Moscow, 23 May. The Board of Directors of RAO "UES of Russia" has accepted the Draft Concept of the Company's Strategy for 2003-2008 as a basis. The Board of Directors instructed the Management Board to finalize the Concept by 29 May taking into account the comments and suggestions made. The Board will hold a meeting on 29 May to approved the Concept and have it signed by the Chairman of the Board of Directors.

The work on the draft Concept of the Company's Strategy was started in autumn 2001. The Board of Directors formed a Working Group comprising representatives from shareholders, the management, independent experts and the investment advisor, the consortium of Alfa-Bank and US investment banking corporation Merrill Lynch. Upon public discussion of the Program and adoption of the electricity reform laws, a decision was taken to expand the timeframe of the Strategy to 5 years. The draft Concept was reviewed by the Board of Directors and unveiled on 8 April 2003 in order to ensure its public discussion and accept further comments and suggestions from shareholders.

Under the Concept, the primary objectives of electricity industry restructuring are enhancing the efficiency of electricity enterprises and creating conditions for attracting private investments in the industry.

This is to be achieved by dividing the sector into natural monopolies (primarily, transmission, distribution, and dispatching) and competitive businesses (generation and sales). Generation and sales will develop in a market environment, whereas the monopolies will be regulated by the state to ensure, among other things, a non-discriminatory access to electricity networks.

The transition stage of the reform is scheduled to be completed by 2006. The following entities have been established and are now operating: OAO "Federal Grid Company of the UES of Russia" (wholly-owned subsidiary of RAO "UES of Russia", to which RAO "UES of Russia" transferred its trunk grids); OAO "UES System Operator – CDA" (wholly-owned subsidiary of RAO "UES of Russia" performing all functions of operational dispatching of the UES of Russia); Non-Profit Partnership "Administrator of Trading System", a central marketplace operator for wholesale electricity trading. 4 pilot projects have been launched to reorganize regional energy systems (i.e. "Tulaenergo", "Orelenergo", "Bryanskenergo", "Kalugaenergo"). This stage envisages reorganization of most regional energos by lines of business.

During the transition period, a limited competitive wholesale electricity market will be launched (5-15%), with the whole of the wholesale market to become competitive by 2006. Electricity to the competitive segment will be supplied by Wholesale Generating Companies (WGCs). The generating assets of RAO "UES of Russia" will be handed over to 10 WGCs, 6 based on thermal power plants and 4 on hydroelectric plants. The draft Concept provides that in the process of divestiture of several WGCs from RAO "UES of Russia" involving exchange of shares in RAO "UES of Russia" for shares in the newly established WGCs, minority shareholders of RAO "UES of Russia" will be entitled to receive stakes in WGCs equal to their stakes in RAO "UES of Russia". It is supposed, that power plants will be evaluated on the basis of the common business evaluation methods which are being developed by international consulting companies.

By 2006 the Federal Grid Company will be separated from RAO "UES of Russia", and the government stake in the System Operator will reach 100%. The government stake in FGC will be increased , to 75% plus 1 voting shares using the means provided by the laws (including the sale or exchange of the government stakes in generating companies).

The distribution companies to be established in the restructuring of regional energos are expected to be united, at the stage of their interregional integration, into several (up to 5) holding companies (Interregional Distribution Companies, or IDCs), which are to be set up as wholly owned subsidiaries of RAO "UES of Russia". In 2006, a company is expected to be divested from RAO "UES of Russia", which will hold shares in all IDCs owned by RAO "UES of Russia", with 52% stake in the spin-off company to be owned by the state.

The distribution companies spun-off from regional energos will serve as a basis for the establishment of Guarantee Suppliers (GS). The key "market" function of the retail market GSs is the servicing of households, consumers financed by the state and those who have not, for various reasons, chosen a distribution company for themselves.

With a view to ensuring efficient performance of the Guaranteeing supplier's functions, a system of mandatory direct contracts between the guarantee supplier and electricity suppliers will be introduced for the volume of consumption by households and other socially important consumer groups. The price level in such contracts should be stable enough, on the one hand, and on the other hand it should ensure a certain level of profitability for suppliers of electricity.

RAO "UES of Russia" restructuring consists in a long series of corporate actions and property transformations. The Concept clearly defines the basic principles for the implementation of all corporate transformations in the Holding Company, including the following:

· Compliance with all regulatory requirements;

· Maximum possible consolidation of the established companies combined with ensuring efficiency for the business and shareholders and prevention of monopoly/oligopoly;

· Maximum protection of shareholders rights;

· Ensuring of transparency of the reform procedures;

· Guaranteed right to proportionate distribution of shares in the newly established companies in the event that a decision on reorganization is passed by a simple majority of shareholder votes;

· Transparency and fairness of assets evaluation in dealings involving corporate assets;

· Retention of the amount and conditions of extinction of the reorganized companies' liabilities vis-?-vis creditors;

· Prioritizing quality rather than speed of transformations;

· Minimization of restructuring costs.

