Anatoly Chubais seems happiest when he is talking about his adversaries -- a lucky trait for someone who is arguably the most hated man in Russia.
"Let's see, who was against us when we started?" cheerily asks the architect of Russia's tumultuous conversion to capitalism. "Governors, most parties in the Parliament, big business, minority shareholders, scientists from the academies, and that's not the whole list."
Chubais, in an interview with Institutional Investor at the Lanesborough Hotel off of London's Hyde Park, is speaking specifically about his latest grand project: overhauling Unified Energy System of Russia, the state power monopoly that is the world's biggest -- and most wasteful -- utility.
In a post-Soviet Russia that is perpetually reforming, electricity is the reform of the year. Spurred by legislation passed by the Duma in February after three years of delays and roughly 1,800 amendments, sprawling UES -- which produces enough electricity to supply Germany and Italy combined -- is to be privatized and split up into more than 40 pieces. "This is the most ambitious utility restructuring ever attempted," says Derek Weaving, an energy analyst with Moscow-based investment bank United Financial Group.
The stakes are huge, both for citizens who depend on UES for cheap electricity (and heat, in Russia's cities) and for industrialists who rely on it to provide power and buy their oil and coal. "Unless the power sector is successfully reformed, growth in Russia will collapse," contends David Geovanis, a managing director of Basic Element, the financial-industrial holding company controlled by Siberian aluminum king Oleg Deripaska.
The UES restructuring may also represent a chance for a financial killing, say the foreign investors who have clung to about 15 percent of the utility's shares through the convolutions of reform legislation. A year ago the proportion of foreign investors in UES was twice that, but many became discouraged and sold out even as Russian players like Deripaska bought in. UES, which trades in Moscow and in the U.S. through American depositary receipts, is valued by the market at only about $55 per kilowatt hour of capacity -- a bargain compared with the $250 per kilowatt hour that purchasers have been willing to pay for Eastern European utilities, says money manager Alexander Branis, a director of Moscow-based Prosperity Capital Management and a UES board member.
At the center of the politically fraught privatization process -- and the attendant controversy over whether UES will fall into the hands of the oligarchs who already control Russia's natural resources -- is, inevitably, Chubais, the man who largely created those oligarchs. In the mid-1990s he was the government's privatization boss under then-president Boris Yeltsin, selling state enterprises like oil company Yukos and metals giant Norilsk Nickel, which have since increased dozens of times in value. In 1996, Chubais managed Yeltsin's come-from-behind reelection triumph over neo-Communist opposition. And in 1997'98, as Russia careened toward currency collapse, domestic debt default and the near-obliteration of its banking system, Chubais was the country's top economic official. Yeltsin, always fond of cabinet reshuffling, soured on him just months before the crisis broke, forcing him to resign. Yeltsin would later coin one of his most quoted presidential epigrams: "It's all Chubais's fault."
Chubais's consolation for this disgrace was his appointment, with Yeltsin's blessing, as CEO of UES in May 1998. The job, characteristically, became a crusade for him. Electricity was the most vital "piece of unreformed socialism" left in Russia, Chubais explains now. Besides, he had a point to prove. "For years all the factory directors were telling me that private property and the market were ideas out of books that could never work in Russia," he says. "So I wanted to show that my ideology could be reality."
He got off to a solid start. UES was a financial cesspool when he took over. The company collected just 10 percent of its bills in cash; the rest it simply rolled over (for the best-connected customers) or allowed to be bartered, spawning a thousand absurd and corrupt payment schemes. Now UES receives and pays out real money, on time; taxes are current, and accounts receivable are down to $8 billion.
"Chubais is something of a Bolshevik, a person for whom the end justifies the means," says former Energy minister Sergei Generalov, now chairman of the Duma's committee on investors' rights. "But if he wasn't the leader of UES, there wouldn't be any reform."
Yet much reforming remains to be done. Many of Russia's 500 or so power stations, some dating from before the Bolshevik revolution, will fall apart by the end of this decade without billions in refurbishing. Russia's key industries already suffer six times as many power failures as their European counterparts.
