Russian Telecommunications Market Development January 2009

Analytical Report. Prepared by the Independent Institute of New Economics Study

1. General Trends of the Market Development

The market of broadband Internet access will escape financial crisis

According to analysts, financial crisis will affect minimally the growth rates of the market of broadband Internet access. However, the market participants are already planning to reduce their capital costs on subscriber base increase in 2009. According to J’son & Partners, subscriber base is expected to increase 70% to 10.5 mn people. Before crisis the number of Internet users would have to reach 11 mn people. In 2009 the market profit is going to increase to 2.9 bn, analysts from iKS-Consulting forecast, while this year the profit has come to 2.3 bn. According to Akado, the market of broadband access is going to grow 20%.
Crisis has not affected much the market participants, they say. However, in 2009 they expect subscriber base and ARPU will decrease. The number of subscriber will only grow 15%. ARPU will decrease 20% for legal entities and 6% for private users.
We note most of operators have already constructed their networks in priority regions. The market participants may focus on plans on attraction of new customers since the infrastructure is already created. Profit, obtained from broadband access services may be spent on debts payment to creditors and equipment suppliers. In 2009 the market players will have to defer their plans on entering regional markets. They will focus on infrastructure improvement.
According to the estimates of J’son & Patners, 57% of the market of broadband Internet access belong to big players, 15% are taken by middle providers and small providers possess 28% of the market. In 2009 big providers will take 60% of the market since small participants will not be able to survive under crisis conditions and the process of consolidation will continue.
The market of broadband access has not been impacted much by crisis, analysts agree. However, the macroeconomic situation will influence it somehow. So, operators will have to reconsider their plans on increase of the corporate sector base. The market may be redistributed and new participants may appear. Besides, operators will promote new tariffs more effectively. According to experts, the service of broadband access will be actively developed in regions since in Moscow and St. Petersburg the growth rates are slowing down. In particular, due to crisis companies are falling in price so big market players have a possibility to acquire them underpriced. Analysts have different opinions on small operators. Some of them say small companies will be able to maintain their positions, developing due to their own resources. Middle operators are not so successful. Middle companies have debts that will hardly be paid. Big companies will absorb them.
According to other experts, middle and small businesses will not survive and big companies will try to acquire them.
So, the growth of the market of broadband access will slow down, experts say. The market participants will try to maintain their subscribers and attract new ones. We note strong competition on the market of broadband access. So, operators will not raise prices for Internet.

Megafon is planning to acquire Cifrograd

Megafon is planning to acquire Cifrograd. Sonic Duo company, a MegaFon’s subsidiary, was given one share of Cifrograd. Thus, Sonic Dou was involved in the retailing company’s chartered capital. Thus, a part of the company’s asset may be acquired. Such strategy allows Megafon to maintain its position on the market. Megafon is negotiating with Cifrograd about redemption of a part of its assets. The amount of the transaction is not disclosed.
We remind Cifrograd possesses 1450 shops. The company’s turnover is RUB 19.8 bn and Cifrograd takes 10% of the market.
According to analysts, the transaction between Megafon and Cifrograd is mutually beneficial for both parties. The operator will be able to increase its profit due to its product promotion. Besides, there is a tendency of acquisition of cell retailing companies by cell operators. The acquisition of Cifrograd will allow Megafon to maintain its competitive advantage and to balance its position in comparison with other market participants which have already acquired such assets. So, according to experts, Megafon is planning to obtain the blocking shareholding or acquire over 50% of Cifrograd shares.
Commentators also assess the company at 40-6- mn USD. The acquisition will not cause changes on the cell market since Megafon is following the strategy of other Big3 players, which have already acquired a share in a cell retailing company, analysts say.

Euroset’s authorities are planning to restructure the business

Euroset’s authorities are planning to restructure the business. Alexander Mamut and the cell operator Vimpelcom intend to found a company Euroset opt, consolidating 50 legal entities of the retiling company. This decision must make the company’s business transparent and understandable for potential investors.
Euroset’s authorities requested FAS to realize the project. FAS will take the decision on this matter within 30 days. Then the company will inform creditors about the reorganization. Besides, the creditors may demand to pay credit debts ahead of schedule.
Euroset has to adjust its business to simplify the company’s work. Besides, the company’s authorities promise to meet its engagements before suppliers and the government. The restructurization is aimed at the company’s costs reduction. We remind, in 3Q2008 the company’s debts were RUB 220 mn.
We note the company’s network includes around 5.1 thousand salons in Russia, Ukraine, Byelorussia, Kazakhstan, Armenia, Kirgizia. In autumn of 2008 the company was acquired by Alexander Mamut for 1.25 bn USD. He sold 49.9% of Euroset’s shares to VimpelCom for 226 mn USD with an option 25%.
Euroset opt will be responsible for the debts of the consolidated companies. So most retailing companies found subsidiaries to avoid tax risks.
According to experts, currently the process of restructurization can be observed in most cell retailing companies on the telecoms market. Euroset is not an exception as well. Analysts agree in the opinion that the process of the business consolidation is driven by the company’s authorities’ desire to make the company more attractive for investors, including foreign ones. Euroset will be able to reduce its costs to 20% after the reorganization, experts say.
Under crisis conditions many companies face difficulties, looking for money for credit debts restructuring. So, companies have to sell a stake of their business. To sell a stake more profitably it is necessary to simplify the business management and make it more transparent and understandable.

TTK extended capacity of Eurasia Highway mainline

TTK extended capacity of Eurasia Highway mainline in the direction to Hong Kong and Frankfurt. Obtaining 30 mn USD due to traffic transit in Europe-Asia this year, in 2009 the company intends to increase revenue from international channels up to 45 mn USD. The port capacity in Hong Kong has been increased 4.5 times. To do this the operator installed additional access equipment in DWDM mainline Eurasia Highway, produced by Huawei. Besides, within the last half-year the capacity of Eurasia Highway mainline in the direction of Hong Kong-Zabaikalsk has also increased.
According to analysts, over the period 2008-2015 the total channel capacity on the telecoms routs between Western Europe and Asian-Pacific region will increase 6 times to 1.5 terabit/ sec. TTK intends to take 15% of this market.

MTS decided to place two new issues of bonds

MTS Board of directors decided to place two new issues of bonds. The amount of each issue is RUB 15 bn, the terms of placement are 5 and 7 years. The company needs money to finance its current work and to convert its debts to different currencies. MTS has around 30% of AFK Sistema’s consolidated debt. In 1-2Q2009 AFK Sistema and its subsidiaries will have to pay 2.56 bn USD and they will try to refinance as much as possible. In the period June-October of 2008 MTS already placed three issues of bonds worth RUB 30 bn. In June the loan was organized by Gasprombank, Raiffeisenbank and Troika Dialog. In October they and Sberbank were acting as organizers.
According to analysts’ estimates, as of the end of September the total debt of MTS was 3.2 bn USD and its pure debt was 2.5 bn USD. It is not a big amount for MTS. In case new loans of MTS replace the previous ones, the operator’s creditability will remain high. In 3Q2008 MTS’ debt, nominated in US dollars, was 80% of the total debt. In April 2009 MTS has to repay the syndicated loan worth 630 mn USD and a part of the planned loans may be spent, experts add.

Sales of mobile phones reduced

In December mobile phones sales of the biggest cell retailing company Euroset increased 2% compared to December of 2007. However, the revenue reduced 4%. However, within the last week of 2008 the demand grew and Euroset’s sales increased 7.5% y.o.y. and the revenue remained the same.
In December Telefon.ru sold 150 000 mobiles, 1% growth y.o.y. However, over December the company’s revenue reduced 6% y.o.y and the revenue from mobile phones sales decreased 30%. Over 2008 the total revenue of the company increased 30% to over RUB 13 bn. The growth was partially driven by the network extension: over a year the number of salons has increased by over 14%. The revenue from mobile phones sales in Eldorado’s salons has increased 20% over 2008.
According to analysts, in December seasonal growth of sales was the same as a year before. However, revenue was a bit smaller than it had been expected. The decline of revenue in December is caused by reduction of prices for handsets. Previously retailing companies had normally raised prices for mobiles in December, but in 2008 they reduced them. Over a year an average price for a mobile has reduced from 220 USD (December 2007) to 180 USD (December 2008). The main reason for this is decrease of credit purchases and that mobiles of the upper segment became less popular. In December 2008 an average price for a mobile reduced around 10% y.o.y.

Euroset and Svyaznoy reduced prices for phones

The leading Russian retailing companies Euroset and Svyaznoy reduced prices for mobiles, offering up the biggest part of price markup. This caused difficulties for their competitors in regions. Svyaznoy decreased its price markup in December in respond to the same actions of Euroset. The biggest cell retailing company wanted to sell its old resources, so the price reduction is temporal.  In total over 4Q2008 4.15 mn handsets have been sold in Russia. The average price for a mobile is 181 USD and the average price mark up is 12.5%. So, over the three months the companies’ revenue is 94 mn USD. According to analysts, Svyaznoy is an initiator of prices reduction. In mid December Svyaznoy paid debts to its three major vendors: Nokia, Sony Ericson and Samsung and they started providing the company with new products. To sell the most before New Year Svyaznoy reduced its price markup to 7% and Euroset did the same. According to analysts, customers are extremely susceptible to prices, so retailing companies have to maintain prices for main models of mobiles.

Cell operators’ revenues

n 3Q2008 in Russia MTS revenue grew 30% y.o.y. to 2.17 bn USD (Vimpelcom – 23.2% to 2.04 bn USD, Megafon – 29.3% to 1.93 bn USD). Over this period Megafon and MTS have obtained 7.5 mn subscribers each in Russia and Vimpelcom’s subscriber base has only increased by 3.3 mn (since January 1st Vimpelcom stopped taking into account clients, not paying for services for three months period). As a result, according to AC&M-Consulting, on the Russian market the share of MTS grew from 32.9% to 34.5% (in terms of subscriber base) and the shares of Vimpelcom and Megafon have become almost equal - 25.1% and 23% accordingly (30.4% and 20.5% in 2007).
Vimpelcom’s average talk duration grew less than that of the competitors, 9.4%. However, MTS and Megafon had to reduce their APPM by 11% to 0.054 USD. Vimpelcom’s APPM grew from 0.064 USD to 0.066 USD.  According to analysts, operators met crisis in good shape. However, Vimpelcom’s position is more complicated due to its big debts. In 3Q2008 Vimpelcom’s net profit decreased 41.3% y.o.y partially due to changes in exchange rates. MTS’ profit reduced 21.3% and the profit of Megafon grew 37.9%. According to experts, MTS should stimulate the growth of its services consumption. The company should increase sales, offering more profitable tariff plans with additional services.

