The Russian Telecommunications Market Development May 2009

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

1. General Trends of the Market Development

Megafon is opening its own retailing network

Megafon’s authorities declared they intended to construct an own retailing network. This year they are planning to open 500 salons of communications under Megafon brand. The company has already assigned 17.5 mn USD for the project. In the frameworks of the company’s strategy the network may be expanded to 1.5-2 thousand of points across Russia. The first investments will be spent on creation of salons, oriented mostly on making contracts for connection and sale of services to subscribers. In future the network will develop, aiming to the increase of mobile phones and other technologies sales. On average, the investments in one salon are assessed at EUR 35,000. The company’s authorities have preferred to create its own monobrand network instead of acquiring independent retailing companies. It is quite reasonable in current unstable conditions, experts say. As a rule, negotiating the sale of a business, retailing companies possess quite big debts, for example, Cifrograd, the acquisition of which was refused by Megafon. According to analysts, Megafon may decide to cooperate with small retailing companies, obliging them to sell the operator’s contracts on the level of around 100% of the total sales.
According to analysts, in current market conditions, when the leading operators have already redeemed a number of independent retailing companies, Megafon should follow a different development strategy. Another reason for this is that currently the retailing business has faced the problem of the dramatic decrease of profit due to the decline in demand for offered products. A part of the retailing company’s debt is transferred to an operator in case the parties make a partnership agreement. However, it may be less profitable than creating an own network.
Regarding the money, Megafon is planning to invest in the retailing network construction, the sum could be insufficient. The real amount will certainly depend first of all on the retailing shops parameters: a size, a range of services, location. Besides, according to experts, the tendency of retailing companies’ acquisition is new for the market and it is still hard to assess its profitability and success.

Summa-telecom intends to enter the market of broadband access

Summa-telecom is planning to enter the market of broadband Internet access, using FTTB technology (Fiber To The Building). This year the company’s services will be available in 10 regions of Russia. Summa-telecom is ready to invest around 70 mn USD in the project of broadband access development.
Previously the company had already declared about entering the market of GSM cell communications and its plans on WiMAX networks development in 330 towns of Russia. However, the company’s plans were not realized.
In 2008 the company already stated it intended to provide services of Internet access in 15 regions of the country. This year the number of regions was reduced to 10 as well as the investments in the project.
By the end of 2009 the company will start providing services of broadband access in the following towns: St. Petersburg, Nizhny Novgorod, Voronezh, Lipetsk, Makhachkala, Tver, Tula, Orel, Rostov-on-Don and Krasnodar. The company possesses its own main-line channels in these regions and such channels have been already put into operation in some of the towns. Within 2009 Summa-telecom intends to connect up to 14 000 buildings and attract around 50 000 subscribers. Thus, the company expects it will take around 10% of the market of broadband access in regions it operates in. These results will be achieved due to high rates of construction and the company’s flexible pricing policy. The largest market share (17%) is expected to be obtained by Summa Telecom in Makhachkala as services of broadband access on FTTB technology have not been provided in the town so far. The operator promises to provide the speed of no less than 100 Mbit/sec in the local network.
Experts assess the company’s plans on broadband access development in 10 Russia’s regions as positive. Penetration of these services is quite low, except big cities, so the company may take good positions if it offers profitable tariffs and high-quality services to clients. Another positive factor is that Summa-telecom is entering the market while other participants are freezing their investment programmes and reducing CAPEX. Thus, Summa-telecom may create more expanded subscriber base.
On other hand the market share, stated by the company, is too optimistic, experts say. The company’s plans on Moscow and St. Petersburg are even unreal since penetration of broadband Internet access is very high in the capital cities. The investments in the project are enough to construct networks and start operating. In future the company will need much bigger investments for the project promotion and development.

