The move could help Vladimir Putin fund spending promises he
made to secure a third term as president and may stem outflows
of foreign money from Russia-focused funds.

Some investors say, however, that forcing state companies to
give up more of their profits to shareholders could weaken the
capital bases of state banks and deprive capital-intensive
energy companies of funds they need for growth.

The government told state companies in November they must
pay at least 25 percent of their net income in dividends, but
that some could be exempted from that minimum if they were
involved in state investment programmes.

First Deputy Finance Minister Tatyana Nesterenko told
reporters on Monday this minimum could now be raised to 35
percent of earnings, while allowing the same exemptions. Another
option was to keep 25 percent as the minimum dividend payment
but allow no exemptions. No consensus has yet been reached
within the government, officials said.

“It was not a discussion, it was not a proposal – it was
mentioned,” a spokesman for First Deputy Prime Minister Igor
Shuvalov said on Monday of policy talks chaired by Shuvalov last
week.

The increase could potentially apply to companies that
represent the backbone of Russia’s commodity-reliant economy
such as energy giants Rosneft and Gazprom.

Profits at Rosneft and Gazprom amounted to nearly $50
billion last year, meaning a combined 35 percent pay-out would
total $17.5 billion. The government has controlling stakes in
both companies.

Increasing minimum dividends at state firms to 35 percent
from 25 percent would add up to $3 billion a year to government
revenue by 2015, according to the calculations of one analyst.

A source at a Russian bank said it appeared the idea was at
a preliminary stage. “I’ve heard about such proposals but it is
hard to say when or how they can materialise,” the source said.

STATE SPENDING GROWS

The debate comes as Russia’s state budget strains under the
impact of weaker oil prices since demand slowed in the top oil
consuming countries, the United States and China.

After balancing its budget last year, Russia expects a
deficit of 0.6 percent of gross domestic product in 2013. GDP
grew by 1.1 percent in the first quarter from a year earlier,
barely half the rate seen in the final quarter of 2012.

The government has looked to increase spending on defence,
pensions and public pay, pushing federal spending up by 18
percent in nominal terms last year – Putin’s re-election year.
It is poised to grow 21 percent more over the next three years,
putting pressure on the government to find new revenue sources.

Efforts to raise money from privatising state assets have
come to little and the government is now looking for other ways
to boost its income.

“Given that privatisations are taking longer than expected
and that terms are not as good as they would like, they are
looking for other ways to meet that target, and dividends are
one obvious choice,” said Bruce Bower, a partner at Moscow hedge
fund Verno Capital.

Gennadiy Babenko, equity research analyst at RenCap, said
that higher dividends would help draw portfolio managers to
Russian equities as a dividend play, given that the Russian
financial market had become less dynamic than its peers.

But RenCap said an obligatory 35 percent pay-out would be
too high for most Russian oil and gas companies to bear. If
Rosneft adopted such a policy, it would have to pay around $7
billion in annual dividends, eating up too much cashflow, RenCap
said.

Gazprom, however, has the capacity to increase pay-outs and
its dividend yield would go to 11 percent if it switched to a 35
percent dividend, RenCap said. Gazprom’s dividend yield is now
6.75 percent according to Reuters data, compared to a sector
average of 8 percent.

Squeezing a 35 percent dividend from Russia’s state banks,
VTB and Sberbank, would restrict growth and
eat up capital, RenCap said. VTB is raising $3.3 billion through
an offering of new shares to investors.

“VTB just raised capital for safety and growth – to then
demand the company start paying it back might be seen as a
pointless exercise by investors,” RenCap’s David Nangle wrote.

(Additional reporting by Douglas Busvine and Katya Golubkova;
editing by Tom Pfeiffer)

Sources with direct knowledge of the situation said
divestments would not be immediate, as the three founding
oligarchs and their advisers focus on May 17 – the date by which
they have to announce to London investors whether they will bid.

Any firesale by the three founders – Alexander Machkevitch,
Alijan Ibragimov and Patokh Chodiev – would also come up against
a market where buyers for large, complex mining assets such as
ENRC’s Brazilian iron ore development are scarce.

But the sources said sales could follow a deal, as the
founders seek to pay back what could be onerous credit lines and
ENRC retreats to its core assets and low-cost Kazakh base -
still the source of most of its output – after an acquisition
spree that left it $5 billion in debt.

ENRC’s founders said on April 19 they were working on a
buyout plan as part of a consortium including the Kazakh
government, calling time on a six-year London adventure after
governance woes, corruption probes and a cooling global economy
left its shares near an all-time low.

