Telecommunications 2000-2004
The Russian telecommunications market is growing at almost the same rate as resource industries: for three years in a row, its turnover has increased approximately 40% per year. The speed of development is governed by two factors: the evolution of new technologies, primarily cellular communications and the Internet, as well as an underdeveloped telephone infrastructure, which guarantees a high level of pent-up demand. During Vladimir Putin's first term as president, telecommunications market volumes nearly tripled from $4.5 billion to $12.9 billion. The capitalization of many of the telecommunications companies whose shares are quoted on stock markets has increased ten times since 2000. The industry's share of total GDP increased from 2% in 2000 to 4% in 2003. Experts, including RF Minister of Information Technologies and Communications Leonid Reiman, say the industry is capable of sustaining high growth rates for the next few years.
History: 2000-2004
In the years of Vladimir Putin's leadership, the Russian telecommunications market has grown and visibly changed. It has become centralized and clearly structured, and revenues have been redistributed among its participants.
Growth
The main event on the Russian telecommunications market in recent years is the emergence of the cell phone as Russians' primary means of communication. The number of “handsets” surpassed the number of ordinary telephones last November, when there were 31.5 million of the latter in the country.
The growth of the business of mobile communications operators is stunning: whereas Mobile TeleSystems (MTS) celebrated the appearance of its one millionth subscriber with great pomp in 2000, today, even the twenty millionth is no longer a reason for celebration – multimillion subscriber bases have become the norm for cell phone companies. Neither analysts nor the operators themselves foresaw such growth rates. A comparison of predictions from four years ago with today's results shows that in key indicators mobile operators have exceeded the most daring expectations by 2.5-3 times. Today this phenomenon can no longer be explained solely by higher than expected incomes of the population, but also by a tangible change in consumer priorities. Russians have begun to spend a larger percentage of their incomes on communications than before. Many years of marketing efforts by cell phone operators and rapid development of technologies have also had an effect.
Four years ago, a cell phone was a status symbol. Today it is a mass-market product. The scope of the main market participants has changed accordingly. In 2000, MTS and Vympelcom shared only the Moscow market. Neither of these networks operated even in St. Petersburg, and their foreign owners had still not decided whether to build networks in the regions at all. Today, the so-called “big three” cell phone companies – MTS, Vympelcom, and Megafon – have covered nearly all of Russia, own the largest operators in the CIS countries, and are already checking the prices of Eastern European and Middle Eastern cell phone companies.
The lightning-fast and nearly simultaneous expansion of the “big three” into the regions was a clear signal to regional cell phone companies. Their only goal became a profitable sale of assets to one of the three large operators. And a strategic sale at that – until the large operators built their own infrastructure in the region and won over subscribers. As a result, the Russian cellular communications market quickly became centralized.
Performers
The alignment of forces on the cellular communications market reflects the present-day structure of the entire telecommunications market. You could call it tripolar, since three business groups control most of the market.
The largest in terms of revenues and asset value is AFK Sistema. According to official information, the controlling interest in this company belongs to Vladimir Evtushenko, the only Russian oligarch in the top ten who did not earn his fortune in the resource industry. Sistema owns a controlling interest in MTS, the Moscow City Telephone Network (MGTS), and a number of large alternative conventional operators, i.e., MTU-Inform, Comstar, Telmos, and Golden Line (they are currently being merged). Skylink, which is building a new-generation mobile communications network in Russia, is one of Sistema's smaller but very promising projects. The value of Sistema's telecommunications assets is close to $7 billion.
In many respects, administrative resources, particularly Vladimir Evtushenko's close relationship with Yury Luzhkov's family, contributed to the formation of Sistema's telecommunications empire. This played a decisive role in the early stages of development, when, for example, MTS received a license to construct a GSM network in Moscow with a guarantee of a ten-year monopoly (although this condition was later removed). However, in recent years, when the battlefield of telecommunications groups expanded to include the entire CIS, strong management became the main factor in Sistema's growth.
The second-largest group on the Russian telecommunications market today is connected with Mikhail Fridman, the head of Alfa Group. Market participants like to tell the story of how Dmitry Zimin, the founder of Vympelcom, was at some out-of-town reception and using his inherent talent as a convincing storyteller, described the role of telecommunications in society in the not-too-distant future to Fridman. This was how Mr. Zimin found an investor for constructing regional networks and how Mr. Fridman found a profitable way to invest money. Since then, Alfa has only been buying telecommunications assets, positioning itself as a strategic investor. This is despite the fact that in other industries Alfa adheres to a different business style: first get into the business, then leave it a few years later after recording a profit. When asked whether he was prepared to sell one of the blocks of a cell phone company's shares being contested by rivals, Vadim Kucharin, head of the Alfa Telecom holding, replied shortly: “At the present time, there's nothing more attractive for investment than mobile communications.”
