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Telecommunications 1991-2000
Rapid advances in the infrastructure sector are considered essential for stable economic growth. The Russian telecommunications industry, which has recorded stable growth during the entire post-Soviet period, is one of the few sectors to meet this requirement. According to an analysis of the Boston Consulting Group, the Russian telecommunications market has grown 15% per year in dollar terms and will continue to grow at this rate in future. The pace of growth may even increase, since Russians have recently shown a willingness to pay much more for convenient communications than in the past. Every three months, more than 1 million cell phones are sold in Russia while Internet use is increasing at an impressive rate. RF Minister of Communications Leonid Reiman has promised the 6 million Russians waiting in line for telephone installation that their orders will be filled in the next three years. Russians have even shown great interest in mobile satellite communications, which are unpopular in the rest of the world: in the third quarter of this year, the number of satellite subscribers in Russia increased 203%, the highest in the world. This interest in satellite telephones is probably due to the fact that 54 000 communities in Russia still have no telephone communications.
HISTORY: 1991-2000
In recent years, telecommunications have changed our lives beyond recognition. Today, we can learn the news on the Internet and read e-mail on cell-phone screens. All this is a product of the latest stage in the information revolution, which began ten years ago in Russia. In September 1991, the first cell phones appeared in Russia and the first web sites were set up.
1991
Delta Telecom, Russia's first cellular communications company, began operations in St. Petersburg in September. The joint venture of the American company USWest and the Leningrad City Telephone Network (Leningradskaya gorodskaya telefonnaya set) started selling mobile phones that weighed 5 kg and cost $1995; it also cost just as much to connect them. In spite of $60 rental fees and call rates of $0.60 per minute, which were outrageous service costs at the time, Delta Telecom connected at least one new customer every day.
Cellular communications appeared in Moscow in December, when USWest and the Moscow City Telephone Network (MGTS) set up the Moscow Cellular Communications (Moskovskaya sotovaya svyaz) joint venture.
1992
In September, Russian scientist Dmitry Zimin founded the Vympelkom company, with the participation of the Impulse Design Office (KB Impuls), the Mints Institute of Radio Engineering, and a number of other companies.
In December, the State Committee for the Management of State Property (Goskomimushchestvo) ordered to establish the state company AOOT Rostelekom. The new company united 20 regional companies providing television broadcasting and international telephone connections; Russian Federation property that had once belonged to Intertelekom, an association of all television stations in the former USSR, was included in Rostelekom's charter capital. The same order of Goskomimushchestvo regulated the procedure for privatizing Rostelekom.
1993
In April, the October Railway (OZhD), RAO High-Speed Line (RAO VSM), and the American company Andrew Corporation built the first Moscow-St. Petersburg fiber-optic communications line, with the Raskom joint venture as the operator. In 1997, Raskom's line was extended from St. Petersburg to the Finnish border. For Moscow companies, the line became the only alternative to Rostelekom as a communications link to Europe.
ZAO Mobile Telesystems (MTS) was registered in October. The company was formed by MGTS, Deutsche Telekom, Siemens, and several other shareholders. Four Russian companies owned 53% of the shares, and the two German companies owned 47%. When the government issued a license to MTS, it promised the company a ten-year monopoly on operations in the 900 MHz band (GSM standard) in Moscow and Moscow Region.
1994
In February, the All-Russian Coordination Center announced the privatization of AOOT Rostelekom, which had a monopoly on television broadcasts and international telephone calls. The company's employees received 24.086% of the preferred shares and 10% of the common shares, and the administration received 5%. Another 10% went to the share sale fund, 38% became federal property, and 22.014% of the shares were put out for an All-Russian voucher auction.
In June, the St. Petersburg Pay Telephone (Sankt-Peterburgskie taksofony) company installed a network of modern international card pay phones in St. Petersburg for the Goodwill Games. In spite of concerns about vandals, the new phones were destroyed even less often than ordinary coin pay phones.
In July, MTS and Vympelkom, which sold services under the Bee Line trademark, announced the start of operations of their cellular networks in Moscow within one day of each other.
In November, the Telekominvest holding was formed in St. Petersburg on the initiative of Valery Yashin, the head of the St. Petersburg Telephone Network (PTS). Its first shareholders were PTS, which owned 95% of the shares, and the Danish company Waza Invest Consulting, which owned the remaining 5%. The purpose of creating Telekominvest was to transfer the shares of joint ventures of St. Petersburg telephone companies to the holding's charter capital.