Cell operators succeeded in connections

Last year cell operators connected more subscribers in Russia than a year ago despite the market penetration and crisis. Megafon became a leader of pure connections. Within December of 2008 the number of cell subscribers increased by 3.44 mn people (+0.96%) in Russia and over 2008 it increased by 15 mn subscribers, 4.2% growth. However, in January 2008 Vimpelcom deleted from its base those subscribers that had paid for services more than three months ago. Megafon also takes account of its subscribers. As a result Vimpelcom’s subscriber base in Russia reduced by 9.4 mn users and in 2008 Vimpelcom lost 3.96 mn subscribers.
However, Vimpelcom obtained 5.4 mn active subscribers and the total increase of new subscribers is 24.4 mn users, 15.2% growth y.o.y (19.5 mn, 13.8% growth in 2007). Previously the number of connections had been reducing gradually. In 2008 all Big3 operators obtained more new subscribers than in 2007 and Megafon has become a leader, connecting 7.8 mn users over the year.
According to analysts, the increase in connections is driven by subscribers’ migration between networks and increase in users, possessing several SIM cards. Owners of several SIM cards were added by clients, using services of mobile Internet access. By the end of the year connections were impacted by financial crisis: subscribers started looking for optimal tariff plans, acquire personal SIM cards instead corporate ones.

FAS approved acquisition of cell retailing company

The Federal Antimonopoly Service has approved the acquisition of the cell retailing company Telefon.ru by MTS. However, the operator has not taken the final decision about the acquisition. Telefon.ru includes over 500 salons. The total revenue of the network is RUB 5.9 bn, according to the results of 1H2008. The prognosis for 2008 is around RUB 14 bn. The company’s debt is 26 mn USD.
In the beginning of December it came out that MTS was negotiating about its networks transfer to the second biggest cell retailing company Svyaznoy. Currently Svyaznoy and MTS are creating a managing company, which will be controlled by the operator. MTS and TS-Retail (a Sistema’s subsidiary, manages around 320 salons under MTS brand and 40 salons under Tochka brand) now possesses over 1700 shops, including franchising salons. Another 650 salons will be transferred to MTS brand in accordance with the franchising agreement with the cell retailing company Betalink, made by the operator this October. Currently Euroset has 4.2 thousand salons across Russia.
According to analysts, Telefon.ru has rather small debts compared to other cell retailing companies: in case MTS is slow, the asset will be acquired by its competitors. The operator had been negotiating about acquisition of Euroset’s shareholding. However, in October 100% of Euroset were acquired by Alexander Mamut for 1.25 bn USD (including the debt worth 850 mn USD). Later he sold 49.9% of Euroset to Vimpelcom for 226 mn USD.

2. Market Participants

AFK Sistema reported for 3Q2008

AFK Sistema reported for 3Q2008. The company’s net profit is 99.9 mn USD, 2.4 times growth y.o.y. Sistema’s profit is bigger than it was expected by analysts. The company’s loss is 396 mn USD due to the change of currency rates and derivative contracts. Sistema’s consolidated revenue is 4.6 bn USD. The company’s telecoms business is the most stable in terms of revenue. We note the profit growth of 2.65% y.o.y in the sector. In the sphere of real estate the company has lost 66 mn USD, in the banking sector figures have remained the same.
OIBDA is 1.7 bn USD, 25.6% growth y.o.y. OIBDA margin is 36.5%. Sistema’s total debt has reduced by 1%.
According to analysts, the company has managed to achieve quite positive results under crisis conditions. The holding has managed to reduce its debt. The company achieved such results due its timely reaction against negative changes of currency rate, experts say. However, by the end of 2009 the growth of the company’s debt is expected, though not very big. MTS will remain one of the most important businesses in 2009, analysts note. Thus, growth of the revenue from non-telecommunications sectors will be insignificant.
According to analysts, by the end of the year the company will have to reduce operating costs since decline in demand is expected as well as the rouble rate changing. The company will manage to maintain its positive results since the company’s management reacts timely against problems of the market, experts believe.

Megafon is planning to acquire Bimocom

Megafon is planning to acquire Bimocom, a Kirgiz company, working under MegaCom brand. Bimocom’s authorities are planning to sell a part of the company. MegaFon is the major candidate for the purchase. Currently Bimocom is owned by the investment holding Eventis Telecom (51%), which manages the alternate operator Saimatelecom (50.1%).
We note Fintur company, controlled by the Sweden-Finnish TeliaSonera, also showed interest to Bimocom. The company’s value is not disclosed yet. However, according to experts’ assessment, it may be from 220 mn USD to 300 mn USD. Eventis Telecoms calculated Bimocom’s revenue for 2008. It will come to 100 mn USD. As of 2008 the company’s subscriber base is 1 000 000 people, ARPU is 9.3 USD per month.
According to experts, the Russian cell operator Megafon has a good chance to acquire MegaCom since Megafon’s employees were engaged in the company’s development. Besides, the Russian operator is interested in strengthening its position on the CIS cell markets to extend its competitive advantage and to obtain additional profit, analysts say. They also note the similarity of the two companies’ slogans that may reduce Megafon’s rebranding costs. MegaFon is recognizable in Kirghizia. Analysts have different opinions on the company’s value. Some commentators assess the company at no more than 160 mn USD. According to others, the transaction amount will exceed 500 mn USD in case MegaCom posseses UMTS licenses.
So, according to experts, in crisis conditions the merger of regional companies and Russian leading operators is a positive strategy that may help the operators to expand their presence on the market and obtain additional profit. The other Big 3 operators MTS and Vimpelcom may not be interested in the transaction since they do not have a formal agreement with the company.

Management of AF Telecom Holding is planning to carry out its businesses centralization

The management of AF Telecom Holding is planning to carry out its businesses centralization. Alisher Usmanov intends to improve performance of telecoms, media and Internet businesses, consolidating them. Besides, to realize this project Vladimir Zhelonkin has been appointed for the position of head of AF Telecom Holding and chair of Telecominvest’s Board of directors. AF Telecom controls 73.9% of Telecominvest.
V. Zhelonkin’s main objective is to provide interaction between different businesses. For example, an enterprise on the basis of Megafon and media and Internet companies may be created for more effective work on mobile content promotion. Besides, the operator may also cooperate with other producers of mediaprogrammes, which do not belong to Alisher Usmanov. Chair of Megafon’s Board of directors and vice president of TeliaSonera Aimo Eloholm says this programme is worth considering. In particular, it would be profitable for the head to obtain a direct shareholding in Megafon instead of the current 26.1% of shares in Telecominvest.
We note the holding’s main asset is 31.1% of Megafon. 8% of Megafon were acquired by the holding from the Bermudan fund IPOC, belonging to Jeffrey Galmond in May 2008. With Telecominvest AF Telecom controls 23.1% of the operator. 15% of the assets were acquired from the North-Western Telecom for 410 mn USD in August 2007 and the rest 58.9% the holding bought from First National Group in May 2008.
According to analysts, the merger of telecoms, media and Internet businesses is a prior objective for AF Telecom. Previously the company aimed at acquisition of assets, which need to be centralized at present. Under crisis conditions, when companies are losing their profit, such approach of the holding’s authorities is reasonable since due to the businesses’ management improvement additional profit may be obtained. Besides, the holding is focusing on promotion of mobile content that is in demand. It is necessary to work up the programme and mechanism of its realization to realize the project efficiently, experts say.
The assets won’t be redistributed in favour of Telecominvest, experts suppose. In future this will depend of the shareholders’ decision. In particular, it is reasonable to work up a total management structure and to maintain businesses’ independence. According to analysts, Zhelonkin’s appointment is positive since he is an experienced manager in the field of media business.

Rostelecom and TTK: possible scenarios of consolidation and consequences

In 2008 the probable consolidation of Rostelecom and Transtelecom was discussed a lot. This had been caused by the acquisition of the investment bank KIT Finance, which possesses 40% of Rostelecom, by the consortium RZD and the IG ALROSA. We note RZD owns Transtelecom. So, in the end of 2008 KIT Finance worked out the strategy of possible consequences in case of the company’s consolidation.
KIT Finance: “Considering the news in the end of the current year we suppose that the two companies’ consolidation has several problems (beside approval of the transaction by the government). First of all, it will be difficult from the point of view of the companies’ businesses, the models of which are quite different. According to financial results, the synergetic effect is not obvious due to big transaction costs and specific character of the managerial teams. It is also worth mentioning that both companies’ recently announced plans about entering the retailing market will have to be postponed in case of the companies’ consolidation. We also note the possible effect of the consolidation on the market of main line services on the whole. Since in the most popular regions (the Central part, the Volga region, Ural and a part of Siberia) the competition is already strong due to presence of Vimpelcom ( together with Golden Telecom), Megafon and MTS, the competitive advantage of the consolidated company seems rather weak. Thus, the competitive advantage may only be obtained in the Far East, the North, which do not provide considerable traffic. We also note Big3 operators try to distance themselves from interaction with Rostelecom and TTK (they use Synterra’s capacities). Thus, the potential consolidation will not impact considerably the market of main line services since its key participants possess their own resources and other participants, as a result receiving non-discriminated access to the consolidated companies’ infrastructure, will not be able to influence the market. So, among all public companies this consolidation may only benefit Comstar-UTS (the company does not have considerable positions in this segment), since the company will get an access to the main line infrastructure and thus, increase its influence in AFK Sistema.
According to analysts, the possibility of Rostelecom and TTk’s consolidation is not big. Under crisis conditions this will cause many risks. Experts undertake some positive and negative aspects of the potential consolidation. They speak of subscriber base increase and reduction of costs when transferring to the common programme of financing. However, they also note decrease of competitiveness and results since the consolidation process will last long. The companies’ entering the retailing market will be also postponed.
The decision on the companies’ consolidation will have political goals instead of economic ones, analysts say. Besides, in case of the consolidation FAS will entrust the companies with additional social load.
Svyaznoy is the first in terms of sales on the market of cellular retailing
Svyaznoy became a leader in terms of sales on the market of cellular retailing. So, the company’s sales of cell phones have increased 2.2 to 17.3% while Euroset has reduced its sales to 31.7%.  We remind in 2008 Svyaznoy’s sales grew 25% y.o.y.. Euroset’s results remained the same as in 2007. Over a year Eoroset’s market share has decreased 4%. Svyaznoy has obtained 18.5% of the cell retailing market, 1.5% growth y.o.y. According to the company’s management, its market share is 19.3% and the sales have grown 29.6% over 2008. In 2008 32.5 mn handsets were sold in Russia. In 2008 36.3 mn phones were sold. The cell retailing market earned around 7.5 bn USD, 1.62 bn of which fall to Svyaznoy.

