The Russian Telecommunication Market Development in November 2007

1. General Trends of the Market Development

1.1. Saturation Rate of Cellular Communications in Russia

According to the data of October of 2007, the number of cell communications users has reached 167.38 mln, increasing by 2.05 mln compared to September of 2007. In October the increase of subscriber base is record compared to the previous months (September – 1.6 mln, August – 1.93 mln, July – 1.53 mln, June – 1.75 mln, May – 1.73 mln, April – 1.74 mln, March – 1.58 mln).

In October penetration of cellular communications in Russia increased to 115.3%, growing by 1.4% compared to September (penetration in September – 113%, in August – 112.8%, in July – 111.4%, in June – 110.4%, in May – 109.2%, in April – 108%, in March – 106.8%).

In 2006 the subscriber base growth in October was in contrary the worst in comparison with other months of the year and even in comparison with indexes of 2003-2005. As of September 2006 subscriber base of cellular communications in Russia grew by 0.925 mln over a month, penetration increased by 1.6%.

As of October of 2007 in Moscow and St. Petersburg subscriber bases were 29.248 mln and 9.422 mln correspondingly compared to 28.857 mln and 9.366 mln in September, to 28.614 mln and 9.330 mln in August, to 28.255 mln and 9.290 mln in July, to 28.094 mln and 9.083 mln in June, to 27.765 mln and 9.102 mln in May, to 27.531 mln and 8.984 mln in April and to 27.352 mln and 8.844 mln in March.

As of late October penetration of cell communications in Russia was 172.25 in Moscow and 148.9% in St. Petersburg (September of 2007 – 169.9% and 147.75, August – 168.5% and 147.1%, July – 166.4% and 146.5%, June – 165.4% and 143.2%, May – 163.5% and 143.6%, April – 162.1% and 141.7%, March – 161.2% and 139.5%).

In St. Petersburg subscriber base and penetration increased in October: by 76 thousand and by 1.2% correspondingly. Thus, penetration growth rate has doubled compared to September and August (0.6%). Nevertheless, despite the better results in comparison with the previous month, October of 2007 has not become a record month over last six month. In July of 2007 the growth of subscriber base and penetration was record (207 thousand and 3.3% correspondingly).

In October of 2007 pure increase of subscriber base in Russia was divided as follows: MTS – 35.7%, MegaFon – 28.2%, other operators – 19.3% and VimpelCom – 16.8%. October was a successful month for all operators. MegaFon increased its share by 1.7% compared to the previous month. Though MTS is still a leader, its subscriber base growth reduced by 9.1% compared to September of 2007. Subscriber base growth of other operators also reduced by 9.3% compared to the previous month. In September subscriber base growth was divided as follows: MTS – 44.8%, other operators – 28.6%, MegaFon – 26.5%.

By late October of 2007 the Big3 subscriber base in Russia was the following:

MTS subscriber base – 55.151 mln people (54.419 mln in September, 53.671 mln in august, 52.873 mln in July and 52.679 mln in June)

VimpelCom subscriber base – 50.640 mln people (50.296 mln in September, 50.365 in August, 49.773 mln in July and 49.594 mln in June)

MegaFon subscriber base – 34.418 mln (33.839 mln in September, 33.397 mln in August, 32.749 mln in July and 32.136 mln in June).

Thus, over a month MTS subscriber base has increased by 732 thousand people, VimpelCom and MegaFon bases have grown by 344 thousand and 579 thousand people correspondingly.

In October of 2007 the Russian market was divided as follows: MTS - 32.9% ( -0.1%), VimpelCom - 30.3% ( -0.1%), MegaFon – 20.6% (+0.1%), other operators – 16.2% (+0.1%).