The basic unbundling mechanism for RAO UES of Russia will be proportionate distribution of shares. The Board of Directors of RAO "UES of Russia" may take a decision to use other mechanisms (including sale through tenders) for divesting companies and assets. All such deals will be considered individually with the use of a mechanism approved by the Board of Directors of RAO "UES of Russia". Shareholders of RAO "UES of Russia" will have access to the documents (including expert opinions prepared by independent advisors) which were used by the Board of Directors of RAO "UES of Russia" when taking a specific decision to deviate from the basic principle.

Such separation mechanisms will involve internationally adopted practices and ensure transparency and full protection of shareholders’ interests, both in the process of asset divestiture and distribution of revenues.

The reorganization of RAO "UES of Russia" and electricity market liberalization is planned to be completed by 2008.

The Concept of Strategy consists of proposals and preferences of the Company. Final decisions on most issues of restructuring of the sector and RAO "UES of Russia" will be taken by the Government of the Russian Federation, which is duly authorized to do so in accordance with applicable legislation on the power sector. The decisions rendered by the Russian Government will be subject to all corporate procedures instituted by RAO "UES of Russia", including approval of decisions by the Board of Directors of the Company.

The Board of Directors reviewed the information on the preparations being made for the Annual General Meeting of shareholders.

The Board gave the Chairman of the Management Board of RAO "UES of Russia" Anatoly Chubais the task to ensure, pursuant to the Depositary Agreement between RAO "UES of Russia" and Bankers Trust Company (Deutsche Bank), that the Depositary issue a power of attorney authorizing Member of the Board of Directors of RAO "UES of Russia" Sergey Kosarev to vote the shares, in respect of which the Depositary has not received any instructions from ADR holders for voting on all items on the AGM agenda.

The Board of Directors of RAO "UES of Russia" determined the money value of the Company's property contributed to the capital of OAO "UES FGC" at RUB 2,986,045,790 based on the appraisal of market value of the property given in the addenda to the Report on Evaluation of Assets of RAO "UES of Russia" prepared by the Consortium of Appraisers.

On 15 March 2002, the Board of Directors of RAO "UES of Russia" decided to make a contribution to the capital of OAO "UES FGC" in form of cash and property of RAO "UES of Russia", and to determine the money value of that property.

The value of property contributed as at 31 March 2003 totalled RUB 89,690,915,192.

Besides, RAO "UES of Russia" transferred to OAO "UES FGC" part of its unfinished construction projects valued at RUB 464,683,000.

Pursuant to the addendum to the Report on Evaluation of Assets of RAO "UES of Russia", the market value of the previously evaluated power grid assets under construction and equipment has been set at RUB 35,334,200.

Besides, the addendum to the Report determines the market value of previously evaluated part of the fixed assets of the power grid facilities whose value has changed owing to changes in the internal structure of those facilities, and the market value of computers, office equipment and furniture to be transferred to OAO "UES FGC" at RUB 2,950,711,590.

The Board of Directors of RAO "UES of Russia" determined the overall money value of the Company's property contributed to the capital of OAO "UES FGC" at RUB 2,986,045,790 based on the market valuation of the property given in the addenda to the Report on Evaluation of Assets of RAO "UES of Russia" prepared by the Consortium of Appraisers.

* Consortium includes Ernst and Young international company, International Trusteeship Center (Russian appraiser) and ENPI Consult (Russian consulting and audit firm).

The Board of Directors has determined the money value of 42.659.794 ordinary shares in OAO "Bureyskaya HPP" at RUB 424,038,352.

The Board has also approved the purchase by RAO "UES of Russia" of a stake in the HPP at the market value of RUB 424,038,352 determined by an independent appraiser, with payment to be made within 3 months.

It was noted that OAO "Zeyagesstroy" owns 42,659,794 shares in OAO "Bureyskaya HPP", par value RUB 10 per shares (or 11.2982% of the authorized share capital of OAO "Bureyskaya HPP"), with the value of the shareholding amounting to RUB 426.597.940. This stake was acquired when OAO "Bureyskaya HPP" was established in return for a contribution to the company's capital made in form of the power plant assets under construction.

OAO "Zeyagesstroy" is a wholly-owned subsidiary of RAO "UES of Russia". It was organized in the 1960s for the purpose of construction of Zeyskaya HPP. Before OAO "Bureyskaya HPP" was established in 1998, the subsidiary performed the functions of both owner and contractor of the construction project at Bureyskaya HPP. OAO "Zeyagesstroy" owns property and construction equipment, part of which is used for the construction of Bureyskaya HPP, and shares in OAO "Bureyskaya HPP".