1995
In January, AFK (Joint-Stock Finance Corporation) Sistema bought a package of MTS shares from the Russian owners. DeTeMobil, a Deutsche Telekom subdivision involved in mobile communications, bought up shares in Siemens.
Starting on February 10, AO Vympelkom's well-known Bee Line logo gained wider distribution when members of Association 800 (Assotsiatsiya 800), an association of Russian AMPS operators, were allowed to start using the Bee Line trademark.
In March, the Moscow Science and Technology Committee and Co. (MKNT), which had been set up by the Moscow government in June 1993 and later reregistered as a fiduciary partnership, won an investment tender for 25% of the shares in MGTS. The tender terms contained a clause that allowed MKNT to demand an additional MGTS share issue amounting to 50% of the company's charter capital and transfer of the new shares to the investor after investing $105 million in developing the telephone company. After MKNT won the tender, analysts began talking about how the Mayor of Moscow had regained control over the telephone network.
AOOT Svyazinvest was officially registered on September 18. The company was headed by Aleksandr Lipatov, previously the deputy head of the privatization and property management department at the RF Ministry of Communications and one of the founders of the new holding. AO Svyazinvest's charter capital was formed by consolidating the federally owned shares of 85 joint-stock telecommunications companies. There were plans to put 49% of Svyazinvest's shares out for investment tenders before the end of the year.
In October, 46.67% of the federally owned voting shares of MGTS were transferred to Svyazinvest's charter capital by presidential decree.
In November, there was a redistribution of the shares of Telekominvest members. Waza Invest Consulting received 51% of the shares, which it transferred to the Luxembourg offshore company First National Holdings S.A., a Kommerzbank subsidiary. SPB MMT of St. Petersburg became a shareholder with 24% of the shares, and PTS retained 25%. PTS and MMT transferred shares of their own joint ventures, including cellular communications companies, to Telekominvest's charter capital.
On November 30, President Yeltsin signed the decree "On the Svyazinvest Joint-Stock Company." The decree gave the government until January 20, 1996 to increase Svyazinvest's charter capital by contributing 8.8% of the federally owned shares in PTS.
In December, the Italian state financial holding STET won a tender for rights to 25% plus one share of Svyazinvest for $1.4 billion. An authorized delegation from STET headed by Ernesto Pascale, the company's managing director, was in Moscow from December 18 to 20. Pascale held a series of talks with Anatoly Chubais, the first vice-premier of the Russian government; Vladimir Bulgak, the Minister of Communications; and Oleg Belov the general director of Rostelekom. At the last minute, STET presented a new set of demands for a payment plan for the Svyazinvest shares. The Russians rejected the demands, and STET refused to pay for the shares.
1996
In March, Nail Ismailov, the head of the investment policy department of the Ministry of Communications, replaced Aleksandr Lipatov as general director of Svyazinvest.
In April, shareholders at Svyazinvest's annual meeting were preoccupied with a dispute over the transfer of 8.8% of PTS's shares to the holding's charter capital. The board of directors approved an application to Goskomimushchestvo and the government to hold investment tenders in the fall for the sale of 10% of PTS's shares. If the application was rejected, the board members were prepared to challenge the transfer of the 8.8% in court.
In September, Russian NMT-450 operators announced the start of the Sotel project (Russian Cellular Telephones). About 20 operators signed an agreement on mutual automatic roaming.
In November, AO Vympelkom became the first Russian company since before the Revolution to list stocks on the New York Stock Exchange. The shares were circulated in the form of American depositary receipts (ADR).
1997
In March, the Ministry of Communications was abolished by presidential decree and reorganized into the State Committee on Communications and Informatization (Goskomsvyazi). First Deputy Minister of Communications Aleksandr Krupnov became chairman of the committee, replacing ex-Minister Vladimir Bulgak, who had been promoted to Vice-Premier.
In April, President Yeltsin signed a decree ordering the sale of 49% of Svyazinvest's shares according to the following plan: 25% plus one share to be sold at a money auction without investment conditions, and 25% minus two shares to be sold by commercial tender with investment conditions.
In June, the state-owned controlling shares in OAO Rostelekom, OAO Central Telegraph (Tsentralny telegraf), OAO Yekaterinburg Telephone (Yekaterinburgsky telefon), and OAO Giprosvyaz were transferred to Svyazinvest by presidential decree.
