Overview of macroeconomic factors

Factors that determine the state of the Russian economy in general and have an impact on the electric power industry:

GDP movement

The index of the physical volume of GDP relative to 2017 was 102,3%

Inflation

In 2018, the consumer price index has been 104,3% since the beginning of the year

Interest rates to attract credit resources

As at 31.12.2018 the key rate of the Bank of Russia is 7,75%. The decision of the Board of Directors of the Bank of Russia, adopted on 14 December 2018, to raise the key rate to the specified size is proactive and is aimed at limiting inflation risks that remain at an elevated level, especially on a short-term horizon

The dynamics of the industry development is also determined by a number of specific factors:

Factors descending in significance

State regulation of tariffs

Description

Electricity transmission and grid connection are regulated by the State. Regulatory approval of tariffs for services of the Company directly influences volumes of received proceeds

The current state

The Russian Government implements a tariff policy on the principle of "inflation minus". Establishment of tariffs below the economically feasible level will lead to underfunding with tariff sources of the Company’s current activity and investment program

Measures to minimize the consequences (if available)

1. Economic justification of costs included in tariffs, including the inclusion of economically justified costs in tariffs incurred in excess of those recorded in tariffs and incurred due to reasons beyond the Company’s control over previous periods.
2. System-wise work to reduce costs and optimize the investment program
3. Implementation jointly with PJSC Rosseti of measures to amend the current legislation of the Russian Federation in the field of pricing for services of natural monopolies to take into account the interests of distribution grid companies in setting tariffs at the retail market.

Changes of energy consumption

Description

Change of energy consumption has a direct impact on the state of the industry

The current state

Actual electricity consumption in the Unified Energy System of Russia in 2018 amounted to 1 055,5 million KWh, which is 1,5 % higher than in 2017.

Measures to minimize the consequences (if available)

A set of measures to increase non-tariff sources of income

The current state of the industry

Description

The state of the industry has a direct impact on all aspects of the Company’s activity

The current state

Substantial depreciation of fixed assets
Acute lack of investment in the industry.
The problem of non-payment
The tariff policy, leading to both an underestimation of both financial performance (pricing on a "cost plus" basis), and the real loss making for a number of companies

Measures to minimize the consequences (if available)

Implementation of the concept of digital transformation
The cost management system implementation
Implementation of new management tools by the Company, automation of key functions to improve the efficiency of accepting administrative decisions