The Russian Telecommunications Market Development in September 2008

1. General Trends of the Market Development

iPhone 3G in Russia

Apple is planning to begin to sell 3G iPhones in Russia. The Western company held negotiations with the Big3 operators and the largest Russian retailers. Apple made a certain agreement with MTS, though it was not announced officially. It will be announced as soon as Apple declares it enters the Russian market. Probably new smartphones will be distributed along with a cell operator’s contract. However, it will be possible to buy a handset without a contract, but it will be more expensive.
The situation is complicated as it is not known how many smartphones has been already imported illegally to Russia. According to different estimates, the amount comes to around 500 thousand. Besides, according to some consumers, the price for a smartphone is overcharge (around 1000 USD)
Apple iPhones (1st generation) appeared on the market in 2007. They could be acquired in the USA and European countries. 3G iPhone was first sold on July 11th of 2008. By the end of 2008 3G iPhone will appear in shops of more than 70 countries and Apple company is planning to sell around 10 mn smartphones. In other countries the price is from 100 USD to 300 USD.
According to analysts, in Russia Apple smartphones sale will start in the nearest future. In the West smartphones are in great demand. Taking into account that many Russian consumers are ready to pay around 1000 USD for a smartphone, big sales are expected. Experts forecast the sales of 1-2 mn smartphones annually.

VimpelCom has introduced its strategy of broadband Internet access development

VimpelCom has introduced its Strategy of broadband access development in Russia under the Fiber to the Built (FTTB) principle. According to the operator’s plans by September 2009 over 80 towns of the country will be covered by fiber-optic networks. By 2010 VimpelCom is planning to provide services of broadband access in 180 towns and by 2011 – in more than 300 towns of Russia. The declared concept has started in 17 towns of Russian since September 22nd. VimpelCom is also planning to introduce a consolidated account to pay for services of cell communications and Internet access simultaneously.
Services of broadband access will be developed by the operator on the basis of recently acquired Corbina-Telecom. Corbina Telecom works on the market of home networks in Moscow and regions. However, VimpelCom has a problem of illegal content in home networks.
On the whole the introduced strategy is feasible, analysts say. However, the operator will have to make efforts to cover small towns. According to experts, VimpelCom will face a problem of copyright. All operators face this problem, but they manage to settle it, experts remind. On one hand, it is explained by imperfection of the legislation, on other hand, by the authorities’ loyalty.

GT has acquired three regional operators

Golden Telecom (GT), which belongs to VimpelCom, has acquired three regional operators for 27 mn USD: in Barnaul, Nizhny Novgorod and Tyumen (the total subscriber base is around 20 thousand people). The operators were acquired in the frameworks of GT strategy on expansion to the regional market of broadband access. Thus, the company has become an owner of 100% of Comtel (Tyumen) and Altaigrof (Barnaul), and of 42% of Agenstvo Delovoi Svyazi (Nizhny Novgorod).
These transactions are the continuation of the company’s purchases on the regional market of broadband access. Akado bought the Internet operator Olympus NSP in Yekaterinburg; Multiregion company declared about the purchase of three providers in the Central Federal Region.
According to some analysts, entering the markets of broadband access is important for GT. It is proved by intensive assets acquiring by the company. Assets acquiring in the regions will influence positively GT subscriber base in future. Besides, the demand for broadband access services is growing, that will obviously influence the operator’s financial condition.
The Moscow market has been conquered in the main and regional markets are of interest, experts say. This segment has real outlooks and it may bring big profit to companies.

Reasons for cell retailer sale

Russian retailing companies are looking for purchasers for their assets. Euroset was the first, that had announced its sale. It was followed by Betalink, Svyaznoy and Dixis. The Big 3 operators, MTS, MegaFon and Bee Line, may become potential purchasers as well as retailing-oriented banks.
The situation is unstable on the market of retail. Some assets are getting cheap. Many companies need strategic investors. So, the sale of retailing companies is the only way out of the crisis. And if an operator possesses a retailing network, contributing to the growth of sales and profit, it is an important factor of mobile companies’ business development.
According to analysts, there are three main reasons for the sale of business: reduction of profitability, debts and financial problems. There are too many retiling networks on the market, the demand is stable and big growth rates can be hardly expected in this segment. The Big 3 operators as well as retailers from other sectors, not connected with telecommunications, are considered as potential purchasers. In case such transactions are conducted, we may expect re-branding of salons.

Altimo is planning to enter the market of Nigeria

The telecoms holding Altimo is planning to take part in privatization of Nigerian telecoms operators Nigerian Telecommunications Limited (Nitel) and Nigerian Mobile Communications Limited (Mtel), investing in the market of the country. Altimo intends to obtain assets for VimpelCom, which already develops its business on cell markets of Cambodia and Vietnam.
Nitel is the major operator of fixed-line communications in Nigeria, which controls 80% of the market and works in 36 Nigerian states. The company has a subsidiary, a GSM operator Mtel, which is also on sale. In terms of subscriber base Mtel holds 5th place in the country, providing services to 150 thousand clients.
In 2006 Ntel had been already privatized: 51% of the operator’s shares has been acquired by the Transnational Corporation of Nigeria (Transcorp), the rest had belonged to the country’s authorities. However, later Transcor was not able to cope with its financial obligations and they decided to attract a new investor.
According to analysts, Altomo’s intention to enter the Nigerian market is quite appropriate. The holding possesses enough lobbying and financial resources to do it. The country has a good economic potential. The approximate value of the assets may reach 1300-1500 mn USD, taking into account the control premium, experts say.
On the whole, according to analysts, Altimo’s expansion to the Nigerian market is logical. Since the Russian market is saturated operators try to invest overseas.

Cifrograd attracted an investor

The cell retailer Cifrograd has attracted an investor, issuing additional shares. The new owners paid no more then 16.7 mn USD for 25% of the retailer. According to this amount and the share of the new investors, the whole company was assessed at around 66.8 mn USD. It is known, one of the purchasers of the additional share issue is an investing banker Dmitry Ivanter.
The additional issue of Cifrograd shares was preceded by the sale of Euroset, the biggest cell retailer, by Alexander Mamut’s structures. The company was valued at 1.25 bn USD, taking into account the company’s debt.
According to analysts, Cifrograd issued additional shares to attract more funds for the business support and development. Experts do not exclude the cell retailer may be sold to one of the Big 3 operators in future. The cell retailing segment may be divided among the Big 3 operators, experts say. 66.8 mn USD is less than fair value of the company and it is the result of the Cifrograd owners’ wish to complete the transaction in the shortest period of time .

VimpelCom has obtained GSM licenses and frequencies in Vietnam

The Vietnamese cell operator GTel Mobile has obtained GSM licenses and frequencies for communications services provision in Vietnam. 40% of GTel Mobile belongs to VimpelCom in the joint venture with the Vietnamese party. The Russian company had been chosen as a partner in the joint venture because of the governmental order, aimed at strengthening the cooperation between Vietnam and Russia. VimpelCom paid 267 mn USD for 40% of the cell operator. According to representatives of GTel Mobile, the operator is going to put its network into operation by summer of 2009 and to take 20% of the Vietnamese market within 5 years.
According to analysts, entering the Vietnamese market by VimpelCom is a positive step and it complies with the operator’s strategy on entering foreign cell markets. On one hand the Vietnamese project of VimpelCom is risky enough, on other hand, the operator possesses enough resources and experience to achieve the goal, analysts say. However, according to some experts, the operator’s activity on the Vietnamese market will not be enough to maintain growth rates and VimpelCom has to look for new markets.

Sistema is considering expediency of MTS and Comstar-UTS consolidation

AFK Sistema is considering the variant of consolidation of MTS and Comstar-UTS. The decision must be taken by the end of the year. VimpelCom was the first company, deciding to expand its business due to fixed-line communications: in February the operator acquired Golden Telecom for 4.35 bn USD and in September GT was transferred under the brand Bee Line Business. Then Sistema’s managers assured MTS and Comstar-UTS would not be consolidated.
According to experts the consolidation will influence positively both MTS and Comstar-UTS. Comstar (4.3 mn lines in Moscow and around 0.5 lines outside Moscow) will be able to increase its subscriber base, offering its services to MTS subscribers (over 61 mn in Russia), and to use the sales network of MTS. And MTS will be able to work out converging services and to provide services of broadband access. The companies will also combine their networks and will not pay each other for traffic transit. According to the data from MTS, the operator received 10 mn USD from Comstar and paid it 34.8 mn USD.

However, it won’t be easy to consolidate MTS and Comstar: Comstar-UTS controls MGTS, which is a company with the complex management structure.

