The Russian Telecommunications Market Development in August 2006

The saturation level of the Russian cellular communications market at the end of the 2^{nd quarter 2006 (according to amount of SIM cards)}

Amount of subscribers 140.3 mln

Penetration Level 96.6%

Increase of subscriber base + 8.2 mln

Volume of the increase by the 2nd quarter 2005 0.679

Penetration Level growth + 5.6%

By the end of the 2nd quarter 2006 the penetration level of cellular communication on the Moscow market has achieved 146.9%, in St. Petersburg and the Leningrad region 126.8%, on regional markets 88.0%

Penetration level

                                     2nd quarter 2006 Growth in the 2nd quarter 2006

Moscow and the Moscow region 146.9% 7.4%

St. Petersburg and the Leningrad region     126.8% 5.7%

Region of the Russian Federation 88.0% 5.4%

By the end of the 2nd quarter MTS subscriber base has increased up to 48.0 mln subscribers (the increase in the 2nd quarter about 2.2 mln), Vimpelcom’s subscriber base has increased up to 46.9 mln subscribers (the increase about 2.1 mln), MegaFon’s subscriber base has grown up to 25.9 mln (the increase about 1.8 mln)

Within the 2nd quarter 2006 subscriber bases of the Moscow region cellular operators has increased by 1.26 mln subscribers and reached 24.98 mln. The volume of the subscriber bases increase in the 2nd quarter 2006 has decrease by 14% as compared to the 2nd quarter 2005.

By the end of the 2nd quarter 2006 MTS subscriber base in the Moscow region has increased up to 10.64 mln subscribers (the increase about 0.39 mln), Vimpelcom’s subscriber base has grown up to 9.79 mln (the increase about 0.27 mln), MegaFon’s subscriber base has increased up to 4.33 mln subscribers (the increase 0.59 mln).

Within the 2nd quarter 2006 subscriber bases of St. Petersburg and the Leningrad region cellular operators has increased by 0.36 mln subscribers and achieved 8.04 mln.

In the 2nd quarter 2006 on the market of St. Petersburg and the Leningrad region as well as on the Moscow market the decline in volume of the subscriber bases increase was observed as compared to the same period of the previous year. In the 2nd quarter the volume of the subscriber bases increase was 84% of the increase volume in the 2nd quarter 2005.

By the end of the 2nd quarter 2006 in St.Petersburg MTS subscriber base has increased up to 2.59 mln subscribers ( the increase in the 2nd quarter 2006 about 0.06 mln), MegaFon’s subscriber base has increased up to 2.95 mln subscribers ( the increase about 0.10 mln), Vimpelcom’s subscriber base has grown up to 1.84 mln subscribers ( the increase about 0.15 mln).

According to the information of Advanced Communications & Media Consulting, in July 2006the amount of subscribers in Russia achieved 143.070 mln, having increased by 2.850 mln since June 2006. The cellular communications penetration level has increased up to 98.55 as compared to 96.6% in June. By late July in Moscow and St.Petersburg the subscriber base volume was correspondingly 25.299 mln and 8.272 mln subscribers as compared to 24.926 mln and 8.108 mln in June. The penetration level in Moscow and St. Petersburg was correspondingly 149% and 130.5% as compared to 146.8% and 126.9% in June. Thus, pure increase in Moscow was 373.000 and in Petersburg 164.000. Both figures was lower then those in June: 407.000 in Moscow and 209 in St. Petersburg. In July pure increase of the subscriber base in Russia was divided as follows: MTS 41.4%, MegaFon 27.4 %, Vimpelcom 8.85 of increase of the total subscriber base. Other operators got 22.4%. As a result by late July the subscriber base of the Big 3 operators (MTS, Vimpelcom and MegaFon) has been the following (figures in June in brackets): MTS – 49.192 mln (48.043 mln), Vimpelcom – 47.149 mln (46.905mln), MegaFon – 26.687 mln (25.928mln). In July the market of Russia was divided among operators as follows: MTS – 34.4% (the market share increase by 0.1% as compared to June), Vimpelcom – 33.0% (the share decrease by 0.5%), MegaFon – 18.7% (the share increase by 0.2%). Other operators owe 13.9% ( the share increase by 0.2%).

