Boston, MA -- (ReleaseWire) -- 04/11/2014 -- A slowdown in household consumption and the Kremlin's failure to sufficiently address structural impediments to investment are likely to continue to weigh on the Russian power sector - based on the fact that power demand remains highly correlated with economic development and industrial production. While the Russian power market is huge in terms of its sheer scale, we maintain our view that it will only register subdued growth over our forecast period as macroeconomic headwinds, a difficult political environment and weak institutional capacity continue to discourage foreign investment. As such, with much of the country's aging capacity having been built in the 1960s and 1970s, we expect most of the investment that is channelled into the power sector to be targeted at modernising and substituting aging and inefficient thermal and nuclear capacity, and improving the inadequate transmission infrastructure.
Our relatively subdued outlook for the Russian power market continues to be underpinned by our downbeat forecasts for Russian economic growth this quarter. In line with our already bearish view on the Russian economy, real GDP growth continued to slow in 2013 - coming in at a modest 1.3%. While a breakdown of the Q413 result was not available at the time of writing, BMI's Country Risk team expects fixed investment to have continued to drag on growth in the fourth quarter - much like it did over the preceding nine months.
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At the same time, the main driver of growth over the past decade - household consumption - continues to weaken. We have said previously, that we believe such a slowdown is structural rather than cyclical and, as a consequence, unless structural reforms are implemented, economic growth is likely to remain subdued over our forecast period to 2023.
Indeed, despite the Russian authorities taking steps to actively encourage investment, the Kremlin continues to fail to address supply-side impediments. To this end, while the Central Bank of Russia has demonstrated it has the resolve to rein in inflation so it can cut rates in H114 and ease liquidity conditions, while at the same time the government has tolerated a weaker rouble to boost export competitiveness, there does not appear to have been any real effort to address structural issues such as corruption, grossly inefficient bureaucracy, inadequate property rights and questionable autonomy of the judiciary. As such, we maintain a gloomy outlook for fixed investment over 2014-2015 and reiterate that, unless structural reforms are implemented to address these issues, investment will continue to make modest contributions to GDP growth for the foreseeable future.
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