Alfa Group owns 25% of the shares of mobile operator Vympekcom and 30% of the shares of alternative operator Golden Telecom. Through the company Alfa-Eko, the financial and industrial group controls OOO TsT Mobile, which owns 25.1% of OAO Megafon. Alfa Group also owns 50.1% of the shares of the Ukrainian company Storm; and through it, 40.1% of the shares of mobile operator Kievstar GSM. Analysts estimate the total value of Alfa's telecommunications assets at nearly $3.2 billon.
The extraordinary activity of the group's lobbyists during development and passage of the new law “On Communications” in spring and summer 2003 is an indication of the seriousness of Alfa's ambitions. The lobbyists' goal was obvious: weaken the influence of the Ministry of Communications on the market by taking away a number of key functions from it, particularly control of frequency resources and issuing of licenses. According to some reports, the idea for the operation came from Dmitry Zimin, who became involved in social and political activities after leaving Vympelkom and selling most of his shares. Mr. Zimin has often publicly criticized both the management plan for the telecommunications market and the actions of ministry officials.
Alfa's lobbyists lost the fight in the Duma, without achieving anything except a scandal. It could not have been otherwise. When Vladimir Putin came to power, representatives of the St. Petersburg group occupied key positions in the industry's leadership. Its leader was the Minister of Informatization and Communications, Leonid Reiman, who became head of the industry two weeks after Vladimir Putin was appointed prime minister in 1999. Reiman's administrative authority was most apparent during the spring administrative reform. Within a few weeks, the abolished Ministry of Communications was revived on the prime minister's arguments about the paramount importance of informatization and communications.
The third large business group controlling the Russian communications market is the so-called St. Petersburg group. On becoming the industry leader, they formed a ready-made team. They set up a large number of commercial communications companies in St. Petersburg, attracting reliable, mostly Scandinavian investors. The St. Petersburg group's main business unit was and is the Telecominvest holding, which centrally manages telecommunications companies in various lines of activity from the payphone business to digital television.
The group's administrative capabilities helped a lot. In less than two years, the cellular operator Megafon, controlled jointly by the group and the Scandinavian company TeliaSonera, became the first company to have a license package for all of Russia.
Megafon is the only one of the “big three” whose shares are not quoted on the stock market. There were plans to place them last year, but a dispute between the company's owners interfered. LV Finance, which owns 25% of Megafon's shares, suddenly decided to sell the entire block last year to Alfa-Eko – a strategic partner of Vympelcom and thus a direct rival of Megafon. The scandalous details of the deal soon became known: it turned out that LV Finance had an obligation to sell its Megafon shares to the offshore company IPOC, which had close ties with Telecominvest. IPOC is currently contesting the sale of the Megafon shares to Alfa-Eko in international courts. This has been the most notorious scandal on the market in recent years.
It is worth noting separately that the St. Petersburg group has a 50% share in Skylink's charter capital through offshore structures. The remaining shares belong to Sistema. Equal participation in a potentially major project shows that the St. Petersburg group and Sistema are closely associated.
Experts estimate the value of the assets controlled by Telecominvest's owners at $700-800 million. At the same time, many of them note that the St. Petersburg team controls the finance flows of companies belonging to Svyazinvest, although the holding itself is 75% state-owned. Today, Svyazinvest controls most regional operators of conventional public switched networks. Under the leadership of Valery Yashin, who became head of Svyazinvest in 1999, the company began a reform program that will be completed this year. In terms of the main indicators, Svyazinvest's progress in the years the St. Petersburg team managed it is obvious. Capitalization increased from $1.6 billion in fall 2000 to the current $3.6 billion. Experts consider rate reform that brought public service rates up to cost to be one of Svyazinvest's important achievements in recent years (although not only the company itself, but also the industry's entire management team deserves credit for this). This is changing the nature of Svyazinvest's business as it gradually converts from a social company to an array of commercial structures.
Non-performers
Although the most important events on the telecommunications market are occurring in the area of mobile communications, the large players have not lost interest in conventional communications companies. As the popularity of the Internet increases, there is increasing demand for the infrastructure of fixed-wire operators; therefore, companies that set up and maintain traditional wire communications networks are an essential element of large telecommunications holdings.
