The Russian Telecommunications Market Development February 2009

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

1. General Trends of the Market Development

MTS is planning to acquire Salon of Communications Eldorado

MTS is planning to acquire Salon of Communications Eldorado. The operator has requested FAS to approve the purchase. Currently FAS authorities are considering the application from MTS. The operator is checking Eldorado’s communications shops. The amount of the transaction will be based on the company’s financial conditions and debts. After the transaction is completed MTS will obtain 400 shops.
We remind Salon of Communications Eldorado belongs to Tenteko Limited. Eldorado company created its own network of shops for mobile phones and services sales in 2005. In 2008 salons of communications were picked out from Eldorado’s structure and named Salon of communications Eldorado.
We note the Czech company PPF Group was planning to acquire Eldorado’s control shareholding. PPF Group intended to pay off the company’s debt worth 500 mn USD and to obtain the asset. Salon of Communications Eldorado is assessed at 10 mn USD.
Eldorado’s salons take around 2% of the market and around 6.5% fall to sales of phones. In 2008 760 000 handsets of 2.3 mn were sold via Salon of Communications Eldorado.
According to experts, FAS will not refuse to the company since Salon of Communications Eldorado is not the leader on the market of cell retailing. Besides, the transaction will benefit both parties. The transaction will allow Eldorado to settle its financial problems and MTS will be able not to lag behind its major competitors Vimpelcom and Megafon. The acquisition of Eldorado by MTS will not impact significantly the operator’s position on the market as Eldorado’s network is not big.
Thus, entering the market of cell retailing is a logical trend for operators of communications. Besides, under crisis conditions, when companies are cheapening and they may be acquired underpriced, the acquisition of Eldorado by MTS is quite reasonable and beneficial.

Vimpelcom may not pay dividends for 2008

Vimpelcom may not pay dividends for 2008, though this is not the result of the company’s financial condition: Vimpelcom will be able to pay dividends worth 1.9 bn USD in 2009 without refinancing. At that the operator does not exclude it will issue the rouble bonds in 2009 as MTS has already done.
We remind first Vimpelcom paid dividends for 2006. Previously the whole revenue of the company was invested in the company’s development. For 2006 Vimpelcom paid 333.4 mn USD or 41% of net profit and for 2007 the operator paid 588 mn USD, i.e. 40% of net profit. MTS has to pay its shareholders no less than 50% of net profit as dividends and in 2007 and 2006 the operator paid 60% and 69% of net profit accordingly.
According to experts, the positions of MTS and Vimpelcom are quite similar and Vimpelcom will pay easily its debt to the shareholders. Experts also note that under the rouble devaluation floating the rouble loan may only benefit one of the state-owned banks. Vimpelcom’s shareholders need dividends and they will be probably paid since Vimpelcom does not have financial problems, analysts note.

IT market in crisis conditions

IDC company did research of the IT market and made forecasts regarding the IT market for 2009. In particular, they expect 22% decrease of Russian IT company’s revenues (nominated in rouble). In 2009 they expect 30.8% decline in sales of IT products in the corporate sector. According to analysts the demand for IT products will drop to 28.4% and the demand for equipment will decrease by 18.4%.
According to the market participants, the share of IT services and Russian products on the IT market will grow on the contrary. This supposition is based upon the expected decrease of products acquisition abroad. First of all this will concern business offers, equipment of information security and software development.
The rouble devaluation has affected the IT segment. Contracts, made by Russian companies with foreign vendors, are effected in dollars. However, Russian companies provide IT services to their clients under long-term rouble contracts. Thus, the contracts has cheapened within the crisis period. Currently the companies are trying to focus on short-term programmes with a short payback period such as outsourcing and IT services provision. Outsourcing may allow the companies to regulate their costs. According to analysts from IDS company, IT outsourcing will maintain its position on the market in 2009.
The IT market will not reduce considerably, analysts say. They forecast more active processes of budgets redistribution on the IT sector. Russian companies will reduce costs on equipment and license contracts with suppliers. The companies will also decrease costs on staff and CAPEX. Programmes, which demand settling complex technical problems, will be postponed.
According to analysts, the growth rates of IT outsourcing will decrease as well. Besides, import substitution will impact positively the competitiveness of a Russian producer, experts note. However, Russian vendors will face problems with business processes realization since it will be difficult to cover all the necessary expenses for IT products.

MTS acquired Telefon.ru

MTS acquired 100% of the cell retailing company Telefon.ru. We remind FAS had approved the acquisition of the retailing company’s share in the end of 2008. The amount of the transaction is 60 mn USD. The operator acquired Narico Holdings Limited, which is the owner of Telefon.ru, from Analog Holdings Limited and Delemont Investments Limited. 12-18 months later MTS will have to pay 25 mn USD to Analog Holdings Limited and Delemont Investments Limited in case the results of Telefon.ru correspond to the contract conditions. Besides, MTS acquired the retailing company, which possessed products at 22.4 mn USD.
We remind Telefon.ru possesses over 500 shops. Over 2008 the company’s revenue has ccme to around 540 mn USD. The company’s debt is 26 mn USD. Telefon.ru takes 4% of the market of cell phones sales. In 2008 the company sold 1.376 mn handsets and the revenue from the sales was around 272 mn USD.
On the retailing market MTS’ main competitor is Vimpelcom. Making the contract with Telefon.ru MTS will own around 3 thousand salons of communications while Vimpelcom possesses 4 thousand shops after the operator made the contract with Euroset.
According to analysts, MTS will be able to strengthen its position on the cell retailing market due to the transaction. However, Vimpelcom still holds the leading position on the retailing market in terms of the number of communications salons. The operator is followed by MTS and Megafon.
Telefon.ru is quite strong player on the cell retailing market, experts say. Besides, MTS managed to acquire the company at quite low price. According to analysts’ forecasts, in the nearest future MTS will consolidate its businesses under the common brand.

Viktor Vekselberg may part with his share in Akado

Akado’s major shareholder Viktor Vekselberg is negotiating the sale of his shareholding in the company. The offer about the company’s acquisition was received by National Telecommunications (NTC), Comstar and several big banks, including VTB. The company was assessed by the owners at 200-300 mn USD without taking the company’s debt into account.
Currently the company’s credit debt is around 450 mn USD. At that most of Akado’s acquisitions in recent times are companies with low profitability. In 1Q2009 the company has to pay around 50 mn USD and in 2Q2009 – 100 mn USD. The company expected for financial support from private investment funds. However, the company’s shareholders have not managed to negotiate with the investors.
In the end of September of 2008 Akado declared it had obtained the credit worth 100 mn USD from Raiffeisen bank. The company stated its investment programme was targeted at financing of its further activity on the regional strategy realization as well as at cable networks enhancement and extension in the regions. In December Akado’s regional expansion was stopped.
On one hand the amount of 200-300 mn USD is overestimated, analysts say. According to experts the fair price for the company is 175 mn USD. However, due to the acquisition Comstar would be able to take the leading position on the Moscow market and to increase considerably its subscriber base. On other hand, Akado is able to pay debts to the creditors since the company has a possibility to refinance the debts and currently it is demonstrating stable cash flow.

Operators ask equipment producers for rebates

Due to financial crisis and exchange rate growth operators of communications are reconsidering their mutual settlements with producers of network equipment. They are trying to convert them to roubles or negotiate acceptable dollar rates.
The payment for technical support of network infrastructure is a serious burden for a provider since acquiring equipment, the company signs a contract with a vendor for annual technical support, which implies payment, determined in dollars. In crisis conditions the market participants are trying to remake their contract with vendors. For example, in 2009 Comstar is planning to convert its payments to vendors to roubles. It is quite logical since the company provides services to consumers, who pay in roubles, the company’s budget is formed in roubles.
However, some companies do not suffer from the rouble devaluation. For example, Synterra works in the rouble zone and all the company’s contracts with suppliers and integrators are realized in roubles. But OJSC Comcor (Akado Telecom) has not managed to avoid problems, caused by the rouble devaluation. Previously they paid in roubles, and currently their vendors want to convert payments to dollars. The provider has to negotiate prices in dollars.
Experts remind, some companies began to convert their mutual settlements to roubles in advance. A year ago these operators started remaking their contracts with suppliers. However, in case a counteragent is from the West, it is almost impossible to pay in roubles. Operators using foreign vendors’ equipment, can hardly ever negotiate payments in roubles.

Svyaznoy is looking for an investor
 

Svyaznoy started negotiating the sale with VTB. The company intends to sell its control shareholding. VTB has offered new terms of the transaction. Currently the whole company is assessed at 200 mn USD. Previously it was estimated at 400 mn USD by the potential purchaser.
We remind in 2008 Svyaznoy was negotiating the sale of its minority shareholdings with VTB and Alfa-Bank. One of the options was a possibility of consolidation of Svyaznoy and Cifrograd. VTB was planning to obtain 15% in the managing company for 100 mn USD. However, both retailers received alternative offers about the acquisition from Big3 operators. In particular, in the beginning of January of 2009 MTS started negotiating transfer of its salons to Svyaznoy’s management and Megafon got interested in Cofrograd.

In 2008 Svyaznoy’s turnover was 2.94 bn USD, 22.6% growth y.o.y. The company’s revenue increased 25.7% to 886 mn USD. The commodity circulation of the company grew 25.6% to 2.052 bn USD.
According to analysts, 200 mn USD is a fair price for the retailing company without taking the company’s debts into account in current financial situation. Svyaznoy holds a good position on the market, its revenue is growing. The company possesses funds and does not need to be sold at the moment. The company may be acquired in the interests of one of Big3 operators. Afterwards the bank may either sell a part of its shares or sign a contract on asset management with one of the operators. Thus, the operator becomes an owner of the company.

Vimpelcom is freezing M&A transactions

Vimpelcom is one of the leading Russian cell operators, stating it is freezing M&A programme due to crisis. The operator is only ready to invest in the projects in Vietnam and Cambodia that had been announced before.
Vimpelcom’s strategy regarding acquisitions was last corrected in the spring 2007: besides the CIS cell market the operator started looking for cell assets on the Russian and international markets, and stated its intention to develop the business on the basis of broadband Internet access, the media sphere, mobile television and digital services. Last Vimpelcom’s big purchases include the acquisition of Golden Telecom in February of 2008 and the acquisition of 49.9% of Euroset for 226 mn USD in the end of October.
Vimpelcom’s competitors declare they do not intend to refuse purchases. MTS is still considering opportunities in the field of M&A, focusing first of all on the domestic market. Megafon is considering the opportunity to acquire assets on the cell retailing market.
According to analysts, investments reduction is a forced measure for Vimpelcom, which has big debts. According to the result of 3Q2008 Vimpelcom’s ratio debt/capital was 1.4 and debt/expected EBITDA was 1.6. The figures are not critical, but within a year the operator has to pay off around 1.74 bn USD. The amount is big, taking into account decline in demand for the operator’s services and the rouble devaluation. Experts do not forecast whether the operator will manage to pay off the debt. It depends on a lot of factors, such as demand, increase of prices, the rouble devaluation, payment of dividends in 2009 and situation on the credit markets. The company could obtain additional funds for development and possible acquisitions, refusing payment of dividends to its shareholders, experts note. According to analysts’ forecast, under the results of 2008 the company’s net profit may come to 1.5 bn USD. In case the company spends 40% of net profit on dividends as it did in 2007, the payment may come to 600 mn USD.

IT enterprises are reducing staff

The Ministry of Communications published the results of the express-poll of 25 Russia’s biggest companies, working in the field of IT. The poll was held by the Association of Enterprises of Computer and Information Technologies (AP KIT). According to these results, in 4Q2008 44% of the respondents reduced their staff: 20% of them fired 10-20% of employees, and 24% of the respondents reduced the staff by less than 10%. 20% of the respondents only expanded their staff. 38% of the companies decreased salaries for their employees: 21% of the companies reduced salaries by 10-20% and 17% of the enterprises decreased salaries by less than 10%.
In 4Q2008 Compulink Group reduced 10% of staff and salaries. Verysell group (system integration, computer equipment distribution) reduced around 10% of employees and decreased salaries as well. The reduction was caused by decline in demand and sales requirement.
Russian enterprises K-Systems and Kraftway reduced their staff as well. Since January 1st the integrator Sistematika has made new contracts with its employees, which implies 40% reduction of their incomes. However, the company’s authorities promised the decrease of salaries would be compensated later.
According to experts, most companies are reducing their staff at present. Crisis has impacted various businesses in different ways: production of computers is going down, while sales requirement for software development is growing. In IT business 50-70% of costs are spent on salaries. According to the data of some leading IT companies, over 4Q2008 sales requirement has decreased by approximately 10%. In 2009 the market of system integration may drop 20-30% (in US dollars): customers will reject big projects.

Companies will spend 50% less on broadband Internet access services

Under crisis Russian companies start reducing their costs on Internet. This was first noticed in regional companies. So, within the period November - beginning of February ER-Telecom’s revenue in the corporate sector has halved. Last November the company’s ARPU in the corporate sector decreased by 16% and by 10% in December. In January ARPU of the corporate segment reduced by 6%. In 2009 the decline is expected as well, though it won’t be so considerable.
Decline in demand can be observed in Moscow, too. Around 30% of corporate clients of Net By Net company are companies with offices, located in business centres. In order to reduce costs most of these companies are moving to other places. Thus, a part of subscribers is being lost. However, the loss is not big yet. In unstable financial situation we forecast the decrease of communication services, consumed by corporate clients. The market of private users is less impacted by crisis and this will provide the companies with stable cash flow, necessary for their development.
Russian providers’ incomes in the corporate segment started decreasing in the end of 2008, experts say. According to them, in 2009 this tendency will remain. On the whole they expect reduction of costs for communication services in big companies will be 10-15% and 20-30% in small and medium businesses. Providers’ revenue from broadband access services may drop 10-15% in 1H2009, but in 2H2009 the decline may be compensated since corporate clients will start using IP-telephony services. In the end of 2008 56% of the providers’ revenue was contributed by private users. Crisis will mostly affect providers, servicing small and medium enterprises since small businesses are able to transfer from corporate tariff plans to tariff plans for private users to reduce their costs.

FAS does not give cheap money

In crisis conditions Svyazinvest’s subsidiaries have to take unprofitable credits: being natural monopoly companies they negotiate these transactions within two months period and the credit rate increases within this period. This led to the conflict between Svyazinvest and FAS, which is not going to simplify the procedure of credit obtaining for the interregional companies.
Currently companies are fighting for those that give money. According to the legislation natural monopoly companies, including Svyazinvest’s subsidiaries, have to obtain credits by way of competition. Because of the long competition procedure, several Svyazinvest’s agreement failed.
According to analysts, the procedure of crediting the interregional companies is extremely protracted. Credit terms have to be confirmed on the Board of directors of MRKs, that must be informed about this before. As a result, if a company makes the agreement with a bank about 12% interest rate on credit, the rate will increase up to 16% within 2 months. Interest rates on credits grow 4 times a year while tariffs change once a year, taking inflation into account. As a result operators, included in the list of systmeforming enterprises, bear real losses. Some experts support FAS since recently natural monopoly companies have demonstrated inefficient management. According to credit contracts, banks may also raise interest rate on credits by 2% after the credit is obtained, experts note.