2. The Market Participants

VimpelCom reported for 2Q08

VimpelCom reported for 2Q08. The considerable revenue growth was contributed by the acquired GT (52.1% to 2.6 bn USD). The share of mobile communications is 2.18 bn USD, the share of fixed-line communications is 477 mn USD. By the end of 2Q08 GT had connected 5.5 mn households to FTTB network (4.1 mn in 1Q08). It is the best result over the whole history of the company. The operator’s net profit has increased 31% (to 470 mn USD) compared to the same period of 2007. However, in comparison with 1Q08 net profit decreased 21.8%. ARPU of the operator in Russian has come to 14.7 USD (12.3 USD in 2Q07 and 13.2 in 1Q08).
The operator’s net profit in the CIS has come to 22.3 mn USD. The revenue of the Ukrainian business has grown considerably due to the consolidation of GT (19% compared to 2Q07).
According to analysts, VimpelCom’s results can be considered as positive, though in comparison with MTS statements over the same period the company’s figures seem worse. OIBDA margin reduction is the result of the consolidation of GT figures, the fixed-line business of which is less profitable than cellular communications business, experts say. The acquisition of GT has provided entering the growing regional market of broadband Internet and also has created opportunities for cross sales and saving of expenses.
The company’s positive results prove stable development of the operator. VimpelCom has already become more attractive than some of its main competitors, experts say.

Severen Group wants to increase its influence in the centre and regions

A Petersburg company Severen Group is planning to increase its presence on the Moscow and regional markets (the Ural, the Far East and the South). The company is planning to pay more attention to business centres since in the corporate segment they have already provide services of Internet access and domestic communications. To increase its share in the Moscow region the company’s management intends to expand the main network in the capital city and then to enter the market of the Moscow region and of some regions of the Central Federal Region. Thus, within the nearest three years Severen Group is planning to connect several tens of business centres in Moscow.
In 2009 Severen Group intends to open subsidiaries in the South and the Ural, in 2010 – in the Far East. Presently the company is only operating in two regional towns (Samara and Novosibirsk).
Analysts agree in the opinion, the company’s plans are ambitious. It may face problems when realizing its plans. Firstly, the operator will face strong competition in Moscow and the Moscow region from the direction of Comstar and GT, the leader of the Moscow market of broadband access. Secondly, even big mobile companies face problems when entering the complex market of the capital city.
According to experts, the operator will be able probably to take a share of the Moscow market. In regions it may take strong position, too. However, it will demand big investments and take a lot of time.

MGTS is strengthening its position on the market of broadband access

MGTS has started to realize its new development strategy. The company is increasing its influence on the market of broadband access. By the end of 2008 the company is planning to increase the number of its consumers of broadband access services by 30%.
At that the operator intends to provide new services for mass consumer mostly. It will place the emphasis on the subscriber base growth.
At present the share of MGTS is 3% on the Moscow market. After new services appear, the operator expects an increase of broadband access subscriber base.
According to analysts’ evaluations, the company’s plans, directed to the most perspective markets development, are positive. Growth of subscriber base due to introduction of new services is a circumspect decision.
In case the operator manages to follow its new strategy, it will succeed, experts say.

Motiv applied for DLD/ILD codes

A Ural company Motiv has applied for codes to provide services of DLD/ILD communications. One pair of DLD/ILD codes is only left and four operators (MTS, VimpelCom, MegaFon and Motiv) pretend to them. Motiv finished its LD network construction, which was examined by Rossvyazkomnadzor. Thus, the company only needs to obtain DLD/ILD codes.
The operator is planning to begin traffic transit from operators and business clients in 2009. However, it will take time to obtain codes as there is a problem of lack of codes for long-distance operators.
According to analysts, Motiv may obtain DLD/ILD codes. However, there are few problems. The operator will hardly be able to compete with such strong federal players as VimpelCom, MTS and MegaFon. Moreover, other companies may try to enter this market, too. Probably, the revenue from services of long-distance communications will not be big. The problem of codes distribution will be solved probably by the end of the year and the codes will be obtained by all alternative operators of long-distance communications, experts believe.

MegaFon bought a content-provider InKor

The Big3 operator MegaFon acquired InKor company, providing the service Ring Back Tone (RBT). Previously the provider had been divided into two companies. Assets, which did not refer to RBT, were directed to the founded InKor Media company. RBT business was acquired by MegaFon. Anton Belenets, director on MegaFon non-profile assets management, has been appointed director general of the new company.
MTS launched this service in 2005 and today subscriber base of this service is around 4 mn people. VimpelCom, which started RBT in spring of 2008, estimates its subscriber base at over 2 mn people.
According to analysts, the acquisition of the content provider by MegaFon will not influence the operator’s development and its financial figures much, in particular. The service, which will be provided by MegaFon, influences the company’s image mostly. In future mergers with operators will be the most optimum alternative for RBT and other content providers.
RBT service penetration in the world is assessed at 3-40% . The business is quite popular and possesses good outlooks of development.

AFK Sistema reported for 2Q08

AFK Sistema reported for 2Q08. The company’s consolidated revenue has increased 40.2% compared to the same period of 2007 to 4.3 bn USD. OIBDA has grown 39.9% compared to the same period of 2007 to 1.5 bn USD; OIBDA margin has reached 35.2%.
Operation profit has increased 32.4% compared to the same period of 2007 to 919.5 mn USD: operation margin has reached 21.5%. Profit from continuous activity has almost doubled compared to 2007 and reached 289.5 mn USD. The company’s assets have grown 45.6% to 32.7 bn USD.
In accordance with the objectives “5X5-25”, set by the company’s shareholders, the company is planning to reach 25% of ROIC within the nearest five years and maintain this figure on such level in future.
According to analysts, Sistema’s statements are neutral. They note considerable reduction of the company’s pure profitability from 14.9% to 8.4%, caused by the rapid growth of the minority shareholders’ share from 536 mn USD to 745 mn USD. Experts connect this fact with the acquisition of 10% of the Indian mobile operator Shyam Telelink in September of 2007. Moreover, within 1H2008 the company’s share in the operator has come to 73%. It is difficult to forecast the company’s development due to its business diversity, analysts say.

An investment company ANN has bought Euroset

The investment company ANN, controlled by Aleksander Mamut, has bought 100% of the cell retail company Euroset from the company’s co-owners Evgeny Chichvarkin and Timur Artemyev. Euroset, which is considered the biggest cell retail company in Russia, was assessed at 1.25 bn USD, taking into account its debt.
In the beginning of September of 2008 the law enforcement bodies conducted a search in Euroset’s head office in the frameworks of the criminal cases.
According to analysts, the sale of Euroset was expected, although few people could suppose it would be acquired by the investment company ANN, controlled by Aleksander Mamut. The sale of the retail company was forced and influenced by the actions of the law-enforcement bodies, experts say. The company’s value of 1.25 bn USD is considered as a fair value by experts. Analysts also agree in the opinion the company will be re-sold to other investors.

Comstar-UTS is launching mobile WiMAX in Moscow

Comstar UTS specified the date of mobile WiMAX launch in Moscow. The launch depends on terms of frequencies receiving. The company is planning to receive them in October-November of 2008. According to the operator’s plans, the network of wireless broadband Internet access on the basis of mobile WiMAX will be put into operation in December of 2008. They plan to set 160 base stations until the end of the year. Depending on consumers’ demand their number may be increased to 400. The company’s mobile WiMAX is an addition to the existing networks of wired broadband access of Comstar.
In 2008 investments of Comstar-UTS in the network construction will come to around 20 mn USD. Comstar chose a decision of Nortel company for the network creation. Tenders for the delivery of equipment and the network construction were won by Kvazar-Micro (working under the brand “Sitronix Information Technologies”). The design works are carried out by Intellect-Telecom company. Comstar-UTS is developing the project in cooperation with Intel company. According to experts from Comstar-UTS, mass sales of laptops with internal WiMAX modules are expected in 2010. Comstar-UTS also applied for receiving of frequencies in the Moscow region.
According to analysts, the company has a good chance to receive frequencies in the nearest six weeks. Moreover, some analysts say the decision has been already taken though not published. The service is not an independent product, but an addition to the company’s services, analysts note. Experts emphasize that demand for WiMAX service depends on several factors such as appearance and introduction of new technologies, which may replace WiMAX before it becomes a mass service, and sales of laptops with internal WiMAX module.

Eldorado has disclosed mobile phones sales

Eldorado company, one of the biggest Russian retail companies, has disclosed its sales of mobile phones. According to its figures, it has taken 4 th place in Russia. According to the data of Mobile Research Group, 30% of the market of mobile phones sales belongs to Euroset. Svyaznoy has 18% of the market. The market share of Cifrograd is 10%.
In 1H2008 Eldorado sold 1.486 mn cell phones; if taking into account wholesales (1.536 mn). 64% of the total amount were sold through the company’s hypermarket network, 36% of phones were sold through Eldorado mobile salons of communications (the company owns 400 salons). The sales grew 54% compared to the same period of 2007. The company is planning to sell around 2.7 mn phones by the end of the year. According to the company’s forecasts, next year its sales of mobile phones will increase no more then 10-15% due to recession of demand.
Eldorado’s results seem very positive, analysts say. 4th place of the company is a good achievement, taking into account the pressure for law-enforcement bodies. The results were contributed first of all by the company’s approach to advertising as well as its price policy. Eldorado has a chance to take 3rd place in case it invests in hypermarket network development, experts believe.