An auction for the sale of 25% plus one share of Svyazinvest was held in July. The winner was the Cyprus-based consortium Mustcom Ltd., which included ONEKSIM Bank, the Deutsche Morgan Grenfell and Morgan Stanley investment banks, and George Soros' Quantum Fund. Mustcom Ltd. offered $1.875 billion for the shares, compared to the $1.710 billion offered by the Dutch company Telefam BV, which included the Spanish communications company Telefonica, Alfa-Bank companies, the Media-Most holding, and Boris Berezovsky. Seventy-five percent minus one share remained state-owned.
The losers began an information war on ORT and in the Media-Most newspaper "Today" (Segodnya) targeted mainly at Vladimir Potanin, Anatoly Chubais, and Vladimir Bulgak However, the government did not reconsider its decision to sign a share sale contract.
On November 12, Aleksandr Krupnov spoke with journalists at Government House about plans for developing the domestic telecommunications industry in the next few years. The main objective of Goskomsvyazi's new strategy was to attract major foreign investors to Russian communications by setting up holding companies similar to Svyazinvest.
In December, the Ministry of Railways of Russia (MPS) approved the document "Main Development Objectives for Telecommunications" without making it public. The document upset the peaceful coexistence between Russian natural monopolies and allowed railways and communications companies to compete with one another. Under contract with Ericsson, MPS began to lay fiber-optic communications lines along railway tracks. The project was scheduled for completion in 2000, and MPS made plans to put several thousand km of fiber-optic lines into service in the next few years.
1998
In January, an extraordinary meeting of MGTS shareholders decided to allow the board of directors to increase the company's charter capital in the second quarter of 1998 by placing an additional share issue equal to 50% of the charter capital. According to the privatization plan for MGTS, the shares would be reserved for MKNT, which would then own a controlling share. However, this move was prevented by Ministry of Finance Instruction #14 of February 7, 1994, which stated that "Increasing the charter capital of a joint-stock company is not permitted without a reappraisal of the company's fixed assets as of January 11, 1994." MGTS's tangible assets had been appraised as of 1992.
In April, Dmitry Vasilev, the head of the Federal Securities Commission ruled that the legal rights to the controlling share in MGTS belonged to AFK Sistema subsidiary MKNT. The Commission based its decision on Presidential Decree #1210 "On Measures to Protect Shareholders' Rights."
On April 28, the licensing commission of Goskomsvyazi approved the results of a tender for the right to provide cellular communications services on the DCS-1800 digital standard (a federal standard; also called GSM-1800). The winning companies were Moscow-based MTT-Invest, which was a member of the Telekom Interregional Transit group (Mezhregionalny transit Telekom); Rosiko, a member of the Moscow-based AFK Sistema holding; and Vympelkom.
On July 17, the general director of AO Moscow Intercity and International Telephone (MMT), Boris Zverev, announced the merger of Rostelekom and MMT, which were part of the Svyazinvest holding. Prior to this, MMT had only been an intermediary between MGTS, the operator of the Moscow telephone network, and Rostelekom, the owner of the long-distance lines.
On August 4, Vice-Premier Boris Nemtsov ordered an amendment to KB Impuls's license allowing the Vympelkom subsidiary to operate in the 900 MHz band in addition to the 1800 MHz band already allowed under the license. Vympelkom had promised to pay the Russian Space Agency $30 million for the frequencies; the agency urgently needed money to fulfill international contracts.
On August 14, the government approved the conditions for an investment tender for the sale of 25% minus two shares of OAO Svyazinvest, which the Russian Fund for Federal Property (RFFI) had scheduled for October 16. The declared starting price for the share block was $1.035 billion, with an investment program budget of $516 million.
Aleksandr Nyago, the former general director of ZAO Northwestern GSM (Severo-Zapadny GSM), became the new general director of Telekominvest in September.
The auction for the sale of the next block of Svyazinvest shares was cancelled on October 13: primarily as a result of the August financial crisis, no one wanted to buy the shares.
Grigory Yavlinsky, the leader of the Yabloko faction in the State Duma, demanded proof of the amendment to KB Impuls's license from First Vice-Premier Yury Maslyukov, who confirmed the issue of additional frequencies with his predecessor Boris Nemtsov.
In November, Mobile Telesystems (MTS) sent a letter to the government demanding that it explain why Nemtsov had sold the Bee Line network the right to operate on the GSM-900 standard for $30 million. The government had originally guaranteed MTS a monopoly on GSM-900 operations in Moscow and Moscow Region.
In a live broadcast on the Ekho Moskvy radio station, AFK Sistema president Evgeny Novitsky threatened to sue Goskomsvyazi.
In December, the Norwegian company Telenor bought 25% plus one share in Vympelkom for $160 million.
