The legal clash between MTS and Turkmenistan – impairment of investor’s rights or defense of State interests?

1In July 2018, Mobile TeleSystems (MTS) started a new investment arbitration at ICSID against Turkmenistan. The long-running legal conflict between these parties clearly shows how investment climate depends on the State’s ability to maintain foreign investor and to guarantee its rights of inviolability of property. Generally, the reckless policy of the State in relation to a foreign investor leads to investment outflow and damage of reputation.

Entry to the foreign market by an entity has, for obvious reasons, always remained formidable and hazardous especially in countries where political and economic issues totally depend on state authorities. MTS is one of the most widespread and well-known Russian providers of telecommunication services in the territory of CIS countries.
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Having taken a strong position on the internal market in some Central Asia countries, like Turkmenistan and Uzbekistan, MTS has become a rival in respect to the local government-owned companies. This circumstance has served as a basis for several investment-State arbitrations.

Legal grounds of disputes

The legal framework generally relies on the Agreement between Russia and Turkmenistan “On promotion and mutual protection of investments” (the Agreement) which was signed on 25 March 2009 and took into force on 23 August 2010. In compliance with Article 5 of the Agreement, both Russia and Turkmenistan promised not to expropriate investments of the counterparty except for a few occasions which are not relevant to the present case.
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Furthermore, Article 4 affords the foreign investors the guarantee of the fair and equal legal status of investments and investors’ revenue.

 Russia still does not recognise the Convention on the settlement of investment disputes between States and nationals of other States, whereas Turkmenistan ratified the Convention in 1992. Nevertheless, Article 9 of the Agreement establishes that in the event the parties fail to settle the dispute amicably within six months, the dispute shall be resolved by means of the ICSID arbitration procedure.

ICSID case in 2010–2012

More than eight years ago Russian telecommunication company MTS, which conducted business through the local subsidiary Barash Communications Technologies Inc., started a legal battle with the government of Turkmenistan according to the rules of ICSID.  MTS sued Turkmenistan on the grounds of illegal refusal to resume agreement for supplying telecommunication services by MTS in Turkmenistan. MTS began functioning in Turkmenistan in 2005 and, within several years, became the leader in Turkmenistan’s internal market.             

However, five years later the government demanded a significant share of the company’s profit and suspended the license for the providing of telecommunication services in the territory of Turkmenistan. MTS had to stop business and the financial losses totalled more than 137.8 million USD.

Arguing its decision, Turkmenistan, acting through the Ministry of Foreign Affairs, indicated that MTS had unjustifiably increased the tariff rates and made a surplus profit, giving to the government only a nominal price.
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Dissatisfied with those measures and in an attempt to reimburse financial damage, MTS filed the claim against Turkmenistan and started arbitration procedure in Geneva, litigation at the Commercial Court of Turkmenistan and investment arbitration procedure in Paris.

After two years, the panel of arbitrators rendered a procedural order on the discontinuance of the proceeding because of a settlement reached by the parties. The parties agreed that MTS would pay off thirty percent of net profit (earlier the portion had been twenty percent) every month in respect to Turkmentelecom. Subsequently, MTS gained the right to use the license for telecommunication services over the next five years.

ICSID case in 2017–2018

The second legal battle commenced when MTS lodged a suit to ICSID. The company released the statement that MTS’s Turkmenistan subsidiary (MTS Turkmenistan) shut down all activities in September 2017 due to the government’s movements. After that, the state-owned company Turkmentelecom deactivated MTS’s technical ability to get access to international and toll call connection as well as Internet capability. As a result, the company was not able to execute any activities and to continue its dealing further. 

MTS alleges that the State violated the company’s rights as a foreign investor because illegal action of local authorities led to the full suspension of the telecommunication company in the territory of Turkmenistan. Moreover, this suspension could be deemed as a complete expropriation of the company’s investments in Turkmenistan and actual losses amounted to over 750 million USD.

The government alleged that there was no decision regarding the license’s denial and MTS had intentionally misled the interested parties and the public. Furthermore, from its point of view, a suspension of the company’s dealing related to the expiration of the agreement on frequencies allocation between the Ministry of Communication and MTS rather than a lapse of the license’s term.

Currently, the parties agreed two arbitrators – one from the US (Mr. John Townsend) and another from Switzerland (Mr. Paolo Michele Patocchi).

MTS decided to withdraw from the Turkmenistan market, and the company is now starting to sell the property and to dismantle the organization’ equipment. In fact, the state-owned company “Altyn Asyr” has become the sole provider of telecommunication services in Turkmenistan. 

Turkmenistan’s peculiarities in the context of investment arbitration 

The outcome of this legal saga is quite unpredictable. In comparison with most other post-Soviet Union countries, Turkmenistan has a relatively scarce number of investment arbitration cases. In alignment with the data, Turkmenistan won two cases, failed two cases and two cases were settled by the disputing parties. In 2018, Turkmenistan also got involved in two other investment arbitrations with two construction companies from Turkey and Germany. The main issue was that Turkmenistan did not fulfill an obligation of payment for dozens of projects performed by both investors. 

At the present moment, Turkmenistan has concluded twenty-seven bilateral investments treaties. Pursuant to the Index of Economic Freedom, Turkmenistan ranks 168th among 180 countries, in the Asia-Pacific region it occupies the 42nd place among 43 countries. Remarkably, the ‘Doing Business Report 2018’ of the World Bank does not contain information regarding Turkmenistan’s current investment situation in this country.

As another example one can invoke, the situation with Italian multinational gas and oil company ENI, when this entity acquired shares of British oil exploration company Burren without prior notification of the Turkmenistan authorities.  The fact of the matter was that Burren held Turkmenistani assets and. In the acquiring of them, ENI did not ask permission to deal with Turkmenistan’ s authorities. Despite economic gain and investment perspectives which might be obtained from the acquisition, Turkmenistan considered this action as a high-handed and unauthorized action of the Italian investor. Turkmenistan officials claimed that all transactions with regard to natural resources of Turkmenistan must concur with them and such actions by ENI demonstrated lack of due respect. As result, ENI’s executives became deprived of the right to enter in Turkmenistan for several years.

In other words, an investment climate in Turkmenistan remains wanting. There is hope that the situation will improve and this very prospective country will appear among the leaders of Asia region and may present attractive opportunities for foreign investors.

About the Author:

Konstantin Voropaev obtained an LLM degree with distinction at Robert Gordon University (Scotland) in 2017 having previously graduated with honours from Omsk State University in 2012. His professional interests include various legal areas, compliance and ethics procedures. He deals with international commercial arbitration in different jurisdictions (Russia, Central Asia, and Europe), legal matters in pharmaceutical production and medical affairs in clinical trials, civil and contract legal issues, compliance.

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