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The Oil and the Glory

How not to get your money back in Turkmenistan

Choose your allegory: the story of the woman who shouts at her husband, who then kicks the dog? Or the tale of who gets the $585 million? Which better explains the troubles of MTS, the Russian telecom company whose business has fallen apart in natural-gas-rich Turkmenistan? In October, Russia’s silver-tongued energy czar, Igor Sechin, flew ...

Choose your allegory: the story of the woman who shouts at her husband, who then kicks the dog? Or the tale of who gets the $585 million? Which better explains the troubles of MTS, the Russian telecom company whose business has fallen apart in natural-gas-rich Turkmenistan?

In October, Russia’s silver-tongued energy czar, Igor Sechin, flew down to Turkmenistan, and immediately ignited a firestorm by announcing that the country’s natural gas (the world’s fourth-largest reserves) wasn’t needed in Europe — Russia would handle that business. That sounded a lot like intimidation to Turkmenistan, whose main cash market has traditionally been Europe, and which relies on Russian pipelines to get its gas there. So it was that, in the subsequent weeks, Turkmenistan offered expanded gas shipments to China — and informed MTS that it would not extend its five-year mobile phone license, which expired Dec. 21. Until then, MTS had some 2 million Turkmen subscribers, or 80 percent of the market.

That covers the dog allegory — MTS suffered because of the dark and clumsy Sechin, who has used such blunt language as a matter of course while directing Russia’s energy sphere for Prime Minister Vladimir Putin.

The alternative refers to the sum that MTS expects to lose over the next five years from the demise of its Turkmen business. One is tempted to blame Sechin, but as for myself, the latter best explains MTS’s troubles. As I heard from a buddy whose business it is to watch Turkmenistan, "If you made me guess, it was because [the mobile phone business] is an awesome cash cow to get. Too much for those close to president’s aides to resist."

In short, President Gurmanguly Berdymukhamedov’s apparat wants the $585 million.

This should be no surprise to MTS, which is controlled by Vladimir Yevtushenkov (No. 93 on Forbes’ list of the world’s billionaires). (Pushing the dog-kicking metaphor further, Yevtushenkov’s holding company, Sistema, yesterday launched a product called Glonass that challenges U.S. control of the GPS market, which drove Putin to crow that the technology targets "women so they can always know where their husbands are, identify their position precisely on the map," Reuters reports.) Yevtushenkov is no child. In Russia, the telecom business is superlatively brutal, and slash, burn, pummel, and sue have defined the route to success.

But someone needs to tell MTS that that’s not how things work in Central Asia. In general, MTS has gone about its Turkmen problems all wrong. First, it’s clear that the answer lay between the numbers 1 and 585 million, meaning how much of its revenue it was willing to share with the Turkmen. Perhaps the only figure the Turkmen would accept all along was 585, but one suspects that at some point, earlier in the game, the number could have been smaller. Judging by a talk with an MTS representative yesterday, and by MTS press releases, the company was simply out of its depth: Come November and December, MTS thought it was still negotiating, even though the game had shifted dramatically.

Then MTS compounded its error — it immediately filed a complaint with the International Court of Arbitration in Paris. Yesterday, Joshua Tulgan, MTS’s director of investor relations and acting director of corporate finance, sought political support in Washington, making the rounds of the State Department and Congress to lay out MTS’s complaints. I met with Tulgan over coffee.

Tulgan explained the injustice of MTS losing out after investing $200 million in Turkmenistan, plus the injustice to its 1,500 employees in Turkmenistan. But I kept thinking — and told Tulgan — about the disconnect between what he was saying and how business is really done in Turkmenistan. There simply is no record that I know of in which an aggrieved foreign investor achieved its aims in foreign arbitration — Turkmenistan doesn’t recognize any such body, and even if it did, it wouldn’t necessarily comply with any foreign judgment. Furthermore, gripes from Washington and other foreign capitals have traditionally been ignored in Ashgabad.

Instead, if Turkmen grievances are resolved, it is usually done in the sauna, over vodka, and over a cash split. You work your contacts. Tulgan said that his guys had a lot of experience in Turkmenistan, a "different experience" from my own. Fair enough. But he also said that Turkmenistan has the world’s second-largest gas reserves (it has the fourth); that Turkmen landlines and Internet don’t work, so that without MTS the country was left isolated (Turkmen landlines work just fine, as does its Internet); that without Russia, Turkmenistan has no alternative natural gas export route (Turkmenistan ships gas through China and Iran as well), and also that MTS is not a Russian company (no comment). Basically, Tulgan doesn’t know much about Turkmenistan.

Which returns us to a basic rule of frontier investment: One can get into an ultra-emerging economy like Turkmenistan and earn a bonanza, but eventually locals will catch on to the largesse and want much more — or all — the business themselves. So one has to have a ready exit strategy.

As we’ve discussed, that’s been the case with fuel sales in Kyrgyzstan, and Big Oil’s experience in Russia. Now it’s MTS’s turn.

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