No investor, however, would pour money into Russia's power industry as it is currently constituted. The state owns 52 percent of UES, which in turn controls 35 stand-alone power plants and all but four of Russia's 70 regional utilities. UES's minority shareholders consist of a hodgepodge of industrial groups, local governments and foreign portfolio investors, from Fidelity Investments to Hermitage Capital Management.
UES is hugely inefficient. A stalemate between Moscow and minority shareholders has perpetuated Soviet-scale waste at the utility. Russia uses five times as much electricity per euro of GDP as Western Europe. Communal housing authorities controlled by local governments act as middlemen between power companies and city dwellers, siphoning off billions from UES.
To his admirers, Chubais is the one man who can force vital change on UES -- and, indeed, on Russia. "He is an iron manager," says Dmitry Vasiliev, deputy director in charge of restructuring at Moscow utility Mosenergo and, before that, Russia's top securities regulator. "More and more people understand that he was absolutely right when he began the privatization process." But to detractors like Grigory Yavlinsky, who heads the Yabloko party in Parliament, Chubais is nothing less than "the godfather of Russian criminal capitalism."
On paper, Parliament has given Chubais permission to extend his controversial privatization prescription to the Russian power system. After UES is broken up, only the national electricity transmission grid and a few other assets deemed strategic -- such as nuclear plants and some big hydropower facilities -- are to remain in state hands. Emerging from privatization will be ten wholesale generation companies and 31 territorial generation companies that will compete freely for customers.
The government, meanwhile, is to phase out regulated electricity tariffs, leaving a market-driven industry by 2008. Western European utilities such as Germany's E.On and Finland's Fortum, which already invest in St. Petersburg utility Lenenergo, might well want to buy into this reformed power market. Russia, after all, is the world's fourth-largest electricity consumer after the U.S., China and Japan.
But the obstacles to dismantling UES and creating a free market in electricity are enormous. Among the things that could go wrong, two stand out. First, the Russian government could wobble in its resolve to free electricity tariffs, as doing so would increase home heating and electrical bills for Russians between two- and fivefold over five years.
Second, powerful businessmen and politicians could short-circuit UES's restructuring diagram, breaking off choice assets through deals with Chubais and his lieutenants. Buying stakes in the utility and fighting for seats on its 15-member board has in fact become a contest among the oligarchs. Aluminum czar Deripaska's Basic Element, which mops up massive amounts of power, holds 2 percent of UES shares, and Deripaska put up Geovanis for the utility's board in an election set for May 30. Andrei Melnichenko's MDM Group, which includes one of Russia's biggest banks and its No. 1 coal producer, has accumulated as much as 15 percent of UES. As of mid-May, Melnichenko seemed a shoo-in for board membership. Both Basic Element and MDM claim they are strictly portfolio investors in UES. Says Geovanis: "There's a misconception in the market that we want to exchange our UES holdings for generation capacity. What we see is just a tremendously undervalued company."
But their fellow shareholders remain wary. "It looks like MDM is up to something -- I just wish I knew what it was," says UES board member and American portfolio manager David Herne, who runs Moscow-based Halcyon Advisers.
For his part, Chubais welcomes the oligarchs' piling into UES and sees them sticking around to run some of the privatized utilities. He also takes a dig at the foreigners who have been selling: "Russian business understands and approves of the reform of energy and is putting enormous means into it with the goal of participating in the energy business. Unfortunately, we can't say the same so far about our foreign partners."
If UES does wind up being carved up by big shots, it would be a severe setback for Russia's proclaimed desire to embrace free and open markets. On the other hand, an orderly breakup of UES into private, competitive power companies would give a huge boost to the economy, draw in capital and set a standard for privatizing other state enterprises, such as natural gas giant Gazprom and the national railway.
Chubais is either the solution or the problem, depending on who you talk to. After all these years on the front pages, he remains an abiding mystery. "Chubais is a mystic," shrugs analyst Weaving. "I know a lot of people who have worked with him very closely, but nobody really knows what he's about." Critics say there is a cynical mind behind the mask: "His intention has always been to sell the assets of Unified Energy System to oligarchs," contends Hermitage Capital CEO Bill Browder. To others, however, Chubais is the heroic chief engineer of Russia's transformation into a modern state. "In people's minds Chubais is evil because he is associated with the selling of the country," concedes Yevgeny Gavrilenkov, senior economist of Moscow-based investment bank Troika Dialog. "But what Russia needs is five Chubaises."
