30 апреля '09

The Russian Telecommunications Market Development April 2009

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

1. General Trends of the Market Development

Megafon refused to acquire Cifrograd

The operator of mobile communications Megafon refused to acquire the cell retailing company Cifrograd. The parties could not agree on the key conditions of the transaction. Cifrograd’s total debt is around 120 mn USD.
Previously Megafon informed it was an owner of 1 Cifrograd’s share, which gave the operator the advantageous right to the retailing company’s acquisition, in case its shareholders agreed to sell the company. In February 2009 Megafon obtained FAS’ approval for the acquisition of Cifrograd and declared its intention to acquire 49% of the retailing company for 10 mn USD. Depending on the results of the company’s operation activity its former owner would have to get a bonus or to pay fines in accordance with the conditions of the special agreement. The transaction was close to be completed and Cifrograd had only to settle the matters of accounts receivable. At this stage the negotiations were suspended.
Afterwards at meetings of the operator’s board of directors they discussed questions, connected with retailing development. So far, Megafon has decided to develop independently its own retailing network, though the company does not exclude transactions on the acquisition of already existing retailing companies. Currently Megafon possesses around 1500 salons and brand-shops.
Megafon is the last of Big3 operators, which acquired no one of the existing independent retailing operators, though the company was always attempting to make such transactions. In the end of 2008 Megafon was ready to make an option agreement, which implied the acquisition of the shareholding in Dixis. However, the agreement was not signed. Vimpelcom on the contrary made the transaction on the acquisition of 49.9% of Euroset, and MTS acquired the shareholding of Telefon.ru and is now preparing to make the transaction on the purchase of Eldorado’s salons.
According to experts, Megafon has temporized regarding retailing companies’ acquisitions. Analyzing the situation and losing time for the acquisition of the most attractive assets, the operator has decided to stake on its own retailing network. This is caused by the assets’ overpricing (due to great interest of Big3 operators) and big debts of the retailing companies, which were developing due to credits from the moment of their foundation.
Cifrograd is considered by experts as the last of the attractive assets among cell retailing companies. The network will be sold sooner or later, they believe. On other hand Megafon may renew the negotiations depending on the situation on the market in 2009. Perhaps, Megafon tries to reduce the retailing company’s value, though the operator may also focus fully on its retailing network development.

Technoparks financing from the budget may be reduced
The Ministry of Communications offered to reduce the costs on technoparks creation. The reduction is caused by the wish to adjust costs from the budget within crisis. In 2009 RUB 1.9 instead of previously planned RUB 3 bn are intended to be spent on technoparks creation. This offer has been already sent by the Ministry of Communications to the Ministry of Finance and the Ministry of Economic Development. The offer will be also considered at the session of the Government Commission on Transport and Communications, presided by Sergey Ivanov. At the same session the Ministry of Communications intends to offer to develop the law on technoparks and prolong the programme of their creation to 2014.
Previously, in 2007-2008 they spent around RUB 3.5 bn of the federal money on technoparks creation. The same amount was assigned from regional budgets of different subjects of the RF. The projects realization causes a lot questions from the bodies of regional and federal power. Many technoparks are developing projects, which lack innovative technologies and ideas.
The budget money is planned to be reduced due to the projects, which are less prepared. They include technoparks in Mordoviya, the Kaluga and Moscow regions and St. Petersburg. The most prepared technoparks are in Novosibirsk, Kemerovo, Tatarstan and Tyumen. However, even the most prepared projects financing can be only started after submitting their concepts of development and business-plans.
According to experts the reduction of technoparks financing from the federal budget is natural. Firstly, this happens in the frameworks of the total reduction of the budget costs due to financial crisis. In this situation maintenance of the social sphere and the country’s defense potential are prior objectives for the government. Secondly, the projects of technoparks may not be applied practically as they were planned before. The plans on technoparks financing are also impacted by the critics, linked to the change of technoparks’ designation at the stage of their construction.
It is important to attract independent investors and venture funds to participate in technoparks construction, experts say. Such investments would allow to improve the project’s efficiency and provide control over the expenses of budget and non-budget funds. It is necessary to work out and change the concept of technoparks in accordance with the new situation and taking into account new challenges and needs, and attract representatives of the expert and scientific communities to the discussion.

AFK Sistema asked investment banks to work out a variant of the transaction on Comstar-UTS’ sale
Several investment banks have received the offer from Sistema for working out the options of the transaction on Comstar’s shareholding sale. The investment banks have to assess Comstar-UTS. The merger of MTS and Comstar-UTS has been discussed for a long time as a response to the consolidation of Golden Telecom and Vimpelcom.
Thus, AFK Sistema has declared the competition. The investment bank, offering the best conditions and a scheme of the transaction, will act as its organizer. The list of investments banks, offered to assess the company, includes UniCredit Aton, Credit Suisse and Deutsche Bank.
One of the probable options is the acquisition of 100% of Comstar-UTS by MTS for cash. Besides, MTS wants to replace the brand Comstar-UTS with MTS though the question of the two companies’ merger will not be solved as quickly as it happened with Vimpelcom and Golden Telecom.
Experts assess Comstar-UTS’ assets in different ways. This is caused by unstable economic situation in Russia. On one hand the transaction may be made at the average market price, that suits the minority shareholders and AFK Sistema. On other hand the price may be lower that meets MTS’ needs. Anyway MTS is considered as the key candidate for the company’s acquisition. No one of the big participants is interested in this asset and foreign investors are not ready to act in this unstable situation.
According to experts, there is a tendency on the telecoms market when operators, limited in cell business development, start taking niches in other fields. Actually, we can see the creation of multiprofile telecoms holdings on the basis of Big3 operators. All the processes consolidation and integration will take some time and as a result we will be able to see the business, where services of fixed and mobile communications and broadband Internet access will be provided by the same companies and sold via the operator’s own retailing networks.

Sales of mobile phones drop by 30%
According to the preliminary results of mobile phones sales in Russia, over 1Q2009 the sales have dropped by 30% y.o.y and by 40% q.o.q. Over last three months around 5.5 mn phones have been sold, the revenue is equal to 819 mn USD. The results are close to the lowest level of sales of 2004, when the leading companies’ total profit was 836 mn USD.
The average price for a mobile phone has also reduced by 30% y.o.y. (currently it is 150 USD). Analysts also point to redistribution of demand for mobiles: the sales of GSM handsets have increased 2-3% in the price brackets of RUB 1500 and less and RUB 3000-7499.
The negative changes in this segment of the market are directly linked to many factors. The major factor is the situation in the sphere of crediting, analysts note. Many banks have toughened the conditions for credit obtaining for a mobile phone acquisition and reduced the number of programmes in this field. As a result, the number of phones, bought on credit, has halved (10% compared to 19% in 2008).
Regarding the secondary market the results reported were 1.5 mn mobiles at RUB 6.5 mn. However, the figures may be twice as less, analysts say.
Nevertheless, Vimpelcom’s authorities declared the increase of the leaders’ share in the field of sales. Euroset’s and Svyaznoy’s shares increased 30% and 20% accordingly. It is mostly caused by their competitors’ bankruptcy (Cifrograd and Betalink).
According to experts’ forecasts, the situation on the market of mobile phones sales will get worse in 2009. Unstable situation in this segment is connected to the world economic crisis and is not a surprise for analysts and the market participants. The decrease of the population’s purchasing capacity has also impacted the situation.
Analysts refrain from the attempts to assess the forthcoming changes in figures. At that the negative trends will be observed on the market within 2009, they note.
The preliminary assessment of the further development of the market of mobiles sales is deplorable. According to the statistics of 1Q2009, the total sales have decreased by 30% in regions as well as in the capital city. The demand for mobiles has reduced considerably as the population’s incomes continue going down. So, the companies, engaged in sales, have changed the range of products: more available handsets are being put in the forefront.

Comstar will exchange 11% of its shares for fixed-line assets
Comstar’s authorities have assigned 11% of its shares for the exchange for assets of fixed-line communications. Currently the value of this shareholding is 170 mn USD on exchange. This amount is sufficient for the purchase of the control shareholding in one of the leading operators of fixed communications. Akado, National Telecommunications and Synterra are considered as the most probable candidates for the absorption.
According to the company’s authorities, the company’s offer on the exchange will be quite interesting for many participants of the market. It is still unknown whether the company will exchange the shareholdings with a big operator of fixed communications or it will prefer to absorb several small companies. If primarily Synterra was considered as the most probable candidate for the acquisition, currently analysts doubt that the transaction will be made. Comstar’s interests will be mostly targeted to the acquisition of Akado and National Telecommunications, experts say. It is improbable that the transaction will be made in the nearest future since Comstar’s authorities are negotiating the sale of its whole shareholding to MTS. To do this MGTS Finance redeemed 46 mn of the company’s ordinary shares from Access Telecommunications for 463.6 mn USD in the end of last year. These shares may become a profitable addition to the exchange of the assets between AFK Sistema and the government. One of the goals of this exchange is forgiving Sistema’s debt worth 770 mn USD to Sberbank. The transaction may also concern Svyazinvest’s and MGTS’ shares (25% and 28% accordingly).
Analysts estimate Comstar as quite an attractive participant of the market. In a long-term outlook the cooperation with this company may be of interest to many operators. However, it is difficult to assess the company’s assets objectively because of unstable economic situation as well as to suppose which strategy of the operator’s absorption will be preferred by Comstar’s authorities.

The number of Internet users increased to 50 mn people in Russia
At the meeting with State Duma deputies Vladimir Putin announced the number of Internet users. It has reached 50 mn people. According to Putin, this number is a breakthrough that is very important for the Russian information society development. In 2007 the Internet was used by around 35 mn people, Prime Minister says. According to the Ministry of Communications, around 25 mn of the Russians used the Internet in 2006 and in 2008 this number increased by 34.3% y.o.y to 47 mn people. The statistics from the fund Public Opinion is different. Over 6 months of 2008 the Internet has been used by 34.4 mn people, taking into account that a person used the Internet at least once within these 6 months. However, children-users (75%) are not included in this statistics. The study of the Ministry of Communications contains all Internet users: children, post and school.
According to the analysts, in 2008 the growth of Internet subscriber base is caused by such factors as the population’s interest, big demand for the service and active development of the market of providers. Experts have different opinions on the Internet base growth in 2009. According to some of them the base will expand to 38-42 mn people. One of the reasons is the growth of unemployment, when the population has to look for information in the Internet. Another reason is the growth of youth audience. However, the Internet base may go down since in crisis condition the Internet is not an article of prime necessity, other experts say.
We cannot speak of mass availability of Internet services due to technological lag in regional and unevenness of the services spread, analysts note. Thus, there are important problems that should be solved by the regulator and the market participants. Firstly, it is necessary to eliminate the monopoly of regional providers that will lead to competition and decrease of prices for Internet services. Secondly, it is important to improve the technical base to increase the speed of traffic transit.

Russia’s IT market may grow despite crisis, analysts from Gartner say

In 2009 the Russian IT market will grow by 2.7-5.7% y.o.y., analysts from Gartner forecast. In 2008 the sale were 17.23 bn USD. The growth of the market will be contributed by contracts on technical support and the remained projects on investing in IT structures.
However, the market participants are skeptic about the forecast. According to president of Verysell company Mikhail Krasnov, Gartner’s forecast is unreal since IT budgets are being reduced everywhere. On the whole in 2009 IT costs may be cut by 30 % in Russia. Foreign agencies are too optimistic in their forecasts, president of IBS Aleksey Ananyin notes. According to director general of the group of companies Armada Aleksey Kuzovkin, if a company manages to maintain the sales of 2008, it would be quite optimistic.
The growth is hardly possible if customers formed their IT budgets in roubles in the end in 2008 and in 2099 these budgets are still being reconsidered since the companies are trying to survive. The expected drop of the market is 20%. Old orders and contracts on technical support will help the companies to maintain their position on the market. The changes on the market are not expected earlier than in summer 2009. IT market is driven by technologies that help to reduce costs to companies of real business.

Akado joined the struggle with crisis
In the nearest time Akado-Stolitsa will launch the anticrisis unlimited tariff. The offer includes the service of Internet access with the speed of several Mb/sec and 28 TV channels. The tariff plan will be different from the existing economical tariff plans, which imply limitation of traffic. For example, since March first limited tariffs for services of broadband access (a monthly fee – RUB 150) have been launched by Comstar-UTS. The operator positions these tariffs as anticrisis. Akado-Stolitsa does not disclose the number of new subscribers it intends to attract by its offer.
According to the company, it is not planning to increase prices in the existing tariff plans in the nearest 6 months. On March 13th the company also cancelled the fee for connection to the Internet worth RUB 500.
The fast growth of subscriber base is not expected, analysts say. Home users are not so mobile to change their tariff plans. In Moscow, where the service of broadband access is almost free of charge, users pay more attention to content and quality of servicing. So, the quality of servicing will define a provider’s popularity. On other hand the considerable increase of subscriber base without the increase of the network capacity will inevitably lead to lower quality of servicing, analysts note. All the anticrisis actions are mostly targeted to PR and not to meeting the user’ needs, according to experts.

In March mobile phones sales may drop three times

According to the data of Mobile Research Group (MRG), in 1Q2009 the sales of mobile phones dropped by 30% y.o.y. At that the worse sales were in March, analysts note. The reason is that the holiday period was over while the economic situation is still unstable and the population’s purchasing capacity is low. The biggest part of cell phones sales is currently provided by “grey” sellers. In crisis conditions their number has increased considerably.
The decline in the mobile phones sales was fixed in the end of 2008. According to the data, provided by MForum Analytics, last October 2.5 mn handsets were sold, 15% decrease compared to September 2008.
According to experts, the drop is caused by the increase of prices for mobiles, reduction of import (40% in 1Q2009), fast reduction of crediting. Besides, the replacement period has increased considerably: previously consumers replaced their handsets once within 6-12 months and currently they are changing their mobiles once wihtin 18-24 months. In some networks the mobile phones sales have dropped by 70% compared to summer 2008, experts note.

IT market in Russia: the share of the state sector will increase by 30%
According to the forecast of IC Finam, in 2009 the share of the state in the structure of IT costs will increase by 30%. The state remains the largest consumer of IT (18% of all IT costs in 2007, 22% in 2008).
The same figures for 2007 and 2008 were mentioned by IDC. In public administration, education and healthcare IT costs are assessed at 4.1 bn USD in 2008 (21% growth). The share of IT costs in the country’s total costs was 16.9% in 2008 (1.1% decrease y.o.y.).
According to IDC, Russian structures of the public administration spent 2.96 bn USD on IT in 2008. At that the Russian IT market reached almost 24.6 bn, i.e. 12% of the whole IT market were contributed by the public administration. We remind that in 2007 the Russian IT market was equal to 22.2 bn USD.
Currently the government is one of the few customers that have not cut their IT costs. For most of the market participants the government is an interesting partner that can help maintain sales in crisis conditions. At the same time IT budgets of the state sector are being partially corrected as well. The federal special-purpose programme Electronic Russia is among the project, financing of which may be cut (by RUB 433.8 mn). The budget of the programme of electronic foreign passports will be reduced by RUB 2.77 bn in 2009.
Exerts assess differently the state sector’s preparedness to invest in IT. On one hand IT budgets of many public customers have not been confirmed yet. And even when they are confirmed, they will be obviously cut. Due to crisis IT costs in Russia have halved and even decreased three times if taking the rouble devaluation into account. Nevertheless, these technologies are among customers’ priorities. On other hand many special-purpose programmes continue to be realized in the state sector (in healthcare, in particular) and their IT budgets have not been cut.

