The Russian Telecommunications Market Development in December 2006

According to the assessment of the Ministry of IT and Communications by the end of the 3^{rd quarter of 2006 the Russian cellular market coverage has been 146.9 mln people and the penetration level has been 101%.}

By the preliminary estimate of the Ministry of IT and Communications according to the results of 2006, the cellular communications penetration level must be more then 100 phones per 100 people and the amount of subscribers will be over 150 mln people. According to the forecasts of the Ministry, due to the market saturation subscribers amount growth will not be as rapid as before. Cellular companies development will be now assessed according to their financial figures.

In 2006 cellular operators have mainly finished their assets consolidation after the market growth slowdown. They paid more attention to the structure of expenses and financial planning. For instance, MTS has minimized investment and reduced their expansion in the CIS in contrast to Vimpelcom and MegaFon.

For the lack of summary data later then the 2nd quarter of 2006 the results of the Sotovik’s selection survey could be interesting. According to the survey, carried out in different regions of the country, 56% men and 53% women have cellular phones. 21% and 25% correspondingly have one phone in a family. 23% and 22% have no phone. Among owners of a cellular phone there are 72% aged 20 and before, 50% aged 30-35, 19% aged 50+. Among cellular phone owners there are 38% having an income of 500 USD and less, 39% having an income of 500-900 USD, 62%, having an income of over 900 USD. 72% men and 67% women use cellular communications daily: 38% and 44% no more then twice a day, 29% and 31% no more then 5 times a day and 33% and 25% - five times and more.

According to analysts’ assessment, in 2006 the cellular phones sales volume will be 10% lower as compared to 2005, i.e. about 29 mln phones. Besides, the cellular retailing market, divided by the 5 large players, has recently attracted attention of cellular operators and large electronics sale networks. Western companies have small chances on the Russian market as there are strong local companies, having strong local brands and routine business practice that reflects specific character of existence on the market.

According to the poll, carried out by Sotovik, by the end of 2006 the most popular cellular phones models in Russia were Nokia 1110, Nokia 8800, Sony Ericsson K750i, Sony Ericsson K790

In 2006 the Russian retailing showed a new tendency: specialization in certain phone models. For instance, Euroset is specializing in different models of Samsung and Motorola.

The launch of Sistema Telecom’s through brand and the presentation of MTS rejuvenated brand have become one of the most outstanding events on the Russian telecommunications market. That was the first such a project in Russia. In experts’ opinion, that means following the direction of the largest worlds telecommunications holdings, a new stage in the global strategy of development of the Group and the companies included.

Since the beginning of the year Sotovik has introduced a unique catalogue of Russian cellular operators for their services ultimate consumers. The catalogue covers all major companies of cellular communications.

MTS and MGTS are starting providing a new joint service “mobile home (phone)”, that allows to use a single number for mobile and home phones both.

In December 22 on the New York Stock Exchange Russian companies’ share prices were the following: MTS – 50.2 USD, Vimpelcom – 79.0 USD

According to IKS-Consulting data, for the 3rd quarter of 2006 the subscriber base of the CIS cellular operators has grown by 6% as compared to the previous quarter and has become 210 mln subscribers. The share of the Russian Federation in the CIS base is stable (slightly more then 70%).

1. Russia                                   146,9                                        101

2. Ukraine                                39,9                                         84

3. Kazakhstan                           7,0                                           47

4. Byelorussia                            5,5                                           56

5. Azerbaijan                        2,7                                           33

6. Georgia                               1,9                                           43

7. Uzbekistan                          2,1                                            8

8. Moldova                          1,3                                           38

9. Armenia                             0,9                                           28

10. Kirgizstan                         0,9                                           18

11. Tajikistan                   0,7                                          10

12. Turkmenistan                      0,2                                            3

MTS                                  7 0.479,011           11                          10

Vimpelcom                        52. 381,5               19                          20

MegaFon                           28.187,6              16                          32

Growth rate of MegaFon and Vimpelcom subscriber bases in the CIS has exceeded (doubled in MegaFon) the same figures in Russia. For 2006 Vimpelcom has hold a record of the CIS, entering markets of 5 countries: Ukraine, Uzbekistan, Georgia, Tajikistan and Armenia.

Vimpelcom has claimed about launch of the network in Georgia (Mobitel). The network is ready to introduce 3G services for 300 000 subscribers, and for 1 mln subscribers in prospect.

In December the coverage area of Bee Line in Ukraine was extended up to the territory, where 84% population lives.