Svyaznoy sells around 26-27% of Nokia phones of its total sales. In Euroset this result is 15-17%. We remind Nokia phones take 35% of the market of mobile phones.

Analysts give various reasons for Svyaznoy’s sales growth. According to some experts, the retailing company focused on sales of cheap handsets and thus provided its competitive advantage. Others say that priority in sale of fashionable phones and gadgets resulted in Svyaznoy’s leading position on the market. . However, the decline of the company’s sales is expected since under crisis conditions these products are not so necessary, while Euroset also delivers a large number of additional services.
Moreover, according to experts, Euroset’s slowdown can be explained by the court hearings, which the company suffered from in 2H2008 and which affected the company’s image. We also note Euroset’s debt is bigger than Svyaznoy’s one. Sales will decrease 25-30$ in crisis conditions that will reduce the retailing business profitability, analysts say.
MTS and Vimpelcom are considering tariffs in conventional units
MTS and Vimpelcom started considering a possibility of transfer to tariffs, nominated in conventional units. In case the dollar rate continues growing, the operators will have to transfer their tariffs to dollars. Vimpelcom has the biggest problems due to currency changes since its debt is over 7 bn USD. The dollar rate has already exceeded RUB 32 that is critical for Vimpelcom and the operator will have to transfer its tariff plans to the dollar. MTS’ upper line is RUB 34. Megafon possesses more free funds and the rouble devaluation does not affect the operator.
According to analysts, in case of transfer to the dollar, the process will be carried out by all the operators simultaneously. The operators will have to take some measures in the beginning of 2Q2009. Big3 operators may also increase tariffs. However, this way is more complex since it requires significant marketing costs. So, transfer to the dollar is more effective for the operators.
MegaFon acquired the control shareholding of the Abkhazian Aquafon
For the first time Megafon acquired a cell operator, purchasing the control shareholding of the Abkhazian Aquafon. The transaction was held almost at the same time when Georgia fined the operator for “illegal work” on its territory. Aquafon provides services to 100000 subscribers, according to Megafon’s assessment. As of the end of November the operator provided services to 43 mn subscribers in Russia and Tajikistan. The shareholders are TeliaSonera, AF Telecom holding and Altimo(25.1%).
We remind that previously Megafon had only worked in Russia and Tajikistan, where the company became a co-founder of TT-Mobile in 2001. Aquafon has been providing GSM services for 5 years and last year the company launched 3G network. In the end of 2003 the operator was acquired by ComTel Eastern.
According to lawyers, Megafon may face problems due to this acquisition in Russia. Until recently Abkhazia had not been considered independent even by Russia and hadn’t had a right to register legal entities.

Sky Link’s revenue will grow 50%

According to the results of 2008, the share of Sky Link’s revenue from mobile data communications in the company’s total revenue will grow 50%. In 2009 Sky Link intends to maintain its growth rates. At that in 2008 the company’s ARPU decreased due to subscribers’ transfer to lower tariffs. Despite the reduction of ARPU Sky Link intends to increase its revenue due to subscribers’ quality. On average ARPU of the operator is 40 USD, decreasing by 9 USD y.o.y. In Moscow ARPU has decreased from 57.4 USD to 51 USD, in St. Petersburg – from 42.4 USD to 32 USD. In regional companies ARPU has reduced by 7.4 USD to 25 USD. According to analysts, since the prognosis is made a fortnight before the end of a year and the company’s management has an access to the data about the company’s development, the plans will be realized. Several months ago Sky Link announced its annual prognosis on revenue growth of 26.6% and over 9 months the company’s revenue has grown 30%. Sky Link is the leading operator and its position on the market will be hardly changed. Besides, it is more beneficial for the company to provide services to quite a small group of profitable subscribers instead of the subscriber base increase.

Providers have not been affected by financial crisis yet

According to estimates of the analytical company J’son & Partners, the total number of subscribers of broadband access will grow 70% to 10.5 mn people in 2008. Financial crisis has not affected this business yet, the market participants note. However, in 2009 operators of broadband access are ready to reduce costs on new users attraction that will lead to slowing down.
According to analysts, the crisis has caused decline in demand for some services, including communications. According to the results of 2008, the market will come to 2.3 bn USD in money terms and in 2009 it will reach 2.9 bn USD. However, this will not last long. In future the market participants will have to reduce costs on new subscribers attraction. In 2009 slowing down in subscriber base growth as well as decrease of ARPU is expected. The total subscriber base of broadband access services will only grow 15%. ARPU will decrease 20% in the corporative sector and 6% in the private sector.

MGTS increased its profit in the New Year night

The monopolist of fixed-line communications in Moscow MGTS reported its results of work in the New Year night. Over the reported period the company’s traffic inside the network increased 31%. Within the New Year day and night, from December 31st to January 1st the Moscow residents made 54 mn calls that exceeded normal results by 31%. Other operators of fixed-line communications did not reported on their networks work within the New Year holiday. Cell operators speak of 30% growth of traffic within the New Year holiday.
According to analysts, almost a half of MGTS’ subscribers use the unlimited tariff plan of local communications.
OJSC Vimpelcom reported results for 2008 on 3G networks construction
One of the leading cell operators in Russia Vimpelcom reported its results on 3G networks construction. The operator has covered over 40 towns by 3G networks. The company’s plans for 2009 are not so large-scale. This year the company will focus on paying off credit debts.
Another operator, obtaining 3G license and starting 3G networks construction in 2008, is MTS. As well as Vimpelcom MTS undertakes the growth of data communications traffic consumption in regions, where 3G networks were launched. MTS Internet- traffic has grown 2-4 times. This year MTS is planning to construct 3G networks in 24-27 towns of Russia.
According to analysts, within 3G networks construction Vimpelcom faced completely new problems such as frequencies clearing, integration of 2G and 3G networks. The company has managed to solve the problems effeciently. Such active construction is not connected with fulfillment of the license obligations.

Shyam Telelink will use MTS brand.

Shyam Telelink, a subsidiary of AFK Sistema in India, will start working under MTS brand. However, the company will not be given to MTS. In February 2009 Sistema’s Indian subsidiary will start using MTS brand. Shyam Telelink will have to pay for the use. The agreement does not imply participation of MTS in Shyam Telelink’s operation activity. MTS’ specialist will coordinate the brand use.
We remind Shyam Telelink is only working in Rajasthan. As of the end of October the company provided services to 194 400 subscribers of mobile communications that is 0.06% of the whole Indian market, and 148 000 subscribers of fixed-line communications. Besides, the company owns 100% of the Internet provider Shyam Internet. In March Shyam obtained a mobile license for work on the whole territory of India and now possesses frequencies in 19 regions out of 22. In 5 regions the company is constructing a mobile network.
According to analysts, Sistema was right, starting the Indian project independently. The project with its risks and cost would have affected MTS. The acquisition of Shyam could change the balance of MTS’ risks and profit. The Indian mobile market is one of the most fast-growing in the world. Annual growth rates come to around 50%. As of the end of October penetration of mobile communications in India was 28.2%. Sistema intends to invest up to 4 bn USD in its Indian subsidiary’s development within 5 years. However, in current conditions it will be quite difficult for Sistema to finance the network construction in India. But in case MTS is involved, it would be reasonable to invest dividends, received from MTS. This would be the most transparent mechanism regarding minorities, MTS and Sistema, experts note.

MTS and Auchan created virtual operator A-mobile

MTS and Auchan have created the virtual operator A-mobile. Contracts will be only sold in Auchan shops in Moscow and the Moscow region. First 15 minutes of calling to other subscribers of the tariff are free of charge. A SIM card, applied to the contract, has the Auchan logo. In case the project succeeds, the cooperation between MTS and Auchan may be expanded. In particular, the companies are discussing a possibility of sale of MTS’ brand phones in Auchan shops.
.According to analysts, Auchan is a good channel for sale of contracts, but perhaps, MTS will not be able to connect a lot of subscribers. With time MTS will have either to introduce a monthly fee or to refuse free minutes. However, MTS promises the tariff will not change. It is a profitable project, experts note. Euroset has several thousands subscribers in Samara, but the network cannot develop the project without a legislative base. The order on virtual operators’ licensing will be signed by the end of 2009.

3.Tension Lines

FAS is suspecting Moscow providers of collusion

FAS is suspecting Moscow providers of collusion on Internet access tariffing for legal entities and private users. Internet access for private users is cheaper than for corporate clients. So, the department obliged the Moscow department to find out reasons for such a variation in prices for Internet access while its cost price is similar for both sectors. The Moscow department of FAS has started investigation.
For private subscribers of Corbina Telecom 1 Gb of traffic costs RUB 100, while companies pay around RUB 1000. Unlimited access to Internet (speed 256 kbit/s) costs RUB 1900 for corporate clients, while private users pay RUB 450 for access with the speed 10 times as much.
Moreover, the Moscow department of FAS accuses providers of violation of the law on competition when connecting subscribers to the network. There are two scenarios: 1) a company connects a building to Internet and its competitors refuse to provided alternative services of broadband access in this building, 2) companies make agreements with municipal authorities in order not to allow to provide Internet services to competitors in the same building. Providers will have to pay a fine of 2% of their company’s turnover for this violation.
Moscow providers tried to explain this situation by several factors. Unlimited traffic for private users is three times as less than for corporate ones. In particular, corporate access is more expensive due to technical peculiarities. Besides, legal entities are more fastidious about services quality. Providers note they have a right to offer tariffs depending on consumers’ category. According to some providers, a company, connecting a building, may prevent an alternate Internet provider from its services provision.
Analysts doubt about the collusion between Moscow providers on secret distribution of the market. The main reason is strong competition in this segment. Besides, strong competition between operators causes low tariffs for private users. In particular, in accordance with the law, companies have a right to set their own prices for provided services, experts note. Thus, the only negative factor is lack of efficient control over the competitive environment in the sector.
According to experts, variation of prices for Internet services for private and corporate clients is caused by more complicated services provision for corporate sector. Monopolism exists partially on the market. However, FAS will hardly find evidence of it and change the policy of providers in the capital city.

