The Russian Telecommunications Market Development in February 2008

1. General Trends of the Market Development

1.1. Saturation Rate of Cellular Communications Market in Russia

According to the data of ACM-Consulting, in late January 164.8 mln SIM-cards were registered in Russia, 4.6% growth (8 mln SIM-cards) compared to the previous month. It is explained that since January VimpelCom has only introduced the data about clients, who paid no later than 3 months ago. As a result VimpelCom's subscriber base has reduced by 18%.

MTS is not planning to change its accounting policy because even clients, who only receive calls, return to the company, MTS president Leonid Melamed says.

1.2. Offer of New and Standard Services

MegaFon has given its North-Western subsidiary 100 mln USD for the 3G network development. By the end of 2008 the new network must cover St. Petersburg. Moreover the 3G infrastructure will be developed in regional centres of the North-West. Almost the same investments in the 3G network development in Petersburg were received by the macroregion North-West MTS.

MTS president Leonid Melamed stated the company had started constructing the 3G network in the Krasnodar region, RBK informs. In 2008 the network will be launched in Krasnodar and Sochi. The company invests around 27 mln USD.

According to estimates of the analyst from Finansoviye Izvestiya I. Vedeneev, at present advertising accounts express an increased interest to the market of mobile advertising. It can be explained by the steady rise in prices for advertising on almost all carriers. In 2008 the new law «On Advertising» took an effect, which reduced considerably the advertising time on TV. In such conditions MegaFon has become a leader among the Big3 operators. The company has worked out the strategy of advertising carriers development, according to which various advertising carriers will be launched, covering maximum of users of different age, gender, social and economic position.

MegaFon company has made the tariff plan «Yedini» more profitable. The tariff plan allows to call at a unit price to Moscow, accross Russia and overseas. Now a call to the CIS countries is 5 roubles per minute from the second minute of a call.

Tele2 has started providing services of the national roaming in VimpelCom's network in Russia.

 Cell operators increase the competition with telecoms operators. According to the analyst from Kommersant B.Gorlina, it is getting cheaper to call from a mobile phone to another city than from a fixed-line telephone, especially when calling inside an operator's federal network. MegaFon's tariff plan «Light» offers 2.4 roubles per minute for a call inside the network regardless of where a subscriber calls from, Moscow or Vladivostok. MTS subscriber from St. Petersburg pays 1.4 roubles per minute for a call to Vladivostok when calling inside the network. VimpelCom's prices for calls to other cities are a little bit higher (4.45 roubles). It has led to reduction in prices for services of telecoms operators. Rostelecom has reduced tariffs since Feb 1. MTT has reduced prices since March 1.

MTS and Microsoft have declared about collaboration in development of new mobile services. They are planning to create innovative services to meet requirements of MTS subscribers in data communications services and products. At first they intend to introduce a complex offer for mobile Internet users, which includes a laptop and Windows Vista software, providing wireless broadband Internet access on the basis of 'MTS-Connect' service. The offer is planned to be launched in June of 2008.

MegaFon strengthens collaboration with Nokia Siemens Network in the field of equipment supply for 2G GSM/EDGE networks and services of management solutions. According to the agreement of the companies, Nokia Siemens Networks will also supply its cutting edge WCDMA/HSPA technology and related the 3G Core network upgrades to the regions of Russia. This is a 3-year frame agreement until the end of 2010.

1.3. Major Companies' Potential (capitalization and profit)

MTS's and Vimpelcom's quotations have raised by 103% and 168% accordingly. According to analysts from the Bank of Moscow, despite the slowdown in the beginning of the year, Russian cell operators continue keeping the capitalization growth. For the first time ARPU has not only stopped going down, but it has increased. It happened because of CPP principle introduction, transfer to rouble tarrifs and introduction of payment for initiation of a call. In 2008 growth of traffic and fall in rate of dollar will be major catalysts of ARPU growth.

However, in 2009 a rouble strengthening will not be so actual and ARPU growth will be only provided by new services introduction on the basis of the 3G technology, Rostoslav Musienko, analyst from the Bank of Moscow, forecasts.

