Nicholas Watson -

The government of Serbia & Montenegro has headed off a damaging row with the Austrian EU presidency, but in doing so provoked ire at home by reaching a politically charged compromise in an ownership battle for Serbia's leading mobile phone company Mobtel.

The deal represents something of a triumph for those in the government of Prime Minister Vojislav Kostunica who are trying to haul Serbia back into the European fold. And finding a way out of the mess caused by the previous owner of the 51% stake in Mobtel, Bogoljub Karic, will go someway to improving relations. Karic is one of Serbia's richest tycoons and flourished under the corrupt regime of the now deceased former president Slobodan Milosevic. He had been in a longrunning dispute with the government, which owns the other 49% of Mobtel, for allegedly failing to put up the entire $50 million in startup capital promised when Mobtel was established in the mid-1990s.

The government also claims Karic hasn't paid it any dividends from the mobile operator's profits which were “tunnelled” out using an extremely opaque corporate structure.

Altogether, the government reckons the state has been gypped out of €115 million by Karic's alleged shenanigans.

While that dispute was awaiting arbitration before a Swiss court, Karic sold his 51% stake in May 2005 to an Austrian consortium led by investor Martin Schlaff. Karic has since fled Serbia with other members of his family to avoid facing criminal charges brought by the state.

Above board Schlaff has always maintained that his group purchased the shares legally from Karic, a view disputed by the government.

The quarrel between the two sides threatened to spiral out of control and damage Serbia's relations with Austria when the Serbian government revoked the operator's license in late 2005, citing the alleged illegal deals, and put state-owned Telekom Srbija in charge of Mobtel's operations.

Under the terms of the deal announced on February 28, Mobtel will be divided up into two entities - one containing the assets and the other the operating license. These will then be sold off separately in tenders, the details of which will be announced in April.

In addition, Telekom Srbija will assume Mobtel's debts of about €90m, while the Austrian investors will settle debts of €30m to the telecommunications equipment maker Ericsson. The Austrians have also agreed to repay dividends to PTT Srbija of €24 million.

And, crucially, both sides agreed to give up their claims to ownership of Mobtel.

The unusual structure - separating the assets and license - highlights the political nature of the deal. Nebojsa Medojevic, economic analyst and director of the Belgrade think tank Group for Change, said neither party had a monopoly on the truth, it was more useful - both politically and economically - to reach an agreement and not allow the dispute to further damage relations between the two countries.

Domestic politics was also an important ingredient in the deal. By creating a new company using Mobtel's assets and divvying it up in a 70/30 split in the government's favour, the deal gives the Serbian government 100% control over the revenues from the Mobtel's license and allows the state to claim the deal won't cost the tax-payers anything.

“Schlaff will have only a portion in the assets of the company that Karic once controlled, not in a national asset such as the license,” says an insider with close links to the Serbian government.

However, the compromise has already come under fire, despite the lack of details, and risks complicating any tender.

Money-back guarantee Finance Minister Mladjan Dinkic said the minimum price for the assets and license would be set at €700 million, with the license representing 40% of that.

The government hopes to make at least €600 million from the sales of the assets and license, while the Austrian investors will receive at least €126 million for their 30% share of the assets - which coincidentally is around the same amount they reportedly invested in Mobtel.

The deal has angered many Serbs, who feel the government has given Schlaff and his friends a free ride by guaranteeing them their money back even though they deliberately made a very risky investment. Analysts say the final price for the assets and license will actually be between €800 million and €900 million, meaning that Schlaff could even made a profit.

Whether the public anger at the deal will harm Telekom Austria's chances in the tender isn't clear.

Telekom Austria had expressed an interest in Mobtel but refrained from investing with Schlaff because of the legal uncertainties.

Much will depend on whether the tender will include "qualitative" criteria such as guaranteeing jobs or investment, say observers.

Vodafone Group, which recently sold its assets in Japan to focus on this region, is also reported to be interested in bidding for Mobtel.

“Many Serbs got pissed off with the Austrians because they were politically blackmailing the government in order to protect Schlaff's investment in Mobtel,” says the insider. “No one likes to be threatened.”

Coming as it does alongside the deaths of Milosevic and former Croatian Serb leader Milan Babic while in custody in The Hague, the deal is seen in many quarters as yet another sign of the West's hypocrisy and victimisation of the Serbian people. Nevertheless, it will undoubtedly help the government in its often vexed relations with the EU and analysts say it should claim some credit for, as Schlaff put it, “sticking to its guns” and being a tough negotiator.

A successful sale of Mobtel would add lustre to the government's whole privatiation programme.

It has already sold off several tobacco factories to multinationals such British American Tobacco and this year it expects economic growth to be at least 6%, helped in part by these sell-offs. Many are hoping the privatiation of Mobtel will play a big part of that process, though political deals are never the best way to ensure it.