2. Market Participants

AFK Sistema is investing in the Indian project
The Indian company Shyam Sistema Teleservices, controlled by the Russian AFK Sistema, has launched its network in several states of the country. Currently Shyam’s network is working in the states Tamil Nadu and Kerala, apart from Radjastan. Construction of networks and infrastructure is carried out in accordance with the company’s strategic plan.
MTS brand, promoted by Shyam, has also appeared in India. The brand has been used in the frameworks of the franchising agreement between MTS and Shyam, since the end of March. Besides, Shaym is planning to put in operation cellular networks in Western and North-Eastern Bengal in 1Q2009. The company obtained licenses for provision of mobile communications services of CDMA standard in 2008.
The RF government is currently considering the question on support of Sistema’s project in India. RUB 23.73 bn for the acquisition of the shareholding in Sistema’s Indian asset were built into the draft amendments to the federal budget for 2009.

Experts mention the diverse attractiveness of the Indian market for cell operators and projects in this field. On one hand cell companies are attracted by low penetration of cell communication while the population is huge. This may provide extensive development within a long period of time without additional investments in innovative services and aggressive marketing. On other hand ARPU is quite low and the competition is strong on the market.
According to analysts, the RF government’s plans on investing in the Indian market in cooperation with AFK Sistema are doubtful due to the unstable economic situation in Russia. Since Sistema has big debts the outlooks of the project development are vague. Perhaps, Sistema is ready to wait for taking the leading position on one of the most promising market in the world after crisis.

Megafon is planning to spend 200 mn USD on the monobrand network development

Megafon’s authorities confirmed the programme of cell retailing business development. So, the operator is planning to spend 200 mn USD on development of its monobrand network within a year and half. In particular, there are no free companies to be acquired on the market of cell retailing. According to Megafon’s board, the stated amount is enough to develop the operator’s own network.
The operator needs 1.5 thousand salons to maintain its competitiveness. The company only intends to realize its contracts in its own and independent networks. Besides, Megafon’s authorities are not planning to pay royalties to retailing companies, which sell Megafon’s services.
According to experts, in crisis conditions Megafon’s strategy of cell retailing development is quite logical and reasonable. Analysts have different opinions on the amount of 200 mn USD, the operator intends to spend on its own network development. The planned amount will be only sufficient for maintenance of shops, some experts believe. However, according to other experts the amount is quite enough and it conforms to the market price. Experts also point to the positive aspects of the own cell retailing creation by the company. Firstly, monobrand salons may only provide sales of Megafon’s contracts and the demand for them will increase. Secondly, this will allow to enhance the quality of servicing. Besides, it is necessary to provide constant control over dealers, who undertook the sell Megafon’s contracts. Moreover, all the biggest cell retailing networks have been already acquired by other Big3 operators and thus, Megafon’s products sales are currently more complicated.
Megafon has been still interested in the acquisition of the third biggest cell retailing network Cifrograd so far. In case the operator acquires the network, it will be able to outstrip its competitors. Development of the own network and partner salons would become the most beneficial decision for Megafon, experts note.

The price for Rostelecom’s preference shares increased by 30%.
Since March 24th the price for Rostelecom’s preference shares has increased by more than 30%. At that the general trend of the market was dropping. The main reason for such dramatic changes is investors’ confidence that Rostelecom will become the centre of assets consolidation within Svyazinvest’s reorganization. The company may be joined by all interregional companies (MRKs) of Svyazinvest.
90% of Rostelecom’s voting shares are controlled by the government. In case of the reorganization owners of the preference shares will be able to take part in the vote at a meeting of shareholders. The preference shares accounts for 25% of Rostelecom’s chartered capital, so when voting on the reorganization the number of the governments voting shares decreases to 68%. To adopt the reorganization scheme the government needs 75% of votes.
Recently the investment bank KIT Finance has been engaged in the redemption of Rostelecom’s shares on exchange. However, 40% of the operator’s shares, controlled by KIT Finance, have been transferred to VTB, Gasprombank and Sberbank.
The rate of Rostelecom’s preference shares is linked to decision making on the holding’s reorganization. The most probable is the reorganization, the bigger is the demand for the operator’s preference shares. In case of the reorganization, owners of these shares will obtain the right to vote at meetings of shareholders and expect for further increase of the share price after Rostelecom is joined by Svyazinvest’s MRKs. The government may be also interested in redemption of Rostelecom’s preference shares since it needs quite a big shareholding to pass its decision at the meeting of shareholders.
Experts also note possible dividends on Rostlelecom’s shares, which may drive investors to acquire the shares. The company possesses enough money and, according to the statements, the dividends may be quite attractive in terms of money. On other hand, Rostelcom’s privileged shares as well as the ordinary ones are overpriced, experts say.

Svyaznoy and MTS: the right to Betalink
Betalink’s salons may be transferred to Svyaznoy. The retailing company currently possesses the right to rent Betalink’s shops (200 points). Besides, it is necessary to mention, according to the contract these salons will be managed by MTS. The operator intends to found a subsidiary, named RTK, which will govern cell retailing business. However, Svyaznoy is planning to develop its network and is interested that the right to Betalink’s salons rent belongs to it. MTS’ authorities are planning to expand the network of cell retailing salons to 2.5 thousand to remain competitive among other participants of the market. Currently the operator owns 1.7 thousand shops. As of the end of 2008 Betalink’s network contained around 750 salons. MTS pretends to 30% of the retailing company’s salons. However, we remind currently Betalink’s business is frozen due to the company’s debts to suppliers.

Analysts have different opinions on the necessity of Betalink’s salons transfer to MTS after the term of the contract with Svyaznoy is up. According to some of them, shops that are located more beneficially, will be transferred to Svyaznoy. Betalink’s shops are of interest to MTS as well, other experts say. The operator is planning to expand its network and this acquisition would be necessary. Besides, the most attractive shops in terms of sales would allow the operator to increase its competitiveness among of the market participants.
Experts also remind Svyaznoy’s plans on its network increase will not affect the plans of MTS. After the contract term is up, Betalink’s shops will be probably transferred to MTS RTK, which may also get the control over Svyaznoy’s shops in future as well.


PeterStar reported for 2008
The operator PeterStar published its results for 2008. The company’s revenue was RUB 2.8 bn, 9% growth y.o.y. The operator’s net profit reduced by 15% to RUB 727.7 mn. According to the report for 2008, Peter Star did not take into account its subsidiaries’ results, when counting the revenue and net profit. The company’s profitability was 27% in 2008. PeterStar is included in the group of companies Synterra, operating in the North-Western federal region of Russia.
The most of the operator’s revenue was contributed by services of the Internet access and data communications (27% growth y.o.y.). In the operator’s total revenue the share of business–telephony was 26% and the share of interoperator services was 11%. Over a half of PeterStar’s contracts fell to corporate clients.
In 2008 PeterSTar expanded its business due to contracts with big corporate structures. The operator launched the network of data communications for Raiffeisen bank’s association of subsidiaries, expanded the network of cash dispensers and organized data communications for VTB. Last year the operator’s services were also used by the State Hermitage, the State Academic Maryinsky Theatre, the St. Petersburg State University.
In 2008 PeterStar made transactions on independent companies acquisition. The operator acquired Gsinternet and Evro-Telecom companies from private investors. The companies provide services in Kaliningrad. In July 2008 PeterStar acquired TD-Telecom, a north-western operator, and the Internet-provider Inar in October.
Crisis affected the company’s investment plans. Financing the project on WiMAX networks development was partially postponed to 2009. PeterStar had intended to construct 23 WiMAX mini networks in towns with the population of less than 100 thousand. Afterwards the operator was planning to develop WiMAX networks in all areas of the North-Western federal region, where the operator provides its services (02/04/2009)/
According to experts, PeterStar’s results for 2008 are quite positive, though they remind the influence of crisis was not so big in 2008. The operator’s business effectiveness should be assessed this year. Currently PeterStar is quite a stable company with good business outlooks. The company declared the increase of compensations to its employees that may contribute to the further strengthening the operator’s position of the market of the North-Western federal region.
The negative aspect for the company is reduction of investment costs. Postponing the terms may hamper the company’s development, though the operator’s major business will not suffer from this. PeterStar’s consolidation with Synterra was also assessed positively since Synterra had helped the operator make big contracts with state-owned companies and institutions.

Sky Link’s anticrisis offer
Sky Link offers subscribers of Moscow and the Moscow region a new service: a fixed wireless phone with a city number in the frameworks of the tariff plan “Unlimited City”. The monthly subscriber fee will be RUB 345 for calls to Moscow numbers. The price for a call to a number of the Moscow region will cost RUB 3 per minute. The call for cell phones will cost RUB 1.5 per minute. The company’s authorities position this project as a profitable offer to users in crisis conditions. At that the new tariff is not targeted to compete with other federal operators, which provide services of fixed-line communications, according to Sky Link. “Unlimited City is most probably an alternative offer to subscribers, who live in areas without fixed-line communications.
The company’s management is not planning to carry out a special advertising campaign to promote the new tariff plan since it is profitable enough to promote itself. According to Sky Link the service will be interesting to the population (03/04/2009)/
Sky Link’s offer will not be in great demand and will not be able to compete with services, provided by operators of fixed-line communications, experts say. In particular, the offer may be only interesting to summer residents, users from areas without fixed-line communications and corporate clients.
According to experts, this tariff plan will allow subscribers to adjust their costs since its prices are almost the same as those of fixed-line operators. So, Sky Link may become a relative competitor of federal companies.

Euroset’s offer was only accepted by Vimpelcom
On April 1st of 2009 the term of Euroset’s offer on sales of contracts and reception payments was up. The offer was only accepted by Vimpelcom.
In the beginning of 2009 Euroset announced the rules, according to which the company was ready to work with operators in accordance with the decision of the Federal Antimonopoly Service. The rules of work are to be equal for all cell companies. This condition was confirmed by FAS while considering the petition from Alexander Mamut’s Rambert Management Ltd. about the acquisition of 100% of Euroset and the further sale of 49.9% of the company to Vimpelcom.
Another Big3 operator Megafon declared it wanted to sign Euroset’s offer as well. MTS is not going to sign the offer since the company does not agree with the prices, set by the retailing company. Besides, MTS refused to give a goods credit for its contracts sale. In exchange for 170 mn USD Euroset had guaranteed to sell 7.5 mn of MTS contracts within a year and half. Euroset had offered 25.1% of its shares as security of the transaction. However, the operator refused the transaction. The similar agreements are now being negotiated with Megafon and Vimpelcom, but the transactions have not been completed yet.
According to experts, the competition between operators has turned into the competition between retailing companies. Previously operators fought for new clients with new services development and provision. Currently, the list of services is increased and extensive development is complicated. So, cell companies have staked on promotion of retailing networks they control to provide the growth of sales. Perhaps, Megafon and MTS will cooperate with the retailing company, though they will focus most on their own retailing networks development.
According to experts, there are not practically independent retailing companies on the Russian market. The new model of the market is being forming currently and this forming coincides with economic crisis. It is still unknown whether we will get the European-American model when a phone is sold with a contract of a particular operator or there will be something new.
Sitronics’ entering the Indian market
The subsidiary of the Russian company Sitronics, Sitronics India, was registered in India. The new company will enter the Indian market with its products for the country’s telecommunications and transport sector. Besides, Sitronics India intends to offer its solutions to the Indian power bodies and educational system.
The Russian concern Sitronics has already worked on the Indian market. In the end of 2008 the company made the transaction with the Indian operator Shyam Telelink, controlled by AFK Sistema. The transaction concerned the delivery of radio relay equipment across India. A subsidiary opening was planned by Sitronics in India though the company does not disclose its investments in the business development in India.
Timur Vekilov has been appointed director of Sitronics India. Previously he held the position of technical director of Sitronics Information Technologies. The head office of Sitronics India has been already opened in New Delhi.
However, experts assess negatively Sitronics’ initiative of the Indian market entering. The company will not be able to compete with multinational holdings and even small regional participants have quite strong positions and are not going to let someone have them. Sitronics may certainly cooperate with Sistema’s subsidiary Shyam Telelink, but CDMA standard, promoted by the company, does not have outlooks of development across India. Despite the opinion that India is a promising market, Sitronics has already lost time for its development since many companies entered this market long ago and they feel quite confident there. To compete with them Sitronics will have to invest enormous amount of money, the company does not possess at the moment.
According to experts, the foundation of Sitronics’ subsidiary in India is first of all targeted to maintenance of the bilateral relations between the two countries’ authorities. Sitronics’ project may contribute to making contracts in the field of defense and administrative regulation. Perhaps, the project is a trial project, which is targeted to estimation of other Russian companies’ opportunities on the Indian market.

Tele2 responds the crisis with low prices
In April of 2009 Tele2 issued another advertising in the frameworks of the advertising series “Family”. The purpose of the advertisement is to emphasize advantages of the operator-discounter in crisis conditions. Tele2 offers subscribers cheap tariff plans and declares about high quality of its communications and services provided.
According to experts, these features of the operator allowed it to take a share among other participants of the market. In crisis conditions it is quite important for a subscriber to call on the phone as much as before at the same prices. However, cutting prices for the whole range of cell communications services Tele2 still focuses on quite a narrow auditory – low-income population. According to experts, Tele2’s marketing strategy may be quite effective and will not allow to lose the existing subscribers at least. Tele2’s auditory are young people, aged 26, housewives and the elderly. In the frameworks of this auditory, the company’s “exotic” marketing decision may be considered reasonable.
Another Tele2’s objective is its subscriber base increase, analysts say. Experts doubt that Tele2 will be able to attract a lot of new clients from Big3 subscriber base, though they do not deny that in conditions when prices are constantly growing some subscribers may change a cell operator to save money. However, Tele2’s cell network covers the small area in Russia and this affects efficiency of the operator’s services advertising.

Interregional companies may join Rostelecom
Svyazinvest’s interregional companies (MRKs) may join the operator of long-distance communications Rostelecom (51% of the operator belong to Svyazinvest). A lot of mechanisms of the project realization are now being worked out, but the main thing is that MRKs will be redeemed based on their market estimates, not fair ones. And taking into account that by the end of March the decision on the redemption of 40% of Rostelecom by Vneshtorhbank will be taken and 90% of the operator will belong to the government, any consolidation of MRKs’ in Rostelecom will be profitable for the government.
However, in case of Svyazinvest’s reorganization its creditors may demand advanced repayment of MRKs’ debts. We remind as of January of 2009 the total debt of MRKs was RUB 144.6 bn.
Previously the holding privatization was the major option of reorganization. This option was being discussed within 10 years. According to the Ministry of Economic Development, they considered opportunities of the holding’s managing company elimination, merger of MRKs, creation of a unified operator on the base of MRKs, exclusion of Rostelecom from the holding and Svyazinvest’s privatization without the operator. They also discussed Svazinvest’s possible consolidation with Rostelecom and the both companies’ privatization. In the beginning of March Minister of Communications Igor Shegolev set the objective to work out a concept of Svyazinvest’s development by the end of March.
MRKs’ consolidation on Rostelecom’s base, based on its current market price, is less preferable for the companies’ minority shareholders, analysts say: the total value of 7 interregional companies is RUB 1.267 bn on RTS, while Rostelecom’s price is RUB 6.397 bn. In case of the consolidation the minority shareholders will be offered to redeem shares at the price, which is unprofitable for them. Currently MRKs’ price is two times as less than the price of similar companies, traded in other countries. According to experts the fair price for MRK is 3-4 times as much. The matter of Svyazinvest’s reorganization is the major driver of MRKs’ securities growth.