The trio are now lining up financing to buy the 44 percent
in ENRC that neither they nor the government own – worth $2.4
billion at current prices. Two sources said they would likely be
backed by Russia’s VTB and Sberbank, ENRC’s largest lenders -
working alongside adviser Societe Generale. The Kazakh
government could also contribute.

“It is all about the financing. Can they get the money
together?” said a third source with knowledge of the situation.
“They are buying a company with a lot of debt and cannot just
leverage it up.”

KAZAKH GOVERNMENT ROLE

The financial position of the individual founders is unknown
and, as they are not directors, it is unclear whether or not
they have pledged their ENRC stock to support loans.

However, the government’s role – combined with bitterness
over the trio’s London experience – is expected to fuel a push
to whittle down ENRC’s presence abroad and concentrate on its
cash-generating Kazakh base, which employs more than 80 percent
of its 79,400 employees and is the main concern for the Kazakh
government.

“The founders feel they have been misrepresented. They
believe they are the victims of bias in (London), and that a lot
of the (whistleblower) investigations are without merit,” one of
the sources said, pointing to woes that the trio feel “directly
resulted from being public”.

“The government’s focus is the Kazakh, core assets.”

The sources cautioned that ENRC’s founders were not likely
to start an asset firesale – not only because of a lack of
buyers, but also because of internal and UK official
investigations into allegations of corruption that have involved
some of ENRC’s overseas operations.

“These assets are quite compromised due to the (UK Serious
Fraud Office) investigation. I think the main aim is to do the
offer for the company – and then look at assets,” said Stanislav
Chuyev, analyst at Visor Capital in Almaty.

Since its 2007 London listing, ENRC has spent more than $6
billion expanding beyond its Kazakh core ferrochrome and iron
ore operations into places such as Brazil and the Democratic
Republic of Congo. More than $5 billion of that was on assets in
development that have generated virtually no cash yet.

CONGOLESE COPPER

The sources differed as to whether copper assets in Congo -
a big bet for the group – would be sold, given their potential.
But Mozambican coal and iron ore operations are more likely
candidates, with the latter potentially attracting buyers such
as Glencore.

Long seen as a suitor for the whole group, the commodities
trader is one of few major international metals producers active
in Kazakhstan – though it is now currently digesting the
purchase of Xstrata.

One major unknown is the position of Kazakhmys,
ENRC’s single largest shareholder with a 26 percent stake.

The Kazakh government and former chairman Vladimir Kim hold
controlling stakes in Kazakhmys, and analysts say balance sheet
pressures could tempt it into a deal it would only recently have
dismissed. Equally, the government could see the germ of a
national mining champion.

“When such information comes out, there is usually a long
procedure,” Kim told Kazakh television when asked about the bid.
“Let this come to a conclusion, and we will take a decision.”

Analysts and investors have pointed to what is likely to be
a bid at a modest premium to a share price up over 17 percent
since the bid was announced, with few rival buyers around. But
they said a rock-bottom offer would also damage Kazakhstan, just
as the government tries to lure investors with new exploration
licences.

“The actual minority investor base is very small … they do
not need to come up with that much cash to pay a reasonable
premium,” one of ENRC’s top 20 investors said.

“If this went out at 250 pence (per share), then everyone
would say that they would never ever look at anything from
Kazakhstan again. The government will not want that to happen.”

ENRC was trading on Tuesday at around 270 pence.

VTB’s supervisory board was expected on Friday to approve
terms for the long-planned issue, said one source close to the
board. A second source close to the issue said the timing of the
sale was yet to be confirmed but it could happen in mid-May.

The sale could be a major test for Chief Executive Andrei
Kostin, one of Russia’s most senior bankers and who has close
ties to President Vladimir Putin, after investors who signed up
for past share offerings by the state-controlled bank have
suffered heavy losses.

Shares in VTB have shed more than half their value since the
bank floated on the stock market in 2007 and a share issue in
2011 was promptly followed by the takeover of Bank of Moscow,
which triggered Russia’s largest-ever bank bailout.

The issue of new shares would seek to bolster VTB’s capital
strength and enable it to expand its lending to Russian
business, but to succeed Kostin may need to bag large “anchor”
investors or win backing from government-related entities.

“There’s a good chance the government buys shares …
because selling 100 billion roubles of VTB is not going to be
easy,” said Jason Hurwitz, analyst at Alfa Bank.

VTB declined to comment.

Yet buying shares would be a surprise move by the
government, which has no plans to participate in the offer, a
senior VTB executive said last year. It would also run counter
to government aims to reduce its stake in VTB, as part of a
drive to reduce state holdings in businesses ranging from
diamond miner Altos to oil major Rosneft.

A source close to the Russian Direct Investment Fund, a $10
billion state fund created to team up with foreign investors on
major private equity-style deals, said it was highly unlikely to
back a VTB offering.