In July 1 2006 SMARTS subscriber base was 3.293 thousand subscribers, the increase by 45% as compared with July 1, 2005. In the 1st half of 2006 pure increase of SMARTS subscriber base was 492.000 subscribers and due to that SMARTS managed to increase its market share by 0.7% despite the presence of MTS, Vimpelcom and MegaFon on regional markets. In August the subscriber base growth was more then 70.000 subscribers and as a result in August 23, 2006 the total amount of SMARTS subscribers was 3.45 mln. Increase of the number of commercial SMARTS subscribers in 2006. For the 1st half of 2006 amount of GSM basic stations has increased up to 2.098. In July 1, 2006 the total SMARTS network capacity was about 4 mln subscribers. According to the results of the 1st half of 2006 the aggregated revenue of SMARTS has increased by 11% as compared to the same period of the previous year and has been 98 mln USD.

According to the results of Internet audience poll, carried out by Sotovik, the information and analytical agency, in August the most popular phone model was Nokia N80. Nokia has also kept leadership as a producer. The demand in price segment of over 400 USD has increased most (+4%), The demand in price segment 301-400 USD has grown by 1%. The largest demand decrease has been observed in price segment 201-300 USD (- 4%).

The common innovation for all cellular operators has become an increase of marketing actions as a response to CPP principle introduction. First the operators set the connection charge, then instead of it they increased the cost per minute of a talk and then simultaneously they offered various bonuses and discounts.

MTS has given discounts on night and weekends talks, on intranet outgoing calls in rush hours and while using MTS Numbers and Favourite Numbers. MegaFon has given the discount White Nights similar to Night Talks of MTS and also introduced the bonus system for subscribers of “Light” prepayment tariff plans. The bonus system is used by Bee Line ,too. Regional operators are working the same ways. For instance, SMARTS intends to cancel fee per second from the first minute of a talk for some tariffs. Utel (Uralsvyazinform) has raised the cost per the first minute, except for intranet calls. Tele2 has introduced a new tariffs line, less profitable for outgoing calls then the line, offered before.

Because of the capitalization decrease of its telecommunications subdivisions MTS and Komstar, in the 2nd quarter 2006 System got pure loss of 14 bln roubles according to RSBU (Russian Accounting Standards) . In the 2nd quarter 2005 System got pure profit of 8.9 bln roubles. According to System’s analysts the loss is connected to overestimating of shares in MTS (52.8%) and Komstar-OTS (51%) as in the 2nd quarter Russian MTS and Komstar quotations were falling.

MTS informes, ARPU in the Russian Federation has reached the limit of decrease and should be flattened out at level of the 1st quarter 2006 (6.2 USD). In the 4th quarter 2005 it was 7.3 USD, in the 1st quarter 2005 it was 9.1 USD. In Ukraine these figures were 7.5, 9.1 and 10.0 USD correspondingly. MTS intends to hold ARPU in Ukraine at level of the 1st quarter 2006 (7.5 USD). A new president of MTS Leonid Melamed plans to increase proceeds by 10-15%, to hold ARPU at the level of the 1st quarter (about 6.2 USD per month), and also to hold profitability according to OIBDA on the level of the previous year, no lees then 50%.

In the first half of 2006 MTS proceeds according to RSBU were 48 bln 652.2 mln roubles, that is more by 59% then the figure at the same period of the previous year (30 bln 661.2 mln). The cost price has increased by 63.24% up to 17 bln 859.4 mln roubles as compared to 10 bln 940.0 mln roubles. The sales income has increased by 56.2% up to 19 bln 501.4 mln as compared to 12 bln 481.8 mln. The profit before taxation has been 2.5 times as much up to 18 bln 792.6 mln roubles as compared to 7 bln 587.3 mln. Within the 1st half of the year the short term debt of MTS has increased from 20 bln 391.7 mln roubles to 28 bln 437.1 mln roubles. The long term debt has increases from 76 bln 71.3 mln roubles to 89 bln 32.3 mln roubles. The short term obligations has increased from 22 bln 014.8 mln roubles to 41 bln 290.2 mln roubles. The account payable has grown from 20 bln 240.7 mln roubles to 22 bln 361.5 mln.

The cellular operator MegaFon has published results of the 1st quarter 2006 according to US GAAP. According to the quarter results, MegaFon’s proceeds are 700.2 mln USD. It can be compared to figures of MTS and Vimpelcom: 929 mln USD and 871 mln USD correspondingly. Volgatelecom Ltd has published a financial statement. on the 1st half of 2006. The proceeds are 10,170.3 mln roubles, while income from the communications service has reached 9,602.8 mln roubles. The pure profit is 1,482.2 mln roubles.

