MTS Uzbekistan stops operations after license suspended

By bne IntelliNews July 19, 2012

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Russia's largest mobile operator Mobile TeleSystems (MTS) on July 17 stopped providing services in Uzbekistan, where it is the largest player, after its license was suspended for 10 days. The company is also being targeted by the Uzbekistani General Prosecutor's Office, which has issued arrest warrants for the arrest of several top managers at its Uzbek subsidiary Uzdunrobita as part of a fraud probe.

This is not the first time MTS has run into problems in the Central Asian region. MTS's Turkmenistan subsidiary lost its license in December 2010. The license was reinstated more than a year later in May 2012, and services are expected to be restored by the end of this year. MTS is also facing problems in Kyrgyzstan, where it claims that its majority holding in local operator Bitel, acquired in 2005, has been wrongfully misappropriated. Uzbekistan is, however, a much larger market than either Kyrgyzstan or Turkmenistan, given that the 29.5m population is the largest in Central Asia.

Uzbekistan's Communications and Information Agency says it has suspended Uzdunrobita's operating license because of "numerous and systematic violations" - a claim MTS says is groundless.

After suspending its mobile services at 6:00pm on July 17, MTS issued a statement saying that, it is fully compliant with the State Inspection of Communication (SIC) of Uzbekistan's requirements, and has appealed to the Uzbek government to stop what it says are "gross violations" in the investigation into Uzdunrobita's financial and operating activities. MTS says the investigation breaches local laws and international treaties protecting the rights of foreign investors.

"MTS unequivocally believes that the suspension of the license is without proper basis and constitutes a breach of MTS's rights under local and international law," the company said. "The actions of the regulatory authorities of Uzbekistan in conjunction with synchronous inspections of the company by several supervising agencies are being carried out in direct violation of local regulations and complemented with the use of tactics of intimidation, including the detainment and arrest of employees of Uzdunrobita, all of which can be interpreted as an unwarranted attack on the business of a Russian investor."

The decision to suspend Uzdunrobita's licence follows a multi-pronged attack on the company. Uzdunrobita has been the subject of a fraud investigation, a series of complaints about its quality of service and a dispute over the use of mobile phone masts across Uzbekistan.

Also on July 17, the Uzbek Prosecutor General's office said it had issued warrants for the arrest of Uzdunrobita officials who are wanted on suspicion of embezzlement and tax evasion.

Uzdunrobita's director for corporate development Azizillo Mirzamoidinov is already in police custody, Prime reports, while warrants have been issued for the director of Uzdunrobita's roaming department, Bakhrom Irgashev, and Rakhim Irgashev, director of one of the company's subsidiaries. The Uzbek Prosecutor General's office says it believes the group masterminded by CEO Bekhzod Akhmedov created a criminal syndicate to embezzle funds from the company, causing over UZS500bn ($260m) in damages. Akhmedov has already fled Uzbekistan to avoid arrest.

MTS warned in June 2012 that it was in danger of losing its license to operate in Uzbekistan following claims about poor service. Uzdunrobita has already closed its sales and service office in Tashkent, saying on July 12 that it had to shut the office for technical reasons. It was also ordered by the SIC to shut down 208 base stations across Uzbekistan, resulting in a serious decline in coverage and communications quality.

Uzdunrobita currently has around 9.5m customers and market share of 38% in Uzbekistan. The Central Asian country is MTS's third largest market, although it accounts for only around 4% of consolidated revenues. Renaissance Capital points out that due to Tashkent's strict currency control regime, MTS is unable to withdraw revenues generated in Uzbekistan from the country.

"Although this negative scenario is unfolding in Uzbekistan, we do not think it should have much of an impact on [MTS] stock," Renaissance Capital said in an analyst note. "For now, we would treat the government pressure on MTS as temporary, but would not rule out the possibility of MTS losing its operations in Uzbekistan."

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