MegaFon is planning to enter the Iranian market

To win a tender for a cellular communications license in Iran, MegaFon will have to pay at least 300 mn euro and pay 15% of domestic revenue to the country’s budget annually. The investment bank Millennium Finance Corporation (MFC) will advise the Iranian government during the tender. MFC was created by a group of international investment and banking companies in cooperation with the Dubai Islamic Bank.
The initial price of 3rd cellular license will be 300 mn euro (440 mn USD). Besides, a company, winning the tender, will have to contribute at least 15% of its local subsidiary’s revenue to the country’s budget. The tender will be divided in three stages: at 1st stage the commission will evaluate applicants’ technical potential; at 2nd stage they will assess business plans; and 3rd stage will concern prices.
To construct a network of 3rd national cell operator initial investments must be no less than 3 bn USD. At 1st stage all provincial centres of Iran must be covered by the network and an operator must provide services to no less than 15 mn subscribers.
MegaFon is the main candidate for the license. The company’s management declared on repeated occasions about its intention to take part in the tender. . In May the operator opened its representative office in Iran and director general of MegaFon Sergey Soldatenkov declared in case the company won the tender it was ready to invest 3 bn euro in cell communications of Iran. According to the results of 2007, the operator’s free money flow reached 885 mn USD, and at that the operator did not pay dividends to its shareholders.
The Iranian license is of interest to the Turkish Turkcell and to Etisalat from UAE, too. Etisalat is a serious competitor. In 2005 the company paid 2.9 bn USD for 3rd GSM license in Egypt. At that the initial price for the license was only 430 mn USD and 3% of revenue had to be paid to country’s budget annually. Turkcell tries to enter the Iranian market, too. In February of 2004 Turkcell headed a consortium, which made an agreement about receiving 2nd GSM license in Iran. Turkcell obtained 51% of the consortium. However, a year later the Iranian Parliament decided to decrease the company’s share to 49%. Afterwards the Iranian government replaced Turkcell with the South-African MTN Group, appealing to the fact that Turkcell had delayed payment for the license.
As a result, in November the joint Iranian and South-African company MTN Irancell obtained 2nd national cellular license, paying 300 mn euro (350 mn USD) for it. According to the results of 2007 its subscriber base was over 6 mn subscribers, its revenue came to 163 mn USD and its net loss was 58 mn USD.
According to analysts, the initial price for the license is overstated as four cell operators have already worked in the country (two national and two regional operators), and penetration is over 56%. Nevertheless, there are enough candidates to struggle for this market. Western companies will not participate in the tender probably because of political reasons, analysts say.

VimpelCom will launch networks in Vietnam and Cambodia

In 1H09 VimpelCom is planning to launch networks of cellular communications in Vietnam and Cambodia. The network examination is already carried out in Cambodia. It will be launched in case it includes no less than 200 base stations. Later the operator intends to increase the number of stations to 1 thousand.
One base station is evaluated at 200 thousand USD. Within three years VimpelCom intends to take 20% of the country’s market and to collect around 2 mn subscribers. In Vietnam the operator intends to take 15-20% of the country’s market, too. It expects to collect 15-20 mn subscribers. The network examination in Vietnam is scheduled to the beginning of 2009. VimpelCom is planning to set around 1 thousand base stations in the country.
In June of 2008 VimpelCom acquired 90% of a Cambodian company Sotelco, owning a license for mobile communications of GSM 900/1800 standard and the frequencies, for 28 mn USD. In June the operator also declared it had founded a joint venture with the Vietnamese GTel Mobile and was planning to invest 267 mn USD in it.
According to analysts, VimpelCom has certain potential to enter other markets. However, Iran is not of interest to the operator because of political risks.

Comstar is planning to acquire Stream-TV

An alternative operator Comstar-UTS is planning to acquire Stream-TV by the end of 2008. Thus, Comstar will get an access to 3.5 mn households and 1.5 mn private subscribers. Next year Comstar will spend 60 mn USD on Stream-TV subsidiaries’ networks enhancement.
On September 4th Sergey Pridantsev, president of Comstar-UTS, declared about consolidation of regional operators, included in Stream-TV. For a month already Comstar has been managing this asset and it has already changed its management. Aleksander Pyavkin has been appointed director general of the company. Vladimir Kondratyev has been appointed for the position of financial director. Viktor Koresh, vice president of Comstar on regional development, has been appointed Chairman of Stream-TV Board of directors.
Comstar-UTS made a contract of agency, which allows it to manage Stream-TV, exercising its rights as a shareholder. After the assets of Stream-TV are transferred to Comstar, the operator becomes a national operator of broadband access with an access to 67 towns of Russia, where the population is over 48 mn people. Stream-TV networks need enhancement. Comstar is planning to enhance up to 90% of the company’s networks, using FTTB technology. The operator is also planning to integrate the networks to create an integrated infrastructure that will allow to provide multi-services of telephony, Internet and TV for mass segment of the market. The operator also intends to use its received resources for a network construction and servicing corporate subscribers.
Though Comstar will get 1.5 mn private subscribers, the operator will not change its strategy on the market of long-distance communications. The strategy is only aimed at corporate clients.
The news about Stream-TV joining may help Comstar to return investors’ favour, analysts note. According to experts, Comstar’s results for 1H2008 are weak and the forthcoming consolidation of Stream-TV is positive news.

Sistema doesn’t intend to sell its shareholding of Svyazinvest

Though Russia’s authorities do not plan to sell 75% minus 1 share of Svyazinvest, AFK Sistema will not look for a purchaser for its blocking shareholding. Vladimir Evtushenkov refuted rumours about the possible sale.
The blocking holding of Svyazinvest was acquired by Sistema from Leonard Blavatnik for 1.3 bn USD for the sake of its subsidiary Comstar-UTS in December of 2006. Evtushenkov did not concealed the goal of this investment was to acquire the rest 75% later. In June of 2008 Vitaly Savelyev, 1st vice president of Sistema, declared in case the decision about Svyazinvest’s privatization was not taken within 18 months, Sistema would decide either to maintain the shareholding or not. Two months later Minister of Communications of the RF Igor Shegolev declared the State was not going to privatize Svyazinvest in the nearest future.
The holding should be re-organized first and its management should be improved. Rosimushestvo has sent an instruction to the holding, demanding to convoke a meeting of shareholders to re-elect the Board of directors and director general. Vitally Savelyev from Sistema and Sergey Pridantsev from Comstar are among the candidates for the position of director general. However, according to rumours, they both refused to take the position.
Evtushenkov either expects the privatization or will use a chance to appoint their director general in Svyazinvest, that is why he is not going to sell its 25%+1 share, experts suppose. Moreover, there is no one to sell the blocking holding to. Previously, the holding had been of interest to Alfa Group and KIT Finance.
The holding’s reorganization will be possible as long as the new management offers a clear development strategy, the representative of the Ministry of Communications note.

VimpelCom may buy Telekom Austria

Vimpelcom intends to expand its presence on overseas markets. The company is considering a possibility to acquire an Austrian operator Telekom Austria. According to the rumours, appeared in May of 2008, AFK Sistema is interested in acquisition of one of Telekom Austria’s assets. The information has not been proved in the company. The company is estimating different markets at present and has not decided yet whether to buy the asset. An Egyptian telecom-holding Orascom has also informed about its negotiations with Telekom Austria.
Before Telekom Austria can be acquired, it should be privatized. However, this process may be delayed due to a new government forming in the country. One part of parties speaks for privatization, and another part votes against.
According to analysts, the acquisition of the Austrian company by VimpelCom will be possible in case the operator obtains a credit. On the whole the purchase seems unlikely. The company spent much on GT acquisition and now it is focusing on its mobile and fixed-line assets consolidation.

MGTS has made a contract with ACBT

The fixed-line communications operators MGTS and ACBT have made a new contract about joining. The previous contract was made by the companies in 1994 and has not been revised since then. According to MGTS representatives, now ACBT is given equal rights as other operators, joined to MGTS network.
The contract about joining with ACBT was made after long months of negotiations. Recently MGTS and CJSC Sonic Duo, a subsidiary of MegaFon, have made a contract about traffic connection and transit.
The same conflict was initiated by MGTS with Synterra company. According to Synterra’s representatives, the company is not ready yet to make a new contract about traffic connection and transit and expects it will obtain a court decision about the current contract legitimacy.
The conflict is a result of financial problems between companies, experts note. MGTS received money from ABCT for its traffic transit though the money was not enough. Then MGTS disconnected partially the cell traffic transit through ACBT network.

