The Russian Telecommunications Market Development in March 2006 

1. The General Trends of the Market Development

1.1. The Saturation Rate of the Cellular Communications Market

The detailed assessment of the cellular communications market development in March has not been published yet.

In February the amount of the mobile communications users in Russia increased by 1.14% (129.64 mln), the penetration level reached 89.7% as compared to 88.3%. By the late February in Moscow 136.8 SIM cards have fallen on 100 people, in St. Petersburg 120 SIM cards have fallen on 100 people.

The Siberian regional representative office of MegaFon has launched a network in the Norilsk industrial district and the Taimir autonomous region.

Sibirtelecom has launched a cellular communications network of a new standard in Tomsk.

DIXIS company, a federal cellular retailer, and the Saratov largest network of communications saloons Marconi have made a franchise agreement. Due to that by the end of 2006 30 saloons under DIXIS brand will have appeared in Saratov and the Saratov region. Lately that has been the third such deal with large regional networks. A week before a franchise contract with the federal cellular operator was made by the Kazan retailing network of home electronics DOMO. This deal will have added 60 new saloons to the company by the end of the year. By the end of the year 75 DIXIS saloons more will have been opened in the Far East. That has become possible due to the agreement with the regional saloons network DalTelecom, made more then a month ago. These agreement has become realization of the strategy on seizure of a maximum share of the retailing market with the help of partnership with regional leader, stated by DIXIS in the beginning of the year.

VolgaTelecom has initiated introduction of the common product brand among affiliated GSM operators in Tatarstan, Mordoviya, the Orenburg region, the Ulyanovsk region, the Saratov region. Uniting the subsidiaries under the common brand, VolgaTelecom expects to continue the process of creating of a united GSM operator in the Volga region.

1.2. The offer of standard and new services

Recently no less then 10 new model of brightly designed phones and smartphones, costing 400 USD approximately and equipped with a large assortment of various functions, have appeared on the market. In this case the general trend of the market development is making a phone an inalienable element of image.

The quick change of models leads to losses of companies’ retailing dealers. For 2005 the total of losses from depreciation of the cellular phones store has exceeded 150 mln USD because of quick reduce of prices, especially in the first months of a model sale.

1.3.The Main Companies Potential (capitalization, profit)

By the end of the 1st quarter (April 4) MTS capitalization in RTS system has been 13,435 mln USD on the classical market and 371,755 on the exchange market.

Within the whole March (from February 28 to March 31) MTS shares were holding the 6th place in the list of 10 leaders of sales on the classical market and on the exchange market as well. On the classical market their share was 2.69 % (the 1st place was held by Gasprom shares – 43.4%), on the exchange market the share was 4.16% (the 1st place was taken by RAO EES Russia – 9.53%).

However, in the late March MTS shares quotations went down considerably. For March 27-28 the company’s shares have dropped by more then 9%, and in March 29 shares of MTS main shareholder Sistema started going down significantly, too.

In March 28, according to results of the tender on the London Stock Exchange, Sistema’s capitalization reduced by 4.62%, and MTS capitalization reduced by 2.7% on the New York Stock Exchange. In total, for two days MTS has lost 1.3 bln USD of capital value, and Sistema has lost 757 mln USD. For the last week of March ADR of MTS has gone down by 7.7%.

The decline was provoked by the financial statements for the 4th quarter of 2005 and for the whole 2005, published by MTS. In the 4th quarter the company’s proceeds reduce by 3.8% as compared to the 3rd quarter (up to 1, 332 mln USD) and the net profit went down by 30.2% (up to 242.6 mln USD).

MTS operational figures have also gone down in Russia. ARPU has reduced from 8.9 USD to7.3 USD per month for the quarter, and MOU has gone down from 130 to 123 minutes per month. The last fact is, as a rule, explained that due to a subscriber base extension, it involves more and more poor population because of an impulsive connecting stimulating by special campaigns. The own MTS forecasts for 2006, where in particular, the company promised to reduce its economic efficiency, have also contribute to the decline. The market disillusionment has been also caused by MTS authorities’ confession, that even such forecast was made without taking into account some negative factors, the abolition of fee for incoming calls, for instance.

However, analysts are quite unanimous, believing, the decline will be over soon, and after that shares of MTS and Sistema will be actively bought in on the market.

MTS competitors, Vimpelcom and MegaFon have not reported for 2005 yet. But the events, concerning MTS, have resulted in reduction of Vimpelcom ADR quotations by 5.3%.

The Central Bank of Russia has included MegaFon and Vimpelcom in the list of companies, whose bills of exchange can be taken for their credits security and that can also be warrantors at bills of other issuers.

In March 22, 2006 Euroset financial director Ruslan Gareev stated, the company would enter the securities exchange in the 4th quarter of 2006 already. Earlier Euroset stated, the initial distribution of securities would be carried out in 2007-2008. They plan to distribute 10-15% shares and earn approximately 200 mln USD.

