Boston, MA -- (SBWIRE) -- 12/03/2014 -- The deterioration of the Russian economy will cap demand for electricity and weigh on utilities' revenues in 2015. A downward revision to our forecasts for real GDP growth amid falling global oil prices, negative investor sentiment, as well as an electricity tariff freeze, will hit earnings at companies like Fortum, Gazprom and Inter Rao - discouraging investment in the replacement of aging generation capacity.

The outlook for the Russian economy - and by extension demand for power - has darkened further this quarter and we have revised down our forecasts for electricity generation and consumption for both 2014 and 2015. Our already-bearish view of the Russian economy has deteriorated as a consequence of geopolitical uncertainty, restricted access to Western financial markets and, critically, a decline in global oil prices. These factors will weigh on broader consumption and feed into weaker demand for electricity.

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To this end, our Country Risk team has downgraded its real GDP growth forecast for Russia to 0.5% in 2014 and 1.2% in 2015. The impact of the prevailing macroeconomic conditions in Russia will have consequences for the power sector. As the economic outlook fades, we expect electricity demand growth to slow and, combined with a freeze in electricity tariffs, this will lead to lower electricity production and lower revenues for Russian power generators. Domestic electricity demand remains highly correlated with industrial output in Russia and, as such, we are now forecasting that electricity generation will contract 1.0% in 2014 and 0.8% in 2015.

In the power sector, we do not expect an exodus of foreign-owned power companies, but we do expect them to repatriate any profits rather than reinvest in assets during this period of volatility. This will hamper Russia's much needed efforts to replace aging capacity and grid infrastructure.

Key Trends And Developments

- Russia has frozen tariff growth on state-regulated...

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