Telenor refuses to pay $1.728 billion

01 April 2009

Following last year’s dispute with TNK-BP, foreign investment in Russia, may be put under further strain following the Russian arrest of Telenor’s 29.9% of VimpelCom. The company that operates cell phone networks in Russia and other former Soviet republics under the Beeline brand. Alfa’s telecoms arm, Altimo owns 44%.

Telenor refuses to pay $1.728 billion

One of the protagonists, Mikhail Fridman’s Alfa Group, is even the same, which in the TNK-BP argument, attempted to have Robert Dudley removed after BP rejected the demand for his dismissal.

However, this fight is arguably more troubling. TNK-BP operates in the politically sensitive oil business; Telenor is in humdrum mobile telecoms. And since the Norwegian state controls Telenor, there are diplomatic implications too.

The move to seize the Telenor shareholding comes after the 8th Arbitration Appeals Court in Omsk in West Siberia passing a ruling obliging Telenor to pay $1.728 billion to VimpelCom. The ruling followed a lawsuit filed by a VimpelCom minority shareholder, Farimex (the British Virgin Islands, 0.002% of VimpelCom's stock). Farimex alleged that Telenor-nominated members of VimpelCom's Board of Directors delayed VimpelCom's 2005 acquisition of Ukrainian Radio Systems (URS), a loss-making Ukrainian mobile operator. Telenor says its Board members opposed the acquisition because URS was over-valued and had no credible business plan. Furthermore, it put VimpelCom in direct competition with the Norwegian company's other interests in Ukraine. However, Altimo took Vimpelcom into Ukraine via a 2006 acquisition, so competing with rival Kyivstar – which Telenor controls, with Altimo as junior partner.

Telenor views the case as groundless and has said Russian companies were trying to steal its assets as part of a long row with Alfa Group. This was also a factor in the TNK-BP dispute. The Alfa group believed Dudley was running the venture exclusively in the interests of BP. Many believed these accusations to be unfounded, an attempt by Russian shareholders to remove Dudley from the company, trying to increase Russian representation on the board, before their 50% share was sold to Gazprom or Rosneft. The fact that Russia wants to dominate all of its ventures seems to be a recurring belief amongst companies who invest there.

Telenor has refused to pay the $1.728 billion to VimpelCom, and has appealed to suspend the court ruling. The West Siberian District Federal Arbitration Court has rejected this appeal. Telenor believes that the court did not take their arguments into account.

The main worry is that the seized shares could be sold before Telenor’s appeal against Farimex is heard on May 26. If sold, then it could prove very difficult to reclaim them from the subsequent owners. This could lead to a long legal battle for compensation from Russia if the ruling is overturned.

The Russian arrest of Telenor’s 29.9% of the VimpelCom company has triggered harsh reactions from a wide range of investors in Russia. It is not in Russia’s long term interest to allow Telenor’s shares to be sold, if it wishes to remain open to foreign investment. Regarding oil, companies such as BP have little choice as to where to invest, but companies in different fields such as Telenor should perhaps look to other countries, rather than Russia, given the evident risks

An option for Telenor could be a corporate divorce from Alfa, so that Kremlin-oligarch relations can be avoided completely. Or alternatively, a swap of Telenor's Vimpelcom stake for Alfa's stake in Ukrainian mobile group Kyivstar, although such an option would probably include a cash element because the Vimpelcom stake is believed to be worth more.

Telenor had not yet been properly notified of the court ruling. Once it gets official notice, it will have five days to pay the claim or its assets can be sold.