1999
In February, the government passed a resolution stating that licensing tenders for GSM-900/1800 frequencies were obligatory only for "bands above 1800 MHz."
Oleg Belov, the head of Rostelekom, was elected general director of Svyazinvest in April.
In June, a government resolution named 59-year-old Aleksandr Ivanov, president of the little-known Russian telecommunications company Komet, as head of the State Committee on Communications and Informatization (Goskomsvyazi). He replaced Aleksandr Krupnov, who lost his job along with his mentor, Vice-Premier Vladimir Bulgak, when Sergei Stepashin became Prime Minister.
On August 25, Leonid Reiman was appointed head of Goskomsvyazi, replacing Aleksandr Ivanov, who had held the position for less than three months.
In September, the Association of GSM Operators sent a letter to Reiman complaining about the conduct of Goskomsvyazi's licensing commission. The Association had information that a number of operators holding GSM-1800 licenses in the regions, in particular, Vympelkom and Telekom XXI of St. Petersburg, had received additional permission to provide GSM-900 services.
In October, an extraordinary meeting of Svyazinvest shareholders dismissed general director Oleg Belov and appointed Valery Yashin as the new head of the company. Prior to his appointment, Yashin had headed PTS.
In November, President Yeltsin signed a decree reorganizing the State Committee on Communications and Informatization into the Ministry of Communications and Informatization of the Russian Federation (Minsvyazi).
2000
In February, the Swedish national telecommunications operator Telia bought 29.5% of the shares of the Luxembourg company First National Holding S.A., which owned the controlling share in the Telekominvest holding of St. Petersburg.
In April, the State Committee for Radio Frequencies (GKRCh) of the Ministry of Communications and Informatization halted further development of AMPS, D-AMPS, and N-AMPS operations in order to clear the frequency range for digital television systems.
In June, the Russian-Finnish company Sonic Duo received a license to set up a GSM-900/1800 cellular network in the Moscow region.
On June 16, the St. Petersburg Industrial and Construction Bank (Peterburgsky promyshlenno-ctroitelny bank) acquired a blocking share in Telekominvest, whose most valuable assets were Severo-Zapadny GSM (37% of the shares), St. Petersburg Pay Phones (Sankt-Peterburgskie taksofony, 51%), Peterstar (29%), and Delta Telekom (25%).
On June 30, there was an initial placement of MTS shares on the New Stock Exchange.
In July, a consortium of consultants headed by Arthur Andersen presented its analysis of scenarios for the future privatization of Svyazinvest. Not surprisingly, the consortium recommended that Svyazinvest do what it was already doing, i.e., amalgamate its subsidiaries and promote reform of the legal regulation system for the Russian telecommunications industry.
In September, MTS and Vympelkom received a letter from the State Communications Directorate ordering them to vacate several frequencies in the 900 MHz band. The recall was based on a letter from Anatoly Kvashnin, chief of the Armed Forces General Staff, in which he implied that Vympelkom should not have been given additional frequencies in this band.
In the same month, Boris Nemtsov, the leader of the SPS (Union of Right Forces) Duma faction, sent an open letter to Vladimir Putin requesting him to personally look into the seizure of frequencies from MTS and Vympelkom. As a result, the Minister of Communications and Informatization, Leonid Reiman, issued an order halting seizures of frequencies from large cellular communications operators.
Valery Yashin, the general director of Svyazinvest, said in October that he did not rule out the possibility that the government would reexamine the results of the privatization of MGTS. Svyazinvest owned 28% of the voting shares in MGTS, and MKNT owned 55.62%. Svyazinvest had lost control of MGTS in 1998, when MKNT placed an additional issue of MGTS shares.
In the same month, Reiman revoked the State Communications Directorate's order recalling frequencies from MTS and Vympelkom.
On October 18, Vladimir Potanin announced plans for restructuring the Mustcom Ltd. consortium, which owned 25% plus one share in Svyazinvest. According to Potanin, the Mustcom member companies, which included the Interros holding, Renaissance Capital Bank (bank Renessans Kapital), the Quantum Fund, the Sputnik Group (Gruppa Sputnik), and Morgan Stanley among others, would have to exchange shares in the consortium for shares in Svyazinvest.
On October 29, George Soros stated that he had no intentions of leaving Mustcom, which owned a blocking share in Svyazinvest.
In November, the management of Telekominvest announced that the Swedish company Telia would become the company's main partner. With Telia's support, Telekominvest planned to build GSM networks in the North Caucasus, various Siberian cities, the Far East, and the Volga region. Telekom's shareholders included First National Holdings Ltd. (85% of the shares), PTS (7.65%), and MMT (7.35%). First National Holdings was in turn owned by Kommerzbank (71.5%) and Telia (29.5%).