Russia’s IT market will reduce dramatically

According to the latest research of the analytical agency IDC, in 2009 costs on IT will reduce 22.1% y.o.y. The least funds will be invested in the software segment, which will decrease 30.8%, the costs for equipment will go down by 18.4% and the market of IT services will reduce by 28.4%. The slowdown of the IT market in Russia is the result of the overall reduction of budgets, analysts say. According to the forecast of IDC, big companies are planning to reduce their IT budgets by 25-30%.
The new economic conditions have changed IT objectives for companies: currently the strategic objective is to maintain operability of the existing processes and instruments instead of innovations introduction. However, there are also positive moments: interests of business and IT will become closer, information technologies will be considerably adjusted and their efficiency will be enhanced.
Currently the most effective instrument regarding recoupment is technology of virtualization in the field of equipment, introduction of systems for operating activity adjustment in the field of software and outsourcing in the field of IT services.
We remind the Ministry of Economic Development reported on the growth rates of ICT. According to the Ministry, in 2008 the Russia’s IT market grew 17.8% y.o.y to RUB 580 bn. The total IT market is contributed by 51.6% of the hardware market, 21.2% of the software market and 27.2% of the market of IT services. Despite positive dynamics of the sector’s major results in 2008, they still expect further slowdown of the market, reduction of IT personnel, increase of non-payments for provided services by commercial organizations.
According to the market experts, the negative forecasts are quite realistic. However, in current crisis conditions some companies are planning to increase their market share and do not expect 30% decline in sales. Besides companies, either freezing or postponing their IT projects, there are companies that accept crisis as the reality and they are ready to change. Nevertheless, crisis affected considerably those branches, which were major consumers of IT services in Russia, for example, the financial sector, gas and oil companies, enterprises of heavy industry. Analysts also note the reduction by 20%+ may mean the IT market growth in national currency. It will depend on the rouble exchange rate to the dollar within 2009.

Comstar-UTS declared raise of tariffs

OJSC Comstar-UTS, a subsidiary of Vladimir Yevtushenkov’s AFK Sistema, declared raise of tariffs for services of Stream Internet and Stream Internet+TV. The growth of prices is over 10%. The changes are coming in force from March 1st 2009. Comstar also informed its corporate clients about reconsidering prices for its telecommunications services from March 1st. in particular, the tariffs in roubles will increase 12%.
Thus, Comstar-UTS is the first big alternative operator, deciding to increase tariffs totally on the highly competitive market after the crisis began. For recent years tariffs for broadband Internet access had been going down considerably and due to this the service was available and mass.
According to experts, Comstar’s example may start a new trend on the market: other operators will increase their incomes due to raise of prices for their services. All capital investments of the companies are determined in dollars and the exchange rate of the dollar has changed considerably. Before the crisis the dollar had been going down and tariffs had not been changing. But currently the situation is different and raise of prices is almost the only way to adjust revenue in foreign currency. On other hand Comstar’s raise of tariffs is a good opportunity for other market participant to take a part of Comstar’s subscriber base. The operator’s initiative will seriously impact its subscribers’ loyalty that may benefit its competitors. The growth of tariffs may be also caused by the group’s big debt, some analysts say. As of the end of 2008 Sistema’s debt was 2.7 bn USD. In Davos Vladimir Yevtushenkov surprised everyone, stating that in 2009 the company intended to spend billions of dollars on big purchases. Probably, they have decided to finance this ambitious investment programme at the expense of Comstar’s Moscow subscribers.

Russian subscribers’ expenses on cell communications start reducing

According to the report of Megafon’s subsidiary in Moscow, in 4Q2008 the growth of mobile communications consumption in Moscow slowed down. 14% of Moscow residents reduced expenses for telecommunications services in December. 20% of the Russians stated they started saving on mobile communications. 14% of respondents started saving on communications in Moscow. Average cell communications expenses reduced to RUB 423 in 4Q2008 (compared to RUB 455 in 3Q2008).
The reduction of expenses was first admitted by MTS. The reduction is noticeable in the corporate segment and in the roaming segment. So, recently MTC have reconsidered their tariff for calls abroad: prices for most popular direction have been reduced. The operator’s corporate clients receive individual offers, stimulating them to continue using MTS services.
Vimpelcom noticed the reduction of users’ activity in overseas roaming. Other segments of the operator are developing in the frameworks of seasonal trends. The outflow of subscribers of Russian cell operators is 8-10% per quarter.
According to analysts’ forecasts, in 2009 MTS’ currency earnings will decrease 28%. Vimpelcom’s currency incomes will reduce 18%. Analysts explain MTS has more corporate clients. The operator is the leader on the market of corporate servicing. The number of MTS’ corporate clients is the same as Vimpelcom and Megafon’s number. However, in money terms MTS’ share is not so big as that of Vimpelcom and Megafon, so the decline in demand for corporate services will affect all Big3 operators, experts say.

Demand for cell phones may remain despite crisis

Mobile phones are necessary now all over the world and demand for them will remain despite the decline, experts from the International Telecommunications Unit (ITU) believe. According to ITU’s report, the number of mobile communications subscribers had been increasing on average 24% annually since 2000 and had reached 4 bn by the end of 2008. While in many countries penetration exceeded 100%, penetration on the two most rapidly growing markets of India and Nigeria is 30% and over 25% accordingly. According to analysts from ITU, the world subscriber base will be expanded due to developing countries, in particular, India, China and Nigeria.
There are several trends of the market further development, analysts from ITU note. Users will save on new phones acquisition and this will affect producers of telecoms equipment. The outflow of subscribers from fixed-line networks is expected: subscribers will save on calls and operators will face difficulties, promoting additional services. Unlimited and prepaid tariff plans will become more popular. And at last, lack of credit funds may make operators decrease investments and this may contribute to the sector consolidation.
According to analysts, all the trends, stated by ITU, can be applied in Russia as well. Currently around 50% of handsets in Russia are quite cheap and this segment will develop more efficiently. The market of mobile phones will decrease by approximately 25%. Users will reject purchases of more expensive and new models. The market reduction will be also driven by problems with crediting. According to some experts, the telecoms market will suffer less since it provides services, which are continually in demand. 1st two quarters of 2009 will be the most difficult for the market and afterwards the situation will become more stable, analysts believe.

Providers raise tariffs to maintain profitability

Following cell operators some Internet providers increase tariffs for their services. So, Comstar stated it would increase tariffs for broadband access services by 10% from March 2009. Currently all operators’ exploiting costs for communications services provision has risen dramatically. Besides, the growth of the dollar rate has led to growth of costs for mutual settlements with foreign companies. As a result the cost price for a service has grown. Comstar’s tariffs growth will only partially compensate losses, caused by the rouble devaluation. Vimpelcom does not intend to raise its tariffs in the nearest future. However, the operator’s prices in the corporate segment have already grown 40% in roubles.
Net By Net is considering the possibility of tariff growth in the corporate and private segments. Tariffs will rise in accordance with the growth of the dollar exchange rate (25-30% on the average). Akado-telecom is planning to raise tariffs in the corporate segment.
According to analysts, raise of tariffs will first concern the Moscow market of broadband access since the price competition has been very strong on this market so far. On regional markets the changes in the tariff policy will be less significant. On the average providers’ profitability under OIBDA is 40%, experts say. Raise of tariffs is the operators’ attempt to maintain their profitability at the same level. Providers suffer less from the rouble devaluation than cell operators since they do not have big currency credits and their CAPEX is determined in roubles.

Big operators of broadband Internet access will expand due to mergers
 

Although all big operators of broadband access reduced their planned investments in regional expansion, in 2009 their subscriber base will grow, analysts from VTB say.
The growth will be partially driven by bankruptcy and sale of small operators, which are currently controlling 41% of the Russian market of broadband access. These companies are not able to obtain credits at present, so many of them will either disappear or change an owner soon. Due to this Svyazinvest’s subsidiaries will be able to expand their subscriber base since despite reduction of CAPEX they will invest around 600 mn USD in expansion on the market of broadband access. Svyaznvest will increase its share on the regional market from 47% in 2008 to 51% in 2009. Vimpelcom will benefit due to crisis as well. According to the forecast of VTB, in the end of 2009 the operator will take 10% of the national market of broadband access and in regions its share will come to 7%. Currently the company is controlling around 3% of the regional market of broadband access.
Comstar intends to develop first of all due to promotion of services to already existing subscribers of cable TV. After Stream-TV’s takeover the company obtained around 2 mn subscribers of cable TV that are not users of broadband access yet. However, the operator does not exclude it will develop due to acquisitions.
According to analysts, one of the trends of 2009 is acquisition of small operators by big market participants. Each company’s strategic goal is to become the leader on the alternative market of communications and broadband access. In 2009 in new unstable conditions there are new opportunities for assets consolidation on the market of broadband access.

In 2010 data communications services will bring in 2.3 bn USD to operators

Analysts from Alfa-Bank forecast in 2010 the revenue from data communications in Russian operators’ networks will grow to 2.3 bn USD, exceeding the revenue, contributed by text messages.
Growth of revenue from data communications is explained by analysts from Alfa-Bank by 50% increase of data communications in recent years. Increase of ARPU from 3G will expand MTS’ revenue by 80 mn USD in 2009. Vimpelcom’s revenue will grow by 90 mn USD and the number of profitable subscribers of 3G may increase ten times in 2008-2010.
According to Alfa-Bank, in case by the end of 2009 the rouble rate is RUB 37.4 for USD, the dollar revenue of MTS and Vimpelcom will reduce by 22% and 19% accordingly, since the companies will not risk to raise tariffs or to convert them to foreign currency. They expect in 4Q2008 MTS’ and Vimpelcom’s non-monetary losses from currency rates changes will increase to 478 mn USD and 162 mn USD accordingly.
However, incomes from 3G are incommensurable with other incomes. Despite the growth of incomes from 3G, the operators’ revenues in dollars will reduce. Alfa-Bank’s forecast on revenue from 3G in 2010 is quite optimistic. To avoid losses in crisis conditions the operators are reducing costs for office, IT, adjust money flows, etc. Operators will focus on voice services, SMS and MMS. The growth on the market may be driven by mobile Internet. Currently penetration of Internet is quite low in regions and consumers have to accept quite high prices, set by one or two regional participants. Mobile Internet will become a real alternative to wireline Internet. However, in crisis conditions mobile Internet will be hardly able to outstrip incomes from SMS and MMS.

Growth rates of Internet-companies’ revenue will halve

Last year the Russian market of Internet advertising was RUB 14.7 bn before VAT or 592.5 mn USD (the average annual exchange rate RUB 24.81 for 1 USD), according to estimates of the advertising agency Mindshare Interaction. Over a year the market has grown 55%. Around 40% of the market (233.7 mn USD) fell to sales of media advertising (banners, etc). A year before this segment of the market had been 159 mn USD. The rest RUB 8.9 bn (358.7 mn USD) were contributed by sales of context advertising. In 2007 this result was 210 mn USD, according to estimates of Mindshare Interaction. Context advertising takes 60% of the market although most big advertisers prefer media advertising.
Internet and Business Association (IBA), uniting 20 Russian Internet companies, assesses the market of context advertising at 330-350 mn USD (after VAT; around 60% growth over a year) in 2008. It is difficult to assess more precisely since the market is not transparent and a lot of new participants appeared in 2008.
Over 90% of the context market is divided between Yandex and Begun, according to IBA. Yandex reports it earns around 85% of the total revenue by context advertising (last year 85% were 255 mn USD). The revenue of Rambler Media from context advertising (the biggest part of which is contributed by Begun, controlled by Rambler Media) was 62 mn USD in 2008. Google does not disclose its results. However, according to estimates of the advertising agency iContext, Google’s revenue from context advertising in RUNET was 25-30 mn USD (in 2007 10 mn USD).
Companies’ revenues from advertising in RUNET were increasing simultaneously with “gross growth” of Internet traffic, mentioned by President Dmitry Medvedev during his speech at the session of the Council on Information Society Development. Despite crisis this traffic will increase, President says, noting that under crisis people’s interest to “such forms of communication” is growing.
According to analysts, use of Internet and in particular, search services will continue growing despite crisis. Traffic will increase due to natural increase of Internet users number. However, the growth rates of Internet advertising will halve, experts say. In 2009 the segment of context advertising will grow no more than 30% (in dollars). Sales of media advertising will increase 30% as well. The growth of revenue from context advertising is only possible in roubles.

2. Market Participants

Galmond sold his shareholding of MTT
 

50% of MMT, owned by Jeffrey Galmond, were sold equally to Eventis Telecom and Danmax. The transactions are assessed at 40 mn USD each. The contract for the purchase of the shares had been made before crisis. Thus, the companies paid the amount, that included the rebate. The authorities of Eventis Telecom acquired the asset to sell it and obtain profit. We remind Synterra had been planning to acquire MTT in 2007. The decision was even taken by the company’s Board of directors in April of 2008. AFK Sistema and Galmond were negotiating the assets consolidation as well. However, they did not manage to take the final decision. FAS approved the acquisition of 100% of MTT by Synterra. Currently Synterra is planning to reject acquisition of MTT. The reason for the refusal is that the company’s business scheme will be changed because of the management replacement and the price for MTT. However, AFK Sistema is still planning to sell its share in MTT.
We note the companies do not disclose the contract details. Besides, the owner of Danmax is unknown. Eventis Telecom belongs to Gleb Ognyannikov, who acquired the company from Dmitry Ivanter, taking the position of director of ABK, and Vladimir Androsik, ex-advisor to director general of Svyazinvest, in 2008.
We remind MTT provides services of domestic and international communications. The most profit is received by the company from traffic transit via its networks. However, the situation on the market has changed: operators are constructing their own networks for traffic transit and as a result MTT is bearing losses. MTT is planning to provide services of long-distance communications and other services to obtain the lost profit.
According to analysts, one of the reasons for changing the owner of a part of MTT are Jeffrey Galmond’s financial problems in crisis conditions. Besides, in the nearest future the company’s management replacement is improbable, experts say. Commentators also forecast decline in growth rates of the company since MTT will lose cell operators’ traffic. The company may also lose a part of its subscribers.
It is quite difficult to asses the company, analysts say. Currently MTT may be only interesting for potential and current owners due to its big subscriber base.

Euroset offers to introduce a single commission fee for payment receiving
 

Euroset offers to introduce a 3% single commission fee for payment receiving for operators. The cell retailing company supposes to take this measure to provide common conditions for mobile operators. At that according to cell companies, Euroset’s profit may almost double.
We remind in autumn of 2008 Alexander Mamut acquired 100% of the company and then sold 49.9% of Euroset to Vimpelcom and made the contract with the operator for the sale of 25% of the asset.
FAS approved the transaction in case Vimpelcom meets certain conditions. So, Euroset does not have to give preferences to a particular operator of communications and mobile phones producer and it has to remain a multibrand network. Besides, FAS obliged Euroset to work out non-discriminating measures for companies, to dispose the list of services and prices, provided by the company, on the company’s website.

MTS’ commission fee is less than 3%, Megafon pays 1.7% for the service. Vimpelcom’s fee is 0.9% if a payment is less than RUB189.9, 1.4% if it is less than RUB 289.9 and 1.9% and 2.4% if a payment is over RUB 290. We note currently retailing companies take 2% fee from operators.
According to analysts, 3% commission fee introduction will allow Euroset to solve two problems. Firstly, the company will obtain additional profit. So, according to experts, the company may earn up to 40 mn USD in 2009. Secondly, Euroset will not break the orders of FAS that will benefit the company’s business. However, the retailing company will create conditions which are equal but not beneficial for all the market participants. This may make the operators break the contracts with Euroset.
So, analysts forecast payment for services via banking cards and cell operators’ websites will become more popular. Besides, Vimpelcom as well as the other operators will pay more for payment receiving. However, the loss will be insignificant for the company since the part of the money will return to the operator as the company’s shareholder.