Shyam Telelink obtained frequencies in India

The Indian Ministry of Communication gave Shyam Telelink frequencies for work across the country. The company obtained all necessary frequencies to be called a Panindian operator. The licenses, which allow to provide cell communications services across the country, had been obtained by Sistema’s subsidiary in the beginning of 2008. However, frequencies distribution only began in April
This autumn the Indian authorities will begin to hold tenders for 3G licenses. An initial price for a license for work across the whole India is around 471 mn USD. They are planning to distribute 3-5 3G licenses at first and 5 another licenses later. The state-owned operators BSNL and MTNL will receive licenses hors concours.
Shyam Telelink is planning to construct an Indian network of cell communications on the basis of CDMA-800. The Indian subsidiary has already made agreements about delivery of equipment from ZTE, Alcatel-Lucent and Huawei Technologies. Sistema has good experience in CDMA networks construction. Before 2004 its subsidiary Personal Communications had been served the CDMA-800 network under Sonet brand in Moscow.
Previously the management of AFK declared that year Sistema would invest 1 bn USD in Shyam Telelink and the total investment might come to 4-7 bn USD within 10 years. Shyam Telelink is planning to cover 70% of cities and roads in India within three years, connecting 35 mn subscribers by 2012 (31% of the total population of the country). The subsidiary’s share in Sistema’s consolidated revenue must reach 5-7% by this time.
India is one of the few markets, possessing great development potential, experts say. The country’s population is over 1 bn people and penetration is not high ( around 23%). At the same time the market is very competitive and its participants have to survive with a very low income. According to CDMA Development Group, Indian operators’ ARPU is only 4.42 USD (compared to 11 USD of MTS ARPU in Russia in 2Q08)
According to analysts, CDMA technology is not very popular in the world. According to the data from World Cellular Information Service, it is used by 11.6% by subscribers throughout the world. However, in India the per cent of CDMA users is higher: around 25% (around 67 mn people) from 281 mn users of cell communications are subscribers of CDMA networks (data India-cellular.com 06/ 2008)

Vnesheconombank has submitted the acquisition of the Svyaz Bank’s shares

The state-owned corporation “The Bank of Development and External Economic Activity” (Vneshtorhbank) has submitted the acquisition of 98% of the Svyaz Bank’s shares and the programme of financial assistance to it to the approval of the Bank of Russia . To regulate the Svyaz Bank’s work they appropriated financial resources, aimed at continuous current payments provision.
Previously it had become known that VTB had been negotiating about a possible acquisition of the Svyaz Bank. However, later they informed that Vneshtorgbank would become a purchaser of 100% of the Svyaz Bank.
The sale of the Svyaz Bank was caused by debts of the bank. The total debt on interbank credits of the Svyaz Bank is from RUB 8 bn to 10 bn.

TTK introduced its statements

In 1H08 Transtelecom’s (TTK) income came to RUB 111.5 bn, 24% growth y.o.y. The company’s net profit came to RUB 1.95 bn. Despite appearance of new players on the DLD and ILD communications market TTK continues growing sequentially.
In May of 2008 TTK carried out re-branding and began home networks construction in the regions. In the nearest years TTK is planning to provide services of broadband access in 120 towns, spending RUB 20 bn on its infrastructure construction. According to the company’s guideline, the retail segment will contribute 50% to the revenue by 2015.
Financial figures of Rostelecom, the major competitor of TTK, have not changed considerably over 1H08. The company has maintained its share on the market of DLD and ILD communications. Over 1H08 Rostelecom’s revenue has come to RUB 30.6 bn. The company assesses its results as positive, noting it has managed to maintain its positions on the market of LD communications, in spite of the new participants appearance.
Experts have no doubts the market of long-distance communications becomes more and more competitive. TTK possesses a good basis, the constructed network throughout the country, while other market participants will have to construct theirs. TTK does not have experience of work with end users and it may affect the company’s entering the retail market.
Alternative operators increase their financial figures faster than TTK and Rostelecom. Over 1H08 CJSC Synterra has doubled its net profit and revenue. According to the statements under RSBU, the figures have come to RUB 2 bn and RUB 3.5 bn accordingly. The company’s income growth is mostly driven by communications channels leasing (these services share is around 80%) and by expansion of services, provided on the basis of Synterra’s IP/MPLS network.

MegaFon reported its revenue

In 2Q08 MegaFon increased its net profit by 22.1% (as a result net profit of the operator exceeded RUB 10 bn) due to additional services and active subscribers attracting. In 2Q08 MegaFon-Moscow started new services “Home Zone” and “Office Zone”, which allow subscribers make calls to fixed-line numbers at reduced tariffs. As a result, in the end of May the subscriber base in the Moscow region exceeded 6 mn people.
According to the company’s estimates, its share of active subscribers in Moscow and the Moscow region is 27% and it continues expanding. MegaFon’s revenue increased 23.8% y.o.y to around RUB 42.5 bn. EBITDA of the operator grew 13.6% y.o.y, to over RUB 20 bn. EBITDA margin came at 48.3%.
According to analysts, MegaFon continues to grow mostly due to its active subscriber base expansion and increasing the use of voice and additional services by its subscribers. The company continues to increase its revenue on the market due to aggressive attraction of subscribers, offering them innovative tariff plans. MegaFon becomes a serious competitor to VimpelCom and MTS, experts conclude.

Bee Line disconnected Golden WiFi

VimpelСom decided to stop development of the Golden WiFi project for individual users. Henceforth the company will only set hotspots in public places: cafes, airports, etc, i.e. in places the operator had set them before GT was acquired.
Primarily GT provided Internet access through dial-up lines under a trade mark Roll. When the demand for dial-up began to reduce in 2005, GT acquired Daicom company, possessing frequencies in 2.4 GHz range in Moscow, for 500 thousand USD. In 2006 GT tested Golden WiFi network and in 2007 the network was put into operation. The network offered three tariff plans: RUB 50 an hour, RUB 100 a night and RUB 500 a month (the traffic was unlimited for all tariffs). Over the first year 10 mn USD were invested in the project and the same amount would have to be invested last year.
The Moscow network of GT became the biggest hotspot in Europe: currently the number of its users is 94 thousand people. GT planned to increase its WiFi network: last year they acquired Alcar company, possessing the corresponding frequencies in the Moscow region, for 1.9 mn USD. The hotspot network was also launched in St. Petersburg, though just in public places. And in Kiev, where GT also provided services of cell communications, the operator planned to construct a convergent network WiFi/GSM.
However, in the beginning of this year GT was acquired by VimpelCom. Primarily the operator decided to create a convergent service and give a possibility to buy time for work in hotspots through SMS to its cell subscribers. But now VimpelCom has focused on broadband access services provision under FTTB technology and on 3G cellular communications networks. We note the problem of 3G frequencies distribution will not be settled in Moscow in the nearest future.
WiFi technology is designed for work indoors. WiFi is not good for permanent use and downloading big data, analysts say.
At the same time the main objective of Golden WiFi was to increase GT capitalization before the forthcoming sale and the aim was achieved. The current decision to set hotspots only in public places will influence the company’s image.

Nesterov has created Broadside

Aleksander Nesterov, former director general of Sky Link, has created a service company Broadside, which will provide services under the brand itWorks to corporate clients through agents: cellular and wired operators. Microsoft acted as a partner of itWorks. itWorks has invested 1.2 mn USD in the infrastructure and it expects to collect 14-16 thousand users over 6 months. The expected revenue of the company over a year is 6 mn USD. 100% of Broadside belongs to Aleksandr Nesterov.
itWorks will provide services for small and medium business: corporate mail, GRM, corporate portal, office messenger, for a license fee. Mobile and fixed-line operators are used as sales agents. They introduce these services as additional services for their corporate clients. itWorks works in cooperation with Microsoft, which delivers decisions and participates in the services promotion, sales organizing and support of clients. The first partner of itWorks, a Moscow subsidiary of Centertelecom, will provide E-mail of Business Class Service to corporate subscribers from this October. Then it will provide GRM, office communicator, etc. They expect ARPU ~ RUB 420.
Business Class E-mail is made for users of free mail services and they lack in them for serious business communications, analysts note. Other clients are companies, already possessing their own mail services, but dissatisfied with them (problems with a system administrator, unlicensed software, etc). Some clients are dissatisfied with free services as quality and reliability are more important for them and they are ready to pay for them.

MegaFon has applied for SMARTS acquisition

3rd biggest cell operator MegaFon has applied to FAS for the acquisition of a Volga region cell operator SMARTS. Previously MTS had applied to FAS for the same acquisition.
MegaFon’s application does not mean the operator will acquire SMARTS in the nearest time. It is one of the stages of a possible transaction. MTS does not assess its outlooks, too. VimpelCom shows the least interest to SMARTS.
Besides the Big3 operators, Svyazinvest’s subsidiary Volgatelecom and a Russian subdivision of a Sweden telecoms concern Tele2 have also shown their interest to SMARTS assets. Tele2 acquired one of the SMARTS subsidiaries in the Krasnodar region (Telecom Eurasia) in 2007.
According to experts the company will hardly cost more than 900 mn USD in the crisis conditions.

3. Tension Lines

MRK increase tariffs

Interregional companies of Svyazinvest (MRK) are planning to increase their unlimited tariff plans. The tariff plans limit was set by the Federal Service on Tariffs on February 1st of 2007.
MRK had already had a possibility to increase their tariffs this spring, though they did not do it in order not to cause the growth of inflation. Since August of 2008 some companies have changed their unlimited tariff plans: Yuzhnaya Telekommunikatsionnaya Kompaniya – from RUB 295 to RUB 315 in the Rostov region, Centertelecom from RUB 290 to RUB 320 for natural persons in the Moscow region and from RUB 250 to RUB 315 in other regions of the Central Federal Region. From September 1st they expect the growth of tariffs in Uralsvyazinform (from RUB 295 to RUB 330, including payment for the line).
According to analysts, the growth of tariffs must help the company to increase its economic efficiency and to finance digitalization of fixed-line networks. Thus, they expect they will enhance services, provided to their subscribers. However, they should not expect big influence on financial results as the revenue may only increase 2-3%. Further increase of tariffs may lead to outflow of subscribers.
According to experts, the Federal Service on Tariffs will obviously raise the upper limit for tariffs as the sector needs funds and investments and tariffs are one of the ways to get them. However, the policy of tariff increase must not be aggressive as it will result in subscribers rejection in fixed-line communications services.

