US embassy cable - 05TASHKENT572

C O N F I D E N T I A L  TASHKENT 000572 
 
 
DEPT FOR EUR/CACEN AND EUR/ACE 
 
E.O. 12958: DECL: 02/24/15 
TAGS: ECON, PREL, PINR, UZ 
SUBJECT: SKYTEL SCANDAL: FIASCO IN THE MAKING 
 
REF: TASHKENT 228 
 
CLASSIFIED BY AMB. JON R. PURNELL, FOR REASONS 1.4 (B, D) 
 
1. (C) Summary: NCI Projects International, a U.S. firm that 
invested in Uzbek cellular company Skytel, claims that President 
Karimov's daughter, Gulnora Karimova, is attempting to take over 
Skytel.  The GOU officially stated that the "primary operator" of 
Skytel's frequency is causing interference with the company's 
network.  After weeks of no response from the GOU, NCI's multiple 
requests for a meeting were granted the same day that the company 
planned a press conference to publicly discuss Skytel's issues. 
The Agency for Communication and Information's spokesperson 
promised to help the company, but later proposed two deals, both 
of which NCI claimed were absurd.  Since then, the company's 
repeated calls for further meetings have been ignored.  Attempts 
to negotiate with Gulnora through intermediaries or directly with 
MTS, a potential competitor in the cellular market for the CDMA 
450 frequency, have been unsuccessful.  With USD 17 million in 
investment and 130 employees hanging in the balance, Skytel 
investors are concerned that a deal cannot be made to save the 
company.  Post sent a letter to DPM and FM Ganiev asking him to 
investigate the issue.  End summary. 
 
2. (C) According to Amcit Director from NCI Projects 
International, the U.S. investment firm involved in Skytel, the 
President's daughter, Gulnora Karimova has approached them for a 
stake in the Uzbek cellular firm.  The company began experiencing 
problems in January when interference on Skytel's frequency 
occurred from what the Agency for Communications and Information 
called the "primary operator."  Skytel later confirmed that the 
interference was coming from the Ministry of Defense.  According 
to the company, Government entities can take over certain 
commercial frequencies in case of an emergency, but this was not 
such a case.  After the company terminated its network on February 
4, company representatives noted that the interference on the 
frequency stopped completely.  Post sent a letter to DPM Ganiev 
asking him to look into the problem. 
 
AN OFFER THEY CAN'T REFUSE 
-------------------------- 
 
3. (C) On February 14, GOU officials from the Agency for 
Communications and Information and Uzbektelekom finally accepted 
NCI's multiple requests for a meeting.  This happened to be the 
day of NCI's planned press conference intended to publicly 
announce the "technical difficulties" the firm has been having. 
The last meeting with First Deputy Chairman Isbasarov from the 
Agency, on January 24, ended with him claiming there was nothing 
he could do to help the company.  However, the morning of February 
14, the tone changed, and Isbasarov promised to assist the company 
in resolving its technical difficulties.  He also warned the 
company about "airing its dirty laundry" in public, referring to 
the pending press conference in the afternoon.  He proposed a 
meeting that afternoon, at the exact same time as the press 
conference, with all of the relevant telecommunications bodies. 
 
ALL IN THE FAMILY 
----------------- 
 
4. (C) In the afternoon, announcing that Uzbektelekom, NCI's 
partner in Skytel, will make every effort to fix the firm's 
difficulties, other Government officials were dismissed, leaving 
Skytel execs with Isbasarov and head of Uzbektelekom, Mukhadinov. 
Isbasarov gave the executives two options:  a) allow the GOU to 
buy back the whole company at a significantly reduced rate 
(considering the depreciation of the equipment) or b) for an 
additional USD 30 million, Isbasarov could personally guarantee 
that Skytel would be able to use the frequency without 
interference from other parties. 
 
5. (C) Aside from the fact that the offer was ludicrous, according 
to the Amcit involved, the question of how Isbasarov could 
guarantee no interference from other Uzbek Government entities was 
unclear - particularly when he claimed he could do nothing to 
solve the present problem.  When the Amcit suggested seeking 
assistance from the U.S. Embassy, Isbasarov excitedly recommended 
keeping the agreement simply between them.  There was no need, in 
his opinion, to involve the U.S. Embassy, the public, etc.  Since 
this meeting, the company has attempted to convene follow-up 
meetings, but the requests have gone unanswered.  The Amcit 
investors returned to the U.S., unsure about the future of their 
investment.  In addition to an investment of more than USD 17 
million, 130 employees who work for Skytel are unsure about their 
future.  Based on their earlier attempt to work through 
intermediaries to come to an agreement with Gulnora Karimova, the 
investors are sure that she is behind the GOU's effort to shut 
down Skytel's operations. 
 
6.  (C) In the past, we have heard of Gulnora asking for shares in 
companies running anywhere from 15-20 percent - not enough to 
raise red flags, but enough to make a decent profit.  However, in 
earlier discussions with her intermediator, before the company's 
"technical problems" began, she wanted 50 percent and would not 
commit to a share swap, which would have been a legal transaction. 
Amcit investor told emboff that NCI attempted to speak with 
potential cellular competitor MTS directly about purchasing the 
company.  However, the company balked at any sale until Skytel 
could get its technical difficulties worked out.  He also alleged 
that Gulnora has been using Russian Federation passports to travel 
to western countries, such as Italy, where her Interpol issues 
would prevent her from traveling. 
 
WHY DOES SHE WANT IT? 
---------------------- 
 
7. (C) Given Gulnora's 2004 sale of Uzdonrobita, it is difficult 
to determine from the outset why she would be interested in a 
company with such a small share of the Uzbek cellular market.  One 
possibility is that she is still a significant shareholder within 
MTS, the Russian public company that purchased her share of 
Uzdonrobita.  MTS runs a CDMA 450 cellular network in Russia and 
is developing one in Tajikistan.  Skytel is the perfect partner to 
these other networks, especially since most of the cellular base 
stations have already been constructed here.  Another possibility 
is that she wants to develop it herself.  Even in its early days, 
Skytel's prospects looked promising as, thanks to its technology, 
it could offer services at cheaper rates and still boast better 
quality than its competitors. 
 
PUBLIC PERSONA 
-------------- 
 
8. (C) Skytel's difficulties and the apparent attempt by Gulnora 
to take over the company are now a matter of public record as 
local Website, Fergana.ru, published its account of the problem. 
According to the site, the real owner is well-known Uzbek 
businessman Sergey Tsoy, who also owns Business Bank, Poytaht 
Hotel and the Segura insurance company, and is in a dispute with 
Gulnora Karimova.  Oybek Khalilov, UzAIG representative and Vice 
President of the American Chamber of Commerce, confirmed that 
Sergey is involved in the company in some fashion.  When asked 
about Tsoy's involvement, NCI's representative said that NCI 
purchased all of Tsoy's shares of Skytel in 2004 and that now he 
is simply an advisor for the company.  Not coincidentally, NCI's 
primary bank in Uzbekistan is Tsoy's Business Bank. 
 
IN THIS ENVIRONMENT, EVERYBODY NEEDS A FRIEND 
--------------------------------------------- 
 
9. (C) COMMENT: We do not second-guess NCI for working with Sergey 
Tsoy, who has certainly been successful despite this difficult 
investment climate.  However, it appears that, whether or not it 
was intentional, Tsoy sold NCI a ticking bomb.  Regardless of what 
type of deal NCI attempts to broker with Uzbek Government 
insiders, it is unlikely to be favorable.  Only a seriously 
influential individual like Gulnora could use this amount of GOU 
resources for her own self interest. 
 
PURNELL