1.2. Offer of New and Standard Services

Nokia Corporation has declared the Russian cell operator MegaFon will provide services of mobile access to e-mail on the basis of Nokia Intellisync Wireless Email. The service, named MegaSync, includes an access to e-mail from mobile devices, advanced opportunities for work with attached files, a calendar, a directory and intertask synchronization. The service will be launched in November of 2007. Nokia Intellisync Wireless is maintained not only by Nokia Eseries devices, but by more than 100 other devices as well (smartphones, phones of an average price category). Euroset has declared the company begins to sell a Samsung Duos phone in Russia, which is able to provide work of 2 SIM cards.

Euroset is the first company, starting selling a Samsung Duos phone. Two SIM cards can be used simultaneously in this handset. At that any time a user can choose which SIM card will be used for data communication, e-mail and multimedia messages sending and reception.

Sky Link company, providing services of high speed mobile Internet access on the territory of 30 subjects of the RF, and Rostelecom, the national operator of telecommunications, have signed a long-term agreement about cooperation, according to which they provide connection and interaction of their networks. Rostelecom will provide connection on the log-distance level and provide Sky Link operators with interconnection services, using its national telecommunication network.

Euroset company has declared preliminary results of sales on credit in its Russian stores over 9 months of 2007. Over the period the share of revenue from sales on credit has come to 33.8%, increasing by 1.3% compared to the same period of 2006(32.5%). At that the revenue from cell phones sales has increased by 18% compared to the revenue from cell phones sales on credit.

Over 9 months an average price of a cell phone, sold on credit in Euroset stores in Russia, has come to 279 USD, increasing by 21 USD or by 8% compared to an average price of a handset, sold on credit in the same period of 2006.

Over 9 month 1.97 mln cell phones have been sold on credit in Euroset stores in Russia, i.e. 24.5% of the total sales of cell phones. In 2006 this share was 23%.

By early November of 2006 subscriber base of Sibirtelecom exceeded 4 mln people. Over last year the subscriber base has grown 1.4 times as much (as of November 1, 2007 it was 2.9 mln users). In 2007 Sibirtelecom placed the emphasis on cell communications services development as one of the prospect directions of the business. The company has invested around 190 mln USD in this segment of services.

In general growth rates of Sibirtelecom subscriber base corresponds to growth rates of cell market in the Siberian federal region (SFR). As of the end of the 3rd quarter of 2007 penetration came to 108% in the region. Sibirtelecom subsidiaries have kept the leading positions in 3 regions of the SFR. According to results of the 3rd quarter of 2007, the market share of Yeniseitelecom has come to 39% in the Krasnoyarsk region. The market share of Baikalinvest has come to 58% in the Irkutsk region. Ulan-Udenskaya Sotovaya Svyaz provides 58% of cell communications services in Buryatiya republic. The market share of Sibirtelecom services of CDMA standard is 25% in the SFR. (CDMA standard is introduced in the Tomsk, Irkutsk and Krasnoyarsk regions.

According to results of 9 months of 2007 ARPU of Sibirtelecom subscribers has come to 9 USD.

1.3. Major Companies’ Potential (capitalization and profit)

Over 9 months of 2007 MTS net income according to RSBU has come to 32.907 bn roubles, increasing by 51% compared to the same period of 2006 (21.79 bn roubles). Proceeds have increased by 30.8% to 106.244 bn roubles. Expenses of the company have grown by 25.4% to 40.38 bn roubles. Profit before taxation has grown by 49.5% and accounted for 43.393 bn roubles.

MTS is the largest operator of cellular communication in the CIS. The company and its subsidiaries provide services to more than 79.1 mln subscribers. MTS major shareholder is AFK Sistema (52.8% of shares). 46.7% of MTS share are floating on the NY Stock Exchange, on European off-exchange markets and MMVB. 0.5% of MTS shares belong to other shareholders.

In the 3rd quarter of 2007 MTS proceeds in Russia came to 1.166 bn USD (+26%), OIBDA was 880.9 mln USD (+27%). According to the company president Leonid Melamed, financial indexes are going up due to growth of service consumption. MOU index (minutes of usage) increased from 151 in the 2nd quarter to 167 in the 3rd quarter of 2007.