In late 2007 for the first time VimpelCom outstripped MTS according to capitalization. It was mostly caused by news about a possible integration of Vimpelcom and Golden Telecom (GT). However, it is obvious, that VimpelCom has reached the level of MTS regardless of the acquisition of GT, R. Musienko says. As of the end of 2007 the fair value of MTS came to 42.8 bn USD, while the integrated VimpelCom and Golden Telecom are estimated at 46.9 bn USD.

In the 3rd quarter of 2007 VimpelCom's ARPU was 22% higher than ARPU in the sector (13.4 USD per month). MegaFon's ARPU was 15 USD. ARPU of MTS was 10 USD. MTS is a leader according to the number of new connections: 59.1% of new subscribers in Russia in January.

According to information from RBK, referring to TeliaSonera, for the first time in its history MegaFon can pay out dividends. In case the Board of directors makes decision to pay dividends for 2007, it will be the first case in the company's history. Payment of dividends for 2006 was blocked by Telecominvest, inspite of MegaFon's positive profitability. (In Russia TeliaSonera owns directly and indirectly a 43.8% share of MegaFon and a 26.1% share of Telecominvest).

In case the information is true, MegaFon will become the last of the Big3 operators, who stopped investing total net profit in development and gave a part of the earned money to shareholders. VimpelCom paid first dividends for 2006 – 330 mln USD or around 40% of net profit. MTS paid 60% of net profit or 747.44 mln USD for 2006. The Board of directors of the operator has approved the strategy, according to which MTS will pay out no less than a half of net profit to shareholders.

1.4. Market Extension Due to Overseas Expansion

In Uzbekistan the subscriber base of MTS has exceeded 3 million people. At that over the last six month the subscriber base growth has been the most rapid over the period of the company's activity in the country: since July of 2007 over a million subscribers have been connected to the operator.

 MegaFon's Board of directors has decided to register a 100% subsidiary MegaFon International, which will be engaged in foreign projects. Alexey Nechiporenko, MegaFon's deputy CEO, has been appointed CEO of MegaFon Interantional. According to him, foreign markets, both in the CIS and other developing countries are considered as one of the possible vectors of development. MegaFon has got one foreign subsidiary in Tajikistan so far.

2. Regulator's Activity and Dynamics of LegaL Field

2.1. News in Legislation and Other Changes in Legal Field

According to Minister of IT and Communications Leonid Reiman, within 2008 tariffs for calls on local mobile phones for subscribers, using the unlimited tariff plan, will be abolished across Russia. The project will be launched partially in March.

According to information from the Ministry of IT and Communications, in March of 2008 several legal regualtions, which allow to adjust mutual payments between operators, are coming into force. It will allow to change prices for comunications services for end users.

2. Struggle with Illegal Entrepreneurship

The Moscow Arbitration Court has appointed Eduard Rebgun a temporary manager of the close corporation (CC) Svyaznoi, the former daughter of the second largest company in the field of cell phones sale. E. Regbun was a manager of the oil company Yukos and held the procedure of its bankruptcy. In late 2007 the Tax Inspection got suspected, the CC Svyaznoi, responsible for the wholesale trade, had not paid 1.2 bn roubles, including fines. Svyaznoi's owners contested the tax claims in court and then declared about the daughter's bankruptcy.

However, according to the present legislation, owners of a company, not paying taxes, are responsible for its activity in the moment when a debt appears.

 2.3. Assessment of Regulator's Actions

After Minister of IT and Communications Leonid Reiman declared that within 2008 tariffs for calls on mobile phones for subscribers, using the unlimited tariff plan, would be abolished, some analysts, questioned by RosFinCom, said it would affect business of cell opertators.

For instance, according to the analyst from AC&M Consulting Elena Sayapina, calls from fixed-line phones to mobile phones are considered as zone calls instead of local ones, thus, they cannot be a part of the unlimited tariff.