Megafon intends to enter the market of broadband access

In 2009 Megafon is planning to enter the market of broadband Internet access. To realize this project the company’s authorities have assigned 500 mn USD. Currently the operator is negotiating with various Internet-providers, searching for the most advantageous conditions.
The interest to the market of fixed-line communications and to the sphere of broadband access in particular is a general trend of big operators’ development. Currently the market of cell communications has been already divided between Big3 operators and the further development of the business seems to be impossible. Broadband access will allow companies to expand the range of services with a small increase of costs. Megafon is the last operator, joining the companies, which expand their businesses in the field of fixed-line communications, so it has few assets to be absorbed. Besides, there are very few providers, which would agree to sell their assets with a rebate. However, in crisis conditions the assets’ value has reduced considerably and Megafon may benefit from this. So far, it has been unknown whether Megafon will prefer to acquire a big participant of the market of broadband access or some regional providers. Net By Net, Westcall and Akado are being considered as potential companies to be acquired.
Megafon’s desire to enter the market of broadband access is quite reasonable, analysts say. All Big3 operators want to obtain control over all spheres of the telecoms market. However, according to experts, during the project realization the company may face some problems. In particular, the operator may not find appropriate conditions for acquisition of assets. At that the sum of 500 mn USD is considered as sufficient by analysts.
Megafon possesses a big potential for operating on the market of Internet services, analysts note. The operator’s share on the market will depend on what assets will be chosen to be absorbed by the company. Cooperation with a big provider would be the most promising option, but such companies are hardly planning to sell their assets in the nearest future. Smaller operators may have debts or insufficient technical base.

Sitronics counts up losses

In 2008 Sitronics managed to reduce its net los 4.3 times to 53.9 mn USD. In 4Q2008 the company’s net loss decreased 6 times to 7.8 mn USD and the revenue increased by 1.2 % to 612.3 mn USD. Such positive results were achieved due to the company’s strategy on withdrawal from low-margin businesses.
In 2008 the company’s profit increased by 23% to 2 bn USD. OIBDA was equal to 133.3 mn USD compared to OIBDA loss worth 101.1 mn USD in 2007. According to Sitronics’ authorities, changes in currency rate affected the company’s loss: Sitronics lost 55 mn USD.
In 2009 one of the company’s goals is to restructure its debt worth 733 mn USD (533 mn USD of which is a short-term debt). Sitronics also intends to reduce CAPEX three times. The company will realize the programme on its position strengthening on the fast-growing markets of the Middle East, Asia and Africa and increase investments in projects with a short pay-back period.
In 2008 the company’s authorities started getting rid of low-margin businesses, in particular, the sector of consumer electronics. In the frameworks of this strategy in April 2009 Sitronics sold the distributing business of Kvazar-Micro to Melrose Holding Company for 50 mn USD.
Despite the successful beginning of the year the company’s authorities take into account that on the whole 2009 will be complicated for the IT market as the market may reduce by 20%.
According to analysts, Sitronics’ statements for 4Q2008 are positive. At the beginning of 2009 the company managed to realize the plans, set by its authorities. The company’s profit and loss are linked directly to changes in currency rates. So, the rouble devaluation has impacted positively the company’s results.
Despite the positive changes 2009 will be a hard year for the company as well as for the IT market on the whole. The expansion in Asian and African countries, planned by the company, may fail as Sitronics risks facing strong competition. According to experts, the company’s authorities should focus on restructuring the company’s debt worth 733 mn USD.

Investments in the innovative sector have been cut by 75%

The National Association of Innovations and Development of IY (NAIRIT) has carried out the survey regarding investments in the innovative sector in 1Q2009. Thus, the investments were cut to RUB 35 bn (75% decrease). The share of the government investments increased by 14% to 87%.
The market participants give negative forecasts on their own programmes development within the nearest three years (72% of respondents). 17% of respondents are planning to complete their projects and 4% expect the programmes will be completed successfully.
According to the statistics from NAIRIT, the market participants will be less active and the level of new programmes development will be lower. The number of innovative programmes reduced by 40%. The number of consultations in the field of innovative programmes development decreased by 37% y.o.y.
Currently the most investments are provided by the government and it will help to keep venture investments in Russia. the economic growth is expected in 3-4 years and by this time the market participants will be able to finance innovative projects. Besides, we note that crisis impacts positively: venture investors will obtain the possibility to participate more actively in projects since the value of assets is going down.
According to independent experts of the sector, reduction of venture investments in innovative projects is a logical process in the frame works of the world unstable situation. Thus, the government support is especially important. The government investments are increasing as they can only provide the stable development of innovative programmes. According to analysts, the growth of private investments is expected in 1-2 years. Besides, non-profile investors may be interested in investing in the innovative sector, since it may become an alternative for their further development.
Currently investors want to invest in reliable and profitable projects. To support their own businesses profitability is one of priorities for them.