MMVB has admitted VolgaTelecom’s funded debts of BT-2 and BT-3 series to the tender. The amount of BT-2 bonds is 3 mln, the nominal value of a bond is 1, 000 roubles, the total volume is 3 bln roubles. The amount of BT-3 bonds is 2 mln 300 thousand, the nominal value is 1, 000 roubles and the total volume is 2 bln 300 mln roubles.

During the visit of President of Russia Putin to Hungary they have reestablished activity of the Russian-Hungarian Intergovernmental Commission on Economic Cooperation. Minister of Information and Communications of the RF L. Reiman has become chairman of the Russian part of the commission. “The Memorandum on Main Directions of Economic Cooperation between the RF and the Hungarian Republic for a Medium-term Prospect” was signed at both presidents’ presence. According to the document, cooperation in the field of information technologies and communications has been among one of the priorities.

The negotiations about an access of Russian communications workers to the Chinese market, held during the visit of Russian president to Peking, did not concern the cellular communications in particular. The Chinese Part has just promised to “update” this issue.

Inform-mobil company is the first of Russian content- and service-providers to enter the cellular market of Georgia, making an agreement with Magticom operator on providing of mobile services line.

Since April 1, Vimpelcom will have established Bee Line brand at the Ukrainian market. Vimpelcom’s new subsidiary The Ukrainian Radiosystems, a participant of the conflict among Vimpelcom and Telenor, will provide services under the brand.

2. The Regulator Activity and the Legal Field Dynamics

2.1. News in the Legislation and Other Changes in the Legal Field

In March 6 President of the RF Putin signed the Federal Law “On Introduction of Amendments to the Article of the Federal Law “On Communications”, passed by the State Duma in February 8 and approved by the Federation Council in February 22.

The Moscow Regional Duma has passed a law on providing disabled and veterans with free cellular communications in case of impossibility to set wired communications to them, at expenses of the region. The cost is 360 roubles per month.

2.2. The State Assets and Svyazinvest Privatization

The decision making on Svyazinvest’s state holding privatization has been still delaying. They have made a decision to postpone an auction on selling of Uralsvyazinform’s and CenterTelecom’s state holdings. The companies are interregional operators of Svyazinvest.

2.3. The Legislative and Law Enforcement Authorities’ Evaluation of Legality of the Deals Held

In March 29 in Sheremetyevo airport officers of the Ministry of Internal Affairs detained the lot of Motorola mobile phones, weighted 99 tones and numbered 167500 phones, having been sent from Singapore to Euroset company.

Regarding the problem Euroset has made an official statement, in which the company charges officers of the law enforcement bodies with non professionalism, and also supposes an attempt to terminate the company’s activity by competitors.

According to the statement, for the 1st quarter of 2006 Euroset has imported independently more then 1 mln 300 phones and paid 3 bln 500 mln roubles of customs duties and taxes to the state budget. Meanwhile, the import of small lots of mobile phones, not designed for use in Russia (bought in United Arab Emirates and Hong Kong, as a rule), and the “grey” import of large lots of phones to the North-West have activated and influenced much the market, especially in Moscow, St. Petersburg, the South federal Region and almost all regions behind the Urals. Conscientious market participants import goods, paying taxes and customs duties at 24 % of a product value. The difference in a cost price of legal and “grey” phones is 7-8%. Nevertheless, the volume of “grey” import is growing despite the frequency of conscientious importers checking.

The statement has been sent to Chairman of the RF government M. Fradkov, Minister of Economic Development and Trade G. Gref, Deputy Chairman of the Government A. Zhukov, Minister of Internal Affairs R. Nurgaliev and Prosecutor General V. Ustinov.

On 20s of March the lot of 1600 infringing phones (clones of Nokia 1100), delivered from China to Russia, were detained in the airport of Helsinki.

3. The Companies’ Activity and Decision Making, Influencing the Market Development

3.1. Activity and Decisions

In March 27, in accordance with the minutes of the special meeting of shareholders in February 22, MTS declared the reorganization in the form of joining the company of the following enterprises: Gorizont, TAIF-TELECOM, MTK-TRK, SibChallenge, Tomsk Cellular Communications, BM Telecom, The Far East Cellular Systems – 900, The Siberian Cellular Systems – 900, Uraltel, and consequently about their activity termination.

Euroset has declared officially about appearance of a new minority shareholder, the Financial corporation UralSib, buying 7.53% share capital for 50 mln USD in October 2005. In fact, the corporation had bought 250 communications saloons. According to analysts, that helped Euroset to recover from the last year’s seizure by the Ministry of Internal Affairs. The assessment of Euroset value has caused disputes among experts.

