Recent press reports indicate that the Russian Federation Ministry for Economic Development and Trade has prepared a draft law which would eliminate restrictions imposed by Federal Law 74-FZ, passed in May 1998, which limit ownership by foreign states, companies and individuals of shares in RAO UES, Russia's power monopoly, to 25% of all types of shares. The law established that 51% of UES shares must remain federal property, and may not be sold, pledged or otherwise disposed of without passage of a special law. Although compliance with the law has been lax (currently, foreign ownership of UES is estimated at 30%), this formal restriction prevents an increase in the market capitalization of the company. Moreover, the restriction has been cited as one of the factors holding back reform of UES.

At present, the restructuring plan for UES, which was approved by a government decision dated July 11 2001 (for further details please see Government Approves Plans for Energy Sector Reforms), provides that UES shares should be swapped for shares of the Federal Grid Company. Under the existing law, this plan will require adoption of a separate special law. Therefore, the proposed draft law seeks not only to remove an awkward restriction, and thereby help the capitalization of UES, but also generally to move forward the reform of Russia's energy sector.

For further information on this topic please contact Laura Brank at Chadbourne & Parke by telephone (+7 095 974 2424) or by fax (+7 095 974 2425) or by email ([email protected]).