MTS want to acquire a retailing company TeleForum

MTS have applied to FAS for the acquisition of the St. Petersburg retailing network TeleForum. The company owns around 200 salons of communications in the North-Western federal region for the most. 20 salons of the company work as monobrand salons under Bee Line brand.
It is not for the first time that MTS acquire cell retailing companies. The operator has already owned Telefon.ru and Eldorado retailing networks. TeleForum may be also acquired by the operator. The most of the company’s shops are located in St. Petersburg. Besides, TeleForum has representative offices in the Krasnodar region, the Rostov region, Ufa and Naryan-Mar.
The matter on the company’s sale has not been settled yet. Good financial results and running the business without credits are the key advantages of the company, according to TeleForum. The company only invests its own money. In case the company is acquired by MTS, Bee Line’s monobrand salons may change their names.
According to experts, there are no obstacles for MTS to acquire TeleForum. The company’s position is assessed as stable in the region. And for MTS this acquisition is a way to increase sales in the North-Western federal region. All big federal retailing networks have been already acquired by this or that operator, so currently cellular companies have started acquiring companies of the 2nd and 3rd levels to develop in regions. The price for TeleForum is not high and it will not affect MTS’ financial condition.
On other hand, experts note the company’s stable position on the market. Unlike most of other retailing companies TeleForum has been running its business without loans. Investing only its own money the company managed to construct an effective network of shops and achieve good results in sales. Moreover, St. Petersburg and the North-Western federal region is an attractive market form MTS in the long-term outlook and the operator will try its best to increase its share on this market.

MTS will get a possibility to refinance their debt

MTS have arranged with banks for refinancing their debt on the loan worth 630 mn USD.
Over 10 banks agreed to refinance the operator’s debt. We remind the loan had been given to MTS by the banking syndicate, including the bank of Tokyo Mitsubishi, UFJ, Bayerische Landesbank, HSBC Bank, ING Bank, Raiffeisen Zentralbank Oesterriich and Sumitomo Mitsui Banking corporation Europe. The total sum of the loan was equal to 1.33 bn USD. The first tranche of 630 MN USD has to be paid off by the company by the end of May 2009 and the second tranche has to be paid off in 2011.
The parties have already come to the agreement, though the warrants have not been signed yet. There will be two stages of financing: at first MTS will obtain 600 mn USD and then 30-50 mn USD more. The credit term period is 3 years and the operator will not have to make payments within the first two years. The crediting rate will be LIBOR + 6.5% per year and besides, MTS will have to pay the banks the reward worth 2.5% per year.
Currently MTS are interested in prolongation of the most of their loans. As of the end of 2008 the operator’s debt was equal to 4.1 bn USD. The company has 1.06 bn USD on its accounts and it has to pay off 1.18 bn USD this year. MTS are planning to obtain cash which in particular, will be necessary for assets acquisition. Taking into the account the complex situation on the market, this year operator has to reduce its investments in the preplanned projects (3G network constructions and the transport network), the network maintenance and payments for deliveries up to 1.5 mn USD
According to analysts, MTS’ decision on its debt refinancing, taken by the operator’s authorities, is rational. Besides, the conditions of the credit, given to the operator currently, are profitable due to the interest rate decrease. The company’s cash release will certainly allow the company to continue investing in the already existing and new projects as well as to acquire assets the company is interested in to stimulate the further development. The possibility of MTS and Comstar’s merger is also assessed positively by experts.
On the whole the news about the agreement between MTS and the banking syndicate is positive, experts note. First of all it is necessary to take into account how it is difficult to obtain loans in crisis conditions. The planned refinancing of MTS’ debt proves than the company is attractive as a borrower. If the loan is obtained, it will allow the operator to pay off its debt on time. Despite the operator’s difficult position, analysts have no doubts that the company will pay off its debt and maintain its competitive position on the market.

