Power blast a wake-up call

The disaster that hit the Sayano-Shushenskaya hydroelectric plant in southern Siberia last week has proved a sobering reminder of Russia's need to ramp up investment to replace its decrepit infrastructure.
The accident occurred after an explosion flooded the plant's main turbine room on August 17, leaving 69 workers dead and a further six missing, at the latest count. Officials have said a rise in pipe pressure and a faulty turbine were possible causes, but no firm conclusions have been drawn yet.
The turbine's producer, Power Machines, said that after 30 years of use the machinery was too old to function properly, and it hadn't been overhauled since 1993.
The explosion highlights a chronic lack of investment in the country's electricity infrastructure, senior officials and industry experts said.
"For 15 years starting from the late ‘ 80s, the Russian power sector was starved of financial resources and it is possible that this in some way contributed to the accident," said Derek Weaving, a utilities analyst at Renaissance Capital.
Prime Minister Vladimir Putin, who visited the wrecked power plant on Friday and commiserated with staff there, lamented Russia's aging fixed capital, which is on average approximately 20 years old, twice that of western Europe.
"In our country ... discipline in dealing with technology is very low," Putin said.
RusHydro, the majority-state owned hydroelectric power monopoly which owns the dam, insisted its maintenance programme was fully up to date.
Officials have ruled out the possibility of terrorism, despite a Chechen rebel group on Friday claiming responsibility for the explosion.
Energy Minister Sergei Shmatko said Wednesday that it would cost 40 billion roubles ($1.25 billion) to restore the plant' s engine room, the equivalent of half the company's annual investment budget. Even before the disaster, RusHydro was asking for a 30 per cent increase in wholesale electricity prices to cover new capital expenditures.
"It would make sense to hike the tariff for 2010 to allow for extra profits for investment and repairs," said Alexander Kotikov, a utilities analyst at Troika Dialog.
RusHydro will not raise its prices to recover repair costs, the company's sales director, Yevgeny Desyatov, insisted on Thursday.
However, the same day Desyatov was speaking, local businesses were already having to cough up an extra 24 per cent for more expensive electricity from coal-fired power stations in nearby regions, while a price cap agreed by the Electricity Market Council last week is generous to electricity producers, at about 50 per cent higher than the average tariff over the first half of the year.
President Dmitry Medvedev ordered the government on Thursday to ensure power supply to the region and protect businesses against price hikes, but it remains tobe seen how effective price caps will be.
RusAl, the aluminium producer owned by indebted tycoon Oleg Deripaska, has announced that the company's plants in the region will have to cut production by half a million tonnes until the hydroelectric plant is back online.
It remains unclear how long the plant will remain idle but repairs could take two to four years, while officials have said that even areas unaffected by the blast will not be working for least a few weeks.
"The main concern is coming winter peak demand, when demand goes up, while the Sayano-Shushenskaya capacity is still not restored," said Dmitry Bulgakov, a utilities analyst at Deutsche Bank.
Siberia, which relied on Sayano-Shushinskaya for 10 per cent of its electricity, isn't the only region that could face a capacity crisis after the entire country almost touched full supply before the recession hit and industrial production collapsed.
"As a consequence of the global financial crisis, demand has fallen by 5 per cent to 10 per cent, so a crisis has been put off for the time being," said Weaving. "Nevertheless, even before the accident at Sayano-Shushenskaya, we reckoned that there would be capacity shortages within a couple of years of the return of economic growth."
The government planned to create an extra 40 gigawatts of output within the next five years to fulfill demand, but some of these new facilities have been put on hold as budget cuts were made.
The government "is willing to maintain the overall size of capacity additions, but delay the implementation of most of the projects by two to three years due to the ongoing economic slowdown," said Pavel Popikov, an analyst at financial company Otkritie.
Unless these projects go ahead, Russia will be facing an energy deficit when the economy bounces back, causing a severe constraint on economic growth as companies face blackouts and power shortages, said Weaving.
"These tragic events underscore the reality that a modern economy needs electric power and that the financial cost of providing safe and reliable supplies is significantly higher than Russian consumers are accustomed to paying," said Weaving.
Generation companies have been pushing for tariff rises in the semi-regulated market, as well as further liberalisation of the sector, in a bid to generate investment.
"The long-term capacity market model hasn't been approved and this is a large part of revenue," said Kotikov. "We don't know how fair capacity prices will be."
Analysts said they hoped Sayano-Shushenskaya disaster would speed up reform and investment in energy production, and that this would help to prevent further accidents.
"The disaster may focus minds and prove a positive catalyst to encourage investment in the sector," Renaissance Capital said in a note to investors.