TALL AND PALE, WITH A HAPHAZARDLY CUT shock of ginger hair, Chubais has been an icy, Teutonically organized fixture in a Russian political world that tends to the florid and the chaotic. Five times as many Russians dislike Chubais as approve of him, according to a 2000 survey by the Moscow-based Fund for Public Opinion. Yet no one, save Yeltsin and President Vladimir Putin, has done more to bring about change in modern Russia.
Born into a military family in Belarus, Chubais was raised primarily in Leningrad. He took an economics Ph.D. from the Leningrad Economic Engineering Institute in 1983 and settled down to teach at his alma mater. Two years later Mikhail Gorbachev took power; by 1987, Chubais was helping to form a Perestroika Club among local intellectuals. In 1990 he ran in the first free city council elections in the renamed St. Petersburg and ended up as deputy mayor to city boss Anatoly Sobchak, a close associate of Gorbachev's.
In 1991, Chubais abandoned St. Petersburg for Moscow as a charter member of Yegor Gaidar's shock-therapy cabinet under Yeltsin. When the bookish prime minister was unseated in late 1992 by colorless industrialist Viktor Chernomyrdin, Gaidar's team scattered -- except Chubais, who stayed on at the State Property Committee to muscle through privatization.
As state property chief in 1992'93, Chubais ran the controversial voucher privatization scheme, which envisioned Russians' buying up state enterprises with chits distributed by the government. In practice the program entrenched the Soviet manager class as owners, with mostly disastrous results. But it did force most industry off the state's books.
In 1995, Chubais oversaw a "loans for shares" privatization program that launched Russia's notorious oligarchs but also laid the foundation for the thriving corporations that have increased Russian oil exports -- the country's biggest money-earner -- by half. Under the plan, rising financiers like Vladimir Potanin (now controlling shareholder of Norilsk Nickel), Mikhail Khodorkovsky (of Yukos) and Boris Berezovsky (of Sibneft) extended loans to the government, taking shares in prime state enterprises as "collateral." The loans, if they were ever really made, were never repaid, and the financiers walked away with the property. Loans-for-shares pushed great hunks of Russia's mineral wealth into private hands before the 1996 election, in which the Communists threatened to regain power. It also made billionaires out of some buyers.
"Was there someone who would have paid more?" snaps an unapologetic Chubais. "Our choice was not to sell expensively or sell cheap. Our choice was to create private property in the country or not create it."
Chubais and the oligarchs were all riding high in 1996 after Yeltsin was reelected and his Communist opponents defeated. Chubais was promoted to deputy prime minister for economic matters. But the ascetic technocrat's reputation was tarnished in late 1997 when he and four allies admitted receiving $90,000 from a company controlled by Norilsk's Potanin, purportedly as an advance for a book about Russian privatization. The book was in fact published, Chubais says, and the proceeds donated to a foundation that sponsors translations of foreign economic textbooks into Russian. Nevertheless, Chubais resigned under pressure in March 1998.
The timing turned out to be lucky, as it blurred his responsibility for Russia's financial crash that August. Chubais contends that his chief role in the crisis was to negotiate a stabilization loan with the World Bank -- Yeltsin had kept him on as Russia's special representative to the Bank and the International Monetary Fund -- that speeded the country's recovery. In any case, he argues, the crisis was precipitated by budget deficits caused by the Communist-controlled Duma.
Surfacing as CEO of UES, Chubais not only had his hand on Russia's electricity switch but also got to play oligarch. He appeared to ally himself in particular with Deripaska, who was battling for control of the aluminum industry. In 1999, UES forced two big aluminum plants into bankruptcy by suing them for back bills. Deripaska grabbed stakes in both, a key step toward creating his aluminum empire.