VimpelCom has published its financial results of the 3rd quarter of 2007. Over the period net profit of the operator has come to 458 mln USD, increasing by 70% compared to the same period of 2006. Proceeds have increased by 43.9% to 1.955 bn USD. OIBDA has grown by 41.4% to 1.015 bn USD. OIBDA margin has reduced contrary the market expectations, coming to 51.9% compared to 52.8% last year. Operating money flow has come to 856.5 mln USD, increasing by 34.1% as compared to the same period of 2006.

Though VimpelCom top-management is satisfied with results of the 3rd quarter of 2007, yesterday quotations of VimpelCom shares went down by 9.7% at the beginning of trades of bidding on the NY Stock Exchange. By the end of the bidding they were 34.5 USD, 4% lower compared to the day before.

According to analysts, results of VimpelCom are good. However, the company’s securities were “heated up” also owing to rumours about the acquisition of Golden Telecom, so the market reduced the quotations.

As of late September of 2007 SMARTS subscriber base came to 1 736 200 subscribers, increasing by 12% over a year. Over the 3rd quarter of 2007 ARPU has been 5.0 USD, increasing by 7% compared to the same period of 2006. MOU has also increased by 4% (to116 min) compared to the previous year. According to results as of October 1 of 2007, proceeds of SMARTS came to 2 499 944 thousand roubles (21.5% growth). Over 9 months of 2007 EBITDA has come to 1 109 675 thousand roubles, growing by 5.6% compared to the same index of 2006. Net profit of the company came to 71 436 thousand roubles, 12.5 times as much as net profit over the same period of 2006.

The operator of mobile communications life:) has introduced its financial and operation statements of the 3rd quarter of 2007. For the first time life:) has reached a positive EBITDA index 2.9 mln USD. In the 3rd quarter of 2007 life:) continued demonstrating growth of the major financial and operation indexes. As of the end of the year ARPU has increased by 49% and reached 5.8 USD in this quarter. The total revenue of the operator has grown by 267%.

1.4. The Market Extension Due to Overseas Expansion

DIXIS group of companies has declared about opening of the 100th store in Astana, Kazakhstan. The company entered the Kazakh market in May of 2005. The company was planning to cover the whole market: the strategy was directed to opening of own DIXIS stores as well as monobrand stores in cooperation with cell operators GSM Kazakhstan, Kar-Tel and ALTEL under the brands K’Cell Express, Beeline and DALACOM correspondingly

2. Regulator’s Activity and Legal Field Dynamics

2.1. Assessment of Past Privatizations, Merges and Absorptions Legality by Legislative and Law-Enforcement Bodies

The Moscow Arbitration Court has answered to the suit of Summa Telecom against Rossvyazohrankulturi. The Court has declared invalid the orders of the Federal Service of July 25 and August 14 about postponing and abolition of GSM tenders. According to the verdict, the tenders, held in 42 regions of the RF, must be held again according to conditions, worked out by Rossvyaz and approved by the Federal government. The market analysts say, the verdict of the Moscow Arbitration Court will affect business reputation of Rossvyazohranculturi, in case the verdict is not appealed.

The 13th Court of Appeal (St. Petersburg) has dismissed an appeal of Sigma Capital Partners (SKP) about appropriation of a 95.4% share of SMARTS. The Court has also remitted SMARTS shares sequestration.

Earlier, on March 14 of 2007 the Arbitration Court of St. Petersburg and the Leningrad region dismissed a suit of SKP about transfer of rights and obligations to 3816 SMARTS shares. SKP referred to a copy of the Agreement about Redemption of the cell company shares. The document was signed by some mr. Fyodorov on behalf of the sellers, shareholders of SMARTS. According to the plaintiffs, Fyodorov had a letter of attorney from SMARTS shareholders. The court found out that no one of the defendants had given a letter of attorney to Fyodorov and signed an agreement about redemption of the company shares.