MTS are constructing a mainline (trunk) network

MTS are planning to construct a mainline network by 2012. The network, the total length of which is going to be 600, 000 km, will connect 7 federal regions of the RF. In 2009 the operator also intends to enter the market in Frankfurt.
Currently MTS have already constructed 10, 000 km of the network. The further expansion of the network will concern first of all the densely populated regions of the RF. The working standards will remain the same: fiber optic communications lines (FOCL) will be constructed in the ground or connected to tangent towers. The planned investments in the projects have not been disclosed yet. The expected merger of MTS and Comstar may correct the working schedule. Comstar covers 6 federal regions and 70 towns, where the company uses fiber optic networks.
The usage of its own mainline network will allow MTS to reduce costs on channels leasing. Currently the ratio of the operator’s own and leased channels is 20/80 accordingly. The main-line networks construction is the common objective for Big3 operators. It becomes necessary after the companies entered the regional market.
According to analysts, the decision on the own main-line networks construction, taken by MTS’ authorities, is reasonable. Moreover, MTS is not the first operator, realizing such a project. Due to its own network the operator will cut its costs on traffic transit, which will become possible after the company’s refusal to lease channels. MTS is planning to acquire Comstar’s assets which will help to reduce costs on the project realization.
However, analysts also point to the obvious disadvantages of MTS’ plan. The project will be obviously compensated, but the similar strategies of Vimpelcom and Megafon will create extremely strong competition in this sphere, which will reduce considerably the project’s profitability. Besides, the operator should take into account that the companies, leasing channels, may make their tariffs cheaper after they lose big clients.

Euroset refuses to invest in salons opening

The new president of the cell retailing company Euroset Alexander Malis has suspended investments in non-profile companies. Euroset’s plans on opening the salons, which had to sell luxury phones, have been reconsidered. The project on such monobrand shops opening will not be realized. The company was planning to invest around 25 mn USD in the project.
The company’s management is carrying out assessment of this segment for Euroset’s development. The company may return to the project if it provides it with special advantages on the market. The new management, presided by Alexander Malis, is planning to focus on sales and postpone realization of the other projects, which were urgent before the crisis. This may be also caused by decrease of the company’s efficiency on the market.
Alexander Malis’ idea is supported by Euroset’s shareholder Vimpelcom, owning 49.9% of the company’s shares. Due to crisis the demand for mobile phones has moved to a cheaper segment. In 1Q2009 an average price of a phone reduced by 6-10% up to RUR 5000 y.o.y.(14/05/2009)
According to Euroset the decision, taken by Euroset’s management, is reasonable and logical in current crisis conditions. The company has quite a big debt and a large amount of ineffective communications salons, which were created to take a position on the market. Currently the situation has changed entirely, which is obvious to the company’s management. So, Euroset will adjust its costs due to reduction of ineffective salons and denial of non-profile projects, which will not provide the company with considerable advantages on the market.
On other hand, the idea of salons for luxury phones sales is reasonable, according to some analysts. The demand for expensive handsets is invariable and the company may return to the project as soon as the trends of the market development become understandable. The growth of demand in this segment of the market may become the key driver.

2. Market Participants

AFK Sistema wants to acquire a shareholding of Svyazinvest

Comstar-UTS’ authorities have applied to Rosimuschestvo about the acquisition of 25% of Svyazinvest’s shares. Previously AFK Sistema planned to sell the government its blocking shareholding of the operator. It was caused by the assessment of the assets, owned by AFK Sistema, by specialists from Ernst & Young. The value has appeared to be 3 times as less than it was expected by the company and is equal to RUR 23 bn. This asset was acquired from Leonard Blavatnik for 1.3 bn USD, which is almost two times as much than the current value of the shareholding.
In this situation Sistema’s authorities considered it more profitable to buy additional shares to reach the control shareholding of 50%+1 share. The company is planning to assign around RUR 20 bn for this transaction. The shares can be acquired due to loans, which are expected to be obtained without any problem by Sistema’s authorities.
AFK Sistema is certainly interested in getting the control over Svyazinvest, the biggest operator of fixed-line communications in Russia. According to the preliminary estimates, in 2008 the company’s total profit may be equal to 8.652 bn USD.
However, analysts are skeptic that the transaction can be completed since the decision on Svyazinvest’s assets sale is taken by the government. And the government want to control the sector of communications itself. Besides, according to the preliminary forecasts, the transaction has not been included in the plan of privatization for 2009.
Sistema’s financial position is not good, so if the transaction is completed, the acquired assets may be spent on repayment of the debt to banks as in happened with the Bashkirian fuel and energy complex. (23.04.2009)
According to analysts, the main reason for Sistema’s wish to acquire 25% of Svyazinvest’s shares is the company’s intention to increase the price for the operator’s asset, the company already owns. Although Sistema’s profit growth, expected if Sistema and Comstar-UTS merge, will help AFK to improve considerably its financial condition. Besides, the estimates of the assets’ value, given by Ernst & Young, seem to be extremely underestimated, experts note. Anyway Sistema will not sell its share in Svyainvest for the current price.

