Power wars: Gazprom cuts of UES

by Ben Aris

Spring has arrived in Moscow, and the season opened with an "energy crisis."
United Energy System (UES) accused Gazprom of drastically cutting supplies of gas, and as a result trams and subways stopped working and some regions could be plunged into the dark. Yet it is a funny time of year to have an energy crisis. Could Gazprom's attack on UES really be all it seems to be?

Energy crises usually happen in the winter, when most of Russia is held in winter's icy grip. But the first shot in this battle was fired t the beginning of April, when Gazprom began cutting gas supplies to UES. The national power company accounts for 40 % of Gazprom's domestic sales. Gas currently accounts for more than 60 % of UES' fuel requirements, and this percentage that has been creeping upwards over the last year.
The stated reason for the cut-off was that Gazprom was fed up with subsidising Russia's power sector and backed its threats with action. It reduced average gas supplies to federal stations by two thirds and to regional energy companies (energos) by 40 % since April 1.
UES countered by saying that power supplies to companies might fall by a quarter as a result. In St Petersburg and Yekaterinburg, tram and metro services were quickly halted. Other regions have had their supplies of electricity cut.

Gazprom's economic argument is a strong one. UES owes Gazprom more than $ 2 bn for past deliveries, and the Russian government has failed to let Russia's industrial white elephants go bankrupt. This means both companies are in effect subsidising Russia's floundering industrial sector.
Managers of Gazprom said that not only did they want these bills paid, they wanted UES to make 100 % of its payments in cash from now on. Barter and mutual debt swaps have been the norm for Russia for years.
All companies are making progress in eradicating barter payments but Gazprom is lagging the rest. UES finished the first quarter receiving over 50 % of its bills in cash. Gazprom, meanwhile, got 35 % in cash -- despite a promise made at the start of the year by UES to pay half its bills in cash.
However, Gazprom's attack on UES was not absolutely necessary, as President-elect Vladimir Putin had already issued a decree, kicking off the new government's efforts to solve the energy sector's problem. Putin ordered all budget-funded entities to pay their fuel bills (one of the main sources of both non-payment and barter) in full. Analysts believe that although the payment issue is a bone of contention between the two companies, it in fact the CEOs of Gazprom and UES, Rem Vyakhirev and Anatoly Chubais, were teaming up to solve a series of problems.

For Vyakhirev, allying with Chubais also makes sense. With Putin in power but without much of a power base, his first job will be to consolidate his position. The presidential privileges enshrined in the 1993 constitution can only be exercised if he has the tools available. Reaching into nearly every aspect of economic life, Gazprom is the perfect tool.
It is believed that Putin wants to gain greater control over the company, which can put nearly every large company in Russia into bankruptcy by dint of their unpaid bills or bring entire regions to a grinding halt by cutting off fuel supplies. With Gazprom in his pocket, Putin would have a big rod to beat everyone from regional governors to oligarchs, as they all depend on gas. As Vyakhirev must feel threatened, the "energy crisis" is a convenient way of forcing Putin to negotiate with him.
From a business perspective, the crisis also fits nicely with Vyakhirev's agenda. Both companies receive far less from domestic supplies of power and gas then they can earn from exports. In Gazprom's case, the less gas its sells domestically the more it can export. UES' problem is more difficult, as it has no choice but to try and wring more money out of Russian companies.

For both companies, cutting off power and heat in the spring provides a convenient excuse to achieving all these ends without actually killing anyone ­- as would be the result of cutting off heating in the winter.
By April 11, Chubais told that he had reached a compromise with Vyakhirev. Gazprom will deliver 24.2 bn cm in the second quarter -- less than the 26 bn cm UES had asked for, but tellingly without the condition of increased cash payments initially set by Vyakhirev.
Chubais also said that as there is still a shortfall, UES will cut off some enterprises, beginning with their worst payers. The regions of Nizhny-Novgorod, Samara, Yaroslavl, Kostromo, Tver, Tula, Volgograd, Rostov, Chuvashia, Orenburg and Sverdlovsk are all to get less power. In practical terms, the compromise means that Gazprom gets more gas to export and UES can cut off enterprises that don't pay their bills without getting blamed for it.
Politically, the whole show was a success too. A few days after the first shots were fired, acting Prime Minister Mikhail Kasyanov told both Kalyuzhny and Deputy Prime Minister Viktor Khristenko to settle the dispute. UES has thus found in the Fuel and Energy Ministry at least a partial scapegoat for the companies that now find themselves in the dark.
Meanwhile, the issue of non-payment of bills between Gazprom and UES remains unsolved. But the decline of barter in the economy in general means that this one is solving itself, albeit slowly. In the long run, it is in Gazprom's interests to see UES hike tariffs and cut off debtors.

Chubais is considered to be a consummate player of the Russian political game, and certainly this row came at a convenient time. A UES restructuring plan was presented to the Kremlin but skipped over the key issue of barter and tariff hikes. Politically unpalatable, power tariff hikes and payment reforms can't be simply announced. A mini-crisis -­ such as the one that started around the same time that UES' plan was presented ­- has been the perfect cover.
As if to underline the point, Chubais was back at the lectern a few days after the compromise with Gazprom was reached, pushing home his advantage. He announced on April 14 that exporters and industrial companies with a high turnover -- i.e., those with cash -- would not only have to pay 100 % of their bills in cash but pay in advance as well. His justification was that the 300 largest enterprises buy 20 % of all power generated in Russia but pay only 62 % of their electricity bills.
All indicators are that Chubais has mounted a major campaign to reform UES, and he has won the first battle handsomely. The next battle will be for influence over (or curbing the power of) the Fuel and Energy Ministry. Rumours in Moscow continue to swirl that Kalyuzhny is for the chop.
The few signs that are coming out of the Kremlin are positive. The progressive economist Andrei Illarionov was appointed head of the Institute for Economic Analysis and as Putin's advisor on economics. German Gref, who is masterminding Putin's economic policy, is also saying the right things. At this point, it looks like Chubais is well placed to win the next fight too.