Alfa Group has claimed they intend to invest about 2 bn USD in telecommunications and other sectors of Indonesia. At the meeting with head of Alfa Bank Petr Aven president of Indonesia Susilo Bambang Udoiono welcomed the Russian holding’s initiative and promised support on the governmental level. Alfa claimed they speak of investment in mobile communications, but currently they do not have an ironclad agreement. Analysts say, the Indonesian market attraction causes serious competitiveness for mobile communications assets between the largest European operators. Such a large investment projects are evidence of realignment of Altimo investment policy: Russian market is becoming of secondary importance.

The Ministry of IT and Communications of Russia is negotiating conditions of entering the Chinese market by Russian cellular companies. According to deputy minister Boris Antonuk, they can speak of foundation of joint ventures of Russian operators and Chinese communications enterprises. However, in accordance with the Chinese legislation, at present foreign companies are prohibited to take part in cellular business, so prospects of the negotiations are vague.

The Ministry of IT and Communications has announced conditions of a tender for 3Gservices introduction. They plan to give three licenses for the services providing and further the 4th or the 5th licenses may appear depending on spare frequency resource. Receiving of applications for 3G licenses will begin in January 16 and last for 30 working days, winners will be defined in April 20, 2007.

The Federal Service on Tariffs has approved 3 types of tariffs for MGTS subscribers: normal, combined and unlimited. The tariffs system changing also concerns cellular communications users.

In late November the information that head of the Federal Agency of Communications (Rossvyaz) Andrey Beskorovani had resigned, was spread. Later the information was refuted. The body, headed by Beskorovaini, deals with frequency distribution. Some market participants believe the spread of the information about possible resignation of Rossvyaz head, could be promoted by Beskoovaini’s opponents in the Russian TV monopoly RTRS, that is struggling with Rossvyaz for choosing a digital-broadcasting format.

Nikolai Mezhuev, a former deputy director of the Moscow branch of Center Telecom was assigned a new minister of IT and communications of the Moscow region.

The Ministry of Economic Development has published a new plan on reorganization of Svyazijnvest, the main prospective object of privatization in the sector. They propose to combine Svyazinvest and its subsidiaries into one company by exchanging of the holding shares for MRK (interregional companies) securities. According to the Ministry’s preliminary assessment, 42-51% votes in the new company can be received by the state (now 75% minus 1) and 13 % can be received by the Cyprian Mustcom, belonging to a co-owner of Access Industries Leonard Blavatnik and an owner of Renova Victor Vekselberg (25% + 1share). Thus, Svyazinvest will change from a managing company into an operational one. The second step of the reform concedes return to a holding structure. Though subsidiaries will be identified according to functions, not to a geographical principle.

The market analysts note that the offered scheme is contrary to Svyazinvest authorities’ position, which recalls its representatives from MRK boards. Svyazinvest is planning to halve the staff of the managing company. It is known, in the nearest future the amount of the holding departments will be reduced from 20 to 9, and the number of employees will be halved almost. In the opinion of the holding authorities, such measures are necessary to raise dividends for the state, the major shareholder of the company.

By the results of the previous year , according to cellular operators and experts, CPP principle introduction was a major regulating decision. According to the data of VCIOM (the Russian Centre of Public Opinion Study), more then 70% of questioned operators and subscribers consider the principle true. The capital operators’ attitude to CPP has been more positive then that of regional operators.

CPP principle introduction has caused to considerable changes in payments between operators of cellular and wired communications. As a result, tariffs for connections between operators have been done transparent and clear enough, contributing to the general market conditions improvement.

Some regional operators think, the introduction has led to more expensive mobile communications for subscribers. Capital operators point to the problems they had with FAS. MegaFon has not settled the problem so far.

Moscow mayor Luzhkov and the Consumers Societies Confederation have complained of new tariffs of MGTS and claimed their intention to address to FAS.

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Three operators of Big3 (MTS, Vimpelcom, MegaFon) has already stated about their participation in the tender for receiving of three 3G licenses.

Three largest regional operators of cellular communications have claimed about foundation of a joint company for participation in the tender for receiving a license for 3G network construction. The aggregate coverage area of the new alliance (Setevaya Company: Tele2, SMARTS and Novaya Telefonaya Company) includes 36 subjects of the Federation. Besides, the alliance participants have made agreements with operators of about 20 regions more. According to CEO of SMARTS Andrey Girev, the new company is ready to invest more then 1 bn USD in the first stage of the 3G network construction.

In addition to assessment of the largest cellular operations effect, experts point to success of the Sweden telecommunications company Tele2 in Russia. In the 3rd quarter Tele2 subscriber base increased by 711 000 users, and within the year the subscribers number has doubled. In June Tele2 launched the network in the Lipetzk region, in July the company bought shares of Indigo (the brand of the American corporation MST Corp), an operator, providing cellular services in 4 large Northern regions: Arkhangelsk, Novgorod, Murmansk and Komi republic). In December the operator began to provide services of cellular communications to the population of Siktivkar and Komi republic.

