UPDATE 3-Home of Russian state telco boss raided in fraud probe

Tue Nov 20, 2012 8:25am EST

* Case related to Rostelecom CEO's former fund

* State bank seeks to recover $225 mln loan

* Medvedev ally seen as possible successor

* Investors worry fraud probes are used to settle scores

By Douglas Busvine and Maria Kiselyova

MOSCOW, Nov 20 (Reuters) - Russian investigators searched the home of the head of a state telecoms firm on Tuesday, in a fraud case that underlines an intensifying battle for money and influence six months into Vladimir Putin's presidency.

Police searched the house of Alexander Provotorov, chief executive of Rostelecom, and the home of a minority shareholder, Konstantin Malofeyev, newspapers and news agencies quoted law enforcement sources as saying.

Rostelecom spokeswoman Kira Kiryukhina said she was unable to comment on the searches. Malofeyev's fund, Marshall Capital, could not be reached by phone and its web site was not working.

Analysts said Tuesday's raids could herald a management shake-up at the $12 billion phone company, Russia's former fixed-line monopoly over which well-connected officials have long vied for influence.

"Maybe this is connected with some conflicts between Rostelecom and the Ministry of Communications - we heard previously that the ministry wanted to replace the current CEO," said Alexander Vengranovich at brokerage Otkritie.

Newspapers reported last month that Provotorov, who took the helm at Rostelecom in July 2010, could be replaced by Vadim Semyonov, the head of state telecoms holding company Svyazinvest who studied law with Prime Minister Dmitry Medvedev.

The Rostelecom case is linked to a deal involving Marshall Capital, in which Provotorov used to be a partner, and follows a slew of scandals t h at has soured the mood of investors towards Russia and Putin's brand of state capitalism.

A corruption probe led Putin to fire his defence minister, Anatoly Serdyukov, this month, while cases of alleged financial malfeasance are being investigated at Russian satellite network Glonass and over preparations for a recent Asia-Pacific summit.

Commentators say such cases are increasingly becoming a tool to settle political and business scores under Russia's 'vertical' power structure, in which Putin - now serving a third Kremlin term - acts as a final arbiter.

Official probes into top Russian firms can quickly unsettle investors concerned by the country's weak property rights and political control over law enforcement and the courts.

MISSING MONEY

The Rostelecom fraud probe is linked to a $225 million loan by VTB to finance a business deal in 2007 in which, investigators suspect, Malofeyev was involved on both sides of the transaction.

VTB is seeking to recover the money and has secured a British court order freezing part of the 10 percent stake in Rostelecom owned by Malofeyev's fund, Marshall Capital.

Alexei Navalny, an anti-corruption activist who has emerged as a leader of opposition election protests over the past year, has accused VTB managers of questionable lending practices, while a British judge has faulted the state bank for failing to do adequate due diligence on the deal.

VTB has rejected Navalny's allegations as "deceitful, biased and insubstantial" and declined to comment on the fraud probe on Tuesday.

News of the searches broke the day before Rostelecom - one of four firms to win licences to provide fourth-generation mobile services in Russia - reports quarterly results.

Shares in the firm, in which the state owns a voting stake of 53 percent, fell by as much as 4.3 percent initially but pared earlier losses to trade down 2.7 percent by 1322 GMT.

INVESTMENT CLIMATE

According to reports, Malofeyev has been taken into custody and Provotorov may be arrested later on Tuesday, while a lawyer for Marshall Capital was being questioned.

Police said only that they were investigating individuals suspected of defrauding a bank, adding that the case did not relate directly to Rostelecom.

In the deal that is at the heart of the investigation that has sucked in Provotorov, a company called Russagroprom bought six Russian dairy plants from Nutritek, in which Marshall Capital was a shareholder.

Russagroprom defaulted on the VTB loan and the bank later brought proceedings against Nutritek and Marshall Capital, securing a British court order freezing part of the fund's 10 percent stake in Rostelecom.

A prolonged investigation could affect Rostelecom's ability to find business partners at a time when, according to financial daily Vedomosti, it is in talks with Sweden's Tele2 to merge their Russian mobile operations.

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