The decision to go ahead with the capital increase comes
despite a recent improvement in VTB’s Tier 1 capital adequacy
ratio, now at 10.3 percent and close to its top peer Sberbank
.

“This speaks volumes about VTB’s need for capital,” said
Ivan Kachkovski, a banking analyst at Moscow brokerage Aton.

Some analysts have said VTB, the Russian bank with the
greatest exposure to Cyprus, may be downplaying the impact of a
recent European Union bailout that imposed losses on depositors
at the Mediterranean island’s two biggest banks.

ANCHORS SOUGHT

Kachkovski said he had little doubt that the VTB deal would
get done with anchor investors accounting for most, if not all,
of the uptake and Russian state entities likely to be
significant investors.

However, one source said that while VTB was still in talks
with large foreign sovereign wealth funds, he was not aware of
any positive outcome. The bank has been talking to these funds
about the sale since early in the year, sources with knowledge
of the discussions said at the time.

Qatar’s sovereign wealth fund had hired financial advisers
to investigate buying the entire VTB stake, but nothing has been
announced. Earlier in April, Kostin said the Qataris were “tough
negotiators” but declined to elaborate. CFO Herbert Moos this
week declined to say whether VTB was still talking to Qatar.

U.S. private equity firm TPG, which bought $100 million of
VTB shares in 2011 alongside China’s investment fund CIC, is not
looking to increase its stake in VTB, a source recently said.

One analyst calculated that in order for the government to
not dilute its stake below 60 percent an offer would need to be
at least $2.39 per global depositary receipt, although it could
be higher. VTB’s GDRs trade at around $2.80.

A sale at that level would values VTB stock at an estimated
price-to-book ratio of 0.6 times, according to Alfa Bank, a
steep discount to the multiple of 1.1 times enjoyed by its
larger and more profitable state rival Sberbank.

The share issue will be the latest hurdle for Kostin, but
observers say the well-connected banker, who has run VTB for
more than a decade, has enough friends in high places to ensure
his job is secure, citing previous difficulties he had survived.

“After Bank of Moscow, people said Kostin’s head would
roll,” said one analyst who declined to be named.

“He won’t last forever, but whoever is pulling the strings
may not be Kostin, and whoever it is, trusts him and is likely
to continue trusting him. He’ll probably keep his job because
changing horses is risky for everyone.”

So far this year, $1.2 billion has been pulled from
Russia-focused equity funds – 8 percent of estimated
Russia-dedicated assets – on concern over a slowing economy,
Russia’s exposure to falling commodity prices and a lack of
progress on reforms to make a murky business environment more
transparent.

With Russia’s oil production now at post-Soviet records and
rivalling that of Saudi Arabia, that might suggest more money
sloshing around the economy will underpin company profits and
push up equity values. But those abundant petrodollars may be
removing some of the incentive for the kind of business-friendly
reforms that comfort foreign investors.

“It seems to be an ongoing process of people gradually
moving out of Russia… I think investors have got all the
warning signals,” said Steven Dashevsky, founder of Moscow-based
investment firm Dashevsky & Partners, who expects to reduce the
weighting of around 20 percent held by Russian equities in his
funds.

In his first major speech to investors since returning to
the Kremlin, President Putin said last June he would press ahead
with sales of non-strategic state assets, fight corruption,
reduce red tape, strengthen property rights and cut Russia’s
reliance on energy exports.

Nearly a year later, investors see few improvements to
Russia’s legal system and scant sign that widespread corruption
has abated. Privatizations are moving slower than hoped.

An ongoing trial of anti-graft blogger Alexei Navalny and
the posthumous trial of whistleblower Sergei Magnitsky appear to
some to reinforce the impression of a country ruled by might,
not right.

Recent treatment of minority investors has done nothing to
help.

In the buyout of TNK-BP by state-controlled oil
producer Rosneft, Russian tycoons including Mikhail
Fridman sold stakes for a total $28 billion. The rump of listed
shares has shrunk by 35 percent since it emerged that there was
no plan to buy minority shareholders out, meaning they would not
benefit from the takeover.

Veteran investor Mark Mobius, executive chairman of Franklin
Templeton’s emerging markets group, said the TNK-BP buy-out “is
the kind of issue that gives pause for thought on the behalf of
investors coming to Russia”.

Speaking at an investment conference in Moscow, he warned:
“The recent case of TNK-BP is probably very instructive because
you had these … oligarchs leave with billions of dollars,
while minority investors are now sitting in a very risky,
unstable situation”.

Mobius is still enthusiastic about Russia and said he had
about $1.2 billion invested in Russian equities. He said that,
overall, he had made money in the country and would still like
to add to his Russia exposure.