Megafon is able pay its first dividends
On April 27th Megafon’s board of directors is considering the question on distribution of the operator’s dividends for 2008. In case the decision is positive, the question will be submitted to the meeting of the company’s shareholders.
So far, Megafon has been the only Big3 operator, not paying dividends. Megafon has not published its financial statement for 2007 yet. According to the results of 2007 the operator’s net profit was 1.384 bn USD. Over 9 months of 2008 net profit has come to 1.255 bn USD.
Megafon’s competitors, Vimpelcom and MTS, have been already paying dividends for several years. According to the dividend policy of MTS, the company spends no less than 50% of its net profit on dividends. According to the results of 2006 and 2007, the company spent 60% of net profit on dividends, i.e. 747 mn USD and 1.24 bn USD accordingly. Vimpelcom spends no less than 25% of net profit on dividends. In 2006 and 2007 the operator’s dividends were 40% of net profit, i.e. 333.4 mn USD and 587 mn USD accordingly.
According to experts, it is difficult to forecast what Megafon’s net profit in 2008 is and how much the operator will spend on dividends since the company is non-public. The amount of the operator’s dividends will be defined by its shareholders. Currently Megafon’s position is much more beneficial than those of Vimpelcom and MTS. According to experts’ estimates, in 3Q2008 Megafon possessed 411 mn of free money and 1.4 bn USD were invested in short-term projects.


Vimpelcom will include profit worth 1.73 bn USD from Telenor in its statements and pay the profit tax

The conflict between Vimpelcom’s shareholders, Telenor and Farimex, may impact the operator’s financial results. In the statements for 1Q2009 the company will have to include the profit worth 1.73 bn USD, it will obtain from Telenor in accordance with the court decision.
The decision of the Omsk Court regarding the recovery of 1.73 bn USD in favour of Vimpelcom on Farimex’s claim will come into effect on March 2nd. Besides, in April Vimpelcom is to pay the tax on non-realized income worth 20% of the compensation and VAT.
According to analysts, after the decision of the Omsk Court had come in force, Vimpelcom obtained the non-realized income worth 1.73 bn USD. The operator is to include this income in its statements for 1Q2009 already and pay the profit tax (20%) and VAT (18%) in April. Thus, the company will pay the tax services 657 mn USD.

Synterra is negotiating the acquisition of 50% of MTT from Eventis Telecom and Danmax
After acquiring 50% of MTT from AFK Sistema Synterra is currently negotiating the redemption of the rest 50% of the operator from the telecoms holding Eventis Telecom and the offshore company Danmax (the companies own 25% of MTT each). The asset will be redeemed to the Cyprus Cladin Investments, a Synterra’s mother company.
In autumn of 2007 Synterra declared about its interest to MTT. Last spring Sistema’s Board of directors approved the sale of 50% of MTT to Synterra for around 400 mn USD, but the transaction failed. Last summer FAS approved Synterra’s petition for the acquisition of 100% of MTT. Then the asset was assessed at 640-720 mn USD by analysts.
According to experts, if Synterra arranges the acquisition of the rest MTT’s shares, the amount of the transaction will be comparable to the price, paid to Sistema by the operator. Thus, MTT may be assessed at around 100 mn USD. After the transaction the operator may decide to consolidate all of its assets, operating on the mass market, and create a unified company on the basis of MTT.

AFK Sistema may give VTB 51% of Sistema-Hals’ shares

AFK Sistema may give VTB 51% of shares of OJSC Sistema-Hals. The procedure of the shares transfer is being considered. The shareholding may be corrected since the negotiations between the corporation and the bank have not been completed yet.
As of the end of September 2008 Sistema’s total debt was 9.4 bn USD. However, the total amount of the debts to VTB is not disclosed by the company. At that the total amount of two credits, given to Sistema-Hals, is 700 mn USD. Besides, VTB actually financed almost fully the acquisition of shares of enterprises, included in the Bashkirian fuel and energy complex by the corporation. In 2005 AFK Sistema had spent 600 mn USD on this and obtained blocking shareholdings of the enterprises of the Bashkirian fuel and energy complex: Bashneft, 4 oil processing plants of the republic, Bashnefteproduct and Bashenergo. The money for the purchase had been given by VTB.
According to analysts, the market price for 50% of Sistema-Hals’ shares is 61.69 mn USD. But the transaction will be non-monetary. The corporation had to give the shares of Sistema-Hals to the bank to regulate the security on the credits, given for the purchase of the enterprises of fuel and energy complex by AFK. Otherwise, the bank may obtain the shares of the Bashkirian fuel and energy complex. The control over these enterprises is a political question for Sistema. Currently the corporation is negotiating about obtaining the total control over the Bashkirian enterprises. Being the key shareholder and creditor of the developer the bank will be able to restructure the corporation’s debt and obtain the maximum profit for the shares after crisis.

Vimpelcom may take possession of Svyaznoy
Vimpelcom owns an option for 51% of the second biggest cell retailing company Svyaznoy (1752 salons). Svyaznoy’s major shareholder Maxim Nogotkov (82% of shares) and VIPBV company (100% belong to Vimpelcom) made the agreement, according to which Svyaznoy Logistics (an operating company of the group of companies Svyaznoy) undertook to promote Vimpelcom’s services and products in Svyaznoy’s retailing network. Simultaneously Vimpelcom acquired 1 share of Svyaznoy for RUB 10 000. However, if the operator gets the right to exercise call option, Nogotkov will be able to redeem this share back.
VIPBV can only exercise call option in case the share of contracts, sold by the retailing company, decreases to 45% and less in Russia and 35% and less in any of the operator’s subsidiaries. The other cases mentioned are bankruptcy of Svyaznoy Logistics and unauthorized sale of Svyaznoy’s shares without preliminary written agreement of VIPBV. According to the contract, the retailing company is assessed at 8.7 EBITDA minus net debt. The contract term is three years. Svyaznoy Logistics obtained 100 mn USD as an advance payment. One of the main conditions of the contract is prohibition to sell or pawn Svyaznoy’s shares to Vimpelcom’s major competitors (MTS and Megafon), the cell discounter Tele2 and Svyazinvest by Maxim Nogotkov. If VIPBV gets the right to exercise its option Vimpelcom will become a co-owner of the two Russia’s biggest retailing companies.

Synterra increased its revenue

In 2008 Synterra’s revenue under RSBU increased by 57%, exceeding RUB 7.8 bn. At that over the reported period the company’s net profit reduced by 22% to RUB 1.7 due to the rouble devaluation.
Without taking into account the company’s currency debt devaluation Sunterra’s net profit increased by 18% to RUB 2.6 bn. In 2008 OIBDA was RUB 3.4 bn and OIBDA profitability was 44%. To compare profitability of Comstar-UTS and Rostelecom was 41.8% and 26% accordingly, according to the results of 9 months of 2008.
Most of Synterra’s revenue was contributed by services of channels leasing (64 % of the total revenue, growth by RUB 1 bn). 20% of the operator’s revenue were contributed by data communications services, VPN and Internet access provision (4.7 times growth).
73% of the operator’s income were contributed by its work on the interoperator market, 20% and 7% were contributed by provision of services to government structures and corporate clients accordingly.
According to analysts, Synterra’s growth rates are among the best on the market. First of all, this is caused by the operator’s big projects’ realization and subscriber base increase. On other hand, the rates of net profit growth lagged behind the company’s revenue, i.e. effectiveness of the company’s work went down. There are not any details about the company’s costs, but they may be linked to the construction of main-line network. Thus, the company has a good chance to maintain good rates of growth in the nearest future.

Megafon will increase the speed of subscriber GPRS traffic transmission
The mobile operator Megafon has increased the speed of subscriber GPRS traffic transmission by 30%. The company has launched the federal project GPRS Optimizor, which allows to regulate traffic due to the solution, provided by OlenCom Electronics.
According to experts, GPRS-Optimizor may become an alternative to 3G networks. On the whole, despite the increase of data transmission speed, they do not speak of the full replacement of 3G. However, in Moscow, which lacks frequencies for 3G, GPRS improved may be in demand and become one of the alternatives to 3G communications.

Eldorado started to sell services of mobile communications

Eldorado started to sell services of cell communications under the own brand in Moscow. The company’s partner is Matrix Telecom, providing mobile communications services as MVNO on the network of Megafon-Moscow. Matrix buys traffic and numbers from Megafon, while it possesses the own call-centre and billing. There is no subscriber fee in Eldorado’s tariff plan and calls for Megafon’s subscribers are cheaper by 50% than others. By the end of 2010 Eldorado expects to provide service to 100 000 subscribers. It is more than Matrix’s subscriber base (75 000 subscribers), though the operator has been working since 2004.
Apart from Matrix several other virtual operators work on Megafon’s network. They are Central Telegraph, Country-com and the operator’s own project “Prosto dlya obsheniya”. Eldorado and Matrix will share their incomes equally.
According to experts, Eldorado’s projects cannot be considered a virtual cellular network. It is just a tariff plan, which is only sold in Eldorado’s shops. It can be called a subvirtual operator, analysts say. MTS has been also selling its contracts through the retailing network Auchan since the end of 2008. According to the operator, within a month around 10 000 subscribers connect to the operator on average . Such projects will hardly appear in regions. Prices for cell communications are higher in Moscow, so the operator can share its incomes with others.

MTS wants to prolong the credit worth 630 mn USD

MTS is negotiating with banks about restructuring the tranche of 630 mn USD of the syndicated credit, obtained in 2006. The tranche is to be repaid in May 2009 and MTS asks its creditors to prolong the term for 3 years on condition of the interest rate increase. MTS carried out meeting with the banks – participants of the syndicate in London. In case they come to the arrangement, the increase of the interest rate may be less than 8%.
We remind in April of 2006 MTS signed the agreement on obtaining the syndicated credit worth 1.33 bn USD. The credit was divided into two tranches. The first 630 mn USD tranche was given for a 3-year term at the rate of LIBOR + 0.8%. The term of the second tranche of 700 mn USD is 5 years at the rate of LIBOR+1% in first 3 years and LIBOR +1.15 later. The credit was organized by ING, Credit Suisse, ABN AMRO, BNP Paribas, HSBC, Raiffeisen, WestLB, Bayerish Landesbank and Sumonito Mitsui.
Due to the money, the operator possesses, it will not be a problem for the company to repay the debt in accordance with the current schedule, analysts say. In crisis conditions any company tries to secure as additional money provides freedom regarding capital costs and acquisitions. As of MTS there may be acquisitions of regional operators as well as transaction in retailing or other neighbouring fields. Or perhaps, MTS needs a lot of money on the accounts for some big transaction, for example, the acquisition of Comstar, which has been discussed for a long time already. On other hand the transaction on Comstar is linked to Svyazinvest’s shareholding.

MTT sold the shareholding of the British WaveCrest
MTT declared the sale of 66% of a British operator of IP-telephony WaveCrest to the second shareholder of the company, a British MARR T&T. The amount of the transaction is not disclosed. 66% of WaveCrest were acquired by MTT from AFK Sistema for 40.6 mn USD in January 2007.
AFK Sistema acquired the operator for 35 mn USD in October 2006. WaveCrest possesses communications centres in Great Britain, the USA, France, the Netherlands, Belgium, Italy, Germany, Switzerland and Hong Kong. In Russia the company’s key business was international traffic transmission.
According to experts’ estimates, in 2008 the Russian market of international traffic transmission and transit reached 580 mn USD or 550-600 min per months. Around 50% of the market is controlled by Rostelecom. MTT’s share is around 10%. On the whole this business is low margin and complex. Running the business, following all requirements of the Russian legislation may be only possible due to the synergetic effect with other businesses of the company. Experts wonder why it is necessary to sell WaveCrest now since the asset fitted into Synterra’s business. MTT’s management did not develop the business of WaveCrest and the asset was probably considered as non-profile, experts add.

Euroset may pledge 25.1% of the business to Megafon

As the negotiations between Euroset and MTS regarding the operator’s share of 35-40% in the retailing company’s sale have been delayed currently the similar conditions are being discussed with Megafon: 7.2 mn connections of new subscribers within a year and half for the royalty worth 167-173 mn USD.
Megafon will pay step-by-step: at first the operator will make an advance payment for 4 quarters and this money will be secured by a pledge of 25.1% of Euroset (Vimpelcom has already obtained an option for this share in Euroset). Since Vimpelcom paid 226 mn USD for 49.9% of Euroset last October the retailing company’s pledged share can be assessed at 113.2 mn USD.
MTS continues the similar negotiations with Euroset. On March 5th the operator’s board of directors also approved commercial conditions of the potential transaction, but the parties have not agreed about secure of the money yet. MTS did not want to take Euroset’s share as a pledge.
According to experts, last year Euroset sold 15 mn SIM cards, 12.6 5mn of which were sold by the company’s Russian subsidiaries. The share of MTS was around 45% (Vimpelcom – 26% and Megafon – 22%). However, within a year the operators’ shares were being changed: MTS’ sales were 34-49% (Vimpelcom – 15-49% and Megafon – 11-30%). The agreement with Euroset on the sale of 7.2 mn contracts will allow Megafon to fix its share in the company’s sales on the level of 35-40%. If Megafon makes the agreement MTS will become a donor of subscribers for other operators.

3. Tension Lines

Byelorussian MTS refused to cooperate with Euroset
The contract, made by the retailing company Euroset and the Byelorussian MTS, has been terminated. 49% of the Byelorussian operator belong to the Russian MTS, 51% are controlled by the country’s government. MTS initiated the contract termination, referring to the weak sale of contracts through Euroset. The share of MTS contracts’ sales through Euroset was around 9%, but this August it has decreased to 5%. Since March 12th the delivery of SIM cards to Euroset’s Byelorussian offices has been stopped.
According to Euroset, Megafon limits on purpose its contracts sales through those salons of Euroset, which are located close to the operator’s monobrand shops.
In Byelorussia Euroset possesses 71 salons of communications. The company’s Russian competitor Svyaznoy has 69 shops. MTS possesses much more salons (around 670) and the operator’s share in terms of subscriber base is 52% on the Byelorussian market. Although in October of 2008 Euroset was acquired by Vimpelcom, the retailing company is to provide equal access to contract sales for other operators, according to FAS’ resolution. This resolution does not apply to Byelorussia, though, on other hand, Vimpelcom does not provide communications services in the country.
According to experts, MTS’ refusal to cooperate with Euroset is more unprofitable for Euroset, which loses the royalty for subscribers connected. MTS will continue selling its contracts through the network of its monobrand shops. Currently the cooperation renewal is impossible as it implies additional costs for MTS. On other hand, Euroset tries to fulfill the conditions of all its contracts made and work well on the market. MTS’ refusal to cooperate will certainly affect the operator’s sales and make the company carry out more aggressive marketing strategy in Byelorussia.
The fact that Euroset belongs to Vimpelcom also impacted the relationships between MTS and Euroset, experts add. While each Big3 operator tries to maintain a level of their sales without outside help, agreements with other retailing companies only imply additional costs and hamper development of the operators’ networks.

