The Russian government has approved the socioeconomic development forecast for 2011-2014, Economic Development Minister Elvira Nabiullina told reporters after September 21, 2011 Cabinet meeting. The previous forecast was approved by the government in April of this year.

According to the forecast, the global economy is expected to grow by 3.8% in 2011, 3.7% in 2012, 3.5% in 2013, and 4% in 2014.

Oil & gas extraction

The extraction and production of primary fuel and energy resources in 2014 is projected at from 5.1% to 8.1% more than last year, according to the forecast.

The proportion of gas in that extraction and production will rise, that of oil will decrease, that of electric power produced at hydropower and nuclear power stations will increase, and that of coal will remain substantially the same, the Ministry projects. Increased demand will drive the increase in the proportion of gas, due to its environmental and consumer advantages, and to the slowing development of nuclear power worldwide and the absence of resource limitations on the production of Russian gas. The decrease in the proportion of oil will happen mainly because of resource limitations, the document says.

Expectations are that exports of fuel and energy resources will by 2014 have increased to 867-910 million tons of standard fuel and 2.4% to 7.5% over the 2010 level. The proportion of exports in overall production of primary fuel and energy resources will decrease slightly to 49.5%-46.8% versus 47.1% in 2010 as oil exports contract.

Domestic demand for fuel and energy resources in 2014 will be up 7.5% to 8.6% from 2010. No substantial change in the structure of consumption will occur in the next few years. The proportion of gas in consumption will decrease slightly from 53.8% in 2010 to 53%-53.3% in 2014. That of power generated at hydropower and nuclear power stations will rise from 10.9% to 11%-11.2%, and that of oil and oil products from 18.6% to 19%.

Planned changes to the taxation regime for oil extraction could create additional conditions for investment in the sector to increase production. In such conditions, the Ministry expects the amount of drilling done in 2014 to increase 33.3% from 2010, including 32.6% more production drilling.

Electricity

Electricity consumption in Russia will grow by an average of 2-2.5% annually in the period from 2011 to 2014, according to the forecast.

The published forecast projects that electricity consumption in Russia will rise 2% to 1.057 trillion kWh in 2012 from an anticipated 1.036 trillion kWh in 2011. Production, meanwhile, is expected to increase by 2.48% to 1.08 trillion kWh from 1.054 trillion kWh, and exports are projected to jump 24.4% to 25.5 billion kWh from 20.5 billion kWh.

The Economic Development Ministry forecast corresponds to the previous forecast included in the general plan for the development of the electricity sector until 2030, projecting annual consumption growth of about 2%.

The Ministry’s forecasts states that electricity production and consumption will surpass the pre-crisis level in 2011.

Overall, the Ministry projects, electricity production in Russia will grow by 9.3% by 2014, and consumption will increase by 8.8%. Actual figures may differ by 0.3-0.6% per year depending on temperatures.

The share of electricity generated by thermal power plants is expected to shrink to 66.5% in 2014 from 67.3% in 2010, while nuclear power is projected to grow to 17.1% from 16.4%, as hydropower remains virtually unchanged at slightly more than 16%.

Implementation of innovation programs will boost generation of electricity at existing RusHydro facilities (without additional launch of capacity) by 1.5% by 2014, and increase utilization of installed capacity at nuclear power plants to 85.8% in 2014 from 81.34% in 2010, as well as reduce losses in public power grids to 10% in 2014 from 10.3% in 2010, when losses totaled 104.9 billion kWh, the Ministry expects.

Electricity exports are expected to be about 2% of production. More than 80% of Russian electricity exports will go to countries outside the C.I.S., with about 60% going to Finland alone. Belarus, meanwhile, will account for over 70% of electricity exports to C.I.S. countries. Imports will be tiny, amounting to about 0.2% of Russia’s consumption.

Russia is expected to increase electricity exports to 26.6 billion kWh in 2014, or by 38.4% compared to 2010, largely on growth of exports to China.

Russia’s Economic Development Ministry forecasts total investment in the electricity sector in Russia in 2011-2014 at 4 trillion roubles, according to the Ministry’s socioeconomic development forecast for that period, which was approved by the Russian government.

Investment in generation operations will come to around 2.7 trillion roubles, of which around 1.4 trillion roubles will be investments in heat generation. Nuclear generation will receive almost 1 trillion roubles, and hydrogenerating operations around 351 billion roubles. Around 29 gigawatts in new capacity will be set up over this period. The remaining funds will go to agricultural power facilities (around 1.3 trillion roubles).

