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Russia's MTS fights to save $1 billion Uzbek business

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Aug. 24, 2012, 2:01 p.m. | Russia and former Soviet Union — by Reuters

Russia's top mobile phone company MTS says it has fallen prey to a "classic shakedown" in Uzbekistan but still hopes to save its $1 billion business after losing its operating licence in the Central Asian state.
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Reuters

MOSCOW - Russia's top mobile phone company MTS says it has fallen prey to a "classic shakedown" in Uzbekistan but still hopes to save its $1 billion business after losing its operating licence in the Central Asian state. 

First, however, the authorities should release four local managers that have been detained and cease a campaign of intimidation against other staff of its Uzbek subsidiary, a senior MTS executive told Reuters.

A three-month crackdown by Uzbekistan on MTS has reinforced the country's reputation as one of the most hostile environments for foreign investors in the former Soviet Union and exposed the lack of clout wielded by former colonial master Moscow.

"We absolutely want to save the business," Michael Hecker, MTS's vice-president for strategy, told Reuters in an interview at the company's Moscow headquarters.

"Any way forward, as an integral part, needs to include the release of our people and the stopping of the intimidation and harassment campaign against our other employees."

Since June, MTS has gone from market leader in Central Asia's most populous state, with 9.5 million clients, to being shut down and hit with $900 million of fines.

New York-listed MTS, controlled by Russian oligarch Vladimir Yevtushenkov's AFK Sistema conglomerate, says it faces a state crackdown of the type that has forced out investors such as London-listed Oxus Gold, U.S. company Newmont Mining Corp and Russia's Wimm-Bill-Dann, now part of PepsiCo .

"We were presented with the agenda of a classic shakedown," said Hecker, who added that MTS had been hit with claims fabricated by "experienced raiders".

A source close to MTS said that the company may write off the $1 billion value of its Uzbek business when it reports second-quarter results next Tuesday. MTS has a market value of $18.5 billion.

Moscow's Uralsib brokerage expects MTS to take an $800 million hit, forcing it to a net loss of more than $600 million.

RUSSIA, U.S. CONCERNS

Uzbekistan's State Inspectorate for Communications withdrew the licence of MTS's local unit, Uzdunrobita, for 10 days on July 17, citing "repeated and systematic" violations. A court revoked the licence permanently on August 13.

Shomansur Abidkhojayev, head of the state inspectorate, said his organisation had found 48 "undocumented" base stations operated by Uzdunrobita. Further inspections found an additional 150 unauthorised stations and optical cables operated illegally.

Russian Foreign Minister Sergei Lavrov intervened to help to secure the release last week of MTS's acting country manager, a Russian citizen, but four local managers remain in custody.

A U.S. State Department official raised the matter on a recent visit to Tashkent. The Helsinki Commission, an independent U.S. government agency that monitors human rights, has written to President Islam Karimov to express its concern.

Uzbekistan, ruled since independence in 1991 by former Soviet apparatchik Karimov, is a vital way station for resupplying the West's security operation in Afghanistan but has a history of troubled relations with both Moscowand Washington.

Tashkent recently pulled out of the Collective Security Treaty Organisation, a Russia-led security group, deepening the isolation of 74-year-old Karimov.

MTS bought 74 percent of Uzdunrobita for $121 million in 2004, acquiring the rest three years later for $250 million. It has since put $1.1 billion into the business, reinvesting cash flows because it was not allowed to repatriate earnings.

A 2003 investigation by the Financial Times suggested that Uzdunrobita had been controlled by Karimov's daughter, Gulnara. At the time, the company's manager Bekhzod Akhmedov dismissed the report as "just a rumour", according to the FT.

DISAPPEARING MANAGER

Akhmedov stayed on after the MTS deal, but he fled the country this June as friction with the Uzbek authorities escalated. MTS says his whereabouts are unknown. Tashkent, through Interpol, has issued a wanted notice seeking Akhmedov on suspicion of fraud and money laundering.

Akhmedov also features in a Swiss investigation of alleged money laundering through accounts held in his name at private bank Lombard Odier, Swiss news weekly L'Hebdo reported last week.

Swiss prosecutors confirmed they had arrested two Uzbek nationals in the case, while Lombard Odier said it had notified the Swiss Money Laundering Reporting Office. Both declined to elaborate.

The four local MTS managers who remain in custody are being pressured, Hecker said, into signing false confessions and have been denied access to lawyers during their interrogations.

"We are most worried about those four people in prison," said Hecker, adding that other staff had been interrogated "in a completely unlawful way, under severe intimidation, physical threats and the threat of imprisonment".

He said that MTS's competitors would not be able to fill the gap any time soon, leaving customers cut off from communications and, as a result, access to emergency services.

Abidkhojayev denied this, saying that competitors such as Beeline, the popular brand of Russia-based VimpelCom, offered an alternative.

"There are other companies working here. They are working day and night to connect subscribers quickly," he said by telephone from Tashkent. "I don't see any frenzy. People aren't standing in line for hours."

MTS is appealing to reinstate its Uzbek licence and could restore services quickly. "We still hope that, on the side of the Uzbek authorities, there will be an insight that this is an unlawful operation," Hecker said. 

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