Vimpelcom has decided to develop Wi-Fi project in regions

The cell operator Vimpelcom has decided to terminate the programme of Wi-Fi development in Moscow, focusing on its realization in 40 regions of Russia, where 16 thousand Wi-Fi points were constructed. Subscriber base is 100,000 people. Wi-Fi system operates in airports, hotels, cafes and restaurants. The amount of the project is assessed at 24 mn USD, the pay-back period is 3-4 years.
We note connection of one public premise costs 1.5 thousand USD to Vimpelcom. According to the company’s authorities, Moscow is provided enough with Wi-Fi points. Speaking of the regional development project, it will succeed depending on economic situation and alignment of forces on the market.
In 2007 the cell operator Vimpelcom acquired Golden-Telecom. In its turn GT had already launched Wi-Fi network in 2006, had 7.5 thousand points in public premises and covered around 80 000 houses.
According to analysts, Vimpelcom is developing not very profitable programme. So, according to experts’ forecast, the revenue from Wi-Fi services will be 30-50 mn USD annually that is a small result for Vimpelcom. First of all the project Bee Line Wi-Fi will impact the operator’s image and contribute to its subscriber base growth. The major points, providing revenue will be airports and hotels. Besides, assessing the investments in the project, analysts say the amount of 24 mn USD is quite real. The pay-pack period may reach 5 years, commentators note. This is caused by high prices for Internet. For regions with low incomes such prices will be impossible.
The regions really need wireless Internet. However, it is necessary to remember that under crisis development of such a large-scale project is rather risky.

Comstar-UTS is reforming business in regions

After acquisition of Stream-TV Comstar-UTS has decided to reform its business in regions. So, a company Comstar-Regions will be founded, controlled by Comstar-UTS. Viktor Koresh will be appointed director of the new company. According to the company’s plans, the consolidation is to be held in 1H 2009. Besides, 6 subsidiaries will be founded in 6 federal regions, except the Far East.
The foundation of Comstar-Regions was driven by the complicated situation on the exchange. Comstar’s authorities fear possible speculation with shares. Regional assets of Comstar-UTS and Stream-TV consist of 80 subsidiaries and depending companies and 30 branch offices. According to Comstar-UTS’ supposition, the regional companies will be included in Comstar-Region by the end of the year. Besides, rebranding is planned in the regional subsidiaries in 2009-2011.
According to analysts, centralization and reforming of regional businesses of Comstar-UTS and Stream-TB has become a priority objective in crisis conditions. The changes will mainly concern reduction of personnel and elimination of double departments. According to analysts, the investments, assigned for the reform, will be small due to reduction of costs. Experts forecast slowdown in construction that will allow alternative participants of the market to strengthen their positions. Due to Stream-TV’s subscriber base Comstar-Regions will be able to increase the number of potential users.
Experts agree in the opinion Comstar-UTS has taken the reasonable decision on the regions consolidation in 2009. This year the situation on the telecoms and economic markets will become more stable.

Vimpeclom refused dividends to its shareholders

Vimpelcom’s authorities advised its shareholders to deny dividends for 2008 since the priority objective was paying off the credit debt worth 1.8 bn USD in 2009. The cell operator is to give its shareholders around 25% of net profit. So, in case net profit is 1.3-1.6 bn USD, the amount of dividends is 330-400 mn USD. This decision will affect the minorities since in 2008 the price per share reduced. The minorities were not able to earn on quotations in 2008 and in 2009 they won’t receive their dividends.
We remind in 2009 Alfa Group will have to pay off its debt worth 2 bn USD to VEB. Vimpelcom’s shareholding has been pledged at this amount. In the situation of economic instability Vimpelcom’s authorities’ decision to maintain a part of funds is quite logical.
We note Vimpelcom’s authorities have raised the question about director general replacement since Alexander Izosimov’s contract is over on December 31st of 2009. The decision will be taken in spring 2009.
According to analysts, the decision, taken by Vimpelcom’s authorities, is reasonable and efficient in crisis conditions. The refusal to pay dividends will allow the company to reduce its debt. Currently when the rouble is devaluating this act is insurance fund for the operator. Besides, dividends could be small since the company’s net profit is lower than expected, caused by the losses because of the rouble devaluation.
The company’s management may also spend the saved money on the investment programme, experts say. Currently paying off the debt is a priority objective. Alfa Group is not interested in the company’s bankruptcy. The decision was taken to eliminate potential risks.

ER-Telcom reported for 2008

In 2008 ER-Telecom increased its revenue by 130% y.o.y to RUB 2.9 bn. According to the company’s plans, in 2009 the revenue will have to grow 40% to RUB 4.1 bn. These results are planned to be achieved due to reduction of the part of costs and due to refusal to develop business in regions.
The company’s subscriber base is 1.5 mn people. Of these cable TV subscribers constitute 57%, Internet users – 39% and 4% are users of telecommunications services.
We note 35% of the total revenue were contributed by cable TV services, 60% - by broadband access services and 4% - by telecoms services. The company’s authorities emphasized the negative aspect – decrease of ARPU in the sector of the business. So, in November 2008 ARPU went down by 16%, 10% in December and 2% in January. The company’s plans on ARPU in the corporate sector are pessimistic: ARPU may halve. They also expect subscriber base decrease (6 times). In 2008 the investments were RUB 7.3 bn, around RUB 2.1 bn were borrowed by the company from Sberbank. The company’s authorities are planning to pay off partially the debt in 2009. In particular, ER-Telecom is planning to reduce operating costs, the investment programme and to hold up its expansion in regions. At that they say the network will not reduce. ER-Telecom’s CAPEX will reduce by RUB 3.4 bn in 2009. The company announce HDTV launch. However, the authorities speak of the project with caution since the demand for digital TV is not big.
According to exerts, ER-Telecom’s results are quite positive. The company has chosen the right direction of its development, offering the most required services, such as broadband access and cable TV. In crisis condition there may be a small decrease of the number of ER-Telecom’s services users. In particular, the company provides services in cities with low penetration of broadband access and cable TV and has the competitive advantage in comparison with other market participants. The company’s ARPU will drop by approximately 10%, analysts forecast. Besides, small debts as well as the plans on costs reduction will impact the company’s dynamic development in future.
According to experts, the company’s announced plans on its profit growth of 40% seem overestimated since crisis may affect them. However, the preventive measures, taken by the company, will help to maintain its position on the telecoms market.

Synterra will use satellite channels of communications in the project of WiMAX mini networks

The interregional operator of communications Synterra has taken the decision to use satellite communications channels in the project of WiMAX mini networks. According to the operator’s estimates, this will not impact considerably the price for the project of WiMAX networks construction and it will accelerate the process of putting the networks into operation.
With the help of its subsidiary Global Teleport Synterra enhanced the offer in the frameworks of the programme “Regional WiMAX mini networks”. Synterra’s partners were offered to use satellite channels of communications as a temporary solution when constructing WiMAX networks in a town.
VSAT technology will be used on 10 of 55 networks, which are now being constructed or tested. According to requests from regional operators, this decision will be interesting for approximately 35% of the programme participants.
VSAT station use will not influence considerably the total value of the project. The price for VSAT station installation and connection will cost a partner, participating in the programe, RUB 70 thousand. VSAT equipment and a channel of communications are provided by Global Teleport. Assembly, start-and–adjustment and further maintenance of the equipment will be carried out by the company’s staff.
According to analysts, the offer of the combined solution WiMAX+VSAT to the partners on the project “Regional WiMAX mini networks is a response to the programme potential participants’ requests. The integration of satellite channels and ground networks may be effective. The price of RUB 512 for 1 Gb is extremely interesting since the ordinary price varies from RUB 1.6 to RUB 2.5 for 1 Mb. In this case when VSAT is a temporary solution, this price is reasonable, especially if Global Teleport’s satellite channels are loaded evenly.

Comstar will pay for M&A transactions with own shares

In 2009 Comstar-UTS is planning to spend its own shares on transactions on mergers and absorptions. This was declared by the company’s president Sergey Pridantsev. In crisis conditions shares are the most universal currency, he explains. In total operator has around 14% of treasury shares on its accounts. The major part of these securities was obtained by Comstar due to realization of put-option by Access Industries company, which belongs to Leonard Blavatnik. Access Industries used the operator’s capital within approximately a year: in December 2007 it acquired 11.06% of Comstar for 322 mn USD and in September sold the shares for 463.6 mn USD. Other 3% of the shares were owned by MGTS.
Last autumn Comstar confirmed its strategy till 2011, which implied regional expansion on the markets of fixed-line communications and broadband access. The company was planning to realize the strategy due to construction of its own infrastructure and acquisitions. As a result revenue from local communications in regions was planned to be increased 12 times from 42 mn USD in 2006 to 500 mn USD by 2011, 300 mn USD of which the company was planning to obtain due to purchases. The biggest acquisition of the company in the frameworks of the strategy has been acquisition of Stream-TV so far. According to Pridantsev, the company has not adjusted its plans, but their realization may be postponed because of crisis.
Analysts assess differently 14% of the company’s treasury shares. According to some of them, the amount is 270 mn USD, others say the shares cost 506 mn USD. The company will benefit from its acquisitions in regions, analysts say. There are still big and small alternative operators in regions, which are attractive for absorptions. Many of these operator will obviously face difficulties for lack of credits. And the competition is becoming less since Vimpelcom and Akado have frozen their plans on possible acquisitions because they have to pay off debts. Before crisis the value of a regional alternative operator was calculated, based on 400-1000 USD for a subscriber. It is difficult to say how these assets have fallen in price since before crisis there weren’t transactions on this market, though, according to the preliminary estimates, the rebate may be 30-40%.

ACTR arranged with RAO

Within a month the Association of Cable Television of Russian (ACTR) and the Russian Copyright Society will make a framework agreement, according to which the fee of broadcasters to copyright owners will not exceed 1% of income from broadcasting activity. Previously the contracts between the Association and RAO had not been made, the fee had been 5%, though RAO had not obtained them virtually.
The signed contract between ACTR and RAO will become a basis of the bilateral negotiations between operators of cable TV and RAO. The document will contain basic parameters, which will be negotiated by the Association members.
Another important issue of the future framework agreement will concern differentiation of concepts “ an operator” and “a broadcaster”. According to the document, in case an operator of communications does not possess a broadcasting license and it is not involved in broadcasting, it does not have relations with RAO.
Framework agreements are not obligatory, but in case an operator finds it possible and necessary to obtain a broadcasting license, its payments will not exceed 1% in the nearest 5 years, that is the best result in Europe.
Analysts assess positively ACTR’s initiative. Any legislative acts certainty makes the market more civilized and it will allow a company’s management to plan and realize precisely the budget. When transmitting channels operators do not use copyright and the related rights and only transmit signal. In case an operator is involved in broadcasting, it defines its channel’s content: films, programmes, etc, it uses copyright and the related right. The proposed agreement with RAO will define the main principles of interaction between operators and possessors of the right, differing concepts of broadcasting and communications services provision.

MTS and Euroset in struggle for retailing companies

MTS’ Board of directors approved the strategy of cell retailing development, including possible participation in the charter capital of CJSC Telefon.ru. However, the operator’s plans may be corrected by the leading cell retailing company Euroset (4.9 thousand salons in the RF, 50.1% belong to Alexander Mamut and 49.9% are owned by Vimpelcom). Euroset intends to acquire Telefon.ru (512 salons), Cifrograd (1451 shops) and Betalink (580 salons). So, Euroset is not planning to acquire the three networks simultaneously. The acquisitions are planned to be financed with credits, Euroset is ready to obtain. In September the company’s debt was assessed at 850 mn USD, currently it has gone down to around 500 mn USD to banks and around 150 mn USD to creditors.
Megafon is interested in acquisition of Cifrograd as well. In the end of 2008 a Megafon’s Moscow subsidiary Sonic Duo obtained one share of Cifrograd from its president Dmitry Derevenski and it gives the operator the advantageous right to redeem the company’s shares from the shareholders, who are ready to sell them.
According to analysts, the acquisition of all three companies by Euroset is improbable since the company is the biggest participant of the market and FAS will hardly approve such a transaction. Some experts see no sense in these acquisitions for Euroset: around 30% of its salons are located close to salons of Betalink, Telefon.ru and Cifrograd. Although, in case Euroset acquires all three networks, the number of its salons in Russia will increase by 66% from 4963 to 7506 shops and its market share will reach 38.5%.

Vimpelcom will issue bonds at RUB 30 bn

Vimpelcom intends to send the Federal Service on Financial Markets (FSFR) documents for registration of the supposed issue of the rouble bonds of VK-Invest, a Vimpelcom’s consolidated subsidiary, worth RUB 30 bn with a 5-year period. The bonds may be issued by three series, RUB 10 bn each. The obtained funds are planned to be spent on refinancing of the current currency debt and the further business development.
As of November 25th of 2008 Vimpelcom’s total debt was around 8 bn USD. Around 76% of the amount are nominated in USD. In 2009 the company’s payment on credit is 1.839 bn USD (in 2010 – 2.002 bn USD, in 2011 – 1.511 bn USD). The company’s funds were 727 mn USD as of the end of September.
According to analysts, the operator could benefit from issue of bonds in 2H2009 since all short-term debts of 1H2009 can be paid by Vimpelcom without any problems. On other hand Vimpelcom should accelerate the issue since it is impossible to forecast the further rouble rate, experts note. Currently there aren’t purchasers for such an issue of the market. The bonds may be interesting to big banks. Vimpelcom will use all possible ways to restructure its debt without changing the operator’s owner.

Rostelecom is planning to acquire regional operators
 

The list of potential purchases, made by Rostelecom, includes 30 Russian companies. At least 4 companies have been already considered by Rostelecom in the frameworks of due diligence. The operator is mainly interested in the market of broadband Internet access, but is also exercising due diligence of Sky Link.
Rostelecom is also interested in state-owned operators of fixed-line communications in other CIS countries. As of the end of September Rostelecom had RUB 20.6 bn and RUB 4.6 bn of the debt. The company’s investment programme for 2009 implies the amount of RUB 8.5-9 bn.
First of all Rostelcom is interested in those markets of broadband access, where Svyazinvest’s subsidiaries do not have dominating positions or where the competition between Svyazinvest’s subsidiaries and alternatve operators is the strongest, for instance, Yekaterinburg, Kaliningrad and the Central Federal Region.
According to analysts, there aren’t big participants on the regional markets almost. Rostelecom may only acquire small ones, such as the Kaliningrad Svyazinform (around 28 000 subscribers of DAMPS cell communications and 26 000 subscribers of fixed-line communications) and the Yekaterinburg Insis (over 15 000 private and corporate subscribers). On other hand Rostelecom’s strategy may be corrected by the new Svyazinvest’s authorities. Entering the market of private users, the operator will start somehow compete with MRKs, especially in case it acquires Sky Link, which possesses a large number of GSM licenses.