Svyazinvest made public its plan to reorganize 85 subsidiaries into 7 large operators with central offices in Moscow, St. Petersburg, Krasnodar, Nizhiny Novgorod, Novosibirsk, Yekaterinburg, and Khabarovsk.
In December, the government approved the Ministry of Communications and Informatization's development plan for the Russian telecommunications market to 2010.
by Ivan Cheberko
PRESENT
The Russian telecommunications market is full of startling contrasts. On the one hand, there are technically backward public network operators who are always complaining about the lack of money, a 6-million-long lineup of people waiting for telephone installation, and a Soviet quality of service. On the other hand, there are flourishing mobile communications companies that advertise on prime-time television and have no problem investing hundreds of millions of dollars in upgrading their networks.
According to information from Alfa-Bank, revenues of cellular communications operators will amount to 50% of all revenues in the Russian communications industry in 2002. Mobile companies also account for 64% of the capitalization of the entire sector, in spite of the fact that subscribers to traditional services outnumber cellular subscribers in all regions of the country.
Both mobile and traditional telephone companies are involved in selling communications services, mainly voice communications, so the gap between them has another explanation. First, the mobile communications operators offer services in line with the main trend in telecommunications, i.e., globalization and personalization, Wherever you are, you use the same telephone and the same number, a service that fixed-telephone operators cannot offer. Second, traditional operators are strictly controlled by antimonopoly agencies.
Local Fixed Communications
Large traditional wire communications operators-city telephone networks and regional telecommunications companies (Elektrosvyazi)-have been controlled by the state through the Svyazinvest holding since the mid-1990s. The exceptions are telephone companies in the national republics of Dagestan, Ingushetia, Tatarstan, Bashkiria, Komi, Tuva, Yakutia, and Chechnya, where telecommunications are controlled by the local authorities; the Moscow City Telephone Network (MGTS), which is controlled by the Moscow company AFK Sistema; and a number of other companies.
The main purpose of the section of the law "On Natural Monopolies" dealing with the regulation of large communications monopolies was to restrain these companies in order to give new alternative operators access to the market. This goal has been achieved, since according to information from Cominfo Consulting (Kominfo Konsalting), the revenue share of nontraditional operators on the traditional telephone market increased from 57.2% to 59.6% in 2000, and will increase even more this year.
A report prepared for a joint session of the boards of the Ministry of Communications and Informatization (Minsvyazi) and the Ministry for Antimonopoly Policy at the beginning of this year clearly defined the niche for companies regulated by the antimonopoly agency: "Traditional communications operators generally provide services to low-income users and offer services that are either unprofitable or marginally profitable, except for intercity telephone communications." Since they are excluded from the high-profit market sectors, traditional operators have become exclusively social companies, except in a few regions where they operate on a commercial basis.
A proven method of reviving a traditional telephone company is to sell a controlling block of its shares to a Western telecommunications company in return for major investment commitments. The investments allow the telephone company to bring services up to modern standards and diversify its services and revenue sources. This is the route taken by governments in the Baltic and Eastern European countries, but not in Russia, since it means a loss of state control over the communications infrastructure. At the end of last year, Svyazinvest's management presented its restructuring plan, under which 78 regional telephone companies would be amalgamated into 7 large companies operating within the federal districts rather than in individual regions of the Russian Federation. According to Svyazinvest, these consolidated companies will be easier to manage from a central office, and at the same time, will have easier access to foreign capital markets. So far, shareholders of telephone companies in six of the seven federal districts have voted for amalgamation.
Long-Distance Communications
Over the last ten years, OAO Rostelekom has monopolized the Russian long-distance market. It is generally regarded as the national intercity and international communications operator, although it has no such legal status in Russia. The company's monopoly has actually been eroding year by year due to the large number of legislative loopholes and the activities of alternative operators. Rostelekom's monopoly was granted by the state and is much more profitable than those of local operators, mainly because Rostelekom sets long-distance rates independently without asking permission from antimonopoly agencies.
Compared to other Svyazinvest companies, Rostelekom complies more fully with international corporate standards, which is why foreign portfolio investors have traditionally paid close attention to it. Foreign investors own 41.48% of the company's charter capital, while Svyazinvest owns a controlling share (50.67%). In April of this year, Minsvyazi and Svyazinvest, representing the state, guaranteed the extension of Rostelekom's monopoly for another four to five years.