According to a range of indicators, the number of Russian Internet users is increasing at rates comparable to the development dynamics of the cellular market. Based on last year's results, there were 8.4 million regular users of the Russian Internet segment, a 40% increase compared to 2003. Internet traffic volumes in the Russian Internet segment increased 180% in 2003.
Development scenarios for the telecommunications market mention a figure of 26.1 million users by 2010. In reality, the number of Internet users will probably be 30-32 million according to estimates of the Ministry of Communications. The low popularity index of the Internet in the country – 5.8 users per 100 people – indicates impressive prospects for increased revenues from the global computer network.
Therefore, Svyazinvest, whose subsidiaries own a developed wire infrastructure, is arousing the interest of large market participants. In addition to the prospects related to wire technologies, Svyazinvest's companies in a number of regions (Siberia, Urals, and Volga) are also maintaining their positions on the most profitable market today – cellular communications. In 2003, the holding's companies earned a total of nearly $300 million from mobile communications, or 9% of total revenues.
Today, Svyazinvest is the only substantial asset on the communications market that is not controlled by private capital. Although the dates and forms of the sale of the holding's shares have still not been set, representatives of Alfa and Sistema have already officially announced their intention to take part in the auction. Of course, the contenders are waiting with great impatience for information on the size of the share block being put up for sale. Specifically, the block in question may be 25% minus two shares (for many years now, this package has been added to the annual privatization plans and then eliminated). There are unlikely to be many offers for it, since it would give virtually no rights to its owner. However, Minister of Communications Leonid Reiman has said that the government is considering various privatization scenarios for Svyazinvest, including the sale of a controlling interest.
American financier George Soros recently became disillusioned with the holding's prospects. This year, Soros decided to sell his blocking parcel of Svyazinvest shares, which he had owned for nearly seven years since the holding was privatized. Soros sold the shares at an enormous loss for $620 million – he had bought the shares in 1997 for $1.875 billion. George Soros deservedly called this project “the worst investment of my career”.
&
People Who Have Left the Scene
Aleksandr Goncharuk
Aleksandr Goncharuk has been called one of the principal authors of AFK Sistema's success on the telecommunications market. In the mid-1990s, the Moscow corporation was involved in many different lines of activity – from insurance to gas stations. On his own initiative, Aleksandr Goncharuk began developing the telecommunications line, becoming head of the subsequently formed Sistema Telecom holding. In the seven years that Mr. Goncharuk devoted to communications at Sistema, the company gained control over its key assets – the cell phone company Mobile TeleSystems (by the time Goncharuk left, its market capitalization was $6 billion) and the Moscow City Telephone Network (and through it – control over MTU-Inform, Telmos, Comstar, and others). Today Aleksandr Goncharuk heads OAO Science Center Concern (Kontsern Nauchny tsentr) located in Zelenograd, through which Sistema controls the shares of 15 electronics companies. Goncharuk says this is the second major turning point of his career at Sistema: “In 1996, I was in the insurance business and everything was fine, but at a certain point when the business was in place and everything was working, I got bored and wanted something new. So I became involved in telecommunications. It's the same now: I think we already have everything in place in telecommunications and the results are there. They needed to set up a business in Zelenograd, and I wanted to go there.”
Dmitry Zimin
Although he no longer manages Vympelcom or talks to the press, Dmitry Zimin, the company's founder is still the best known person in Russia from the cellular communications world. Zimin began building up Vympelcom when he was 59 without any previous business experience. Zimin had spent most of his working life at the Mints Radio Engineering Institute, where he was occupied with the theory and technology of radar antennas. Dmitry Zimin's resignation as Vympelcom's general manager was announced in May 2001. On the same day, it was learned that Alfa Group would become a strategic investor in the company. Zimin sold part of his shares in Vympelcom to Alfa for $24.7 million. However, it would not be quite correct to say that the founder of Vympelcom has retired on a pension, since he remains president of the company and is a major shareholder (he owns about 10% of the shares).
Aleksandr Nyago
The head of the Telecominvest decided in 2001 to make a fundamental change in his life and left both the company and the industry. Immediately after leaving Telecominvest, Nyago became head of the TVEL power engineering holding. His resignation was somewhat unexpected, since high-ranking members of the St. Petersburg telecommunications group rarely quit their jobs without apparent reasons or clear comments. As a result of this mysterious resignation, there was speculation that Aleksandr Nyago had not found a common language with younger managers of the post-Soviet generation who appeared in large numbers among the St. Petersburg group in those years.
