TELENOR-FRIDMAN TELECOMS DISPUTE HEATS UP

C O N F I D E N T I A L SECTION 01 OF 04 MOSCOW 000743 SIPDIS STATE FOR EUR/RUS, EEB/CIP, EEB/IFD/OIA STATE PLS PASS USTR (HAFNER, KLEIN) COMMERCE FOR MAC (MATT EDWARDS, JAY THOMPSON) E.O. 12958: DECL: 03/23/2019 TAGS: ECPS EINV ETRD ECON RS SUBJECT: TELENOR-FRIDMAN TELECOMS DISPUTE HEATS UP REF: 08 MOSCOW 2596 Classified By: Ambassador John R.Beyrle, Reasons 1.4(b,d). -------------- SUMMARY -------------- ¶1. (C) The long-standing battle between Norwegian government owned Telenor and Russian oligarch Mikhail Fridman for control of mobile phone providers in Russia and Ukraine is heating up again. On March 12, each side secured major judgments against the other. Telenor won a billion-dollar contempt judgment against Fridman's Alfa group of companies in New York, while Alfa succeeded in convincing a Russian regional appellate court to seize Telenor's shares in Russian service provider Vimpelcom. Telenor has long indicated a willingness to negotiate a settlement but, thus far, Fridman has resisted. The Norwegian government is quietly lobbying both Russian officials and the EU, in an effort to apply pressure on Fridman. The Russian court's seizure of Telenor's shares is another blow to investor confidence in Russia, and once again demonstrates that Russian insiders can use Russia's court system at the expense of their foreign partners. END SUMMARY. -------------- A Long-Running Feud Heats Up -------------- ¶2. (SBU) Russian oligarch Mikhail Fridman, head of the Alfa group, and Telenor, the mobile telecom company majority owned by the Norwegian government, have been embroiled in a battle for control of billions of dollars in mobile telecom assets in Russia and Ukraine for several years. Fridman and Telenor made a series of interlocking investments in Russian and Ukrainian telecom companies starting in the late 1990s. The two investors subsequently began to fall out about five years ago when Fridman accused Telenor of blocking Vimpelcom's foreign acquisitions, particularly in Ukraine. Since then, the two companies have been engaged in a seemingly endless series of arbitrations and litigations in Russian, Ukrainian, Swiss and New York courts. The conflict heated up on March 12, when major adverse judgments were entered against Fridman's companies in New York and against Telenor in a Russian regional appellate court. ¶3. (SBU) The crown jewels of the Fridman-Telenor investment joint venture are Vimpelcom, Russia's second largest mobile phone company, and Kyivstar, Ukraine's largest wireless provider. Each company is now worth billions of dollars. Fridman's companies control the majority stake in Vimpelcom, but Telenor has a blocking minority stake (in Russian business practice, possession of more than 25% of a company,s outstanding shares is generally regarded as a blocking stake). In Kyivstar, the situation is reversed, with Telenor holding the majority of shares, while Fridman has the minority blocking stake. -------------- --- Judgment Against Fridman's Companies in New York -------------- --- ¶4. (SBU) Both the Kyivstar and Vimpelcom shareholders' agreements between Telenor and Fridman require that all litigation be brought in either Swiss or New York courts. In conformity with these agreements, Telenor filed suit against Fridman's Alfa group in New York. In the lawsuit, Telenor alleged that Fridman's Alfa group of companies effectively controlled two other Ukrainian telecom companies that directly competed with Kyivstar. Telenor also alleged that Fridman prevented Kyivstar from taking strategic action by failing to participate in board meetings for several years, all in violation of the Telenor-Fridman shareholders' agreement for Kyivstar. ¶5. (SBU) In a previous judgment, arbitrators and federal judges in New York agreed with Telenor and ordered Fridman's companies to either sell down their stock in the competing Ukrainian companies to less than 5% of the outstanding shares, or sell their shares in Kyivstar. New York courts have also concluded that Fridman has a history of engaging in collusive litigation where he effectively hides behind dummy MOSCOW 00000743 002 OF 004 companies or controls both the plaintiff and defendant in manufactured lawsuits. ¶6. (SBU) When Fridman's companies repeatedly failed to abide by these court decisions, a federal judge issued a contempt judgment against them on March 12. The contempt order levies fines, which potentially amount to billions of dollars. The order further requires Fridman's companies to deposit their shares in Kyivstar with the New York court. On March 17, in partial compliance with the New York judgments, Fridman's companies announced they were selling down their shares in one of the two competing Ukrainian companies (Turkcell),but to our knowledge there has been no mention of the second company or of the deposit of Kyivstar shares with the New York court in the press. -------------- Judgment Against Telenor in Omsk -------------- ¶7. (SBU) Following the New York court's judgment and, in the view of some analysts, prompted by that decision, the Omsk regional appellate ordered the seizure of Telenor's shares in Vimpelcom. The Omsk court justified its decision as necessary to secure a $1.7 billion dollar judgment it had previously issued against Telenor. ¶8. (SBU) The original judgment in the Omsk case was the result of a lawsuit filed by a minority Vimpelcom shareholder, Farimex Products, which alleged that Telenor damaged Vimpelcom,s value by delaying a board decision on the latter company,s purchase of a small Ukrainian telecom company (reftel). Fridman and his Alfa group of companies has denied any link to Farimex, but the owner of record is apparently one of Fridman's cousins, and Telenor and many telecom analysts believe that Farimex is likely a shell company owned and controlled by Fridman. Moreover, Telenor and many analysts believe Farimex's claim to be riddled with procedural and substantive irregularities (reftel). ¶9. (C) In addition, Alfa and Fridman have a history of using Siberian courts in shareholder disputes with foreign partners -- most recently last summer against BP in the dispute over TNK-BP. In a March 17 meeting with the DCM, acting TNK-BP CEO Tim Summers said he had seen this "blueprint" before, right down to the use of an obscure minority shareholder -- in TNK-BP,s case Tetlis -- owned and controlled by Fridman. -------------- Telenor and Norwegian Government Next Steps -------------- ¶10. (C) Natalia Schneider, Telenor's Corporate Affairs Director in Russia, advised us that the company intends to seek an appeal of the Omsk court decision and a stay of the sale of the company's Vimpelcom shares. According to Schneider, the case next moves to another appellate court in Tyumen, which Telenor believes is also controlled by Fridman. After that, Telenor plans to appeal to the Moscow Arbitrage Court, where Telenor expects a genuinely fair hearing and likely success on the merits. She noted that in past Telenor-Fridman litigations, Fridman has succeeded in regional courts, but has always lost on appeal once the cases have gotten to Moscow. ¶11. (C) Schneider informed us that, in theory, the Vimpelcom shares could be sold on the Russian RTS Stock Exchange prior to the next appeal. Telenor and most analysts believe, however, that a sale is unlikely. According to press reports, the Moscow bailiff charged with seizing Telenor's shares has said he will proceed with caution, given the high-profile nature of the case, and is not about to engage in any quick sale of the shares. Moreover, according to Schneider, because of the publicity surrounding the case, any buyer of the shares would be on notice of Telenor's claim and pending appeal, and could expect a lawsuit from Telenor to rescind the sale and recover the shares. Finally, the lawyers for Farimex have said they are not interested in seeking a sale of Telenor's shares at this time. ¶12. (C) In addition to pursuing an appeal of the Omsk judgment, Schneider informed us that Telenor has lobbied both the Association of European Businesses and the EU (and us) to MOSCOW 00000743 003 OF 004 make the case with GOR senior officials that a seizure of shares or a billion-dollar judgment effectively stripping Telenor of its ownership interest in Vimpelcom would be a huge blow to investor confidence and sentiment in Russia. While the Norwegian Government has been somewhat circumspect in how it is addressing the case with the GOR, Norwegian Embassy sources informed us that the litigation will be one of the top items on the agenda when the Norwegian Foreign Minister meets with Russian FM Lavrov during the week of March 23 in Moscow. According to the Norwegian Embassy, the Norwegian FM will repeat Telenor's message that the case could have a negative impact on investor sentiment in Russia. They believe that, if the issue remains unresolved, it will also likely be raised again when the Norwegian PM visits Moscow at the end of May. ¶13. (C) Norwegian Embassy sources indicate that the Telenor-Fridman dispute was also raised on the margins of the last meeting of the Norway-Russia Bilateral Trade and Investment Commission in October in Moscow. At that meeting, Norway's Trade Minister reportedly raised with Russian First DPM Zubkov her concern about the impact that the case was having on the investment climate in Russia. She also expressed hope that nothing would happen to Telenor's shares in Vimpelcom until after a final resolution of the litigation, including the exhaustion of all appeals. ¶14. (C) Contacts at Telenor and at the Norwegian Embassy in Moscow tell us that if there ever is an effective taking of Telenor's shares in Vimpelcom through the Russian Farimex litigation, then Norway would have the option of bringing Russia to an international forum under the terms of the countries' bilateral investment agreement. -------------- -------------- Blow to Investor Confidence or Opportunity to Settle? -------------- -------------- ¶15. (C) Telecom analysts from UBS, Troika Dialogue and Renaissance Capital tell us that the case is a blow to investor confidence, but they discount the possibility that Telenor's shares in Vimpelcom will actually be disposed of in a fire sale or effectively stripped because of a huge monetary judgment in a regional Russian court. Instead, they believe the two major judgments in New York and Omsk create an opportunity for Fridman and Telenor to try to settle their differences, or to sever the partnership. ¶16. (C) Telenor has repeatedly stated its interests in a negotiated settlement, but it is less clear whether Fridman is. As Schneider conveyed to us, Fridman is "unpredictable," and it is always difficult to anticipate what his next move will be. For the last couple of years, many observers have thought the best way to unwind the interlocking investments would be a stock swap, where Telenor would receive Fridman's shares in Kyivstar, and Fridman would receive Telenor's shares in Vimpelcom, with perhaps some additional exchange of cash to make up for any valuation differences in the shares at the time of transfer. Thus far, however, Fridman has avoided serious settlement negotiations, and one analyst told us that Fridman would drive Telenor "right to the edge of the cliff" to gain maximum advantage before agreeing to a resolution. ¶17. (C) In the absence of a resolution within the next few weeks, some analysts believe that the GOR may step in to apply pressure to Fridman to negotiate a settlement, in order to avoid any further damage to Russia's already sagging reputation among foreign investors. -------------- COMMENT -------------- ¶18. (C) As noted in reftel, this long-running Telenor-Fridman dispute, combined with Kremlin, security service, and oligarchic control in other major Russian telecoms companies, will continue to impede the innovative, technological development needed in the sector. Given Fridman's litigious track record with foreign investors (e.g., TNK-BP),major foreign investors may well decline to do business with his family of companies in the future. Beyond that, the dispute has the potential to reduce further investors' confidence in MOSCOW 00000743 004 OF 004 the Russian legal and judicial system, since the Farimex case demonstrates that Russian entities can continue to use suspect judgments in far-flung Russian courts to apply maximum pressure to foreign investors. ¶19. (C) If Norway continues to lobby us to weigh in with the GOR regarding the dispute, our position should be that the USG is not in the best position to assist, but we will raise the issue in general as part of our broader concerns about the investment climate in Russia. BEYRLE