The interview with MP Nikolay Leonov, who also serves on the State Duma Committee on Security and Defence Issues, was conducted by Valeriy Kalabugin. The text of the interview, published by Russian newspaper Nezavisimaya Gazeta on 21 June, follows; subheadings have been inserted editorially:

Audit Chamber's findings

The Russian Federation Audit Chamber has published the results of an analysis of implementation of the Programme for Reform of the Russian Federation Electricity Industry and has stated that reform is being formulated and managed by the Unified Energy Systems of Russia joint-stock company itself without the state being properly involved in this process. It was acknowledged that reform is being implemented in accordance with the interests of the Russian joint- stock company leadership without consideration for the interests of the country's economy as a whole, which may have negative socioeconomic consequences.

The Audit Chamber also concluded that reform "has had an adverse impact on fundamental sectors of industry" but "will intensify the Unified Energy Systems of Russia joint-stock company's monopoly position on the federal wholesale electricity market and create a conflict of interests with independent electricity producers, barring the state from controlling these monopoly areas of activity." Therefore, the Audit Chamber considers it necessary to take "anticrisis measures that presuppose the state's involvement in running the industry".

Reforms "threaten Russia's economic security"

State Duma Deputy Nikolay Leonov, a member of the State Duma Committee on Security and Defence Issues, agreed to comment on the problems of electricity reform in Russia and the activity of the Unified Energy Systems of Russia joint-stock company management.

[Interviewer Valeriy Kalabugin] Can you tell us how you assess the consequences of the reforms being conducted by the Unified Energy Systems of Russia joint-stock company for the economy as a whole and for the country's citizens?

[Leonov] I can say unequivocally that the reforms being conducted by the joint-stock company, as well all its activity, pose a direct threat to the country's economic security. The media are providing convoluted, hazy explanations of the essential nature of the reforms. No one is saying that prior to Chubays and his reforms the single energy system operated perfectly and that there was absolutely no need for any reform.

But it was with the arrival of Chubays and the start of reform that the problems began. Everyone will remember the rolling outages that disconnected troop units and hospitals where people died on the operating table.

Reform began on the pretext of bringing down prices, but let us take a look: Over the past six years tariffs have done nothing but rise, more rapidly furthermore than inflation - up 15-20 per cent. What consequences can there be? How can GDP be doubled with that kind of tariff policy?

Competition "just fine words"

[Kalabugin] But one of the main aims of reform is, after all, to create a competitive environment on the electricity market?

[Leonov] Of course, that was what was said but these have remained no more than fine words. In actual fact the joint-stock company is simply clearing this energy market of competitors. Here is an example for you. Most heat and electric power stations in Russia operate on coal and a huge number of people are employed in this sector. Instead of creating a competitive environment among coal companies the Unified Energy Systems of Russia joint-stock company is concluding a monopoly agreement with the Siberian Coal and Power-Generating Company. They signed an agreement 30 December with this company whereby all heat and electric power stations belonging to the joint-stock company would buy this coal but experts estimate that it is more costly than the coal of other companies which are prepared to supply it.

But they have been forced out. This constitutes a direct threat to the internal security of the whole country. You know what is happening at mines now - jobs are being cut, there are strikes and hunger strikes which are causing people to die.

[Kalabugin] But does this agreement conform with legislation?

[Leonov] It conforms rather with the personal interests of the company boss. Power generation has become a personal business for him, hence the agreement with the coal company is an agreement between two businessmen pursuing their own objectives. And this kind of attitude can be discerned in all the actions and decisions taken by the joint- stock company led by Chubays. I would further say that there has never been anything in Chubays's actions aimed at strengthening the Russian state and economy. It has been a case of personal ambition, nothing more.

An example being his statement during the Duma election campaign about cutting tariffs in regions with the correct political orientation. After all, this is a promise to corrupt the population. The joint-stock company is a state structure, yet Chubays runs it like a personal asset.

At the same time it is hard to find the signature of Anatoliy Borisovich himself on any documentation. Since the days of privatization he has entrusted his deputies with signing important documentation, it is safer that way.

"Inefficient investment"

[Kalabugin] The document published by the Audit Chamber talks of inadequate investment in the company's fixed capital, But everyone knows about the Bureyskaya hydroelectric power station, the Sochi heat and power stations, and the Northwest heat and power stations in St Petersburg. Is that not developing the industry?

[Leonov] Certainly, the joint-stock company is making loud statements about this and about the fact that there are currently more generating capacities than distribution networks. But that is only because electricity consumption has fallen on the whole because of the slump in production.

If you are talking about construction, the Bureyskaya hydroelectric power station is a purely Soviet construction project. The cost of construction of the Sochi heat and power stations has proved to be twice as high as the cost in Western Europe despite the fact that construction costs here are far lower. It is logical to ask where the money is going. Whereas the cost over there is 1,000 dollars per kilowatt-hour of established capacity, here it is 2,000 dollars. That is evidence of inefficient investment.

Not to mention the fact that the gala launch of the Northwest heat and power stations turned into a farce. The press reports that illuminations were provided by power from the external grid and steam was supplied from the neighbouring boiler house.

In actual fact there has been no modernization or serious construction either. Hundreds of millions of dollars have already been spent on the so-called "mothballing" of the Boguchansk hydroelectric power station. Is this an example of competent asset management?

I realize that these are not facts that are generally known but that is not surprising either. After all, Chubays puts considerable effort and money into "cultivating" his image as an effective manager.

[Kalabugin] What do you think about the Unified Energy Systems of Russia joint- stock company acquiring assets abroad? In Georgia, for instance?

[Leonov] I think that this is deception of the first order along with much of what energy managers do. I know from sources at the joint-stock company that a premium of up to 5m dollars is awarded for asset acquisition. The asset is acquired and the interested party considerably inflates the price and receives the premium. That is foreign assets for you.

As I have already said, Chubays's activity is simply dangerous for Russia. After all it is since Chubays took up the post of chief executive that the number of foreigners owning shares in the company has increased, whereas by law no more than 25 per cent of the shares in the electricity industry should be handed over to foreigners.

[Kalabugin] What mechanisms do you think can be used to change the situation in favour of Russian state interests?

Action needed

[Leonov] First, the Russian government must study closely what is happening to the electricity industry and reform. Second, the Audit Chamber must conduct a highly detailed inspection of the Unified Energy Systems of Russia joint-stock company's activity since everyone is aware of the outrageous scale of misuse of what are effectively state funds. I am referring, for instance, to Chubays's funding of political and media projects.

Lastly, there should be a general meeting of the Unified Energy Systems of Russia joint-stock company shareholders, which should elect a competent individual as chief executive - furthermore elect rather than appoint as happened last year on the instructions of an eminent state official. It is finally time to abide by the law - an organization like the joint-stock company must be run by a legitimate chief executive.