RUSSIAN UTILITIES: Is There Any Place for Private Investors?

State interference and regulatory tightening have intensified this year, dispelling hopes that the initial crackdown on the utilities sector was aimed at winning votes for the parliamentary and presidential elections. Recent regulatory moves have been deeply flawed: RAB regulation has de-facto migrated towards the indexation method – that is, to tariff-setting based not on the economic cost of invested capital but on the wishes of politicians. Generating companies have fared no better and many plants have become loss-making. Even capacity delivery contracts (DPM), the last functioning mechanism introduced by the reformers to provide a return to shareholders, have come under attack. In a further blow, the government’s most recent proposals envisage below-inflation growth rates for end-user electricity prices from 2016.

A worsening macroeconomic backdrop implying slower GDP growth and a weaker rouble adds to the pressure on generators. Privatisation is the only visible potential driver but it is unlikely to happen in the current political situation, in our view. We downgrade stocks across the sector and adopt a more conservative approach to regulation, markets and operating efficiency. Our only BUY-rated stock remains E.On Russia; we assign six companies HOLD ratings and 17 receive a SELL.

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