C O N F I D E N T I A L SECTION 01 OF 03 MOSCOW 002629

SIPDIS

DEPARTMENT FOR EUR/RUS, EEB/CIP, EEB/IFD/OIA
STATE PLS PASS USTR (EHAFNER, CKLEIN)
COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON)

E.O. 12958: DECL: 10/16/2019
TAGS: ECON ECPS ETRD RS EINV BEXP
SUBJECT: STAGE SET FOR RESOLVING TELENOR-FRIDMAN TELECOM
DISPUTE.

REF: A. A. MOSCOW 00743

B. B. 08 MOSCOW 02596

Classified By: Economic Minister Counselor Matthias Mitman for Reasons
1.4 (b/d)

Summary
--------------


1. (C) On October 5, Norwegian government-owned Telenor and
Russian-controlled Altimo announced the creation of a new
mobile operator, potentially ending a half-decade feud over
control of their current joint venture, Vimpelcom. Telenor's
Corporate Affairs Director in Russia called this a positive
outcome for both parties. The two companies would create a
new venture and suspend all their ongoing legal proceedings.
While the foundation has now been laid for settling this
dispute, the Norwegian Embassy will wait for a decision in
the related lawsuit in Omsk, expected in March 2010, before
declaring the conflict settled. Other potential sticking
points in the proposed new venture include the necessity of
receiving Russian government permission for the new firm to
operate in a strategic sector and an agreement between the
parties on a management team acceptable to both sides. End
summary.

Setting the Scene
--------------


2. (C) Starting in the late 1990s, Telenor (majority owned by
the Norwegian government) and Altimo (controlled by Russian
oligarch Mikhail Fridman) made a series of investments in
Russian telecom companies, including in leading Russian
mobile operator Vimpelcom. Telenor also invested in
Kyivstar, a Ukrainian mobile services provider. A battle
between the two investors began in 2005, when Vimpelcom
attempted to expand its own presence in the Ukrainian market
through the purchase of the Ukrainian mobile provider
Ukrainian Radio Systems (URS). Fridman accused Telenor of
obstructing Vimpelcom's expansion into the Ukrainian market
by blocking Vimpelcom's purchase of URS, while Telenor

insisted that the proposed URS purchase was simply a bad deal
for Vimpelcom. Despite Telenor's objections, the URS purchase
eventually proceeded. URS has been loss-making for VimpelCom
through 2008.


3. (C) In March 2009, the two companies began a legal
battle. Farimex, an obscure minority shareholder in
Vimplecom with alleged ties to Altimo owner Fridman, filed
suit against Telenor in Omsk, Siberia. The Omsk court
initially ordered the Norwegian firm to pay compensation of
$1.7 billion to Farimex. When Telenor refused to pay and,
instead, appealed the verdict to a higher court, the Omsk
court ordered the sale of almost all of Telenor's 30% share
in Vimplecom. These actions put Telenor at risk of losing
its stake in the joint venture (Reftels A, B). Telenor, for
its part, filed suit against Fridman in New York, using the
terms laid out in the original investment agreement and has
won several preliminary judgments in that forum.

Terms of the Current Deal
--------------


4. (C) On October 5, Telenor and Altimo announced the
creation of a new telecom company, which could end the
half-decade feud over control of Vimpelcom. The companies
announced the deal, reportedly after talks between Prime
Minister Putin and Telenor's executives. Natalia Schneider,
Telenor's Corporate Affairs Director in Russia, told econoff
that, under the agreement, Altimo and Telenor would suspend
all their on-going legal proceedings and create a new
venture, Vimpelcom Ltd. The new company would be registered
in Bermuda, headquartered in the Netherlands, and listed on
the New York Stock Exchange. The firm would incorporate
Telenor's and Altimo's stakes in both VimpelCom and Kyivstar.


