Latvia Safeguards Its Telecommunications Assets

As of early 2020, Latvia remains the only Baltic State whose telecommunications market is not wholly controlled by a foreign-owned private enterprise, namely the Swedish companies Telia and Tele2. This situation is particularly important in light of developments in this sector last year. According to Petras Masiulis, the CEO of Tele2 Baltics, 2019 was marked by the dispute between the United States and China over the employment of Huawei information technologies by European countries, raising to the forefront serious security concerns in the telecommunications business (Lithuania Tribune, January 3).

Tet Ltd. (Lattelekom from 1992 to 2006; Lattelecom from 2006 to 2019) is the largest Latvian state-owned technology and entertainment company. It is a telecommunications operator, an Internet Service Provider (ISP) and, since 2017, an electricity service provider as well. Tet’s core business is the provision of fixed-line electronic communications services (voice and data communications and Internet services), information technology services, and electrical services. Fifty-one percent of Tet’s shares are owned by the Latvian state, while the remainder are held by the Danish company TILTS Communications, which is itself owned by Telia (Apollo.lv, May 9, 2019).

The last attempt to merge the largest mobile communications provider in Latvia, the state-owned Latvijas Mobilais Telefons (LMT—currently, 49 percent owned by Telia), and Tet failed in October of last year, when the newly formed government decided to suspend the memorandum of understanding (MoU) signed between former prime minister Māris Kunčinskis and Telia (TVNET, October 1, 2019).

The history of Telia’s struggle to wrest control of the Latvian telecommunications sector goes back to 2003, when Latvia’s government, looking to liberalize the domestic telecom market, revoked this Swedish company’s local monopoly at that time (Apollo.lv, May 9, 2019). Shortly after the settlement of the resulting arbitration dispute, the Nordic business group offered the state 9 million lats (about $14.15 million; Latvia has been on the euro since 2014) to privatize LMT and Tet—a proposal Riga ultimately rejected. Three years later, Telia offered around 500 million lats ($785 million) for both state-owned companies, but the government again rebuffed the offer. Discussions by various government working groups on privatization options followed but with no result. Another proposed merger of LMT and Tet, in 2013, was also eventually rejected by the Latvian authorities.

In 2017, after the Latvian government’s dismissal of the latest LMT-Tet merger proposal, Telia warned Riga that it might seek out third-party buyers for its capital shares in both companies (Medium.com/@juriskaza, October 19, 2017). Girts Rungainis, a partner in investment banking and financial advisory firm Prudentia, noted as early as 2011 (amidst that year’s debate over merging LMT and Lattelecom/Tet) that Telia may seek out an Asian buyer such as China to purchase its shares in the Latvian telecom firms. However, as Rungainis emphasized at that time, Latvia, a North Atlantic Treaty Organization (NATO) member, should maintain control over its major telecommunications-sector operators because IT companies play a key role in its domestic defense industry (Diena.lv, August 24, 2011).

In addition to the military and national security implications, the Prudentia-linked expert pointed to a series of fines levied on Telia for corrupt transactions in Uzbekistan in the recent past, as well as several criminal proceedings against a number of the company’s former senior executives in Sweden. Together, these scandals also harmed the Nordic company in its dealings with the Latvian government and may cast a shadow over its efforts to leave the Latvian market, Rungainis concluded (Diena.lv, August 24, 2011).

Should Telia eventually follow through on the threats to sell its ownership stakes in Tet and LMT, attracting new investors may prove difficult. Other buyers will likely balk at the long-term indecision of the Latvian state when it comes to the domestic telecommunications market as well as at Riga’s rejection or disregard of offers from various foreign partners over the years.

According to Telia’s corporate spokespersons, the Swedish firm’s main concerns in its long-term dispute with the Latvian government boil down to the interests of their shareholders and efforts to boost company earnings. An “optimization” of Tet and LMT would help both of those goals, Telia argues. Latvia’s current Minister of Transportation Talis Linkits echoes this point, claiming that bringing these two companies together would be mutually beneficial to consumers and shareholders. But LMT CEO Juris Binde finds advantage in separating Latvia’s two main telecom operators. According to Binde, “A possible duplication of functions between the industry’s ‘major players’ would benefit the competition within the market.” Moreover, LMT is not ready to give up anything in favor of Tet, as competition is the main driver of development, which is to the benefit of customers, he asserted (Nra.lv, May 9, 2019).

The debate over the future of Latvia’s leading telecommunications operators has so far focused mainly on business interests and consumer preferences, without much serious thought given to the important security concerns of selling ownership in critical national infrastructure objects to third parties. At the same time, a crucial issue stemming from Telia’s desire to merge LMT and Tet is the fact that Sweden, though a close European partner and European Union member, is not part of the NATO alliance. This view was also supported by some high-ranking elected officials in the Latvian parliament.

Glen Grant, a leading defense expert at the Baltic Security Foundation, has suggested to look at this issue in two ways. “On one hand it brings greater security in that anything that ties Sweden closer to Latvia financially and, in this case, also with infrastructure is a good thing. But what it does also could be considered a strategic vulnerability in that we no longer have control of the assets.” Grant recommended that Latvian decision-makers consider passing a law that if more than 30 percent of the Swedish company is sold to either China or Russia, then its local subsidiaries revert to Latvian national ownership (Author’s interview, December 1, 2019).

Presumably, the latest Latvian government decision not to merge LMT and Tet will not be the end of this story. More dialogue on this between Riga and Telia can be expected to resume sooner or later. But this time, the authorities will be more likely to take into account not only the proposed financial benefits but also the implications for Latvian national security of delegating ownership over Latvia’s critical infrastructure assets.