Court has taken the decision on FAS’ claim against Rossvyazkomnadzor

The court has taken the decision on FAS’ claim against Rossvyazkomnadzor, satisfying the claim of the antimonopoly department to declare invalid the results of the tenders for GSM licenses in Siberia and the Far East. We remind Summa Telecom obtained 13 licenses according to the results of the tenders, held in 2007. After the tenders FAS, Rossvyaz and Rossvyazohrankultura initiated several court hearings. According to Rossvyazkomnadzor, they may appeal.
In case Summa Telecom had received frequencies from GKRC, the company would have had a right to provide services in these regions. The company could appeal against the verdict of the court. According to the law, a winning company is to obtain frequencies from GKRC and then obtain licenses. If the operator did not observe the law, Vimpelcom may expect for return of the frequencies and recurring tender.
According to analysts, the court has made the objective decision on FAS’ claim against Rossvyazkomnadzor. However, experts have different opinions on the recurring tender holding. Some of them believe the tender will be held. And Vimpelcom will become the main candidate for 3G licenses. It would be logical to give the operator such a chance. The operator possesses funds to provide the networks operating in the regions that is important under crisis conditions. According to others, the frequencies may not be disposed for the tender since the department may find a lot of reasons in order not to hold the recurring tender.

GPKS has faced the problem of new satellites financing

State Enterprise Space Communications (GPKS) has faced the problem of new satellites financing. Supposedly GPKS will start operations of 4 new satellites Express-AM until 2015. Their value is RUB 27 bn. The satellites are designed to provide TV broadcasting. We note that previously GPKS assigned the money for satellites construction from its budget. In 2009 the budget does not imply investments in the project. GPKS is trying to solve the problem due to funds that may be invested by operators and due to credits.
So, some companies are ready to invest in the programme, in particular, Synterra’s representatives. However, according to them, the operator should not invest money in a satellite operation. The companies should consider possible ways of cooperation with equipment producers.
Credits are being considered as one of the variants of co-financing. So, GPKS intends to pledge 4% of shares, it owns in Eutelsat, and obtain additional funds since the assets value is several millions euros. Igor Shegolev promised GPKS would receive RUB 10-15 bn for the project realization in the frameworks of the federal special-purpose programme of TV and radio broadcasting development by 2015. However, the regulator will not be able to assign the finds to the enterprise for satellites construction in 2009.
According to analysts, no scheme of additional funds attraction will be efficient. Firstly, under crisis conditions creditsmay be hardly obtained. In particular, GPKS may expect for the state money, distributed by banks. Secondly, private companies will fear to invest in such a long-term project with the vague pay-back period. Thus, the government has to guarantee the programme realization to private companies.

Value of Alfa-group and Telenor’s conflict

The corporative conflict between Alfa-group and the Norwegian holding Telenor regarding the Ukrainian cell operator Kievstar may cost the partners over 300 mn USD. The growing devaluation of the Ukrainian grivna is devaluating rapidly Kievstar’s undistributed profit, accumulated due to the corporative conflict, which had been lasting for more than three years.
We remind from 2004 till 2007 Kievstar’s undistributed profit had come to 9.796 bn grivnas (1.24 bn USD under current exchange rate), 70% of which are nominated in the grivna and deposited for a short-term period in banks. To distribute net profit as dividends between the shareholders Kievstar needed the decision of the general meeting of shareholders. However, since 2005 these meetings had been ignored by Storm, a subsidiary of Alfa Group, owning 43.5% of Kievstar, after Telenor had blocked Vimpelcom’s entering the Ukrainian market. 44% and 29.9% of Vimpelcom belong to Alfa Group and Telenor accordingly.
Kievstar’s shareholders have already confirmed dividends for 2004-2005 of 3.46 bn grivnas, analysts say. This amount must be distributed between shareholders within 60 days after the meeting, i.e. by February 15th. The Norwegian company will have to convert the received dividends to another currency. According to experts’ forecasts, by the end of this year the dollar exchange rate will fluctuate around 8 grivnas. Kievstar must pay Telenor 1.955 bn grivnas (244 mn USD) and 1.505 bn grivnas (188 mn USD) to Alfa Group as dividends for 2004-2005. In case the matter on dividends payment had been settled, the exchange rate would have been 5.05 grivnas for 1 dollar. Telenor would have been able to obtain 387 mn USD and Alfa Group would have received 298 mn USD. Telenor is studying thoroughly the situation and planning to use all legal opportunities to recover losses.

Svyazinvest will reduce its investment programme

In 2009 Svyazinvest will almost halve its investment programme – to RUB 39.5 bn against RUB 73 bn of this year. Such decision is explained by credit squeeze and Svyazinvest’s subsidiaries’ tariffs adjustment, which is lower than it was planned. In crisis conditions other state-owned companies are also reducing their investment programmes: RZD and Gasprom have already stated their plans. All reductions will only concern costs adjustment, the companies’ staff will not be reduced. At that the costs, which the companies will be able to do without within crisis, will be only reduced. First of all Svyazinvest’s investment programme will be reduced, because the programme for 2009 does not imply investments in the universal service of communications since it has been already financed.
According to analysts’ assessment, in 2009 the rouble devaluation may come to 15-20%. Thus, Svyazinvest’s costs for currency debt paying off may come to around 15 bn roubles, increasing by 2.5 bn roubles. Svyazinvest will not be affected by its investment programme correction. The cost will be probably spent on more promising directions, in particular, broadband Internet access, where Svyazinvest’s MRKs can strengthen their positions while competitors reduce their costs. At that Svyazinvest’s subsidiaries may even benefit somehow from costs reduction. For example, MRKs may lack in money for transfer to the hot-choice regime (a possibility to choose an operator, when making a long-distance or international call), and Rostelecom will benefit from this since the operator can maintain its market share, experts add. Analysts agree in the opinion that other state-owned companies are also reducing their investment programmes. Gasprom’s investment programme may be reduced to 720 bn roubles.

Cell operators will start hire-purchase sale of phones

In 2009 cell operators may start hire-purchase sale of phones. They will be impacted by the market stagnation and more tough credit policy of banks. Since the end of November Vimpelcom has been already granting a 33% rebate for any phone to anyone, who connects or switch to one of the seven operator’s tariffs with a monthly fee and make an additional agreement for a year. The action is only carried out in Bee Line’s offices. Vimpelcom expects to attract profitable subscribers.
MTS will start selling subsidized phones, following the example of the global mobile operator Vodafone. On October 30th 2008 Vodafone and MTS made the agreement about strategic partnership. According to the agreement, MTS will get an access to all producers of phones that will allow the company to provide networks with new models on significant rebates.
According to analysts, in Russia ARPU of a prepaid subscriber is 5 USD, contract subscribers provide operators with 40 USD. Currently Bee Line’s share of contract subscribers is 12-13%. If the operator adds 1-2 % with the action, the result will be perfect. Some experts agree in the opinion that operators and retailing companies need access to cheap credits, without which cell phones sales will drop twice in 2009. Bee Line’s offer is interesting for those who is not able to acquire an expensive handset at full price. The monthly fee of the cheapest tariff, connecting to which you can get a rebate, is RUB 500. Bee Line’s action is the first step to subsidizing of phones, experts note. The phone becomes a free bonus for a subscriber, making a long-term contract with the operator. Since autumn Megafon has started hire-purchase sale of iPhones 3G (for RUB 49) to those, who connect to E tariff and who will pay monthly RUB 2800 for a phone and RUB 850 as a monthly fee. Now operator is analyzing this experience.

Svyazinvest is looking for ways to restructure its subsidiaries’ debts

Svyazinvest is considering the opportunity of some interregional companies’ crediting due to funds of other holding’s assets, in particular, Rostelecom. Svyazinvest is included in the list of Russia’s systemforming enterprises, published in December. According to the intentions of the Ministry of Economic Development, the companies, included in the list, will be supported by the government, including crediting and tax debt restructuring. In the end of 2008 Rostelecom declared its strategy of development for 5 years. The company intends to turn into a universal operator of fixed-line communications, in particular, providing services of Internet access to end users. Until 2013 Rostelecom’s CAPEX will come to RUB 35.6 bn and the company is ready to assign up to RUB 46.7 bn for transactions.
According to analysts, the governmental support will be first of all necessary for UTK and Centertelecom since according to experts’ estimates, these companies’ share capital is 38% to 67% of the debt and 44% to 56% accordingly. MRKs’ crediting due to Rostelecom’s funds is a rational solution. However, Rostelecom will have to reduce costs on absorptions. In 2008 Rostelecom has around RUB 19 bn of free money without taking into account the costs on regional expansion. By 2013 the operator will have RUB 23.5 bn of free money, experts note. Some analysts agree in the opinion that most of MRKs’ loans were made via state-owned banks so the government could meet the companies’ wishes and extend the terms of credit paying off. In unstable economic conditions Svyazinvest is looking for ways for its subsidiaries’ debts restructuring. The holding is considering the opportunity of MRKs’ crediting due to Rostelecom’s funds.
Sonic Duo paid off debt to CT-Mobile
In the end of December Megafon, owning 100% of Sonic Duo, approved the agreement of sale of ordinary bills between its Moscow subsidiary and Holmpton Ltd. According to the data from the website of FAS of July 21st 2008, Holmpton Ltd is affiliated with CT-Mobile, founding Sonic Duo in cooperation with the Finnish Sonera in 2000 and then exchanging the Moscow company for 25.1% of Megafon’s shares. The current transaction concerns paying off the borrowing costs, received by Sonic Duo in 2001. The conditions of the agreement implied that Sonic Duo had to redeem and retire the bills of several millions dollars in the end of 2008.
We remind in 2001 CT-Mobile was controlled by Central Telegraph, which is controlled by the state-owned holding Svyazinvest. Afterwards the share of CT in CT-Mobile was diluted from 50% to 0.01% in spring 2001. CT-Mobile implemented two additional issues and CT was not able to redeem them . As a result the Bahamian Transcontinental Mobile Investments, owned by an investment banker Leonid Rozhetskin, remained the only shareholder of CT-Mobile. In summer of 2003 CT-Mobile’s owner changed again, the company was acquired by Alfa Group structures for 295 mn USD.
Analysts remind in 2000, when Sonic Duo obtained a GSM license for work in Moscow, MTS and Vimpelcom were collecting subscribers and the third GSM operator needed funds to construct a network and take a share on the market. The company’s shareholders were the first who provided the operator with money due to redemption of additional issues and credits supplying. For example, Megafon’s credit debts to TeliaSonera is 39.9 mn USD.