Leonid Rozhetskin
Russian-American financier Leonid Rozhetskin is remembered for a deal with Megafon shares. Rozhetskin sold the business to LV Finance and along with it, sold a block of Megafon shares to Alfa-Eko, which was actually a rival of Megafon (Alfa Group is Vympelcom's largest shareholder and strategic partner). Another Megafon shareholder, IPOC Fund, alleged that at the time of the deal with Alfa-Eko, IPOC had bought out virtually all of the Megafon shares from LV Finance. Leonid Rozhetskin also had a prominent role in the privatization of Svyazinvest in 1997. Rozhetskin, who was executive director of Renaissance Capital Bank at the time, was the one who arranged the deal to acquire 25% of Svyazinvest's shares for George Soros. Leonid Rozhetskin had advised Soros on issues of investing in Russia, and it is quite possible that he inspired the billionaire to buy Svyazinvest. As is well known, Soros incurred enormous losses from this deal.
George Soros
The American financier decided to quit the Russian telecommunications market as suddenly as he entered it. Despite the economic upturn underway in 1997, no one imagined that the state could receive $1.875 billion for 25% of Svyazinvest's shares or that Soros would provide most of this money. Soros' agents said at the time that the financier had acquired the asset for the sole purpose of increasing its value. However, the August crisis the following year lowered the value of Svyazinvest's assets. It must be said that George Soros proved to be a patient investor. When members of the Mustcom consortium, which had bought Svyazinvest on a sharing basis with him, got tired of waiting for Svyazinvest to go up in price, Soros bought out their shares. Then he waited another four years, and when Svyazinvest's shares actually began showing good growth rates, he sold his block for $620 million, explaining his action as a dislike for President Putin's political regime.
&
People Who Have Arrived on the Scene
Maksim Gorokhov
Maksim Gorokhov, Telecominvest's general manager, belongs to the new generation of senior telecommunications company executives without a long career in the industry behind him. He graduated from a St. Petersburg polytechnical institute in the 1990s and became an investment banker. From 1993 to 1998, he was president of Evropa Capital Bank and then became a partner of the Energomashbank investment group. Maksim Gorokhov came to Telecominvest in fall 2000 as director of corporate finance. He became head of the holding in May 2002.
Aleksandr Izosimov
Aleksandr Izosimov quite unexpectedly became general manager of Vympelcom last August. He is a former senior executive of the Mars food company, who had nothing to do with telecommunications. The 39-year-old businessman rose very rapidly. A graduate of the International Agrarian Institute (MAI) in Moscow and holder of an MBA from the French business school INSEAD, he started at Mars in 1996 after five years of working in the offices of the consulting firm McKinsey & Company in Stockholm and London. He was Mars' general manager for Russia and the CIS until 2001, when he became a member of Mars' global management board for the CIS, Central Europe, and Scandinavia in charge of more than 20 regional markets. Izosimov explained his decision to accept Vympelcom's offer by the fact that the cellular communications market in Russia was starting to resemble a conventional market for mass-produced inexpensive goods, so his experience at Mars stood him in good stead there.
Vasily Sidorov
Vasily Sidorov, a vice president of SistemaTelecom, replaced Mikhail Smirnov as president of MTS last summer; Smirnov had headed the company from the time it was founded. Sistema's shareholders explained that it was time for a change of leadership: the infrastructure of MTS' network was more or less complete, and the time had come for routine management of business processes. For this, they needed another type of manager. Vasily Sidorov is 32 years old; he is a graduate of the Moscow State Institute of International Relations (MGIMO) and the Wharton Business School of the University of Pennsylvania. Before coming to Sistema Telecom, he was deputy general manager of OAO Svyazinvewst.
Mikhail Fridman
The head of Alfa Group and one of its principal co-owners is the only prominent Russian oligarch to become active on the telecommunications market in recent years. Fridman began buying up communications assets in 2001. At that time, Alfa acquired large blocks of Golden Telecom and Vympelcom. Mikhail Fridman had been interested in communications before this – Alfa Bank was a member of the TeleFAM consortium that had fought for 25% of Svyazinvest's shares in 1997. However, the company offered less than George Soros and lost the auction. Today, Alfa's telecommunications assets are worth $3.2 billion. To all appearances, Mikhail Fridman is planning other acquisitions in this area. An Alfa official recently announced that the group was interested in acquiring shares of Svyazinvest at an upcoming investment tender.
&
by
Ivan Cheberko
All the Article in Russian as of June 21, 2004
|