OAO "Bureyskaya HPP" is the developer of Bureyskaya HPP. After the power plant is launched, it will be operated by OAO "Bureyskaya HPP". The HPP is funded mostly by RAO "UES of Russia", with part of the finance provided by the federal government.

The receivables of OAO "Zeyagesstroy" total RUB 306 million and are unlikely to be recovered. The amount of payables is in excess of RUB 1,200 million, which includes wage and tax arrears, electricity payments owed to OAO "Amurenergo" and debts owed to some other creditors.

The principal reason for such build-up of payables was the small proportion of cash in the investments allocated by RAO "UES of Russia" for the construction of Bureyskaya HPP in 1993-1997. During that period, most investments were made in kind, i.e. in form of commodity and material valuables received in settlement of debts owed for electricity.

In order to avoid the possible loss of the shareholding in OAO "Bureyskaya HPP" owned by OAO "Zeyagesstroy", RAO "UES of Russia" intends to acquire these shares.

The funds received by OAO "Zeyagesstroy" as consideration for the shares in OAO "Bureyskaya HPP" will be used to pay off the arrears of taxes payable to budgets of different levels, and settle the debts owed to other creditors.

The Board of Directors has determined the money value of the 351,450,514 ordinary shares in OAO "Zeyagesstroy" at RUB 10,081,000, and approved the sale of these shares by RAO "UES of Russia" under the following conditions:

- method of sale: tender using the services of a securities sales agent accredited with RAO "UES of Russia";

- shareholding price: at least RUB 10,081,000.

OAO "Zeyagesstroy" is a wholly-owned subsidiary of RAO "UES of Russia". The authorized share capital of OAO "Zeyagesstroy" is RUB 175.725.257 divided into 351.450.514 shares of RUB 0.5 per share.

Being a construction contractor, OAO "Zeyagesstroy" does not take part in the generation, transmission, dispatch or distribution of electricity and heat, which means that OAO "Zeyagesstroy" shares are non-core assets for RAO "UES of Russia".

The Board of Directors has approved that Deputy Chairman of the Management Board of RAO "UES of Russia" Vyacheslav Sinyugin combine his office with that of a Board member of OAO "Syktyvkar Heat Investment Company".

OAO "Syktyvkar Heat Investment Company" was established by subsidiaries of RAO "UES of Russia" – OAO "Komienergo" and OAO "VNIPIenergoprom", and the Komi Republic Government, ZAO "Complex Energy Systems (owner of strategic stakes in OAO "Permenergo", OAO "Rostovenergo", OAO "Komienergo", OAO "Sverdlovenergo"), and ZAO "Enekos" (power equipment manufacturer).

The company has been established for the purpose of submitting a joint application for the tender announced by the Ministry of Science of Russia to implement a project called "Development and practical elaboration of technical, technological, organizational and financial (including complex) solutions for reforming the heat supply systems in the regions of Russia".

Participation of OAO "Komienergo" and OAO "VNIPIenergoprom" in the establishment of OAO "Syktyvkar Heat Investment Company" has been approved by the Board of Directors of RAO "UES of Russia".

Vyacheslav Sinyugin was nominated for the Board of Directors of said company by OAO "VNIPIenergoprom" and elected at the Founders' meeting held on 31 March 2003.

The Board of Directors has approved the sale of 698.490 ordinary shares in OAO "Stavropolenergonerud" held by RAO "UES of Russia" under the condition that the starting price of the stake and investments is at least RUB 150,000,000.

OAO "Stavropolenergonerud" (OAO "SEN") was established in 1993 for the purposes of construction and operation of the Malkinsky sand-and-gravel pit. Shareholders of OAO "SEN" include RAO "UES of Russia" (55.88%), OAO "Stavropolagropromstroy" (6.4%), ZAO "Stroymaterialy" (10.16%), Committee for State Property Management of the Kirovsky District Administration of Stavropolsky Kray (10.16%), and the Ministry of Property Relations of Stavropolsky Kray (17.4%).

The Board of Directors has approved the purchase by the Company of ordinary shares in OAO "Station Ekibastuzskaya TPP-2" on the following conditions:

number of shares to be purchased: 6,059,026 ordinary shares in OAO "Station Ekibastuzskaya TPP-2", par value 1,000 tenge per share, which makes up 50% of the authorized share capital of said Company;

the stake is to be purchased at a price not higher than the market value, USD 21,163,463.72.

The Board of Directors has approved the transfer by RAO "UES of Russia" of 3,702,432 shares in OAO "Station Ekibastuzskaya TPP-2" at a price of at least USD 3.49288 per share (after these shares are acquired by RAO "UES of Russia") in order to discharge the liabilities of RAO "UES of Russia" under its contracts with electricity suppliers.