Uralsvyazinform has introduced the statement of unfunded and financial results for the 1st half of 2006. The proceeds have increased by 16.5%, reaching 15,620.8 mln roubles. The pure profit is 1,571.4 mln roubles. The proceeds from the communications operators have increased by 51.9% up to 2,687.3 mln roubles. The proceeds of the GSM operators are 4,4 times as much that is 4,806.3 mln roubles. That was contributed by joining Uralsvyazinform by the subsidiary cellular operators Ermak RMS, the South-Ural Cellular Phone and Tumenruskom, and also by increase in the amount of mobile subscribers by 44.5% up to 4 051.9 thousand users.

According to the information of iKS-Consulting, since the expansion to the CIS countries in 2001 Russian operators have spent 1.38 bln USD on purchase of local companies.Vimpelcom and MTS has invested about 700 mln USD each in the cellular market of the CIS. For the 1st half of 2006 the operators’ subscriber bases in the CIS have increased as follows: Vimpelcom by 69%, Megafon by 24%, VTS by 16%. Since early 2006 the amount of cellular communications subscribers in CIS has increased by 21 %. Vimpelcom activated significantly in the 2nd half of 2005 – 1st half of 2006.But the company’s share in the CIS subscriber base is not so considerable while MTS is leading due to the Ukrainian market, where the company has been working since 2003.

According to general director of Vimpelcom Alexander Izosimov, the company can buy the Kirghiz cellular communications company Sky Mobile, a subsidiary of the Russian Altimo, one of Vimpelcom’s shareholders. Though the negotiations about Bitel’s property assignation to Sky Mobile are not over, partners of Bitel has already received the information about rewriting of its property on Sky Mobile. The other Vimpelcom’s shareholder Telenor is watching the situation and reminds that the possible buying of Sky Mobile by Vimpelcom must be founded economically as it was with URS buying.

A new version of the law “On Advertising”, having come into force since July 1, 2006, prohibits telecommunications companies to spread an advertisement without a preliminary agreement of a subscriber.

In September the State Duma deputy M. Korobov is planning to put for discussion draft amendments to Article 2 of the law “On Communications”, according to which the possibility to declare a communications operator considerable shall be spread on all participants of the telecommunications market. Thus, the Big3 operators (MTS, Bee Line and MegaFon) can be declared considerable, too. In that case they must take a separate stock of their incomes and expenses, and their intranet tariffs will be regulated by Rossvyaznadzor.

The Ministry of Information Technology ad Communications decided to postpone on six years the introduction of the principle of possibility for a cellular communications user to be transferred to other operator, holding a mobile number (MNP). That was first mentioned by Leonid Reiman on the Russian Economic Forum in April 2005.

Svyazinvest is lacking in the forecast plan of the federal assets privatization for 2007, confirmed by the Russian government by the order of August 25, 2006.

Minister of Economic Development German Gref does not exclude, that Svyazinvest privatization will not take place. According to his words, the situation has not been defined yet, and different variants are still been worked over. But for all that he emphasizes, that though the decision of Svyazinvest privatization has not been made yet, in 2006 they must make a decision about excluding of the company from the list of strategic enterprises. In his opinion, privatization is the most optimum alternative: it is necessary for the whole state holding of Svyazinvest to go private at the rate 75% minus 1 share.

FAS (the Federal Antimonopoly service) has filed a charge against MTS, Vimpelcom and MegaFon with having breached Article 6 of the Federal Law of March 22, 1991 #948-1 “On Competition and Limitation of Monopolistic Activity in Commodity Markets”. Article 6 provides a number of prohibitions, regarding agreements and concerted practices between economic entities. That was caused by the agreement of the operators, concerning establishing interconnect tariffs for each other and third-party players. According to FAS, that put obstacles for regional operators in the way of entering the mobile communications market. In response to FAS activity several federal operators has stated that establishing of lower tariff was conditioned by wide practice of discount use for bulk buyers. In experts’ opinion, that will, probably, be disputed in court.

According to FAS, the department will conclude regarding the information, introduced by MTS, Vimpelcom and MegaFon about simultaneous first minute cost increase after pronouncing of a judgment on the case, concerning interoperators payments between the Big 3 participants. Rossvyaznadzor has not carried out the decree of the Moscow Arbitrage, which in August 18 obliged it to give Vimpelcom a license for work in the Far East. The Court invalidated the April order of Rossvyaznadzor, refusing the company to licensing. The court decreed to oblige Rossvyaznadzor to give the license within 10 days from the date of the decision taking. The term was over in August 28. The Far East is the only federal region, Vimpelcom is lacking a license in.

