On July 17, 2012, the operation of Uzdunrobita, a subsidiary company of Russian MTS, was suspended by Uzbekistan’s Prosecutor General’s Office, before having its license revoked in August. Uzbekistan’s economic court charged Uzdunrobita with violating the antimonopoly law and the law on consumer rights protection and advertisement. The total sum of the claims raised against Uzdunrobita by the Uzbek prosecution and anti-monopoly bodies exceeds US$ 1 billion, while MTS has already written off over US$ 1 billion in the second quarter of 2012 due to the termination of the company’s operation in Uzbekistan. Russia and other relevant investment stakeholders now seriously reconsider future operation in Uzbekistan.
BACKGROUND: MTS had been operating successfully in Uzbekistan from 2004 until June 2012, when Uzbek authorities charged it with the illegal exploitation of more than 250 base stations, unauthorized use of financial resources, misappropriation, illegal cashing schemes, dodging taxes and the operation of regional branches without license. Uzdunrobita’s former Director General, Bekhzod Akhmedov, was charged in June with involvement in a criminal group engaged in the extraction of uncontrolled profits. Akhmedov is currently a fugitive and is wanted on an Interpol warrant. Meanwhile, four local top managers were prosecuted and convicted as a result of the case filed. They were released from prison, but were sentenced to pay over US$ 700 million in fines, which the court ordered to be obtained by seizing assets from MTS. Thus, the company assets were nationalized and about 9.3 million of MTS private and corporate clients in Uzbekistan left without mobile connection.
The MTS representatives were surprised and shocked at the ease and speed by which Uzbek authorities came up with the charges, investigated and closed the case. The whole process from presenting the charges to the actual confiscation of the assets took only three months. During the investigation, 50-90 witnesses were heard per day. Besides, numerous violations of human and procedural rights were reported. The very fact that the company’s assets were expropriated on claims raised against physical persons, four managers at MTS-Uzbekistan, also falls outside legal practice in Uzbekistan.
The Director General of Uzdunrobita, Dmitriy Shukov, thinks that the case of MTS-Uzbekistan illustrates the business expropriation mechanism in Uzbekistan. According to Shukov, there were elements of business valuation during the investigation. Furthermore, representatives of competing companies such as Perfectum Mobile were part of the investigation committee and had a chance to learn the company’s internal operation. Shukov also mentioned that the appropriation of the company’s assets actually started already during the investigation activities.
Russian investors are not the only ones that have been subjected to persecution and confiscation of businesses in Uzbekistan. Just to name a few, the large Turkish trade networks Demir and Turkuaz, British and U.S. gold mining enterprises, the joint Kazakh-Russian Bekabadcement, and a milk factory sponsored by Russian Wimm-Bill-Dann, have all during the last couple of years suddenly been charged with certain illegal activities subjecting them to persecution and state confiscation of their assets, similarly to the present MTS case. It should be noted that MTS invested about US$ 1 billion in developing the mobile connection market of Uzbekistan, providing services to about one third of the country’s population.
IMPLICATIONS: Even though Uzbekistan is quite attractive to foreign investors in many spheres of economic activities, and especially to mobile operators, the country lacks legal guarantees or mechanisms for safeguarding or restoring the rights of investors if violated. Article 10 of the law of the Republic of Uzbekistan “On guarantees and measures for protection of the rights of foreign investors” stipulates that investment disputes may be resolved by consultations between the parties. If the parties fail to resolve the dispute, the case should be addressed to Uzbekistan’s economic court or submitted for arbitration in accordance with the norms and procedures of international agreements on investment disputes, which Uzbekistan has signed. However, the norms of the mentioned law do not oblige Uzbekistan to direct the dispute to international arbitrary bodies, but considers this as an option that should be confirmed in writing by both parties to the dispute. Furthermore, Uzbekistan has not signed some of the basic international conventions for protection of human and economic rights.
The head of the joint stock finance corporation Systema that controls the JSC MTS, Mikhail Shamolin, stated that the company will contest the verdict of Uzbekistan’s economic court in international courts. On October 9, the Supreme Economic Court of Uzbekistan admitted MTS’s appeal against revoking the license of Uzdunrobita, and the decision is postponed to October 16. A small chance for a positive outcome still exists, as the court may delay the decision for some time and then redirect it to other instances or drop the charges.
Meanwhile, MTS seeks other solutions. Between September 26 and October 7, MTS Vice President for strategic and corporate planning Michael Hecker took part in the OSCE Human Dimension Implementation Meeting’s side events in Warsaw to appeal for EU and U.S. sanctions against Uzbekistan. The call is especially relevant in light of the fact that around thirty percent of the MTS stock in free circulation is owned by U.S. investors. The Russian Chamber on trade and industry also expressed its concern with the situation around the large Russian company. The U.S. Committee on Security and Cooperation in Europe also supported the case of MTS-Uzbekistan.
Last but not least, the issue of “Protection of the Russian investments and property in the Republic of Uzbekistan” will be raised on October 18 by the Committee on property issues of the Russian State Duma. Representatives of the specialized committees of the Russian State Duma and the Federal Council, Ministry of Foreign Affairs, Ministry of Economic Development, Federal Migration Service, the authorized representative on protection of entrepreneurs’ rights under the President of the Russian Federation, as well as other specialists and experts on property and investment protection will attend the meeting.
CONCLUSIONS: Upon acquiring independence, Uzbekistan long stayed relatively closed to foreign investment. A certain opening of the country started about ten years ago, and was very selective. While offering a large consumer potential to foreign investors, Uzbekistan sets some tough rules of the game, and offers almost no guarantees for the protection of investor’s basic rights. The practice shows that if a foreign business gets the attention of the Prosecutor General, there is almost no way to keep it running and safe. Most of the suffering investors cannot imagine that this type of large business closures would take place without the explicit authorization from the very top layers of the Uzbek government. The MTS case, however, received wide international coverage and publicity. The chances that MTS will get remedies for the large losses it has suffered are extremely slim, however, the case may have a significant negative impact on the volume of foreign investment flowing into Uzbekistan not only from its long-lasting partners like Russia, but from others as well.
AUTHOR’S BIO: Nargiza Majidova holds a Master degree in Political Science from Central European University in Budapest, Hungary. She is currently Monitoring and Evaluation unit manager at an international NGO in Tajikistan.