Against this backdrop, investors were alarmed when in May 2000 Chubais aired his first plan for breaking up UES. His idea was to divide the power monopoly into as many as 700 pieces -- utilities and individual power plants -- and sell them all. With Russia near the trough of its post-1998 depression, the likely valuations would have been 5 percent of their replacement value, estimates Hermitage Capital's Browder.
The probable customers? Chubais had tipped his hand when he'd proposed a curious transaction with Deripaska: The oligarch's aluminum company would have swallowed one of the biggest hydropower plants in the world, UES's 6,600-megawatt Sayano-Shushenskaya facility, through a "merger."
Shareholders bitterly fought Chubais's sell-off plan. They angrily pointed out that UES had floated 48 percent of its shares in the mid-'90s and that those shareholders now saw the prospect of their money disappearing in Chubais's spin-offs. Many bailed out. UES shares lost two thirds of their value in the eight months following Chubais's announcement and are still off 15 percent from their May 2000 level. Russia's RTS index climbed 85 percent during that same period.
But some shareholders preferred to struggle on. Browder, the warhorse of Russian corporate governance campaigns, ceded the lead role to money manager Branis, who in 2000 was just 22. A St. Petersburger like Chubais, he had started trading stocks in high school, dropping out of college to work as a broker. He caught the eye of two Swedes who had formed Prosperity Capital, a Russia boutique which today has $300 million under management, $60 million of it in the power sector. They brought Branis to Moscow. Prosperity Capital's big utility portfolio and Branis's persistence won him a seat on UES's board.
Branis knew that only one man in Russia could cow Chubais: Vladimir Putin. So he set out to meet him. He found an ally in Putin's chief economic adviser, Andrei Illarionov, a Chubais disparager who has dubbed the reform of UES a "national disgrace." (UES operatives, in turn, accuse Illarionov of trying to drive down the utility's shares so that his cronies can buy them cheaply.) Eventually, Branis reached Putin's chief of staff, Alexander Voloshin, a Yeltsin-era survivor with a reputation as the ultimate Kremlin fixer, who also happened to be chairman of UES. Voloshin set up two interviews with the president in spring 2001. "At the first Putin didn't have much grasp of the issues, but it was remarkable how much he had learned by six weeks later," Branis recalls.
In July 2001, Putin decreed that pro rata distribution would be the guiding principle for UES's reorganization. All existing UES shareholders would receive proportional stakes in spun-off companies, and Chubais would have no right to sell their stakes out from under them. The state's share of UES's successor companies would be diluted to 26 percent on average.
Chubais didn't back down from his sell-off proposal right away. Skirmishes continued over half a dozen proposed side deals on UES properties, making Branis and his crusading shareholders apoplectic. The most controversial again involved Deripaska, who was to have lent $10 million to UES, taking as collateral shares in the Boguchansk power plant, another hydropower facility close to Deripaska's east Siberian aluminum smelters. The Soviet state spent $1 billion building Boguchansk but left it half-finished.
Shareholders made their feelings about these sell-off schemes quite clear. UES's stock plunged by half between January and September 2002, whereupon Chubais changed tack, calling for a moratorium on asset sales. Since September, UES's shares have doubled.
Chubais is now eager to lay claim to the pro rata methodology. The asset sales that spooked investors were just one of many options, he maintains. "Reform by selling assets was one strategic alternative we studied in detail, as opposed to dividing the assets among shareholders," he says. "Each variant had its pluses and minuses." The proposed deal with Deripaska over the Boguchansk plant was "absolutely transparent and absolutely clean," he adds.
Shareholder watchdogs worry, nonetheless, that the Duma formula leaves Chubais with wiggle room. "Noncore" assets, for instance, are excluded from the sell-off ban but are never defined. "What we need now is a change in UES's by-laws to prohibit all asset sales until reform makes more progress," says Alexander Lebedev, president of the Moscow-based National Reserve Bank, which is thought to own about 4 percent of UES and has backed Branis's reform efforts.
Shareholders are also up in arms over a Chubais plan to seek "outside managers" for key UES subsidiaries during the "transition" years. UES presents this as a way to lure E.On and its Western rivals to share expertise without asking them to put up money. Branis, however, maintains that the true "temporary" managers will be well-placed Russian groups that will run the utilities down so that they can buy them cheaply later. A Chubais spokesman counters that unless the companies' profits and market capitalization increase, contracts will be canceled.
