Electric shock

Russian electricity: Russia’s President Dmitry Medvedev has pledged to end state capitalism, but no one seems to have told the state capitalists. Russia's powerful state companies are expanding their grip in key economic sectors. Nowhere is this more significant than in electricity, where a landmark market reform is going deeply awry.

The latest illustration comes courtesy of gas giant Gazprom, which plans to merge its already sizeable electricity holdings with those of tycoon Viktor Vekselberg. The result will be to create the largest electricity generator in Russia, majority-owned by Gazprom, with a 25 per cent market share – up from the 17 per cent that Gazprom controls at present.

This comes three years after Russia completed what looked like a sweeping privatisation of the sector, selling it off to an eclectic mix of foreign investors, Russian oligarchs — and Gazprom. Spearheaded by former deputy prime minister and veteran privatiser Anatoly Chubais, the radical plan was meant to attract badly-needed investment, and create competition that would cut costs.

Gazprom’s heavy involvement raised doubts from the start: transferring assets from one inefficient state behemoth to another is not much of a privatisation. Russia’s competition regulator has already spoken out against the merger — but it seems doubtful that it can overcome the combined lobbying might of Gazprom and Vekselberg.

Nor is Gazprom the only state-owned giant now consolidating its grip on the industry. Along with expanding holding Inter RAO, and state-owned hydroelectric and nuclear power companies, these groups already control 63 per cent of power generation capacity, which will rise to 71 per cent after the merger. That makes it doubtful that there will ever be true competition.

Investors who rushed to participate in the privatisation are in any case deeply disillusioned. Electricity share prices have tanked because Vladimir Putin’s populist government keeps backsliding on plans to take electricity prices closer to market rates. Vekselberg may in reality be looking for the best way to exit a duff investment — the market value of his power assets is now around half of the $4.2 billion that he paid for them.

With their state-backed competitors expanding their grip, other out-of-pocket investors may also be eyeing the exit — the exact opposite of what privatisation was supposed to achieve.