A Fairynightmare: Russia and the Golden Goose

The Moscow Times reports on how Russia is pathologically savaging the last vestiges of its credibility among foreign investors:

A lawyer for Farimex Products said Friday that it did not want Telenor to sell its stake in VimpelCom, a perhaps surprising admission given that Farimex has spent the past few months fighting in court to make Telenor pay close to the very value of that stake.

The now three-year saga, which has drawn comparisons to the attack on Yukos and the drama last year at TNK-BP, stands alone for the questions it has raised regarding the hierarchy of competing verdicts — and the might of individual shareholders.

For lawyers, it is a question of whether related verdicts in New York, Omsk and Kiev comply with their respective domestic legal codes and the decisions of the other courts. For market participants, the case represents a more simplified issue of business ethics.

An Omsk court last week seized Telenor’s 29.9 percent stake in VimpelCom after the Norwegian telecoms firm failed to pay the $1.7 billion that minority shareholder Farimex believes that it owes VimpelCom, Russia’s second-largest mobile operator.

It’s obvious enough that a forced sale of Telenor’s stake would send VimpelCom shares — including Farimex’s .002 percent stake — plummeting. Why the tiny Farimex decided to take on Telenor in the first place is another story.

Once an unknown British Islands-registered company, Farimex is now a key player in a drama starring Telenor and Altimo, Alfa Group’s telecoms unit. Surprisingly, the only character noticeably absent is VimpelCom itself, in which Altimo is also a shareholder with a 40 percent stake.

“This is a test case for how serious the Russian government is in encouraging foreign investment in the post-crisis world,” said Roland Nash, head of research at Renaissance Capital.

“In the past, Western capital markets were able to deliver finance to Russian corporates. Now, the state is in control and has the opportunity to either step in and make it clear that foreign investors are either welcome to invest in Russia or not.”

Farimex says Telenor purposefully blocked VimpelCom’s expansion into Ukraine in 2005 to protect a 56.5 percent stake in Kyivstar, VimpelCom’s would-be competitor, successfully keeping the Russian company out of the Ukrainian market for two years.

Assuming that VimpelCom would have garnered 25 percent of the Ukrainian market, losses for the delayed entry would amount to about $2 billion, said Philip Townsend, head of research at Metropol.

The feud also concerns the rights of Telenor and Altimo as shareholders in Kyivstar.

Alfa owns a 43.5 percent stake in Kyivstar and gained greater leverage in 2006 when Ukraine decided that a shareholder must own at least 60 percent to enjoy the privileges of a majority shareholder.

A subsequent court ruling in Kiev ordered the Kyivstar board to be re-evaluated as Telenor no longer had control under the higher threshold, Kirill Babayev, Altimo senior vice president, said in a telephone interview.

According to the Kyivstar shareholders contract, Telenor was allowed to appeal the case in New York, leading to further tangles when several aspects of the Kiev ruling and a recent New York verdict contradicted each other.

On Wednesday, a New York court found Alfa in contempt and ordered the company to pay $100,000 per day until it complies with an earlier ruling.

The New York court also demanded that Alfa bring its Kyivstar stake to New York as a deposit while Alfa’s shares are technically frozen for protection by the Ukrainian commercial court, Babayev said.

“We are definitely trying to cooperate with the courts worldwide and comply with the rulings,” Babayev said. “But how can we comply with two rulings that contradict one another? It’s hard work.”

Further complicating the proceedings is the lawsuit that Farimex filed against Telenor in Siberia. Alfa claims that it has no connection to Farimex or the suit, an argument that Telenor has contested.

Telenor spokesman Dag Melgaard called the Omsk ruling “illegal” and a “lawsuit that should never have been considered in the first place.”

“We are really worried that a small company like Farimex is actually capable of raising such a lawsuit in the Siberian region,” he said.

The appeal of Telenor’s case will rest on whether Russia decides to uphold any aspect of the New York or Kiev rulings based on reciprocity, said Edward Bekeschenko, a partner at Baker & McKenzie.

As much as the trial is a bellwether for foreign investor rights in Russia, it will also be a test for how the country interprets foreign judgments. While just recently Russia began to look at such verdicts on a case-by-case basis, the trial could be a way for the country to develop a more cohesive legal policy on the issue, Bekeschenko said.

While Bekeschenko said there were few similarities between the Telenor case and the Yukos trial, Renaissance Capital’s Nash said many investors were looking to the one-time oil giant’s demise as a historical precedent.

“In many ways, I think it is even bigger than Yukos,” he said. “Yukos was about an oil company and oil is strategic, while this is about a mobile telecoms company. It doesn’t have any real strategic value, and so there is no excuse for the rights of foreign investors to be walked over.”

In turn, Altimo’s Babayev said Alfa’s spat with Telenor bore greater resemblance to the TNK-BP saga in that the “foreign investor did not want the Russian partner to go beyond the Russian borders,” in this case to Ukraine and other parts of the Commonwealth of Independent States.

That dispute, between BP and a consortium of Russians including Alfa Group shareholders, was over management and strategy, including over the 50-50 venture’s operations abroad.

Still, Babayev remained confident that Altimo and Telenor could still resolve their disputes through negotiation. “In my view, we can definitely make a resolution together if we both want to sit down at the table and negotiate,” he said.

Melgaard of Telenor, however, feared that the outcome would not be pretty. “At this point, a divorce is the best way out, in our minds,” he said.

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