Boston, MA -- (SBWIRE) -- 03/05/2013 -- BMI View: Recent events are testament to our core view that, whilst the Russian power market benefits from considerable market size and widespread electricity export links, a whole host of challenges still face prospective investors in the sector, especially as new policies suggests that the government's approach to the electricity sector is muddled. Macroeconomic trends, coupled with declining population, are set to take a toll on power demand. In addition, while we expect Russia to converge steadily towards developed standards of wealth, we caution that structural risks, including a weak business environment and poor institutional capacity will pose challenges to project development across all segment of power sector over the long term.

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The Russian Federation is currently one of the top electricity generating economies in the world. Yet, a number of concurring factors point to the fact that the diverse components of Russia's power market will see rather moderate growth over our forecast period to 2021. BMI's Country Risks analysts anticipate that Russian growth will slow markedly over our 10-year forecast horizon, with real GDP growth to average 3.91% between 2017 and 2021.

In addition, an adverse demographic trend is likely to constrain hikes in demand in the long term. Hence, BMI believes that during the period 2012-2021 electricity consumption will see an average annual increase in consumption of 1.77% year-on-year (y-o-y), mirrored by 1.6% average annual growth for generation, with the country continuing to play an important role as exporter of energy in the region. That said, it is interesting to note that Finland is set to test its first power exports to Russia in 2013. Although a highvoltage 400 kilovolt electricity transmission has been in operation between Russia and Finland since 1982, technical restrictions had so far blocked exports to Russia and we note that commercial terms for potential shift have not been agreed yet.

Among the key trend and development observed in the market this quarter, we also highlight that:

- Refurbishment and substitution of ageing plants will represent one of the main drivers for new investments, with gas remaining the most significant source for power generation, owing to its abundance. That said, our view that attempts to lessen the country's strong reliance on thermal sources could create opportunities for other segments is playing out, with RusHydro having announced that it plans to build seven major power facilities in the Far East region following President Vladimir Putin's decree injecting RUB50bn into the company's capital in November 2012.

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