Fortum makes U-turn on Russian business, plans market exit

Finnish utility Fortum Oyj will exit its Russian activities, marking a U-turn in strategy as the war in Ukraine and sanctions on Russia continue.

"We are preparing for a controlled exit from the Russian market," CEO Markus Rauramo said on the company's first-quarter earnings call May 12. Divestments are the preferred path for ridding Fortum of its Russian business, Rauramo added.

That includes resuming the sale of subsidiary Uniper SE's Russian arm, PJSC Unipro, which was launched in late 2021 but paused in the early days of Russia's invasion.

Unipro operates five thermal power plants in Russia with 11.3 GW of capacity. Beyond that, Fortum has 4.7 GW of power generation capacity in the country and 7.6 GW of heat production capacity. More than 1 GW of wind and solar generation is in operation, and about 2.4 GW is under construction or development.

In March, Fortum announced an end to new investments in Russia, but the company said it wanted to hold on to its Russian business.

Fortum has taken €2.1 billion in impairments for its Russian businesses and assets. That includes a €1 billion item for Uniper's share in the suspended Nord Stream 2 gas pipeline.

For now, the Russian assets continue to be consolidated within the group. "At the end of Q1, we concluded that we still have control of our Russian assets, both Fortum and Uniper," CFO Bernhard Günther said on the May 12 call. The situation is fluid, however, and this conclusion could change "very soon," Günther added.

Fortum's Russian operations represented 57% of its direct greenhouse gas emissions in 2021, 38% of its power output and 20% of its comparable operating profit, analysts at MSCI said in March. Divesting the unit would reduce the overall share of fossil fuels in Fortum's power mix from 65% to 48%, they added, and selling Unipro would reduce Uniper's fossil fuel share from 74% to 63%.

Selling the Russian assets will require approval by the Russian government, Rauramo said. Fortum will determine what kind of interest there is for the businesses, but the timeline for the divestment is unclear. "These transactions take the time they take," the CEO said.

Finland's changing mind

The geopolitical landscape in Europe has shifted further since Fortum's last earnings update in March, and Finland is at the forefront.

In April, Finnish nuclear operator Fennovoima Oy scrapped plans to build the Hanhikivi nuclear power plant in northwestern Finland by cancelling the construction contract with Russia's state power company, Rosatom.

Finland is also preparing to join the NATO military alliance, ending decades of military neutrality. The country shares a 1,300-kilometer border with Russia.

"Finland must apply for NATO membership without delay," Finland President Sauli Niinistö and Prime Minister Sanna Marin said in a joint statement May 12. "We hope that the national steps still needed to make this decision will be taken rapidly within the next few days."

Marin is in favor of ending Russian energy receipts in Europe as soon as possible. "We are supporting and actually financing Russia's war by purchasing oil, gas and other fossil fuels," the prime minister said in March.

According to Rauramo, Europe's energy system will continue to rely on Russian molecules for some time. Uniper has a delivery contract with Russia's PJSC Gazprom until 2035. "The phasing out of Russian gas will likely be a multiyear project," Rauramo told analysts.

In the interim, Fortum is ready to extend the use of coal into the coming winters, including in Germany, should governments request it, the CEO said.

New capital expenditure will increasingly go into renewables, however. Fortum targets growth capital expenditure of €3 billion for 2021 to 2025, of which 50% to 55% will be dedicated to renewables. "If anything, the ... terrible war in Ukraine and the energy crisis highlight the importance of the energy transition," Rauramo said.

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