Russian companies pretend to Ukrtelecom

The Fund of Ukraine’s State Property (FGIU) declared it would offer 67.8% of the biggest fixed-line operator Ukrtelecom for sale. According to Dmitry Parfenenko, acting as director of FGIU, the preliminary price for 67.7% of Ukrtelecom is 7.5 bn grivnas (969 mn USD). The possibility of participation in the competition for Ukratelecom’s share acquisition is currently considered by the German Deutsche Telecom, its Hungarian subsidiary Magyar Telecom, the Turkish Turkcell, the Bank of New York, Alfa Capital, Reiffeisenbank, Credit Suisse and Merrill Lynch.
Another candidate for Ukrtelecom’s acquisition may be the Norwegian holding Telenor (owns 29.9% of the Russian Vimpelcom and 56.5% of the Ukrainian cell operator Kievstar). Besides, Rostelecom declared its intention to fight for Ukrtelecom’s acquisition in case it is offered for sale. AFK Sistema has shown its interest to the privatization as well.
The final decision on participation in the planned competition should be expected after the conditions are published, experts note. According to analysts’ assessment, 7.5 bn grivnas is quite a reasonable initial price for the operator’s state-owned shareholding. Within the competition the company may be sold for 8-15 bn grivnas. The operator’s fair price is 10 bn grivnas, though a year ago Ukratelcom was assessed at 12 bn grivnas. The sale is necessary this year to maintain the operator’s investing attractiveness since Ukrtelecom continues losing its market share.

The new Board of directors of Svyazinvest may change the holding’s charter

The new Board of directors of Svyazinvest is considering the matter of making amendments to the holding’s charter. The corresponding item is included in the Board’s work plan, signed by Ivan Rodionov acting as chair of the company’s Board of directors.
Svyazinvest’s charter has been trying to be changed for several years already and the formal reason is that the charter does not correspond to the Federal Law on joint-stock ventures.
According to AFK Sistema and Rosimuschestovo, supporting the charter change, the are displeased that the Board of directors has not influenced actually important decisions taking, and all powers have been given to the holding’s management. In particular, the supporters of amendments were offered to submit the holding’s subsidiaries’ annual budgets and investments programmes to the Board of directors. Besides, the Board of directors had to confirm all the subsidiaries’ transactions worth over RUB 10 mn, and transactions worth over 25% of the assets’ balance value had to be approved by 75% of the Board.
Experts agree the authorities of Svyazinvest’s Board of directors have to be expanded. MRKs are the main assets of Svyazinvest and the Board of directors has to influence more decisions, taken by the MRKs’ management. The corresponding amendments have been offered within 5 years already. In case the amendments are approved, this will not happen under the minorities’ influence. In case of a big transaction, for example, redemption of 25% of Svyazinvest from AFK Sistema, the holding’s restructuring and creation of a unified operating company on its basis, Svyazinvest’s privatization, it is necessary to bring the charter in correspondence with the law before the transaction is completed. Otherwise the taken decision may be disputed.

Megafon may deny acquisition of Cifrograd

Megafon may deny acquisition of Cifrograd. Firstly, the tax risks are too big. Secondly, the present shareholders of the retailing company do not agree with the number of conditions, laid down by Megafon. According to the transaction conditions, the money, received by the shareholders from Megafon, would have to be left in the company as a loan.
Megafon and Cifrograd started negotiating this January. There was also information that one Cifrograd’s share was given to Sonic Duo, a Megafon’s subsidiary, so Megafon obtained the advantageous right to the network acquisition. And in February FAS approved Megafon’s application for acquisition of 100% of Cifrograd. The whole network was assessed by MegaFon at 10 mn USD without taking the company’s debt into account. Currently the company’s debt is RUB 3.8 bn.

According to analysts, Cifrograd may be assessed at 30 mn USD. Cifrograd’s shareholders’ refusal to take Megafon’s conditions is logical, experts say. However, if Cifrograd does not manage to negotiate with Megafon, the only way out for the company will be bankruptcy since it will hardly attract another investor. On other hand Megafon will have to focus on the market of small regional networks, in case the transaction is broken. Creation of its own base may cost much more for Megafon and small assets consolidation will take more time.

Start-telecom joined Vebalta
 

Start-telecom made agreement about its telecommunications joining with Vebalta. As a result of the companies’ cooperation Start-telecom’s network connectivity will be improved, the operator’s services will become more available and the companies will get a possibility to develop joint projects.
Enhancement of the network connectivity and quality of Internet services are parts of start-telecom’s strategy on its operation on the market of main-line services. Over 4Q2008 the company has increased the number and capacity of UpLink-port of access to Internet. Currently start-telecom has over 13 points for traffic exchange with the biggest providers with the total capacity of 60 Gb/sec. The company has agreements on traffic exchange with such companies as Masterhost, Filanko and RTKomm.RU.
Vebalta has started its own network development, that includes joining to the leading main-line operators, one of which is Start-telecom.
According to analysts, the market of main-line services grows by 20-25% annually, so the new participants have opportunities to form subscriber base. However, they have to offer lower tariffs for servicing and provide services of higher quality. In case Start-telecom takes these factors into account, it has a good chance to take a strong position on the market. At that the company has to increase its subscriber base rapidly since in several years the company’s success will depend on its network scale.

Rostelecom will sponsor of the Olympic Games in Sochi

Rostelcom has become a telecoms sponsor of the Olympic Games in Sochi in 2014. Comstar, MTS, Vimpelcom and Megafon participated in the competition for the contract as well, but the first three companies withdrew their applications on the last stage of the competition. The status of the Olympic telecoms company will cost Rostelecom 170 mn USD, 70 mn USD of which have to be in cash.
The information about holding the competition for the right to become a telecoms sponsor of the 22nd Olympic Winter Games was published on the official website of the Organizational Committee Sochi-2014 in December 2008. 15 Russia’s biggest operators of communications were entitled to participate in the competition. The competition was held in two stages: on January 26th the Valuation Committee considered the participant’s offers, and on January 27th the auction was held.
According to experts and the market participants, the value of the sponsor holding is overestimated. For example, the sponsor holding of the telecoms sponsor of the Olympic Games in Beijing cost around 100 mn USD to China Mobile. At that the summer games are more popular that the winter ones. Currently Rostelecom’s financial condition is quite good: according to the results of 1H2008 the operator’s OIBDA was RUB 7.8 bn and its short-term liabilities were RUB 16.05 bn, RUB 2.5 bn of which were credits and loans. On other hand in current unstable conditions it would be more logical to spend 170 mn USD on acquisitions, for example, on acquisition of Internet-providers or assets in the CIS. The operator is also a part of the state-owned holding and had certain social responsibility.

Vimpelcom is acquiring equipment for Vietnam
 

The joint venture of Vimpelcom and the Vietnamese state-owned corporation Global Telecommunications Corporations – GTel Mobile- made the agreement about provision of equipment for network construction in Vietnam. GTel Mobile has chosen Huawei and Erricson as providers. The contract details has not been disclosed yet.

We remind in July Vimpelcom signed a contract with the Vietnamese state-owned company GTel and its subsidiary GTel TSC about foundation of a joint venture GTel Mobile. In the joint venture Vimpelcom owns 40% of shares, 50% belong to GTel, and 9% belong to GTel TSC. Vimpelcom’s initial investments in the joint venture were 267 mn USD. The shareholders were planning to invest in GTel Mobile’s development 1.8 bn USD within 5 years.
In November 2008 Vimpelcom’s director general Alexander Izosimov declared the company’s CAPEX could be reduced due to crisis. CAPEX for 2009 will be reconsidered and this will concern all Vimpelcom’s companies, including those, operating in Asia.
According to analysts, currently Vimpelcom does not have free funds to invest them in the network construction. The company has to pay off its debts. However, at present the company may manage without considerable investments. The variant, when vendors will supply equipment on credit, is possible. In future Vimpelcom will invest less than it was planned before. For Vimpelcom the development in Asia is not a priority now. Taking into account the operator’s intentions to reduce CAPEX, it will not manage to construct the Vietnamese network quickly. Experts remind, as of the end of November 2008 Vimpelcom’s total debt was 8.003 bn USD. At that in 2009 the company will have to pay off 1.84 bn USD and of these 400 mn USD will have to be paid off in 1Q2009.

Big3 have won 20% of the market of mobile data communications from Sky Link

Over 4 months of UMTS-networks operating MTS, Vimpelcom and MegaFon have won 20% of the market of mobile data communications from Sky Link. 3G networks development in Russia has driven noticeable growth of 3G traffic: according to the results of the research, held in 2008, the volume of data communications in CDMA-2000 and UMTS networks was 1636 Tb, 3.4 times as much y.o.y.
Before the launch of UMTS networks 3G traffic had been only developed by the CDMA operator Sky Link. The most considerable growth was observed in 4Q2008, when 3G traffic grew 62% q.o.q and 3.1 times y.o.y. The main reason for such rapid growth was 3G networks development by Big3 operators. As a result in 4Q2008 UMTS networks contributed 18% to the whole 3G traffic.
According to experts, despite Big3 operators’ activity, the main part of 3G traffic still belong to CDMA networks of Sky Link. This is caused by quite late launch of 3G networks and the expanded presence of Sky Link in regions as well as the operator’s possibility to work in Moscow.
3G market is developed insignificantly, no more than10% of its potential, experts say. Sky Link only benefits from its growth since the operator remains the leader according to the area and quality of coverage of mobile Internet. However, in case UMTS networks continue growing at the same rate, in 6 months Big3 operators will become the leaders in the segment of mobile broadband access.

Svyazinvest’s net profit grew 6.5%

According to the preliminary results of 2008, the revenue of OJSC Svyazinvest under RSBU is RUB 253 bn, 3.6% growth y.o.y. The holding’s net profit growth has reached 6.5% over the same period. The holding’s EBITDA has increased 12% to RUB 82 bn and EBTDA margin is assessed at 32.4%.
In total Svyazinvest’s interregional companies provide services to 3.3 mn subscribers of broadband access. Over the last three years the number of operating xDSL and ETTH-prts in MRKs has reached around 3 mn and subscriber base on IPTV services has reached 50 thousand users. The growth was driven by incomes in the segment of new services and IT-technologies worth RUB 35.4 bn, more than 1.5 times growth y.o.y.
According to analysts, Svyazinvest’s companies maintain stable positions in their major segment – traditional telephony – as well: over the last 3 years the number of fixed-line subscribers has increased by 3% to 29 mn people (as of December 31st, 2008). Simultaneously Svyazinvest continues cell business development in the Ural, Siberian and Volga federal regions, being the 4th consolidated operator in Russia: according to the results of 2008 the total number of active cell subscribers of MRKs was 12 mn people (113% growth over 3 years). MRKs’ growth rates could be even higher: without crisis they would be 17-18%. However, the achieved results allow to consider Svyazinvest’s business as successful. Many federal players are freezing their programmes of regional development, especially in the field of broadband access, experts say. This gives MRKs a chance to increase their market shares and attract new subscriber base, maintaining growth of revenue from new services.

MFI Soft doubled sales

In 2008 MFI Soft, a Russian producer of infocommunication equipment, doubled sales of NGN solutions in Russia. Despite reduction of operators’ investment programmes, in 2009 the company intends to maintain the growth rates of its sales due to taking marketing and commercial measures.
In 2008 MFI Soft’s sales of NGN solutions in Russia and the CIS increased 2.6 times, and the growth of Russian sales exceeded the foreign ones. The company’s total sales of NGN solutions increased by 55%. As of the end of 2008 the company installed over 800 NGN solutions all over the world. Over 500 solutions were installed on the markets of Russia and the CIS. The total VoIP traffic increased by 30%.
The considerable growth of sales in Russia is connected with realization of the projects on introduction of the company’s new inforcommunication solutions, first of all RTU complex for creation of communications centre on IP base. Within 2008 the company provided 11 RTU complexes for development of multiservice network for Effortel on the territory of Russia and installed communications centres on RTU base for Comstar-UTS.
Besides, in 2008 the company also introduced a new FMS-platform to provide convergent services of fixed-line and mobile communications.
According to analysts, rapid growth of the company’s sales in 2008 can be explained easily: big investment in this sector had been planned before, the orders had been placed in 1H2008 while companies started adjusting their budgets in 4Q2008. In 2009 it will be difficult to maintain such rates of sales growth and slowdown is probable. Some companies (Comstar-UTS, Sibirtelecom) will continue developing their projects, while more participants of the market have already reduced investments in this segment. As a result decline in demand will lead to the competition growth that will affect sales in money terms.

Growth of Euroset’s turnover did not exceeded 2%

In 2008 Euroset’s turnover exceeded 5.7 bn USD, according to the report on securities of Trade House Euroset (the group’s head company) for 4Q2008. Euroset assessed it own market share at 31%, and in December 2008 and January 2009 the market share was estimated at 35%.
In 2007 Euroset’ turnover was 5.6 bn USD. Thus, over 2008 this result has not grown almost (the growth less 2%). At that a year ago the company increased its turnover by 1 bn USD, from 4.6 bn USD in 2006 to 5.6 bn USD in 2007, its growth had been 21.7%.
The turnover of the main Euroset’s competitor Svyaznoy grew by 25.6% to 2.94 bn USD in 2008. The company assesses its market share at 15.6% (in terms of handsets) and 15.9% (in money terms). The turnover of another cell retailing company Telefon.ru increased by 31% to RUB 13.3 bn in 2008.
According to experts, in crisis conditions decline in demand is a positive factor. Euroset is a big company with the market share of 40%, so it cannot grow as fast as its competitors. Besides, within the negotiations about the company’s sale, Euroset was not engaged in aggressive development. Euroset was the first cell retailing company, which achieved “geographical” limit of growth, analysts note. According to the company, in the end of 2008 the company owned 4963 salons in Russia and the CIS. After the acquisition of Telefon.ru MTS became the second largest owner of retailing network, possessing around 2200 shops. Svyaznoy owns 1752 shops in Russia. Change of the owner and crisis could partially caused Euroset’s weak results.

AFK Sistema renamed its Indian subsidiary

AFK Sistema decided to rename its India subsidiary Shyam Telelink. The new name of the company is Sistema Shyam TeleServices Ltd. (Sistema Shyam TeleServices). Shyam possesses licenses for provision of CDMA-800 mobile communications services across the country. Last autumn Shyam put its networks into operation in Rajasthan. Currently the operator’s subscriber base is over 500 thousand users, including approximately 300 thousand of mobile communications subscribers.
According to the business plan, within 3 years Shaym has to cover 70% of big Indian cities, motor roads and railways with its network. Within 5 years Sistema intends to invest around 4 bn USD in India, and this year the needed investments will come to several millions dollars.
A new head office of Sistema Shyam TeleServices was opened in Gurgaon, where a lot hi-tech companies are located. The head-office is a combination of a corporate office and technological centre, where around 120 people will work: the company’s top-managers and specialists of various subdivisions of the corporate centre.
According to experts, the company’s renaming is linked to reorganization in Shyam’s corporate structure after Sistema’s coming. The corporation is the major shareholder and key investor of this project: Sistema’s companies take active participation in its development. For example, MTS brand has been used by Sistema Shyam TeleServices since February 2009 and Sitronics has provided the company with its equipment for cell networks construction in India.

Synterra will take part in the competition for telecoms services provision
 

The Ministry of Communications announced the competition, a winner of which will be able to provide telecoms services to all regions and departments, participating in production and distribution of electronic foreign passports. Synterra has been a single candidate so far.
The announcement about the competition was published on the portal of Government Purchases. The initial price of the auction is RUB 762 mn.
The auction concerns the system of production of foreign passports, equipped with chips with biometric information. Such passports have been given to the Russians since 2006. Currently the system is divided in three zones. The pilot zone (in the Kaliningrad region and Moscow) has been served by Rostelecom since 2006. The 1st and 2nd zones (the rest of the Russia’s territory) are served by Synterra, which won the auctions in 2007 and 2008.
The values of the government contracts, won by Synterra, are RUB 187 mn and RUB 303 mn accordingly (according to the company’s data). Rostelecom has not disclosed the value of its contract.
Synterra intends to participate in the auction. And Rostelecom is not interested in the project any more after it was dismissed from participation in the auction for 1st zone. Transtelecom, the second biggest owner of main-line network of communications, will not participate in the auction either. Comstar-UTS and Vimpelcom are studying the auction conditions.
In 2008 the Ministry of Communications decided the operator had to be single. To choose a single provider of telecoms services is a principal decision since it will allow to create a common telecommunications infrastructure for the project. At that a winner of the auction may hire subcontractors as no operator is able to connect the system centres to channels across the whole country. For example, currently Synterra is using services of local operators-subcontractors.