The Association-800 has applied to FAS

Regional operators of the Assocoation-800 applied to FAS. The reason was a possible taking over of Sky Link, winning GSM 900/1800 licenses in 45 regions in 2007, to MTS. In case the transaction is made, there will be a new constraint of competition on the regional market since AFK Sistema becomes a monopolist.
The tender for the licenses was announced last April. The purpose of the tender was to move new participants to the regional market, which would be able to become competitors of the Big3 operators in future. AFK Sistema applied to FAS for the purchase of 50% of Sky Link in order to obtain more influence and power in the regional segments. Thus, the members of the Assocoation-800 speak of the violation of the antimonopoly legislation.
Analysts have different opinions on the matter. According to some of them, the Association’s application to FAS is reasonable and regional operators’ fears are appropriate. There is a tendency of federal operators’ strengthening on the telecoms market and regional players are losing their influence as they do not possess sufficient base for the competitive business. According to other analysts, the application to FAS is not reasonable enough and the fears are overestimated.
The application to FAS may be initiated by one of the Big3 operators, not interested in MTS strengthening, experts say. Thus, MTS may receive new licenses and strengthen its position on the market.

Rostelecom was removed from a tender for Kirghiztelecom acquisition

Gosimushestvo of Kirghizia removed the Russian holding Rostelecom from a tender for acquisition of 77.84% of Kirghiztelecom shares. Turk Telekommunikasyon A.S. (Turkey) and Axos Capital GmbH (Germany) left the field, too. The tender was announced on June 17th and the results had to be published on August 29th, though they were not. Rostelecom had already attempted to acquire 51% of Kirghiztelecom in 2003. At that time Swetel A.B., the Sweden company, had won the tender.
Thus, the main candidates for a stake of Kirghiztelecom will be Kazakhtelecom (Kazakhstan), ElKat Invest (Kirghizia), Nimisco holdins Co.limited (Cyprus), Colimar holdins Co. limited (Cyprus), Ala-Too kenii (Kirghizia) and the consortium of Kirghiz legal persons, consisting of Telecom Invest, KirghizKreditBank, BiMoCom Ltd and Ermen-Too Resources.
According to analysts, the decision of Kirghiz authorities to remove Rostelecom from the tender is reasoned to some extent. It is probably caused by violation of the tender conditions. Perhaps, the pretenders for the stake in Kirghiztelecom were not able to come to an agreement with the country’s authorities. Another variant is that those actions of the authorities gave way to Kirghiz and Kazakh investors.
According to experts, the Kirgiz asset is attractive for Rostelecom. The approximate cost of the sold stake of Kirghiztelecom is 50-60 mn USD.

Prosecutor’s Office opened a case against employees of Euroset

The employees of Euroset Boris Levin and Andrei Ermilov were arrested for two months under the petition of Prosecutor’s Office during the searches, held in September of 2008. They were accused of extortion and kidnapping of Andrei Vlaskin, engaged in phones transportation for a well-known Russian retail company, in 2003. The suspected employees were convicted of the crimes.
Not long time before these events AFK Sistema had informed that the acquisition of Euroset by the consortium was one of the possible variants. Previously Alisher Usmanov, owning shares of MegaFon, and Aleksey Reznikovich, director general of Altimo, had shown their interest to the company, too.
Analysts have different opinions on the matter. Firstly, such activity may be initiated not by competitors, but by law enforcement bodies in order to promote some people. Secondly, the case is being considered as connected with the preplanned transaction on the cell retail company sale as the value of a company with legal problems, will fall significantly. Thirdly, the accusations and the arrest of the company’s employees seem excessive, some analysts note.
Euroset will probably remain a leader on the market, experts say. If the conditions are negative, it may decrease its market share by few per cent. After the company’s owners are replaced, the conflict may be settled.

Indian authorities charge Sistema with the delict

Indian authorities charge Sistema with an unauthorized increase of its stake in the cell operator Shyam Telelink. Thus, Sistema has become an owner of 73.97% of the Indian company. The Council for Foreign Investment had to give a permission to increase a stake in such strategically important sector of communications.
Sistema began its step-by-step acquisition of Shyam Telelink in autumn of 2007. First it acquired 10% of the operator and then it was waiting for a permission of CFI to buy the rest stake. In December of 2007 the permission was given. Simultaneously AFK made an option with Shyam Telelink for increase of its stake to 74%.
Now the country’s authorities are considering sanctions for Sistema’s delict: from a penalty to the transaction cancellation.
According to analysts, the accusations seem a bit strange and belated. Firstly, a year ago CFI allowed to increase the stake of AFK to 74%. Secondly, three years have already past from the moment of the transaction. According to analysts, the conflict might be caused by appearance of a local investor, interested in Shyam Telelink’s assets, or by Sistema’s ignorance of certain legislative aspects.

MGTS and Synterra continue to have legal proceedings with each other

The hearing on Synterra’s claim against MGTS, connected with MGTS’s non-execution of clauses of the contract , made between the operators, was held in the Moscow Arbitration Court. According to Synterra, the court was presented new data, which could not be commented by MGTS’s lawyers. According to MGTS, the court asked for additional data from Synterra and the consideration of them was postponed to October 14th of 2008.
The conflict between the operators was transferred to court after MGTS had limited Synterra’s traffic transit. Synterra’s financial claims are not big and come to RUB 375 thousand.
MGTS’s representatives note the court was presented insufficient documents for the judicial trial and the hearing was postponed.
Despite the contrary opinions about the trial, the conflict may be settled, experts note. Not long ago MGTS signed a contract with Synterra about an access for its subscribers to emergency services’ numbers. Moreover, Synterra recovered MGTS expenditure for services, provided previously.

Telenor excluded Altimo from the claim

The Norwegian holding Telenor excluded Altimo and its affiliated company Eco Telecom from the claim, brought to the Court of New York against these companies and VimpelCom’s minority Farimax. In the claim Telenor demands to close the trial in the arbitration Court of Khanti-Mansiisk Autonomous Region, where Farimax had demanded 2.8 mn USD from the Norwegians for the delay of the cell operator’s expansion into Ukraine.
The claim against Altimo, Eco Telecom and VimpelCom’s minority Farimax Products Inc (registered on the British Virgin Isles and controlling 0.002% of Vimpelcom shares) was brought by Telenor in June. In April Farimax also brought a claim to this court, demanding of the biggest Vimpelcom’s shareholders, Telenor, Altimo and the affiliated structures, to compensate the cell operator and its minorities 3.8 bn USD for the delay of VimpelCom’s expansion into Ukraine. In particular, Telenor, owning 56.5% of another Ukrainian operator Kievstar GSM, had blocked on repeated occasions acquiring of CJSC The Ukrainian Radiosystems by VimpelCom. That is why the main claims were brought to Telenor by Farimax, which demanded to arrest Telenor’s shareholding of VimpelCom.
In June Telenor initiated the trial in the Court of New York against Altimo, Eco Telecom Limited and Farimax. The Norwegians insisted Farimax was affiliated with Alfa Group and demanded to withdraw the claim for the Arbitration Court of the Khanti-Mansiisk Autonomous Region and combine it with the Farimax’s claim in Geneva as it had been provided by VimpeCom’s shareholders’ agreement. In March Eco Telecom brought the same claim to the Arbitration Court of Geneva, asking to recover 1 bn USD from Telenor. According to Farimax it is not linked to Altimo. On August 17th the court of the Khanti-Mansiisk Autonomous Region excluded Altimo and the affiliated companies from the claim of Farimax. Telenor was declared responsible for endamagement worth 2.8 bn USD to VimpelCom. Telenor was also ordered to pay costs worth RUB 460 thousand. This decision has been appealed by the Norwegians now.
According to lawyers, there is a decision of the Russian Court, according to which Altimo was excluded from the claim. Taking this into account, it will be very difficult to carry out a decision, that may be made by the American or Swiss courts, in Russia.

Rossvyazkomnadzor against Akado

The Department of the Federal Service on Supervision in the sphere of Communications (Rossvyazkomnadzor) in Moscow and the Moscow region has published a declaration, according to which collection of payment for a tariff plan change from subscribers by Akado-Stolitsa company was illegal.
Rossvyazkomnadzor informed the subscribers of Akado-Stolitsa that each company’s client in case he had paid for a tariff plan change, could demand of the operator to compensate.
However, Akado-Stolitsa’s representatives say the claims of the regulator are groundless, but still they guarantee to return money to their subscribers. According to the company, the collection of payment was legal as they provide data communication services instead of telematic services, indicate in the rules. (ComNews, 25/09/2008)

4. Business and Authorities

The Ministry of Communications speaks for consolidation of Rostelecom and Central Telegraph (CT)

The Ministry of Communications offers Svyazinvest to consolidate Rostelecom and CT. According to the regulator, it is necessary to elaborate on all possible variants of the consolidation in order to take the most effective decision.
The idea to consolidate Central Telegraph and Centertelecom was considered as economically ineffective by the Ministry, though it had been approved by Rosimushestvo.
According to analysts, the decision about Rostelecom and CT’s consolidation will depend on the heads of the government and the telecoms sector. There are three ways of development, each of which has its own aims. The first way is consolidation of CT and MGTS. It may cause problems with antimonopoly bodies and strengthen Comstar’s position. The second way is consolidation of CT and Centertelecom, which has been already considered as unprofitable. And the third way is consolidation of CT and Rostelecom, which may start the company’s business diversification and provide additional working experience in the field of broadband Internet access and IP-TV.
According to experts, the consolidation of CT and Rostelecom is the most optimal as the transaction may influence both companies’ development and development of convergent services in particular.

