SKYTEL SCANDAL: FIASCO IN THE MAKING

C O N F I D E N T I A L TASHKENT 000572


DEPT FOR EUR/CACEN AND EUR/ACE

E.O. 12958: DECL: 02/24/15
TAGS: ECON PREL PINR UZ
SUBJECT: SKYTEL SCANDAL: FIASCO IN THE MAKING

REF: TASHKENT 228

CLASSIFIED BY AMB. JON R. PURNELL, FOR REASONS 1.4 (B, D)


1. (C) Summary: NCI Projects International, a U.S. firm that
invested in Uzbek cellular company Skytel, claims that President
Karimov's daughter, Gulnora Karimova, is attempting to take over
Skytel. The GOU officially stated that the "primary operator" of
Skytel's frequency is causing interference with the company's
network. After weeks of no response from the GOU, NCI's multiple
requests for a meeting were granted the same day that the company
planned a press conference to publicly discuss Skytel's issues.
The Agency for Communication and Information's spokesperson
promised to help the company, but later proposed two deals, both
of which NCI claimed were absurd. Since then, the company's
repeated calls for further meetings have been ignored. Attempts
to negotiate with Gulnora through intermediaries or directly with
MTS, a potential competitor in the cellular market for the CDMA
450 frequency, have been unsuccessful. With USD 17 million in
investment and 130 employees hanging in the balance, Skytel
investors are concerned that a deal cannot be made to save the
company. Post sent a letter to DPM and FM Ganiev asking him to
investigate the issue. End summary.


2. (C) According to Amcit Director from NCI Projects
International, the U.S. investment firm involved in Skytel, the
President's daughter, Gulnora Karimova has approached them for a
stake in the Uzbek cellular firm. The company began experiencing
problems in January when interference on Skytel's frequency
occurred from what the Agency for Communications and Information
called the "primary operator." Skytel later confirmed that the
interference was coming from the Ministry of Defense. According
to the company, Government entities can take over certain
commercial frequencies in case of an emergency, but this was not
such a case. After the company terminated its network on February
4, company representatives noted that the interference on the
frequency stopped completely. Post sent a letter to DPM Ganiev
asking him to look into the problem.

AN OFFER THEY CAN'T REFUSE
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3. (C) On February 14, GOU officials from the Agency for
Communications and Information and Uzbektelekom finally accepted
NCI's multiple requests for a meeting. This happened to be the
day of NCI's planned press conference intended to publicly
announce the "technical difficulties" the firm has been having.
The last meeting with First Deputy Chairman Isbasarov from the
Agency, on January 24, ended with him claiming there was nothing
he could do to help the company. However, the morning of February
14, the tone changed, and Isbasarov promised to assist the company
in resolving its technical difficulties. He also warned the
company about "airing its dirty laundry" in public, referring to
the pending press conference in the afternoon. He proposed a
meeting that afternoon, at the exact same time as the press
conference, with all of the relevant telecommunications bodies.

ALL IN THE FAMILY
--------------


4. (C) In the afternoon, announcing that Uzbektelekom, NCI's
partner in Skytel, will make every effort to fix the firm's
difficulties, other Government officials were dismissed, leaving
Skytel execs with Isbasarov and head of Uzbektelekom, Mukhadinov.
Isbasarov gave the executives two options: a) allow the GOU to
buy back the whole company at a significantly reduced rate
(considering the depreciation of the equipment) or b) for an
additional USD 30 million, Isbasarov could personally guarantee
that Skytel would be able to use the frequency without
interference from other parties.


5. (C) Aside from the fact that the offer was ludicrous, according
to the Amcit involved, the question of how Isbasarov could
guarantee no interference from other Uzbek Government entities was
unclear - particularly when he claimed he could do nothing to
solve the present problem. When the Amcit suggested seeking
assistance from the U.S. Embassy, Isbasarov excitedly recommended
keeping the agreement simply between them. There was no need, in
his opinion, to involve the U.S. Embassy, the public, etc. Since
this meeting, the company has attempted to convene follow-up
meetings, but the requests have gone unanswered. The Amcit
investors returned to the U.S., unsure about the future of their
investment. In addition to an investment of more than USD 17
million, 130 employees who work for Skytel are unsure about their
future. Based on their earlier attempt to work through
intermediaries to come to an agreement with Gulnora Karimova, the
investors are sure that she is behind the GOU's effort to shut
down Skytel's operations.


6. (C) In the past, we have heard of Gulnora asking for shares in
companies running anywhere from 15-20 percent - not enough to
raise red flags, but enough to make a decent profit. However, in
earlier discussions with her intermediator, before the company's
"technical problems" began, she wanted 50 percent and would not
commit to a share swap, which would have been a legal transaction.
Amcit investor told emboff that NCI attempted to speak with
potential cellular competitor MTS directly about purchasing the
company. However, the company balked at any sale until Skytel
could get its technical difficulties worked out. He also alleged
that Gulnora has been using Russian Federation passports to travel
to western countries, such as Italy, where her Interpol issues
would prevent her from traveling.

WHY DOES SHE WANT IT?
--------------


7. (C) Given Gulnora's 2004 sale of Uzdonrobita, it is difficult
to determine from the outset why she would be interested in a
company with such a small share of the Uzbek cellular market. One
possibility is that she is still a significant shareholder within
MTS, the Russian public company that purchased her share of
Uzdonrobita. MTS runs a CDMA 450 cellular network in Russia and
is developing one in Tajikistan. Skytel is the perfect partner to
these other networks, especially since most of the cellular base
stations have already been constructed here. Another possibility
is that she wants to develop it herself. Even in its early days,
Skytel's prospects looked promising as, thanks to its technology,
it could offer services at cheaper rates and still boast better
quality than its competitors.

PUBLIC PERSONA
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8. (C) Skytel's difficulties and the apparent attempt by Gulnora
to take over the company are now a matter of public record as
local Website, Fergana.ru, published its account of the problem.
According to the site, the real owner is well-known Uzbek
businessman Sergey Tsoy, who also owns Business Bank, Poytaht
Hotel and the Segura insurance company, and is in a dispute with
Gulnora Karimova. Oybek Khalilov, UzAIG representative and Vice
President of the American Chamber of Commerce, confirmed that
Sergey is involved in the company in some fashion. When asked
about Tsoy's involvement, NCI's representative said that NCI
purchased all of Tsoy's shares of Skytel in 2004 and that now he
is simply an advisor for the company. Not coincidentally, NCI's
primary bank in Uzbekistan is Tsoy's Business Bank.

IN THIS ENVIRONMENT, EVERYBODY NEEDS A FRIEND
--------------


9. (C) COMMENT: We do not second-guess NCI for working with Sergey
Tsoy, who has certainly been successful despite this difficult
investment climate. However, it appears that, whether or not it
was intentional, Tsoy sold NCI a ticking bomb. Regardless of what
type of deal NCI attempts to broker with Uzbek Government
insiders, it is unlikely to be favorable. Only a seriously
influential individual like Gulnora could use this amount of GOU
resources for her own self interest.

PURNELL