Dixis has not agreed on debts paying off

The cell retailer Dixis has not managed to agree with suppliers of phones about debts paying off. The former Euroset’s president Eldar Razroyev, organizing the negotiations, stopped cooperating with Dixis. Dixis group had serious financial problems in autumn 2008. In the end of September the company’s debts to banks-creditors were 265 mn USD and the company’s shareholders were considering the offers about sale. The biggest part of the debt to the suppliers falls to one of the group’s companies Dixis Trading and in the end of 2Q2008 it was RUB 1.8 bn ( 76.7 mn USD). The company’s major creditors were Nokia (RUB 630 mn), SonyEricsson (RUB 350 mn) and Samsung (RUB 150 mn). By the end of the year the company managed to reduce its debt to 50 mn USD. Currently the amount of the claims against Dixis is 75.3 mn USD.
Dixis is not going to pay off debts to producers already: this decision was insisted by Alfa Bank, which had become a co-owner of Dixis.
According to analysts, the scheme of the company’s debts restructuring was proposed by Eldar Razroyev, the former president of Euroset, who had been invited to Dixis as a consultant. After the company’s shareholders had refused to pay of the debts, Razroev refused to participate in the project.

Big3 operators; revenue will go down

In 2009 Big3 operators’ revenue will reduce 5-12% first in the history of mobile communications in Russia, analysts from Nomura forecast. According to the company’s analysts, the decline in the operators turnover will be caused by the rouble devaluation, rise in prices for equipment and decline in population’s demand. However, in 2010-2017 the operators’ revenue will start growing again, though slower than before.
According to Nomura’s forecast, in 2009 MTS’ revenue, nominated in dollars, will reduce 11% to 7.09 bn USD, Vimpelcom’s revenue will decrease 12.1% to 6.55 mn USD and the revenue of Megafon will drop by 5.7% to 6.8 bn USD. Over the 10-year history of mobile communications in Russia Big3 operators’ revenue only dropped due to seasonal factor – results of 4th quarter were better than results of 1st quarter of next year. But from 2010 revenue of all Big3 operators will start growing by 4-10% a year until 2017.
According to analysts, previously the operators’ revenue grew every year. The operators’ revenue will depend on the further development of crisis and oil prices. Some analysts agree in the opinion that growth of the operators’ revenue, nominated in roubles, will slow down, but the result will be maintained. Concerning the revenue, nominated in dollars, it is difficult to forecast.

4. Power and Business

The Ministry of Communications is planning to reorganize Svyazinvest

The Ministry of Communications is planning to reorganize Svyazinvest. Minister of Communications Igor Shegolev supposes than the state-owned holding’s services convergence is one of the most admissible variants of the reform. The decision about the convergence will be taken by the working group, consisting of representatives from the Communications Ministry, Svyazinvest, interested departments and investment bankers. The working group has to work up the company’s development strategy, focusing on the company’s investment attractiveness. The variant of the holding’s services convergence was offered since it allows to provide more services in “one window” system that is a considerable advantage in the current financial situation on the telecoms market.
Svyazinvest’s financial attractiveness dropped considerably in 2008 since the holding had to settle important social matters. This caused additional costs. According to Igor Shegolev, having realized investments, it was possible to expect for the holding’s bigger value. Besides, another Svyazivest’s co-owner AFK Sistema fears that its share will be diluted due to the reform.
The convergence of Svyazinvest’s services is possible, analysts say. However, such a component as cell communications is necessary to be included in the system of the federal operator. To increase the company’s capitalization investors should understand the company’s strategy. According to commentators, the reform may be prevented by the contradictions between the holding’s authorities and minorities.
Svyazinvest is able to increase its share price on the exchange. To do this the holding has to reduce CAPEX and provide its shares redemption. Besides, analysts do not exclude the holding’s value may be diluted. This negative factor will depend on the company’s development strategy. Thus, involvement of investment bankers and other interested structures in the working group may impact positively the company’s reorganization since the group will take competent decision, which will take into account opinions of various parties.

Operators have obtained the possibility to transit domestic and international calls via their networks

Operators have obtained a possibility to transit domestic and international calls via their networks. We note access codes have not been given to companies yet. So, MTS, Vimpelcom and Megafon have already transited domestic and international traffic via their LD networks, although the department has not organized access codes distribution yet. Besides, the companies, giving their LD networks to the Communications Ministry, are allowed to use them for transit of domestic and international traffic, do not have to possess codes.
We remind Big3 operators obtained licenses for services of long-distance communications. In 2008 the operators gave the networks to Rossvyazkomnadzor. Currently the operators are expecting to receive codes from the Ministry.
The Ministry is planning to carry out the reform of codes system. The Department provided operators a pair of 2-digit codes for domestic and international calls. Currently the Ministry only has one free pair of codes. So, NTS (the Scientific and Technical Council) at the Ministry offered to increase the number of codes to 4 digits. This will allow operators to enter the market of long-distance communications. In particular, the companies will not have to rent other channels.
According to experts, lack of codes will not affect the operators’ work since they have already obtained the licenses for LD services provision. Analysts have different opinions on the reform. According to some of them, such measure will impact first operators of fixed-line communications. Cell companies, providing DLD and ILD services to subscribers via their own networks, will take a part of traffic from wireline operators that will increase revenues of the first ones and reduce them for operators of fixed-line communications. The reform will not cause any difficulties and affect data communications, other experts say. Subscribers only may face difficulties, dialing 4-digit codes.
The permission to transit domestic and international traffics via their own networks, given to Big3 operators, will certainly increase their additional profit. The right to transit traffic via own networks must be given to all cell operators, experts note. Otherwise such measure seems lobbing interests of particular companies.

The working group approved draft amendments to the Law “On Communications”

Naum Marder’s working group approved several draft amendments to the Law “On Communications”. The amendments concern mostly technical problems. In particular, the group participants had already worked out the principles regarding the procedure of licenses re-registering and frequencies distribution.
So, the decision on licenses re-registering will be taken within 60 days instead of 30 in case a legal entity is changed. If the application is filed late, a licensee has to be administratively liable instead of losing the license. Besides, a new license registration is not required when making additions to the same license.
The initiators also made the important conclusion on terms of frequencies distribution, which are planned to be reduced from 120 to 30 days. Within 10 days a candidate for frequencies must obtain the decision on the matter and within 30 days the commission must prepare licenses for a potential owner. We note this was initiated by Vimpelcom’s authorities. However, Rossvyazkomnadzor’s representatives spoke against this decision since reduction of the registration terms will lead to the department’s staff expanding.
According to analysts, the decisions, offered by Naum Marder’s working group, are positive. So, increase of terms for filing an application for a license in case of a legal entity’s reorganization will prevent applicants from administrative and legal violations since the reorganization process may not be on schedule (30 days) due to bureaucratic barriers. Another positive aspect is reduction of terms for distribution of frequencies. The term of 120 days affects operators’ work and they lose their profit and subscribers.
According to analysts, the offered amendments will be approved by the government since the legal acts, regulating operators’ activity, lag behind dynamic changes of the sector.

The government has not passed the bill, regulating tariffs between operators

The government has not passed the bill, regulating tariffs between Big3 operators. The deputy Maksim Korobov, the author of the bill, offered to consider operators, covering 25%+ numbers of a federal subject or the whole country, as significant. So, MTS and Vimplecom could be included in this list since they provide communications services to 25% of the country’s subscribers. However, Megafon could only become a significant operator in a few regions, where the operator’s coverage is 25% and more of the subscriber base.
Currently, according to the law “On Communications”, a company, covering no less than 25% of the region’s subscriber base, can only be considered a significant operator. Thus, fixed-line operators can only be called “significant’. We note that cell companies use codes, not connected to a particular region unlike fixed-line operators.
We remind the former Minister of Communications Leonid Reiamn supported the amendment. In case the new bill was passed, the government would be able to control MTS and Vimplecom’s tariffs for traffic transit they provide to other companies. However, the new government speaks against the amendments. According to Sergey Sobyanin, they did not passed the bill since this innovation may cause a conflict in the legislation of the communications sector and the antimonopoly department. Besides, this may lead to prices stagnation instead of reduction of tariffs for subscribers.
According to analysts, the government’s active participation in economic processes has never lead to positive results. Prices, the government starts regulating, usually go up. Moreover, the amendment to the law could be effective for tariffs reduction. The project’s objective is the control over tariffs between operators instead of their reduction. Thus, the amendment is senseless. In particular, the government sets prices depending on cost price of a service instead of the demand on the market. Such amendments may cause confusion in the legislation and documents backup that may worsen already complex situation in the sector.
Operators are able to control tariffs independently, experts note. The competing environment can be created by market tools such as access to the market for new participants. This will contribute to reduction of prices and as a result will decrease the monopoly of big participants.

The Federation Council approved the bill “On Transfer of Rights to United Technologies”

On December 22nd of 2008 the RF Federation Council approved the bill “On Transfer of Rights to United Technologies” with or without help of tenders and auctions. The law will allow the RF subjects to transfer technologies or its parts for their efficient use. The approved federal law will add Part 4 of the RF Civil code and impact the country’s further development of innovations. The law sets peculiarities in the rights to united civil, military or double technologies, which belong to the RF or the RF subject, and other people by their transfer with the help of tenders or auctions. The clauses of the law concern the rights to united technologies and their parts if the part can be independent in accordance with the RF Civil Code’s clauses.
According to lawyers, this federal law develops and specifies norms of Part 4 of the RF Civil code, devoted to the rights to intellectual activity results. In fact the law forms a new legal field on our market, creates the market mechanism of demand for technologies production and financing of science and inventors.

Russian television companies requested the Communications Ministry not to raise fees

Russia’s leading TV and radio broadcasting companies requested the Communications Ministry and the Federal Service on Tariffs not to raise fees for frequencies rent until 2011. The offer is included in the list of the anticrisis measures, sent to the Ministry by the National Association of TV and Radio Broadcasters, which consists of the 1st Channel, the radio station Mayak, Radio of Russia and others. The fee for transmitters exploitation is 4th biggest of the costs, following salaries, taxes and payment for content. It has been increasing 5-12% annually so far.
The Department will contribute that TV channels and radio stations agree with operators on optimal tariffs. New tariffs have been declared for the state-owned channels (1st, Russia, Sport, Culture) and radio stations (Mayak, Vesti FM and Radio of Russia).
Analysts remind RTRS is the major operator of TV broadcasting in Russia. Some regions have alternative commercial stations of TV broadcasting, but they take an insignificant part of the market. RTRS for radio is one of 3 leading radio stations in Moscow and a single one in regions. Payment of a music radio station may take over 10% of its costs (approximately 10-25 thousand USD monthly). Increase of tariffs in 2009 may become critical for the market, experts add. According to analysts, RTRS also has problems due to increase of tariffs for electricity, rent for the ground, occupied by transmitters.

