MTS' Central Asian trials extend to Uzbekistan

By bne IntelliNews June 26, 2012

Clare Nuttall in Almaty -

Russia's Mobile TeleSystems (MTS) is in danger of losing the right to operate on the Uzbek market, after authorities threatened to revoke its licence over poor service, complaints about the company's use of mobile masts, and a fraud probe. The fight over the licence is just the latest trial for the company in Central Asia.

According to reports in the Uzbek press, the State Communications Inspectorate has said it could strip MTS-Uzbekistan, the country's largest mobile operator, of its licence after receiving alleged complaints from customers about quality of service. The company is also under fire from officials who say it does not have the necessary authorisation to use 48 of its mobile base stations in Uzbekistan.

MTS-Uzbekistan, which has been active since 2008 and has around 9.5m customers and market share of 38%, is also being investigated on allegations of fraud. Reports say that the company's former director, Bekhzod Akhmedov, is believed to have fled the country. An audit carried out by the Uzbek prosecutor and tax authorities claims to have uncovered misuse of funds, misappropriation of assets, illegal cash-out of funds and tax evasion, Interfax reports.

An MTS spokesperson told AP that the company sees no reason for the Uzbek authorities to revoke the licence and that it has already submitted documentation for most of the 48 base stations.

"It remains unclear what stands behind the allegations and whether MTS will be able to prevent its licenses from being suspended," Troika Dialog writes in an analyst note. "We think the company can easily stop using the 48 base stations and not suffer any meaningful negative impact on the services it offers, but the issue, in our view, appears to be bigger than just 48 base stations."

The pressure on the company comes just six weeks after MTS achieved a breakthrough next door, with the company striking a deal to return to Turkmenistan in May. The Turkmen subsidiary lost its licence in December 2010, but services are due to be restored within the next two to five months following a series of negotiations with Ashgabat. 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.

However, Uzbekistan is a much larger market than either Kyrgyzstan or Turkmenistan, given that the 29.5m population is the largest in Central Asia. Poor fixed line coverage, with services covering only around 7% of the population, has seen rapid growth in the mobile telecoms market. After a leap in subscriber numbers in 2008, the mobile subscriber base has been growing by around 30% a year, with penetration reaching around 80% in early 2011.

Since MTS entered the market, Uzbekistan has become its third-largest market, accounting for around 4% of consolidated revenues. In 2011, MTS's EBITDA in Uzbekistan was $231.4m. Troika writes that although the latest news is negative, "given the size of operations in Uzbekistan, the negative impact on MTS' valuation would only be around 5% under the worst-case scenario of licenses being suspended."

The Russian mobile operator is hardly alone in its struggles. International companies operating in Uzbekistan have faced numerous problems in recent years, despite insistence from Tashkent that the government wants to promote international investment. Oxus Gold, one of the longest-standing investors, claimed in 2011 that it was being forced out of the Amantaytau Goldfields joint venture by its Uzbek partners. The same year, security forces raided the Turkish-owned Turkuaz shopping centre, beating several of its employees and confiscating goods. A documentary broadcast on Uzbek state television later accused 50 Turkish businesses of promoting the Islamic terrorism.

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