Bee Line is increasing tariffs for traffic transit for operators
Bee Line-Business, a company, managing fixed-line and DLD/ILD communications of Vimpelcom, has decided to increase tariffs for traffic transit for operators, which rent its networks, and companies, which signed an agency contract with Bee Line-Business. Besides, the increase of prices for DLD/ILD communications concerns Ukraine as well. According to the company’s authorities, the reason is that the tariffs between the operators were determined in roubles and it is reasonable to bring them to the average level, accepted on the market.
Some operators, renting Vimpelcom’s networks, increased prices for communications. The increase of prices concerns mainly international calls. Bee Line-Business’ management does not exclude the possibility of rebates introduction for the companies, which cooperate with it. However, the company notes, the decision to raise tariffs for DLD/ILD communications depends fully on the operators.
The world economic situation has corrected the pricing policy regarding the Ukrainian partners as well. So, from mid April 2009 Vimpelcom will make changes in the prices for international calls, depending on the currency rate grivna-dollar. We note Vimpelcom’s competitors’ prices for DLD/ILD communications are determined in dollars. So, the operator has decided to set market average prices for its services provided.
MTT and Rostelecom, operators of long-distance communications, are not going to increase prices for DLD/ILD communications for their subscribers. On contrary they are introducing special tariff plans for their users.
According to experts, Vimpelcom’s actions is reasonable reaction to the changes on the telecoms market. Operators will increase their tariffs until the demand for their services starts dropping. However, the companies may lose clients as well as companies-agents, using the operator’s traffic. There are two reasons for Vimpelcom’s decision. Firstly, most of the services are provided for foreign currency. Secondly, Vimpelcom has big debts to the creditors that makes the company look for money to maintain its business profitability.
The increase of tariffs for operators, which rent traffic of the big participants, will strengthen competition between them. Besides, due to this small companies may lose advantages and even leave the market. Thus, such big operators of fixed-line communications as MTT and Rostelecom will take stronger positions on the market.

The Norwegian Government interfered in the conflict between Altimo and Telenor

Russian bailiffs gave the Ministry for Justice and Police of Norway the document, containing the information about the beginning of execution regarding Telenor. The Norwegian department planned to send the documents to the County Court of Oslo. However, it did not. According to Farimex’s representatives, the Norwegian government keeps intentionally the documents and thus, interferes indirectly in the conflict between Altimo and Telenor. Besides, Farimex’s authorities accuses the Norwegian government of violation of the “Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters”, as the Royal Ministry of Justice and Police of Norway is the central body, which must accept requests about the service of documents from the contracting states, including Russia.
We remind that 29.9% of shares, owned by the Norwegian holding Telenor, were arrested because of the non-execution of the verdict of the Omsk Court about the refund of losses to the cell operator Vimpelcom (1.7 bn USD). Vimpelcom’s representatives had gone to the law, accusing Telenor of preventing the company’s entering the Ukrainian market. Primarily the sum of Vimpelcom’s losses was equal to 2.8 bn USD. After Telenor’s appeal to 8th Omsk Arbitration Court the fine was reduced to 1.7 bn USD. Currently the Norwegian holding can solve this problem without losing a part of the asset in Vimpelcom, if the company pays the fine or submits the guarantee from the head company to the court. So, the court may suspend the resolution execution. (06/04/2009)/
According to analysts, the preliminary conclusions on the intentional keeping the documents are impossible. For example, the documents could not conform to the standards of documents circulation in Norway. In particular, the County Court of Oslo could be inappropriate body to service the document to Telenor. Besides, under the Convention, the state-participant has a right to service a document in accordance with its normative base. Non-execution of the Russian court’s resolution by Telenor is advantageous for the Russian party since the Vimpelcom’s shares arrested, owned by Telenor, may be transferred to Altimo, which could benefit from division of assets on its own conditions. In case the Norwegian government does not have valid reasons for the documents keeping, we can speak of intentional interfering of the government in the conflict between the two companies. If Telenor does not pay the fine, its shares will be offered for competition. That’s why Vimpelcom shares were arrested as they act as a guarantee of the payment.
The Russian legal proceedings seem unreliable to European colleagues due to its commitment, experts say. This situation is hardly possible for the EU participants. However, the Norwegian government may use some bureaucratic cavils to give Telenor time to respond Altimo

The conflict between MTS and Euroset may be transferred to court
MTS’ authorities intend to recover the debt from Euroset. The operator informed Euroset’s management that the retailing company’s debt is currently equal to RUB 1.1 bn. RUB 500 mn of the total sum is the debt on the advanced payment, carried out in 2008. RUB 325 mn is the debt on subscribers’ payments receiving and RUB 270 mn is the debt on realization of iPhones provided. Euroset also registered the counterclaim worth 740 mn USD the operator had not paid for services provided before and included in the dealer contract. The further development of the conflict may lead to court proceedings.
We remind in summer 2008 the parties made the dealer agreement, in the frameworks of which the retailing company obtained the advance payment worth RUB 700 mn. MTS’ authorities believe it is possible to settle the matter ex curia. However, according to experts, MTS’ conditions are quite tough. The operator has set a 5-day term for the money transfer. Than Euroset will have to pay a fine worth 25% of the debt and MTS will get a right to demand urgent offset of the debt. Concerning the payments on subscribers payments and the sales of iPhones, they have to be made immediately in a day when the notice is received. For each day of delay Euroset will have to pay the penalty worth 0.5% of the total sum. Thus, over a week the debt to MTS may increase by RUB 1.6 bn.
Primarily MTS’ claims against the retailing company had been assessed at RUB 420 mn, but Euroset did not make the payment on time. Within the conflict the dealer agreement on the operator’s services promotion was terminated unilaterally and on April 4th the operator’s subscribers’ payments stopped to be received in Euroset’s salons.
Terminating the agreement with Euroset MTS may lose significant funds on connections and further payments of subscribers. Currently, around 13% of connections on MTS tariff plans are carried out via Euroset and around 3% of subscribers’ payments are made through the retailing company’s salons.
According to analysts, the conflict may lead to court proceedings between the companies. The dealer agreement, made by the two companies, may become a basis to start legal settlement of the matter. However, not all conditions, laid down by MTS’ authorities, seem realistic to experts. The operator is going to use the current situation to fight with competitors and promote its services of cell communications on the telecoms market since the conflict is widely reported in mass media.

It is early to forecast the conflict development, experts say. The conflict may be settled ex curia. However, MTS has reasons to go to the law: the parties’ mutual obligations, fixed in the contract, a part of which was not fulfilled. MTS’ subscribers suffered most of all from the protracted conflict between the companies since they cannot make payments in Euroset’s salons and connect to the operator’s network anymore.

SPRF accused Euroset and Vimpelcom of violation of the resolution of FAS
The Federal Antimonopoly Service was sent the application from Petr Shelisch, chairman of the Union of Consumers of Russia (SPRF), where Vimpelcom and Euroset were accused of non-execution of FAS resolution. FAS is considering the application. So, according to head of SPRF, Euroset and Vimpelcom carry out discriminating policy regarding operators of communications, overstating commission fee for their services sale.
We remind after 49.9% of Euroset had been acquired by Vimpelcom from Alexander Mamut FAS decreed that within 3 years the retailing company had to remain a multibrand network and prohibited the company to give priority to any communications operator. Currently Euroset is setting monopoly-high prices on the market. We note Euroset is the leader on the market of cell retailing. According to SPRF, the retailing company prevents alternative operators from entering the telecoms market.
There is an unpublished agreement between Euroset and Vimpelcom on active sales of Vimpelcom’s contracts, analysts believe. Probably, FAS will investigate this incident, experts say, but Vimpelcom will find enough arguments against the accusation of discriminating activity. For example, MTS terminated the agreement with Euroset on its own initiative and the retailing company continues providing services to other operators: Megafon, Motiv, SMARTS and Tele2.
According to experts, giving priority to one of operators is quite an ordinary thing in retailing. Besides, FAS did not placed any limitations regarding MTS, which also redeemed retailing companies. Vimpelcom has certainly acquired a big participant of the cell retailing segment, which may affect commodity markets of other participants. Thus, Euroset has to adhere to the limitations, placed by FAS.

Cifrograd is close to bankruptcy
Cifrograd is close to bankruptcy. The company’s total debt to cell phones suppliers and banks is equal to 120 mn USD, according to the preliminary estimates. Nokia, Samsung, Sony Ericsson and Motorola have already terminated the contracts on their goods delivery with the company. The company’s salons are being closed everywhere. Cifrograd is not the only retailing company, which becomes a bankrupt. Previously Dixis and Betalink left the market. The main reason for their bankruptcy was inability to repay credit debts in crisis conditions.
We remind the first debt worth RUB 381 mn was demanded from Cifrograd by Samsung. In the end of 2008 Motorola stopped the delivery of its products to the company, accusing it of non-execution of the obligations of the contract. Cifrograd’s biggest debt is to Nokia (around 40 mn USD). In such complex situation the company’s management hoped to sell its control shareholding to Megafon. The companies were negotiating from the end of 2008, when Megafon acquired one share of Cifrograd that gave the operator the advantageous right to acquire the company. Then Megafon obtained the permission of FAS to acquire 100% of the company, though 49% for 10 mn USD had been only negotiated before. In March the operator refused the transaction, not satisfied with the conditions offered.
Experts note the common for the cell retailing market tendency of the business resale to big operators. In crisis conditions when sales of cell phones dropped, many companies are close to bankruptcy. This has been caused by saturation of mobile communications market and reduction of credit programmes for the population. Besides, recently the retailing companies have obtained big loans from banks for their businesses development in regions and currently the are unable to repay the debts due to the rouble devaluation and unstable financial situation in Russia on the whole.
Disappearance of a number of independent cell retailing companies may impact positively the market development in future, experts say. They expect redistribution of customers among the remained participants of the market. This will allow to keep independent companies as separate representatives of the market as currently most retailing companies are being transferred to big cell operators, which are also interested in control over their contracts sales.

Telenor’s share in Vimpelcom may be put up to auction

The Federal Arbitration Court of the West-Siberian Region dismissed Telenor’s claim, where the company had asked to suspend attachment of the decision of 8th Arbitration Court of Appeal of Omsk.
On February 20th the Omsk Court ordered to exact 1.73 bn USD from Telenor in favour of Vimpelcom. The case had been considered on Farimex’s claim (owned 0.002% of Vimpelcom). Farimex had accused the Norwegians of preventing Vimpelcom’s entering the Ukrainian market in 2004-2005. The court decision came into effect. Telenor appealed the decision in a court of cassation. The hearings have been scheduled to May 26th .
The Norwegian authorities promised to “use all available channels” to protect Telenor’s assets. According to them, this matter affects Russia’s image in foreign investors’ eyes.
Experts remind usually a cassation instance approves such claims so that the applicant does not lose his property before the cassation considering. The refusal to answer a claim can be also appealed in the Higher Arbitration Court. However, the time is against Telenor. On March 12th the bailiffs arrested the company’s shares of Vimpelcom and now the shares may be sold at auction. However, it is impossible to sell the defendant’s shares until the company receives a notice about the beginning of execution. In this case the defendant will have 5 days for execution. There are also forced ways to exact the company’s property without servicing the notice. And if the shares are sold it will be hard to return them.

Synterra filed a suit against Post of Russia

The Arbitration Court of Moscow received the claim from Synterra, which asked to exact RUB 190.7 mn from the federal state-owned unitary enterprise Post of Russia. According to the case materials, the defendant had not settled accounts for products and services.
The claim is linked to the significant debt of Post of Russia for communications services rendered. Currently the enterprise has not paid for services, provided by Synterra from August till December 2008.
We remind in 2008 Synterra participated in the realization of two projects for Post of Russia. In one of the project Synterra in cooperation with Start-Telecom had to construct VPN-network in the frameworks of the programme for modernization of the system of electronic money orders. Synterra provided connection of 3053 offices, located in all regions of the country, except the Central, Volga federal region, Bashkortostan and the Perm region, where the works were carried out by Start-telecom. Besides, in 2008 Synterra connected points of collective access in the frame works of the programme of universal communications services provision (9000 points of the departmental network of data communications).
In the new economic conditions the new authorities of the enterprise have to reduce its costs, including the costs on telecommunications, experts say. It is quite natural that such a big customer as Post of Russia has right to ask the company-partner for special conditions of work. Another question is whether the partner is able to meet such requirements. According to analysts, not for the first time Synterra faces the problems of payment for its services by state-owned organizations. In October 2007 Synterra won the competition of the Ministry of Communications for creation of VPN-network in the frameworks of the programme on transfer to biometric passports. The sum of the government contract, made with Synterra on October 15th 2007, was equal to RUB 187 mn. During the competition in the beginning of 2008 the government had to choose a subcontractor to provide services of the network maintenance. However, the competition was not held because of the Ministry’s authorities’ replacement. Thus, Synterra continues servicing the network on credit, expecting for the competition, promised by the Ministry.

Cifrograd may be closed
In the nearest time the Russian market of cell retailing may be left by another participant. The number of Cifrograd shops has reduced three times almost over last two months. 70% of the company’s staff has been fired and the company is selling the rest equipment. At the beginning of the year the number of the company’s shops was 450 and currently there are only 130. At that 120 of 150 shops, located in Moscow, were closed. From April the company’s wholesaling department will be closed and its employees will be fired.
A part of Cifrograd’s assets was transferred to other company Delovoi Partner (Business Partner), an official dealer of Nokia handsets, registered on January 30th of 2009. Cifrograd’s debt to Nokia is equal to around 47 mn euro. Several mobile producers, including Nokia and Samsung, are going to file claims against Cifrograd to exact debts from the company. At that Cifrograd’s debt to the suppliers is around 70 mn USD while the company’s total debt is equal to 100-120 mn USD.
In January 2009 Megafon started negotiating with Cifrograd. In February FAS approved the acquisition of 100% of Cifrograd by Megafon. Currently the negotiation has been terminated.
The market of cellular retailing has to be transformed, analysts say. The demand is much lesser than the offer. To balance this situation the number of cell retailing shops ought to be reduced by approximately 40%.

iPhones have been taken over the public control
The Society on Consumers’ Rights Protection “Public Control” brought 4 claims against MTS, Vimpelcom and Megafon. The organization accuses the operators as official dealers of Apple on iPhones sales in Russia of violations of the legislation on consumers’ rights protection. The operators do not provide full information about the products and the instruction does not give sufficient details on the handset use, according to Public Control. In particular, the instruction does not inform customers that the mobile phone cannot be used until it is activated in the Internet. Besides, Public Control accuses Big3 operators that they introduce various conditions for iPhone purchase (including the price), depending on the customer’s contract for communications services provision.
One of the claims was only brought against MTS. According to Public Control, the condition, set by MTS, when the product may be only returned with its receipt and warranty service coupon, contradicts the law “On Protection of Consumers’ Rights”.
Even if the court recognizes the law violation in the warranty conditions and instruction for iPhone, a customer will have to go to the law to return money for the handset acquired. According to experts, most of the society’s claims (except the necessity to actuate the mobile in the Internet and to acquire it with the contract) may be referred to all producers, working in Russia.

GLONASS is still unnecessary for civil consumers
According to Vice Prime Minister Sergey Ivanov, GLONASS has not become popular in the marker sector. The main reason for this is lack of compact and competitive consumer equipment. At that means of transport, big constructions and road, which do not need compactness, can be equipped with CLONASS receivers now.
In comparison with the competing navigation system GPS, in GLONASS the more complex mechanism of encoding is used, at the military’s insistence. Currently there are no plants in Russia to produce compact GLONASS chips to use them in cell phones, laptops and navigators.
The major producers produce navigators for GPS and there is a wide range of such devices on the market and moreover they cost 30% less than devices, designed for GLONASS. Big market participants are not so interested in such a narrow segment of the market and small companies lack funds. The production may be financed by some state-owned corporations, for example, Rosnanotehnologii.