MTS has reduced roaming tariffs in tourist countries

From February 21st MTS is reducing tariffs for international roaming. European roaming tariffs will decrease by 10% on average, Asian roaming tariffs will reduce by 60%, while roaming tariffs for business directions, for example, the USA, Great Britain and Germany, will increase by 25%. The tariffs changes also concern such countries as Bulgaria, Greece, Italy, Spain, Cyprus, Slovakia, Slovenia, Croatia, Finland, Montenegro, the Czech Republic, Turkey; in the Middle East they are UAE, Israel; in Africa – Egypt and Tunis; in South-Eastern Asia – China, Thailand and Hong Kong. On mass directions, where subscribers are more sensitive to prices, MTS has reduced roaming tariffs. The operator has compensated them by raise of tariffs for roaming in less popular countries. Thus, operator is settling two problems: it allows the mass segment to continue using roaming services as before and compensates losses from currency rates changes.
According to analysts, the reason for the raise of tariffs for international roaming is that the operator’s main mutual settlements with foreign partners are effected in foreign currency. So, the change of roaming tariffs will probably lead to MTS’ subscribers transfer to new tariff plans and thus, MTS’ incomes may go down. Currently because of decline in demand and costs for communications consumers are more sensitive to changes of tariffs. Operator’s main objective is to stimulate growth of traffic. However, after new tariffs introduction MTS will have additional risks.

3. Tension Lines

Sergey Ivanov criticized GLONASS

Sergey Ivanov criticized GLONASS. Vice Prime Minister emphasized several problems, connected to the project’s management. Firstly, there is no balance between providing a consumer with navigation techniques, the ground control of GLONASS and spacecrafts development. Secondly, the control of the system is inefficient and the work of government customers is not coordinated. According to Ivanov, in Russia production of electronic cards and devices, receiving GLONASS signal, is not arranged.
Ivanov’s critics was directed to the Ministry of Economic Development and Roskartografia. Sergey Ivanov advised the departments to start working on production of GLONASS receivers and cards and to consolidate the activity in the legislation. We note that devices, eceiving GLONASS signals have been already produced, but their number is limited. Besides, the major problem of the project is lack of necessary financing.
According to analysts, Sergey Ivanov;s criticism is quire reasonable. The programme is lengthy due to certain problems, such as lack of electronic cards and the arranged production of GLONASS receivers, lack of funds. It is necessary to promote GLONASS and increase the project budget, experts say. Besides, one ministry should be in charge of the projects, analysts add. Competition between suppliers of equipment for GLONASS would impact the terms of the project realization. To attract additional investments an open joint-stock company should be founded, where the government owns the control shareholding, and the rest shares belong to private investors.
Besides, according to analysts, GLONASS possibilities should be limited in order not to affect the system use for military purposes. In particular, it is necessary to define a potential consumer to adjust production of the system and make it efficient.

FAS is planning to limit Svyazinvest’s subsidiaries’ monopoly

Currently the Internet market is extremely monopolized. So, the Federal Antimonopoly Service is going to take measures against Svyazinvest’s subsidiaries to limit their influence on the market. Svyazinvest’s subsidiaries set too high prices for access to subscriber’s lines. As a result companies cannot decrease prices for Internet access for users. Most operators, small and big, refuse to develop their businesses.
The discriminated approach causes unequal conditions for the market participants. So, FAS has decided to file a suit on violation of the antimonopoly legislation against Sibirtelecom and the North-Western Telecom. In particular, the department has started investigation on the wholesale market of Internet services.
According to analysts of the sector, FAS’ actions are quite reasonable and logical. Actually MRKs are taking dominating positions on the Internet market now. Due to this Svyazinvest’s subsidiaries set too high prices for alternative operators of communications. And MRKs’ actions impact subscribers. However, according to experts, MRKs will avoid serious penalty and the companies will only pay small fines. So, possessing the whole infrastructure, MRKs will be able to remain overestimated tariffs for Internet-traffic transit via their networks.
FAS’ activity against Svyazinvest’s subsidiaries is very positive, experts note. However, they do not see outlooks of development of equal conditions for the monopolists and regional players on the market of Internet access. Besides, it is more profitable for big companies to construct their own networks of broadband access since the market will be still controlled by the monopolist for a long time.

Megafon started increasing tariffs for communications
 

The cell operator Megafon has increased the price for international calls by 25%. This decision was driven by the rouble devaluation. We note that roaming tariffs are nominated in USD and euro. The other Big3 operators have not taken such measures so far, though growth of their tariffs is expected as well, experts note. In particular, Vimpelcom’s authorities are only studying the situation on the market. MTS are not making changes.
So, the price for outcoming call from the CIS to Russia will increase from RUB 43 to RUB 54 per minute, from the USD - from RUB 80 to RUB 100, and from Europe – from RUB 45 to RUB 56.
According to Megafon’s authorities, the most of international calls are made from Europe, Turkey, Egypt and China. In 2008 the profit from international calls receiving was 7% of all funds, obtained due to communications services provision. Besides, the revenue from international calls was 1.6 bn USD in 2008, increasing by 24% y.o.y. We note that subscribers, spending holidays abroad, use mainly SIM-cards of local operators. Due to international tariffs increase this practice will develop more.
Raise of international roaming tariffs is logical, analysts of the sector note. According to experts’ forecasts, under the rouble devaluation, operators’ profits from services of international communications may decrease considerably. Before crisis Megafon had financed these services to keep its subscribers, currently such actions are not logical. In particular, according to analysts, growth of prices will depend on the economic situation on the whole. Raise of tariffs for international calls may be expected from Big3 operators as well as from other telecoms operators. Such measures will obviously affect subscribers’ loyalty that may cause their outflow.
Thus, raise of tariffs for communications is a necessary measure in crisis conditions. It allows to maintain profit. Operators have to take measures to avoid potential risks. Most of subscribers, using services of international communications are corporate clients, that were previously offered tariffs, allowing to save on communications. Now the market participants have a possibility to balance their funds, increasing prices for roaming.

Rossvyazkomnadzor appealed against the court decision on FAS’ claim regarding GSM frequencies in the Far East

The Federal Service on Supervision in the sphere of Communications and Mass Communications (Rossvyazkomnadzor) appealed against the decision of the Moscow arbitration court, which had answered the claims of the Federal Antimonopoly Service about declaring invalid four competitions for GSM frequencies in the Far East in December.
The hearing between FAS and Rossvyazcomnadzor in the field of communications lasted for a year and a half in the court of first instance. The dispute concerned the GSM competitions, which had been announced by the Federal Agency for Communications in April 2008 and held in June 2008. The major winner of the competitions was Summa Telecom company, unfamiliar on the market (the company obtained 13 licenses for 11 regions), which possessed no experience in cell communications services provision. Meanwhile OJSC Vimpelcom only obtained licenses for working 3 regions of the Far East region, important for the operator (the Magadan region, Jewish Autonomous Region and Koryakia Autonomous Region).
FAS requested the court to abolish the decision about the competitions after it had considered Vimpelcom’s claims, according to which Rossvyaz had violated the law “On Protection of Competition”. According to the competition’s conditions, companies, already possessing licenses for the corresponding regions, had advantage in the competition. FAS concluded such preferences limited competition on the market of mobile communications, and filed the claim against Roosvyaz about the competitions abolition.
According to experts, despite the court hearings, the operators, obtaining licenses under the competition results, are preparing project documentation on communications networks and filing applications to the GKRC for receiving frequencies, necessary to start services provision. However, until the court hearing is completed, no decision will be taken since it will make the situation even more complex. FAS insists on second competitions holding. According to the current legislation, obtained licenses cannot be withdrawn from operators. So, operators may lose their licenses under court decision, experts say.

The Ministry of Economic Development sent the Ministry of Communications the project of the federal special-purpose programme to be improved

The Ministry of Economic Development sent the Ministry of Communications the project of the federal special-purpose programme “Development of Digital TV and Radio Broadcasting in the RF for 2009-2015” to be improved. The programme, the investments in which were planned to be RUB 127 bn, has to be considered by the government in February. The profile ministries assure they don’t have principal disagreements and the problems are only technical.
According to the project of the federal special-purpose programme “Development of Digital TV and Radio Broadcasting in the RF for 2009-2015”, the total amount of the programme financing is RUB 127.3 bn, RUB 80.1 bn are planned to be taken from the federal budget, RUB 1.13 - from the regional budgets and RUB 46.08 bn - from off-budget sources. The most expensive items of the programme are construction of ground digital TV networks (RUB 60.2 bn) and construction of three multi-complexes (a package of channels, broadcasted on one frequency), which are to be available to the most of Russia’s population (RUB 35.46 bn).
The necessity of the transfer to digital TV and radio broadcasting was declared by the Ministry of Communications in 1999; then they supposed that construction of networks for digital broadcasting would start in 2006 and finish by 2015, but the concept has not been approved so far. In the end of 2005 projects of digitalization were submitted by the Ministry of Communications and the federal state-owned unitary enterprise (FGUP) RTRS. Their budgets were 4 bn USD and 1.5 bn USD accordingly. However, both projects were sent to be improved and their budgets increased to 14.3 bn USD and 6.38 bn USD. In October 2007 another project of digitalization, developed by Rossvyazohrankulura, was prepared (10 bn USD), but it was not approved either. Last year the Ministry of Communications submitted its variant of the government commission’s concept on TV and radio broadcasting development. This concept was recommended to be considered by the government, but first it had to be approved by the Ministry of Finance and the Ministry of Economic Development

According to analysts, some components of the federal special-purpose programme Electronic Russia should be improved. In particular, firstly, the programme should cover much more spheres of life, unite uncoordinated efforts of local, regional and federal authorities. Electronic Russia has to become the country’s programme. Secondly, use of IT should become a fundamental basis of the federal bodies’ activity. Thirdly, it is necessary to return confidence in the banking system and to launch reliable and faultless payment systems. Without them electronic commerce and digital economics cannot develop.

The number of criminal cases in IT sphere increased by 21%

In 2008 subdivisions of K-Department of the Ministry of Internal Affairs (MVD) of the RF instituted 5572 criminal proceedings, linked to illegal activity in the field of IT (21.4% growth compared to 2007, according to director of the Bureau of Special Technical Measures of MVD Boris Miroshnikov). The number to cyber crimes increased by 2 000 to 14 000.
Last year 5638 criminal cases on Article 272 of the Criminal Code (“Illegal Access to Computer Information”), 1359 case on Article 273 (”Creation and Spread of Harmful programmes”) and 620 case on Article 159 (“Fraud”)were referred to court, 66% growth compared to 2007.
According to analysts, great number of violations is anonymity of Internet-environment. Our country lags behind in the struggle with anonymity. However, the situation has started changing recently. Many Internet companies are now involved in clearing and self-regulation. So, last year 1200 websites with harmful content were closed. Currently the country’s authorities intend to support the increase of “clearing” mechanisms in the society

Lessors have sealed Betalink’s salons

The attempt of Betalink, a network of communications salons, to negotiate reduction of rent with its lessors has led to temporary closing of several shops in Moscow, Petersburg, Yekaterinburg and Novosibirsk. The network’s authorities sent the lessors the letter, requesting to reduce the rent by 30-40% from February 2009. Many lessors did not agree with conditions, offered by Betalink, and sealed the shops. Around 20-30% of the network’s shops were temporary closed (as of November 2008 the company had 750 salons).
In November 2008 Betalink made a franchise agreement with MTS. Under the contract the operator pays the network a monthly bonus for a certain number of sales. Currently MTS is not going to reconsider the contract conditions. On the whole Betalink fulfils the plans on sales.
Other cell retailing companies requested their lessors to reduce rents as well. The negotiations between Euroset and its lessors are successful. Before 2009 the company had managed to negotiate the rent reduction of 20-30% on average. In January the lessors were even more loyal and agreed to reduce rent by 50-60% in some shops.
According to analysts, currently there is a tendency to rents reduction. Retailing companies ask their lessors to reduce rents by 20-30%. Their requests are quite logical since due to the rouble devaluation their costs on rent increased 25% on average and the networks’ turnovers are currently lower because of decline in demand. The cost for 1 sq m varies from 1.5 thousand USD to 10 thousand USD a year depending on a shop’s attractiveness. We expect lessors will make concessions and rent will reduce no less by 10% on average.

Dixis is on the verge of closing

Since the beginning of 2009 Dixis Distribution has not made any contracts with suppliers of phones (Nokia, Samsung and Sony Ericsson). Nokia does not have a contract with Dixis for 2009 either. Samsung has prolonged the contract with Dixis automatically, though shipment under the contract will be possible after the retailing company pays fully the debt for 2008. According to the statements of Dixis Trading, in the end of June 2008 the company’s debt to Samsung was RUB 150 mn and the total debt was RUB 1.8 bn (76.7 mn USD).
Later the debts to the suppliers were reduced to 50 mn USD, but payments on credits started to be demanded by banks. Since the autumn the banks filed claims of 84.6 mn USD to the Moscow Arbitration Court against Dixis’ various subsidiaries. In January the company’s total debt was 258 mn USD. On January 20th Dixis Trading was not able to pay RUB 113.4 mn to the holders of bonds.
In the end of 2008 the group tried to save its business by transfer of the staff, contracts with suppliers and lease contracts to Dixis Distribution. The negotiations with suppliers were taken upon himself by the former president of Euroset Eldar Razroyev, invited by one of the biggest Dixis’ creditors Alfa-Bank (Dixis’ debt to Alfa-bank is around 30 mn USD). Under Razroyev Dixis Distribution tried to agree with its suppliers on the following scheme: the suppliers write off 50% of the debts and the rest 50% will be paid off in parts by Dixix Distribution in 2009. However, then Dixis Distribution refused to pay off any debts and Razroyev quitted the company.
According to experts, the scheme of Dixis’ business transfer to Dixis Distribution was worked out by Alfa-Bank. The bank expected to return its money, agreeing about exchange of the company’s debts on shares of the new network, created on the basis of Dixis Distribution. The network would supposedly open shops on the grounds, previously rented by Dixis, hire the former employees and agree about the debts restructuring with the suppliers. This plan could have worked in case the company had found an investor, ready to invest in the new network development. However, the search of such an investor failed, though the offers had been received by many companies, for example, Megafon and MTS.

Svyaznoy is ready to pledge 50% of shares

The second biggest cell retailing company Svyaznoy may pledge 50% of its shares to pay to the Federal Tax Service (FTS) in case the company has to pay on tax claims worth RUB 2.69 bn.
Before September of 2009 CJSC Svyaznoy was included in the group of companies (GK) Svyaznoy, engaged in cell phones sales. CJSC participated in selling products of the whole group. According to the results of the office inspections, carried out in 2007, tax bodies charged the company to pay taxes for 2004-2006. Svyaznoy appealed to the Federal Arbitration Court of the Moscow Circuit. Simultaneously on January 31st of 2008 the company filed the claim about bankruptcy to the Moscow Arbitration Court. The court dismissed the appeal.
According to analysts, Svyaznoy’s value is 140 mn USD without taking the debt into account. Thus, to pay on tax claims, Svyaznoy may pledge around 50% of its shares. Parity is not excluded, but it’s improbable. The practice, when retailing companies write off their debts to non-existent companies, is widely spread in Russia. Taking into account the growing interest of operators to retailing companies, such cases may be attractive for potential purchasers. Certainly, this causes decrease of an asset’s value.