The Ministry also said that the share of investment in state-owned companies will decrease. At the same time, private investment will be present in heat generation, since it is the most competitive sector, while financing for natural monopolies (grid systems, hydroelectricity, and nuclear power) will come from the state.

Furthermore, the forecast states that over 50% of total annual investment is provided for in capacity supply agreements, along with which grid facilities will be set up for allocating new capacity. The bulk of investment from supply agreements is expected in 2012-2014.

Projects outside of capacity supply agreements are susceptible to lack of financing. In addition, regions where the construction of major facilities according to supply agreements is not planned might face a decrease in the reliability of power supply.

RAB “reboot”

The growth of revenue of IDGC Holding’s (company comprising interregional and regional distribution grid companies) interregional distribution grid companies will be restricted to 12% as of July 1, 2012, and to 10% in 2013 and 2014, according to the forecast.

The Economic Development Ministry, which drafted the forecast, proposes to “reboot” RAB (regulated asset base) regulation by recalculating the basic parameters of long-term rates for divisions of IDGC.

Slowing the growth of distribution grid rates will become the main instrument to restrain the growth of end prices for electricity, which, according to the macroeconomic forecast, will rise by an average of 6.5-7.5% for all consumers in 2012, and 3% for households (including an increase of 6% on July 1).

In the subsequent two years, end prices for electricity are expected to increase by 9-11% annually, going up for households by 8-9% in 2013 and 10-12% in 2014.

Besides rebooting RAB, the Ministry is proposing another three mechanisms to restrain electricity prices: eliminating investment markups for nuclear and hydropower plants; scrapping indexation of fees for capacity (for delivery to households, “forced” and the most expensive generators); and imposing a price cap on capacity in the Siberia free power transfer zone. The latter measure contradicts a previously approved government resolution concerning free prices for capacity in three free power transfer zones: Central, Urals, and Siberian.

The Ministry forecast states that there should be an “increase in the rates of distribution grid companies (taking into account payment for services of OJSC FGC UES and not taking into account payment of electricity losses) of 11% as of July 1, 2012, and no more than 9-10% per year in 2013-2014.”

In regard to the FGC, price curbs are not specified. The previously approved increases for the company (26.4% in 2012) will certainly not be preserved, but the overall increase is greater than the general cap for grid companies – 11%.

The specific amount by which FGC rates will increase on July 1, 2012 is not yet known, a source at the Economic Development Ministry said. The main change in the regulation of FGC will be in the way of calculating the investment component of the rate on the basis of facilities actually built and used by consumers, rather than on the basis of declared plans. Consequently, the rate increase will be calculated by the Federal Tariff Service (FST) taking into account facilities that FGC commissioned in the course of the year. Based on FGC statistics on the implementation of its investment program (99.7% of planned facilities commissioned in 2010, 99.8% in the first half of 2011), this factor should not have a major impact on rates.

The Ministry forecast proposes to adjust FGC’s investment program to move back certain projects to a later date “in order to increase the efficiency of capital investment.” FGC’s investment program currently totals 954.2 billion roubles for 2010-2014, and has not been changed yet.

There are no plans to change the basic parameters for calculating the rates for FGC.

But things will be different for interregional distribution grid companies. “For IDGC, the parameters will have to be ‘rebooted.’ This is a forced measure, because the initial parameters [on the basis of which RAB was calculated – ed.] are higher than they could be,” the Ministry source said.

As an example of inflated parameters, he said that with the existing RAB in distribution grids the debt burden of IDGC will remain zero in the period to 2015, although the rate presupposes borrowing for grid development.

The Ministry is proposing to “reboot” by “reducing the estimate of the capital base, restraining growth of operating costs, bringing loss norms in line with the targets of investment programs.” In addition, there may be a review of the return factored into RAB, but only for “old” capital. The authorities are now discussing whether to make the review general or individual (for the initial period of regulation) for each region.

All this will require another resolution to change the basic principles of prices in the sector (resolution 109). The Ministry source said there are plans to approve this document before the end of 2011. Then regional energy commissions (REC) will have six months to adjust the applications of distribution grid companies and approve rates. RECs will have the freedom to select the instruments for restricting the growth of IDGC rates within the bounds of the level set by the macroeconomic forecast (11% for 2012), for ex-ample,*reduce operating costs while maintaining capex.

“For other regional grid organizations [not part of IDGC] the transition to RAB must be carried out with similar restrictions,” the forecast states. As of 2012, all of these organizations will transition to long-term regulation (including with the use of the indexation method), and the increase in their rates may not exceed the increases for IDGC.