VGTRK offered the Ministry of Communications to form a package of Internet resources

The Russian State-owned TV and Radio Company (VGTRK), owning such channels as Russia, Sport, Vesti, Culture and Bibigon, offered the Ministry of Communications to form a social package, consisting of 8 digital TV channels, which will be transmitted across Russia at the expenses of the government. The offer was made at the session of the working group on Internet development in regions at the Ministry of Communications on December 24th.. VGTRK offers to consider official websites of the Kremlin (kremlin.ru) and the government (government.ru) and some of the own Internet projects (for example, the website for children mirbibigona.ru) as socially important.
Access to the websites, included in the social package, will cost users less than usually, and the costs for traffic will be compensated according to the scheme, worked out by the officials.  According to analysts, decrease of prices for access to some websites would be urgent for regions, but not for Moscow: a lot will depend on the programme conditions, if it will be worked out. 70% of Moscow households are already provided with Internet access, subscribers are ready to pay for. However, in regions the cheaper access may be in demand. But it would be better to improve Internet access in a different way: by construction of new main line channels in regions that will allow to eliminate monopoly there, experts add. Some analysts agree in the opinion VGTRK’s offer can be realized with the help of the government’s support. However, it will be probably necessary to change to law “On Communications” otherwise preferences to particular websites can be considered as limitation of providers’ right of property.

The space system of surveillance and communications Arktika is created in Russia

Roskosmos, Rosgidromet, the Ministry of communications and other federal executive bodies are working at realization of new projects, aimed at quality improvement of space technologies use in behalf of Russia’s economic development. First of all it concerns Arktika projects that implies creation of specialized space systems of surveillance and communications in the Arctic region.
The Kaluga region, Tatarstan have already started cooperating with Roskosmos’ enterprises: various pilot projects are being realized in the Moscow, Yaroslavl and Krasnoyarsk regions. The results of the space activity are used in the regions in the frameworks of the corresponding regional special-purpose programmes.
According to analysts, the measures, implied in the federal space programme, on increase of the orbital group and its qualitative characteristics will allow to solve the most important social and economic problems of the country due to sufficient space information. In the nearest future the Russian system of distance probing of the Earth “will develop in the directions of new satellites creation and ground infrastructure improvement”. There is also the necessity to solve the problem of delivering space data to end users, especially to regions of Russia.

The Ministry of Communications intends to protect the Internet

The Ministry of Communications intends to protect the Internet. Within 2009 the system project on providing continuous work of all communications networks in emergency situations will be developed. This was announced by Minister of Communications Igor Shegolev at the session of the Governmental Commission on Federal Communications and IT. He also noted the project of creation of the system for centralized managing of the electricity network had already existed. However, the Commission, which will meet once a month, sent the project to be worked up to provide special consumers with continuous communications in emergency situations.
The Council at the Ministry of Communications will be headed by a general constructor. The expert council will consist of specialists from various leading companies of the sector.
Regarding Runet, the national segment of the Internet, the Commission discussed the mater of its security, including hacker attacks. The Ministry of Communications intends to work out warning measures for use of Runet for information struggle. This also concerns IT, computer programmes and interaction between providers and operators to support the national Internet network.
According to analysts, several years ago such centralized network worked in Russia, but then departmental and corporative networks were created. Currently we do not have a global network, meeting the needs of the whole country. According to analysts, cybercrime is one of the main problems for Russian specialists. Concerning Svyazinvest’s reorganization, the commission on reforming is being created by the order of Vice Prime Minister Sergey Ivanov. Analysts from some companies have already worked up some variants of the holding’s reforming. After one of these variants is approved by the government, we can speak of the terms of Svyazinvest’s reorganization.

5. Economics of Innovations

Igor Shagolev is going to enhance support of technoparks

Igor Shegolev is going to enhance support of technoparks under crisis conditions and to expedite the process of their launch. Thus, Minister offered to audit the works on tehchnoparks. He defined the goals of the innovative sector development. The main objective, set to heads of 9 regions, where technoparks are being developed, is enhancement of support of companies, engaged in innovative programmes, and creation of business infrastructure. At that they have to focus on construction of functional and technological premises.
We remind the plan of technoparks construction was confirmed in 2003 and its realization started in 2005. So, they intended to construct technoparks on the base of the University named after Bonch-Bruyevich in St. Petersburg. In 2007 they declared construction of tehcnoparks in 7 regions and in 2008 the number of regions increased. The project has been launched in St. Petersburg, Mordoviya, Tatarstan, the Kaluga, Kemerovo, Moscow, Nizhny Novgorod, Novosibirsk and Tyumen regions.
We note currently no technopark is put into operation. By 2010 they intend to construct a ground in St. Petersburg. According to Minister, the projects must not be frozen. In particular, they are planning to audit works on technoparks and redistribute the budget funds between the projects. The government obliged the regions to report on the funds spent and to reconsider financing due to reduction of prices for construction materials.
Analysts agree in the opinion the audit of the works on technoparks is a reasonable requirement of the government. Cheapening of construction materials and works allow to reconsider costs for the project realization. So, there is a problem of new projects development.

The Ministry of Communications is planning to regulate problems of the Internet

The Communications Ministry is planning to regulate problems of the Internet. The department has decided to create 5 working groups, consisting of the sector’s representatives (the Regional Public Centre of Internet-technologies, the Russian Association of Electronic Communications, companies Mail.ru, WebMoney, Ru-center, MoneyMail, etc) and officials. The groups’ main objectives concern the struggle with spam, personal data protection, the network development in regions, electronic commerce and information security, limitation of Internet-service providers’ liability. The first meeting of the group, scheduled to the end of 2008, will be devoted to the problem of spam.
Representatives of the sector assess positively the Ministry’s initiative since it is necessary to create a normative base for settling problems of the sector, in particular, struggle with spam. So, the representatives of Mail.ru have already offered to introduce criminal liability for spam.
We remind working groups and committees on the matters of electronic commerce and the Internet had been already considered at the Banking Committee of State Duma and the Ministry of IT and Communications previously. Currently it is necessary to define a connecting link to regulate the groups’ work and to carry it through.
According to most of analysts, creation of the working groups on the sector’s urgent problems is positive. It is also reasonable to involve the sector’s representatives since the processes will be studied in details and the decisions will be more thorough. However, according to some analysts, such initiatives are irrational since the Internet has insuperable problems, including the struggle with spam. Officials often take dilettantish decisions, so the market participants’ opinions will impact positively the sector’s development, experts add.
In fact currently the Internet is not controlled that causes risks for investors. The market participants may also lobby own interests, but they will take into account important problems of the sector, thus, according to analysts, the Ministry’s officials will probably become a coordinating link.

Comstat-UTS has launched WiMAX network in Moscow

Comstar-UTS has launched WiMAX network in Moscow. The network is the second constructed network after Scartel. The funds, invested in the project, come to 20 mn USD. The network will be mobile. The network subscribers can use the Internet without disconnection. The connections speed is 10 Mbit/sec. WiMAX as wireless access to the network will become addition to wired access. The service price is not known yet. In spring of 2009 the network will be put into operation.
We note in 2008 the operator made the agreement with Intel company on collaboration in the field of WiMAX technologies development. Currently laptops with WiMAX adapters have not been produced yet, but mini-laptops, such as Aspire One of Acer are being already sold.
Moreover, Scartel’s WiMAX network Yota has already started working in Moscow and St. Petersburg. Scartel ordered modems and NTS MAX 4G communicator from Samsung. 20000 devices are already on offer. From April the fee for unlimited service will be RUB 900 per month for subscribers, using modems, and RUB 1400 for those, acquiring communicators.
According to analysts, the demand for mobile WiMAX will be low due to lack of special devices, supporting WiMAX. So, the project will be popular quite long time after. Experts note WiMAX and Wi-Fi technologies are quite similar. In particular, Comstar will lag behind companies, providing services of Wi-Fi networks, since they possess devices, necessary for wireless communications use.
The amount, invested in mobile WiMAX introductions, is small, experts note. Besides, they forecast the services will take a small market share on the telecoms market.

Corbina is launching paid IPTV

From January 15th Corbina Telecom is launching IPTV in Moscow. Within 1Q2009 the operator will transfer the service to Bee Line brand. The company has already stopped leasing digital set-up boxes for IPTV viewing, continuing selling set-top-boxes. IPTV service will cost RUB 270 monthly. Currently the technical matters and billing problems are being settled. Corbina has provided pilot IPTV services to Moscow subscribers so far. The services launch was planned long ago, but it was postponed due to lack of the agreement with the regulator. The service will be only launched in Moscow.
According to experts, the market of IPTV is promising and it will grow 50 % annually. Some commentators connect this with development of the federal special-purpose programme “Development of TV and Radio Broadcasting for 2009-2015”. Analysts assess carefully the outlooks of Corbina’s project since 1) IPTV is not a profile business of the operator, 2) there are already strong participants on the market, 3) Corbina’s offer is not so convincing as Stream’s one. Nevertheless, some experts note the operator may become the third leading company in this segment. The company’s profit from the project is assessed as low and even zero, according to experts.

Satellites Express-MD1 and Express-AM44 are ready to be delivered

The satellites Express MD1 and Express-AM44 are ready to be delivered to the cosmodrom Baikonur in Kazakhstan. These satellites will be launched with one racket on February 11th of 2009. The satellites were created in the frameworks of the programme o of the Russia’s state-owned satellite group’s update and the Russia’s Federal Space Programme, confirmed by the order of the RF government in 2005. Express-AM 44 is designed for provision of services of digital TV and radio broadcasting, Internet access, data communications, video conference calls, creation of multiservice networks VSAT and president’s and government’s mobile communications. Express-AM44 is equipped with 10 transponders of C-band (40 MHz) and 16 transponders of ku-band (54 MHz) and 1 transponder of L-band (1 MHz)
The small satellite Express-MD1 is created to solve problems of mobile president’s and government’s communications, for providing services of digital TV and radio broadcasting, the Internet access, data communications, video conference calls. The satellite is equipped with 8 transponders of C-band (40 MHz), and 1 transponder of L-band (1MHz).
According to analysts, the satellites are worked out, taking into account the forecasts of development of the Russian market of satellite communications and digital TV and radio broadcasting until 2015. The launch of the satellites, planned in 1H 2009, will allow GPKS to meet needs for satellite capacity of Russian users and operators as for TV and radio broadcasting as for provision of other services, including telecommunications, data communications and broadband Internet access. However, the satellites’ launch will hardly improve the situation of the deficit in satellite capacity. AM44 will mostly provide services of GPKS in Africa. And MD1 will be located at 80 degrees East with AM2, having technical problems. Besides, MD1 does not have enough transponders to meet the current needs for satellite capacity. The cost of 1 MHz ku-band is over RUB 110 000 and since 2006 it has increased 25-30% due to the capacity deficit. According to some analysts, Express-MD1 and the satellite KazSat-1, taken out of service because of the serious technical problems, were constructed on the same platform that also results in the cautious prognosis about its stability.

