Putin’s desire to limit annual energy tariff growth likely to hurt Russian energy stocks

Today’s edition of Slon.ru published a chart indicating a poor stock performance of energy utility companies that came as a consequence of President Putin’s attempts to limit the growth of energy tariffs. His recent requirement is to keep the tariff growth within 6 percent per year, which is currently below the official annual inflation in the country. Authors expect that this will drive investors away from the Russian energy sector, as demonstrated by the performance of the MICEX Power Index of the Moscow Stock Exchange.

At the beginning of 2011, the Government decided to limit the annual growth of energy tariffs to 15 percent, which didn’t prevent energy prices in several regions of the Russian Federation to increase by as much as 40-50 percent within a month. This made President Putin – at that time looking to return to the office for his third term – quite unhappy, and he decided it was time to put a stop to the uncontrolled growth of energy prices for households. While his intentions were decent, portfolio investors reacted by pulling out from the sector and sending the market capitalization of respective companies into a nosedive. This is visibly displayed by a chart below, which shows the value of the Moscow’s Stock Exchange composite energy index plummet at the beginning of 2011, and then again at the beginning of 2012, when the Parliament considered limiting the energy tariff growth to the annual inflation rate. After focusing primarily on the electricity utility companies, the Government is expected to attempt to control the tariffs of the heating companies.



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