The senior analyst from CRM Design Mikhail Ratinski, in contrast, believes, the innovation is quite reasonable. According to him, the tariffs abolition will not affect business of cell operators, because the existing agreement between operators of mobile and fixed-line communications will be hardly changed.

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

3. Success and Failure in New Assets Buying

To acquire Golden Telecom, under conditions of the tender offer VimpelCom needs the consent of owners of no more than two-thirds of the company's shares. It is possible to acquire 90% of its shares, including additional issue, that allows VimpelCom's subsidiary Lillian Acquisition to buy the rest 10% forcibly.

AFK Sistema is interested in participation in the tender for sale of the state share holding in Ukrtelecom. Though they say in the company, it is early to speak of the participation until the tender's conditions are declared. It is also unknown which company will take part in the tender: Sistema or its subsidiaries MTS, UMS and Komstar-OTS.

 The Ukrainian government, in its turn, declared the state would keep 25%+1 share of Ukrtelecom. 67.79% of the operator will be displayed for sale and a buyer will be defined in the framework of the tender. The operator's capitalization is 4 bn USD. Accordingly, 67.79% will cost 2.71 bn USD.

3. Companies' Actions on Stock Markets

 In February 28 VimpelCom announced about the end of the additional term for the tender offer, made by its indirect subsidiary Lillian Acquisition Inc. The tender concerns redemption of all GT shares at a price of 105 USD per share. The shareholders offered 38 093 677 shares of the operator for sale, i.e. around 94.4% of all GT shares.

The total sum of the offered shares allows to complete the merger without voting of GT shareholders. Thus, VimpelCom Finance B.V. (100% subsidiary of VimpelCom) and Lillian Acquisition intend to hold the merger in the nearest future. After the merger all GT shareholders, who did not offer their shares for sale in the framework of the tender offer, will get 105 USD per share in cash as well.

 Sky Link has published a report about results of the additional issue of nominal shares. 3 241 372 nominal shares were issued additionaly. Nominal price of a share is 100 roubles, the total sum is 324 137.2 thousands roubles. According to the results of the additional issue floatation the operator's chartered capital has come to 1 296 547.2 thousand roubles. The securities were floated among the company's shareholders in proportion to a number of shares, they possess.

At the special meeting shareholders of the Volga region operator SMARTS voted for the company's reorganization from a closed corporation to a public company. They believe it will give shareholders an additional free play and a possibility to hold an IPO. It will help to sell the company as the company's owners have decided to offer it for sale.

The decision about the company's reorganization was made unanimously by shareholders, who were present at the meeting. But Volgatelecom's representatives were absent. According to Volgatelecom's managment, they are against the change of SMARTS property form, because they lose a number of benefits and opportunities as shareholders.

3.3. Personnel Changes in Major Companies

At the special meeting MTS shareholders have elected the new Board of directors. It consists of:

Alexey Buyanov, senior vice president, chief of the financial complex of AFK Sistema, Sergey Drozdov, senior vice president, chief of the property complex of AFK Sistema, Yevtushenkova Tatyana, advisor to president of MTS, Giani Mohanbir Singh, independent member of the Board of directors, Leonid Melamed, president of MTS, Paul J. Ostling, independent member of the Board of directors, Vitali Savelyev, 1st vice-president, chief of telecommunications assets development complex of AFK Sistema. Savelyev has been elected the chairman of the Board of directors. Drozdov has been elected the deputy chairman.

The shareholders have also made a decision about reorganization of MTS in the form of joining of Volgograd Mobile, Astrakhan Mobile, Mar Mobile GSM and Primtelecom to MTS.

On February 27 Golden Telecom informed the USA Security and Exchange Commission about the new Board of directors of the company. Contrary to the statements, made before, CEO of the company Alexander Izosimov is not among the members of the Board, nominated by VimpelCom.

The rest candidates, nominated by VimpelCom are: Dmitri Pleskonos, executive vice president of VimpelCom; Elena Shmatova, chief financial director of VimpelCom; Peter Covell, vice-president on operations; Alexander Gersh, independent director.