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According to the information of MGTS, CPP principle introduction has led to decrease of traffic volume from wired phones to cellular phones by 30% in July as compared to July 2005, taking into account season and total dynamics of wired operators’ traffic. At that in July MGTS sent 1.8 mln bills as compared to 380 bills in June 2006. In August the traffic volume is being grown again.

In August 8 during the talk with President V.Putin president of Alfa-bank Petr Aven stated, the group intends to found a large telecommunications company, having main assets in Russia, in which Alfa group will be a leading shareholder. According to his words, this kind of business is being actively developed in the company. In autumn 2005, in particular, the group bought 13.2% of Turkcell in Turkey. But primarily Alfa would like to be a Russian company and also shows interest to the CIS. According to commentators, Aven’s words are not in accord with the last year’s statements of the main co-owner of Alfa Mikhail Fridman. He stated, he would like to create a global operator on the basis of a large multinational company. In July 31 it became known officially, that 100% shares of the federal retailing network Ultra had carried over to Euroset Holding, which would invest in further development of the network and would be its logistic operator. Former president and general director of Ultra Temur Amidjanov and Sergey Vilski have been included in the board of directors of Euroset. The brand of Ultra, independence of the trade and marketing policy and the personnel have been held.

The group of companies Dixis has declared the results of regional development in 2006. Since the early 2006 the retail network of digital technics shops, working under Dixis brand, has increased by 70% up to 1201 shop. Dixis shops work in 73 regions of the Russian Federation as compared to 57 in early 2006. By the end of the year the company will have started working in 4 more regions minimum, own shops will have been opened in 7 new regions. In regions the market share of Dixis is from 10% to 25%. By the end of the year the company hopes to cover no less then 15% of the Russian market of cellular retail. Since 2006 Dixis network has been working in all federal regions of the Russian Federation. The company has opened 11 sister companies, own private shops and more then 500 shops of franchising partners. The largest sister company is the North-Western company.

The telecommunications holding Telenor has bought 100% shares of the Serbian cellular operator Mobi 63 (Mobtel before) for 1. 513 bln euro. MTS also pretended to the operator.

Kievstar GSM, the Ukrainian operator of cellular communications, has refused Euroset to the possibility of work as a Mobile Virtual Network Operator (MVNO) in the own network. According to Kievstar, having studied working experience of virtual operators in Ukraine and overseas, the company concluded, that currently the cooperation with MNVO-operators is inexpedient from the marketing point of view.

In August 14 a new structure of the corporate management was confirmed in MTS. The united managerial center of MTS is divided on the corporate center “MTS groups” and three subdivisions: MTS Russia, UMS and Foreign subsidiaries. According to the information from the company, they believe, that will lead to reduction in personnel and managerial expenses. The new structure of management has been created to raise the operative efficiency and decrease managerial expenses. The personnel reduction must contribute to recovery of the operator’s economic efficiency. Reductions in the Corporate center will concern 3% of MTS personnel, but in future they can be more significant.

A new position, vice-president on operations, has been introduced in Vimpelcom. Peter Kovell, since 2004 having worked a general director on operations of the Bulgarian Telecommunications Company, has been applied for the position.

Euroset has ceased connecting clients to the network of the cellular operator Tele 2. Six months ago Euroset cancelled a bonus for sellers in its outlets for Tele 2 contracts sale. According to the company, it is not profitable to sell Tele 2 contracts as if a client, connected by a dealer, does not speak a certain number of minutes, the dealer is obliged to give a bonus back to the operator. It concerns almost half of connections. In 2005 Euroset agreed with such conditions as they and Tele 2 were planning to found a Mobile Virtual Network operator (MVNO), working in Russia and the Baltic countries, but the plans has not been realized. In 2005 Euroset sold about 80 thousand contracts of Tele 2 monthly, before the New Year Holiday it sold about 100 thousand.

Chairman of Euroset board of directors E. Chichvarkin has raised claims to Nokia, concerning, as he confirms, the facts that the company does not deliver fashionable models, plans to give a profitable business to the other company and has not chosen Euroset as its distributor in the CIS. To influence Nokia the employees has been offered to put Nokia phones’ instructions away, take the phones away and sell them only on customers’ persistence.

The lot of 117 thousand Motorola phones, arrested in March 29, 2006, has been returned to the rightful owner, the company Euroset, Both parties has stated, they are glad to resume the relations and intend to forget the incident.