The state is in no hurry to end Rostelekom's monopoly, not only because it is profitable, but also because the company fulfills a social function, e.g., providing communications for the military, and is involved in redistributing funds within the sector. Inflated international and intercity rates partially compensate local operators for losses.
Rostelekom is relying on the remaining four to five years of its monopoly to prepare for competition by consolidating its position within Russia, e.g., in the areas of state-of-the-art Internet services and IP telephony, and enter the international routing market. As a result, Rostelekom faces a major reorganization, whose final form will be approved at the end of next year, although structural changes are already underway. In November, the company's board of directors decided to reduce the number of branches, so that in 2003, there will be one branch in each of the seven federal districts instead of the current 24 regional branches.
Departmental network operators will likely try to compete with Rostelekom on the long-distance market. The largest of these networks is Transtelekom, built by the Ministry of Railways (MPS). Transtelekom was set up in 1997 with the aim of improving MPS's information technology infrastructure; the company's telecommunications network is built along railway right-of-ways and now extends more than 40 000 km. Transtelekom's shareholders are 17 Russian railways that each own 3% of its shares, for a total of 51%; the remaining 49% are managed by Digitech Holding Ltd., a Cyprus-based offshore direct investment fund. Two years ago, Transtelekom's management made plans to sell 49% of its shares to a strategic investor who would provide about $800 million for developing the network, but they are still looking.
The Mirtelekom group of companies is also a potentially influential player on the long-distance market. Antel Holdings Ltd., a member of the MENATEP group, recently bought up a controlling share in Mirtelekom's member companies, including shares in Raskom, the owner of the Finland-St. Petersburg-Moscow fiber-optic communications line built jointly with the October Railway (Oktyabrskaya zheleznaya doroga).
Power companies are also involved in building communications infrastructure. In November 1999, RAO UES of Russia (RAO EES Rossii) announced the formation of the ENIFKOM (Energy, Information, and Communications) holding, which is supposed to operate the communications systems already built by RAO UES subsidiaries. Lenenergo alone has 800 km of fiber-optic cable lines, 200 km of copper wire lines and 11 radio-relay links extending more than 100 km in St. Petersburg and Leningrad Region; it also operates a trunk-line system and two automatic telephone exchanges (ATS).
At present, departmental network operators do not have the full operating licenses needed to attract investment and start competing on the long-distance market, and will not get them as long as the state maintains Rostelekom's monopoly.
Mobile Communications
The most successful and promising area of the Russian telecommunications market is cellular communications. In spite of the fact that, at 15-20 cents per minute, cell phone calls in Russia are no cheaper than in rich countries, the number of cell phone users is increasing faster here than anywhere else. In the third quarter of this year alone, Russians bought more than 1 million mobile phones, and the number of subscribers is expected to reach 7 million by the end of 2002. More than 80% of subscribers use telephones operating on the worldwide GSM standard.
The Russian mobile communications market is dominated by the Moscow-based companies OAO Vympelkom, which owns the Bee Line networks, and OAO Mobile Telesystems (MTS) and the St. Petersburg holding Telekominvest, which sells services under the Megafon trademark. Together, they control more than 72% of the market.
MTS is the largest of the three leading companies with 2.5 million subscribers, followed by Vympelkom with about 1.8 million subscribers and Telekominvest with about 750 000. The large gap between the MTS-Vympelkom duo and Telekominvest is due to the fact that in recent years the number of mobile system users has been growing fastest in Moscow, where 52% of all subscribers live, whereas the Megafon network only started operations in Moscow in November 2001.
However, Megafon has a licensing arrangement that allows it to provide services on 82% of the Russian Federation. Telekominvest has strengthened its position in the last year and a half, no doubt helped by the presence of members of the St. Petersburg telecommunications industry in top positions at Minsvyazi, Svyazinvest, and Rostelekom.
Scandinavian operators predominate among foreign companies on the Russian cellular market. For example, the Norwegian company Telenor is Vympelkom's strategic partner, and the Swedish company Telia and the Finnish company Sonera are partners of Telekominvest. MTS's major foreign shareholder is the German company Telekom.