The Ministry of Communications continues modernization of Post of Russia

After its reorganization the Ministry continues modernization of Post of Russia. The Ministry intends to launch two zone sorting centres (in the Central and Western Federal Regions) and to make all the country’s post-offices corresponding to a unified corporate style.
The sorting centres building must to be finished in September in the Central Federal Region and the end of the current year in the Western Federal Region. . The new centres will contribute to the increase of processed mail.
Primarily the construction had to be finished in 2006 (in the Moscow region) and in 2007 (in St. Petersburg). However, the terms were changed due to some objective reasons. At present the company is planning to finish the construction by the time fixed.
According to analysts, the launch of two zone sorting centres is a logical decision, that will contribute to the company’s work and improve its financial figures. However, the decision may be caused by the growing competition on the market of mail service, some analysts note.
Experts have different opinions about the company’s privatization. They say it is possible, noting, however, the company’s management has to do much to make the company attractive for potential investors. Nevertheless, according to other experts, Post of Russia is a strategic asset and it must not be controlled by private people.

The Ministry of Communications will consolidate scientific networks

The RF Ministry of Communications began to develop a project of Russia’s scientific networks consolidation under the instruction of the RF State Committee. The work on Russia’s scientific networks consolidation has been carried out since the beginning of the 90s. The new initiative of the Ministry is to recommence the project’s financing and to renew equipment in the existing networks. They promise to consolidate Russia’s scientific networks, European networks and the consolidated European scientific network GEANT3 in particular.
The project will be realized by the Department of Scientific and Technical and Strategic Development of the Industry, headed by Oleg Chutov. The project will be headed by Deputy Minister of Communications Aleksey Soldatov. Currently they are developing a concept of the scientific networks consolidation, which must be introduced to the government until 2009. The Ministry of Education and Science will be a customer and main user of the scientific networks consolidation.
In the frameworks of the consolidation they are planning to use super computers, existing in Russia, information exchange between scientific associations of Russian and Europe, etc. It is not known yet which of the operators will provide stable connectivity of the networks across Russia.
Russia’s scientific networks consolidation was started in the beginning of the 90s. In particular, the project “The Basic Network for Needs of Science and the Highest School RBNet (Russian Backbone Network)” has been existing since 1996 and it provides connectivity between most of the Russia’s highest schools. The transportation network of the project has been provided by Rostelecom since 1996. The Russian Research Institute of Social Networks Development (RosNIIROS), controlling all domains of the Russian Internet segment previously, works at the project, too.
According to specialists, the new Ministry’s initiative is to attract funds to already existing consolidated networks. The networks only need their equipment and the transportation network modernization. The Ministry of Communication was always engaged in the work at the networks consolidation. Aleksey Soldatov also has good working experience on such projects realization.

5. Economics of Innovations

MTS and MegaFon will issue dual number SIM cards

The Big3 operators MTS and MegaFon are planning to issue dual number SIM cards. The innovation will allow subscribers use their phone for personal and corporate needs separately. They will be also able to use two tariff plans simultaneously. As 3G networks are expected to be introduced in the nearest future, the new service may be used for integration of the 2G and 3G communications.
VimpelCom declared about its dual number SIM cards introduction in June of 2008. The service was only started in St. Petersburg and the Leningrad region. Now the service is available to VimpelCom’s subscribers across Russia.
According to analysts, the service may become important among mobile communications users. Dual number SIM cards may be in great demand among those subscribers, who have corporate numbers, use several numbers in order to use an appropriate tariff plan. It may be considered as another stage of struggle for a client. The service may be of interest to 5-10% of subscribes, analysts say.

Synterra invests in NIOKR

Synterra, an alternate operator of communications, invests in the development of the domestic system of network security. The operator’s investments in the project will come at RUB 50-70 mn within a year. The operator will attract leading specialist in the field of information security from Russian force departments and scientific schools to the work at the systems creation. MFI Soft company, the project’s general contractor, will be engaged in the product promotion, its introduction and maintenance.

The specialists from R&D, a Synterra’s subdivision, working on the basis of Teleport St. Petersburg company, will test the system of network security in the special pilot zone of the operator’s network.
The creation of the domestic system of communications networks information security is one of the most actual directions of many Russian companies.
Other operators of communications are also interested in domestic scientific development. On behalf of AFK Sistema Intellect Telecom is engaged in scientific development. AFK is planning to use and apply its achievements. Besides, in the beginning of 2008 Sistema and a group of companies created the Scientific and Technical Council, consisting of representatives of Comstar-UTS, MGTS, Comstar-Direct and AFK Sistema, in order to establish unified scientific and technical policy, to introduce leading technological experience and achievements of domestic and overseas science in the field of IT and telecommunications in the frameworks of Comstar-UTS group.
Providing services to the largest business corporation and the government structures, it is necessary to invest in domestic scientific development that is able to protect Synterra’s infrastructure and consequently to make it favourable for telecoms projects development and realization, analysts say.

Sistema is planning to take up GLONASS

Sistema’s subsidiaries may become the main candidates for government contractual works, promised to producers of devices for GLONASS navigation system. Sistema participates in the strategy development of a federal operator of information and navigation services for transport, ministries and departments. This operator is NIS (Navigation and Information Systems) and it was founded in November of 2007 by Sistema’s subsidiaries Sitronix and RTI Systems in cooperation with the Russian Research Institute of Space Instrument Making.
AFK also expects to become one of the suppliers of chip for GLONASS navigators. The chip (0.09 micron) will be able to turn from the American GPS navigation system to the Russian GLONASS. While the Zelenograd “MICRON”, controlled by Sitronix, is building a plant for micro chips (0.13-0.18 micron) production, Evtushenkov promised to start production of more miniature chips and navigators on their basis in cooperation with an undisclosed Chinese company. Recently a joint venture has been founded by Sitronix and the producer of ZTE communications equipment in China.
In the end of August the RF Prime Minister signed a resolution, according to which, all transport must be supplied with GLONASS devices.
According to experts’ assessment, the market price of a chip for GPS navigator comes to 7 USD. Thus, to provide buses, trolley-buses and trams, the government would have to invest around 0.7 bn USD. GLONASS navigators are not well-spread yet: the most popular model only takes 0.12% of the market. It includes a board worth 300 USD instead of a chip and the whole device costs around RUB 23 000 - much more expensive than GPS navigator.

6. Personnel Changes

Aleksey Chuikin will resign his position of Euroset president, because he has not managed to agree upon the conditions of cooperation with the company’s owners.
The information that Chukin might not prolong his contract with Euroset appeared in June. Chuikin has not decided yet where he would work in future. Until the end of September he intends to choose among the proposals he received. The proposals are from the companies, working in the field of financial, automobile and electronic retailing. According to Aleksey Chuikin, he has no any mutual pretensions to Euroset’s owners. Dmitry Denisov, commercial director of Euroset, has been appointed acting president of the company. The former Euroset president Eldar Razroyev had been holding this position for over three years. Chuikin was working as the company’s president for about a year.
Such frequent rotation of top managers is not typical for Russian retailing, analysts say. Over the previous months, several more managers, including Andrei Rukavishnikov, vice president on marketing and advertising, have quitted the company. It will be difficult to find a substitute for Chuikin. Head of a retailing company must not only be able to manage general retailing technologies, but he must also know peculiarities of the market segment, where a company works.

***

Konstantin Solodukhin, director general of Rostelecom, has been elected Chairman of the Board of directors of RTKomm.RU. Pavel Tereshenko has been elected his deputy. Valeri Lokhin has been appointed director general of the company according to the decision of the Board.
From July Valeri Lokhin was acting as director general of RTKomm.RU after Pavel Tereshenko had resigned this position. Tereshenko has taken the post of deputy director general on business development in Rostelecom and has been elected deputy Chairman of the Board. On August 12th at the meeting of the Board Solodukhin and Terechenko kept their positions.
Four new representatives of Rostelecom were included in RTKomm.RU Board of directors: Andrei Baklikov, Rodion Levochka, Galina Rusakova and Vadim Yakovlev. The Board also includes one representative of Svyazinvest: Viktor Savchenko, director of the Department for Corporate Management and Legal Provision of Svyazinvest.

***

Pavel Repin, deputy director general – commercial director of Centertelecom, has been appointed a member of the company’s Board with the term from August 20th of 2008 till July 30th of 2009 inclusive. After this appointment Centertelecom’s Board consists of 11 members. Vagan Martirosyan, director general of Centertelecom, is Chairman of the Board.
In the beginning of August Repin was appointed deputy director general - commercial director of the company. Previously he had been working as director in Internet Resheniya company.

