Political Risks Will Pressure VimpelCom In 2014

VimpelCom is under investigation from the US Securities and Exchange Commission (SEC) concerning its telecoms operations in Uzbekistan. The operator confirmed that its commercial headquarters in Amsterdam were visited by representatives of the Dutch authorities, who obtained documents and informed the company that it was the focus of a criminal investigation in the Netherlands. VimpelCom has experienced a difficult few months since October 2013 and we believe it may have further to fall in the short-term.

VimpelCom is a Russian company but has its headquarters in Amsterdam and is listed on the US NASDAQ stock exchange. Russia, Ukraine and the Commonwealth of Independent States account for a large proportion of its 220mn customers, but the company has a truly global presence with other operations Asia, Africa, the Middle East, Italy and Canada. Its share price has taken a hit in 2014 following the widespread market sell-off in Russia as investors exited positions to lower their exposure to the Crimean crisis. The company incurred a net loss of US$2.66bn in Q413, after writing down its Ukraine assets by US$2.1bn to reflect the higher political risks and reduction in Ukraine's credit rating. VimpelCom's operations in Russia and the Ukraine accounted for 39.3% and 7% respectively, of revenues in 2013 and it is therefore one of the companies most at risk from further flare-ups in tensions.

The situation for the rest of its operations is also unenviable, evidenced by the SEC's investigation of its Uzbekistan business. The reason behind the investigation of VimpelCom in Uzbekistan has not been revealed by the company or the SEC, however, BMI has previously highlighted the risks of doing business in Uzbekistan ( see 'Industry Risks Outweigh Potential Rewards', June 11 2013). VimpelCom's domestic and regional rival MTS had its licence suspended by the Uzbek government in 2012 amid claims of bribery and corruption, and was subsequently removed from the market. VimpelCom has benefited from the exit of MTS but the government now plans to use the MTS assets to launch a new GSM network for state-owned Uzmobile. Given the criminal charges laid before MTS, it is possible that similar investigations regarding licence payments may be brought against VimpelCom.

VimpelCom Heading Further Down
VimpelCom Share Price, (US$)

Political Risks Will Pressure VimpelCom In 2014

VimpelCom is under investigation from the US Securities and Exchange Commission (SEC) concerning its telecoms operations in Uzbekistan. The operator confirmed that its commercial headquarters in Amsterdam were visited by representatives of the Dutch authorities, who obtained documents and informed the company that it was the focus of a criminal investigation in the Netherlands. VimpelCom has experienced a difficult few months since October 2013 and we believe it may have further to fall in the short-term.

VimpelCom is a Russian company but has its headquarters in Amsterdam and is listed on the US NASDAQ stock exchange. Russia, Ukraine and the Commonwealth of Independent States account for a large proportion of its 220mn customers, but the company has a truly global presence with other operations Asia, Africa, the Middle East, Italy and Canada. Its share price has taken a hit in 2014 following the widespread market sell-off in Russia as investors exited positions to lower their exposure to the Crimean crisis. The company incurred a net loss of US$2.66bn in Q413, after writing down its Ukraine assets by US$2.1bn to reflect the higher political risks and reduction in Ukraine's credit rating. VimpelCom's operations in Russia and the Ukraine accounted for 39.3% and 7% respectively, of revenues in 2013 and it is therefore one of the companies most at risk from further flare-ups in tensions.

VimpelCom Heading Further Down
VimpelCom Share Price, (US$)

The situation for the rest of its operations is also unenviable, evidenced by the SEC's investigation of its Uzbekistan business. The reason behind the investigation of VimpelCom in Uzbekistan has not been revealed by the company or the SEC, however, BMI has previously highlighted the risks of doing business in Uzbekistan ( see 'Industry Risks Outweigh Potential Rewards', June 11 2013). VimpelCom's domestic and regional rival MTS had its licence suspended by the Uzbek government in 2012 amid claims of bribery and corruption, and was subsequently removed from the market. VimpelCom has benefited from the exit of MTS but the government now plans to use the MTS assets to launch a new GSM network for state-owned Uzmobile. Given the criminal charges laid before MTS, it is possible that similar investigations regarding licence payments may be brought against VimpelCom.

