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).

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SUMMARY
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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.

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A Long-Running Feud Heats Up
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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.

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Judgment Against Fridman's Companies in New York
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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

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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.

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Judgment Against Telenor in Omsk
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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.

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Telenor and Norwegian Government Next Steps
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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

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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.

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Blow to Investor Confidence or Opportunity to Settle?
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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.

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COMMENT
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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

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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