Reforming and restructuring
the energy sector is a priority for Mr Putin. What
are your major plans to reform the sector?
The Russian government has a different approach
to restructure the different parts of the energy
sector. Successful restructuring has already taken
place in some sector as for example the coal sector.
We can already see the positive results in this
sector because it started when the whole sector
incurred large losses and was subsidised directly
by the state budget whereas it is now almost completely
privatised and we saw production growth in the coal
sector last year for the first time since reforms
began. Companies are profitable as they are investing
in new projects and labour productivity trebled
since the start of the process. Some social problems,
of which the state takes care, remain, but the coal
industry restructuring is a success story and a
good example for new restructuring efforts.
Other sectors, which are operating within a market
economy environment, still function with an organisational
structure from the Soviet years. This is one of
the key obstacles for development of these sectors
such as the electricity and gas sectors. A year
ago, the Government adopted a comprehensive program
of restructuring the power sector and we should
present by the end of the year a new concept of
gas market development which will set up the basic
directions of the gas sector restructuring.
Although there have been some delays with implementing
the electricity sector reform, the process is actively
being carried out in three basic directions: first
of all a new legislation which we will set up for
long term rules for the sector's functioning, secondly
the restructuring of companies, thirdly establishing
a new competitive electricity market.
Legislation has been submitted to the state Duma
by the government and will be considered in September.
We hope that the legislation will be adopted this
autumn.
Considering the restructuring of the companies,
significant progress has already been made with
the establishment of new companies at a federal
level, which will set the infrastructure for a new
market. We expect the two new companies to be operational
in the beginning of 2003, once we will have gone
through the registration procedures and the property
transfer. We are making significant progress in
establishing the key players in the wholesale competitive
market. We also have to restructure the vertically
integrated power sector company called AuEnergo
as the un-bundling of these vertically integrated
utilities is one of the targets of the reforms.
Several new companies will be established on the
basis of AuEnergo and this will separate transmission
and distribution businesses from generation and
energy sales.
Establishing a wholesale competitive market will
be pursued in two stages. First of all, we will
be creating the infrastructure for a new market
and establish the first experimental trade mechanisms
using free pricing in localised sectors of the wholesale
market. This procedure should start in September.
The second stage will be the introduction of a comprehensive
wholesale market in which free pricing will be used
as a basis to set tariffs.
Will free pricing be used only on the wholesale
market or on the whole market including the consumer
and corporate sectors?
In a first stage we will be introducing free pricing
only for a limited part of the wholesale market,
which represents up to 15% of the overall traded
electricity. This is likely to take place in 2004.
The consumer market will also be liberalised, but
there will be limitations based on the amount of
consumed electricity: not all the consumers will
be allowed to purchase electricity for a free price
or choose the supplier, but only those who qualify
and comply with the requirements regarding the minimum
amount of electricity consumption. This qualification
limit will gradually be decreased. In 2006 to 2008,
the amount of consumers on the retail market which
will work on a free price basis will be relatively
large.
One of the main goals of this reform is to make
it a more competitive environment and eventually
liberalise the market. How do you believe this will
help attract more investors and private companies
within Russia or foreign investors?
The first step to attract considerable volumes of
private investments into the power sector is 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. There
are a large number of limitations and regulations
that are set by the state authorities and these
will eventually be removed.
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.
So this is the new environment, which will be set
up by the governmental reform program. We believe
that the interest of investors will further rise
as the program is being carried out. We currently
can see a rising interest of the largest strategic
investments companies of the world, which are asking
us for information.
The Ministry is thus actively involved in building
up foreign contacts?
Yes and we have a lot of consultations about this.
Specific steps are being taken by our Ministry and
also by the Ministry of Economic Development and
Trade, with whom we work closely together. We have
intensive consultations with investors and the measures
taken by the government are influenced by these.
As an example, before writing the draft legislation
concerning the electricity reform, we had a number
of interviews with potential strategic investors
in this sector and we made a list of basic requirements
set by investors for creating comprehensive comfortable
environment in this sector. We then took this into
account when working on the law.
Russia is about to join the World Trade Organisation.
How will this impact the energy sector?
I believe that the energy sector is one of the sectors
of the Russian economy which should be the least
afraid of a liberalisation of the market.
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This first concerns the oil sector as Russian oil
companies are already players on the world market.
Secondly, Russia is the major supplier of natural
gas to Europe and it will rise due to the significant
increase of demand from the EU.