Softline company opened the venture fund Softline Venture Partners

Softline company opened the venture fund Softline Venture Partners for support of software developers in Russia and the CIS. The company is planning to invest around 20 mn USD in software development. SVP fund, created by the company, will be engaged in investing in independent software developers, working in Russia and the CIS.
According to analysts, crisis is the best time for investing in software. The sector remains promising and in the nearest future it will demonstrate high growth rates. However, currently the sector’s companies have faced problems when attracting investments and paying off credits. As a result assets in the sector are cheaper than a year ago. The fund may reach good long-term profitability. Simultaneously the companies will receive additional resources to survive under crisis conditions. The fund is not big. Even in case of acquiring non-controlling shareholdings it will hardly finance more than 10-15 companies.

GLONASS will cover fully the area of Russia and the CIS.

GLONASS will cover fully the area of Russia and the CIS by February 2009. The system will work in full force after the end of testing and putting into operation 3 satellites, launched on December 25th.
We remind GLONASS was put into operation in behalf of the Defense Ministry in September 1993 with a limited orbital group, consisting of 12 satellites. On February 18th of 1999 GLONASS was defined as the system of double purpose. In December of 2005 Vladimir Putin charged Roskomos and the Defense Ministry to expedite GLONASS orbital group’s reconstruction.
According to analysts, it is possible to cover 100% of the territory of Russia and the CIS countries. GLONASS will be able to cover the territory after Russia has the orbital group, consisting of 30 KA, 24 of which will work. Most analysts agree in the opinion in February the orbital group of 20 KA will probably work in orbit.

Transport will be equipped with GLONASS navigation systems

Minister of Transport Igor Levitin informed that by 2010 all state-owned and commercial transport in Russia would be equipped with GLONASS navigation systems. Last year the government was only planning to complete the programme of equipping transport with GLONASS navigators.
All new transport, produced in Russia, must have GLONASS receivers. This will allow to enhance considerably transport work and as a result contribute to ecology improvement in big industrial centres.
According to analysts, in summer 2008 the forecasts on GLONASS development were not so optimistic and by 2010 the progamme on transport equipping was only planned to be developed. Provision of the market with navigation services was postponed to 2010. In the beginning of 2009 GLONASS satellite system lost one satellite, but, according to the statement of Roskosmos’ representatives, it will be launched again in the nearest time. GLONASS group will reach 20 satellites soon.

6. Personnel Changes

Vladislav Shabanov has been appointed for the position of head of the search direction of Mail.ru. Previously this position did not exist in the company. Shabanov was holding the position of head of the department for search technologies in RosBusinessConsulting company. In Mai.ru his objectives are development of search of Mail.ru, GoGo.ru portal and vertical search projects of Mail.ru.
According to analysts Vladislav Shabanov is one of the best on the market of specialists on search machines. He is able to manage any search projects independently. Mail.ru has obtained a very strong specialist, able to enhance the key direction of the company.
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Sergey Savelyev has been appointed deputy head of the Federal Space Agency. Previously he was holding the position of leading specialist of the directorate fro organizational development and business technologies of CJSC “Sukhoi’s Civil Planes” According to the government’s order # 1672 of November 19th of 2008, S.Savelyev took the position of deputy director of Roscosmos. He will be engaged in settling the matters of international cooperation of the agency. Before Savelyev this position was held by Alexander Medvedchikov. This is the 3rd appointment in Roscosmos within 2008. In February the RF government appointed Vitaly Davidov for the position of deputy head of Roscosmos and Sergey Ponomarev for the position of 2nd deputy director.
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At the extraordinary meeting the shareholders Group Angstrem elected the Board of directors for the first time. The Board is headed by the former deputy minister of communications Dmitry Milivantsev, who will be engaged in strategic development of the Zelenograd concern. Besides, the Board consists of director general of Group Angstrem Alexander Lubimtsev, director general of OJSC Angstrem Valery Dshkhunyan, director general of OJSC Angstrem-A Anatoly Sukhoparov, the representative from AMD Nikolai Lisai, Maria Myshkina and the lawyer Grigory Tsuprik, who is a nominal owner of 1 Angstrem’s share in behalf of the entrepreneur Sergey Veremeyenko.
According to analysts, the owner decided to divide the management into operating and strategic management. D. Milovantsev will be engaged in settling the matters of strategic development. The Board of directors was created for general coordination and proper strategic development, experts note. The concern’s shareholders needed a high-ranked person, having experience of work in the government structures. Vsevolod Vukolov’s appointment failed, experts add.
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The authorities of Tele2 Russia have appointed Alexei Barov for the position of sales director. The company expects this appointment will help to realize the company’s ambitious plans on regional expansion. Previously this position was held by Maxim Subbotin, but he quitted the company in 2007. A. Barov will be in charge of development and introduction of Tele2’s services sales strategy, interaction with federal and local leading companies. Besides, he will be responsible for new channels search, processes standardization and employees training.
According to analysts, Tele2 was always positioning itself as a cell discounter, working on the market of mass services. So, Barov’s experience of 10-year work in Mars company will be useful. Tele2 Russia has ambitious projects for the nearest future. Aleksey Barov will help the company to realize them.
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The Board of directors of Sibirtelecom, a Svyainvest’s interregional company, has prolonged the powers of the company’s director general Alexander Isayev for a three-year term. We remind Alexander Isayev was appointed director general of Sibirtelecom on April 2nd of 2007. The new contract is valid until December 23rd of 2011. Over a year ago Sibirtelecom started reorganization.
According to analysts, the company has serious objectives on financial results achieving, maintenance of the market share and enhancement of clients’ loyalty, that demands large-scale changes in the company’s business. In 2008 the company’s top managers have already started changing business processes and business profile of the company, but they still have to enhance the operator’s effective work.
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The Ministry of Communications sent the Ministry of Economic Development the letter, recommending Yevgeny Yurchenko for the position of director general of Svyazinvest. Y. Yurchenko possesses experience of work in the holding: from November 2002 to March 2005 he was working as deputy director general of the company and supervising financial matters. After quitting Svyazinvest he was engaged in mergers and absorptions in Comstar-UTS and currently he is heading the Tambov branch of Sberbank.
According to analysts, Shegolev criticized repeatedly the holding’s authorities for the low level of management in Svyazinvest. In particular, Minister complained that despite large-scale investments, the company’s capitalization was low and a lot of cell assets were lost.
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Boris Antonyuk has been dismissed from the position of deputy minister of communications. By the order# 1938-p of December 24th Vladimir Putin dismissed B. Antonyuk from this position due to its abolition. In the Ministry of Communications B. Antonyuk was supervising the work of Electrosvyaz sector. Since the moment of the Ministry’s reorganization in May 2008 he was heading the work on eliminating the former Ministry of Communications and IT.
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The former deputy director of Svyazinvest Vladimir Zhelonkin has been appointed director general of AF Telecom Holding, managing Alisher Usmanov’s telecoms assets, and has been elected chair of Telecominvest’s Board of directors (73.9% of shares belong to Alisher Usmanov). The major Usmanov’s telecoms asset is 31.3% shareholding of the third biggest cell operator Megafon, which belongs to Telecominvest.
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The RF government has confirmed new members of the State Commission on Radio Frequencies (GKRC). The changes were introduced by the government’s order# 1838-P of December 8th 2008. According to the order, GKRC was quitted by Boris Boyarskov, Yevgeny Karpov, Stanislav Putinsky, Nikolai Saschenko, Mikhail Sukhodolsky. They are replaced by deputy minister of industry and trade Yuri Borisov, director of the Department of the Ministry of Nature Rinat Gizatulin, , deputy minister of communications Naum Marder, head of the RF Military Communications Yevgeny Meichik, deputy minister of transport Alexander Misharin, head of the Federal Service on Supervision in the sphere of Communications, IT and mass Communications Sergey Sitnikov, deputy minister of internal affairs Alexander Smirny.
Besides, currently the Commission includes: head of Federal Customs Service Andrey Belyaninov, head of the Federal Agency for Communications Valery Bugayenko, deputy head of the Federal Service on Hydrometeorology and Environment Monitoring Valery Dyadyuchenko, head of the Department of Radio Electronic Struggle of the General Staff of the RF Military Oleg Ivanov, deputy director of the Federal Protection Service (FPS) of the RF Yuri Kornev, deputy head of the Federal Agency for Technical Regulation and Metrology Vladimir Krutikov, head of the Foreign Intelligence Service Yuri Lukichev, head of the Department for Radio Communications of the Service of Special Communications and information of FPS Alexander Maximov, head of the Federal Agency for IT Vladimir Matyukhin, head of the Federal Air Navigation Service Alexander Neradko, deputy head of the Federal Space Agency Yuri Nosenko, 1st deputy head of the Science and Technical Service of FSB of Russia Andrey Presnov, head of the Federal Agency for Press and IT Mikhail Seslavinski, director of the Department for Legal Regulation of Analysis and Control of Activity of Federal Services of the Ministry of Justice Yuri Yakovlev.
According to the clause on GKRC, confirmed by the government in autumn of 2008, Minister of Communications Igor Shegolev is Chair of the Commission.