Many other investors are cutting theirs, some of them
concerned that a lower oil price may push the country into
recession following a growth downgrade in April.

Maarten-Jan Bakkum, emerging market strategist at ING
Investment Management in the Netherlands, said ING’s funds had
reduced their Russian positions in the last three to five months
and could cut them further.

“We don’t have a big position in Russia. Last year we were
overweight, but Russia has been disappointing,” he said. “I find
it very hard to play Russia in an environment where commodity
prices are moving very fast and Russia is very sensitive to the
oil price.”

According to fund data provider EPFR, there were inflows of
$153 million into Russia-focused funds overall in 2012, but $793
million exited in the final quarter. There have been eight
straight weeks of outflows from Russia-dedicated funds.

“In the past, the Russia growth story was one thing that
Russia investors could hang their hat on,” said Erik DePoy at
Gazprombank in Moscow. “Well, that growth story is not so
exciting anymore.”

PULLBACK

Russia is not the only large emerging market to suffer as
investors focus more of their attention on Japanese stocks and
U.S.-based loan funds.

But Russia has seen net outflows this year while others in
the BRIC group of countries – Brazil, Russia, India and China -
have seen inflows if Russia’s share of large global funds is
included beside Russia-focused funds, according to EPFR.

Russian equities now trade on a 12-month forward
price-to-earnings ratio – which compares share prices to
forecast earnings – of 5 times, while Turkey trades at 11 times
and Mexico at 16.3 times, according to one trader.

That suggests Russia represents good value, yet trading
volume has declined. The nominal dollar value of the MSCI
index’s Russian constituents traded daily so far this year was
40 percent less than in full-year 2012, according to one
Moscow-based bank.

“The most concerning thing is that when you see the market
picking up you don’t see a pick-up in volume, so there’s a lack
of conviction,” said Peter Westin, Chief Equity Strategist at
Aton, a brokerage in Moscow.

Selling has come from exchange-traded funds (ETFs) as well
as actively managed funds, analysts say. ETFs typically have big
weightings in large stocks such as Gazprom, Lukoil
and MTS, said one trader. Stocks with large
foreign ownership tend to be those listed in London,
particularly miners such as Evraz and Polymetal
, the trader said.

The Market Vectors Russia Fund, one of the largest
ETFs focused on Russia, is down 14 percent this year.

Fund performance has also struggled. Average returns for the
funds covered by Thomson Reuters fund research firm Lipper over
the last three months are at a negative 4 percent.

While some are selling, others see an opportunity.

Sam Vecht, head of BlackRock’s Emerging Europe equity team,
believes investors are making a mistake by chasing emerging
markets that have performed better than Russia in recent years,
and has been topping up his Russian investments.

“Valuations are stupidly cheap,” one London-based hedge fund
manager said of Russia. “I’ve never seen stuff so cheap there.
People must be putting a really high discount factor because
companies may be raided or because of corruption.”

Yet if the fortunes of Russian equities are about to turn,
the evidence is slow to appear.

“There is a general sense of fatigue about the Russian
market,” said Gennadiy Babenko, equity research analyst at
Renaissance Capital in Moscow.

“People say that you should buy now because its cheaper, and
it will improve in the future,” said Babenko. “But it is not
improving.”

Mobius, whose emerging markets group has shares in TNK-BP,
made his comments one day after a meeting between Rosneft chief
executive Igor Sechin and investors at which the state-owned
company said the possibility of buying out minority investors -
who hold around 5 percent of TNK-BP Holding – was not discussed.

Shares in TNK-BP rose after the meeting but they are still
about 40 percent below this year’s peak price in January, before
Rosneft completed its $55 billion purchase of the bulk of the
crude oil producer.

Sources close to the minority shareholders told Reuters they
think Rosneft should buy them out for $2.8 billion, based on
what Rosneft paid for its majority stake in TNK-BP.

“TNK is the big issue. We think the assets of TNK-BP are
much greater than the price reflects and we hope that it is
fairly treated so minority shareholders get a fair treatment,”
Mobius, executive chairman of fund manager Franklin Templeton’s
emerging markets group, said during a conference in Moscow.

Mobius, whose group has $1.2 billion invested in Russian
equities, said Rosneft should pay out all the cash it has in
TNK-BP.

“So a nice fat dividend to all shareholders would be nice,
including (to) Rosneft,” he said. “I hope (for an outcome) as
soon as possible. The longer it goes on the worse it gets.”

The treatment of the TNK-BP minority shareholders was a
litmus test for conducting business in Russia, he added.

First Deputy Prime Minister Igor Shuvalov, speaking at the
same conference, said that Rosneft intended to resolve the
problem, without elaborating.