On September 13 of 2007 the Federal Arbitration Court of the North-Western District of St. Petersburg reversed the decision, taken by the 13th Court of Appeal of St. Petersburg about transfer of rights and obligations to 799 SMARTS shares (20% +1 share) from the Cyprian offshore company “Angentro Trading and Investments Ltd” (Marshall Telecom Investments before) to SKP. Due to the decision of the 3rd instance Sigma cannot be a shareholder of SMARTS.

2.2. Struggle with Illegal Entrepreneurship

In the Basmanii Court of Moscow the first hearing on the criminal case of the owner of SMARTS Gennadi Kirushon was held. Prosecutor’s Office has charged Kirushin according to four articles of the Criminal Code of the RF. Kirushin is suspected of illegal use of base stations, which were not allowed by Rossvyaznadzor to be exploited. Another part of the charge concerns theft of 5 SMARTS shares (0.125%), which were supposedly taken away by Kirushin from Sigma.

The Arbitration Court of Moscow has dismissed the suit of VimpelCom about declaring invalid the decision of FAS. FAS of Russia imposed a fine worth 100 thousand roubles on VimpelCom for violation of the antimonopoly legislation. In August 8 of 2007 FAS declared VimpelCom had violated Part 1 of Article 14 of the Federal Law “ On Competition Protection”. VimpelCom was calling subscribers of competing operators, proposing them a contract for communications service providing. FAS regarded it as an act of unfair competition.

According to information from Vedomosti (15.11.2007) with reference to The Wall Street Journal, that Prosecutor’s Office of the British Virgin Isles has asked the US Department of Justice to assist in the investigation of IPOC activity. Representatives of Prosecutor’s Office declares about “indisputable proofs”, according to which the RF Minister of Communications Leonid Reiman is connected with activity of the offshore and some other Russian telecommunication assets. Prosecutor’s Office intends to charge Jeffrey Galmond with perjury as he called himself a beneficiary of the fund. According to the market analysts, it will not affect representatives of the Russian telecommunication sector owing to lack of evidence of Minister’s connection with IPOC.

3. Companies’ Actions and Decisions, Influencing Most the Market Development

3.1. Success and Failure in New Assets Acquisition

MTS representatives confirm their interest to the telecommunication market of Kazakstan. The sale of one share holding would be logical for the local monopolist of fixed communications Kazakhtelecom, which owns shares in two local GSM operators. In September MTS president Leonid Melamed mentioned about their interest to one of them, Mobile Telecom Service. However, according to the press-service of Kazakhtelecom, owning a 51% share of the operator, the asset is not for sale. The market analysts have different opinions about prospects of MTS to enter the Kazakh market, noting the cell market of Kazakhstan is close to saturation.

The Supreme Committee on Competition of the Indonesian government (KPPU) has obliged the Singapore holding Temasek to sell its share in one of two cell operators, either Telkomsel or Indosat, within 2 years. KPPU chairman explained the company owned shares in two operators simultaneously and abused its dominating position by very high fees for its services. Earlier, the Singapore newspaper The Strait Times reported the investigation of the antimonopoly service regarding Temasek’s shares in two cell operators had been initiated by the Russian Altimo, which did not conceal its interest to assets of the holding. According to the newspaper, in future the Russian holding hopes to persuade the government of Indonesia to buy Indosat shares from Temasek and to sell them to Altimo.

According to the market analysts, the decision of the Indonesian antimonopoly department is beneficial for Altimo.

VimpelCom has made an offer to buy Golden Telecom holding for 4.03 bn USD (100 USD per a share). The price is lower than the current capitalization of Golden Telecom, though the company’s shares reached 100 USD after rumours about the forthcoming deal with VimpelCom, analysts say.

The telecommunication holding Golden Telecom was founded in 1999, registered in Denver, Colorado, USA. 36% shares of the company are circulated on NASDAQ, 18% of shares belong to the Norwegian operator Telenor, 27% belong to Altimo, 11% are owned by Rostelecom and 8% belong to Inure company. Golden Telecom has branch offices in 26 cities of Russia. The company is working in Ukraine, Kazakhstan and Uzbekistan.