Telenor accuses Vimpelcom of inactivity

Telenor, which has not managed to cancel the court decision about exacting 1.7 bn USD from the company on Farimex’s claim so far, accuses its subsidiary Vimpelcom of inactivity. The company sent a letter to Vimpelcom’s director general Alexander Izosimov, asking the company’s management to express their opinion on the conflict between the shareholders.

Telenor insists that Vimpelcom has to refuse the right to exact under the execution. Vimpelcom’s management has to reconsider its passive position, according to Telenor.
Vimpelcom’s presence at the court hearings could lead to a serious internal conflict between the shareholders and the management. To avoid the conflict is in the operator’s interest. Currently Telenor offers the operator to act against its own interests and postpone the money transfer to the operator’s accounts. Having no way out, the Norwegian company does not know what to do and tries to attract public attention to the problem.

MTS stopped receiving payments through Euroset
MTS’ decision to stop receiving payments through Euroset shops is caused by that the retailing company is unable to provide timely transfer of money to personal accounts of the operator’s subscribers. The operator’s subscribers will not be able to replenish their account through terminals, located in Euroset shops. Previously MTS and Euroset worked under the special agreement, which implied crediting of the retailing company by the operators. According to the agreement, the money are transferred to subscribers’ accounts from the special deposit, opened by the payment agent.
According to the agreement between MTS and Euroset, MTS opened the deposit for its subscribers’ money transfer to their accounts. Thus, the operator credited Euroset. However, on April 1st the term of the agreement has was over and MTS asked the retailing company to return to the previous standard agreement. MTS asked Euroset to transfer RUB 420 mn to the operator’s account by April 2nd at the latest. Otherwise MTS will start to inform its subscribers that they are not able replenish their accounts in Euroset shops. The money has not been transferred yet.
According to analysts, both companies will be affected by termination of the agreement. In comparison with other retailing companies, Euroset possesses the most developed regional network. Payments through terminals are not so spread in regions than in the capital cities. Euroset will obviously incur a loss since it will lose the commission fee from the payments.

Court passed the sentence on Superphone’s owner

The Savelovski District Court of Moscow accused president of Superfone Oleg Teterin of violation of the inventive and patent rights of CJSC GDM Group (works under Gigafone brand). The court sentenced him to pay the fine worth RUB 150 00 to the state and to recoup GDM Group the loss worth RUB 6, 144, 966.
The dispute between Superfone and the American Global Direct Management Corp. (in Russian it is represented as CJSC GDM Group) started in spring 2007. The dispute concerns the use of similar technologies. On May 4th 2007 the Savyolovskaya Interdistrict Prosecutor’s Office of Moscow filed the action “on violation of patent rights”. GDM Group’s claims concerned theft of the GDM technology, patented by the Eurasian patent in 2004, which offered Gigafone’s service for advertising on mobiles (ads can be shown during incoming calls and text messages). Oleg Teterin had worked over this project in the American company. Then he quitted and created his own company Superfone where he launched the similar service and patented it in Rospatent.
After several examinations had been carried out in September 2009, the Savyolovskaya Prosecutor’s Office declared Oleg Teterin the accused. In March 2008 he was detained and imprisoned for three months. At that in February 2008 Oleg Teterin won the case in the Arbitration Court of Moscow, which dismissed the claim of CJSC GDM Group on violation of the patent rights in the field of mobile advertising by Superfone.
In accordance with the law, use of the invention is illegal in case the invention is used without a contract with the possessor of the right about transfer of exceptional rights which is registered in Rospatent. Nevertheless, the court’s case can be only considered well-founded if it is proved that Superfone’s services is totally similar to Gigafone’s services

Minority shareholders lost MGTS again
The Moscow Arbitration Court dismissed the claims of 6 minorities of MGTS. 6 minority shareholders of MGTS demanded to declare invalid the decisions of MGTS’ board of directors, which had approved giving 2-year credits at RUB 8.48 bn to Comstar-UTS’ affiliated companies. According to the minorities, such matters are to be settled at meetings of shareholders while the decision had been made by the board of directors. From June till November 2008 the companies MGTS Finance, AMT, Petrodvor (MGTS’ subsidiaries), Skif-line (a subsidiary of Stream-TV) and Comstar One Ltd (a Comstar-UTS’ subsidiary) obtained the credit worth RUB 8.48 bn at 11.3% interest rate per annum. On December 9th 2008 the Moscow Arbitration Court registered the claim from 6 minority shareholders of MGTS: Mikhail Ivanov, Alexander Kiroyev, Mikhail Martynov, Viktor Orekhov, Vladimir Ruzanov and Iraida Ulanovskaya, who had not agreed with the decision of the Board of directors. All the money were spent on payment of the option to Leonard Blavatnik’s Access Industries in the frameworks of the transaction on the acquisition of 25% +1 share of Svyazinvest by Comstar-UTS. Since the credits had one purpose and their total amount was over 2% of the total value of MGTS’ assets, the decision had to be approved by the general meeting of shareholders.
Taking these decisions the board of directors of MGTS complied with the interests of all the company’s shareholders, including minorities. It is especially important in crisis conditions. The minorities could affect MGTS’ economic position. The situation is transparent to anyone. However, MGTS had already had to have legal proceeding with these shareholders. According to the results of 2005, MGTS did not pay dividends and the minorities, including this group of five, tried to contest this decision, but they lose the case in courts various instances.

Court introduced external administration in CJSC Svyaznoy
The Arbitration Court of Moscow introduced external administration in CJSC Svyaznoy for 18 months. This was requested by the Federal Tax Services, which owns 56.39% of votes at the meeting of the company’s creditors. At the meeting, held on March 20th, they decided to replace the company’s manager Eduard Rebgun. He had been an acting manager of the company, which had applied to be declared bankrupt on January 31st 2009. Previously CJSC Svyaznoy had been removed from the group of companies Svyaznoy, which is the second biggest cell retailing company in Russia.
Currently CJSC Svyaznoy has six creditors and the company’s total debt is equal to RUB 4.307 bn. The company’s debt to the Federal Tax Service is assessed at RUB 2.728 bn, around 2 bn of which are arrears on taxes (they give the right to vote at a meeting).
According to experts, the company may only repay a part of its debts to the Federal Tax Service. However, it is a success for tax officials that they have managed to take the control over the company within the process of bankruptcy.

The Federal Tax Service inspects Euroset
FTS is inspecting the companies, included in the group of companies Euroset. Euroset’s subsidiaries across the country are being inspected since FTS suspects the company of “grey schemes” use for import of goods.
The inspections were started in December 2008. They were caused by the tax bodies’ attention to all retailing companies after the tax scandals with Svyaznoy and Eldorado. Last year FTS # 28 on Moscow imposed on Eldorado (now Optovik) the additional RUB 15 bn for 2004-2005. A part of the taxes were paid by the company and another part is being contested in court. The trade network Eldorado declines its connections to Optovik. The similar story happened to CJSC Svyaznoy, which the additional RUB 2.7 bn for 2004-2006 were imposed on.
According to analysts, “grey schemes” have not been used in Euroset since October 2004. The company’s authorities prohibited to work with companies, directors general of which were unknown and with companies, not registered in the Tax Inspection. Probably, there are other reasons for the inspections, experts say.

Vimpelcom demands to cancel GSM licenses in the Moscow Arbitration Court

Vimpelcom demands to cancel the GSM licenses for provision of cell communications services in Siberia and the Far East, which were obtained within the competitions, held in 2007. Summa-Telecom was among the companies, obtaining these licenses. Vimpelcom has brought a claim to the Arbitration court of Moscow. FAS, Summa-Telecom, Streamton, BIT, AKOS, NTK, Firma Geokom, North-East Communications and Esotel-Rustelecom act as third parties on the claim. These companies won the competition for GSM licenses for work in the Far East and Siberia, held by Rossvyazohrankulturi in summer 2007.
Vimpelcom demands to oblige Roskomnadzor to cancel the order # 111 of Rossvyazohranculturi and abolish the licenses awarded by issuing a new order. According to the operator, the order # 111 contains the decision of licenses distribution under the invalid results of the invalid competition, the conditions of which do not conform to the antimonopoly legislation.
Recently Vimpelcom has only provided services of cell communications in the Amur, Kamchatka, Sakhalin regions and the Khabarovsk region due to the acquisition of local companies. Within several years the operator was trying to obtain GSM frequencies in the Far East. However, the State Commission on Radio Frequencies (GKRC) explained its refusal by lack of free frequencies in this region. In summer 2007 the competition for licenses for the Far East and Siberia were held. Vimpelcom submitted the application to participate in the competition and also brought the claim to FAS and to court against the Federal Agency for Communications, which had announced the competition. According to the results of the competition, Vimpelcom only won licenses for work in three regions.
According to experts, Vimpelcom’s chance to cancel the awarded licenses is little.

Bailiffs ask for a month to estimate Telenor’s shareholding in Vimpelcom
The forced sale of 26.6% of Vimpelcom’s shares, which belong to the Norwegian Telenor, to exact 1.72 bn USD from the company is postponed till next month. A bailiff of the Arbitration Court of Moscow, where Telenor demands to suspend the process of the shares sale, stated that this was the time, necessary for the shareholding assessment.
Currently Telenor is appealing the decision of the Court of Appeal in the Court of Cassation of the West-Siberian region, located in Tyumen. According to the procedural schedule, the claim is to be considered on May 2nd. On March 23rd the Court of Cassation already refused Telenor’s request to suspend execution of the decision on exacting 1.72 bn USD, but the company appealed this refusal and the claim will be considered by court in Tyumen on April 28th. Simultaneously Telenor brought the claim to the Arbitration Court of Moscow regarding suspension of the execution. According to Telenor, this unprecedented plea cannot be executed before it is examined in court of cassation, especially as Telenor will not be able to return the sold shares of Vimpelcom. Farimex’s representatives, supported by the court bailiff, insisted Telenor had to pay off 1.7 bn USD. However, the court has postponed the hearings till April 30th, when the results of the session of the Tyumen court are known.
The formal reason for postponing the hearings by the Moscow Arbitration Court was that the court had to listen to Vimpelcom. Previously Telenor had sent a letter to Vimpelcom’s director general and president Alexander Izosimov, demanding to refuse the exaction and not to allow the transfer of the money, obtained from the possible sales of Vimpelcom’s shares, owned by Telenor, to the company’s accounts. According to Telenor, this will cause new court proceedings, in which Vimpelcom will act as a defendant.
Telenor assesses Vimpelcom’s position as “strange”. It seems Vimpelcom does not care whether it will obtain 1.72 bn USD or not. This does not conform to Farimex’s statements that it acts to Vimpelcom’s interest.
Analysts also expect for Vimpelcom’s precise position on this case. Such precise position of the operator would become good news for the market. The operator’s neutral attitude to the matter seems strange to investors.

4. Power and Business

The government is reducing costs for biometric passports
Financing of the programme on introduction of electronic foreign passports may be cut. The organizations, participated in the programme realization, may receive 30% of the money less than it was built into the budget for 2009. Currently this will not affect the programme realization. The Russians will supposedly receive around 5 mn of foreign bio passports.
Primarily they planned that the profile ministries and departments would obtain RUB 8.7 bn for exploiting the system of production, registration and control of passports and visas, containing biometrical information. Such documents have been already used by citizens of the USA and EU. Supposedly biometrical documents will be necessary when visiting these countries. In Russia such documents have been distributed since 2006. According to the data from the Federal Migration Service (FMS), over several years biometric passports have been given to 200 thousand people. In 2008 this number was over 1 mn of people.
The money on biometric foreign passport introduction are obtained from the budget by the Ministry of Communications, FMA and the Ministry of Foreign Affairs. This year the programme financing will have to be equal to RUB 8.1 bn. However, according to the new amendments to the budget, sent by the RF government to State Duma, the costs on the programme are planned to be cut by RUB 2.77 bn. This will not affect the work of the system of biopassports distribution, but the documents production may go down.
The major supplier of chips for biopassports will be chosen this year according to the results of the competition, organized by the RF government. Samples of chips, used in foreign passports of new generation, have been presented by Micron, controlled by Sitronics, and Angstrem company.
According to analysts, introduction of biopassports is the worldwide tendency. Russia will not avoid it, especially if to take into account that in future some countries want to open their borders only to those, having passports, containing biometrical information. So, despite the expected slow-down in these documents introduction in Russia, the programme will not be suspended.
Although the use of biometric passports is convenient and logical, Russian citizens will hardly benefit from them, experts say.

The regulator is creating the integrated base of radio frequencies
Roskomnadzor declared its intention to create a unified integrated data base of Russia’s radio frequencies. The data base of radio frequencies will be created to allow operators to check whether a frequency is free before submitting an application for its use.
In 2008 the federal state-owned unitary enterprise “Major Radio Frequency Centre” (GKRCC) launched a special section on its web site, which allowed operators to register their applications for online examination carrying out. And Roskomnadzor introduced the electronic information system, providing information about considering applications for radio frequencies.
The system, launched by Roskomnadzor, is to enhance transparency of the regulator’s work, to make applications considering quicker. Operators will be able to increase the rates of their networks’ development. The access to the information on free radio frequencies, contained in the integrated data base, may allow operators to submit applications for radio frequencies and construct networks simultaneously. This will allow to reduce economic risks as well as costs.
Experts assess the initiative of the unified integrated base of radio frequencies as positive. According to them, the process of registering applications for frequencies will become quicker and more open due to the base. Transparency of the process is also of great importance.
On other hand, the base creation should coincide with common informatization of various systems of the Communications Ministry and Roskomnadzor. The frequency range must be controlled by all regulating organizations on the basis of one integrated data system. However, even in this case operators have to negotiate with the Ministry of Defense and the regulator’s initiatives do not solve the problem of use of frequencies, possessed by the militaries and force bodies.

The Federation Council did not confirm the law on payment systems’ activity

The Federation Council did not confirm the law “On activity on reception of payments from natural people, carried out by payment agents”. Primarily, the Federation Council Committee on Finance Markets and Money Circulation, presided by Dmitry Ananyev, had approved the project, but advised the member of the Council not to confirm amendments and the law “On Banks and Banking Activity”. As a result the bill on payment systems activity was not approved at all. We note that previously the bill had been approved by State Duma.
In accordance with the Centrobank’s instruction, payments reception must be only carried out if an agent has a contract with the bank. We note that 5% of companies, possessing terminals, only have agreements with the bank. The bill included such clauses as the necessity to install fiscal systems on terminals and cash dispensers. This innovation faces a lot of problems. In particular, this measure will demand significant investments while around 30% of cash dispensers are not ready for additional appliances to be installed on them. Head of the Federation Council Committee on Financial market and Money Circulation paid the most attention to the necessity to introduce administrative and criminal liability for people, receiving payments. Garegin Tosunyan, president of the Association of Russian Banks, offered to introduce obligatory registration of payment agents in Centrobank. Besides, to receive payments the companies have to open accounts in banks. Such approach will strengthen the system of the government control and allow to protect consumers’ rights, Tosunyan adds. We note that use of check-out techniques is mentioned in the law “On Application of Check-out Techniques”, though it is not implied by Centrobank’s instruction.
According to analysts, the government representatives refused the bill due to its unpreparedness. The payment system has to be regulated more toughly, experts say. However, when introducing limitation measures, payment systems will lose their flexibility and as a result, their profitability that may lead to disappearance of these services on the market.
In case additional limitation measures are not introduced to the law, tax abuses from the market participants and in particular, from representatives of small business, will continue. On other hand, new tough rules may cause the growth of a commission fee that will affect the end user.