***

Giprosvaz company replaced its director general. Anton Yevgenyev has been appointed the new director general. Previously he was working as 1st deputy director general. The former head of the company Aleksander Sisoyev quitted the company and headed a competing enterprise Svyaz-electro-proyekt.
In January of 2008 Yevgenyev came to the company and took the position of 1st deputy director general. He was in charge of commercial matters, production and development. Then he was acting as director general. Previously he had worked in Svyazinvest as director of the Department of the Company.

***

Lider company decided to pay more attention to its telecoms assets. The managing company created a subdivision on investments in technological and media assets. The subdivision is headed by Sergey Kuznetsov, the former director general of a big alternate operator Arktel. Besides Lider’s existing assets development, Kuznetsov will be also in charge of search of perspective investment projects in the telecoms sector.
Experts do not exclude Lider may found a telecommunications and media fund, where decisions about purchase and sale of assets will be made by Sergey Kuznetsov. The fund will probably invest in no less then blocking shareholdings, i.e. the company will participate in strategic development of companies.

***

The Department of IT has been created in the Central Machinery of FAS. The Department will be responsible for control and supervision over keeping to antimonopoly legislation in the field of IT. The Department will be also in charge of informatization and automation of FAS. The Department has been headed by Viktor Kudryavtsev, previously holding the position of deputy director of the Department for Transport and Communications Control.

***

On August 18th of 2008 the Commission on TV Broadcasting in the RF was changed. Igor Shegolev, Minister of Communications, replaced Leonid Reiman on the position of Deputy Director of the Commission. The resolution about the Commission change was signed by the RF Prime Minister Vladimir Putin. As before the Commission is headed by Dmitry Medvedev.
B.Antonuk, V. Ampigolov, Yu. Izmailov, V. Komissarov, D. Molchanov, P. Pozhigailo, A. Sokolov and V. Yazev lost their positions in the Commission. I. Shegolev, M. Avdeev, A. Zharov, N.Marder, D. Peskov, Yu. Prokhorov, D. Severov became new members of the Commission. Besides, according to the resolution, Boris Boyarskov holds the position of head of Rossvyazkomnadzor, Leonid Reiman is Advisor to the RF President and Aleksey Gromov holds the position of deputy head of the RF President Administration.

***

Director general can be replaced in Svyazinvest. The Ministry of Communications and Rosimushestvo offered the RF Government to re-elect Aleksander Kisilev. The Ministry of Communications offers to put forward a matter about re-election of director general to the agenda of an extraordinary meeting of Svyazinvest’s shareholders. Kisilev had become a head of the holding in June of 2006. Previously, in 2000-2006 he had been holding positions of deputy, 1st deputy and assistant sequentially for the former Minister of Communications Leonid Reiman.
According to experts, Kisilev may be asserted some claims: low income growth rate (over 2007 the company’s consolidated revenue increased 12%, while other telecoms operators’ incomes grew 25.8%); rapid growth of expenses (in 2008-2010 seven subsidiaries of the holding are planning to invest 6.5bn USD, i.e. around 64% of the total revenue of last year). However, Svyazinvest’s managers just fulfilled the decisions of the officials, included in its Board of directors. Kisilev had contradictions with the holding’s minority shareholders as well as with its subsidiaries.

***

Eldar Razroev is returning to Euroset as a member of the company’s Board of directors. Currently the Board consists of two people – Chichvarkin and Artemyev.
Razroev was heading Euroset for three years. Before he had been holding managerial positions in MegaFon and VimpelCom. Last June he started to work in AFK Sistema and headed Sistema’s subsidiary Sistema Mass Media. However, this June he has quitted this company. This July Aleksey Chuikin, replacing Razroev in Euroset, has quitted the company. Dmitry Denisov, former commercial director, is acting as director general of the retailer now.

***

Andrei Volodin, director general of Stream TV, quitted the company after 9 months of work. His quit was caused by disagreements between him and the company’s shareholders about the company’s development. Aleksander Pyavkin, former deputy for Volodin is acting as director general now.
When heading the company Volodin managed to create a branch structure in the company, including re-registering of licenses, registering of branches, technical audit of networks, redemption of stakes from minorities and renegotiating with partners and subscribers. He managed to do this within 6 months. Moreover, he developed the consolidated financial and technological policy of Stream TV, which includes 55 subsidiaries in 42 towns of the country.

***

Irina Potekhina has been appointed head of Corporate Communications Complex of AFK Sistema. Previously she was holding the position of director of the Department on Interaction with Government Bodies. According to the new development structure, approved by Sistema’s Board of directors on July 26th, the Corporate Communications Complex includes the Department on Interaction with Public Organizations and the Department on Relations with Investors.
Gennadi Frolov, heading the Department of Corporate Communications of Sistema previously, has been transferred to Sistema-Gals, where he will take the position of vice president on corporate communications of the company.

***

The RF Prime Minister Vladimir Putin signed a resolution about inclusion of Igor Shegolev in the Marine Collegium at the RF Government. The Marine Collegium is headed by Deputy Prime Minister Sergey Ivanov.

***

Konstantin Kaplin has been appointed director on development of MGTS, included in the group of companies Comstar–UTS. He has replaced Viktor Alekhin, who quitted the company. Previously Kaplin had been working as advisor to director general of Dalsvyaz.

***

Igor Shegolev was included in the Government Commission on Investment Projects, which are of the state importance. The RF Prime Minister Vladimir Putin made changes with his resolution #1260-p in the composition Government Commission on Investment Projects. Dmitry Kozak, Minister of Regional Development, has been appointed Chairman of the Commission.

***

Grigori Bunatyan has been dismissed from the position of director general of OJSC Rosinfokominvest due to his state of health. Iraida Kirillina will be acting as director general of the company. Previously she was holding the position of executive director of the National Association of Innovations and Development of Information Technologies.

***

The former director of the Federal State-owned Unitary Enterprise (FGUP) Post of Russia Igor Sirtsov has become a head of the managing company Marta, the Russia’s head structure of the holding of the same name. The company tries to reestablish solvency of the holding, which declared about its bankruptcy in August of 2008 (Marta’s creditors demand to return over RUB 3 bn). According to partners of the company, the Svyaz Bank, the major partner of Marta with close links with the Ministry of Communications, could initiate this appointment. Sirtsov had been working at the Ministry before the appointment.
Before Post of Russia Igor Sirtsov had been vice president of the oil company Atlas (1990-1998), advisor to Chairman of the Board of ria Novosti (1998-1999), advisor to Chairman of Goskomtelekom (1999-2000). Lately he was holding positions of director of Post of Russia and advisor to Minister of Communications.
According to experts, Sirtsov has obtained good working experience of crisis manager in the Post of Russia. He created a big successful company from more than 80 uncoordinated state enterprises. Igor Sirtsov could be offered 350-400 thousand USD annually. The Svyaz Bank, one of the possible initiators of Sirtsov’s appointment, is considered as one of the company’s major creditors.

***

Dmitry Denisov has been appointed president of Euroset. He has been acting as director general of the company so far. Previously he had headed the consolidated subsidiary Voronezh.

***

According to the decision of the Board of directors of Dalsvyaz, the number of members of the Board was increased from 7 to 8 people. Aleksander Pototski, deputy director general – technical director, has been appointed 8th member of the company’s Board. A. Pototski does not possess ordinary shares of the company and does not participate in its chartered capital.

***

The Board of directors of Dalsvyaz has scheduled an extraordinary meeting of shareholders to October 30th of 2008 to approve the company’s reorganization by separation of CJSC “Sotovaya SSR”. Igor Shabanov has been appointed director general of the company. The members of the Board of Sotovaya SSR: Aleksander Kikosh, deputy director on technical matters of the Kamchatka subsidiary of Dalsvyaz : Yevgeny Mordovski, deputy director; Yevgeny Torgashin, deputy director general - - director of the Magadan subsidiary of Dalsvyaz; Galina Shutak, deputy director general on technical matters of the Magadan subsidiary of Dalsvyaz; Dmitry Sidorin, deputy director on business development of the Magadan subsidiary of Dalsvyaz.

***

The Board of directors of MTS decided to dismiss Vsevolod Rosanov from the position of the Board member. At the meeting of the Board they also decided to elect Aleksander Popovski and Aleksey Koren members of MTS Board.
In July of 2008 Rozanov was appointed director general and president of Shyam
Telelink, a Sistema’s subsidiary in India. Previously he had held the position of vice president on finance and investments of MTS.

***

The Board of directors of MTS approved 9 candidates to a new Board of directors , which will be confirmed at an extraordinary meeting of MTS shareholders on October 3rd of 2008. Three of the nine candidates are independent ones. The list of candidates for voting includes: Anton Abugov, 1st vice president of AFK Sistema, head of the Complex of Strategy and Development; Aleksey Buyanov, senior vice president of AFK Sistema, head of the Financial and Investment Complex; Sergey Drozdov, senior vice president of AFK Sistema, head of the Property Complex; Tatyana Yevtushenkova, advisor to president of Sberbank of Russia; Giani Mahanbir Singh, candidate independent member of MTS Board of directors; Eldon Daniel Crowford, candidate independent member of MTS Board of directors; James Paul Ostling, candidate independent member of MTS Board of directors; Vitaly Savelyev, 1st vice president of AFK Sistema, head of the Complex of Telecommunications Assets Development – Sistema-Telecom; Mikhail Shamolin, president of MTS.

