Latvian officials have committed to the World Trade Organization that it would end Lattelekom's monopoly status, in which the state is the majority shareholder, by the end of 2003.
That promise contradicts an agreement signed between the government and Tilts in 1993 that extended the monopoly until 2014.
The court procedure, which is expected to start in 60 days, will take place in Stockholm, and Latvian commercial law will be used as a basis for the decision.
Christer Nykopp, Tilts's chairman of the board, said the company's legal team has done a lot of preparation, and "there would be no point in the procedure if we didn't have confidence in the Latvian law."
He emphasized that the dispute was not about "the removal of the monopoly as such," but about the compensation for the losses this move will entail for Tilts Communications.
Neither government officials nor the Latvian Privatization Agency would comment on the filing.
Nykopp refused to quote the size of compensation Tilts is seeking, or to make any estimates, but said "the fact that we are going through arbitration at all indicates that it's rather substantial."
Negotiations with the Latvian state about compensation have been going on for several years, but have come to the dead end. "We haven't moved anywhere in the last year," Nykopp said. "The differences we saw already in 1999 are so large that we no longer expect the negotiations to lead to a solution."
The umbrella agreement stipulated that if the parties at some point were unable to reach an agreement by negotiation process, one of them could turn to an independent arbitrator, who would then make a decision. Tilts has tried many times to resume negotiations, but did not succeed because "the Latvian Republic was not ready," Nykopp said.
Until the court issues a verdict, it will be impossible to start privatization of Lattelekom, because Tilts Communications will not give its approval, which is necessary to start the procedure. Nykopp maintained that the same would be true had negotiations continued: "If it's not known what will happen to the company in the future, one cannot get a good price for it."
Other than that, Lattelekom should not be affected. Nykopp emphasized that the suit was filed against the Latvian government, not against Lattelekom.
"Since this is a dispute between shareholders, it should not affect the company," Nykopp claimed. "We can't allow the company to lose its value."
Lattelekom is also most likely to lose its monopolistic position at the end of 2003, whether or not the Arbitration Court has come to a resolution by that time.
Backing down on the commitment for liberalizing the fixed network telecommunications market will be very difficult and damaging for the Latvian state, Nykopp admitted.
Although it is customary in the arbitration procedure to file a claim before informing the second party, the head Tilts negotiator came to Riga on Aug. 14 to inform the Latvian Privatization Agency of the decision to file, Nykopp said.
"Unfortunately, because of the differences in the calendars, there wasn't anyone in LPA to take this information," the chairman added.
Latvian Privatization Agency refrained from comments on the Tilts decision, and Lattelekom issued a statement declining to discuss the dispute between its two owners.