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. Last Updated: 07/27/2016

NEWS ANALYSIS: Rostelecom Move Leaves Svyazinvest in Quandary

National telecoms holding company Svyazinvest faces an uncertain future after possible merger partner Rostelecom took major steps toward increased self-sufficiency and the government alienated minority investors by ignoring their proposals at a shareholders meeting.

Rostelecom, which Saturday slipped out of the government's control when preferred shareholders received voting rights on their shares for the next 12 months, is set to merge with Moscow MMT, the capital city's long-distance provider.

Moscow MMT shareholders' vote at Tuesday's annual general meeting to accept the national long-distance holding's merger proposal marked another impressive step forward in Rostelecom's long-term plan to turn its operations around.

Meanwhile, Svyazinvest seems to be tying itself in knots, with the state determined to retain full control over the holding even at the expense of the company's future prospects, analysts said.

The George Soros-led Mustcom company, which holds a 25 percent plus one share in Svyazinvest that it bought for $1.9 billion in a controversial privatization auction in 1997, had put forward to Monday's extraordinary shareholders' meeting to amend the company charter so that the chief executive must be approved by 75 percent of shareholders.

But the state, which holds the rest of the Svyazinvest shares, moved to postpone any such decision until a further extraordinary shareholders' meeting to be held in the fall. It also voted to instal former Deputy Prime Minister Vladimir Bulgak on the board.

Just three days after approving a similar proposal at national power utility RAO Unified Energy System, government representatives said that they had opposed Mustcom's proposal because it would damage the national interest.

"This violates the requirements of the law and the interests of the government," said Svyazinvest general director Oleg Belov, Interfax reported.

Mustcom representatives were unavailable for comment but the move was criticized by analysts.

"I'm surprised Belov positioned himself in such a manner after all the investor-friendly talk we heard over the past weeks," said Marina Oganesyan, telecommunications analyst with Aton.

Despite earlier talk that an alliance with Rostelecom could be Svyazinvest's best hope of turning its operations around, Belov may now be moving away from such an option, analysts said.

The decision by Moscow MMT, which holds 20 percent of the Moscow market, to merge with Rostelecom, could move both companies further away from Svyazinvest, analysts said.

"The merger gives Rostelecom control over the entire market for long-distance calls in Moscow," said Oganesyan at Aton.

That puts Rostelecom in a very strong position, she added.

To make the merger attractive to MMT shareholders, Rostelecom agreed to give 2.4 shares in return for one MMT share. This immediately lifted MMT's market capitalization from $20 million to $58 million.