The regulator investigates LTE
The Ministry of Communications approved the offer of Infocommunication Union (ICU) to start research in the field of construction of networks of LTE standard. The work on preparing offers to the normative acts, setting the rules for communications means application, will be coordinated by deputy director of Rossvyaz Lyudmila Yurasova.
LTE standard introduction was first spoken of across the world in January 2008, when the international partner association Third Generation Partnership Project (3GPP), developing promising standards of mobile communications (GSM, GPRS, EDGE, UMTS (WCDMA), IMS, etc.) confirmed LTE as the next after UMTS standard of broadband network of mobile communications. According to the data from the international association of cell communications operators UMTS Forum, by 2015 the total income of operators of LTE communications networks will be equal to 150 bn USD, i.e. around 15% of the world market of cell communications services. In 2010 UMTS Forum is starting developing commercial LTE networks. In August 2008 a partner of 3GPP, the Infocommunication Union, was engaged in the matter of LTE standard introduction in Russia, sending the Ministry of Communications and the Ministry of Defense the offer to start investigating the new standard.
According to analysts, the decision of the Communications Ministry proves that even in crisis conditions the state regulator is able to carry on an open and constructive dialogue with the market participants regarding the most important questions of introduction of the most promising technologies, which may impact considerably the infocommunication market of the world as well as of Russia in the nearest future. LTE standard introduction is a promising option for communications networks development, analysts say. Due to the technology’s level of development, the pilot works on LTE standard use may start next year. LTE is a logical continuation of 3G networks development and its development may take more time (3-5 years). Operators are interested in providing their subscribers with more opportunities. At that any standard introduction is driven by networks and terminal certified equipment availability on the markets as well as by the sector regulator’s policy.

The government may refuse to acquire a Shyam’s shareholding from Sistema
The government is considering the possible acquisition of shares of the Indian operator Sistema Shyam Teleservices (the former Shyam Telelink), 73.7% of which are controlled by AFK Sistema, according to Vice Prime Minister Sergey Shuvalov. At that he emphasized that at firsts the government had to approve amendments to the budget and understand whether it had money for the acquisition. If there is no money in the budget, the transaction will not be made. The draft amendments to the budget for 2009, prepared by the government, imply RUB 23.73 bn for the acquisition of the shareholding in Sistema Shyam Teleservices by the government. Besides, the transaction also depends on other factors, including the position of the Indian party.
According to experts, if previously Sistema was planning to invest up to 7 bn USD in the Indian project, currently they do not even speak of millions. In case AFK does not manage to attract investments for Shyam’s development, the company will have to sell its share. The shareholding in Shyam may be of interest to MTS, but it will be more obvious in 2-3 years when we can understand how well the project develops. Regarding the acquisition by the government, 20% of the operator’s shares are planned to be acquired, according to the unofficial data.

GKRC confirmed the frequency-territorial plan of the first multiplex
GKRC confirmed the frequency-territorial plan for development of the first multiplex (the digital package of obligatory programmes) in the frameworks of the transfer to digital broadcasting.
The plan implies frequencies for digital TV networks in all regions of the country. The working group, created by the Ministry of Communications and the Ministry of Defense, will work out frequencies for TV channels of all three multiplexes. The first multiplex will be launched in the 470-863 MHz band.
The plan has been made according to the conditions of Electromagnetic compatibility (EMS) with radio electronic means of analog TV of the planned digital channels and radio electronic means of special consumers. Primarily the plan had had to be confirmed by the RF government, but finally the plan was confirmed by GKRC to accelerate the transfer to digital TV and radio broadcasting.
At that in some cases the representatives of GKRC decided not to apply the moratorium on distribution of frequencies for analog TV. During his speech head of Roskomnadzor’s department Alexander Stadinchuk reminded that in January 2008 GKRC had decided to stop completely radio frequencies distribution for TV broadcasting until the frequency-territorial plan of digital TV was developed. However, such a moratorium prevented the execution of license conditions for some broadcasters. So GKRC decided to make a few exceptions. Analog channels will continue to be used. The moratorium does not extend to cases when it is necessary to re-register a license to another legal entity, change parameters, change an installation site, etc. The moratorium does not also apply to the conversion of radio frequency range and to the use of digital TV channels, working at the Olympic Games 2014 in Sochi.
According to analysts the fact of the plan confirming by GKRC is a great step forward. Over February the Federal Service on Supervision in the sphere of Communications, IT and Mass Communications had to find frequencies. After the plan is confirmed, system projects will have to be developed. The document had had to appear in 2Q2008, but it took a long time for the departments to coordinate the plan.

State Duma approved the bill on payment terminals

The RF State Duma approved the bill, regulating the work of payment terminals, in 2nd reading. The law “On Activity on Reception of Payments from Natural People, Carried Out by Payment Agents”, coming into effect from January 1st 2010, extends considerably the range of services, that can be paid for through terminals.
So, it will be also possible to pay off credits, pay fines, state duties and taxes through terminals. Besides, the new bill obliges operators of payment reception to be registered in Rosfinmonitoring. Besides, According to the bill, payment terminals are to be equipped with check-out technique.
According to experts, previously all costs of terminal owners only included payment for rent, which was equal to 2-4 thousand for a terminal monthly depending on the region. The obligatory equipping terminals with check-out techniques will double the costs of terminal owners. However, the new bill allows to compensate these costs due to the extended range of services, which can be paid through terminals. The new bill is unable to affect small business since incomes from terminals are much bigger than the costs on check-out techniques. Simultaneously the bill will help exclude unfair entrepreneurs, using grey schemes of payments reception.

The government did not hear Telenor

Head of the Ministry of Foreign Affairs Sergey Lavrov refused to interfere in the conflict between Telenor and Vimplecom’s minority Farimex. After the meeting with the Norwegian Minister of Foreign Affairs the Russian Minister affirmed that the conflict could be settled “at the corporate level”.
On March 11th the court bailiffs arrested the whole Telenor’s shareholding in Vimpelcom (29.9% of voting shares). The reason for the arrest was the decision of the Omsk Court, according to which the fine worth 1.7 bn USD is to be exacted from Telenor on Farimex’s claim in favour of Vimpelcom. The Court of the West-Siberian Region refused Telenor’s request to suspend the execution.
The Norwegian Minister of Industry and Commerce Sylvia Brustad stated that the confrontation between the Norwegian company and the Russian shareholders of Vimpelcom had reached the dramatic phase. The Minister intended to involve” all the channels, she has” and take measures at the higher level. She also called the conflict between Altimo and Telenor the most important bilateral matter in the relationships between Norway and Russia.
The Norwegian government’s actions seem strange, experts say. According to the Constitution of the RF the legislative power is separated from the executive power, so neither Lavrov nor Prime Minister Putin have legal reasons to influence the legal procedure. Currently the only Telenor’s opportunity to keep its shareholding in Vimpelcom is to pay the required 1.7 bn USD to the cell company. According to analysts, the final decision will be taken by the Higher Arbitration Court. In case the Court takes a side with Farimex, a lot of similar claims are expected in future. Previously minority shareholders’ claims about compensation paid had never been answered.

The Ministry of Industry and Commerce will support producers of electronics

The Ministry of Industry and Commerce intends to support Russian producers of electronics within crisis. The Department is considering the matter about the increase of producers’ share in deliveries under government orders to 25%. According to the current Russian legislation the share of Russian products in purchases under government orders is to be equal to no less than 15%.
Besides, radio electronic equipment must be included in the list of these products, since currently it is not considered as radio electronic products, produced in Russia. It is also necessary to form internal markets for domestic producers in such directions as network and subscriber appliances for digital TV, the equipment for satellite navigation systems, the system of electronic documents, consumer electronics and the systems of radio frequency identification.
According to analysts, in 2008 the Russian market of electronics was equal to RUB 300 bn, around 10% growth. The changes in the legislation will not only concern Russian producers, whose major activity is introduction and development of new technologies. The changes are also aimed to stimulation of Western producers, such as Nec, Siemens and Nokia, to develop more actively on the RF area. To increase Russian producers’ share in government orders is a good idea, which will allow to protect the producers in unstable crisis conditions. Another question is whether the Russian companies possess enough capacity to meet needs of the government sector. As a rule, Russian producers are only engaged in products development and introduction while they are actually produced in China or Korea.

The Ministry of Communication will increase the control over the programme on technoparks creation
The Ministry of Communications monitored the work of technoparks and concluded that the situation on the state programme development is far from being perfect. At the first session of the Interdepartmental Commission on Coordination of Activity, Creation, Functioning and Development of Technoparks the results on technoparks monitoring in 5 regions of Russia (Kazan, Tyumen, Kemerovo, Novosibirsk and Novgorod) were published. According to the working group, the results do not conform to the priorities, implied in the state programmes “Creation of technoparks in the sphere of high technologies in the RF” and “ The Concept of the long-term social and economic development of the RF for the period till 2020”.
According to analysts, the idea to “ establish order and stimulate hi-tech development and their commercialization” is urgent. Actually there are not any high technologies in technoparks and at the best they have integrators who develop neither ideas nor technologies and only introduce existing products. At the worst a technopark is used as an office with cheap rent by companies without any relation to IT. Currently Russia hi-tech products obtained a chance for development due to the rouble devaluation and the tendency of import replacement. On other hand, according to experts, though the Ministry’s initiative is a bit late, it may impact positively techoparks development.

The government’s resolution on Roscomnadzor came into effect
On April 1st the RF government’s resolution of March 16th 2009 “On Federal Service on Supervision in the sphere of Communications, IT and Mass Communications” came into effect. Currently the list of the Department’s responsibilities does not include the item “Distribution of licenses for networks (constructions of communications) exploiting”
The former Ministry of Communications wanted to simplify the procedure of networks registration for operators. The Federal law of February 9th 2007 introduced the simplified rules of networks registration. Operators had to submit not each project of the network, but a large part of the network, that would simplify considerably the registration procedure. According to the law, the project examination can be only carried out by legal entities or natural people, accredited by a federal body of the executive power in the field of communications under the order, set by the government. However, currently there is no such an order. So, there are not any requirements to those, possessing the right to make the system project examination. So far, this problem has been solved in accordance with the previous procedure of awarding licenses for communications constructions exploiting. But since April 1st no one can award these licenses.
The situation in the legislation may affect the telecoms market on the whole. Operators do not know how to submit networks for examination and Roskomnadzor does not know what to do with those that launched their networks without submitting them. Currently operators have been sent over 500 orders to submit their networks and these orders are to be executed immediately. According to analysts, since April 1st operators have not been able actually to use legally their constructed networks, which are to be registered. The regulator will probably solve this problem somehow. The regulator may make amendments to the normative base or the government will pass the necessary resolution about the procedure of accrediting people, who possess the right to carry out system projects examination.

Svyazinvest will have two independent directors

Rosimushcestvo responded to Svyazinvest regarding the status of its independent directors (the holding had applied to the Department in February). Formally Svyazinvest’s new board of directors has contained 5 independent directors, but they were nominated by the government.
According to the government’s resolution, no one of the offered candidates to members of the holding’s board of directors was nominated as an independent director. This means that 5 members of Svazinvest’s board of directors (Mikhail Butrin, managing director of CJSC VTB-invest; Ivan Rodionov, professor of the Higher School of Economics; Nikita Ryauzov, managing director of MDM bank; Konstantin Malopheyev, managing partner of Marshall Capital Partners; Marlen Manasov, member of the board of directors of UBS) have a status of professional directors, but at the annual meeting of the holding’s shareholders the two last people will only obtain a status of independent directors.
In accordance with the government’s resolution, directors, nominated by the government, vote on the following matters: confirming the agenda of the general meeting of shareholders, the increase of the chartered capital due to additional issue, creation of an executive body and early termination of its powers, recommendations on dividends, approval of big transactions (25% + of the balance value of assets) as well as the matter of election of chairman of the board of directors.
According to analysts, these matters are the key for the company. Other important matters, not included in this list, concern transactions on disposal of subsidiaries’ shares, which are not considered as big transactions. Experts agree with the government’s idea to introduce independent directors to boards of directors of state-owned companies. If a company wants to be attractive for investors, it has to meet requirements of the market, i.e. have independent directors in its board of directors, minimal participation of the controlling shareholder as well as good financial results.

The Infocommunication Code will replace the law” On Communications”

MTS offered the Association of Documental Telecommunications (ADE) and the Ministry of Communications to work out the Infocommunication Code. The idea of the Infocommunication Code creation appeared during the work of the group, created by the order of the Ministry of Communications and ADE in the end of last year. The working group, named “Development of the Concept of Infocommunication Regulating, Facilitating to Integration of Communications, Broadcasting and Informatization” (the group is headed by Igor Maslennikov, director on development of MFI Soft), is develop an infocommunication model of the sector’s work in future, offer a model of its regulation and create the infocommunication vocabulary.
According to MTS, the Infocommunication Code will replace the range of the existing legislative acts, regulating interaction between participants of the infocommunication market, including the federal law “On Communications”. The Code will consist of 14 sections, among which the infocommunication legislation, participants of infocommunication relationships, information and information security, use of radio frequency range and radio electronic appliances, peculiarities of services provision in the field of infocommunications, use of infocommunication infrastructure, use of the Internet, etc.
The existing legislation is imperfect, experts say, though their attitude towards the new legislative act passing is cautious. No law can unite all clauses and it needs additional acts. The federal law “On Communications” came into effect in 2004 and has been the major normative act, regulating relationships in the field of communications services provision so far. The law is regularly added by normative acts and various amendments. Despite the problems the federal law “On Communications” meets requirements of the telecoms sector.

Deputies may discuss again amendments to the civil code, prohibiting free use of content in the Internet
The Ministry of Communication asked the government to return the draft amendments to Part 4 of the Civil Code for the second reading. The second reading took place in January 2009 and after that several big Internet companies applied to the Ministry of Communications. They were alarmed by Article 1273 of Part 4 of the Civil code, which regulated the norms of “free reproduction of production for personal purposes”. The existing variant of the Article allows not to pay a reward to an author or possessor of rights, if the work is used for personal purpose. The amendments, approved in two readings, specify that the work can be used in such a way “if it is necessary”.
It will be difficult to prove the necessity of a picture downloading, experts say. Thus, any Internet user may be accused of violation of exceptional rights for the production. This will lead to the fine worth RUB 10 000 -5 000 000, and even a two-year imprisonment. Laws, regulating intellectual rights, must be improved, taking into account interests of “all participants of relationships”

Svyazinvest’s fortune will be decided by May
Within a month the working group on the matters of Svyazinvest’s reorganization will complete the examination of offers, submitted by the holding’s strategic committee. By the end of April Minister of Communications Igor Shegolev intends to submit the final decision to the Government Commission on Communications and Transport.
The working group is carrying out the examination of offers on Svyazinvest’s reorganization, worked out by the holding’s strategic committee. Recently they have sent the Ministry of Communications the range of the offers on the company’s reorganization. To consider them the RF Vice Prime Minister Sergey Ivanov signed the resolution about creation of the working group at the Government Commission of Communications and Transport on matters of Svyazinvest’s reorganization, headed by Minister of Communications.
The company’s reorganizations should be carried out to provide additional growth of gross domestic product due to stimulation of development of all sectors of economics by creating the modern telecommunications infrastructure as well as to increase the value of state-owned telecoms assets.
The holding’s consolidation would be the best solution, analysts say. In current conditions, when it is necessary to strengthen financial and managerial components, the consolidation of Svyazinvest will allow to create a structure with the greater value. Besides, it is necessary to foresee variants of the further consolidation of fixed and mobile assets in the frameworks of the unified holding. After crisis the market concentration will increase and it will be easier for the government to pursue its policy in the sector through the consolidated structure.