Rosneft bought the Anglo-Russian oil producer from BP
, which ended up with an almost 20-percent share of
Rosneft as a part of the deal, as well as a consortium of four
Soviet-born tycoons.

Russian President Vladimir Putin has hailed the deal but it
was met with scepticism by some investors and non-state firms
wary of the Kremlin’s growing presence in business.

Sechin, a Putin ally, has said Rosneft has no obligations to
TNK-BP minority shareholders and the company will not offer any
buyout.

“The issue of a share buyout from TNK-BP minority
shareholders was not discussed during the meeting,” a Rosneft
spokeswoman said of Sechin’s discussion with investors.

BofA Merrill Lynch analysts said Rosneft was considering
“reasonable exit options for TNK-BP minorities” and that Sechin
seemed open to a dialogue. But a source familiar with details of
the meeting said Sechin had not sent any clear signal to the
investors.

“I wouldn’t read too much into this. There was nothing
concrete,” the source said.

Russia’s Alfa bank said in a note to clients that there was
“still no clarity on Rosneft’s position towards TNK-BP Holding
minorities.”

(Additional reporting by Katya Golubkova; Editing by Timothy
Heritage and Mark Potter)

Russia, which has used its clout as a veto-wielding Security Council state to blunt Western pressure on Syria, says the U.N. probe announced last month should focus on Syrian government allegations rebels used chemical arms near Aleppo.

Western countries want two additional rebel claims about the use of such arms investigated as well. The Syrian opposition says President Bashar al-Assad’s government carried out all three alleged chemical attacks.

In a pointed statement, Russia’s Foreign Ministry on Saturday voiced anger over a letter in which it said the U.N. Secretariat told the Syrian government it intended to broaden the investigation beyond the incident in late March near Aleppo.

It said the U.N. Secretariat was seeking overly broad access for investigators to facilities and individuals in Syria and wanted to use aircraft for transportation.

“This approach brings to mind the line taken over an investigation into the presence of chemical weapons in Iraq, which was based on deliberately false data and led to well-known consequences,” it said, referring to the U.S.-led invasion in 2003.

“We cannot fail to draw the conclusion that under pressure from certain states, the U.N. Secretariat is taking an unconstructive and inconsistent position that in essence undermines the investigation (into the incident near Aleppo),” it said, without mentioning U.N. Secretary General Ban Ki-moon by name.

Last month, Russia accused Western nations of trying to use the investigation to push Assad from power and said the probe might be biased unless Russian and Chinese experts were part of the team of investigators.

Russia says that it does not intend to prop up Assad but that his departure from power must not be a precondition for a political solution to the conflict.

More than 70,000 people have been killed during Syria’s two-year conflict.

(Reporting by Megan Davies and Steve Gutterman; Editing by Jason Webb)

Fridman is linked with two bids for the Russian unit of Nordic operator Tele2 – one from his A1 vehicle and the other, at a higher price, from MTS and Vimpelcom, in which he is a leading investor.

Usually a master tactician with a ruthless focus on value, the 48-year-old tycoon is flush with cash and confidence after he and his partners pulled down $14 billion by selling oil firm TNK-BP to Kremlin-backed oil major Rosneft last month.

“This is standard Fridman – he’s being aggressive and he has cash now and feels he can be more aggressive,” said one Moscow-based investor. “He probably wants to invest it instead of having it sit around earning zero percent in a bank.”

For all Fridman’s deal-making prowess, the game seems over.

Tele2 said on Thursday it had completed its $3.55 billion deal to sell its Russian business to state-backed bank VTB. While the price was lower than the Fridman bids, the deal offered cash in hand, rapid clearance by Russian regulators and a cut of any profits if VTB sells the unit on quickly.

It was closed just eight days after it was announced. Vimpelcom, MTS and A1 declined comment regarding the completion.

The approaches from A1 and the MTS-Vimpelcom alliance of Russia’s telecoms market leader and No.3 player were made public after Tele2 had announced its agreed sale. In the days that followed, they scrambled to show their hands. A1 offered up to $4 billion; MTS and Vimpelcom up to $4.25 billion.

“There was an attempt to do it through A1 and later on Vimpelcom tried directly… I don’t see anything else than just a tactical approach, and then it did not work out,” said one telecoms executive who declined to be named.

Ukraine-born Fridman, one of a group of businessmen who amassed vast fortunes and political influence under Russian President Boris Yeltsin in the 1990s, seems left with few options.

MODUS OPERANDI

Vimpelcom and MTS say Tele2 spurned their approaches, while A1 maintains it put forward its own higher offer before the VTB deal was signed, only to be ignored.