Despite the success of mobile communications in Moscow, analysts believe that the market for cellular services in the capital is nearly saturated and the main potential for growth is in the regions, where spending power increased noticeably in the time of high energy prices. As a result, in 2001, operators began actively constructing networks in the regions and wherever possible, buying local GSM operators. This past year, Vympelkom announced it would spend up to $337 million on the Vympelkom-Regions project [including $220 million from the sale of Alfa Group (Alfa-grupp) shares], which involves constructing networks in four federal districts. MTS has built and recently launched a network in St. Petersburg and has concluded negotiations to acquire a controlling share in Kuban GSM, the fourth-largest Russian operator in terms of number of subscribers. Telekominvest, which gained entry to the Moscow market by acquiring control over Sonic Duo, has launched networks in the North Caucasus and a number of cities in the Volga region and has promised to invest $600 million in developing regional networks. Due to the unprecedented activity of large operators, 2001 was a record year for setting up new GSM cellular networks.
by Ivan Cheberko
TRENDS
The government is carrying out major reforms in all areas of public wire communications, from rate policy to consolidation of telephone companies into one operator for each federal district. Nevertheless, private operators will remain the growth engines of the telecommunications industry in the next few years.
State Companies
The state will be the major player on the Russian telecommunications market in the next few years, and companies that are managed through the Svyazinvest holding and control the main communications infrastructure will remain state-owned. Minsvyazi will control other market sectors by licensing its participants.
Certain changes may be made on Russia's accession to the World Trade Organization (WTO), since membership in the WTO implies liberalization of the market for services such as long-distance communications and a change in licensing procedures, i.e., transferring licensing functions from the corresponding ministry to an independent agency. Of course, Russia will try to specify certain conditions for the telecommunications industry during negotiations on WTO accession, for example, allowing foreign companies to offer services in Russia only if they set up a subsidiary there with Russian participation and granting Rostelekom a ten-year monopoly. However, there is no guarantee of success.
The telecommunications industry is generally considered to be a successful sector of the Russian economy; however, this success is mainly due to private companies that sell new kinds of services. Traditional telephone companies that serve most of the population and operate the main infrastructure are becoming poorer. According to Minsvyazi, the return per ruble invested in facilities of traditional operators was 0.48 ruble in 1995, but only 0.3 ruble in 2000.
Last December, the government approved a development plan for Russian telecommunications to 2010 prepared by Minsvyazi. According to the main points of the plan, there should be 36.9 million telephones in Russia by 2005 (there were 32.8 million at the end of 2001) and 47.7 million by 2010. At the same time, the number of mobile communications users will increase to 9.24 million by 2005 and 22.2 million by 2010. The number of Internet users will be 6 million by 2005 and 26.1 million by 2010. The estimated cost of the program is $33 billion.
This program is probably a conservative forecast of development in the industry. At the end of November of this year, Minister of Communications and Informatization Leonid Reiman spoke of plans to install 2 million new telephones in the coming year, which means that by the end of 2002, there will already be 34.8 million telephone lines in Russia, only 2.1 million less than the number planned for 2005. This is the yearly installation rate, assuming it remains the same. In the mobile communications sector, the number of subscribers is increasing by more than 1 million per quarter, which means that the target of 9.24 million for 2005 will be reached by the end of 2002. There are already more than 7 million cell phone users in Russia. As for Internet users, according to data of the Monitoring.ru group, 6.6 million people used the Internet at least occasionally in February 2000, which is already more than Minsvyazi's forecast of 6 million users by 2005.
Thus, Reiman will probably be able to announce fulfillment of the five-year development plan within three years at the outside and even overfulfillment in the case of mobile communications and Internet use. However, quantity is one thing but quality is another. Sizable investments are needed to develop basic communications infrastructure in Russia, but so far, these investments have not appeared. The main problem here is that rates for traditional communications services are strictly controlled by antimonopoly agencies.
Along with consolidation of operators this year saw the beginning of the rate reform, which implies increase of telephone rates to cost level (an increase of 20-25%). Further the rates will gradually include the investment component. However, according to Vadim Belov, the deputy director of Svyazinvest, "rate reform is complicated by the fact that there is no independent regulatory agency. A regulator that is answerable to the government inevitably makes decisions based on politics."
However, a change in regulatory principles is not the only thing facing large operators. At the end of August of this year, the board of Minsvyazi approved the draft bill "On the Introduction of Amendments and Additions to the Law 'On Communications'", in effect, a new version of the law. Among other things, the bill proposes the creation of a general-purpose service fund (FUO), into which 3% of the earnings of all communications operators in Russia would be transferred monthly. The exceptions would be companies that operate separate engineering networks or special-purpose networks. Companies operating in all telecommunications sectors, including the major cellular communications companies, would contribute to the fund. This is an accepted practice in many countries; for example, in the US, the public service fund collects from 4.7% to 5% of the amounts have to be paid by users.
