When it became clear how Mosenergo would be reformed, strategic purchases of Mosenergo stock began. The wild ride prices took in late September and early October is more likely than not the result of major speculative maneuvering.

Yana Galukhina

The price of Mosenergo stock began to rise in late July and continued to go up for more than two months. During this time, it quadrupled. In July and August, brokers and analysts were convinced that shares were being bought up by a strategic investor, an organization with close ties to Gazprom. Back in 2003, Gazprom subsidiary Gazprombank bought a 12% stake in Mosenergo from Renaissance Capital Investment Company and during its recent summer shopping spree, analysts estimate that the bank was getting close to holding a controlling stake in the Moscow energy company. By the end of September, the market was abuzz with rumors that Gazprom already had the stake it wanted in Mosenergo and that there was reason to expect a decline in quotes.
In spite of these predictions, Mosenergo stock prices continued to rise. From September 27 to October 5, they more than doubled and reached the historic high of 9.95 rubles per share. Soon afterwards, however, they began just as rapidly to decline. By October 11, a share in Mosenergo cost a mere 4.80 rubles. For all of mid-October, quotes fluctuated slightly around this level. Thus, Mosenergo turned from one of the very few Russian blue chips (stocks with high liquidity and low volatility) into a high-risk speculative stock in just two months.

Strategic interest

Gazprom has long been interested in electricity and this fits well into its strategic plan of becoming a global energy company. According to official Gazprom reports, at the end of last year the corporation and its subsidiaries controlled 15.8% of Mosenergo stock. This summer, it began to actively purchase shares in the electric company, motivated by the coming reforms at Mosenergo. At a June meeting, shareholders approved a plan to divide the company according to its various business lines. On the foundation of Mosenergo, Gazprom hopes to found 13 companies, four generating electricity, three distributing it, one selling it, one managing the grid (as part of the federal company), and several repair and construction companies. After restructuring, Mosenergo will end up with 17 heat and power stations, which will be united into Territorial Generating Company Number 3 (TGK-3). TGK-3 will be the largest generating company after industry reform with a total capacity of around 10.6 MWt (currently, Mosenergo’s power stations have a capacity of only 14.8 MWt).
Clearly, TGK-3 is one of the most tempting pieces of the energy reform pie. Gazprom’s extreme level of interest in gaining control of this TGK also makes plenty of sense. Mosenergo’s power stations primarily use natural gas, and Gazprom, as the main supplier of this input, would like to gain a major customer. Gazprom would also like to reach final consumers and thus make additional profits.
According to various estimates, Gazprom wound up with a 25-30% stake in Mosenergo over the summer and autumn. Some may think that this is not enough to direct the future TGK-3. Let’s not forget, however, that Mosenergo’s main shareholder is RAO UES, which holds a 51% stake, while Gazprom, as its directors recently announced, holds a 10% stake in UES. Thus, Gazprom has a total of 30-35% of the Moscow energy company’s stock. Gazprom can also work together with the government which has a 12% stake in Mosenergo. As Sergei Suverov stated, “We have come to an agreement that RAO UES shareholders, and not the monopoly itself, will participate directly in the future energy companies, and maybe no one will have a controlling stake.” Gazprom, as the biggest shareholder, will end up actually controlling the situation in the company.
Nonetheless, analysts believe that Gazprom was not the only player in the strategic game for Mosenergo. European energy giants also may have exhibited interest in the Moscow company, most likely the German company E.ON (since 2003 the parent company of Ruhrgas). “The main business of companies like E.ON or the Italian corporation Enel is managing energy assets and this is what brings them the bulk of their earnings,” explains Mikhail Zak, Senior Analyst at Web Invest Bank. “At present Mosenergo is not extremely profitable, but the industry is in the process of restructuring. Starting in 2007-2008, prices for electricity are expected to rise in Russia and Russian energy and electricity assets will become substantially more profitable.”
E.ON’s interest in the Russian energy industry is further demonstrated by a memorandum of mutual understanding the company signed with Gazprom in July. The document talks of the companies working together on “joint projects in natural gas production, gas transportation to Europe, power generation in Russia, and development of distribution and sales infrastructure for natural gas and electricity in Europe.” Apparently, Gazprom and E.ON have agreed in principle that the German company will take part in restructuring Mosenergo, but how this will work in practice remains unclear.

Speculators’ tricks

The strategic purchases ended in mid- to late September. The market should have calmed down, yet what happened next defied all of analysts’ expectations. On Tuesday, September 28, Mosenergo stock lost 22%, on October 1 33%, and on October 5 70%. Over seven trading sessions, the MICEX had to halt Mosenergo trades three times because quotes were fluctuating outside the maximum established by regulators. As prices rose during the strategic buy up, speculators on the market thought that after the dramatic growth, prices should fall. They opened up shorts, meaning they sold shares without cover. Prices continued to rise and speculators betting on falling prices began to experience losses. Investment companies were forced to close their clients’ positions in accordance with stock exchange rules. “But it’s not always possible to close a position,” explains Zak. “A broker lets the market know that he has demand for a certain number of shares, but there are no bids on the market. Then the broker says that he’s ready to buy shares at any price. It has a snowball effect. So, not all shorts can be closed in a day. Sometimes the agony drags on for a week.” Trading volume at the time was exponentially greater than the yearly average. Then, all of a sudden, everything stopped as suddenly as it started. On Monday, October 11, the price of Mosenergo fell by 52%. “Additional shares came to the market which had been converted from ADRs,” stated an investment company analyst who preferred to remain anonymous. “It’s possible that regulators played a role. In order to burst the bubble, some of the deals were conducted outside of regular trading between individual investors.” The large-scale speculation was over.

Getting in gear

Beyond all the plusses and minuses on investors’ personal accounts, the Mosenergo game had yet another consequence. Lawmakers reacted. The Deputy Chair of the Duma Banking Committee, Anatoly Aksakov, wrote a letter to Oleg Byugin, the Director of the Federal Financial Market Service (FSFR), expressing his concern regarding the “absence of proper reaction from the executive branch and of concrete steps aimed at preventing the repetition of such scenarios in the future.” Aksakov also recommended founding “a responsible committee able to take on the public role of analyzing and studying the situation.”
The executive branch has yet to respond, but according to Aksakov, “FSFR representatives explained that this was not manipulation via insider trading, but rather margin trading as part of a major speculative game.” In November Duma deputies plan to begin debate on a new version of the Law on Insider Trading, and incidents similar to what happened to Mosenergo, Aksanov believes, should be regulated preferably by the exchanges and arbitration courts.

More in Russian>> www.expert.ru