Power - but not to the people

Russians pray that their neighbours pay their electricity bills: thanks to Soviet wiring, if one get

The Kamchatka peninsula, the farthest eastern reach of the former Soviet empire, has for decades been the epitome of cold war secrecy. A snowswept "closed region", it is home to the sophisticated early warning system designed to be impenetrable and to relay to Moscow the first signals of an American nuclear strike from Alaska. But this January, after enduring the frost of the cold war and the collapse of the regimes that built it, Kamchatka met its match - in an unpaid electricity bill.

On one habitually freezing Saturday in January this year, Russia's national electricity company, Unified Energy Systems (UES), had had enough of the military installation's $6.8m debt and cut the power. A bit more than just the lights went out. The station not only collects all the data from Russia's spy satellites but also provides support for the International Space Station. When UES pulled the plug, Cosmonaut Yury Anufurienko of Russia and astronaut Daniel Bersha of the United States were spacewalking outside the station. It struggled to maintain its position during the power cuts, which lasted days.

But the crisis at Kamchatka was far more than just a madcap sideshow to a nation's troubles. There, two titans of Russian society clashed. UES is headed by Anatoly Chubais, the economist who spearheaded the drastic reforms to Russian state companies in the Nineties that took the economy on a roller-coaster ride towards capitalism, ending in the financial collapse of 1998. The Russian military was the raison d'etre of the Soviet beast, to which all other ends and lives were sacrificed. But at Kamchatka, it was clear who now had the upper hand.

"Cutting off power is not one of the best ways to settle debts," said one UES official at the time, as they flicked the switch on the tired Russian military behemoth. Power cuts in Russia are in keeping with the extremes of climate and lifestyle upon which the country thrives. The Soviets wired the utilities for whole towns to the same circuits. So when a factory fails to meet its bills, the town's nearby flats and hospitals lose their hot water or lighting. Since the state began to relinquish ownership of everything, companies no longer have the right to gas or electricity unless they pay their bills. Neither do people. Russia is learning this the hard way.

Kamchatka's problems came to a head when the government raised the prices that UES - still a state company with the monopoly on electricity - could charge. Unfortunately, the Russian government had weeks earlier fixed the military budgets for electricity according to the old prices, and so it was not long before funds ran short. This tiny bureaucratic slip shut 157 satellites down.

The road to this tangled situation began amid the vodka glasses and earnest discussions of a Moscow club in the early Nineties. Chubais and a few like-minded reformers met regularly and began to plot the nation's dramatic switch to a market economy, aware that such talk could still have them sent to the gulag. Their ideas remained dangerous dreams until Boris Yeltsin, still edgy after the 1991 coup attempt, decided he had to keep the reactionary remnants of the Soviet machine in check, and launched the nation into privatisation.

Workers were given shares in their companies in the form of vouchers. They were squandered, swapped in market stalls and traded on street corners.

But the vouchers were just bits of paper until the company was privatised, and so Russian workers, the traditional enemies of big business and its stock exchanges, became desperate to cash in on their new assets, and perversely became the main advocates of privatisation, which soon sped through.

Large chunks of the state's resources were sold off. Sometimes the prices were competitive; at other times they were laughably low. The worst case came when the government, strapped for cash, accepted a proposal from a consortium of wealthy businessmen, the men who would later be known as oligarchs. They offered to "manage" the poorly run state utilities and natural resource companies in exchange for a "loan" to the government.

These loans gave half a dozen men shareholder control over companies such as Gazprom, which owns 30 per cent of the world's natural gas, and the equally wealthy oil giants Yukos and Lukoil.

When Yeltsin faced an ever-popular Communist Party at the 1996 elections, the oligarchs simply used their television stations to sway the electorate his way. And Yeltsin never forgot the favour.

The sell-off continues: the profiteers are taking around $10bn out of Russia every year and putting it in offshore accounts in places such as the Cayman Islands.

One part of the economy seems to have adjusted to the ideas of the market, while the remainder loiters in Soviet times. In Russia, the traditional arguments against privatisation falter. The accepted idea is that capitalism is the sure way to keep Russia from returning to the medieval, savage repression of Soviet times. But the madness is in the method: these companies were sold to a select cadre of men whose basic instincts were not to transform Russia into a capitalist utopia but to line their own pockets.

"Only a few big monopolies remain - in electricity and gas," said an equity research analyst at Credit Suisse First Boston. "In the other sectors there is real competition and people can choose what they buy. But in electricity and gas, the end user has benefited from the monopoly as the government does not want to raise the prices. So they have stayed very low . . . But once competition comes to those sectors, consumers will suffer. We would expect prices to go up and the government to raise tariffs."

This is little comfort in quotidian life. While the process of "restructuring" the utility giants is in its infancy, basic bills have risen dramatically. Electricity prices in Moscow have been hiked 15 per cent in two years. In the gas sector, two years have seen bills rocket between 10 and 40 per cent, depending on the region. Rail fares - hugely important when vast tranches of barren land separate the main cities - have risen 70 per cent in two years.

The future is bleak for the average Russian's monthly bill. While reforms of the gas sector have yet to be announced, UES will have to dissolve into privatised entities by 2004-5. Only by the end of the decade, analysts predict, will prices begin to see the benefits of competition. Chubais has argued that, if the ageing Russian electrical system is to get the investment needed to make it work in future, prices must double, if not treble. For ordinary Russians, this means an empty fridge.

Elena Ivanova is a single mother who lives with her two teenaged children in a two-room flat in Moscow. She now pays the state for her bills, as the Moscow administration subsidises all utility payments. They own the huge power plants that heat the city's water, and the pipes that carry it.

"At present I have little to pay over the rent," says Ivanova. This way she manages to balance her books, and can keep a regular supply of food in the fridge. Muscovites can only entertain a future where the state continues to distribute and subsidise their hot water, heating and electricity. And as the row continues in the ivory towers as to whether the future should involve Russians all paying separate, market-adjusted bills, Ivanova can do little other than worry: "If the bills start coming to me, who knows what the future will hold?"

The author is Moscow correspondent for the Observer and Guardian. This is the latest in an occasional NS series on privatisation around the world. Previous articles covered South Africa and Belize