VolgaTelecom holding has consolidated its cellular assets in the Volga region, bringing the number of subscribers to 2 mln people and making the company the 7th largest company in Russia. However, according to experts, it will not influence much the cellular market of the country.

3.2. Personnel Changes in the Main companies

In March 2, the Norwegian company Telenor, a large shareholder of Vimpelcom and Golden Telecom, gave the sack to head of the company’s Russian office Yoran Olson. The Russian business of Telenor will be managed by senior vice-president of the Norwegian company Shell, Morten Yonsen. Experts connect this action with a wish of the Norwegians to overcome a course of the conflict with Alfa group.

In March 15 a newly-appointed general manager of the Moscow region of Vimpelom Dmitri Pleskonos emphasized the involvement of newcomers in the amount of subscribers and increasing of active subscribers share in the total amount as the main direction of the company’s activity.

In March 28 the MTS stockholders meeting reelected the composition of the company’s board of directors. It includes Aleksey Buyanov, Alexander Gorbunov, Vladimir Lagutin, Peter Middleton, Helmut Royshenbah, Vasilii Sidorov, Sergey Shebetov.

4. The Conflict Zones and Interests Opposition Fields

Vimpelcom keeps making efforts to get a license for work in the Far East, being withstood by a competitor New Telephone Company (NTC). As well as Vimpelcom NTC pretends to frequencies in the 890-915 MHz, 935-960 MHz, 1710-1785 MHz and 1805-1880 MHz bands. The case has been lasting since 2001 and has not been settled yet, in spite of the support of Vimpelcom by the Federal Antimonopoly Service, having ordered the State Commission on Radio Frequencies to study the company’s request once more. The next session of the commission must be held in April 17.

Sky Link has opened internetwork roaming with a single company in the Dnestr Region Interdnestrcom, which is demanded to be closed by the Moldavian authorities.

The authorities of Georgia have charged MegaFon company with illegal work in South Osetia, though that is denied by MegaFon. The Georgian parliamentarians have threaten to bring an action to the International Court in Strasburg.

The opposition between Vimpelcom largest shareholders, the Norwegian holding Telenor and the Russian Alfa group, concerning assets in Ukraine is enduring.

Executive vice president of Telenor in Eastern Europe and the CIS Ian Tigesen declared the intension of the company to settle the conflict. Telenor is ready to begin integration of Vimpelcom and Kievstar, that has been sought by Alfa for a long time, on condition that the process will be accompanied by signing a contract about the partnership termination procedure. The contract, signed by the parties, gives them a right to initiate a terminable auction, in the frames of which each party will offer a share of the other party for a certain money. As a result, there will be only one large shareholder in the company.

Telenor has also offered Vimpelcom to buy 100% shares of Kievstar for no less then 5 bln USD with money payment. Vimpelcom has offered no more then 5 bln USD with its share payment, but agreed to think over Telenor’s proposal.

In April 1a proceeding of the action of Telenor against Vimpelcom will start in the Moscow Arbitrage. Telenor demands to declare invalid the decision of the company’s shareholders meeting of September 14, 2005, concerning the purchase of the Ukrainian Radiosystems for 254.8 mln USD.

According to the statement of head of the Federal Antimonopoly Service I. Artemyev, FAS does not intend to interfere in the dispute between Telenor and Alfa group regarding their share increase in Vimpelcom as that is a dispute of two economic subjects. Moreover, the law on access of foreign investors to strategic sectors of the economics has not been passed yet, emphasizes Artemyev. At the same time he mentions, FAS authorities intend to meet with representatives of both companies. He excludes the possibility of one-way actions of FAS in favour of Alfa group.

The commission on Antimonopoly Policy of the EU has started investigation regarding the Swiss company TeliaSonera. In February 2000 Telia bought 32% shares of the Luxemburg First National holding (FNH), owing 51% Telecominvest, for 80 mln USD. Few months later Telia exchanged its share in FNH for 26% shares of Telecominvest. By that time FNH had already possessed 75,5% shares of the Russian holding. The German Commerzbank was a single owner of FNH at that time and Telia made a deal with the bank. But in late 2003 the bank began to move away from the Luxemburg company, and in spring 2004 it was found out that Commerzbank had been just a nominal shareholder of FNH and the real owner was a Danish lawyer Jeffrey Galmont. Presently European commissars suspect, that in 2000 Telia concealed wittingly a real seller of FNH share. The name of the current minister L. Reiman was also mentioned in connection with this case.

SMARTS company has appealed against the deal, as a result of which Marshal Capital Partners (MCP), affiliated with Sigma group, has become the company’s shareholder. The proceedings have been still going on. In March 7, in Samara the preliminary hearing was held, concerning the claim of MCP, that belongs to general director of SMARTS Gennadi Kirushin, against a former shareholder Andrei Skvortzov and MCP.