Incoma Ltd disconnected the website of the branch of the Pension Fund

The Branch of the Pension Fund of Moscow and the Moscow region was deprived of the website, where 16 thousand organizations report. The rights to the domain belong to the former provider of the Pension Fund of Moscow and the Moscow region, CJSC Incoma Ltd. The provider disconnected the website after the contract had been obtained by another provider, Comcor.
We remind CJSC Incoma Ltd won the competition for creation and servicing the data communications network of the Pension Fund of Moscow and the Moscow region in the end of December 2007. The only competitor of Incoma was Comcor, which had provided services to the Pension Fund before. Comcor’s application was declined since the provider had fixed the conditions of services provision in the Moscow region and had not mentioned measures of information security. According to Comcor, they prepared all the necessary documents and even set lower price for their services (RUB 39.9 mn against RUB 44 mn of CJSC Incoma). Comcor tried to contest the competition results in FAS, but failed. After the competition the fund had problems with communications and “the work of information system was actually paralyzed”, the sources from the Pension Fund confirmed.
The new competition for services provision to the Pension Fund of Moscow and the Moscow region for a 6-month period was held on January 27th. The competition was won by Comcor, offering the price almost 5 times as less. The government contract was signed. Nevertheless, according to Incoma Ltd. Comkor won’t be able to start the website operating since the rights to the domain belong to Incoma.
Before May 2008 Comcor had possessed the rights for the domain Pfrmsk.ru, but the provider had not prolonged the term of the contract, so in June 2008 the domain was put up for auction. As a result in July 2008 the rights to the domain were given to CJSC Incoma.
According to analysts, there is a problem in the norms of the federal law about government purchases. The law allows to purchase complex technological services of anyone, possessing necessary licenses and offering lower prices. The Pension Fund will probably have to negotiate with Incoma without court. However, the chance to return the domain is not big.

Internet portal of government services did not started working on time

In December 2007 the government charged the federal executive bodies to provide services to the population via Internet from 2009. And in May 2008 the government approved creation of the unified portal “Russia’s State-owned Information Centre” (OGIC). In October 2008 three auctions of RUB 495 mn, connected with OGIC development, were held. The federal state-owned unitary enterprise NII Voskhod only took part in the auctions.
The portal (www.ogic.ru) is already available; it offers distribution of Russian passports, temporary registration, confirmation of foreign diplomas, registration of rights to realestate, etc. However, no service can be used for the lack of the normative base, according to the information on the website.
Russia provides around 3900 government services and it is impossible to make all of them electronic in such a short period of time, experts note. The Ministry of Economic Development is preparing a list of top priority services and after it is approved they will start working on the plan of making these services electronic.

The Association Internet and Business is preparing the appeal to Igor Shegolev

Internet and Business Association, uniting 20 companies, working in RUNET (including Yandex, Google, Mail.ru and Rambler), is preparing the appeal to Minister of Communications Igor Shegolev. The amendment to Article 1273 Part 4 of the Civil Code threatens users with that they won’t be able to use freely content (texts, music, video, etc) for private purposes. This article regulates the norms of “free reproduction of product for private purposes”. According to the current variant of the article, a Russian citizen may not pay a reward to authors and possessors of the rights, in caser he/she “reproduce a product” for private purposes. The amendment, made by State Duma on January 30th 2009, confirms that a citizen has a right to do this “in case of need”.
This definition is too uncertain and it may cause misuse. Copying any content from Internet (including Internet-browser, etc) may be declared illegal. This may result in thousands of claims about violation of copyright.
According to experts it will be hard to prove that a user needs to download information for private purpose. Violation of sole rights may result in the fine from RUB 10 thousand to RUB 5 mn (Article 1253 Part 4 of the Civil Code).

Russia constructs information society slower than other developing countries

Russia’s development of information society is not only behind developed countries, but it lags behind some new developing industrial countries, according to the Ministry of Communications. Such conclusion was made in “The Analysis of the RF Information Society Condition”, prepared on the instructions of Minister of Communications Igor Shegolev.
According to the authors of the document, this condition reflects insufficient level of information society development in the country and insufficient maturity for this development.
Russia lags behind a number of countries in IT penetration (number of Internet users, spread of broadband channels of communications, etc).
The conclusion on Internet services availability was made by the Ministry on Communications on the basis of statistics for 2007. Despite continuous growth of Internet availability, one of five households (20.99%) only had access to Internet and the density of Russian Internet users was one of the lowest in Europe, according to Rosstat’s data in 2007.
Analysts remind the research began last spring after Igor Shegolev had been appointed Minister of Communications. “The Analysis” will become the first research product, created on the money of the federal special-purpose programme Electronic Russia, and it will be available for public discussion.

The market of broadband is slowing down due to decline in construction

Last year the number of high-speed Internet users increased 1.5 times. This service is available to 885 000 of 1.9 mn houses. In 2007 subscriber base increase by 137%. This year the number of users will expand to 1.1 mn people, the market is close to saturation.
Providers may be affected by construction. This year house construction may drop 10-15% and in 2010-2011 the decline may reach 40% compared to 2008. For the corporate segment the changes will be even more serious. This year 25-30% of the planned offices will only appear on the market. According to the forecasts, by 2012 offers will go down by 45% to 1.25 mn sq.m.
West Call company , 88% of the revenue of which are contributed by corporate clients, expects 20-25% growth of its subscriber base, though before crisis 40% growth had been planned. To compensate losses West Call is planning to offer anticrisis packages of services.
According to analysts frozen projects may lead to revenue reduction by 5-10% in two years. In 2009 subscriber base growth may drop by 10-20% compared to 2008. In the corporate sector the decline may reach 20%. The growth may be provided by reconnections of other operators’ subscribers. Operators will attract subscribers by higher quality of services and increase in the number of services provided.

4. Power and Business

GKRC will award licenses following competition

GKRC will award frequencies following competition instead of operators’ private applications as it was previously. In case competition between operators is strong they suppose to hold an auction. In particular, GKRC’s authorities have decided to use frequencies of the 2.3-2.4 GHz band for WiMAX, 3.95-26.1 MHz for DRM standard and 7.9-8.4 GHz for radio relay communications. We remind the previous system of frequencies distribution was held under the rules, set in the legislation. According to the authors of the idea, such measure will make the system of frequencies distribution more understandable and transparent. According to the market participants, the competition requirements have to be equal for everyone and it should not provide advantages to a certain group of operators.
The decision of GKRC to distribute frequencies following competition is logical and reasonable as it will allow to develop non-discriminated access to the resource more efficiently, analysts say. Participation of big number of operators in competition will make the system of frequencies distribution transparent and open. Besides, competition in the system of frequencies distribution will provide the government with additional funds for the budget.
Besides, according to experts, the previous system of frequencies distribution often led to transactions on mergers and absorptions. So, the new scheme is to create equal conditions for all the market participants and contribute to development of small and medium business.

The government is planning to acquire a shareholding in Svyazinvest

The government is planning to acquire 25% +1 share of Svyazinvest from AFK Sistema. At that the budget funds will not be spent on the acquisition. The transaction will be carried out due to exchange of assets. Previously the government was planning to acquire Sviazinvest’s stake for 1.9 bn USD. However, currently the authorities of the Ministry of Communications has decided to carry out the transaction without attracting funds from the federal budget. In particular, it is still unknown, which assets will be given by the government in exchange for Svyazinvest’s shares. Probably, they will be assets of MGTD and MRKs. Besides, the regulator may write off Sistema’s debt to Sberbank of 1 bn USD and give the part of MRKs’ shares. We remind previously AFK Sistema pledged Svyazinvest’s asset, it owns, at 1 bn USD. In the spring of 2008 the government ordered Svyazinvest to audit shares of MGTS (520 mn USD). Besides, according to Comstar’s authorities, the transaction could be made by exchange of shares between the government and Comstar.
According to analysts, the potential transaction on assets exchange is mutually beneficial to the government and AFK Sistema both. In case the transaction is made, the government will be able to control the company and the regulator will be able to reform the business. AFK Sistema will obtain necessary assets and get rid of debts. Besides, Svyazinvest’s asset was additional load for the holding and it did not bring the needed profit.
In particular, previously Sistema expected it would win in Svyazinvest’s privatization. Currently the privatization is almost improbable. Comstar-UTS is entering regional markets independently. After the transaction is made Comstar may obtain 28% of MGTS’ shares, 61% of Central Telegraph’s shares and restructure its debts.

The Ministry of Communications is planning to support foreign vendors

Foreign vendors, developing their business in Russia and engaged in personnel training, may expect for support of the Ministry of Communications. So, Minister of Communications Igor Shegolev stated foreign partners that ICT equipment producers could obtain certain preferences, such as premises in technoparks, reduction of terms for certificate obtaining, introduction of a special system of taxation. The priority objective is to support producers, that are ready to share their technologies and train personnel. According to Minister, the previous scheme of sales between foreign producers and Russian partners is outdated already, so it is necessary to develop new forms of cooperation. It is necessary to reform the system of equipment delivery by foreign vendors to the government since initial and end prices are very different.
For example, Alcatel-Lucent company has developed personnel training and shared experience of IT for a long time already. The company opened training centres and centres on API development.
Analysts have different opinions on the programme efficiency. The positive factors are creation of additional working places, improvement of personnel training, introduction of new technologies in the sector. However, there are negative aspects. Foreign vendors are not interested to share their experience with Russian partners. Besides, they may exclude Russian producers from the market since they are more competitive and viable. According to experts, it would be more logical to support Russian innovation companies and thus strengthen their positions on the market.

FAS confirmed IT-experts

The Federal Antimonopoly Service confirmed members of the Council of Experts on Competition Development in the field of IT, which was created in the end of 2008. The Council includes representatives of FAS and the Ministry of Communications and heads of the biggest IT companies.
The Council of Experts on IT will interact closely with the Department of IT Control, created in FAS. The Council’s decisions will be recommendations, but they will influence considerably decisions of the Department of IT Control. The Council will be engaged in preventing monopoly activity, matters, connected with keeping to legislation in the filed of IT by government bodies, and preparing offers on legislation and the government control improvement in the field of IT.
The Council of Experts is headed by deputy director of FAS Anatoly Golomzin. Besides, the Council includes deputy director of the Department of the Government Policy in the field of Informatization and IT at the Ministry of Communications Sergey Ivanov. The Council also includes representatives of “The Association of Enterprises of Computer and Information Technologies” (AP KIT), “The Association of Producers of Electronic Equipment and Devices”, “The Non-commercial Partnership Russoft”, “The Non-commercial Partnership of Suppliers of Software Products”.

Top managers of the biggest IT companies have become members of the Council. These companies are 1C, Consultant Plus, Lanit, Google Russia, BAC, Intel, I-Teco, IT, FCBi Moscow.
According to analysts, IT sector has not needed tough control and regulation so far. Nevertheless, the Council’s creation is reasonable. As opposed to other sectors IT sector develops without artificial limitations. All problems of the sector are successfully settled inside the community.

The Ministry of Communications started struggling with crisis

The Ministry of Communications has created a working group on enhancement of stable development of the sector of communications, IT, mass media and mass communications in crisis conditions. Besides government officials the group will include representatives of the sector. Deputy minister Alexander Maslov has been appointed head of the group. Besides, the group also consists of: heads of the departments Alexander Narukavnikov, Valery Taranov, Artem Yermolayev and Yekaterina Larina and representatives of lower agencies and services.
According to experts, the crisis has not affected IT-sector yet. 56% of the companies have not reduced their staff and in 41% of the companies salaries have remained the same. Moreover, in case of mass personnel reduction some companies are ready to help in personnel re-training. The working group will be able to work out operative measures on economic stability and enhancement of enterprises and organizations’ stability in the crisis conditions.

Rossvyazkomnadzor will work under new rules

Rossvyazkomnadzor is ready to execute clauses of the law “On Protection of Rights of Legal Entities and Individual Entrepreneurs When Exercising Government Control (supervision) and Municipal Control”. In particular, the service will change the procedure and terms of planned inspections.
The meeting on realization of the new law, passed on December 26th of 2008, was held in Rossvyazkomnadzor. The law needs correction of several normative acts, on the basis of which Rossvyazkomnadzor exercises control and supervision over the sector. Besides, changes have to made in the plan of the service’s activity for 2009. This work is to be finished by July 1st of 2009, when the law is coming in force.
The participants of the meeting decided to create a working group, consisting of heads of the departments of Rossvyazkonnadzor’s central machinery. The group will have to define a list of document, needed to be changed in accordance with the requirements of the new law.
It is known that Rossvyazkomnadzor will change the procedure of terms of planned and non-planned inspections of communications objects. But there are not concrete measures yet.
According to experts, the new law is to reduce administrative pressure on business, though because of the law entrepreneurs received more obligations. Communicators will hardly feel serious consequences of the new law since the law only contains formal requirements, experts say. For example, under the new rules Rossvyazkomnadzor is obliged to inform prosecutor’s bodies about planned inspections. But the prosecutor’s office will not react if the inspection is unreasonable. Besides, Rossvyazkomnadzor does not influence telecoms business.

The Ministry of Communications urges IT companies not to reduce personnel

The RF Ministry of Communications urges companies, working in the sphere of IT, not to reduce personnel during the world financial crisis. In future reduction of IT personnel may lead to uncompetitiveness of an enterprise.
Within crisis the objective of many enterprises is adjustment of costs. Some sectors of economics may cut financing of their IT directions. However, for the recent 15 years solution in the field of ICT has become important and IT systems’ viability impacts the company’s performance.
Under crisis costs, linked to systems of the enterprise management, local networks, have to be reduced last of all. IT sector needs qualified, educated and consequently well-paid personnel. Personnel is a resource, needed to be invested for years, but these investment have a short pay-back period. If IT departments, system administrators are reduced, after crisis the enterprise may become uncompetitive.
According to the Ministry of Communications on the whole the IT sector was RUB 1.825 trillion under results of 2008, 22% growth y.o.y; investments in the sector increased 15% y.o.y to RUB 262 bn.
Experts of the telecoms market agree with the Ministry. The sector is currently developing, new programmes on personnel training are being created. However, in case a new programme on specialist training is initiated, many companies will be able to participate in it. It is early and unnecessary to speak of personnel reduction, while investing in young specialists is urgent. Then after crisis the sector will adapt easily to new conditions and remain competitive.

The Ministry of Communications will revive Expocom
 

The Ministry of Communications has decided to revive the exhibition “Svyaz-Expocom”, providing it with the status of the largest event of the sector. The regulator sent the market participants letters, offering to take part in the exhibition in May. To return operators to Expocentre on May 12-15th the regulator decided to hold the Board of the Ministry, which is usually held in February. Within the exhibition the Ministry is planning to hold a lot of activities for the sector representatives, including the session of the Ministry’s Board about results of the year.
The Ministry’s initiative was accepted watchfully by companies as they have already lost interest to Svyaz-Expocom. Some companies see no sense to spend on participation. Although, if the Ministry is engaged in organization of the exhibition the event may obtain a new status.

