Manuel A. Abdala International Dispute Resolution Involving Russian and CIS Companies

1. Successfully Getting through the Complexities of Law and ValuationPresentation of Damages Cases Manuel A. Abdala International Dispute Resolution Involving Russian and CIS Companies London - February 27, 2013

2. Risks v. Uncertainty • Frank H. Knight established the economic definition of the terms in his landmark book, Risk, Uncertainty, and Profit (1921): • Risk is present when future events occur with measurable probability • Risk typically related to probability of negative outcome (reducing value) • Risk, however, once it materializes, can either reduce or increase value • Uncertainty is present when the likelihood of future events is indefinite or incalculable

3. How to Deal with Risks and UncertaintyMarket Tests • 1. Stock market prices reflect value • Billions of hourly stock trades set values, despite unknowns • Related damage valuation techniques: • Event studies - how stock would have evolved in the absence of certain events • Relative market multiples (comparable companies) • 2. Transactions reflect value • For tested party or on a relative basis (comparable companies) • Can also include value attributed to controlling stake • 3. Contracts on futures/options reflect value • Examples: Brent (crude oil), currencies, metals, commodities, etc.

4. How to Deal with Risks and UncertaintyValuation Assessments • DCF Method • Widely used by practitioners • Allows to isolate the impact of the breach • Other damage valuation techniques • Net capital contributions • Adjusted book values • NAV (mining)

5. Measuring RisksDCF Exercise: Via Discount Rates • Standard sources of risks • Market risk (of holding equity) • Industry risk • Country risk • Currency (or depreciation / inflationary) risk • If discount rate is computed in local currency Cost of Equity based on Capital Asset Pricing Model (CAPM): Base Rate (time value of money) Currency Risk Market Risk Cost of Equity = Risk Free + Beta (β) * (Market Return – Risk Free) + CRP + Other Market Risk Premium Industry Risk Country Risk Premium

6. Measuring RisksDCF Exercise: Market Risk Premium (MRP) • Difference Between Equity Yields and Debt Yields Source: Own Production based on Prof.AswathDamodaran (http://www.stern.nyu.edu/~adamodar/pc/datasets/histretSP.xls).

7. Measuring RisksDCF Exercise: Industry Risk (Beta) • Volatility Differential: Oil and Gas v. Market, Beta (β) Parameter Source: Own production based on Yahoo Finance.

8. Measuring RisksDCF Exercise: Country Risk Premium • Sovereign Spreads Over US Treasury Bonds Source: Own production based on Federal Reserve Bank for U.S. yields and IHS Insight for EMBIs.

9. Measuring RisksDCF Exercise: Country Risk Premium • Kazakhstan’s EMBI Spreads Source: Own production based on IHS Insight.

10. Measuring RisksDCF Exercise: Currency Risk • Relationship between Spot and Future Exchange Rates Source: Own production based on CME Group for future rates and OANDA for spot rate.

11. Measuring RisksDCF Exercise: Other Risks • Project specific risks: • Regulatory risk • Taxation risk • Tax stabilization clauses • Liquidity distress / bankruptcy risk • Size premium • Pre-completion risk • Real Estate projects • Start ups • Caution: Possibility of double counting risks • E.g., country risk can include several risks such as regulatory/taxation

12. Measuring RisksArbitral Tribunal’s Recognition of Risks Adders • Alpha Projektholding GMBH v. Ukraine (ICSID Case No. ARB/07/16) • “In calculating interest to update the damages claim to February 2009, Claimant’s damages expert applied the 12 month LIBOR rate, compounded annually. The Tribunal concludes that a more appropriate rate is the risk-free rate plus the market risk premium…The Tribunal believes that this rate better reflects the opportunity cost associated with Claimant’s losses, adjusted for the risks of investing in Ukraine.” (emphasis added) • EDF International S.A. et al. v. Argentine Republic (ICSID Case No. ARB/03/23) • “The Tribunal finds that the CAP Model is widely used to calculate the cost of equity… • The Tribunal understands that the time value of money is represented by the risk-free rate… • The Tribunal understands the market risk premium as the extra return that the market provides over the risk-free rate to compensate for market risk… • When involving investment in emerging countries such as Argentina, the cost of equity must account for a country risk premium.” (emphasis added)

13. Measuring RisksDCF Exercise: Via Probabilistic Scenarios in Cash Flows • Construction of different scenarios: • Based on the DCF valuation model structure • Tree decision kind of reasoning • Assigning weights to potential outcomes • Running Montecarlo simulations • Discount each scenario at the risk free rate • Each scenario has some likelihood, the multiplicity accounts for the risks • Cautions: • Introduction of subjectivity • Which variable is independent and random? • What is its probability distribution? • Less generally used by practitioners

14. Measuring RisksDCF Exercise: Tree Decision Logic Year 0 Year 1 Year 2 Year T CF2uu … … CF1u CF2ud … … CF0 CF2du … … CF1d CF2dd … …

15. Conclusions: Risks and Uncertainty • Markets deal with uncertainty all the time • Does not necessarily preclude the assessment of value • Only very rare assets are very difficult to value • Yet, one can organize an auction and prompt revealed preferences • Markets/valuators can quantify the impact of risks on value • Via market tests • Via valuation assessments

16. Structuring the Claim/Defense Quantum Expert Considerations • Expert selection • Industry specific expertise • Damages/Compensation valuation expertise • International Arbitrations expertise (written and oral testimony) • Relationship between fact witnesses and expert testimony • Assuring consistency • Practical challenges / expert – client relationship

17. Thank You