Russia to hold off on energy price increases until summer to curb inflation

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On Tuesday, the Duma's Budget Committee approved a further increase in tariffs for electricity, heat, and gas proposed by the Ministry of Economic Development

­The price rise will come into force on July 1st giving consumers and manufacturers an extra six months to adapt to the tariff increase. Russian Prime Minister Vladimir Putin said that lower energy consumption in summertime will make the hikes milder than in January.

"Gas prices will rise not more than 15%. The increase in electricity tariffs, including energy network, are in line with the inflation forecast, and all these changes will come into force not on January 1st 2012, but July 1st  2012, bearing in mind that the summer period is remarkably low for energy consumption… and consumers would better adapt to a higher tariff than on January 1st ,” he said.

The decision will help to moderate inflation accelerated by regular tariff hikes by monopolies like Gazprom at the start of the year. Gazprom's domestic gas tariff will grow sharply by 15% from July 1st  despite a previous plan for two-step growth, with 5% coming on January 1st and another 9.5% growth on April 1st. Above all, this implies a roughly 6% heat and electricity tariff growth target for 2012, with effect from July 1st. The only exception from the delay is Russian Railways, which is to see a January 1st hike, but only by 6%, accompanied by a one-billion-euro state subsidy.

Peter Chankin and Artem Konchin, analysts at Unicredit Securities, see the move as negative for utilities sector equities with a focus on candidates’ promotion prior to the elections.

“The decision significantly differs from our base case assumptions for the sector in 2012, and we would expect substantial pressure on share prices from the news. We see the tariff decision as a sign of the ruling elite's focus on the upcoming elections and a negative move for all utilities.”


Chankin and Konchin added that the new tariff scenario put the brakes on companies’ financial results and narrows investment programs.

“The decision confirms expected low tariffs for the distribution sector and creates a downside risk to the market's expectations of 15%- 17% tariff growth for Federal Grid. The generation business should see lower revenues in both the electricity and heat segments, driven by the delay in gas price growth and inflation-targeted tariffs, respectively,” they exploained.  “Minister of Economic Development Elvira Nabiulina said that the decision should not have a significant impact on the operations of natural monopolies, but the investment programs of Federal Grid and MRSKs may see carry-forwards and extensions. For Federal Grid, assuming 6% tariff growth from July 1 (or a 3% full-year average) and holding all other things equal, this would imply a 29% cut to 2012 EBITDA and a 5% cut to our 12M TP. For RusHydro, assuming that lower gas price growth translates to just 6% growth in average free market electricity prices for the year would imply just a 5% cut to our 2012 EBITDA forecast and only a 0.5% cut to our TP. On the other hand, comments by Nabiulina and Prime Minister Putin clearly indicate that the long-term program of gas price increases remains intact and that the 2012 decision should be see as a one-off measure aimed at controlling inflation,” they added.