US-Russian forum erupts, published in European Business magazine

Published in European Business magazine

Simmering tensions between the Russian government and the country's largest company reached boiling point during this year's annual US-Russian Investment Symposium in Boston when presidential economics aide Andrei Illarionov called the management of Unified Electrical System (UES) "bandits" and said the company was the least efficient in Russia.

The attack left the 400 participants present at the forum open-mouthed in astonishment, including a large delegation of UES executives. Some began a slow hand-clap in an attempt to persuade Illarionov to conclude his speech. "It looks like those people just forgot that they are management, rather than a group of bandits who captured the company. And this management is hired and can be fired, and completely forgot about it," he said. "This is an absolutely inappropriate, vulgar and boorish attitude."

Illarionov was speaking at a dinner, following an earlier debate at the Harvard-sponsored event, where UES had been criticised for selling off its assets too cheaply. But Illarionov made it clear that he was referring to the entire organisation, which employs 668,000 people. "We have heard many times that UES is the largest company in the world. It is true. But at the same time, it is the most ineffective company in the world," he snapped.

The flare-up concerns plans to break up UES in the next few years so that it becomes - on one hand - a monopolistic power grid and on the other hand a power generator in free market competition. Illarionov is concerned that former privatisation minister Anatoli Chubais, now chief executive of UES, will act dishonestly. "He thinks Chubais plans to skim off the profits and run away with vast amounts of money," says Brigadier General John Reppert, who organised the event.

The UES point of view, as expressed by deputy chief executive Sergei Dubinin, is that the company needs to divest itself of holdings in order to emerge as a profitable concern. But criticism of UES asset sales has been widespread and shares in the company have collapsed in the past two years, falling by 48 per cent, while all other major Russian companies saw their values rise. A rally in the UES share price was sparked earlier this year when the company announced it would halt asset sales.

Anatoli Chubais has a track record of dubious business decisions: it was his 'loans for shares' scheme in 1995 which allowed a small group of oligarchs to gain control of much of Russia's most valuable resources. Chubais was due to address the Boston conference, but after Illarionov's outburst he made his excuses and failed to show.

Russian minister of labour Alexandr Pochinok commented approvingly that Illarionov is the "biggest critic of the Russian system", but his attack landed him in some hot water when he returned to Moscow. The Russian news agency Ekho Moskvy challenged his decision to be so nakedly aggressive to a Russian company, suggesting that investors might be put off doing business with Russia.

"The issue of whether to invest or not does not exist for those people who gathered in the hall in Boston," he told Ekho Moskvy radio station in a live broadcast. "It has already been decided - to invest. Where to invest and in which projects is a different issue. It is up to investors to decide whether to invest. We are interested in investment in Russia going into the most effective projects."

UES claims that it needs at least $10 billion in new investment over the next ten years to modernise its power plants and build new capacity. The company is forecasting power shortages by 2007 unless there is a funding boost. But independent UES board member Alexander Branis, who is also head of Prosperity Capital Management, raised the spectre of management companies taking control of the new generation companies and diverting cash away from shareholders. "It was surprising that, since the government is the majority shareholder in UES, that they used this forum to vent their feelings," said one participant.

The row dominated the Symposium, now in its sixth year, since it was such a noisy and public airing of normally private passions. And energy issues created further ructions at the event, with a row over Russian government subsidies to the gas generating sector. Both European and US delegates are opposed to this system, since they believe it gives Russian exporters an unfair advantage. Russian delegates remained unmoved: "This is our competitive edge and you've got to understand that," said Grigori Tomchin, chairman of the Duma Committee for Economic Policy and Entrepreneurship. "We will never commit a ritual suicide through this type of liberalisation. It may happen after there's a real restructuring of natural monopolies, or it may never happen."

This issue has become a sticking point in the ongoing negotiations for Russia to enter the World Trade Organisation (WTO). The country has long campaigned for membership, but has so far failed to convince enough existing WTO members of its credentials, despite many legal reforms and improvements in corporate governance.

Nevertheless, things are certainly moving in the right direction, as the results of the symposium show. "We set up a total of 120 bilateral meetings," reports Brigadier General John Reppert. "This is double the number in 2001." He cannot yet give figures for how much business resulted, since legal and communications issues normally mean a three month gap before confirmation, but "There were clearly some very serious discussions going on, dealing with some substantial amounts of money."

Reppert characterises the past four years of the conference in quite distinct ways: in 1999 there were feelings of resentment over the 1998 Russian crash, which left investors suspicious. "How did you people let it happen?" was a typical sentiment. "There was a sorting out of guilt and responsibility," says Reppert. In 2000, there was a scattering of meetings, mainly in the gas and oil sectors and with the major US corporations. By 2001, contracts were being signed and a sense of practicality had arrived: people were asking "what kind of agreement works?"

In 2002, there were far more mid-sized companies attending and doing business, according to Reppert, encouraged by three straight years of economic growth, second only to China. "Investment is shifting to Russia and away from countries like Brasil and Singapore," he adds. At the conference, Russian deputy economics development and trade minister Yuri Isaev proudly recited a list of the country's recent achievements: a 25 per cent rise in hard-currency and gold reserves, a 25 per cent increase in foreign direct investment, besides many reform measures aimed at liberalising the economy and promoting trade.

Nevertheless, Russia remains a country with a long way to go before it reaches parity with EU nations. The World Economic Forum recently put Russia 64th out of 80 countries in growth competitiveness, while the Wall Street Journal placed the country 135th out of 156 nations in terms of economic freedom. This statistic brought a wry smile to the face of Mikhail Khodorkovski, chief executive of the Yukos oil company. "Who knows? We might even squeak up to 134th place in the economic freedom league table," he said at the Boston conference.

Noreen Doyle, the EBRD's first vice president, attended the event and found there to be a sense of realism, alongside the improving statistics. "There remain quite a lot of challenges," she says. "I was relieved not to find inappropriate optimism." The bank has seen its funding for Russian projects return to pre-1998 levels, with [euro]1 billion committed during 2002.

"I felt there were more Russian companies promoting transparency this year; they're demonstrating openness by bringing in international people, for example, and more disclosure of ownership," says Doyle. "If you look at total FDI in Russia, it's still rather low, but companies are beginning to see a degree of stability in the couple of years of Putin's government; things are advancing beyond the oil and gas deals and into equity investments, which means a longer-term commitment. We're seeing companies like GM and Boeing making serious investments."

Doing business will Russia has become a far more practical possibility in recent years; this investment symposium underlined the fact and hinted at the possibility of a genuine rush of trade interest in 2003.