According to analysts, broadband Internet is the most high growth segment of the market. It is growing more rapidly than markets of fixed and mobile communication.

3.2. Stock Markets

Altimo is placing 500 mln USD in bonds with a floating interest rate under deposit of 18% of VimpelCom shares. The market price of the deposit is around 6 bn USD. The London branch of Deutche Bank acts as an organizer of the deal. Altimo does not reveal what the funds will be spent on, explaining only they will be invested in the current activity.

The trading house Euroset has made an offer for redemption of its 3-year bonds worth 3 bn roubles, which were placed in June of 2006.

According to the company president Aleksey Chuikin, because of the crisis on the financial market the debt money have become too expensive, so Euroset has decided to repay the loan in advance.

4. Conflict Zones and Fields of Interests Opposition

4.1. Contradictions between Entrepreneurs During and As a Result of Property Structure Changes, Merges and Absorptions

The financial director of Altimo, Alfa Group’s telecommunications subdivision, Teijo Pankko informed the holding was ready to exchange a part of its share holding of MegaFon on a share in the Scandinavian TeliaSonera and another part on money. Lately it has been confirmed by the head of TeliaSonera Lars Nyberg.

The market analysts speak of expediency of cooperation between the parties. However, they doubt about prospects of the deal, because court disputes around the blocking share holding of MegaFon reduce the price of the Russian operator securities. Obviously, TeliaSonera will not want the Russian consortium to have an opportunity to influence decision making in the Swedish-Finnish company.

The Court of the Bermudan Isles has approved withdrawal of mutual claims of the Bermudan fund IPOC and Alfa Group’s divisions, who had had legal proceeding regarding 25.1% of MegaFon shares since autumn of 2003. According to the amicable agreement, Alfa has remained an owner of MegaFon blocking share holding, for which it paid 295 mln USD in August of 2003. Alfa, charging IPOC with “money laundering”, in its turn, has abandoned its claims.

They said in IPOC that they had agreed about a purchase of the blocking holding with its former owner LV Finance before Alfa and had even paid for the deal. To prove that the fund went to Russian and international courts. However, nowhere the fund could prove its case. Moreover, in May of 2006 the Zurich Arbitration Court, refused to answer the fund’s claims and even made a conclusion than IPOC beneficiary was not the Danish lawyer Jeffrey Galmond, but some “witness #7”. (the Russian Minister of IT and Communications Leonid Reiman).

After 4 years of ineffective opposition IPOC agreed to sign an armistice, one of the conditions of which may be IPOC’s walkout from MegaFon. The contract was signed by all parties in the summer. Now the court has dotted the conflict. According to commentators, it could expedite negotiations about the sale of around 30% of MegaFon shares (belonging to affiliated companies of IPOC) to Alisher Usmanov.

The Court of the British Virgin Isles has recognized a right of Altimo to a 13.8% share of Turkcell, which belongs to the Turkish Cukurova. At that the Court has declared it is impossible that the shares come into possession of Altimo as Cukurova had blocked entry of the corresponding changes in the shareholders registry.

The Court has also taken a decision in Altimo’s favour, rejecting the petition of TeliaSonera to arrest the mentioned Turkcell shares.

In April of 2007 Altimo declared that Cukurova Group had violated several regulations of the credit agreement, according to which Alfa Group’s subdivisions had given Cukurova a credit worth 1.7 bn USD in 2005. Altimo demanded from Cukurova to return the rest 1.35 bn USD, and after the demand was not carried out, the consortium called for the shareholding of Turkcell, which belonged to Cukurova. However, Cukurova blocked entry of changes in the company shareholders registry.

During the hearings in the court of BVI, the Scandinavian TeliaSonera brought a suit against Altimo, demanding to arrest the same shareholding of Turkcell and pleading the contest between TeliaSonera and Cukurova. The Court dismissed the suit of TeliaSonera and obliged the company to return Altimo the costs.