According to analysts, crisis of Svyaz-Expocom began long time ago and the last exhibition showed that the most popular telecommunications exhibition in the country was loosing its popularity. Although at first blush the display area and the number of its participants increased (854 companies compared to 630 in 2007), the participants were not active. The problems of Expocom began in 2000, when a co-organizer and owner of Expocomm brand, the American company E.J. Krause & Associates, did not manage to agree with the former Ministry of Communications, which wanted to obtain something more than mentioning in announcements in exchange for support of the exhibition. In response the Ministry organized its own exhibition in 2001 – Infocom. Within the first years Infocom was not popular, though it was preferred by many big exhibitors, such as Svyazinvest, Megafon, etc. Then the world vendors started participating in Infocom and in 2007 AFK Sistema’s subsidiaries preferred Infocom to Expocom.

The Ministry of Communications will unite Linux-community

The Ministry of Communications finds it necessary to consolidate developers of free software. Besides, the regulator intends to create an independent centre of competence and technical support, which will provide services to government-financed organizations, using free software.
Besides, works on free software developing have to be carried out in cooperation with the world community, so the regulator is planning to support those domestic producers of free software that participate in international projects.
According to analysts, the regulator’s support of Lunix-community consolidation is very positive for the market. Currently the Russia’s Lunix-community is uncoordinated and to achieve good results consolidation is necessary. Due to the consolidation the companies will have a chance to make themselves known on the world market and transfer government-financed organizations to free software.
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ADE will protect from communications

The Association of Documental Telecommunications (ADE) prepared the technical regulations “On Security of Communications”. The document is to protect people, plants and animals from harmful influence of communications. The Federal Agency for Communications expects the regulations will come in force this year.
The document regulates requirements to electrical, mechanical and fire security, nonexplosiveness, radiation security, security of production, storage, transportation, realization and utilization of communications, installation and commissioning of communications.
The technical regulation was prepared in cooperation with the Ministry of Communications, the Ministry on Emergency situations, the Ministry of Health and Social Development.
The regulation reduces risks of the sector participants. Situations, when a company cannot launch expensive equipment because the controlling bodies doubt if it is reliable, are quite frequent on the market. The regulation will allow to avoid such problems. Besides, the regulation will cause changes of the market environment since some operators or producers will have either to reduce their market share or to look for new partners. At least we can hope the sector participants will start using quality and safe equipment.

Dmitry Medvedev held the Council on IT

The first in 2009 session of the Council on Information Society Development was held in the Kremlin. The order about the Council foundation was signed in November 2008. Opening the session Dmitry Medveded emphasized that no progress and modernization were possible without IT: it concerned science and technical sphere as well as maters of management, matters of democracy strengthening in the country. Recently IT and information services have become quite considerable item of the Russian non-raw export, reaching 1 bn USD, according to President.
Nevertheless Medvedev stated “we are not satisfied yet since on key directions we are dramatically behind the most of developed countries”. Despite Russia possesses a high “intellectual potential and a lot of programmers”, the lag from the leading countries is increasing.
In particular Medvedev noted that in state-power bodies circulation of documents was still carried out on paper, and “computer are mostly used as a typewriter”.
Citizens do not have a possibility to send applications from their computers or to receive electronic information under “one window” system.
The strategy of information society development was approved in February 2008. Currently the strategy plan has not been worked out fully, according to Medvedev. The working groups were offered to take responsibility for certain directions.
Experts mention Russia’s lag on ICT use from developed countries as well. This reflects insufficient level of information society development in the country and insufficient maturity of conditions for the development.

FAS returned Euroset’s applications for acquisitions of retailing companies

On February 6th Euroset submitted applications to FAS for three acquisitions: for acquisition of 100% of Telefon.ru, Cifrograd and Betalink. However, FAS decided to return the applications to Euroset. They are not considered submitted since they do not contain a number of documents, defining an object and content of the transactions.
Euroset submitted the applications the day after MTS’ Board of director had approved acquisition of Telefon.ru and Megafon’s Board had approved purchase of Cifrograd. Betalink had made the marketing agreement with MTS, according to which the retailing company could only cell MTS’ contracts.
According to analysts, return of applications is a standard procedure, which is implied by FAS regulations. Euroset did not expected seriously for acquisition of these networks. Its objective was to persuade MTS to acquire a share in Euroset: Vimpelcom and Alexander Mamut (owns 50.1% of Euroset) have been looking for a partner within several months.

President has legalized navigation activity

The RF President Dmitry Medvedev signed the federal law “On Navigation Activity”. The document creates legal frameworks for development of navigation technologies and GLONASS group. On the basis of the new law technical regulations and standards for satellite navigation operation will be worked out.
The new federal law is aimed at creation of conditions for meeting requirements in navigation devices and services, provided in the sphere of navigation activity. The law concerns relations, arising due to provision of services of satellite positioning and production of navigation devices in the interests of the country’s social and economic development, defense and security of Russia.
In particular, the term “navigation activity” first appeared in the law. Navigation activity is defined as activity, linked to definition and use of coordinate and time parameters of objects. Besides, the law fixes means of navigation and objects of navigation activity.
The federal law “On Navigation Activity” is to provide large-scale use of navigation systems, including GLONASS, in the interests of the RF defense and security, various sectors of economics and international cooperation.
It is the first legal document on satellite navigation. Technical regulations and standards can be created on its basis. The law creats legal frameworks for navigation technologies introduction, defines the government’s duties as well as duties of federal and regional authorities. However, according to some analysts, the new document demonstrates that marketing filters into legislative activity. Systems of satellite navigations were regulated by laws on cartographical activity. At that systems of global positioning are not designed for routing and are not responsible for the activity.

5. Economics of Innovations

Information about subscribers will be protected by law

Big3 operators have taken the responsibility to finance the project on protection of subscriber’s personal data. We note, according to the government’s resolution, from 2010 all companies, dealing with a user’s personal data, are to keep privacy and protect it from disclosure and leak. For the communications sector the standard will be developed by the Infocommunications Union (the organization, representing and protecting interests of telecoms operators). Then the document is to be agreed with the Federal Security Service, the Ministry of Communications and the Federal Service for Technical and Export Control. ReignVox is one of the companies, engaged in the development of technical parameters for subscriber’s personal data protection. The company was founded in 2008 by the system integrator Bell Integrator and RNT. ReignVox possesses the number of the necessary licenses, highly skilled staff and good working experience in this sphere that resulted in choosing the company as a developer. We remind no competition for the standard developers was held.
So, ReignVox has already started analyzing the systems of personal data protection in MTS, Vimpelcom and Megafon to work out a standard, common for all operators of fixed-line and wireless communications.
According to the analysts, under the law #152-FZ of July 2006 “On Personal Data” the systems of personal data, available for telecoms operators, are to be systemized in accordance with the requirement by January 1st of 2010. Besides, mobile operators have to provide their services’ users all data about people, possessing access to such information and to inform subscribers about legal consequences for them, caused by personal data processing. Operators are to keep privacy and also introduce cryptographic means to protect personal information in case of illegal access.
According to some analysts, involvement of the government bodies and the sector representatives in the process of developing the standard on personal data protection for the telecoms sector is positive and logical. The requirements on personal data protection are mentioned in the normative acts of the RF government, other experts note. However, according to lawyers, no normative act gives an operator the right or obliges an operator to develop the own standard in personal data protection. At that the regulator demands considerable operating and material costs for preparation of the document, regulating the work with subscribers’ personal information. Thus, it is obvious that Big3 operators try to realize the government’s requirement with lesser costs. This also caused choosing ReignVox as a developer and lack of competition.

RTRS initiated prohibition on import of analog TVs

Aleksey Malinin, head of RTRS, spoke of the initiative to prohibit import of analog TVs, not receiving digital signal and not equipped with DVB-T-tuners. Thus, Malinin hopes to accelerate Russia’s digitalization. The Ministry of Communications did not support the initiative.
According to analysts, such measure is inappropriate since it may lead to reduction of offers on the market that will affect the population’s buying attitude. Under crisis this measure will be useful neither for companies nor for consumers. Besides, digital broadcasting is not of great importance for the country’s population. According to some experts it is necessary to introduce gradual prohibition on analog TVs import by 2011, since digital broadcasting launch may be postponed for lack of set-up boxes and TVs, receiving digital signal. By this time prices for small digital and analog TVs will become equal, experts say.
The program of the country’s digitalization would be more efficient if there are more flexible requirements of digital equipment import. It would be more rational to reduce a tax rate for imported digital TVs and tuners, experts say.

FAS offered to introduce new rules of non-discriminated access

The Federal Antimonopoly Service has worked out new rules of non-discriminated access to communications networks. The project is now being endorsed by the Ministry of Communications, the Federal Service on Tariffs and the Ministry of Economic Development. The new rules are aimed at simplifying independent operators’ access to networks of federal companies. In particular, the operators can only refuse alternative companies, if they do not possess necessary equipment for work in their networks. Monopoly companies are to give reasons for their refusal. One of the reasons may be that an operator does not possess a license. Besides, the new rules include the resolution about raise of tariffs for alternative operators. So, prices for federal operators’ infrastructure use can be increased once a year and they are to be equal for all users.
Svyazinvest’s subsidiaries, included in the list of natural monopolies , are to provide their networks to independent operators of communications in accordance with FAS’ plan. The holding’s authorities agree with the opinion of the Ministry of Communications that these rules regulate ownership instead of rights to free competition. The project will not be approved by the department, Igor Shegolev says. According to the market participants, the project may regulate the sector and simplify operators’ access to the federal companies’ infrastructure.
The project of non-discriminated access to infrastructure of monopolies will impact positively the sector, experts say, in particular, it will contribute to development of free competition. Besides, a consumer will be able to choose an operator and tariffs for Internet access will be reduced. However, analysts also speak of negative aspects. So, state-owned operators will lose interest to investing additional funds in their own infrastructure development since it is their competitive advantage.The project of non-discriminated access to federal companies’ infrastructure may stimulate development of the market of broadband access in regions and development of small and middle participants of the market.

The exchange on content sale will be founded

The exchange on content sales will be founded in Russia. To do this the Association of Suppliers of Interactive Services is founded, which will include operators and possessors of rights to content. The Association’s aim is development and introduction of models and means for mutually beneficial cooperation of operators and possessors of rights. For example, the exchange will allow operators to avoid the necessity to spend hundreds thousands dollars for acquisition of rights to resale of media content and subscribers will obtain a wide rage of interactive media services.
We remind that currently operators of broadband access networks are acquiring the right to distribution of music, video, etc, but they obtain access to the limited content base, which as a rule, seldom meets requirements of subscribers. Besides, possessors of rights demand an indemnity payment from operators to avoid risks. The fee for content use depends on number of views, but possessors of rights cannot control this, for example in cable networks.
Costs on the system creation are assessed at 7-10 mn USD and in particular, this money will be spent on support of the infrastructure for content publishing, system of mutual settlements and salaries of the exchange administrators. The Association could become a founder of the exchange. The exchange is currently of interest for Synterra, Tattelecom, the North-Western Telecom, Transtelecom (TTK), Vimpelcom, Central Partnership, Story Pictures and some operators of local networks in Moscow and St. Petersburg.
According to experts, creation of the exchange is positive. The project will be of interest to a lot of small and big operators. However, analysts estimate differently possible results of the exchange’s activity. The exchange operating will allow to achieve the goals set, such as mutually beneficial work of operators and possessors of rights, reduction of prices for content and big choice for subscribers, some experts say. According to others, the exchange foundation will not lead to reduction of prices for content.

3G within crisis: growth or stagnation
 

According to analysts from Alfa-Bank, by 2010 cell operators will increase 10 times their revenues from 3G services. So, by 2009 MTS will obtain profit of 80 mn USD (Vimpelcom – 90mn USD). Besides, incomes from 3G services will outstrip incomes from SMS.
3G subscriber base will increase 10 times to 26 mn people, according to Alfa-Bank’s research. In particular, by the end of 2009 the number of subscribers, acquiring 3G mobile phones, will grow. The number of handsets will reach 21.3 mn. ARPU will be 17 USD.
According to experts, year by year Internet traffic will grow 50% annually. The total revenue of operators of communications from 3G services provision will be 2.4 bn USD by 2010. Such results will be achieved due to growth of the service popularity, increase of the network coverage and growth of speed of data communications, analysts note. VAS revenue in ARPU will increase 3% y.o.y to 18%.
According to estimates of Alfa-Bank, profits of MTS and Vimpelcom will go down by 22% and 19% accordingly. The drop is caused by decline in demand in the corporate sector and the increasing dollar rate. So, APPM (average price per minute) will decrease by 27% in 2009.
Crisis will obviously influence cell operators’ plans, independent analysts of the sector suppose. They do not expect for dramatic growth of 3G services in the nearest time. The growth of revenue from 3G services will hardly outstrip the growth of revenue from SMS. This may be only achieved when revenue from SMS drops 8-10% annually. However, analysts forecast that SMS will become even more popular. Besides, currently in the period of continuous construction of 3G networks, their coverage is not big. In current unstable condition people will prefer to use services of wireline operators, unlimited Internet tariffs of which are cheaper that those of 3G networks.
Active development of 3G services may start within 2 years, when financial situation will become more stable and a consumer will be ready to pay for the service. We note in the long-term outlook we can speak of ARPU growth. The result will depend on the scale of 3G network coverage. Currently 3G networks are not developed in Moscow and the Moscow region, which are the most profitable markets. Concerning regions, Big3 operators’ revenue will not be big due to the lag of the telecoms sector development.

Synterra has monetized mobile WiMAX

In the frameworks of the project “WiMAX mini networks” the Russian operator Synterra announced the first in Russia commercial start of mobile WiMAX network in Aprelevka, the town of the Moscow region. Systems of Telecommunications company has become Synterra’s partner on the project.
The network, based on Alcatel-Lucent equipment, consists of one base station with the coverage 5-7 km. According to the partners, the network will first of all provide access to clients, who need prompt connection to Internet. Later they plan to start selling USB-modems and other mobile devices to provide services to mobile subscribers.
Systems of Telecommunication has chosen Zyxel and Sagem equipment. The partners do not disclose the number of subscribers they are planning to attract.
According to Synterra, other 15 WiMAX mini-networks are being tested in different regions now and 40 networks are being prepared for launch.
One of Synterra’s competitor, Comstar-UTS may enter the market of the Moscow region with mobile WiMAX networks. Comstar-UTS has already provided services of wireline WiMAX in some towns of the Moscow region. So in the Moscow region the operator offers a wide range of telecoms services (telephony, broadband Internet access, IPTV) for corporate and private users and recently Comstar-UTS has entered the market of zone communications. The operator also uses wireline WiMAX for services provision. So, we do no exclude in future Comstar-UTS will develop mobile WiMAX networks.

3G network was tested in the Moscow underground

The first fragments of 3G network in Moscow may be put into commercial operation this year already: Big3 operators did successful research of electromagnetic compatibility of 3G networks and radio-electronic equipment of the Ministry of Defense in the Moscow underground. According to the forecast of MTS, by 2010 3G network will be available in the central part and in main streets of Moscow.
The research on electromagnetic compatibility of 3G networks and military systems proved that 3G networks operating in the Moscow underground is possible with limited number of base stations.
According to director of the Moscow underground Dmitry Gayev, by the end of 2009 MTS will start providing 3G services on stations and in trains. The agreement about 3G services provision was only signed with MTS.
Cell operators have been trying to launch 3G in Moscow for a long time , but their attempts have been blocked by the military so far: frequencies, necessary for 3G, are used by the forces of air-to-air defense of Moscow. The decision to distribute frequencies of 2.1 GHz and to announce the competition for 3G licenses was taken by GKRC in October of 2006. Currently each fifth mobile phone in Russia is a handset with support of 3G standard.

