In spite of Yukos’ troubles and potential delays in Russia�s electricity sector reform plans, the country appears to remain an attractive target for Western companies. Last month Siemens announced its intention to increase its stake in Siloviye Mashiny (Power Machines Group), while E.ON also signalled a clear intention to further its activities in the country.

Many power and energy companies will admit to having an interest in Russia but most remain cautious about the market and the perceived potential difficulties of doing business in the country. They are therefore waiting in the wings to see how electricity market reform progresses; how the Yukos situation will develop; to analyse risk profiles and so on.

Their caution is understandable in this age of shareholder scrutiny and given the uncertainties in the Russian market, but makes Siemens’ move look all the more bold. Indeed Siemens has placed itself centre stage, in the spotlight. But, provided the deal with Power Machines goes through, it will pay off in the long term.

Under the deal, Germany-based Siemens is reported to have agreed to buy an equity-weighted 35.5 per cent stake in Power Machines, Russia�s leading power equipment company. The deal is structured as a 50-50 joint venture between Siemens and Interros, a Russian industrial group controlled by Vladimir Potanin, one of the country�s oligarchs. Interros owns 71 per cent of Power Machines.

Siemens will have 50 per cent minus one share in the joint venture, giving it a 35.5 per cent stake in Power Machines. Siemens already owns 4.4 per cent of Power Machines, so the deal will in effect give it a 40 per cent holding. The Germany company will have management control of the joint venture, and will be able to increase its stake to 100 per cent within five years. It has also agreed to invest $200m in Power Machines over the next three to five years to modernize its assets.

The financial terms of the deal have not been disclosed. However, at current market rates, a 35.5 per cent stake in Power Machines is valued at around $110m, according to Aton Capital.

The Russian government is reported to be in support of Siemens� bid, particularly in light of the investment it will bring to the Russian engineering sector. However, prime minister Mikhail Fradkov has stated that the deal needs to be carefully examined, and the final decision will be taken by the Federal Anti-Monopoly Service in early August.

The Siemens deal means that a previously agreed merger between Power Machines and Russian engineering firm OMZ has been cancelled. While analysts believe that this is not good news for OMZ, OMZ has stated that it will continue to sell its non-core assets and focus on nuclear power equipment.


Power Machines Goup’s activity structure, 2003
Click here to enlarge image

Investment by Siemens is probably a better way forward for Power Machines than a merger with OMZ. Power Machines said that on close examination of future financial flows, it had failed to find “considerable synergy effects” from the OMZ merger. On the other hand, Siemens will enable the company to modernize its assets, and will also give it access to new technology and markets.

The deal gives Siemens a firm footing in the Russian power technology sector. Power Machines Group is Russias leading manufacturer and supplier of equipment for hydro, steam, gas and nuclear power plants. It also manufactures transmission and distribution equipment as well as transport and railway equipment. The total installed capacity of its power generating equipment amounts to 287 GW in 45 countries, equivalent to ten per cent of the world�s installed capacity. Power Machines� annual results for 2003 show revenues of $352m, an increase of 27.3 per cent over 2002. Its order book stood at around $1.63bn at the end of 2003. In addition to having a leading position in the Russian power equipment market, it also has ambitions to increase its market share internationally.

Siemens will be able to use Power Machines as a platform for growth in the huge Russian electricity market. Total installed capacity in Russia stands at around 215 GW, although it is thought that only 170 GW of capacity is actually available. The system is dominated by conventional thermal plants using coal, natural gas and oil. Hydropower accounts for 19 per cent of generation and nuclear 16 per cent.

Electricity demand in Russia remains below Soviet-era levels but is growing at 2-3 per cent per year on the back of economic growth. Russia�s national electric utility, RAO UES, estimates that generation will reach 938 TWh by 2005 and 1065 TWh in 2010, up from 908 TWh in 2003.

The IEA believes that Russia has adequate capacity to meet its needs until 2010. However, much of the country�s electricity infrastructure is in need of modernization. According to the IEA, $6.5bn per year of investment is needed up to 2010, and up to $16bn per year will be needed thereafter as more of the generating fleet becomes obsolete.

This is the market which Siemens will have access to should its deal be approved. The only question mark over this market is when investments will start to flow, and that depends on the electricity market reform programme which at present seems to have slowed.

Nevertheless, it seems that Siemens will be ready and waiting on stage when the market is ripe. Will its competitors still be waiting in the wings?