In a 150,000-word posting to the US financial regulator, the Securities and Exchange Commission (SEC), the company lists the damaging consequences of the war to its operations, its reputation and its finances.
It says, starkly: “We have concluded that a material uncertainty remains related to events or conditions that may cast significant doubt on our ability to continue as a going concern, such that we may be unable to realize our assets and discharge our liabilities in the normal course of business.”
Veon, which is registered in Bermuda and headquartered in Amsterdam, risks the wrath of the Kremlin by referring 183 times in its SEC filing to the “conflict” in Ukraine. The Kremlin prefers the term “special military operation”. Anyone in Russia who uses the word “war” is threatened with a jail term of 15 years: “conflict” is a close synonym of “war”.
The Veon filing says: “Our business, financial condition or results of operations or prospects could be materially adversely affected by any of these risks, causing the trading price of our securities to decline and you [the shareholders] to lose all or part of your investment.” The share price on Nasdaq has already dropped from US$1.72 at the start of 2022 to $0.66 at close of business on Monday.
Risks are from “the ongoing conflict between Russia and Ukraine” and “its adverse impact on the economic conditions and outlook of Russia and Ukraine”, as well as “physical damage to property, infrastructure and assets”.
But it also warns of “the effect of sanctions and export controls on Russia and counter-sanctions enacted by Russia”.
There are no international sanctions on Veon itself, but the company warns of the possibility that this might happen – and its association with “designated” – that is, sanctioned – people means it has “suffered reputational harm”.
Apart from anything else, executives and suppliers might refuse to work with it. Both Ericsson and Nokia have ceased to supply operators in Russia.
Veon says in its filing: “The ongoing conflict between Russia and Ukraine, including any adverse publicity relating to us, may make it more difficult for us to attract and retain key talent, including senior management, both at the group-level and also within our key markets.”
The biggest reputational challenge is that Veon’s biggest shareholder is Russian-controlled LetterOne, which owns 47.58% – a controlling stake in a normal world. LetterOne is controlled by Mikhail Fridman (pictured), Petr Aven, Alexey Kuzmichev and German Khan, all of whom have had sanctions imposed on them.
Fridman and Aven both stepped down from their board positions in March. The chairman and CEO of the investor told shareholders: “They will not receive dividends, communications or any funds or economic resources, directly or indirectly. Their assets in the business are effectively frozen, they have no rights as shareholders and – if sanctions are lifted – the board is under no obligation to return these rights.”
But yet another challenge is that 65% of Veon’s revenues comes from the two countries at war. According to the last annual results, published in February as Russia’s army was crossing Ukraine’s border, around 52% of Veon’s business comes from Russia, where it operates as Beeline, and another 13% comes from Ukraine, where it is Kyivstar.
Veon warns shareholders in its SEC filing of its precarious situation as a foreign-owned company in time of war: “The Russian government has historically placed limitations on the ability of foreign persons to own and invest in companies that operate in Russia, and such restrictions have already and will continue to be increased as the ongoing conflict between Russia and Ukraine continues.”
There’s also a danger that the company is running low on cash, partly because of sanctions but also because of depressed economic activity in war-hit Russia and Ukraine.
Last month Veon shifted two loans, from sanctioned Sberbank and Alfa Bank, that were with EU entities in the group to the company’s Russian operation, VimpelCom. This “has allowed Veon to ensure that the majority of the group’s rouble liabilities are held within Russia”.
The SEC statement says that last year’s capex was $1.82 billion, up from $1.79 billion in 2020 and $1.63 billion in 2019.
At the end of 2021, total borrowing was $7.6 billion, plus lease commitments of $2.7 billion. And it has $1.3 billion in cash at head office.
It has a revolving credit facility of $1.25 billion, agreed in March 2021, and other loans from Alfa Bank – which is also closely connected with Fridman – as well as from Pakistan, where the company’s brand is Jazz.
But this morning Veon’s market capitalisation on Nasdaq was just $1.25 billion.
The company warns: “Despite our current liquidity levels, there can be no assurance that our existing cash balances and revolving credit lines, together with cash generation made available to the group level, will be sufficient over the medium term to service our existing indebtedness.”
It adds: “We may have technical difficulty transferring cash to our Russian and Ukrainian operations to service their loan repayments. … The ongoing conflict between Russia and Ukraine has impaired our ability to make cash transfers into and out of both Russia and Ukraine. In Russia, this is due to many of our entities’ countries of incorporation being considered to be an “unfavorable jurisdiction” by the Russian state.”
Credit agencies have downgraded Veon’s ratings, putting up interest rates. “The terms of any additional capital raised in the near future will likely be on terms less favorable than our existing financing arrangements, both in terms of interest rate, financial covenants and restrictive covenants.”
The Central Bank of Russia (CBR) increased interest rates from 9.5% to 20% when the war started at the end of February and then moved it down in April, but only to 17%. “Any further increase in interest rates would have an impact on our Russian subsidiary’s weighted average cost of capital, which could result in potential impairment of our cash generating units in Russia.”
But the war is also causing volatility in the market: Ukrainian refugees are not going to be spending their money with Kyivstar and sanctions on Russia means Beeline customers will be spending less.
Meanwhile, Veon is clearly worried about the possibility of sanctions from Russia itself, thanks to the so-called “Yarovaya laws”.
It explains: “Operators are required to provide information to Russian investigative authorities and gradually install pre-approved equipment to ensure storage of metadata for three years and contents of communications for six months.”
There’s also the RuNet law, which imposes “a number of obligations that aim to ensure the centralization and control over data traffic on a broad range of persons”.
Telcos are “install counter-threat equipment to be provided by the Russian authorities, participate in trainings and file certain notifications to the Russian authorities”. This will effectively create “an autonomous system that can support the operation of the internet in Russia in the event of disconnection from the global network and allow the Russian government to centralize, control and restrict data traffic”.
The Russian subsidiary of Veon is “in the process of ensuring compliance with these requirements”, says the SEC filing.