In addition to grids, restrictions will also be imposed for the retail sector. The regulated revenues of retail companies are expected to increase by no more than the rate of inflation: by 6% in 2012, 5.5% in 2013, and 5% in 2014. In order to restrict the ability of retail companies to inflate retail prices in the future, it is necessary to alter the current legal framework, the socioeconomic development forecast states.

Steel, pipes

The Economic Development Ministry expects that by 2014 Russia will increase production of rolled steel products and pipes by 16% and 30% respectively, compared to the 2010 figures, according to the forecast.

Steel prices rose considerably in the first quarter of 2011. However, UK consulting firm MEPS forecasts that growth in the global steel industry will slow dramatically in 2011 and beyond.

Given the adequate supply of steel products on the world market, Russian steel exports are not expected to grow until 2014. The Ministry expects that Russian steelmakers will maintain rolled steel exports at the 2011 level in the medium-term, and see exports recover to the pre-crisis level of 2008 by 2014. Semi-finished products will continue to account for a large share of steel exports.

The Ministry believes Russian exports could decline in the future due to the replacement of steel products with reinforced plastic, composite materials, and other materials in the automotive, aircraft, construction, and other sectors. In addition, global overcapacity and development of production facilities in importing countries must be taken into account.

Pipe exports are expected to increase by 6-7% in 2011 and grow in the medium term along with the global economy. However, exports could be constrained by excess pipe capacity in China, which, according to the Russian Pipe Industry Development Foundation (FRTP), now stands at about 40 million tons.

The proportion of imports on the domestic market for steel products is also expected to shrink gradually in the medium term. The share of steel pipe imports, for example, is forecast to drop to 12.5% in 2014 from 15.3%, due to industry-wide modernization aimed at import substitution.

Utilities

The Russian government has decided to freeze prices on electricity for households until July 2012, the Ministry said in its forecast.

Electricity prices for households will increase by only 6% as of July 1, 2012. According to an earlier approved forecast, rates from January 1, 2012 were to go up by 10%. At the same time, indexation over the coming years might be higher than the planned level: 10%-12% as of July 1, 2013 and 10%-12% as of July 1, 2014. The initial upper limit for indexation came to 10% (starting from January).

According to the forecast, the average annual increase in regulated heat prices in 2012 will come to 4.8% after an earlier forecast of 10%-12% price growth.

The indexed gas price for households has also been frozen until July 2012: gas prices will be indexed at 15% effective July 1, 2012 instead of a planned 15% increase on January 1, 2012. Thanks to later indexation, average annual price growth in 2012 will come to 10% (and not 15%). Over the following years, indexation will also be set starting form July at the earlier planned rate of 15%.

According to the forecast, rates for passenger railway transport services have not undergone correction and will increase by 10% on January 1, 2012, 2013, and 2014.

Coal

Coal production in Russia is expected to increase by 3.1% year-on-year, to 327 million tons, while exports may drop 2.1% to 113.4 million tons, according to the forecast.

The Ministry forecasts that coal production will grow 8.5% compared to 2010, to 344 million tons by 2015, and exports will rise 4.5% to 121 million tons. Russia is expected to mine 333 million tons of coal in 2012 and 340 million tons in 2013.

Coal production this year is expected to be slightly lower than in the pre-crisis year of 2008, when output totaled 328.6 million tons.

Coking coal production is forecast at 67 million tons, with demand continuing to growth.

Domestic coal consumption is expected to increase by 8.6% from 2010 to 232.3 million tons this year.

The proportion of coal mined in the Kuznetsk and Kansko-Achinsk coal basins will grow, bolstered by their developed resource base, the Ministry said.

The Ministry expects production to increase amid continued growth of demand for coal on foreign markets, as well as by Russian power plants, whose combined consumption is expected to increase by 8.7% to 140 million tons in 2011.

The Ministry said factors constraining growth in the sector include high logistics costs (transport costs account for over 30% of the end price of coal), low throughput capacity of railroad networks and ports, lack of incentives to improve quality and intensify coal processing, and the high capital cost of developing new fields.

In order to support the Russian coal sector, tax legislation was amended in 2011 to differentiate natural resource extraction tax rates for coal depending on its energy value. In addition, a 30% deduction on the NRET is allowed for expenditures on measures to ensure safety.

The Ministry expects Russian coal exports to decrease 0.7% (compared to 2010) in 2012, but then to increase 1.9% in 2013.

Exports are expected to get a boost from the construction of a coal terminal with annual capacity of 7 million tons at the Murmansk port, as well as the second phase of an automated complex of the coal terminal at the Ust-Luga port that will reach full capacity of 12.4 million tons of steam and coking coal per year in 2012.