6. Personnel Changes

The Sweden telecommunications holding Tele2 has appointed Olga Osina new financial director for Russian operations. Previously she was working as manager on corporate finance of the group British American Tobacco (BAT). On the new position Olga Osina will be in charge of managerial statements, control, tax management and effective management of money flows.
Former financial director of Tele2 Kai-Uve Melhorn quitted the company. According to the company, he had contributed much to the company’s development within the last year and a half.
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Pavel Pestryakov has been appointed IT director of Alfa Group consortium. He will be responsible for organization of interaction and control of effectiveness of work of the company’s IT services, development and introduction of corporate standards and procedures in the field of IT.
From 2001 till 2004 Pestryakov was working as IT director of Rusagro group, in 2004-2006 he was technical director of Incom-Real Estate. His last working place was OGK-4, where he was holding the position of deputy director general and member of the board.
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Kai-Uve Melhorn has been appointed deputy director general on financial matters of Megafon. Previously this position was held by Andis Lochmelis, quitting the company in 2008. Before the appointment Kai-Uve Melhorn had been financial director of the cell operator Tele2 Russia.
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At the extraordinary meeting Megafon’s shareholders elected new Board of directors. The new members of the Board are director general of AF Telecom Holding Vladimir Zhelonkin and director of OJSC CT-Mobile( an Alfa Group’s subsidiary) Dmitry Vizianov. They have replaced the former director general of OJSC Telecominvest Vladimir Pogrebenko and independent director, supported by CT-Mobile Alexander Okun.
The rest five seats in the Board are still held by director general of Telecominvest Ivan Streshinski, financial director of Altimo (an Alfa’s telecoms asset) Teijo Pankko, head of support of international operations of TeliaSonera Aimo Eloholm, senior vice president of TeliaSonera Esko Juhani Ritkonen and president of TeliaSonera Tero Kivisaari.
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Comstar-UTS announce that on January 11th of 2009 the general meeting of shareholders of CJSC Stream-TV, included in the group of companies Comstar-UTS, took the decision about change of the Stream-TV’s Board of directors. Sergey Pridantsev, president of Comstar-UTS, has been elected chairman of the Board of directors. Viktor Koresh has been appointed director general of Stream-TV.
The new Board of directors also includes vice president on regional development Viktor Koresh, vice president on economics and finance Irina Matveeva, vice president on personnel management Dmitry Karmanov, vice president on corporate management and legal matters Kirill Andreichenko, director of the Department for Property Projects of AFK Sistema Sergey Shishkin, director of the Department for special projects of the business unit Telecommunications Assets of AFK Sistema Aleksey Goreslavski.
Viktor Koresh, appointed director general of Stream-TV, will combine this position with the position of vice president on regional development of Comstar-UTS.
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On February 2nd at the general meeting of shareholders of Comcor (Akado Telecom brand), Leonid Gushturov was appointed director general of the company. Previously he was holding the position of deputy director general on commercial activity in the company.
Leonid Gushturov proved he was a strong and effective manager. According to the results of 2008, the company realized all plans and achieved the goals, set by the shareholders. This was also achieved due to the coordinated work of the company’s subdivisions, supervised by Gushturov. This year the company’s major objective is to strengthen Akado-Telecom’s position in various segments of the market.
Leonid Gushturov started his career in 1997 in the Scientific Research Institute of Informatics and Systems of Management named after N. Bauman. He was engaged in software creation for navigation complexes as leading developer. In 2004-2006 he was working in MGTS and Central Telegraph, holding positions from leading engineer to deputy director of the Department for services provision. In 2006 Gushturov was transferred to Comstar-UTS for the position of director on business development. In February he was transferred to Comcor for the position of deputy director general on commercial activity.
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The Board of directors of OJSC MGTS, a subsidiary of Comstar-UTS, decided to accept the request of the company’s director general Nikolai Maksimenka about his dismissal because of transfer to Comstar-UTS. The board also decided to appoint Sergey Nazarov, vice president on marketing of Comstar-UTS, for the position of director general of the company.
From February 4th 2009 Nikolai Maksimenka is being transferred to Comstar-UTS to the position of advisor for the company’s president. Sergey Nazarov will start working as director general of MGTS from February 4ht of 2009.
Nazarov’s objective will be achieving the new level of telecoms services’ promotion and quality.
From 1994 Nazarov was holding positions from engineer of technical support of sales in the Moscow representative office of AT&T to deputy director on sale of the Moscow representative office of Lucent Technologies. In 2003 he headed the Department for Work with Clients of Centertelecom. From January 2006 till June 13th 2007 he was holding the position of deputy director general –commercial director on Centertelecom. In June 2007 Nazarov was transferred to Comstar-UTS to the position of vice president on marketing.
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Ilnar Abdullin has been appointed for the position of financial director of RTKomm.RU. From October 2008 he was acting as commercial director of the company. The former director of RTKomm.RU was Irina Popova. She was transferred to Synterra for the position of deputy financial director.
Ilnar Abdullin has been working in OJSC RTKomm.RU since October of 2005. In the company he was sequentially holding positions of financial analyst, head of the Department for Financial Accounting. Previously he had worked in Arktika, Evrohimtrade and Almaz-Holding, where he had began his career.
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Mikhail Gerchuk, vice president on commercial matter of OJSC MTS, has become a member of the company’s board. He has replaced Cynthia Gordon, who was working as vice president on marketing of MTS till December 2008. Currently she is holding the position of director on global development of brand.
MTS’ board also includes: the company’s president Mikhail Shamolin; acting as vice president on finance and investments Aleksey Kornya; director of the business unit MTS Russia Alexander Popovski, vice president on corporate communications Andrei Terebenin, vice president on security Pavel Belik, vice president on personnel management and legal matters Sergey Nikonov, director on strategic projects Mikhael Hekker, director on legal matters Ruslan Ibragimov, vice president on technique and IT Alexander Bogatyrev, vice president – director of the business unit MTS Foreign Companies Oleg Raspopov, director general of CJSC Ukrainian Mobile Communications (a 100% subsidiary of MTS) Andrei Dubovskov.
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OJSC Rostelecom has founded the Department for Business Processes and appointed Yevgeny Pelimski director of the Department. Previously Pelimski headed the Department of Internal Audit. The new department will be in charge of adjustment of existing business processes and development of new ones, management of risks and control over key results of the activity.
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The RF President Dmitry Medvedev has confirmed members of the interdepartmental working group, which will be engaged in preparation of introduction of new passports and visas in Russia. The group has been headed by Advisor to President Leonid Reiman.

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At the second extraordinary general meeting of Svyazinvest’s shareholders new members of the Board of directors and the Check-up Committee were elected. Yevgeny Yurchenko has been appointed director general of Svyazinvest for a 5-year term. Previously he was holding the position of the Tambov branch of the Central-Chernoszem bank of Sberbank of Russia. He possesses experience of holding the leading positions in Svyazinvest: from November 2002 till March 2005 he was working as deputy director general of the holding.
The elected members of Svyazinvest’s Board of directors are: Mikhail Butrin, managing director of CJSC VTB-Invest; Mikhail Leschenko, advisor to Minister of Communications; Konstantin Malofeev, managing partner of the Fund of Direct Investments of Marshal Capital Partners; Marlen Manasov, member of the Board of directors of CJSC UBS Bank; Sergey Pridantsev, president of OJSC Comstar-UTS; Leonid Reiman, Advisor to the RF President,; Ivan Rodionov, professor of the state university “Higher School of Economics”; Nikita Ryauzov, managing director of MDM Bank; Vitaly Savelyev, 1st vice president – head of the complex of Telecoms Assets Development of AFK Sistema.
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According to the decision of the Board of directors of OJSC National Communications of February 11th of 2009, Nikolai Zatsepin has been appointed director general of the company. In recent years Zatsepin was holding positions of deputy director general on content of OJSC Sistema Mass Media and director general of CJSC Stream-Content (belongs to AFK Sistema).
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Ex-director general of Svyazinvest Alexander Kisilev has been appointed new director of the federal state-owned unitary enterprise Post of Russia. The term of registration of applications for the position of director general of Post of Russia was over on February 10th and Kisilev was a single applicant. He informed that they had already created a working group, consisting of representatives of Post of Russia and Rossvyaz, which would prepare offers on the enterprise improvement and submit them to the Ministry of Finance, the Ministry of Economic Development and the Ministry of Communications. The competition documents, sent by Kisilev to the Federal Agency for Communications, contain offers to continue the programme, confirmed in 2002, which implies turning Post of Russia into a joint-stock company. Kisilev also offered a programme on financial and banking services provision on the basis of branches of Post of Russia in cooperation with Svyaz Bank. The priority objective of the enterprise will be marketing promotion of EMS.
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At the extraordinary meeting shareholders of Central Telegraph elected the new Board of directors. The Board includes 6 representatives of Svyazinvest and one representative of Rosimushcestvo. So, the new members of the Board are: Mikhail Batmanov, director of the Department of Corporate Management and Legal Security; Bogdan Golubitski, director of the Department of Economics and Finance; Dmitry Yerokhin, deputy director general of Svyazinvest; Yekaterina Yerofteeva, deputy director of the Department of Strategic Development; Ludmila Kormilitsina, director of the Department of Corporate Management and Legal security; Mikhail Leschenko, advisor to Minister of Communications; Viktoriya Chernousova, specialist of Rosimuschestvo
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The new director general of OJSC Svyazinvest Yevgeni Yurchenko started forming a team. The holding declared appointments of 4 deputies to director general. They are Aleksey Lotkov, Viktor Savchenko, Elena Umnova and Nadezhda Filippova. On the new position Aleksey Lotkov will supervise matters of economics, statistics and account. Besides, he will be in charge of strategic development and tariff policy of the group. Viktor Sachenko will be responsible for legal security of the holding and matters of corporate management. Elena Umnova will be in charge of financial and budget policy. Besides, she will be engaged in organization of interaction with financial and credit institutions. Nadezhda Filippova will be responsible for organizational development, personnel management and development of corporate culture.
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Sergey Atamas has been appointed director on coordination of regional development of Synterra. Previously he was acting as advisor to the company’s president and he also supervised development of satellite technologies in the company.
Sergey Atamas will be engaged in realization of the company’s regional policy, expanding the zone of the company’s presence and promotion of the company’s products and services to regional markets. He will also coordinate and develop Synterra’s regional infrastructure, including due to mergers and absorption of telecoms assets.
Previously from November 2007 the position was held by Mikhail Amelushkin. Before the transfer to Synterra he had been working as vice president in the Russian representative office of the American company NetCracker Technology.
The position of director on coordination of regional development was founded in 2007 because of active development of Synterra’s regional projects. In particular, this concerns the partnership project on creation of regional infrastructure of broadband access for mini-networks WiMAX and the programme 40x40 on development of the national network of centres for information processing, storage and distribution in all the seven federal regions of the RF. the number of Atamas’ responsibilities is bigger compared to Amelushkin’s. For example, he will be also responsible for development of interaction of regional structures with other Synterra’s subsidiaries.

7. Figures and Facts

According to the results of 2008 Svyaznoy’s commodity turnover is 2 052 000 000 USD. The number of sold phones increased by 29.6% to 6.35 mn handsets in 2008.
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In 2008 the revenue of the cellular retailing company Telefon.ru was 540 000 000 USD (around 31% growth y.o.y.). Last year the company sold 1.376 mn handsets, earning around 272 mn USD. The sales of phones increased 31% y.o.y.
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In 2008 the turnover of CJSC United System of Moment Payments was RUB 175 600 000 000. Thus, the turnover in Russia increased by 54.7% y.o.y.
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143 913 minutes were talked by a subscriber of Megafon Moscow. The subscriber exceeded the previous results, included in the Russian Book of records for 2007. The previous record belongs to the subscriber of Megafon Moscow, who talked for 136 664 minutes.
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In 2008 the revenue of CJSC Sonic Duo was RUB 53 400 000 000 (20% growth y.o.y.)
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RUB 250 000 000 were paid by Synterra to its regional partners on VSAT technologies in 2008. The amount includes new stations installation, after-sales service and maintenance of equipment.
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In mid January Comstar-UTS’ subscriber base was 3 mn people. The number of subscribers of broadband access exceeded 1 mn people, the number of users of cable TV and IPTV was over 2.1 mn people.
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16 mn USD were paid to MTS on the 9th coupon of Eurobonds worth 400 mn USD. The bonds had been placed on January 21st of 2005, the period of circulation is by 2012, the coupon rate is 8%.
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The total amount of the contract of telecommunications sponsors of the Olympic games in Sochi in 2014 (Rostelecom and Megafon) is 260 mn USD.
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In 2008 4700 new base stations were launched by MTS in the RF, including 2.6 thousand station in GSM-900 bond and over 2.1 thousand in GSM-1800 range.
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32% of mobile communications users in Russia has two and more handsets. So, 27% of respondents have 2 cell phones, 5% possess 3 phones and 67% only have one cell phone.
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25 800 000 RUNET’s internet users visit social services at least once a week.
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In 2008 the number of subscribers of broadband access of OJSC the South Telecommunications Company was 351 000 users. Thus, the company’s subscriber base has doubled compared to 2007.
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11 136 public phones were installed by OJSC CZT during the second stage of the programme telecommunications universal services introduction with use of public phones in 9 regions of the North-Western Federal Region of the RF.
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IN January-December of 2008 prices for communications services increased by 2% in Russia.
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As for the beginning of 2009 Svyazinvest’s total debt was RUB 121 400 000 000.
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In total the investments of Svyazinvest’s interregional companies for 2009 will be RUB 30 bn. Currently Svyazinvest’s (OJSC Rostelecom and 7 interregional companies) liabilities are 121.4 bn.
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One of Synterra’s credit is worth 16.9 mn USD. The second company’s credit is 12.3 mn euro.
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In 2009 Centertelecom’s budget implies net profit worth RUB 4.715 bn.
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The number of mobile communications subscribers has reached 4 bn people across the world. Mobile networks’ subscriber base has doubled for the recent 2 years and a half. According to prognosis of GSMA, by 2013 the number of mobile communications subscribers will reach 6 bn people.
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IN 2008 Peter Star invested RUB 330 mn in construction of VOLS. The total length of communication lines exceeded 4 thousand km.
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In 2008 penetration of cellular communications in Russia reached 132%. The number of registered SIM cards increased to 187.5 mn.
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Export of Russian information technologies had services has reached 1 bn USD. This was stated by the RF President Dmitry Medvedev at the session of the Council on Information Society Development in Russia.
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RUB 100 mn were invested by Synterra in creation of the first Commercial Centre of data communications in Kazan.
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In 2009 OJSC Dagsvyazinform will invest RUB 21 mn.
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In 2008 the turnover of the payment system e-port was RUB 74.1 mn (30% growth y.o.y.).
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In January the number of GSM subscribers reached 187 830 000 mn people, increasing by 0.5% compared to December.
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The amount of the contract on introduction of platform for convergent solutions MEDI IN/OCS, made by Sitronics and Uzdunrobita, a MTS’ subsidiary in Uzbekistan, is 18 mn USD.

Sources: Vedomosti, Prime-TASS, RBK Daily, Comnews, Cnews, Interfax, Kommersant