Russia’s rust is showing

During the last decade of soaring Russian oil prices and stock market valuations, only a few brave souls bothered to complain about the lack of infrastructure spending. They were proved horribly right by last week's catastrophe at the Sayano-Shushenskaya hydroelectric plant.
Why the Kremlin held off this spending is understandable - particularly given the public's fear of national bankruptcy, which sprang from the August 1998 crash.
On Vladimir Putin's watch as president, serious steps began to be taken, from 2005 onwards. But as the global financial tsunami hit Russia last year, it became clear that a golden opportunity had been missed to modernise and diversify the economy.
The economic lopsidedness is something that everyone is well aware of, from Putin and President Dmitry Medvedev on down. But during the oil boom, no one seemed to be capable of changing the record.
As long as the megabucks were rolling in - fattening state coffers, swelling oligarchs' bank accounts and filling tree-shaking bureaucrats' pockets - everyone was happy. They merely paid lip service to the mantra of investing in infrastructure.
Now the chickens have come to roost with a vengeance.
As a result of last week's tragic explosion, electricity firms and industrial producers in Siberia will try to pass on the $1.2 billion repair bill to their customers in the form of higher tariffs. And workers in industry, already hit by the crisis, will face more job losses and wage cuts.
If the country's power plants are allowed to continue deteriorating, further such disasters will cripple not just electricity production, but also the ability of Russian industry (which relies heavily on cheap Siberian electricity for its competitive edge) to grow again after the crisis.
And after two decades of chronic underinvestment in the country's power sector, last year's privatisation of electricity firms failed to raise any significant investment capital.
Sadly, who will now pay for the modernisation of the power industry is not clear. In a crisis, private owners will seek to maximise their profits, while the federal budget is no longer the bottomless pit it was a year ago.
Lest we forget, the sell-offs were masterminded by 1990s privatisation guru Anatoly Chubais, and benefited mainly a handful of well-connected insiders.

Six Dead, Seven Missing In Ukraine Mine Accident

DONETSK, Ukraine -- Rescue teams on Tuesday pressed on with efforts to find seven miners missing deep underground in Ukraine's Donbass coalfield more than 24 hours after an accident that killed six of their comrades.
Rescue workers have conceded there is little chance of finding the missing men alive at the Skochynsky colliery, with gas levels still high and underground temperatures of 43 Celsius (109 Fahrenheit).Thirty-one teams of rescue workers and medics have been dispatched to the mine in Donetsk, the coalfield's main centre.Officials say the accident, 1,000 metres (3,300 feet) below the surface, was caused by a release of methane and a rock fall during maintenance work at the pit, equipped with some of Ukraine's most sophisticated safety equipment. Thirty-eight miners reached the surface safely.Accidents are common in Ukrainian mines, many constructed in the 19th century and barely modernised since Soviet times.About 200 miners died last year in accidents, but the toll has been declining. In 2007, more than 100 in three explosions occurring over two weeks. An explosion in 1998 killed 63 miners at Skochynsky mine.

State Mulls Boosting Its Stake in AvtoVAZ

The government discussed rescuing AvtoVAZ by increasing its stake in the struggling carmaker through an additional share issue, a Cabinet official said Tuesday after a meeting of the state's anti-crisis commission. No final decision, however, was made on the form or amount of state support that might be offered to AvtoVAZ, the official said by telephone. AvtoVAZ head Boris Alyoshin said last week that the company needed 26 billion rubles ($753 million) to restructure its debt. The company used 45 billion out of 75 billion rubles of its total assets as collateral, Alyoshin said. The company's total debt to suppliers and creditors is 44 billion rubles, Alyoshin told reporters Tuesday after the commission meeting. Alyoshin also said the commission had considered supporting AvtoVAZ by the additional share issue and by increasing the capitalization of shareholder Russian Technologies, which would then help the automaker, Interfax reported. Russian Technologies, Renault and Troika Dialog each have blocking stakes of 25 percent plus one share in AvtoVAZ. Alyoshin said state guarantees would not be enough for AvtoVAZ because of a 10 billion ruble cap on the guarantees, and a default on loan repayments "would lead us to bankruptcy." "Standard means in the form of state guarantees would not work for us," he said. The commission's discussion about an additional share issue startled Renault officials. "We were not notified about such an alternative, we were not even warned that such a possibility exists," Renault spokeswoman Olga Sergeyeva said. She declined to give further comment other than to say that Renault did not have any representatives present during the commission meeting. The meeting, chaired by First Deputy Prime Minister Igor Shuvalov, included Alyoshin, Deputy Prime Minister Igor Sechin, Finance Minister Alexei Kudrin and Samara Governor Vladimir Artyakov, who sits on AvtoVAZ's board of directors. A Troika Dialog representative declined to comment on the possible share emission, saying it was "premature" to do so. AvtoVAZ representatives declined to expound on Alyoshin's comments. The Cabinet official said the anti-crisis commission also discussed other forms of government assistance for AvtoVAZ, including state guarantees, loans from state-owned banks and direct state help. The Economic Development Ministry has been ordered to develop an AvtoVAZ rescue plan for presentation to the government in the next two weeks, the government said in a statement on its web site.

Carmakers Brace for Uncertain 2009

After several years of stellar growth, the market for foreign cars in Russia is starting to crash, but a host of economic factors have made it hard to say how bad 2009 will be, industry experts said Thursday.The Association of European Businesses predicts an 18 percent decline in total new car sales this year, a figure that averages companies' own forecasts. Total sales for both Russian and domestically produced, foreign-branded new cars will decrease to 2.4 million this year, from 2.93 million in 2008."It's as bad as any other forecasts out there," Martin Jahn, vice chairman of AEB's auto committee, said at an annual conference held by the group. "It's difficult to forecast even next week."The forecasts are based on expectations for currency devaluation, unemployment, oil prices, the availability of financing and other economic factors -- none of which are particularly stable. Government anti-crisis measures, such as increasing import tariffs on foreign cars, are also bad for the industry, the group said."We don't see the tariff increase as beneficial, and we don't believe from experience in other markets that it is the right thing to do," said AEB chairman David Thomas, who is also president of Volvo Car Russia. Companies will inevitably raise prices in the second or third quarter of the year, as "profit margins on the Russian market are already relatively low," he said. Nevertheless, import duties won't change consumer preference much, Thomas said. "Russians choose foreign cars for factors other than price." The share of Russian brands on the market has declined in 2008 from 36 percent to 29 percent, according to AEB figures.