The government will control foreign investors in Runet
The government should control the process of foreign investors’ coming to the Russian Internet. The RF President Dmitry Medvedev considers this question as normal and emphasizes that the government should invest in this sphere as well.
In the end of March Minister of Communications Igor Shegolev said that his department supported that big participants of the market were Russian. However, according to Medvedev, foreign investors’ coming to search systems and large social networks is inevitable. He emphasized the government had to invest in this sphere as well.
According to analysts, foreign investments should be controlled. The government can control foreign investors’ coming with the mechanism of transactions approval. Some transaction (especially those concerning big assets) will have to be submitted to FAS, that may eliminate some investors. This is the world practice, applied in many countries. The main thing is that the criteria for eliminations should be transparent and public.

Sky Link asks for delay
Sky Link asked Roskomnadzor to allow the company to postpone the start of provision of services under GSM licenses, obtained in 2007 in 45 regions. According to the licenses, Sky Link has to start providing services of GSM communications in the end of 2009, but the company will not start the networks on time: the court proceedings concerning the results of the GSM competitions lasted for two years almost and creditors did not give loans for the networks construction. Another reason for postponing is the world crisis.
The GSM licenses in 45 regions were obtained by Sky Link according to the results of the competitions, held in the end of 2007. Soon the company stated it would develop a two-standard network CDMA2000/GSM: CDMA will be used for data communications and GSM will be used for voice communications. Sky Link was going to invest 10 mn USD for GSM development in each region, the license had been obtained for. By 2011 the operator was planning to provide the entire coverage. However, Summa Telecom, dissatisfied with the results of these competitions, initiated a number of court proceedings. The hearings lasted for more than a year.
Simultaneously Sky Link is looking for partners, ready to share costs on GSM networks construction. They will be probably MVNOs, several such projects are being studied.
According to analysts, the court hearings regarding the obtained licenses, have prevented considerably the operators’ work. The hearings lasted for two years almost. In current unstable conditions banks-creditors are extremely sensitive to such risks.

The regulator made WiMAX operators suspend expansion
Some Russian WiMAX operators had to suspend their expansion in regions and postpone the launch of their networks in 1-2Q2009. This was caused by the decision of GKRC to suspend considering the applications for frequencies in the 2.50-2.69 MHz bond, the main range for most of the Russian WiMAX operators, until May 2009.
In January GKRC charged Roskomnador to determine available radio frequencies in the 2.30 -2.40 MHz, 2.50-2.69 MHz, 3.40-3.45 MHz as well as 3.50-3.55 MHz bonds by May 10. At the same time GKRC decided to suspend considering the applications for frequencies distribution in 2.50-2.69 MHz bond. This decision was contained in the letter, signed by Minister of Communications Igor Shegolev.
According to analysts, in conditions of the decline in demand 3-4 months of the delay are not dramatic from the marketing point of view. However, the payback periods may increase considerably due to the delay and the company’s current debts will grow as well.

The Ministry of Communications decides the future of zone networks of Communications

The session of the working group, devoted to networks of zone communications (the interim level between local and long-distance communications) was held at the Ministry of Communications. The working group consists of representatives of MRKs, Big3 operators and alternative operators.
Currently a subscriber is not able to choose an operator of zone network. Besides, the significant operators-regional monopolists, owning the most of networks of local communications, do not wand to accept calls from alternative operators of zone communications, trying to act as zone operators independently. The participants of the working group offered to stimulate construction of new zone networks, which are alternatives to MRKs’ networks.
In October 2008 Deputy Minister of Communications Naum Marder supposed the Ministry could refuse the zone level at all. The variant of the refusal is still being considered. In this case prices for traffic transit may go down considerably, but the operators will not have economic incentives to create a new infrastructure, alternative to Svyazinvest’s networks. So, currently the group is discussing the variant of “limited liberalization”, which does not imply entire refusal of the zone level, but decrease requirements to such networks construction. At that there will be “certain limitations” for traffic transit, but the operators will have incentives to construct an alternative zone infrastructure, since it becomes profitable.
According to experts, liberalization of the market of zone communications is senseless. It will be unprofitable for alternative operators to operate on this market since they will have to pay a lot to operators of local and long-distance communications.

Subscribers cannot be disconnected because of disputes between operators

The Higher Arbitration Court explained that pretrial settlement of disputes between operators, including property matters, had to be carried out without breaking the communications networks integrity and breaks in provision of services to subscribers. The regulator applied to the Russia’s Association of Communications regarding disputes between operators and communications networks connection.
Currently Synterra is trying to prove illegal actions of MGTS regarding limitation of its traffic transit. This summer MGTS has disconnected some operators from its network. The main reason was lack of a contract for traffic transit. Synterra tried to prove illegality of the MGTS’ actions, but lost the case in the court of 1st instance and the court of appeal. This March FAS declared illegal the actions of Bashinformsvyaz on blocking calls from MTS’ network.
According to analysts, a significant operator possesses no right to refuse unilaterally any services provision, and moreover, disconnect other operators from its network. Thus, third parties must not suffer from disputes between operators.

5. Economics of Innovations

The Ministry of Justice registered the order, authorizing MVNO
The RF Ministry of Justice registered Igor Shegolev’s order, allowing to register MVNO (mobile virtual network operator) across Russia. According to the regulations, the order will come into effect 10 days after it is published in mass media. After the order comes into effect, a license for sale of cell communications services can be obtained without frequencies, a base and numbers. Frequencies, a base and numbers can be obtained from one of the existing operators on a contractual basis.
First MVNOs appeared in England around 10 years ago. This was caused by the decision of the British regulator Oftel to oblige cell operators to share numbers and frequencies with other operators to stimulate competition on the market. Virgin Mobile was the first virtual operator. Currently the company’s subscriber base is around 4 bn people.
Unlike a full-grown operator of cell communications a virtual operator has only to arrange about conditions of partnership and confirm them in Roskomnadzor to obtain a license. Euroset sold SMARTS’ services of communications in the Volga region. Besides, MTS and Auchan network are realizing the project A-Mobile, in the frameworks of which a special tariff plan of MTS is being sold in the network hypermarkets. The last MVONO project is Megafon’s brand “Simply for Communications” (Prosto…). It is positioned as an operator-discounter. Unlike the existing projects this project has its own independent billing, a separate call-centre and a servicing centre. Sky Link stated it is going to start MVNO project of CDMA networks basis as well. The retailing company X5 Retail Group is interested such projects, too.
According to experts, new virtual operators may appear on the market of mobile communications, although it will be impossible to launch these new MVNO-projects without Big3 operators’ counter wish. The main obstacles for virtual operators’ development is lack of a normative base, regulating relationships in this field, and lack of free frequencies, most of which are now possessed by the Ministry of Defense.
Besides, the late development of mobile communications services in Russia led to the late start of MVNO-projects, which are not innovative already, experts say. This situation is compared with the situation in the field of air traffic, when air companies-discounters appeared in Russia much later than in other regions of the world, and these air companies could not take positions on the market. As a result this kind of business has not become widely-spread in the country.

Roskomnadzor is working out new standards of personal data protection

Igor Shegolev, Minister of Communications, charged Roskomnadzor to work out new standards of personal data protection. The standards are to help preventing information outflow from information systems at various levels. Roskomnadzor will prepare offers on making changes in the current legislative base to protect the rights of personal data possessors.
Personal data protection is one of the key directions of Roskomnadzor’s work. Currently there are a lot of gaps to be eliminated by the Department in cooperation with the Ministry of Communications. First of all, they concern documents, which provide privacy, as well as difficulties when certifying the means for personal data protection.
Experts assess positively the initiatives of the Ministry and Roskomnadzor in the field of development of new standards for personal data protection. Such standards are necessary in Russia. Personal data can be easily acquired on the “black market” that is inadmissible for the modern state.
On other hand the initiative has to be developed as well as controlled and implemented by appropriate bodies, experts note.

Russia’s outlooks to be among the top 20 of ICT countries
During the conference “Regions and Informatization. Priorities and Solutions”, held in Ryazan, Leonid Reiman, Advisor to the RF President declared that Russia had a chance to become one of the Top20 of the most developed countries in the field of informatization by 2015. According to him, the further development of Russia’s telecommunication infrastructure is among priorities.
We remind currently Russia only takes 74th place in the rating of the most developed countries in this sphere. However, the objective, set by the Council on Information Society Development, is quite achievable, according to experts.
Reiman emphasized that recently all the necessary conditions had been created in Russia for telecoms companies’ development. However, the noticeable quantitative changes have not resulted in significant qualitative ones. They also mentioned informatization of the state sector, where the established telecoms infrastructure will allow to simplify the process of documents circulation. Any application can be sent through the Internet. The conditions for such a project realization are only created in Moscow and some other regions. One of the obstacles for the projects realization is uncoordinated work of some institutions involved. First of all the Council will have to get over disconnection between departments. The Council members have worked out the plan on informatization, which is to define a position for each institution at the federal and regional levels. Municipal authorities will be involved to expand the telecoms infrastructure and provide control.
The objective of the information society development in Russia by 2015 may realized on time, experts say. Currently we have all the necessary conditions for the further development of the telecommunication sphere. The area of mobile communications development as well as the extended Internet-audience involves all regions of the country.
According to analysts, the government’s decision to take the control over the informatization process is reasonable if to take into account disconnection between institutions. Creation of the plan on development of telecommunication and IT spheres as well as involvement of municipal authorities and representatives of business in its realization were assessed positively by experts.

Big3 operators are allowed to test 3G

GKRC has decided to allow the use of radio frequencies in Moscow and the Moscow regions and to test 3G equipment in the 900/1800 MHz bond. Currently these frequencies are being used by operators to provide GSM services. The decision was taken due to the requests of MTS and Vimpelcom, which as well as Megafon are not able to develop full-grown 3G networks in the Moscow region. 3G licenses were obtained by Big3 operators in spring 2007.
The 2.1 GHz bond is standard for UMTS. This frequency has been recommended by the International Union of Telecommunications. In Russian cities Big3 operators construct 3G networks in this bond. However, so far, it has been impossible to construct 3G networks in Moscow and the Moscow region since the bond is occupied by so-called special consumers (force departments). The transfer of UMTS from 2.1 GHz to 900 MHz is possible and has already been done in some countries.
According to experts, the operators are certainly satisfied with the decision of GKRC, since this will solve the problem of 3G launch in Moscow. On other hand use of UMTS in the bond, used by GSM, may affect the quality of communications in Moscow and the Moscow region. The operators only possess equipment for operating in the 900MHz bond. Introducing of UMTS in this bond the operators will have to press GSM considerably, and a part of GSM stations will have to be transferred to the 1800 MHz bond.

3% of Russian subscribers use 3G services
According to the estimates of AC&M-Consulting, in 2008 3G services were really used by 5.2 mn people. In the end of 2008 Russia’s total subscriber base was equal to 187.83 mn of acting SIM-cars, so 3G penetration was 2.8%. 3G subscriber is a subscriber, who uses a handset, supporting 3G and is continuously present in the zone of 3G network coverage. MTS only agrees with AC&M-Consulting regarding subscribers, usually using non-voice services of 3G networks. According to Vimpelcom and Megafon, they do not mark out 3G subscribers from the total number of their users. All innovative services are based on 3G, for example, mobile TV and streaming audio, so ARPU of subscribers, using 3G services, is 30-40% bigger than average. Such subscribers pay 20-25% more than an average user, whose ARPU was equal to 9.5 USD per month in 4Q2008 in Russia.
MTS, Vimpelcom and Megafon obtained their 3G licenses in April 2007, but they started launching their 3G networks in 2H2008. Currently MTS’ 3 G networks are launched in 20 towns of 6 federal regions (except the Central Federal Region). Vimpelcom’s 3G networks are operating in 42 towns of all regions. And Megafon has covered over 10 regions in the North-West as well as Dagestan and Sochi with its 3G networks.
Before Big3 operators 3G networks had been started by Sky Link, thought they had been constructed on the basis of CDMA2000. However, this technology as well as UMTS meets requirements for 3G of the International Union of Telecommunications: the network is capable to provide data communications at a speed of no less than 144 Kbit/sec in a moving car, 384 Kbit/sec when walking and 2 Mbit/sec in stationary condition.
According to analysts, in 2008 the whole market of mobile Internet (WAP, GPRS, EDGE, 3G and EV-DO technologies) grew by 73% to 935 mn USD. The dramatic growth of incomes, contributed by mobile Internet access, is explained by the increase of consumption, caused by active promotion of 3G modems. In some region such devices are even in short supply, for example, in Siberia and the Far East, where mobile Internet is a real alternative to dial-up. On other hand, so far, 3G market has not been very competitive, all the operators’ traffic and incomes are growing and the market shares have not been redistributed yet.


6. Personal Changes

Megafon, a mobile operator, informed about the decision of 1st deputy director general on operating activity Alexander Volkov to resign from his position. Alexander Volkov was among ideologists and creators of the company. He headed the division of mobile communications in Telecominvest, the objective of which was to consolidate separated GSM assets in Russia, on the basis of which Megafon was founded later. When the operator’s head office had moved to Moscow, Volkov headed its North-Western subsidiary.
The position of deputy director general on operating activity is retained in the company.
Viktor Yushkin has been appointed director of the administrative department of OJSC Rostelecom. Since October 1999 Yushkin has worked in the company, holding sequentially positions of leading specialist, head of the service, head of the administrative section, deputy director of administrative department.
Vimpelcom declared that the company’s executive vice president on business development in Russia Jean Pierre Vandromm was resigning from his position. His responsibilities will be transferred to chief executive director Boris Nemsich. Within the working process he will decide who is able to take Vandromm’s position.
The rumours, that Vandromm would resign from his position, appeared after the information about Alexander Izosimov’s quit had appeared. Previously Vandromm had been called as one of the possible Izosimov’s successors by the market participants. However, the company’s shareholders found it necessary to appoint a Russian for the position of the company’s head and Alexander Torbakhov took the poison of the company’s director general.
According to analysts, Vandromm’s position will be probably eliminated. His responsibilities may be transferred to Boris Nemsich. This must cause more serious restructuring in the company’s top-management. Vandromm’s quit after the statement about Izosimov’s resignation may be assessed as the shareholders’ planned actions towards the operator’s top-management reorganization. Within the work in the company Vandromm acted as a good specialist, experts note.
Konstantin Kravchenko resigned from his position of director general of Universal-telecom and was appointed executive director of Svyazinvest. His position will be taken by the company’s co-owner Vladimir Lokhtin, who had been working as executive director of Svyazinvest before 2006.
Universal-telecom (Geolife brand) specializes in the development of systems of monitoring the objects on the base of GPS and GLONASS systems. The company’s major owner is Alisher Usmanov, who possesses a little more than 50% of the company. Vladimir Lokhtin and other top-managers of the company own the rest shares.

