November 24, 2006

Bankers to Back Up Energy Companies of Europe in Russia

RAO UES of Russia and Finland’s Fortum sealed yesterday a Memorandum of Intentions to implement Kyoto Protocol in Russia. The document that was concluded within the framework of Round Table of Russia’s Industrialists provides for constructing 40 new generating facilities. At the same time, Fortum will continue buying out the stocks of existing energy companies of Russia. EBRD is ready to back up the consortium. Investors, however, are on the guard about Gazprom’s growing interest in the industry.

RAO UES CEO Anatoly Chubais and Fortum President Mikael Lilius sealed in Helsinki yesterday the Memorandum of Intentions to implement Kyoto Protocol in Russia. The protocol provides for reduction in hydrocarbon emission by 35 million tons, which will be achieved through 40 projects of constructing new generating facilities.

Chiefs of the companies said the protocol will continue cooperation in power engineering of Russia, where Fortum is a strategic investor intending to strengthen positions.

Fortum that owns a block stake in TGC-1 and a percent in WGC-5 will continue buying the stocks of generating companies, Marina Balabanova from Fortum said, specifying it is interested in 25 percent in WGC-5 that RAO UES will put up for sale in spring. Official bidder for the stake is Gazprom.

EBRD could become Fortum’s partner in Russia. Two days ago, the bank transferred $35 million for a percent in WGC-5, said Vadim Dormidontov, a senior banker at EBRD. Similar to Fortum, the bank acquired the stocks via IPO. EBRD has no intention to resell the stocks, Dormidontov specified. “It is the first experience of EBRD when it buys energy assets for itself. We intend to participate in IPOs of energy companies in future,” the banker said, adding EBRD “is actively negotiating” with Fortum, Italian Enel and German E.ON about joint buyout of generating assets in Russia.

But the stocks will be of interest provided the energy assets are being passed to private investors, Dormidontov pointed out. “Otherwise, we won’t invest in it.”

Indeed, European investors see Gazprom rather than private investors in power engineering of Russia. Gazprom holds 10.5 percent in RAO UES, more than 30 percent in Mosenergo (the stake will exceed 52 percent in the following months), around a percent in WGC-5, some shares in WGC-1, WGC-2, WGC-4 and WGC-6.

“A new monopoly is maturing on energy market of Russia,” said one of the Round Table participants.