At the same time, Moscow Mayor Yuri Luzhkov appears to want to share in the privatization spoils. In March, Mosenergo executive Vasiliev called a press conference to blow the whistle on what he said was a secret deal between Moscow city hall and UES. Mosenergo plans to split into four companies -- two each for power generation and distribution -- and the Moscow government, Vasiliev says, is bent on owning 30 percent of both distribution companies. The hitch for Luzkhov: The city now owns only 3 percent of Mosenergo. So UES, which owns 51 percent of Mosenergo, was to back an issue of distribution company shares to facilitate this tidy arrangement, according to Vasiliev. UES, in a carefully worded statement, replies: "Mr. Chubais has more than once stressed that no current shareholder in Mosenergo will have any preferential right, because it would contradict the law."
The purported UES-Moscow compact would represent a bald dilution of minority shareholders, but that's not what worries Vasiliev most about it. The ex-regulator is more alarmed that Luzhkov's tactics may open the door for local grandees throughout Russia to grab the choke points of the revamped energy system, stifling the competition that is supposed to make it work. Mayors' control of communal housing authorities already mars the prospects for a free market in power. For a start, the authorities owe UES $2 billion that even Chubais can't seem to collect.
Yet the UES chief likely had little choice but to go along with Luzhkov: The mayor's FatherlandAll Russia party might have used its 67 Duma seats (out of 450) to block the UES reform bill. Now lesser leaders will doubtless try to ape Luzhkov's example. "This battle for influence will happen all over the country," Vasiliev predicts. "In any situation, municipal owners will be worse than private owners."
Amid a maelstrom of troubles, there are still three reasons to hold out hope for Russian electricity reform. First, the potential benefits of getting it right are enormous, and the wonders wrought by private ownership of Russia's oil industry -- 2 million barrels a day in increased production -- are visible proof of the power of free, or at least freer, markets. Vasiliev, like Chubais, welcomes oligarchs' buying UES shares, counting on rivalries among them to establish a rough form of competition.
Ordinary Russians will take a hit from market prices for heat and electricity. But the state has five years to phase those in, and efficiency gains could cushion the blow. Even after five years of Chubais, UES uses three times as many employees to produce a kilowatt hour as the typical emerging-markets utility.
A second reason to be cheerful is that Putin, who has maintained his interest in power reform and seems assured of a second term through 2008, has the time and the popularity to see change through. The president made Prime Minister Mikhail Kasyanov personally responsible for overhauling UES -- Kremlin semaphore signifying that he won't let it get bogged down among the four ministers who sit on UES's board.
The third factor in Russia's favor is perhaps Anatoly Chubais himself. Approaching middle age, the tireless, implacable anti-Communist Bolshevik shows signs of maturing along with his country. His personal Web site -- www.chubais.ru -- evinces the rarest of qualities in a Russian politician: a sense of self-mockery. Visitors are treated to a "Why They Don't Like Chubais" section of press clips and even to Chubais jokes. ("What did the CIA call the new virus it invented to destroy everything in Russia?" "Chubais!")
These days the UES boss spends about half of his 80-hour work week on the affairs of his market-oriented political party, the Union of Rightist Forces (SPS in the Russian abbreviation), which won a respectable 8.5 percent of Duma seats in the 1999 election. Critics fear that Chubais the UES reorganizer may be too keen to do favors for potential contributors to Chubais the politician. "I don't think he is personally corrupt," says fund manager Branis, "but Chubais doesn't mind if there are corrupt people around him. UES would do better with a CEO who is working for shareholders and not doing 20 different political things on the side."
Whatever his detractors may say about him, they have little choice now but to let Chubais attempt his electricity reforms. Asked what makes him proudest about his contentious career, Chubais answers without hesitation, "Irreversibility." He translates: "After what we did, it is impossible to move the country backward, ever. There will never be a return of Communism to Russia no matter who is the next president, or the one after that." Now all he has to do is prove to Russians that the tumult was worth it.
