Latest trends of Fortum’s business in Russia

Baltic Rim Economies

Evgeniy Shitikov,
Member,
Public Council under the Ministry of Energy and Tariff Regulation of the Chelyabinsk Region,
Russia

Anti-Corruption Activist

In July 2021, the Finnish and Russian media published the news that Fortum sold the Argayash power plant to the structures of Rosatom. I worked at this station and still live in Ozersk, for the sake of which it was created. Therefore, in this news, I saw several important trends.

  1. Argayashskaya heating plant is one of 2 Fortum power plants in Russia that burns coal. The demand to convert coal to gas was the aim of my proposed one-man protest at the Finnish Embassy in St. Petersburg 2 years ago. The solution turned out to be simple, that is, to sell the station without re-equipment. Carbon footprint will be on the same level. Still, the technology of coal combustion will be exploited up to 2064.

    Fortum is a Finnish state-owned company, with over 50% shares. Fortum has more than 10 thermal power plants in various regions of the Russian Federation – Chelyabinsk, Tyumen and Khanty-Mansi Autonomous Area. These are the regions with a developed metallurgic and oil-and-gas industry, the Urals and Western Siberia. The demand for electricity and heat has always been at a high level here, as long as industrial and mining companies operate there.

    However, the energy transition and the European Green Deal will inevitably lead to economic crises in these regions. Decarbonization of the world and European economies will mean a decrease in product demand in the regions of the Urals and Western Siberia that is metals, oil and gas in 2025-2035 perspective. Accordingly, the demand for electricity in these regions will also decline.

  1. In Russia Fortum has been a modernization leader. The company introduced state-of-the-art and efficient technologies in the energy sector. The company paid special attention to environmental issues so that all emissions requirements meet Russian environmental standards, or even exceed them. However, it was not always possible to comply with these requirements. Russian regulatory authorities proved serious violations in the courts.

    In addition, corporate management in the Russian Fortum division was not always efficient. Russian managers committed a number of violations of antimonopoly and tax laws in 2011-2019. The evidence can be found in the court decisions database that contains numerous cases of corruption and misapplication of company funds. The Federal Antimonopoly Service of Russia proved in court the fact of a cartel conspiracy in the procurement of industrial safety expertise (the case of JSC Promtechexpertiza).

    Finnish top managers of Fortum and regulatory structures nevertheless ignored numerous cases. The composition of the top management team of the Russian division has remained unchanged for over 12 years.

  1. The representative office of Fortum was opened in Russia under the Russian Federation government and Anatoly Chubais `personal guarantee, the head of the Russian Open Joint Stock Company of Energy and Electrification ”United Energy System of Russia”. The government guaranteed recovery of money invested within ten years with a return of about 14% to foreign investors. Investors assumed the obligation to build new power units within a certain period and pay fines for failure to meet the deadlines in exchange. Renewal of 15% of the total installed power generation capacity in the country has become possible thanks to the Capacity Supply Agreements. Fortum has built the Nyagan GRES and Chelyabinsk power plant #4 under special “Capacity Supply Agreements”. Wind and solar power plants are being built under the “Capacity supply agreements #2”.

    The mechanism of capacity supply agreement however is being seriously criticized in the professional sphere. The Energy Consumers Community comprising the largest Russian metallurgical plants is ardent opponent of the Capacity Supply Agreements. CSA is considered to be a non-market mechanism that artificially creates incentives for generating companies. If the political situation in Russia changes, the Investment Return Guarantee Mechanism may be seriously adjusted in accordance with market-based models.

In conclusion, decarbonization and possible destabilization of the political system that are inevitable within 15-20 years are the main risks for Fortum in Russia. The political system in Russia is based on fraud. The past parliamentary elections confirm it. Inevitable decarbonization and possible political destabilization pose serious risks to the long-term sustainable development of Fortum in Russia.

My advice to top managers of Fortum’s headquarters (Espoo) is to appoint Finns to posts of top managers. It was in the first 2 years of Fortum’s work in Russia. In this case, order and no corruption in Russian division is guaranteed.

Expert article 3070

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