Analysts have described the A1 bid as a means to make the MTS-Vimpelcom bid look more appealing to Tele2.

But they also note that Fridman’s activism reflects his concern about Vimpelcom’s competitive position in Russia as the weakest, and most indebted, of the Big Three market players led by MTS and followed by Alisher Usmanov’s MegaFon.

“I think (A1) has (made its bid) on behalf of Vimpelcom to a certain extent, they’re doing it to protect Vimpelcom,” said Anna Lepetukhina, telecoms analyst at Sberbank.

The dual bids ratcheted up the pressure on Tele2 – ensuring a message was heard that more money is on offer. The telecoms companies and A1, which is part of Fridman’s Alfa Group, have said they are pursuing their bids separately.

Remaining tactics could include taking legal action or attempting to buy Tele2 outright- both things A1 has said it is considering. It could also try to buy the asset from VTB, although if the bank sells it within a year it will have to hand a chunk of the profit to Tele2.

“Alfa and A1 are extremely clever and extremely aggressive and they will sue anybody at anytime with any argument, whether it’s a good one or not,” said one Moscow-based lawyer.

Shortly after the VTB deal was announced, A1 said it was considering taking legal action, claiming lost opportunity and that it was in talks with minority shareholders. Minority shareholders have not come forward.

A1′s threat to litigate was in keeping with Alfa’s modus operandi. Fridman has fought pitched legal battles against some of the biggest foreign investors in Russia – among them Vimpelcom co-owner Telenor and oil giant BP.

There has been scepticism whether such an approach with Tele2 would work. “If it’s really a question about a UK or U.S. public takeover, and the company is really in play, the board has a duty to go with the highest offer, but I don’t think this is that kind of situation,” said one Moscow-based lawyer who asked not to be named. “I think it’s more like a private deal.”

DIVERSIFICATION

Flush with cash from a $28 billion deal alongside three other tycoons to sell out of TNK-BP, and a $5 billion windfall from selling a stake in MegaFon, Fridman has been encouraged by the Kremlin to pump money back into Russia.

However, some observers have said the tycoon, worth $16.5 billion according to Forbes, is looking to spread his risk and pare back his exposure to Russia – where his assets also include stakes in Alfa bank and struggling food retailer X5.

Fridman has made some large exits in Russia, selling out of MegaFon and TNK-BP, while making moves to increase his influence over Egypt’s Orascom Telecom and Turkey’s Turkcell.

Alfa Group is setting up an international investment business, the head of the AAR consortium which invested in TNK-BP recently said. This would look for long-term strategic investment opportunities in Russia, North and South America, Asia and Africa.

(Reporting By Megan Davies; additional reporting by Maria Kiselyova; editing by Doug Busvine and David Stamp)

Fridman is linked with two bids for the Russian unit of
Nordic operator Tele2 – one from his A1 vehicle and
the other, at a higher price, from MTS and Vimpelcom
, in which he is a leading investor.

Usually a master tactician with a ruthless focus on value,
the 48-year-old tycoon is flush with cash and confidence after
he and his partners pulled down $14 billion by selling oil firm
TNK-BP to Kremlin-backed oil major Rosneft last month.

“This is standard Fridman – he’s being aggressive and he has
cash now and feels he can be more aggressive,” said one
Moscow-based investor. “He probably wants to invest it instead
of having it sit around earning zero percent in a bank.”

For all Fridman’s deal-making prowess, the game seems over.

Tele2 said on Thursday it had completed its $3.55 billion
deal to sell its Russian business to state-backed bank VTB
. While the price was lower than the Fridman bids, the
deal offered cash in hand, rapid clearance by Russian regulators
and a cut of any profits if VTB sells the unit on quickly.

It was closed just eight days after it was announced.
Vimpelcom, MTS and A1 declined comment regarding the completion.

The approaches from A1 and the MTS-Vimpelcom alliance of
Russia’s telecoms market leader and No.3 player were made public
after Tele2 had announced its agreed sale. In the days that
followed, they scrambled to show their hands. A1 offered up to
$4 billion; MTS and Vimpelcom up to $4.25 billion.

“There was an attempt to do it through A1 and later on
Vimpelcom tried directly… I don’t see anything else than just
a tactical approach, and then it did not work out,” said one
telecoms executive who declined to be named.

Ukraine-born Fridman, one of a group of businessmen who
amassed vast fortunes and political influence under Russian
President Boris Yeltsin in the 1990s, seems left with few
options.

MODUS OPERANDI

Vimpelcom and MTS say Tele2 spurned their approaches, while
A1 maintains it put forward its own higher offer before the VTB
deal was signed, only to be ignored.

Analysts have described the A1 bid as a means to make the
MTS-Vimpelcom bid look more appealing to Tele2.

