result is in line with Putin's broader political agenda of recentralizing state power while reining in regional governors, say Kremlin observers. Even so, Andrei Illarionov, Putin's economic advisor and a Chubais critic, took issue with the plan. Mr. Illarionov said it caters to a "small minority" of UES chiefs and "scarcely reflects the proposals and opinions of the president."

UES board member Andrei Trapeznikov counters that the reform plan would have been "absolutely impossible" to adopt without Putin's direct support - and that shutting out regional governors, who have for years set local energy prices to enhance their popular support - was the "main achievement."

"UES is the thread which must be pulled to untie the knot of all Russia's economic problems," Mr. Trapeznikov says. "Now the federal power is strong and can talk properly with the regional governors - and insist on the president's political line."