FACTBOX-Five risks to watch east of the EU

MOSCOW Aug 12 (Reuters) - East of the European Union, investors will be closely watching border tensions, Ukrainian elections, fluctuating oil prices, tensions between Turkey's ruling party and the military and a court case seen as a litmus test for investment security in Russia.

Below is an overview of the key risks in the region.

SECURITY OF INVESTMENT IN RUSSIA

Foreign investors in Russia are closely watching Norwegian telecom Telenor's (TEL.OL) battle to block a forced sale of its stake in Russia's second-biggest mobile phone operator Vimpelcom VIIP.N, a case that has rekindled investor concerns over the treatment of foreign firms in Russia.

A Siberian court ordered Telenor to pay a $1.7 billion award to Vimpelcom after Farimex, a tiny Vimpelcom shareholder, accused the Norwegian firm of holding back Vimpelcom's expansion in Ukraine.

Telenor lost a lawsuit last month to block a forced sale of its stake in the firm, but promised to appeal the decision. It regards the court battle as part of a protracted dispute with Alfa, a powerful conglomerate run by Russian billionaire Mikhail Fridman, although Alfa has denied any link with Farimax. [ID:nLS730399]

It is the first major dispute involving a foreign company since last year's row over oil giant BP's (BP.L) Russian subsidiary TNK-BP, in which Fridman's conglomerate ultimately wrested control.

The TNK-BP dispute coincided with a verbal attack on New York-listed coalminer Mechel by Prime Minister Vladimir Putin, which helped prompt a sell-off of Russian shares that was closely followed by a wider market nose-dive after the Georgia war and demise of Lehman Brothers.

RUSSIAN OIL PRICES

Russia's economy is heavily dependent on oil and gas exports so any sharp fall in prices would be likely to lead to a sell off in the equity and bond markets and undermine forecasts for domestic demand that have driven foreign direct investment.

If oil prices average less than $55 dollars over the next three years, Russia would have a bigger budget deficit than forecast and will have to borrow more than the $60 billion abroad that the Finance Ministry plans under current forecasts.

While Russia would probably have little problem selling Eurobonds, officials privately recognise that such large external borrowing is only a short-term solution to the deficit.

A decline in the oil price would limit the Kremlin's ability to ease social tensions resulting from the recession and could put pressure on the relationship between President Dmitry Medvedev and his patron, Prime Minister Vladimir Putin.

Any serious tensions between the two, who say they have good relations, could tear the government apart with unpredictable consequences. Putin's assertion that he brought stability to Russia after the chaos of the 1990s would also be undermined.

A rise in oil prices on the other hand could drive investment and Russian securities could quickly soar on a relatively small inflow of foreign capital. That would cut the need for foreign borrowing, pull Russia out of recession sooner than expected and drive investment in new oil and gas fields.

NEIGHBOURHOOD TENSIONS

Investors have generally shrugged off rhetoric between Moscow and Western capitals, though any escalation of tensions over Georgia and Ukraine could rattle markets. Last summer's Georgia war helped prompt mass investor flight from Russia, knocking a quarter of the value of Moscow stocks in a month and pushing up the cost of insuring sovereign debt in the credit default swap market as far afield as Poland. Diplomats have warned that skirmishes along Georgia's de-facto border with the Russian-backed rebel regions of South Ossetia and Abkhazia could escalate into a full blown conflict. [ID:nLK5404] With a presidential election approaching in Ukraine, some investors have pointed to the risk of rising tensions between Russia and Ukraine over the Russian-speaking Crimea and a base in Sevastopol, which Russia's Black Sea leases from Ukraine. Any repeat of a gas row between Moscow and Kiev would raise the spectre of a disruption to gas supplies to Europe. Medvedev waded into Ukraine's election campaign this week, calling pro-Western President Viktor Yushchenko "anti-Russian" and encouraging his replacement to co-operate with Moscow.

UKRAINIAN POLITICS

Political infighting ahead of a Jan. 17 presidential election is expected to dominate Ukraine in the current months.

Ukraine's fractious parliament is likely to find itself in a stalemate which may delay passage of important bills needed to fight the crisis and receive further IMF vital funding.

Yushchenko, whose approval rating stands at around 4 percent, has little chance of winning the election. That makes it a contest between Prime Minister Yulia Tymoshenko, with some 14 percent of the vote, and Viktor Yanukovich, who has some 24 percent and was backed by Russia at the last election.

Yushchenko's almost inevitable loss will remove a key irritant to Moscow as both the other candidates are seen as more friendly to the Kremlin. Both say they want to be business and investor friendly, with a win for Tymoshenko possibly instilling some stability in the party that currently forms the government.

In the short term, investors have been unnerved by government statements it wants to restructure the $500 million Eurobond state energy firm Naftogaz due by the end of September.

Analysts see this as primarily a political decision for Tymoshenko rather than a financial necessity after the IMF disbursed a $3.3 billion tranche earmarked specifically for external debt redemptions. Restructuring the bond could seriously damage investor confidence but analysts see payment as more likely. [nLB194576]

TURKEY'S MILITARY

Tense ties between the AK Party government, rooted in political Islam, and the staunchly secular military are undermining stability in Turkey.

Turkey's Constitutional Court will rule in the coming months on new laws giving civilian courts the right to charge military personnel. If the government wins, relations could worsen.

In the long-term, the AK Party government has the upper hand, as a massive trial against nearly 150 alleged coup plotters, including serving and retired military officers, and other government critics, has shown. [ID:nLK85087]

Last week a prosecutor indicted 52 more people on charges of plotting a coup, widening a case that has the potential to cause instability if it collapses or evidence emerges the government has had a hand in arresting opponents for political purposes. [ID:nL5496052]

Overall, risks of a military coup are very small given the AK Party now has public opinion behind it and the military, traditionally one of Turkey's most respected institutions, has seen its reputation hurt as critics see the coup trial as evidence of the military's involvement in undemocratic actions.

Nevertheless, any escalation could still damage markets. (Additional reporting by Paul de Bendern in Istanbul and Sabina Zawadzki in Kiev)