The decision in question has taken by the Board of Directors of RAO "UES of Russia" pursuant to the Intergovernmental Agreement between the Russian Federation and the Republic of Kazakhstan of 19 January 2000, the decision of the Board of Directors of RAO "UES of Russia" of 2 February 2001 to take steps aimed at recovery of the debts owed by Kazakhstan's business entities to RAO "UES of Russia" and its subsidiaries and dependent companies for the electricity supplied to Kazakhstan in 1993-1999.

It was noted that, during the period between 1992 and 1999, RAO "UES of Russia" supplied electricity to the Republic of Kazakhstan, which resulted in debt owed by Kazakhstan's business entities to RAO "UES of Russia" growing to USD 26,964,463. To date, these consumers have not been able to pay off their debts.

Electricity supplies to Kazakhstan's companies were handled by RAO "UES of Russia" under agency agreements with Russian energy generators. As no payments were made under these agreements, the debts owed by RAO "UES of Russia" to electricity suppliers reached USD 16.48 million.

On 19 January 2000, Prime Minister of Kazakhstan K. Tokaev and Chairman of the Russian Government M. Kasyanov signed a Protocol on the discharge of the debt in question by transferring a 50% stake in the joint venture established at Ekibastuzskaya TPP-2 and the property of the Northern Production and Transport Authority, and the Trudovaya and Udarnaya railway stations.

The financial scheme of the transactions is designed to recover the debts owed by Kazakhstan and pay off the debts owed by RAO "UES of Russia" to electricity suppliers.

The agent of RAO "UES of Russia" in this deal is OAO "UES Payment Optimization Center".

According to the report of an independent appraiser (the appraisal was performed by the Kazakh party), the market value of the property being conveyed is USD 5,801,000. The property is to be purchased at a price not be higher than its market value, which makes USD 5,801,000 .

The shares are to be purchased at a price not higher than their market value, which is USD 21,163,463.72.

Consideration for the property shall be the set-off by RAO "UES of Russia" of the debts owed by Kazakhstan's solvent distribution companies for the electricity supplied in 1993-1999 against the amount of payables making USD 5,801,000 .

Consideration for a 50% stake in OAO "Station Ekibastuzskaya TPP-2" shall be the set-off by RAO "UES of Russia" of the debts owed by Kazakhstan's solvent distribution companies for the electricity supplied in 1993-1999 against the amount of payables making USD 21,163,463.72. The shares will be distributed among RAO "UES of Russia" and Russian electricity suppliers.

The remaining 50% stake in OAO "Station Ekibastuzskaya TPP-2" will be held by ZAO "Ekibastuzsky Energy Center", a Kazakh company authorized by the Republican Government to settle the debts owed by Kazakhstan's businesses for the electricity supplied.

Analysis of the state of Ekibastuzskaya TPP-2 and the business plan drawn up with the help of the power plant's specialists shows that this project holds much promise for RAO "UES of Russia".

Ekibastuzskaya TPP-2 was built in 1990-1993 in the immediate neighbourhood of the Ekibastuz coal field. The power plant has installed capacity of 1,000 MW and is linked up to the UES of Russia via the Siberia-Urals transmission lines of 500 kV and 1,150 kV.

Analysis of the electricity market capacity for Ekibastuzskaya TPP-2 has shown that demand for electricity in North Kazakhstan, South Urals and the Omsk Region energy system totals 6-6.5 billion kWh at a price of 0.7-0.8 cents. The estimated cost of electricity generated by the power plant makes 0.55-0.57 cents per kWh.

Competitors of Ekibastuzskaya TPP-2 in the area are Ekibastuzskaya TPP-1 and Aksuiskaya TPP.

The anticipated revenues of USD 48-50 million annually will be ensured by increasing generation to 6 billion kWh, provided that the designated technical characteristics are preserved, half of the electricity is supplied to Russian consumers, and measures are taken to reduce the cost of generation and ensure a reliable power reserve at the power plant.

It should be pointed out that the initial stage of organizing business processes at the power plant will require establishment of sources to fund the working capital and overhaul the power plant's facilities. For that purpose, USD 50-70 million in investments will need to be made in 2003-2008. The Government of Kazakhstan has suggested inviting an outside investor to acquire a stake in OAO "Station Ekibastuzskaya TPP-2".

The benefits of RAO "UES of Russia" participation in the project include the use of Siberia-Urals transit lines located in Kazakhstan. Pursuant to the Protocol of 14 June 2002, the Kazakh party will hand over the management of the 500-kV and 1,150-kV transmission lines to the power plant, which will ensure an advantageous transit of electricity between Siberia and Urals, connecting the Central part of Russia with West Kazakhstan. This business may generate USD 50 million in additional revenues annually.