Russia & CIS Risks Pose Threat
Revenue Breakdown By Unit, 2013

The strong state presence in the CIS telecoms markets is a large deterrent for any company wishing to enter these markets. Aside from Uzbekistan, the governments in Kazakhstan, Kyrgyzstan and Tajikistan all maintain shares in incumbent providers and have historically shown preferential treatment to these companies. In Kazakhstan for example, state-owned Kazakhtelecom's mobile subsidiary Altel, holds the only licence for 4G in the country, creating a difficult competitive environment for VimpelCom. Many of these markets have reached a saturation point in growth potential, which is further compounded by limited prospects for mobile broadband. The CIS is characterised by low spending on mobile services, high costs of infrastructure rollout due to geographical size and topography and significant interference from governments. The company's CIS operations (encompassing Kazakhstan, Kyrgyzstan, Uzbekistan, Tajikistan, Georgia and Armenia) accounted for 17% of the group's revenues in 2013, leaving it highly exposed to these largely unattractive markets.

The company is also under pressure in the rest of its global operations and we expect to see VimpelCom look to exit some of these markets during the course of 2014. In Southeast Asia, for example, the company has already withdrawn from Cambodia and Vietnam, and we expect the same to occur in Laos. The unit had just 325,000 subscribers at the end of 2013 and saw revenues decrease by 49% year-on-year due to a smaller customer base, leading to lower voice revenues alongside the impact of international termination traffic. VimpelCom described its Wind Mobile unit in Canada as being virtually worthless in March, writing down the value of the company asset to zero. The company has failed to challenge the established three operators in the Canadian mobile market, and it pulled out of the January 2014 auction of 700MHz spectrum after failing to gain financial support from VimpelCom. A buyout, bankruptcy or withdrawal therefore seems likely for Wind in Canada. Furthermore, in Algeria, the government is looking to take back VimpelCom's majority stake in Djezzy, holding back 3G licences for years in order to put pressure on VimpelCom to exit.

Large Discrepancy In Industry Risks
Global Average Vs. VimpelCom Average Risk/Reward Ratings, Q214

The company cites unfavourable regulatory and governmental measures as well as unstable macro environments in Pakistan and Bangladesh. In Sub-Saharan Africa, VimpelCom's Telecel operates in Zimbabwe, Burundi and the Central African Republic (CAR). Zimbabwe is the most promising of these markets over the short to medium term, given its higher GDP per capita of US$711 in 2013, and relatively developed telecoms market. Although a high mobile penetration rate, estimated at 96% in 2013, somewhat limits opportunities for subscriptions growth, BMI forecasts growing opportunities in the higher-value 3G/4G and broadband segments. By contrast, despite their mobile penetration rates below 30% in 2013, according to BMI estimates, CAR and Burundi's landlocked positions have held back economic growth and investment in their telecoms industries. Both countries have sub-US$500 GDP per capita, which limits consumers' ability to spend on telecoms services and makes them unattractive investment targets for telecoms operators, especially when considering the added costs of deploying and operating telecoms networks in landlocked countries, where transport and power infrastructure is less reliable.

BMI's Q214 Risk/Reward Ratings reveal a similar undesirable story for VimpelCom's operations, which outside of Canada, Italy and Russia, score well below global averages. The global average for the Telecoms Risk/Reward Ratings was 49.2 in Q214, with the markets in which VimpelCom has a presence scoring 44.4. This does not include Central African Republic, Georgia and Armenia, which are not currently covered in BMI's ratings system but would likely drive this average score even lower still. VimpelCom performs best in the Industry Rewards category, trailing the global average by just 1.1 points, implying there are opportunities present in its operations. However, we highlight the 9.9-point discrepancy in the Industry Risks score, which reflect the poor regulatory environments, heavy state interference and political risks of markets it has entered. BMI therefore expects the company to continue to struggle in 2014, with asset divestments likely and political risks adding pressure to its operations.

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