Telenor has finally settled its protracted legal battle in the Russian courts over its shares in Russian mobile company VimpelCom.
In early October, Telenor, the world’s seventh largest telecoms company with 168 million mobile subscribers in 13 countries, and its Russian partner Alfa Group, agreed to merge their Ukrainian and Russian holdings. The deal will combine Russia’s number two mobile company, VimpelCom, with Ukraine’s Kyivstar, creating a company worth $23bn.
But before anyone breaks out in a Kozachok dance for joy over the settlement – expected to be closed by the end of the second quarter next year – both companies have warned that several unresolved issues remain, including lingering legal threats and gaining regulatory approval from international authorities.
The legal battle began in 2005 when a claim was lodged against Telenor by Farimex Products, a company registered in the British Virgin Islands that owns 0.0002% of VimpelCom. Filed with a Siberian court, the lawsuit claimed that Telenor’s representatives on VimpelCom’s board were opposing the expansion plans of VimpelCom in Ukraine. Even though Telenor denied the charge, the court found the company guilty and fined it $2.8bn, which Telenor has steadfastly refused to pay, accusing Farimex of being a front for Alfa, the Russian financial group. Alfa has denied it has anything to do with Farimex and did not respond to requests from fDi Magazine for a comment.
Confusingly, Alfa also happens to be co-owner of VimpelCom. A ruling handed down in June by Russian bailiffs ordered the auction of Telenor’s shares to settle the fine. Interestingly, the October deal between the two companies comes shortly on the heels of a lunch Vladimir Putin had with Telenor CEO Jon Fredrik Baksaas (along with other business executives) in late September. Though Dag Melgaard, communication manager at Telenor, does say that Mr Putin and Mr Baksaas did “exchange some views and Mr Putin was updated on the case”, the talk was short and it was “purely coincidental” that the case was settled a week later.
Telenor’s investment headache is the latest in an increasing number of Western companies that are finding investing in Russia a complicated game of financial roulette. Courts in Russia in the past few years have ruled against the likes of Deutsche Bank, which was unable to collect collateral on a $2bn loan, the Spanish cell phone operator TeliaSonera, which lost in a shareholder dispute, and, perhaps most famously, the case last year when BP lost control of its investment with TNK-BP.
It has been quite the learning curve for Telenor, a company that has increasingly been investing in central and eastern Europe since the early 1990s; from the beginning the case had been far from transparent with Telenor lawyers questioning the impartiality of the process and the timeliness of some of the rulings. Mr Melgaard says: “Yes, we think some of the actions by the courts were strange and in contradiction to Russian law [and] all of these illegal rulings would not have happened in a Western jurisdiction.”
“It is not only extremely serious for Telenor and our shareholders but also for other foreign direct investments that have been done or are on the brink of being done in Russia,” Telenor’s Mr Baksaas told fDi before the case was settled. “[This case] proves that protection under Russian domestic laws does not exist for a foreign direct investor.” In other words, if Telenor – a company that made one of the most highly anticipated and largest investments in the country – can lose control of its investments through the Russian courts, no investor is immune.
Sergey Smetanyuk, vice-chairman of the Committee on Constitutional Legislation in the Duma and a member of the United Russia party, told fDi: “The VimpelCom case is not a simple one and the problem is really a process of growing pains.”
Despite the Russian drama, Telenor’s investments in other parts of the globe have been fruitful for the company over the past few years. Telenor’s revenue grew from NKr37bn ($6.42bn) in 2000 to NKr110bn last year. Not bad for a company that started out life as a telegraph service in 1855.
Telenor began investing outside Scandinavia in 1993 in Hungary with the purchase of Pannon and has since invested in other eastern European countries such as Serbia and Montenegro, and across Asian markets such as Malaysia and Thailand.
Last year the company entered into the lucrative Indian market through an agreement with Unitech Wireless. Telenor will hold a 67% controlling stake in the company and this autumn it will begin rolling out the network nationwide. This is a huge investment opportunity for Telenor, says Mr Baksaas. “India is the most rapidly growing mobile market with penetration at 35% and that is set to double in the coming years,” he says. “Numbers of subscribers coupled with economic growth makes India one of the strongholds in the world and that is why we have positioned Telenor in that market.”
Telenor’s foothold on the Indian subcontinent started back in 1997, when the company invested in Bangladesh’s Grameenphone (it owns 62% of the company), the largest mobile operator in the country with more than 20 million subscribers. In 2005 it expanded further in the continent with the launch of Telenor Pakistan. While the company is the second largest mobile network in Pakistan with 22% of the market share, it is also the fastest growing network, partially because of expansion into northern areas of Pakistan and in Pakistani-administered Kashmir.
It has not all been smooth sailing in the region, however. Last year a television documentary uncovered environmental violations and questionable working conditions at a few of the Bangladeshi companies that Grameenphone had been subcontracting work to. Children as young at 13 were filmed working in harsh conditions and so Telenor, before the programme aired, came forward to say it would investigate the charges. Mr Melgaard says: “Yes, these allegations proved right mostly and we have admitted that it took us by surprise. We responded quickly and made demands for improvements.”
Since then, the company has implemented new auditing systems for checks and balances across all its investments. “It is a learning curve in countries such as Bangladesh,” says Mr Baksaas. “We can’t believe everything in an emerging economy is done by Western standards, but we can play a role when it comes to improving and speeding up those values.”
Whether standards and values are improving for investors in Russia is another matter altogether. Asked if he would dissuade other investors from jumping into the Russian market, Mr Baksaas says he still feels positive about the potential for trade and investment within the country. “But we need to add that the respect for entered agreements, entered principles and in this case a shareholder agreement written solidly for Russian law runs the risk of being tampered with,” he cautions. “I would reckon that most boards in western Europe and beyond should consider moving to Russia with a significant investment.”
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