February 16, 2007 / 11:45 AM / 13 years ago

UPDATE 2-Russia seen blocking Fortum from TGK-1 control

(Adds foreign bids for OGK-5 in the last three paragraphs)

MOSCOW, Feb 16 (Reuters) - Russia will not allow Finnish energy firm Fortum Oyj FUM1V.HE to take control of power firm TGK-1 OAO (TGKA.RTS) for strategic reasons as it serves Russia’s second most important city St Petersburg, analysts said on Friday.

They said the management of Russian power giant Unified Energy System (UES) EESR.MM, which is being dismantled as part of power sector reforms, made the comments on Fortum during a meeting with analysts on Thursday.

UES declined to comment, while Fortum Vice President Kari Kautinen said in a statement it was too early to discuss what stake it might bid for when more TGK-1 shares are sold in July, but Fortum, as the biggest minority investor, already had an interest in TGK-1’s success.

Fortum has a blocking stake of over 25 percent and could win a controlling stake of more than 50 percent when TGK-1 issues more shares to fund its investment needs.

Fortum has said it is interested in buying into one or two Russian power generating firms, but analysts said UES was signalling it would not be able to take control of TGK-1.

“The announcement suggests that a leading foreign investor in Russia’s electric utilities sector cannot take charge of its main holding in the industry,” said analysts from Aton brokerage after the meeting.

“We see the news as negative for the entire generation universe, and believe it increases the political risks faced by potential strategic investors.

“In our view, the news could also have a negative impact on the placement prices for the new share issues planned by companies in the sector,” Aton said.

The Russian government under President Vladimir Putin has regained control in many industries from oil to metals and aerospace and has said it would limit foreign involvement in strategic sectors of the economy.

Oil major Royal Dutch Shell (RDSa.L) had to cede control of its Sakhalin-2 project to gas monopoly Gazprom (GAZP.MM) last year after months of state pressure and many foreign investors had to limit their appetite for entering or expanding in Russia.

Gazprom is actively expanding into power generation as part of its declared goal of becoming a diversified energy player and has recently announced a plan to merge its power assets with power and coal business of SUEK, Russia’s top coal producer.

Gazprom already controls a big stake in Moscow’s power generation firm Mosenergo and has ambitious plans to expand in St Petersburg, the home city of both Gazprom Chief Executive Alexei Miller and Putin.

As part of the restructuring, UES is being broken up into six wholesale power generating firms and 14 regional generators in a move designed to create competition in the sector.

On Friday, analysts also quoted UES’s management as saying on Thursday that Fortum, Italy’s Enel (ENEI.MI) and Czech firm CEZ CEZPsp.PR were seeking a blocking stake in one of the generation firms, OGK-5 OGKE.MM.

OGK-5 sold 14.1 percent of its capital in a pilot additional share issue last year and UES is planning to sell another 25 percent out of its 75.03 percent stake in OGK-5 in the second quarter of 2007.

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