A new direction was founded in Vimpelcom Directory for work with key clients – the Directory for Corporative Sales of the Moscow region. The new body was headed by Andrey Pyatahin, having been working in Vimpelcom since 2001. According to his words, the nearest plans of Vimpelcom include considerable strengthening on the market of Moscow and the region by the Directory structure development, strengthening methods, having shown their efficiency, and more attention to large clients.

Oleg Bliznuk, former CEO of Vimpelcom Ural regional branch, has been assigned CEO of Armentel. His duties include strategic development of business and efficient management issues.

Dmitry Baklanov, a former director of Vimpelcom Tumen branch, has been assigned regional director on the Ural region.

Since December 22, 2006 VolgaTelecom board of directors has stopped authorities of L. Kormilitzina and A. Ganeeva as members of the board of directors. Vladimir Ulyanov, deputy CEO on security, has been assigned a member of the board of directors.

Euroset company has terminated Tele2 services promotion in its saloons. The company’s contracts are still in Euroset assortment, but sellers will not recommend them to customers and explain tariff plans peculiarities. Eldar Razroev, president of Euroset, says the reason for the denial is disloyal attitude of the operator to the retailer. Tele2 assesses such actions as blackmail.

The market analysts note, such tactics is typical for Euroset. The same actions were undertaken toward Samsung, Nokia and other operators in some regions. Euroset also fought with MTS and Bee Line. Experts supposes, the conflict will be settled. However, the operator can suffer more damage as a quarter of its services is sold in Euroset saloons. At the same time Tele2 sales take only 1-2% of the total sales volume in the retailer’s saloons

The Russian holding Altimo, managing telecommunications assets of Alfa Group, proposed the Norwegian colleagues from Telenor to discuss a possible exchange of assets. CEO of Altimo Alexey Reznikovich sent a letter with the offer. Altimo offered to exchange its 43.5% of Kievstar for 26.6% voting shares of Vimpelcom, belonging to Telenor. An opposite variant is also possible: the Norwegians get control over Vimpelcom and Altimo gets 100% of Kievstar. Telenor representatives note, shares exchange in Vimpelcom and Kievstar is not a single variant. The potential deal conditions are vague. But analysts suppose, in case of the assets exchange, the conflict will be settled, that will contribute to the Russian operator capitalization.

SMARTS shareholders have been offered to sell 97% shares of the company for 500-800 mln USD (closer to upper figure). According to CEO of SMARTS Andrey Girev, the decision about assets sale can be made by late January 2007. A buyer’s name is not mentioned by the company, it is known the deal must be profitable enough for a potential investor. The market analysts point to the Sweden Tele2 as the most probable buyer of SMARTS shares, supposing the Volga region company is not very interesting for Big3 operators.

The Supreme Court of the Bermudas has rejected Alfa Groups claim, concerning prohibition for the investing fund IPOC to participate in a trial in New York on a charge of fraud of affiliated with Alfa people. Now the process in the circuit court of the Southern county of New York, begun in June 8, 200, can be wakened on condition that IPOC guarantees, they will not reveal materials, concerning some certain defendants by July 1, 2007.

In June 8 2006 IPOC filed an action to the circuit court of the Southern county of New York in accordance with the Racketeer Influenced and Corrupt Organizations Act (RICO) to Alfa Group authorities regarding their actions with cellular companies assets. The defendants are chairman of Alfa Group board of directors Vikhail Fridman, a former owner of 25.1% of MegaFon shares Leonid Rozhetzkin, president of alfa Bank Petr Aven, the American company Capital Markets IN., Alfa Telecom (now Altimo) and a former head of the Zurich company Von Meiss Blum&Partners, being an agent in the sale of 25.1% of MegaFon shares in 2003, Hans Bodmer. The claim says that Rozhetzkin and Fridman invented a scheme, allowing Rozhetzkin to get means of IPOC. Fridman could to get control over IPOC assets through close natural persons and companies. IPOC demands of the defendants to return of 25.1% shares of MegaFon and pay compensation of 150 mln USD. However, the claim has not been considered as at the instance of CT-Mobile, belonging to Alfa Group, the Supreme Court of the Bermudas prohibited IPOC and any affiliated company as well as their representatives to claim for 25.1% shares of MegaFon in degrees of jurisdiction. In the opinion of many analysts, the dispute problem can be only settled due to an agreement of lawsuit between the parties.

In Moldova Vimpelcom has lost in the tender for introduction of the 3rd line of GSM 900/1800 cellular communications to the Moldavian- Cyprian company Eventis Mobile. However, there is an informal opinion that the Russian operator MegaFon may stand behind the company.