The decision to increase the number of the Board members from 7 to 9 people was made according to the requirement of the Russian legislation. In accordance with the requirement, in case the number of shareholders is over 10 people, the Board of directors must consist of no less than 9 people.

***

Tatyana Yevtushenkova, a daughter of the founder and major owner of AFK Sistema Vladimir Evtushenkov, has been appointed advisor to president of Sberbank of Russia German Gref.
From December of 1999 Yevtushenkova had been working as a director of the Investment Department of CJSC Sistema Telecom. In 2002 she was transferred to MTS, where she was holding the position of vice president on strategy and development and then the position of advisor to president. She is a member of MTS Board of directors.

***

The former director general of the Federal State-owned Unitary Enterprise “Russian Satellite Communications Company” Yuri Izmailov started to work on OJSC Rostelecom as advisor to director general. He will be in charge of interaction with special consumers and government bodies. Izmailov had been heading RSCC for almost 5 years. Now he is replaced by Aleksey Ostapchuk.

***

Aleksander Antonenko, holding the position of executive director of Radionet previously, has been appointed deputy director general of the company. He will be responsible for matters on the company’s economic activity. The matters include such objectives as governing the interaction of major blocks of the company: technical and commercial blocks in the frameworks of the company’s operation activity.

***

Aleksey Denisov has been appointed executive director of USP Compulink company. Previously he had been working as head of projects in McKinsey&Co and he had been in charge of operation effectiveness growth of industrial enterprises and projects in the field of IT.
The position of executive director is new in the structure of USP Compulink. It was created to strengthen an operating team of the company. Denisov will supervise matters of operation activity and administrative management of the company.

***

Konstantin Yunov has been appointed director on IT of OJSC MegaFon. He has replaced Nina Parfenova, quitting the company. From February of 1997 Yunov had been working as deputy director on technical matters, chief engineer of Kubansvyazservis’s branch OJSC Kubanelectrosvyaz (later UTK). Then he was holding positions from deputy technical director of UTK to director of UTK branch the Centre of New Technologies.
From September of 2005 he was working as deputy director general on IT of CJSC Mobicom-Kavkaz.

***

Lubov Strelkina has been appointed accountant general of MegaFon. She has replaced Lubov Rudnitskaya, holding this position from 2002. From 1996 to 2008 Strelkina had been holding positions of head of an auditing group of Audi, deputy accountant general of CJSC SMARTS, accountant general of MSS-Saratov (later MSS-Povolzhye).

***

Nataliya Tesakova has been appointed marketing director of CJSC Scientific and Engineering Enterprise “Infromzashita”. She will be in charge of organizing of the Marketing Department effective work as the company is oriented to the service market, and the branch decisions development.

***

Sergey Savchenko has been appointed financial director of the cell operator Shyam Telelink, a Sistema’s subsidiary in India. In 2002-2004 he had been holding various leading positions in AFK Sistema, including positions of vice-president, head of Sistema’s Financial Department and 1st vice president on finance and investments of CJSC Sistema Telecom. From 2004 to 2007 he had worked as vice president of the International Bank On Reconstruction and Development and then as 1st vice president of CJSC Sistema Gals on finance and investments. Before the appointment in India he had been working as deputy director general of the managing company of an investment group Aton.

***

Dmiry Milovantsev, holding the position of Deputy Minister of IT and Communications previously, has been included in the Board of OJSC Armada. The new executive body (the Board) was created in Armada in September of 2008. The Board will govern the company’s current activity. It will also have to increase effectiveness of corporate management and to raise rapidness of decision making and reacting to market changes.
According to the decision of the Board of directors, the Board includes Aleksey Kuzovkin, Chairman of the Board, director general of Armada; Maksim Selivanov, director general of Soyuzinform; and Dmitry Milovantsev.

***

Maksut Shadayev, director of the Department for the State Policy in the field of Informatization and IT, is quitting the Ministry of Communications. Several other key employees of the Department have also sent in their resignation.
In the team of the former Minister of Communications Leonid Reiman Maksut Shadaev had been holding the position of director of the Department of State Programmes, Infrastructure Development and Limited Resource Use. Many achievements of the Ministry are connected with the activity of this Department: the project on connection of schools to Internet, the project on equipping of schools with free software in three pilot regions. The Department also introduced such projects as creation of technological parks, creation of a branch investing fund to support small IT companies and tax reduction for software exporters. Besides, Shadaev was responsible for development of a new programme on the Russia’s electronic government creation.
According to experts, the team’s resignation was caused by serious contradiction between Shadayev and some government bodies and by lack of support from FAIR, responsible for realization of the federal programme Electronic Russia. In case new members of the Department continue this activity, the Ministry may expect progressive development of information society and our country may be included in the list of countries-leaders as it was worded in the Strategy of Russia’s Information Society Development. However, the policy is changing.

***

Mikhail Yemelyannikov has been appointed head of the Directorate on Development of the Russian service company Informzashita. Previously he had been in charge of information security in Svyazinvest. The Directorate on Development is a new structure in the company.
The company is aimed at the service market and at creation of industrial decisions. Yemelyannikov will govern a portfolio of services, already provided by the company, and coordinate works on new services creation and promotion.
Informzashita provides services on design, implementing and maintenance of systems and processes, which provide business security. This year Informzashita is planning to enter a market of outsourcing. In 2008-2010 investments in this sector development will come to 8 mn USD. Informzashita will be engaged in consulting, design and maintenance of IT security decisions.

***

Natalya Krivosheina has been appointed head of a new VimpelCom’s subdivision – the Department of Broadband Internet Access Development in the Company’s Structures in the Southern and Northern Caucuses. Previously she had been holding the position of director of the Rostov branch of Corbina Telecom. The new subdivision is included in the structure of regional management on mass market.

***

Alla Aleshkina, the former 1st deputy chairman of Sberbank of Russia, is resigning her position of head of the Svyaz Bank after financial problems and change of the shareholder in the bank. Aleksander Zhitnik, the former manager of Vneshekonombank, will become new director of the bank.

7. Figures and Facts

54 000 000 people will use CDMA EVDO Rev A technology across the world by 2013, analysts from ABI Research say.

$60 000 000 will be invested in STREAM TV networks modernization by Comstar in 2009.

Cell communications penetration comes at 56% among legal entities.

In 2007 the market of IT services came at $4 400 000 000 in Russia, analysts from IDC say. Despite the rapid growth the share of service segment remains the same – 20%.
A new iPhone 8 Gb will cost RUB 23 000. An iPhone 16 Gb will cost RUB 27 000. These prices were set by the 3G operators. Communicators will be sold along with contracts. Tariff plans costs are not defined yet. Analysts doubt the Big3operators will sell preplanned 3.5 mn phones within two years in Russia.
According to the data of the research of Amplua-broker company, the Russian market of electronic education has come to $100 000 000 – 150 000 000 annually. According to the data from the Global Industry Analysts, in 2007 the US market of electronic education was 17.5 bn USD and by 2010 they expect it will exceed 52.6 bn USD.
7% of Russians will use 3G phones by the end of 2008, MegaFon says.

177 300 000 cell GSM subscribers were registered in Russia in August of 2008. The subscriber base has grown 0.9% compared to July. In August penetration in Russia was 122.1% compared to 121.1% in July.
According to the report, the Russia’s subscriber base of MTS reduced to 61.475 mn people in August compared to 61.857 mn in July.
According to the results of the month, the company took 34.7% of the mobile communications market in the RF. In Moscow the operator provided services to 48.1% of subscribers (30.45 in St. Petersburg).
VimpelCom’s market share was 25% in August. The company provided services to 44.259 mn people compared to 43.412 mn people in July. In Moscow the operator took 29.4% of the market (19.1% in St. Petersburg).
MegaFon’s subscriber base was 40.572 mn people in the end of August (39.724 mn in July), i.e. 22.9% of the market. In Moscow MegaFon’s market share was 21.3% and 34.5% in St. Petersburg.

Euroset, one of the biggest cellular retail companies in Russia, was assessed at $1 250 000 000.

1 486 000 cell phones were sold by Eldorado in 1H08. 645 of phones were sold through the network of the company’s hypermarkets. 36% were sold through Eldorado Mobile salons.
 

In 2Q08 net profit under US GAAP of OJSC MegaFon came at RUB 10 081 000 000. The company’s consolidated revenue reached RUB 42 bn 420 mn, 23.8% growth y.o.y. EBITDA grew 13.6% to RUB 20 bn 480 mn. EBITDA profitability was 48.3% compared to 52.6% in the same period of 2007.

Cell communications penetration will come to 61% across the world by the end of 2008. The number of active contracts for cell communications services will reach 4 bn this year. In 2000 cell communications penetration was only 12%.

RUB 42 500 000 000 were earned by MegaFon in 1H08.

При подготовке использованы материалы следующих СМИ: «Ведомости», Прайм-ТАСС, «РБК Daily», Comnews, Cnews, «Интерфакс», «Коммерсант».