DTEK may sue Russia for USD 0.5 bln in losses in Crimea

A subsidiary of DTEK Energy (DTEKUA) has initiated talks with the Russian government to resolve a dispute over the expropriation of its Crimean assets, the holding’s press service reported on April 11. If the talks aren’t successful, the subsidiary will file a complaint with the international arbitration court, according to the report. Total compensation that DTEK will seek from Russia may exceed USD 500 mln, which is an estimate of the value of all the assets of Krymenergo. The self-proclaimed Crimean government, controlled by Russia, nationalized Krymenergo (controlled by DTEK) in 2014. DTEK claims the seizure of Krymenergo breached a Ukrainian-Russian inter-government agreement for the mutual protection of investments.

Alexander Paraschiy: This is a good move for DTEK, and it will be beneficial for Ukrainian government as well, which holds a 25% stake in Krymenergo.

We believe DTEK’s estimates of Krymenergo’s value is too high. As of end-2013, the book value of its total assets was USD 334 mln, including USD 235 mln in net value of property, plant and equipment. The company’s revenue was USD 328 mln and EBITDA was USD 24 mln in 2013. That suggests its fair value is closer to USD 150-250 mln, or at least half of what DTEK claims. Interestingly, DTEK purchased a 45% stake in Krymenergo during its privatization in 2012 at an implied MCap of just USD 71 mln.

An interesting twist to this story occurred on March 30, when the Russian news site novayagazeta.ru cited an official in the occupied city of Sevastopol who claimed a Russian Cabinet order was issued calling for settling all “nationalization” issues in Crimea. That suggests a soon resolution of DTEK’s dispute is possible. At the same time, we do not consider it as the base-case scenario, particularly because the same report claimed that the alleged Russian Cabinet order seems to put the burden on settling debts on the two Crimean budgets (incuding the city of Sevastopol). But these tightly strapped budgets are unlikely to have money for that. Secondly, Ukraine officially does not recognize the “authorities” of Crimea as legitimate. So, if a decision on compensation will be approved by them, it won’t be recognized as legitimate as well.

All in all, we expect the dispute will take a lot of time and it will result in much smaller compensation award than DTEK is claiming.