. Last Updated: 07/27/2016

Energy Sector Laments Cash Crunch

Russia's energy producers gathered Monday in Moscow to display the latest technology in their sector, but painted a grim picture of their financial state at a time of falling demand for electricity, and Western investors said they would hang back from the sector.

"Factories can pay neither their workers' salaries nor their electricity bills," said Viktor Nechayev, head of strategic development at Unified Energy Systems, Russia's main power generator. Electricity producers, he said, are left "in a critical situation."

Nechayev was speaking at the Energoprogress exhibition, which runs this week at Sokolniki Park. But while the exhibition showcases many of the world's most advanced technologies in electricity production, many of the Western firms present said their Russian counterparts could not afford to buy it.

"With a minimum 40 percent import duty on every piece of equipment that enters Russia, no one can afford to buy our know-how," said Stephen Breuer, head of the German engineering firm AEG T&D in Moscow.

"The Russian government puts a lot of rocks on our path," he said.

For producers, one of the biggest problems is nonpayments from customers. The Russian government last week approved in principle a doubling in average domestic electricity tariffs, bringing them more in line with industrial rates, which may bring in more revenue -- or more unpaid bills.

"The only way to solve this problem [of not paying energy bills] is to cut off the electricity from those who don't pay," said Anatoly Bersenev, head of the science and technology department of the Unified Energy Systems company.

Alexander Kazbegi, an energy analyst at Salomon Brothers in London, agreed that the problem of nonpayments was "very acute," saying companies were being forced to use either promissory notes or barter payments to cope. But in the long run, he said, the utilities would have to take measures such as closing down some units.

However, he said UES's traditionally paternal relationship toward local power companies in which it owns stakes prevented it from adopting such a rationale.

Electricity output has dropped by 20 percent in the last five years, Kazbegi said, a reflection of a fall in industrial output of some 40 percent in the same period.

"The country's industrial production is on its knees, and the general demand for electricity is falling," said Vladimir Grigoriev, head of construction at the Moscow electricity company Mosenergo.

The need to replace and update the technology of some of production units could open the door to foreign companies who want to penetrate the Russian market, but many said they were still facing a wall of customs duties and taxes to operate in Russia.

"There is a huge potential here, but the right conditions for us do not exist yet," said Dimitry Slychkin, an engineer with Germany's Siemens, citing high duties on imported equipment.

"The West is not hurrying to invest in the Russian energy sector," Nechaev of UES said.