At the extraordinary meeting Sitronics’ shareholders elected new members of the company’s board of directors. The number of members increased from 9 to 11 people. Denis Muratov, resigning from his position of vice president – head of the complex of development of innovations and venture projects of AFK Sistema last year, was elected to the board again. At the meeting of the board of directors he was elected chairman of the board of directors again.
The seats on the board have been also kept by the company’s former president and current shareholder Yevgeni Utkin, the company’s president Sergey Aslanyan, director of the state-owned unitary enterprise the Moscow Metropolitan Dmitry Gayev, senior manager of Coral Capital Management Yuval Almog and 1st vice president on new products and technologies development in Sitronics Nikhan Khurem.
Anton Abugov, 1st vice president - director of the complex of strategy and development of AFK Sistema, Sergey Boyev, vice-president - head of the unit High Technologies and Industry, Aleksey Buyanov, senior vice president, Kirill Poltevsky, director of the department for strategy of the business-unit “High Technologies and Industry” as well as David Khidashely, senior vice president of the World Technological University (UNESCO), independent director, became members of Sitronics’ board for the first time.
Svyazinvest’s board of directors has confirmed members of the board’s committees and approved the regulations of the committees. The Committee on Strategic Development, headed by Konstantin Malopheev, the member of the board of directors, managing partner of Marshall Capital Partners, consists of Mikhail Butrin, managing director of VTB-Invest, Mikhail Leschenko, advisor to the Minister of Communications, Marlen Manasov, the member of the board of directors of CJSC UBS Bank, Sergey Pridantsev, president of Comstar-UTS as well as Alexander Provotorov, 1st deputy director of Svyazinvest.
The Audit Committee, headed by Ivan Rodionov, the board’s member , professor of the Higher School of Economics, consists of Sergey Pridantsev, Mikhail Butrin, Leonid Reiman (the member of Svyazinvest’s board, Advisor to the RF President) and Elena Umnova (deputy director of Svyazinvest).
The Committee on Personal and Rewards, headed by Mikhail Leschenko, consists of Sergey Pridantsev, Nikita Ryauzov (the member of Svyazinvest’s board of directors, managing director of MDM Bank), Ivan Rodionov and Nadezhda Philippova, deputy director general of Svyazinvest.
Besides, Dmitry Yerokhin, Elena Selvich and Yevgeni Chechelnitsky, quitting the company, were withdrawn from Svayzinvest’s board.
The board of director also took into account the information about candidates, nominated by the company to be elected to boards of directors of depending unites of telecommunications.
Director General of Centertelecom Vagan Martirosyan has appointed Aleksey Kamishev financial director of the company. Previously Kamishev worked as deputy director on economics and finance of Centertelecom’s Voronezh subsidiary. The position of financial director was previously held by Aleksander Lutsky.
In 2002 Kamishev was appointed for the position of 1st deputy director of Centertelecom’s subsidiary Voronezhsvyazinform. Afterwards he took sequentially positions of 1st deputy director of Centertelecom’s subsidiary in Voronezh, deputy director on economics and finance of the Voronezh subsidiary. Since March 2009 he has been working as deputy director general - financial director of OJSC Centertelecom.

Vladimir Bondarik has been appointed deputy director general of Svyazinvest. He is 8th deputy of the holding’s director general Yevgeny Yurchenko. Previously Bondarik worked as director of the telecoms company Roylcom and advisor to the Minister of Communications.
Vladimir Bondarik has started working since March 16th. On the new position he supervises the matters of technical development of Svyazinvest’s group of companies in the field of telecommunications and IT.
Yevgeny Yurchenko, appointed head of the holding in February 2009, started to replace the holding’s top-management immediately. He appointed 4 deputies director general: Aleksey Lokotkov, Elena Umnova, Viktor Savchenko and Nadezhda Philippova. Aleksey Lokotkov supervises the matters of economics, statistics and reporting. Besides, he is in charge of strategic development and the group’s tariffing policy. Viktor Savchenko is responsible for legal security of the holding’s activity and corporate management. Elena Umnova is in charge of the matters of the group’s financial and budget policy. She is also engaged in organization of interaction with credit organizations. Nadezhda Philippova’s responsibilities include organizational development and personal management as well as development of the company’s corporate culture. The 5th deputy director Alexander Provotorov supervises the matters of strategic development and reforming, corporate development, mergers and absorptions as well as external communications.
President of the biggest cell retailing company Euroset Sergey Yurchenko, making a 3-year contract with the company in November 2008, is quitting the company. Vladimir Shishko, an employee from Vimpelcom, has been appointed acting president of Euroset.
The company’s shareholders are satisfied with Yurchenko’s work, but in current unstable situation they would like to find a candidate for this position, who possesses more experience for work within crisis.
According to analysts, one of the Yurchenko’s achievements during his work in the company is that the company’s debt is currently less compared to the debt of the recent years. Besides, he settled the old conflict between Yevgeny Chichvarkin and Nokia. Personal changes in Euroset are considered by experts as a protracted replacement of the old team. The new head of the company will have traditional objectives, such as the business adjustment, enhancement of the company’s efficiency and increase of the company’s market share.
At the meeting on March 20th 2009 the board of directors of OJSC Comstar-UTS decided to terminate powers of the board’s member Dmitry Karmanov. He will continue working in the company as vice-president on personal management. He was withdrawn from the board with the purpose of adjustment of corporate management in Comstar-UTS. The number of the board’s members was reduced by 1 person. Currently the board consists of 7 people: president Sergey Pridantsev, 1st vice-president Aleksey Goncharuk, vice president on strategy and development Alexander Goncharuk, vice president on technologies Alexander Kirillov, vice president on regional development Viktor Koresh, vice president on economics and finance Irina Matveeva and director general of OJSC MGTS Sergey Nazarov.

Olga Turischeva, ex-director on venture business development of Vimpelcom, has replaced Mark Opzumer on the position of director general of the Internet company Rambler Media. Arkady Moreinis, director on working out and development of Rambler Media, and Sergey Beshev, ex-director of the Moscow macro region of MTS were considered as candidates for this position as well.
Olga Turischeva was transferred to Vimpelcom for the position of marketing director in 2001. In particular, she supervised Vimpelcom’s rebranding, carried out in 2005. In July 2007 she was appointed director on venture projects of the operator. Before Vimpelcom she had worked as marketing director for the Russian representative office of the German company Bosch und Siemens Hausgerate (1998-2000) as well as for the representative office of the Italian producer of consumer electronics Merloni Elettrodomestici S.p.A as brand-manager and coordinator on sales and marketing (1995-1998).
According to analysts, the key objective for director general of Rambler Media is to reduce costs and to maintain revenue on the level of 2008 at least. It is also important for the company not to lose the audience as it happened to the Rambler searching system. To do this the company has to work out the strategy and find a field, where Rambler will be the best. Due to Turischeva’s working experience, she is capable to cope with the objective set, analysts say.

On March 27th the board of directors of MGTS, included in the group of companies Comstar-UTS, appointed Nikita Brodsky, advisor to director general, for the position of deputy director general – commercial director. Nikita Brodsky was also included in MGTS’ board.
Previously the position of deputy director general had been held by Eduard Sharai, who was transferred for the position of director on marketing and sales. Eduard Sharai kept his seat in MGTS’ board.
On the new position Brodsky’s responsibilities will be development of services, provided by the company, including broadband Internet access, enhancement of the company’s commercial activity, the control over realization of the complex programme for enhancement of the quality of telecoms services provision and introduction of common standards of client servicing.
Akado-Stolitsa declared the appointment of Maxim Polozkov for the position of deputy director general on commercial activity. Poloskov’s key objectives are attraction of new subscribers when maintaining traditionally high quality of servicing as well as development of TV services of new generation, including HDTV and interactive TV.
Comstar-UTS declared the appointment of Andrei Petrov for the position of deputy director general – technical director of Stream-TV, included in the group of companies Comstar-UTS. He was appointed for this position by the order of director general of Stream-TV.
This position has been introduced in the company recently in accordance with the new personnel arrangements. The Department of Capital construction, the Department of Exploiting and Development as well as the Department of IT report to the company’s technical director.
Andrei Petrov started his career in Zond-Holding company, where he held positions of engineer and leading specialist. In 2004-2005 he worked as chief technical specialist in Infotel company. In 2005 he was transferred to the position of director of the project and then to the position of technical director in CJSC Center Telecom Service. In 2009 Petrov was transferred to CJSC Stream TV for the position of technical director.
OJSC Sitronics has appointed Andrei Volodin director general of Sitronics IT. Sitronics IT is a Russian structure of the subsidiary Sitronics Information Technologies (the former Kvazar-Micrcro). Previously Sitronics IT had been headed by Sergey Sapelnikov, who quitted the company.
Since this January Volodin has been holding the position of 1st deputy director general in Sitronics IT. Previously he worked as director general of CJSC Stream TV (included in AFK Sistema as well as Sitronics). In 2001-2006 he was working as vice president on technical development in Euroset, director general of the Ukrainian Euroset and director general of CJSC Electrosvyaz (a Euroset’s subsidiary).
Grigory Tamashevichus has been appointed director of the Department of Sales on the communications market of the group of companies Optima. The Department’s key objective is development of the telecoms direction of the company’s activity, expanding the portfolio of solutions offered, consolidation and increase of the company’s practical experience on realization of complex telecommunication projects in enterprises of communications as well as neighbouring sectors of economics.
The Finnish IT-company Stonesoft has opened its representative office in Russia and the CIS countries. Mikhail Romanov has been appointed director of the representative office. Currently apart from director two engineers are working in the representative office as well. According to Romanov, they are planning to expand the company’s staff in 2009.
Andrei Kolesnikov has been appointed director of the Coordination Centre of the domain .ru. Previously this position was held by Andrei Romanov. The company’s director was replaced in accordance with the Centre’s charter and under Romanov’s request about resignation. Previously Andrei Kolesnikov was the member of the council of the Coordination Centre of the domain .ru as well as director of the media-subdivision of SCS Sovintel company, included in the group of companies Vimpelcom
On the new position Kolesnikov will be engaged in supporting stability of the zone .ru functioning , provision of domains’ administrators with high-quality services, work with public institution of the Internet-industry. Besides, he will cooperate with the Ministry of Communications, law-enforcement bodies, public organizations and other international organizations.
Valery Yermakov has been appointed deputy director general of OJSC Megafon. Previously Yermakov held the position of director general in OJSC MSS-Povoljye (a Megafon’s subsidiary on the Volga region). He will head the company’s operating activity as well as coordination of Megafon’s subsidiaries’ development.
Alexander Malis, Vimpelcom’s top-manager, may become new president of Euroset. Euroset has been working without president since the end of March, when the company’s shareholders retired Sergey Yushenko after 4-month work as the company’s president. Vimpelcom hoped to find a candidate for this position, who possesses more experience of work in crisis conditions.
From 1995 Malis worked in Corbina Telecom, the operator of Internet access, fixed and mobile communications. from 2007 he headed Corbina. Corbina became Vimpelcom’s partner in 1999, reselling the operator’s services on cell communications of D-AMPS standard. For a long time Corbina had been the second biggest operator of broadband Internet access in Moscow in terms of subscriber base. In 2007 the company was outstripped by Akado.
Dmitry Ryzhkov, deputy director of the RF Government Machinery has become a head of the working group on “electronic government” creation at the Governmental Commission on Administrative Reform. Previously the working group was headed by Kirill Androsov. Personal changes are fixed in the order of the RF government of April 8th 2009.
The working group of “electronic government’ creation in the RF was created in September 2008. At that time it was headed by Kirill Androsov. The idea of electronic government is being realized very slowly. It was mentioned by the RF President Dmitry Medvedev at the session of the Council on Information Society Development in February.

The Minister of Communications Igor Shegolev has confirmed two deputies director of the Federal Service on Supervision in the field of Communications, IT and Mass Communications (Roskomnadzor). They are Alexander Katulevsky and Roman Sheredin. Names of other two deputies of the department’s director will be disclosed later.
Previously Alexander Katulevsky worked as 1st deputy director general of the state-owned unitary enterprise “Radio Frequency Centre of the Central Federal Region”. In Roskomnadzor he will supervise licensing and control-supervising activity in the field of communications.
Roman Sheredin worked as 1st deputy director general of CJSC “Corporation O.S.S.” (Moscow). On the new position he will be responsible for the matters on supervision in the field of IT and the activity on protection of rights of personal data owners.
MTS eliminated the position of vice president on engineering and IT, dividing the responsibilities between two employees. AndreI Ushatsky has been appointed vice president of MTS on engineering . Valery Shorzhin will supervise development of IT in MTS group.
Andrei Ushatsky is in charge of the strategy of the operator’s network technical development, enhancement of the network’s efficiency and provision of quality standards in MTS group.
Ex-vice president on technique and IT Alexander Bogatirev continues supervising work in this sphere as advisor to the company’s president.
Anton Khozyainov has been appointed deputy director general – financial director of OJSC Rostelecom. The former financial director Andrei Gaiduk was transferred to another position.
Anton Khozyainov is not a new employee in Rostelecom: in January-February 2009 he worked as advisor to director general of CJSC MC NTT, a Moscow subsidiary of Rostelecom.
Previously he had worked in various investment funds.

7. Figures and Facts

The total length of Synterra’s main-line network has exceeded 70 000 km.
In 2009 5, 200, 000 people used 3G services (UMTS standard). On the whole in the end of 2008 187.83 acting SIM cards were registered in Russia, so penetration of 3G was equal to 2.8%.
In 2008 the number of crimes in the Internet increased by 33%.
$400 000 000 are planned to be invested by MTS in its subsidiary in Ukraine in 2009.

RUB 8.8 bn are the planned capital costs of Rostelecom in 2009. In 2008 the operator’s investments were equal to RUB 8. 236.
RUB 60 mn were the investments of OJSC UTK in the development of the own telecommunications infrastructure in Sochi in 2008.
In autumn of 2008 Runet’s audience for half a year was equal to 34 mn people, i.e. 30% of Russia’s population aged 18+

In 1Q2009 the first market of retailing sales of cell phones was 819 mn USD, 2.16 times decrease y.o.y.
Subscriber base of the Indian cell operator Sistema Shyam Teleservices has reached 500000 subscribers. The network covers a thousand of towns in three Indian states. By the end of 2009 the operator’s subscriber base may reach 1 mn people, if Sistema manages to invest the planned funds in the Indian operator despite crisis.
In 2008 the revenue of CJSC Sky Link was equal to RUB 8.3 bn, 30% growth y.o.y.

In 2009 the Russian IT market will decrease by 14.2%, according to experts.
86 new salons are planned to be opened by Euroset in Russia. They will include shops, frozen within the process of the company’s optimization, as well as new ones.
In 2009 Russian cell operators’ incomes, contributed by mobile Internet access, will increase by 67%, according to analysts’ forecasts.
RUB 1 bn are planned to be invested by the federal state-owned unitary enterprise Post of Russia in Tatarstan Pochtasi’s modernization by 2011.
In 4Q2008 the number of connections to cell networks reduced by 15% y.o.y. The number of cell subscribers increased by 162 mn people across the world and according to this result 4Q was the weakest in 2008.

$2 000 000 were invested by MTT in the system of traffic routing. The project had been initiated by OJSC Sitronics.

Within the nearest two years Russia will increase its orbital group GLONASS by 12 machines.




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