Telenor Acknowledges Complications as Appeal Planned Against US$1.7-bil. Damages Claim

Norway's Telenor has insisted that it will fight the decision by the Eighth Arbitrazh Appellate Court in Omsk (Siberia) ordering to it to pay US$1.7 billion in damages. The ruling follows a claim from British Virgin Islands-based Farimex, a minor (0.002%) VimpelCom shareholder. Farimex filed a lawsuit in which it claimed that Telenor nominees on the board of VimpelCom had financially harmed the Russian group by delaying by nearly a year the US$231.3-million acquisition of Ukrainian RadioSystems (URS). The purchase of URS was finally concluded in November 2005 against the will of the Nordic group, which currently owns 29.9% in VimpelCom. Farimex had initially filed a claim for US$3.8 billion against Telenor in a Russian regional court in April 2008, eventually resulting in a ruling that Telenor should pay damages of US$2.8 billion. On appeal, the case was moved to Omsk where the ruling of US$1.7 billion in damages has now been made.

Telenor Vice-President Dag Melgaard has indicated that Telenor will first appeal to a court in Tyumen (Siberia) and thereafter to the Supreme Court in Moscow (Russia). However, before this can happen, it will have to wait until the Eighth Arbitrazh Appellate Court in Omsk publishes its written ruling in early March 2009. Telenor has admitted that before it can appeal the verdict, it may have to pay the US$1.7-billion fine. While a motion to arrest Telenor's shares in VimpelCom was denied, the damage claim can be enforced by VimpelCom and Farimex.

Outlook and Implications

• Reasons for Telenor's Opposition to URS Purchase: Telenor has maintained in a press release that although it has invested US$600 million in URS, the Ukrainian unit is making a loss. Therefore, Telenor has stated that its opposition to the deal was based on the fact that URS was over-valued; that the deal lacked transparency, given that URS was sold by five offshore companies whose beneficial owners are still unknown; and that URS had no credible business plan. URS held a 4% share of the Ukrainian mobile market at end-2008. Telenor has also previously alleged that Farimex is acting on behalf of Altimo, the telecoms arm of Russian holding Alfa, which owns a 44.0% stake in VimpelCom. Altimo has denied any such connection, although Telenor has pointed out that Farimex's only director, Dmitry Fridman, is the first cousin of Alfa owner Mikhail Fridman.
• Numerous Difficulties Facing Foreign Investors in CIS and Eastern Europe: The fact that a tiny shareholder can wreak such havoc does not reflect well on Russia's reputation as a forum for foreign investment, but the example of the Omsk court ruling is just one of a number of problems facing foreign investors. The constant pressure exerted by Farimex, which Telenor has claimed is one of Alfa's "proxies" in Russia and Ukraine, may eventually force Telenor to seek a divorce from Alfa and exit from its CIS interests. As well as its VimpelCom stake, Telenor owns 56.5% in leading Ukrainian mobile operator Kyivstar; here too, Alfa has pressurised Telenor towards divestment. Moreover, national economies in the CIS region are rapidly deteriorating, a problem that is dragging down Western European banks supporting subsidiaries. While large European telcos that have invested in the CIS and Eastern European regions, such as TeliaSonera and Tele2, have recently touted revenue increases from operations in these "emerging markets", their failure to take into account plunging currencies paints a false image of growth (see Europe: 11 February 2009: TeliaSonera Q4 Earnings Rise 14.8% and 10 February 2009: Tele2 Q4 Profits Jump 46%). Within the energy sector, state-backed firms have created a hostile environment towards foreign investors and, with the outflow of foreign capital exacerbating the effects of the financial crisis, there appear to be numerous reasons for foreign operators to steer clear of the region.
• The Largest Telcos Could Still Benefit: However, even within this environment, there might yet be a silver lining for larger, more financially secure telcos, as they may yet capitalise when smaller rivals find themselves forced to exit. For example, Deutsche Telekom is one of the emerging favourites to take advantage of the imminent privatisation of Ukrtelecom, the fixed-line incumbent in IMF-dependent Ukraine (see Ukraine: 11 February 2009: Deutsche Telekom, Turkcell, Magyar Telekom Interested in Ukrtelecom Stakes). IHS Global Insight sees this as a likely example of how the best-managed telcos could yet head a slew of M&A activity in these troubled financial times.