Chief managing director of Altimo Alexey Reznikovich, chairman of GT Board of directors and president of Alfa Bank Petr Aven, advisor to CEO of SCS Sovintel Vladimir Bulgak, executive director of Telenor ASA in Eastern and Central Europe Tor Halvorsen and independent director David Smith have quitted the Board of directors of Golden Telecom.

Shell Morten Jonsen, president of Telenor Russia, Jean Pierre Vandromm, chief manager of GT, Oleg Malis, senior vice president of Altimo, and independent directors David Herman and Patric Gallagher have kept their seat in the Board of directors of the company.

Per Olof Shestedt, representative of TeliaSonera, quits MegaFon's Board of directors on his own initiative.

Beside him, MegaFon's Board of directors consists of six more top-managers. Two of them are representatives of TeliaSonera (Aimo Eloholma and Esko Juhani Ritkonen). The Board also includes representatives of CT-Mobile, controlled by Altimo, (Alexander Okun and Mohamed Amersi) and representatives of Telecominvest (Maxim Gorohov and Maria Kastritza).

MegaFon's management has also declared about creation of a new position - 1st deputy CEO on operating activity. Alexander Volkov, former director of the North-Western subsidiary of MegaFon, has been appointed for this position. Sergey Soldatenkov is CEO of the company.

The Sweden telecommunications holding Tele2 has declared about creation of a separate structure of the business Tele2 Russia. Donna Cordner, former executive vice president of Tele2 on corporate finance, has been appointed chief executive of the company.

According to analysts, the holding has started preparing Tele2 Russia, assets of which are estimated at 3 bn USD, for entering of exchange.

According to the portal spbIT.ru, Natalia Malkova, head of the North-Western office of Euroset will resign in the nearest future. According to the company's co-owner and chairman of Euroset's Board of directors Evgeni Chichvarkin, it is a single resignation by mutual consent. However, other leading employees from Malkova's team are going to resign, the portal reports.

Sky Link informs about appointments in the framework of preparation to consolidation of the regional operating companies and creation of a consolidated federal operator. Within 2008 six subsidiaries will be formed in the regions, the company works in.

In accordance with this strategy some appointments will be carried out in CC Sky Link and two largest companies of Sky Link: PC MSS and CC Delta Telecom.

Gennadi Golant is at the head of Sky Link's technical block as deputy CEO – technical director of the company. Earlier he worked in Delta Telecom. Nikolai Demenchuk, former deputy CEO of Start Telecom, has been appointed CEO of Delta Telecom.

Sergey Hanenkov, former commercial director of MSS, has been appointed alternate CEO of MSS. Larisa Kapranova has been appointed for the position of chief accountant.

4. Conflict Zones and Interests Opposition Fields

4.1 Contradictions between Entrepreneurs

During and As a Result of Property Structure Changes, Mergers and Absorptions The meeting of shareholders of MegaFon, where the shareholders had planned to approve the merger of seven 100% subsidiaries (the Moscow Sonic Duo, Mobicom Kavkaz, Mobicom Center, Mobicom-Novosibirsk, Mobicom-Khabarovsk, MSS-Povoljie, Uralski GSM ), did not take place. Representatives of the company's two co-owners were absent. However, representatives of CT-Mobile, which belongs to Alfa Group, were present, showing for the first time they were ready to support the consolidation of MegaFon and its subsidiaries. Before for three years almost AlfaGroup had been blocking the consolidation, demanding guarantees that its stake in the operator would not diffuse after the reorganization.

Altimo, the telecommunications asset of Alfa Group, owns 6.61% of Turkcell shares, but it receives dividends from 13.22%, which had belonged to the company until December of 2007. It was caused by the conflict with Telenor, which owns the Ukrainian operator Kievstar together with Alfa. Altimo was ordered by the New York Arbitration Court to sell all competing with Kievstar assets. Executing the order, Altimo sold a half of its share holding to the Kazah investment holding Visor Group for 20 mln USD, keeping the right to receive dividends. According to results of 2007, net profit of Turkcell came to 1.6 bn USD.