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Investment in Russia: Super Power Opportunities

The Russian power sector is priming itself for outside financial and infrastructure investment. By Branko Terzic and James Balaschak
Fortnightly Magazine - February 1 2003

to 3 percent per year. The growth, coupled with the retirement of aging power plants, will require new power plant construction. Total investment needs in the Russian electric power and heat networks are estimated to exceed $147 billion by the year 2020. The proposed restructuring plan accepts the principle that private capital can be made available to meet these needs if regulatory and investment conditions are made attractive to domestic and foreign investors.

The Dominant Monopolies

Reformation of the Russian power sector must begin with the restructuring and unbundling of the RAO UES, currently the largest power monopoly in the world. Its role in the Russian electric industry is crucial, and the proposed reforms have been initiated by policies surrounding its future.

The electric power sector is a basic industry in the Russian economy, serving both the internal needs of the domestic economy as well as exporting electricity. Thermal, hydroelectric, and nuclear power plants produce Russia's total installed electric capacity of approximately 214 million kW.

The total length of Russia's electric transmission lines, of all voltage classes, is 2.5 million km, of which 150,000 km are 220 kV to 1,150 kV networks.

The RAO UES owns more than 90 percent of the electric transmission system and covers all of the inhabited territory of the country, from its western borders to the far east. The size of this electric transmission grid makes it one of the largest centrally managed utilities in the world.

About two-thirds of power production in Russia comes from thermal power stations, 19 percent from hydroelectric stations, and 14 percent from nuclear power stations. Unconventional renewable sources of energy are quite insignificant-less than 0.1 percent.

Distribution of power generation in Russia by fuel source used is shown in Figure 2.

Figure 3 shows the distribution of the installed generating capacity between the above companies as of the beginning of 2000.

The RAO UES, RosenergoAtom, and AO-Energos

The RAO UES was established in 1992 as an open joint stock company, with shares traded on the public exchanges. Owned by the Russian government, the holding company has a controlling stake in 72 regional energy supply companies, the AO-Energos, and 32 large power plants, making RAO UES the leading player in the Russian power sector. The company owns 71.1 percent of all hydro and 86.9 percent of all thermal Russian power generation. It owns 96.3 percent of all electric transmission and functions as the central dispatcher for the country.

The regional electric companies are part of the RAO UES structure, and the federal power stations are formally independent joint stock companies. As such, they prepare their own balance sheets and income statements. However, RAO UES strongly oversees their production and financial activities.

In addition to actively trading shares of RAO UES, Russia's capital markets also trade shares of the largest AO-Energos included in the RAO UES holding. Large-scale reform and restructuring processes initiated in RAO UES in the summer of 2001 are due to be completed by 2008.

In the nuclear sector, RosenergoAtom was established in 1992 and charged with centralized state management