Assessing Fair Market Value in Russian Debt Valuation

A client was reassessing the fair market value of frozen assets in Russia. The client had provided several loans totalling more than one billion euro to its subsidiary in Russia. Due to the sanctions imposed on and by Russia, it was impractical to sell assets in the country and exchange the earnings from rouble to euro. This situation rendered the assets “locked” and practically inaccessible, although technically still belonging to the group. Consequently, the Russian subsidiary was unable to fulfill its obligation to pay interest or repay the principal.

NERA assessed the fair market price of the outstanding loans provided by the client to its Russian subsidiary. To realistically model the value of outstanding loans, which is highly contingent on the severity and duration of various sanction regimes, a unique economic valuation was applied. These factors are uncertain and, because they depend on the geopolitical actions of various governments, are largely unforeseeable to market participants. However, historic examples were utilized to structure scenarios that could capture probable outcomes to simulate future income streams.

Leaving other factors aside, we evaluated the likelihood and timeframe for repayment of the principal and interest payments. NERA successfully modelled both the uncertainty from the sanction regimes and their impact on the market value of the frozen assets

The client used the economic analysis to acquire a range of reasonable and fair values for the remaining value of the loan. Many other Western companies are currently facing similar problems regarding their Russian investments. These challenges demonstrate the importance of conducting thorough economic analyses to properly assess and mitigate losses in foreign investments.