But they also note that Fridman’s activism reflects his
concern about Vimpelcom’s competitive position in Russia as the
weakest, and most indebted, of the Big Three market players led
by MTS and followed by Alisher Usmanov’s MegaFon.

“I think (A1) has (made its bid) on behalf of Vimpelcom to a
certain extent, they’re doing it to protect Vimpelcom,” said
Anna Lepetukhina, telecoms analyst at Sberbank.

The dual bids ratcheted up the pressure on Tele2 – ensuring
a message was heard that more money is on offer. The telecoms
companies and A1, which is part of Fridman’s Alfa Group, have
said they are pursuing their bids separately.

Remaining tactics could include taking legal action or
attempting to buy Tele2 outright- both things A1 has said it is
considering. It could also try to buy the asset from VTB,
although if the bank sells it within a year it will have to hand
a chunk of the profit to Tele2.

“Alfa and A1 are extremely clever and extremely aggressive
and they will sue anybody at anytime with any argument, whether
it’s a good one or not,” said one Moscow-based lawyer.

Shortly after the VTB deal was announced, A1 said it was
considering taking legal action, claiming lost opportunity and
that it was in talks with minority shareholders. Minority
shareholders have not come forward.

A1′s threat to litigate was in keeping with Alfa’s modus
operandi. Fridman has fought pitched legal battles against some
of the biggest foreign investors in Russia – among them
Vimpelcom co-owner Telenor and oil giant BP.

There has been scepticism whether such an approach with
Tele2 would work. “If it’s really a question about a UK or U.S.
public takeover, and the company is really in play, the board
has a duty to go with the highest offer, but I don’t think this
is that kind of situation,” said one Moscow-based lawyer who
asked not to be named. “I think it’s more like a private deal.”

DIVERSIFICATION

Flush with cash from a $28 billion deal alongside three
other tycoons to sell out of TNK-BP, and a $5 billion
windfall from selling a stake in MegaFon, Fridman has
been encouraged by the Kremlin to pump money back into Russia.

However, some observers have said the tycoon, worth $16.5
billion according to Forbes, is looking to spread his risk and
pare back his exposure to Russia – where his assets also include
stakes in Alfa bank and struggling food retailer X5.

Fridman has made some large exits in Russia, selling out of
MegaFon and TNK-BP, while making moves to increase his influence
over Egypt’s Orascom Telecom and Turkey’s Turkcell.

Alfa Group is setting up an international investment
business, the head of the AAR consortium which invested in
TNK-BP recently said. This would look for long-term strategic
investment opportunities in Russia, North and South America,
Asia and Africa.

(Reporting By Megan Davies; additional reporting by Maria
Kiselyova; editing by Doug Busvine and David Stamp)

The deal with state-controlled bank VTB was
followed swiftly by counterbids from groups associated with
tycoon Mikhail Fridman, but Tele2 said the deal was already
done, prompting speculation that the Kremlin may have dictated
proceedings.

The counterbids were from the Russia’s top mobile phone
operators, which could fear number-four player Rostelecom
will be merged with Tele2 Russia to challenge their
dominance.

Those companies have shown their discontent at being shut
out of the bidding.

A1, Fridman’s investment vehicle which made an all-cash bid
of $3.6-$4 billion, has threatened legal action against Tele2
and its advisor Morgan Stanley.

The other, $4.0-4.25 billion bid came from Vimpelcom
, part-owned by Fridman, in conjunction with No. 1 mobile
firm MTS. An MTS executive on Monday called it “strange
and dubious” for Tele2 to ignore a higher bid and urged its
management and board to start talks and show a “sign of life”.

“My reading between the lines is that they have been told by
the Russian authorities that if they sell to VTB they will get a
fair price for the asset,” said an analyst who declined to be
named.

Tele2 announced the deal with VTB last week and analysts saw
it as a precursor to a re-sale of the business, with
state-controlled Rostelecom a likely buyer.

Rostelecom, which backed the idea of merging with Tele2
Russia in the past, recently attracted Arkady Rotenberg, a
construction tycoon who is a former judo sparring partner of
Putin, as a shareholder and changed its CEO.

It declined to comment about Tele2 on Tuesday.

NO BREAK CLAUSE

Fridman, worth $16.5 billion according to Forbes, is flush
with cash after closing a $28 billion deal with three tycoons to
sell a stake in oil firm TNK-BP.

But Tele2 said its deal cannot be reopened to new bidders.

“It is easy to come in with bids after we have closed the
deal. Those offers were obviously not on the table when we
entered into the exclusivity arrangements with VTB,” Tele2′s CEO
Mats Granryd said on a conference call with analysts on Tuesday.

