Court Hits Telenor for $2.8Bln

A Siberian court in the wee hours of Saturday morning ordered Norway's telecoms company Telenor to pay $2.8 billion to VimpelCom in a ruling that highlighted the unusual judicial practices that may beset foreign investors.

Telenor, whose larger partner in VimpelCom is Alfa Group's telecoms arm, Altimo, said it would appeal the verdict of the Khanty-Mansiisk Arbitration Court, which ruled that the Norwegian firm stalled New York-listed VimpelCom's $230 million deal to buy a Ukrainian mobile operator.

The Norwegians complained that the choice of the court was puzzling, procedural irregularities abounded and the sheer size of the compensation — more than 12 times the value of the deal — defied common sense.

On top of that, the judge in the case handed down the ruling at 2 a.m. on Saturday, after leaving a group of Telenor lawyers and representatives waiting for seven hours in a court building before returning from a recess that he announced would last just 30 minutes, a company spokesman said.

"We just had to hang in there and wait," Dag Melgaard, Telenor's vice president for communications, said by telephone Sunday.

The court complaint came from Farimex Products, a British Virgin Islands-registered company that owns 0.002 percent of VimpelCom shares. Telenor owns 29.9 percent of VimpelCom's voting stock.

The court ruled that Telenor damaged VimpelCom by delaying its 2005 deal to buy mobile firm Ukrainian Radio Systems and awarded one-half of the $5.7 billion compensation sought by Farimex.

Farimex also brought its claim against Alfa's Altimo and affiliated companies, including CT-Mobile, which is registered in Khanty-Mansiisk, on the same counts, but the judge cleared the other defendants.

Telenor said Altimo subsidiary CT-Mobile, a shareholder in MegaFon, has no relation to VimpelCom.

Alfa has been entangled in separate legal disputes over its holdings in VimpelCom and MegaFon for years, with multiple, often-conflicting rulings being handed down in various national jurisdictions.

Telenor said it believed that Farimex is affiliated with Alfa Group, which holds 44 percent of VimpelCom's voting stock. A rift over strategy in Ukraine was a major reason why the partnership between Telenor and Alfa broke down years ago.

"It doesn't help [our] future partnership, certainly," Melgaard said of the court ruling. "Hopefully, Alfa will some time come to their senses and discover it's just ludicrous and doesn't take them anywhere. They just look stupid now, I think, in most people's eyes [in] trying to do this."

Altimo rejected being behind the Farimex lawsuit but said it supported the case against Telenor.

VimpelCom was able to complete the deal to buy the Ukrainian operator at the end of 2006, a year later than it planned, Altimo vice president Kirill Babayev said Sunday.

The number of mobile phone users in Ukraine grew from 50 percent to 75 percent of the potential market over the year that the deal to buy the company was up in the air, Babayev said. "If we had bought it in 2005, VimpelCom would now be [Ukraine's] third-largest operator with a significant market share and worth much more," he said.

In March, Alfa subsidiary Eco Telecom filed a near-identical claim against Telenor to the Khanty-Mansiisk case in a Geneva arbitration court, Telenor said.

Telenor said it opposed the Ukrainian Radio Systems acquisition because it was vastly overpriced and made no business sense. In addition, the sellers didn't identify themselves, the company said.

Altimo and Telenor are also partners in Kyivstar, Ukraine's largest cell phone operator.

Farimex's legal action against Telenor bears some similarities to the case that obscure firm Tetlis won last month against TNK-BP in another Siberian court, based in Tyumen. Tetlis, also a small-scale shareholder, won a judgment against British oil major BP worth close to $500,000 over secondees' salaries.

Alfa, a TNK-BP shareholder through the AAR consortium in conflict with 50 percent-shareholder BP, supported the lawsuit but insisted that it had no connection to Tetlis, which was founded by two former Alfa employees.

Events like this, or the risk of them, are the biggest reason after corruption why foreign investors are still very reluctant to commit to Russia even though they expect the country to harbor a better growth potential than China or India, said Chris Weafer, chief strategist at UralSib, citing recent surveys.

"It certainly does serve to remind foreign investors … that Russia remains a difficult place to do business, and partnerships with Russian investors have to be treated with more care than partnerships with other investors," Weafer said of the Khanty-Mansiisk ruling against Telenor.

If the $2.8 billion in damages were to be enforced, it could cause Telenor to ultimately leave Russia, said Rostislav Musiyenko, an analyst at the Bank of Moscow.