The fund would be used to finance unprofitable activities of traditional telephone companies, which would continue to assume social responsibilities, such as installing telephones in rural areas, selling services to nonprofit organizations, and providing a basic set of telecommunications services of a specified quality to users in a given period and at an affordable price. Today, operators have to compensate their losses themselves by raising prices for corporate subscribers and for long-distance services; however, if the bill is passed, they will be compensated from the service fund. It is also proposed to spread the "social" burden equally among all market participants.
Private Companies
GSM cellular operators have been the leaders of the telecommunications industry for several years. Their success shows that the communications market is both rapidly growing and attractive to investors. The main trend in the cellular communications sector today is towards centralization of cellular companies, which was especially noticeable this year. At the beginning of the 1990s, Minsvyazi issued licenses for network construction in individual Russian regions, since at the time there were no investors willing to invest in constructing a country-wide network. By 1998, when people's ability to pay had increased and the investment climate had improved, the Ministry began to issue licenses for larger regions corresponding to the present-day federal districts. Today, cellular communications companies have ambitions to expand throughout the country.
MTS, Vympelkom, and Telekominvest intend to become national GSM operators and are extending their influence by either obtaining licenses for still-undeveloped areas or by buying local GSM operators. As a result, the only relatively large provincial operator that is still not affiliated with any of the "big three" is SMARTS in the Volga region.
Large Russian cellular communications companies themselves became foreign investors this year. This fall, MTS obtained a license to build a GSM network in Belarus and committed itself to investing up to $200 million in the network over a period of ten years. Telekominvest obtained the right to build the first GSM network in Tajikistan.
MTS and Vympelkom are also the only Russian companies to have placed their shares on the New York Stock Exchange, the largest and most demanding exchange in the world.
In September of this year, the tenth anniversary of cellular communications was celebrated in St. Petersburg, and Valery Yashin, the head of Svyazinvest, predicted that within two years mobile telephones would outnumber fixed telephones in Russia. This prediction is realistic if the number of cell phone connections increases at the same rate as in the last two years. However, foreigners are less optimistic. For example, the American company Pyramid Research has forecast that there will be 14 million cell phone users in Russia by 2006, which is 2.5-3 times less than the number of ordinary telephones, and less than in Poland. Another company, UFG Research, has predicted that only about 6% of Russians living outside of Moscow and St. Petersburg will be using cell phones by 2005. However, up to now, all forecasts relating to the cellular market in Russia have proved to be overly pessimistic.
The three large GSM operators, MTS, Vympelkom, and Megafon, represented by two of its companies, Northwest GSM (Severo-Zapadny GSM) and Sonic Duo, are competing for the right to build so-called third-generation (3G) mobile communications networks in Russia (GSM belongs to the second generation). In theory, 3G has almost unlimited communications capabilities; for example, information can be transmitted through these networks at speeds of up to 2 MB/s, and the owner of one of these telephones will be able to use it to watch television.
MTS, Vympelkom, and Megafon are members of the National Association of Third- Generation 3G Communications Operators. The Ministry of Communications and Informatization has still not specified the conditions for issuing 3G licenses, although 3G networks are already being built in many countries and the world's first sales of 3G services began in Tokyo this fall. Many cellular company representatives estimate that if construction licenses for 3G networks are issued in Russia next year, the first of the new-generation systems could start operating by the end of 2003 on a semicommercial basis.
In addition to cellular communications operators, so-called alternative operators are becoming more conspicuous players on the Russian telecommunications market. In contrast to the slowness and technical backwardness of traditional telephone companies, new companies like Comstar (Komstar), Sovintel, Global One (Global Odin), Kombellga, Telmos, MTU-Inform, and others can provide their clients with high-quality fixed communications. According to Cominfo Consulting (Kominfo Konsalting), these companies sold $350 million worth of services in Moscow last year.
Office communications have always been a traditional activity of alternative operators, which is understandable, since corporate clients typically request services such as videoconferencing or high-speed Internet on a dedicated channel. However, MTU-Inform and Komstar have recently started focusing their attention on the home sector. MTU-Inform, for example, has provided services for all Donstroi apartment buildings, and Komstar has done the same for the community of Kurkino. These companies are calculating that affluent homeowners appreciate the potential of modern digital communications and are prepared to pay an alternative operator more rather than using the services of the Moscow City Telephone Network (MGTS). Thus, with time, alternative companies may become operators in elite residential areas as well as in offices.
by
Ivan Cheberko
All the Article in Russian as of Dec. 24, 2001
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