He said Tele2 talked to most, if not all, players in the
Russian market before entering into an exclusive arrangement
with VTB on Feb. 22, but that no cash bids were made. It looked
at all options such as joint ventures and partnerships, he said.

“When VTB came, it represented a very good deal with very
good value,” Tele2′s head of investor relations Lars Torstensson
said. “We decided to give them a very short period of time of
exclusivity.”

Tele2 said there was no break clause in the deal with VTB
which would allow it to revoke it on payment of penalties.

Kinnevik, Tele2′s biggest shareholder with a
stake of 30.5 percent of its capital and 47.9 percent of the
votes, has said it fully supports the VTB deal.

MTS and Vimpelcom were unfazed, saying they would press
ahead with their offer.

BIDDERS DISCONTENT

MTS said that, prior to the VTB deal being announced, it had
tried to contact Tele2 about an offer but that the Nordic
company “categorically cancelled every contact (since February)
and did not allow their advisors to be in contact with us”.

“(Tele2) must have known MTS and Vimpelcom were interested
and that they could have negotiated a higher price,” said Anna
Lepetukhina, telecoms analyst at Sberbank. “Of course
it raises questions – but what else is in the agreement? This
might explain why they chose VTB instead of other parties.”

Tele2 also disclosed that its deal with VTB included a
provision that it has the rights to half the profit obtained by
the state bank if VTB re-sells Tele2 Russia within a year.

The analyst who asked not to be named cautioned against
pricing the asset-flip provision into Tele2′s valuation, saying
it could take over a year to structure a deal.

Analyst Lepetukhina said that Rostelecom buying Tele2 Russia
would imply the worst-case scenario for the big three mobile
players, but Rostelecom would still need to prove it can
challenge them.

“It doesn’t necessarily mean that… they will immediately
become the strong national player,” she said.

MTS joined with rival Vimpelcom Ltd (VIP.N: Quote, Profile, Research, Stock Buzz), part-owned by billionaire Mikhail Fridman, to bid for Tele2′s Russian unit on Thursday, topping a lower bid by Fridman’s A1 investment group and an agreed deal with state-controlled bank VTB (VTBR.MM: Quote, Profile, Research, Stock Buzz).

New York-listed MTS and Vimpelcom are bidding for Tele2 Russia to try and prevent government-controlled Rostelecom (RTKM.MM: Quote, Profile, Research, Stock Buzz) from taking the asset, some analysts have speculated.

MTS said it has still had no response from Tele2.

“Our predominant focus is to get the Tele2 management and shareholders and board to the table to consider our offer and to show a sign of life,” said Michael Hecker, MTS’ VP, Strategy and Corporate Development, in an interview. “We are waiting for an answer from Tele2 to our request, to acknowledge our offer, to get into a process, and put the VTB process on hold.”

Hecker added that it was “strange and dubious” for management and the board to ignore a financially superior offer.

VTB has said that its deal is concluded and legally binding. Hecker, however said that he was not aware the deal was closed.

MTS and Vimpelcom’s offer to buy Tele2 was for $4.0 billion to $4.25 billion, topping A1′s all-cash bid of $3.6-$4 billion and VTB’s $3.5 billion deal. A1 said on Friday that it may take legal action to defend its right to buy.

MTS said that some minority shareholders had expressed their concern with the process, but declined to comment on which shareholders these were or how much they controlled.

Tele2 is Russia’s fourth-biggest mobile operator with around 23 million subscribers in 2012 after MTS, MegaFon (MFON.MM: Quote, Profile, Research, Stock Buzz) and Vimpelcom. Focused on Russia’s regions, it does not have a 3G or 4G license in Russia. Without the ability to offer data services, analysts say its growth prospects are limited.

Analysts say there is little reason for VTB to hold the asset long and have speculated that the bank bought Tele2 on behalf of Rostelecom or that it will carve the asset up and sell it to the “Big Three” – MTS, Vimpelcom and MegaFon.

MTS said the “door is fully open” should MegaFon want to join up to bid.

“The fact that Vimpelcom and MTS teamed up together does not mean that MegaFon might not at a later stage also join,” Hecker said.

MTS said it sees a strategic rationale in buying Tele2 as it would give Tele2 customers access to data services and superior network quality. MTS and Vimpelcom would be able to realize economies of scale, he said by integrating Tele2′s customer bases, network assets and sales.

MegaFon said it is not in talks with VTB, MTS or Vimpelcom but is watching how the situation develops. Tele2 could not immediately be reached for comment.

(Reporting By Megan Davies and Maria Kiselyova; additional reporting by Anastasia Teterevleva and Simon Johnson; Editing by Nick Zieminski)