This trade with foreign countries has been going
on for many years and Gazprom already is a player
on the European market. I furthermore believe that
there are significant prospects for entering the
European electricity trade through the synchronisation
of the European and Russian power systems. Russia
is also both an importer and exporter in the coal
sector.
This means that there are not many limitations in
the energy sector, which should be subject of discussion
to enter the WTO. In addition to this, G8 countries
are now willing to diversify their sources of import
for energy and this should be beneficial to Russia.
Nevertheless, are there some companies that are
more prepared than others to these upcoming changes?
One of the reasons for restructuring the electricity
sector was the poor level of corporate governance
in the structures of the companies. We believe that
the level of corporate governance and financial
management will significantly rise and that new
companies in the power sector should be better prepared
to enter the world trade system. This is why the
government undertakes this restructuring. There
are less problems in the oil and coal sectors where
private companies are successfully operating. There
are some concerns in the electricity and gas sectors
and this is why the government considers restructuring,
but as soon as this will have been completed, we
believe that we will be able enter the world trade
system.
That would mean that European companies would
compete with Russian companies on the same market?
Gazprom is a supplier and a transporter of gas,
not only a reseller. Russian oil represents for
instance 21% of the total net imports of the EU,
gas represents 41%. So the role of Russian companies
on the European market will remain a role of suppliers.
Some companies try to compete, and some of them
successfully, in the retail market.
Being such an important exporter of both gas
and oil, Russia is dependent on world prices. How
is this currently affecting the overall economy
and the budget? Do you see any alternative strategies
to help this situation?
One of the concerns of the governmental policy on
energy is to diversify the country's GDP and to
rise the role of products with higher added value
and we consider this situation where crude exports
dominate as a threat to the development of the interests
of the country. We will not fight against crude
oil production and exports, but will concentrate
our efforts on products with a higher added value.
For example, one of the concerns in the oil sector
is to support the development of oil refineries
in the country and significantly rise the quality
of refined products. It is not a secret that Russian
petroleum products are of inferior quality and the
European market does not always want to import them
because of a poor quality. One of the basic structural
elements of our program is diversifying the structure
of national energy production and exports. I believe
that Russian exports of refined petroleum products
will rise.
Another issue is the volatility of oil prices and
we are developing a comprehensive project of establishing
a strategic petroleum reserve in Russia, which will
have a different role from the American one for
example because we are not dependent on oil imports
but should have an instrument to balance the world
oil market within the Governments hands.
However, the Russian economy does not depend on
oil as much as is being said and we are interested
in stable oil prices rather than high prices: a
stable price corridor. One of the goals of the strategic
oil reserve is to balance the volatility of oil
prices.
More and more foreign investors are coming to
Russia. Do you see any particular area in the energy
sector, where there is more potential for investors
than in others?
First of all, I would mention the production of
oil products with higher added value, the sector
of refining crude oil and developing the infrastructure.
I believe that the infrastructure has the highest
investment potential in the overall energy sector.
The infrastructure in the coal sector is more linked
with the railways reform. Investing in infrastructure
has one significant advantage - it has guaranteed
sales, but if you are a power producer, your power
may sometimes be less efficient and will therefore
not be bought. Services and infrastructure always
have a guaranteed demand. Also the construction
of new power stations will be of particular interest
to private strategic investors both domestic and
foreign.
Looking five years ahead, what do you see as
the biggest challenge for the Ministry and for yourself?
Five years from now is the time when the basic disproportions
in the Russian energy sector should be removed by
structural steps, adopting the new energy legislation,
correcting the current taxation system in the energy
sector. In five years we should thus be speaking
about a new era for the Russian energy sector. There
will be a set of regulations adopted for each governmental
authority granted some regulatory power. There should
be a stable environment for market players. I believe
that in five years, these measures will be finished.
If this is achieved, then our major challenge will
be.
What would be your final message to our readers?
The investment climate in the country is a basis
for our contacts with investors. I am meeting with
specific companies, bankers and potential investors.
The first thing I tell them is that we do not promote
specific projects, but we promote the overall climate.
I believe that all the measures taken by the new
Russian government over the last couple of years
are now producing their first specific results.
A new environment has been created and the climate
is almost favourable. It is thus time for investors
not only to study the environment in Russia, but
to come and study specific opportunities in specific
sectors. If they do not do it now, others will take
their share of the market.
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