5. (C) According to Schneider, this agreement results in a
positive outcome for both parties. The deal, expected to be
finalized by summer 2010, is contingent upon both parties
ending all current outstanding litigation (Ref A). Asked
specifically about the Farimex lawsuit, Schneider noted that

MOSCOW 00002629 002 OF 003


this case was not part of the formal agreement, but both
parties understood that "somehow, the lawsuit in the Omsk
court would dissolve; or else there will be no deal." In the
future, the partners would settle their disputes in London
under New York law.


6. (C) Other key elements of the deal include an agreement
that key senior management for the new venture, slated to be
announced by January 2010, would be agreeable to both sides.
The new management plans to begin joint expansion into
markets such as the CIS countries, Ukraine, Georgia, Vietman,
Cambodia, Laos, with potential future work in other parts of
Asia and Africa.


7. (C) Ownership and control of the new joint venture
appears fairly evenly divided between Telenor and Altimo.
Under current conditions, the proposed exchange of shares
would result in Altimo holding slightly more voting shares
(43% to 35% for Telenor), but Telenor would still control a
blocking share and be able to influence major corporate
decisions.

Waiting for the Judgment
--------------


8. (C) Norwegian political officer Baard Vandvik confirmed
that Telenor and the Norwegian Embassy are pleased that the
dispute has been resolved. However, Vandvik stated that a
positive outcome in the Siberian court case is not
guaranteed. The Norwegian parties are anxiously awaiting the
decision, expected in March 2010. He concluded that,
notwithstanding the uncertainties, this is a major step
forward in the long-running feud between the two companies.
In addition to the resolution of the lawsuits, the parties
must also agree on a management team for the deal to take
effect. Such agreement on management has proven difficult in
other instances (e.g., TNK-BP, where Fridman was also a
player).


9. (C) Finally, the deal requires governmental approval in
several different countries. Under the terms of the
agreement, Telenor will surpass the 25% threshold for foreign
ownership in a company identified by Russian law as
"strategic." Thus, the proposed company will require Russian
government approval of its ownership structure in order to
operate in Russia. While most analysts speculate that the
Russian government will grant approval for the deal -- given
GOR interest in achieving resolution to this dispute -- the
committee charged with processing these requests has not
always acted in a transparent manner. A few market watchers
have highlighted this as a potential remaining area of risk.
The newly created company also will need to obtain permission
to operate from other countries in the region, including from
Ukrainian authorities where the proposed new company is
expected to have a sizeable market share.

Is the Deal Fair?
--------------


10. (C) Various industry analysts voiced the opinion that the
deal is beneficial for both parties. Martin Hoff, a
Norwegian telecom analyst, stated that the pressure from
Altimo and Farimex did not result in Telenor having to accept
poor terms on the deal, which provided a good value for the
Ukrainian assets. Konstantin Belov, a telecom analyst at
UralSib, agreed that the deal was fair, while Troika
Dialogue's Yevgeny Golosnoi contended that the main
accomplishment is ending the conflict. Yet, Olga Pleshanova,
a Kommersant journalist who previously reported on this case,
told econoff that she is waiting to see the outcome of the
Omsk hearing. While still retaining some skepticism, she
noted that both companies were pressed to resolve the
conflict by the reciprocal court actions.

Comment
--------------


11. (C) Faced with potentially losing its multi-billion
dollar asset in Russia, Telenor was eager to negotiate a
settlement despite reports Fridman was reluctant to cooperate
(Reftel A). The conflict might have dragged on to the

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detriment of both the Russian and Ukrainian telecom
consumers. Norwegian government actions, combined with
Putin's intervention and uncertainty on the outcome of the
reciprocal lawsuits in New York and Omsk, ultimately put
sufficient pressure on the two parties to settle their
differences. While the deal holds the potential to create a
strong market player internationally, the parties must still
overcome several hurdles, including agreeing on a joint
management team and obtaining needed governmental
permissions. Even with this potentially positive outcome,
the whole affair reinforces concerns about the business
climate for foreign firms investing in Russia. Even with a
positive Omsk court ruling next spring, the generally dismal
performance of Russian courts and unpredictability of dealing
with Russian partners remains a cloud on the business
environment. End Comment
Beyrle