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The government continues replacing officials with independent directors in state-owned companies’ boards. The directive, confirming candidates from the government to Svyazinvest’s Board, was signed by Vice Prime Minister Igor Shuvalov on December 30th. The Board will only include two officials: the former Minister of Communications, Advisor to President Leonid Reiman (he was heading Svyazinvest from 1999 till 2008) and Advisor to Minister of Communications Leonid Leshenko. The rest 5 candidates from the government are independent managing directors of the MDM bank Nikita Ryauzov and of CJSC VTB-invest Mikhail Butrin, professor of the Higher School of Economics Ivan Rodionov, managing partner of Marshall Capital Partners Konstantin Malofeev, member of the Board of directors of UBS Marlen Manasov. Another two seats are controlled by Svyazinvest’s minority shareholder AFK Sistema.
According to analysts, the intention to replace officials with independent directors in boards of state-owned companies was announced in June 2008. Independent directors were included in the boards of several state-owned companies (Sovkomflot, Zarubezhneft, RZD), most seats were only taken in AIZK. Svyazinvest may become the second company. In November the corporation nominated senior vice president of AFK Sergey Drozdov, 1st vice president of AFK Vitaly Savelyev and president of Comstar-UTS Sergey Pridantsev to Svyazinvest’s Board of directors.
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The second biggest Internet provider in Moscow Akado-Stolitsa has replaced its managing director. Denis Lobanov has been appointed for this position. For around a year he was heading Komkor, controlled by Akado, and before he had worked as deputy director general of MGTS.
Lobanov’s objective is to establish qualitative servicing of subscribers. This coincides with the company’s strategy and Lobanov’s experience of work in MGTS will be required. Under Lobanov MGTS introduced three tariff plans instead of one (“pay by the minute”, fixed and combined). Most of the Moscow residents chose the most expensive tariff plan (fixed) - 53%. In regions this tariff plan was only chosen by 15-20% of subscribers. Sergey Alimbekov, heading Akado-Stolitsa, will be transferred to Akado’s managing company where he will be engaged in new projects.
According to analysts, Lobanov possesses big experience of work in mass sector after working as commercial director in MGTS. A year and a half ago Sergey Alimbekkv was appointed director general of Akado-Stolitsa and his objective was to create a new company, uniting separated assets and increasing the coverage of Moscow households with the network. Alimbekov managed to settle this matters. Under him Akado–Stolitsa took the second place among Moscow providers in terms of the number of households, where the company’s services were provided. Some experts agree in the opinion that last year it was known that the Moscow market of broadband access is saturated and the quality of services was of the most importance. According to analysts from J’Son & Partners, in 2H2008 Akado-Stlitsa provided services to 22.3% of Moscow users of broadband access. Comstar-UTS was the leader of the market (36%) and Corbina took the 3rd place (19.6%).
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In March Sitronics’ shareholders will reelect the company’s Board of directors. The new Board may not include the current chair, vice president on innovations and science of AFK Sistema Denis Muratov, who is quitting the corporation.
According to analysts, one of the reason for Sitronics’ Board reelection is Denis Muratov’s quit. He has been holding the position of vice president on innovations and science since February 2006. Last year, after Sistema had been headed by Leonid Melamed, its organizational structure was changed: three business units were formed: Telecommunications Assets, Consumers Assets and High Technologies and Industry. The subdivision, responsible for hi-tech and venture projects and supervising Sitronics and RTI Systems, was headed by the former director general of RTI Systems Sergey Boyev. Perhaps, these changes caused Muratov’s resign from his position. He may stay in the company as independent director, analysts say.
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Director general of National Telecommunications, controlled by Yuri Kovalchuk’s structures, Sergey Kalugin has been replaced by Viktor Pinchuk on his position. Viktor Pinchuk is heading 100% subsidiary of National Cable Networks. On December 25th the Boardd of directors of the National Cable Networks took the decision that Pinchuk would continue working in the company, but as a member of the Board of directors and a member of the Committee on Strategy.
We remind the group of companies National Telecommunications (NTC) unites operators of cable television and broadband Internet access in Moscow, St. Petersburg, Yekaterinburg, Novosibirsk, Kurgan and Elektrostal. NTC also owns 51% of CJSC Makomnet, constructing telecommunications infrastructure in the Moscow underground. NTC’s subscriber base is 4.5 mn people. 51% of NTC belong to Yuri Kovalchuk’s National Mediagroup (NMG), 12.4% belong to Surgutneftegas and the rest shares are distributed between Severstal, Sberbank, Gasprombank and VTB.
According to analysts, Pinchuk’s appointment for the position of director general of the company is reasonable since now the company needs a manager. The company’s main objective is to strengthen its positions in Moscow, where the company is developing triple pay services under OnLine. Telecomfort provider. Previously Pinchuk stated the company intended to connect 60 000 subscribers of digital television, 97 000 users of broadband access and around 15 000 users of digital telecommunications. Experts note that the personnel changes in NTC were preceded by the changes in the mother company. In November 2008 Sergey Fursenko, heading the National Mediagroup, took the position of the company’s president and executive director Mikhail Kontserev became chair of the company’s Board. Then the changes were caused by the necessity to enhance the company’s management. Thus, Fursenko will be responsible for strategic matters and Konterev will be in charge of operating management.
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The cell operator Megafon is getting ready for purchases. The company has introduced the position of director on mergers and absorptions and Dmitry Kononov has been appointed for this position. In early 2000s he took active part in Megafon’s creation. Kononov’s objective will be acquisitions on the market of broadband access and cell retailing, where Megafon has not been introduced yet.
Kononv will be in charge of transactions structuring, negotiating with potential partners, financial analysis and due diligence.
We remind Kononov is not a new employee in Megafon. In early 2000s working as consultant of the Board of directors of First National Holding S.A. he supervised acquisitions and consolidation of assets that later were consolidated under Megafon brand. From 2002 till 2004 he was working as financial director of the operator and then as an advisor in Telecominvest and a member of its subsidiaries’ boards of directors.
According to experts, Megafon is the only of Big3 operators that can afford large-scale acquisitions in crisis conditions. In 3Q2008 Megafon had 411 mn USD of free funds and 1.4 bn USD of short-term investments. The company’s free funds will be hardly spent on purchases since they are necessary for current costs. The short-term investments could devaluate under crisis. So, the company has 500-700 mn USD for acquisitions. MTS and Vimpelcom cannot afford significant acquisitions due to their big debts, analysts add.
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Oleg Shimanov, heading TO Legenda, has been appointed director general of Dixis Distribution. We note in the end of 2008 Dixis sold CJSC Gadget Service to TO Legenda.
Previously it had been planned that Eldar Razroyev, the former president of Euroset, would resuscitate Dixis. Razroyev offered Alfa Bank the scheme of the company’s debts restructuring that should have been realized by the end of 2008. However, the new owner of the retailing company did not approve the scheme.
We remind Dixis Distribution was founded in December of 2008 after Dixis’ bankruptcy (the company’s debt was assessed at around 240 mn USD).The new legal entity will pretend to renewal of the brand contracts with lessors. It was unknown who would develop the business of Dixis distribution until the end of 2008. Dixis group unites 701 salons and another 445 salons work according to the franchising scheme. The company’s share in cell phones sales is 45 (estimates of Mobile Research Group). According to the results of 2007, Dixis’ turnover is 960 mn USD.
According to analysts, Shimanov is an Alfa’ Group’s creature. Their ways crossed in 1994. Then the managing company Alfa Capital took part in the privatization of the Moscow factory Bolshevik. Oleg Shimanov was director general of the factory and spoke against including Alfa’a representatives in the enterprise’s Board of directors. The conflict was settled due to mediation of Credit Suisse First Boston, which was a financial consultant and organizer of Bolshevik’s auction. Later the factory’s authorities and Alfa Capital attracted a strategic investor, the French company Danone, which acquired finally 80% of the enterprise. Director general of the managing company Dixis is formally responsible for the bankruptcy. Creation of the new company is an objective of director general of Dixis Distribution. The company’s survival depends on its new shareholder’s position. The company’s debt to suppliers without fines is 80 mn USD, according to analysts’ estimates.
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Technical director of CJSC Sky Link Gennady Golant quitted the company. On January 20th of 2009 he sent in his resignation. Gennady Golant is planning to start working on the new position in February.
According to information from ComNews, Gennady Golnd may start working in Scartel company, developing WiMAX network in Moscow and St. Petersburg.
According to Sky Link press service, they are not planning to hire a new employee for Golant’s position, the position will be abolished.

7. Figures and Facts

129% is penetration of cell communications in Russia, according to the data of J’son & Partners. In November the number of registered SIM-cards grew to 183.8 mn. On the whole cell communications penetration has reached 129% and 181% in the Moscow licensed zone. The total monthly growth of subscribers was 2.3 mn people (+1.3%), 6% growth y.o.y.

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$6 900 000 000 is the total revenue of Russian cell operators in 3Q2008, according to assessment of analysts from J’son & Partners.
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RUB 1 240 000 000 000 were earned by Russian cell operators in 2008, according to the data from the Ministry of Communications.

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RUB 2 400 000 000 were spent by Megafon on redemption of the head office building in Kadashevskaya embankment.
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22% is the growth of the market of IT in 2008, according to Minister of Communications Igor Shegolev.

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RUB 20 000 000 is the amount of bonds of 2nd issue for a 5-year term, confirmed by AFK Sistema.
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RUB 1 130 000 000 is the amount of tax claims, contested by MTS
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5 000 employees will work in MTS by 2012 due to reduction of staff
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$150 000 000 were invested in improvement of 180 nm chips by Sitronics. To do this the concern attracted a strategic partner, the state-owned corporation Rosnano that helped to finance the project.
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6 satellites of GLONASS system will be launched in 2009 and in 2010 the first satellite GLONASS-K will be launched.
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RUB 897 300 000 000 is revenue from communications services in Russia in January-September of 2008. The revenue from DLD and ILD services grew 11.5% to RUB 94.3 bn. The revenue from local telecommunications increased 1.8% to RUB 101.9 bn. The revenues from document telecommunications and mobile telecommunication increased 16.2% to RUB 79.8 bn and 22% to RUB 400.0 bn accordingly. The profit from services of traffic connection and transit reduced 16.2% to RUB 79.8 bn.
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RUB 100 000 000 were invested by Synterra in its network’s capacity expanding in the South Federal region in 2008.
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RUB 29 600 000 000 were paid by MTS as dividends for 2007. The company’s shareholders obtained 60% of the company’s net profit for 2007.
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24,87% of Comcor were returned by the telecoms holding Akado from MDM-bank.

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RUB 216 400 000 is the amount of tax claims, contested by UTK. The court of review declared valid the decisions of two instances, which dismissed the claims of the Tax Inspection against the South Russian subsidiary of Svyazinvest.
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2 500 000 euros were earned by Sitronics in Poland. This amount was obtained by the concern’s subsidiary Intracom Telecom, fulfilling the contract with the Polish cell operator Polkomtel. The contract implied the equipment improvement, prolongation of the license for software, etc.
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RUB 46 800 000 000 is Megafon’s revenue according to the results of 3Q2008.
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$960 000 000 is Dixis’ turnover for 2008
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RUB 13 000 000 000 is the total revenue of Telefon.ru for 2008
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300 000 000 euro is the credit, obtained by the cell operator MTS from Gasprom.

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17 700 000 people use the Internet daily, according to the poll, held by the Public Opinion Fund in autumn of 2008.

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40% is the expected decrease of cell phones sales in Russia in 2009. The revenue from cell phones sales will reduce by 15% to RUB 155 bn, compared to RUB 185 bn in 2008.

Sources: Vedomosti, Prime-TASS, RBK Daily, ComNews, Cnews, Kommersant.