THE POWER SECTORS - OPPORTUNITIES IN EQUIPMENT

Compared to the oil and gas reforms, the power industry reforms at first looked easier to accomplish as the cost of the construction and maintenance of electric transmission lines and other facilities is much lower than the transportation costs in the oil and gas industry. A low share of transportation costs in electricity cost considerably reduces the list of technological limitations and should have simplified the reform of the Russian power industry, which for long has been monopolized by the vertically integrated holding company, United Energy Systems of Russia (UES).

In 2001, the Russian government, as the 51% shareholder of UES, announced that it will reform and restructure the monopolist and the electrical power sector in line with international trends of deregulation. The reforms entail the creation of a legislative framework and an infrastructure for a competitive market, to be completed by 2004; the implementation of full liberalization of wholesale and retail electricity markets and the expansion of the competitive market, to be completed by 2007, and; the privatization of generating companies and regional energy companies by 2011.

As in a lot of utility reform processes around the world, and much to the dismay of investors, the timeframe and maybe even the entire scheme looked better on paper than it worked out in practice in which delays and hundreds of amendments have been dragging the process. The main discussions in Russia have been over the distribution of property in power-generation, the idea of network and marketing joint-stock companies being formed on the basis of UES, the need to guarantee the safety of energy supply, and the regulations of electricity tariffs between the federal authorities and regions.

Vladimir Milov, Deputy Minister for Energy, would like to attract considerable volumes of private investments into the power sector. Contemplating on the most effective way to do this, he prioritizes "…the removal of administrative barriers, such as regulation in sectors which should be competitive and based on free prices and a free amount of suppliers… The second part is that the sector currently exists of an absolute monopoly situation, which does not promote economic efficiency. We are now restructuring these companies to establish new ones, which are transparent and operate on market-based principles. This should make it more attractive for investors."

In any case, the electrical power equipment industry in Russia offers opportunities to foreign investors due to the significant lack of financing to modernize products. This impedes the abilities of local manufacturers to reach international quality standards.

However, even though companies with the likes of Siemens, Westinghouse Electric, General Electricy and Pratt and Witney are operating in the local market, Russian companies have consistently gained strength and market share since 1998. For instance, Russian Electrotechnics' (RUSEL), producer of secondary equipment for energy sector, point of view is very indicative since the company has good business authority and sufficient market share. RUSEL was recently named the company of the year in the category for best industrial applications manufacturer of the 2001 all-Russian contest organized by the business weekly "The Company". According to Nenad Popovic, RUSEL President and Chairman of the Board of Directors, "Regarding privatisation of the energy sector in Russia, the most important thing is that new shareholders and new investors will have to invest in the restructuring of power plants. Therefore, as a producer of secondary equipment we are an excellent partner for these investors. In UES there has been little investment in the past 20 years, so the first thing that the privatisation will do is encourage investors to reconstruct and develop new production possibilities. This is where our secondary equipment will be necessary, so we expect investment levels to increase by 5-10 times in the next five years, because companies will need to re-build, modernise and compete in a deregulated energy environment".

The Russian government plans to build 25 nuclear power plants in first half of the 21st century. The strategy of the Minister of Atomic Energy is hereby clear. As indicated by Minister Alexander Rumyantsev, "Amendments to the atomic energy law have been adopted, which allows us to import spent fuel into the Russia. The essence of these changes is that we have obtained support on the part of Russian producers to supply fresh fuel to countries worldwide....it has enabled us to work in the international market with existing agreements which permitted both the exporting and importing of spent fuel".

The development in atomic energy looks promising and the ambitious program looks realistic. The Minister reports that "...in terms of our program for atomic sector development, last year we launched a Nuclear Power Plant in Volgodonsk. This year, after the reconstruction, we have started the operation of a block of Nuclear Power Plants in Kursk. Next year we will start operating yet another block of Nuclear Power Plants in Kalinin, and in the coming years we intend to start two new blocks every three years". Additionally, important international project for the coming 10 years 'Megatonnes to Megawatts' (for the transfer of uranium), which represents major investments between Russia and the US, may be signed by both governments in May 2003.