The Organized Crime and Corruption Reporting Project (OCCRP) released Uzbekistan: How The President’s Daughter Controlled The Telecom Industry, a report documenting Gulnara Karimova’s corruption, on March 21st 2015. The report, available in full here, it documents the methods and levels of corruption that Ms. Karimova allegedly participated in and it sheds light on the challenges that ICT companies have when operating in risky environments.
What does the report say?
Gulnara Karimova, 42, is the daughter of President Islam Karimov, who has ruled over Uzbekistan since 1990 when it was part of the Soviet Union. Ms. Karimova allegedly used her position to manipulate and extort approximately one billion USD from ICT companies in Uzbekistan over the course of approximately 13 years. The following three cases, all highlighted in the report, come across as the most egregious:
- Uzdunrobita was the first mobile carrier in Central Asia. While fronting no money, Ms. Karimova was able to obtain a controlling stake in the company in January 2002. According to a former partner, Ms. Karimova sold a controlling share of the company for 100 million USD in July 2004. Through stock maneuverings, Ms. Karimova eventually sold her remaining stocks in the company for 250 million USD.
- Trades allowed Ms. Karimova to allegedly benefit through multiple sales through her interaction with the Russian company VimpelCom. The exact amount is not clear, but Ms. Karimova is thought to have made profits in the tens of millions of dollars.
- TeliaSonera is a Swedish-Finnish telecom company that operates worldwide and within the Central Asian market. TeliaSonera entered the market under suspicious circumstances. A problematic company had all issues disappear when TeliaSonera moved in and began negotiating with the government. Ms. Karimova eventually obtained and then sold licences to TeliaSonera in a questionable business transaction. Finally, she sold the company she had created with no capital for 220 million USD.
A very detailed, yet easily comprehendible, infographic of the payments is available here.
Although other industries were likely involved in Ms. Karimova’s activities, telecommunications took centre stage. There are two separate reasons why this occurred, with lessons that others can learn from.
- Telecommunications is a highly-regulated industry. In order to operate, a company must obtain expensive licences from governments. Whoever has access to the licences is in a position to release them as they see fit. In corrupt environments, this is problematic.
- Telecommunications are not mobile. By definition, telecommunications must be anchored to a particular country. If a company would like to build a factory, it can assign criteria and open it in any country. If a company wanted to benefit from the lucrative and high-growth mobile market in Uzbekistan circa 2000, it had to navigate those waters.
What’s the big deal?
While people discuss corruption as a high-level and abstract, it always has an effect on the business climate and market efficiency. Because it is a high-risk environment, any company entering Uzbekistan will demand higher profits to justify the higher risk profile. Finally, any money spent on bribes will become another business expense, to be made up by passing the cost on to consumers or skimping on infrastructure upgrades. The end result is a smaller ICT market with inflated prices.