Russia-based mobile operator MTS made a €543 loss in the second quarter as problems at its Uzbekistan subsidiary severely impacted the company’s balance sheet.

As European Communications reported earlier this month, MTS has had problems in the country since February when the Uzbek authorities levied a charge for unpaid tax receipts.

Following more audits, the arrest of senior management and the seizing of internal documents, two weeks ago a court upheld the local regulator’s demand that all of MTS’s licenses in the country be withdrawn.

An appeal by MTS was rejected on Monday leading to its operations being suspended – nominally for a three-month period – and a further €533 million of charges were levied on the company.

MTS said it strongly denies any alleged wrongdoing.

“While we continue to challenge the allegations against MTS-Uzbekistan and make use of the appeals process within Uzbekistan, we are also evaluating other appropriate legal strategies to defend our legitimate rights and investment interests,” added MTS president and CEO Andrei Dubovskov.

Its Uzbek operations represent a small but growing part of MTS’s overall portfolio; Q2 revenues there grew 22.3 percent to €106 million.

However, the unit made a loss of €810 million as MTS recorded an impairment charge of $461 million on its balance sheet and has provided a further €399 million for tax, anti-monopoly and other liabilities.

The developments in Uzbekistan were a blip on an otherwise good set of financial results.

Although overall group revenues were down 0.2 percent year-on-year to €2.5 billion, this was down in the main to “significant weakening” of the Russian ruble versus the US dollar.

Its main Russian business unit grew revenues by 8.9 percent when measured ruble (in euros it equates to €2 billion).

“We continue to see benefits in our mobile business through a combination of strong tariff plans, prudent sales strategies and continued investments in our networks,” said Dubovskov.

In July, the company won a license to provide LTE services from January next year.

The CEO is expecting to capture growth as it increases its consumers upgrade to smartphones.

“By the end of the year, we will increase our retail footprint by up to 500 stores… the combination of 3G networks and a retail presence will help us drive sales of smartphones and increase smartphone penetration, which will in turn lead to higher-value customers,” he said.

Revenues were also up in Ukraine (7.2 percent) and Armenia ( two percent) when measured in local currencies.

“We saw sustained growth in usage of voice and data products in each of our markets of operation,” added Dubovskov.

However, CFO Alexey Kornya warned that the next six months will be tougher.

“We feel there is a likelihood that margins will weaken in the second-half of the year due to the stabilization of revenue dynamics given the overall economic environment; increased labor costs based on new laws regarding social taxes; continuously rising rent and maintenance costs as we expand our mobile and fixed networks; further expansion of our retail footprint and its rising contribution to the Group’s financial results,” he said.

There is also the question of how the Uzbekistan saga will play out.

MTS has a decision to make about its long-term presence there and it will not want it to remain a stain on its balance sheet.

Given the growth that it is experiencing in its other markets it could well be worth exiting.