Tele2 Russia published its statements for 1Q2009

Tele2 Russia, a subdivision of one of the leading European alternative telecommunication companies, has published the consolidated results of its work in 1Q2009 and plans of the company’s further development.
In 2009 the company continued the accelerated development of its networks in new Russia’s regions and adjustment of costs. Currently Tele2 is operating in 17 regions of Russia, the company’s subscriber base is equal to around 10.6 mn people. Besides, other 18 networks will be launched within 2009-2010.
In 1Q2009 the company attracted 220,000 new subscribers (320,000 subscribers in 1Q2008). ARPU remained on the same level as in 1Q2008, i.e. RUR 215 (RUR 217 in 1Q2008). The company’s operating profit was equal to RUR 6 832 mn (RUR 5 686 in 1Q2008). In January-March 2009 CAPEX of the company was equal to RUR 2.252 bn (950 mn in 1Q2008). The company’s EBITDA was RUR 2.183 bn (RUR 1.928 bn in 1Q2008).
According to the company’s statements, we can see that the demand for additional services has been increasing since these services became available due to the launch of EDGE technology in all the regions Tele2 operates in. as of March 31st 2009 the company’s subscriber base was equal to 10, 642 mn people, i.e. 54% of the total mobile subscriber base of the Tele2 holding. The share of Tele2 Russia in the total profit of the holding’s mobile operations is around 275, according to the statements for 1Q2009.
Currently the company’s most important objective is the launch of networks in new regions. According to Tele2’s plans, this year first of all the company’s network will be put into operation in the Tomsk region within May-July of 2009 and other 6 regional networks will start operating within 3Q2009. The operator confirms its plans on its networks launch in 12 regions of 18, where the company possesses licenses or has already acquired companies. (27/04/2009).
Despite the crisis in 1Q2009 Tele2 managed to increase its subscriber base and start constructing new networks in different regions of Russia. The company has chosen a right strategy of its services promotion on the market, also due to its marketing solutions, which were realized originally and were not targeted to competition with Big3 operators. The company’s key advantage are low tariffs, which are especially urgent within the economic crisis and allow Tele2 to attract more subscribers from neighbouring target groups. Moreover, the company has started providing services of mobile Internet access, which increases its competitiveness on the market.
On other hand, before crisis the segment Tele2 works in was not of interest to Big3 operators because of low margin. There were more promising segments of the market, in which the operators invested considerably. And currently these segments have been affected by crisis and some of Big3 operators have already turned to Tele2’s segment. If Big3 operators state their intention to develop their own alternative projects-discounters, it will be difficult for Tele2 to compete with them due to difference in financial and other resources.

GPKS will provide the routine taking the Unified State Examination (USE) in regions

The State Enterprise Space Communications (GPKS) has denied the fears of mass media representatives regarding the possible failure of carrying out the Unified State Examination (USE) in the Krasnoyarsk region and the Altai Republic. The fears were caused by the failure on Express AM2.
One of the objectives of the satellite group controlled by GPKS is to provide continuous work of Internet which is necessary to realize the project Education. In the frameworks of the state project the satellite resources are realized by GPKS according to the special tariff plans with considerable rebates. According to GPKS, during USE additional satellite resources were used instead of Express AM2. Representatives of GPKS call to various institutions and companies engaged in large government projects like Education to take part in development of alternative options for their effective realization without affecting GPKS’ reputation. Anyway due to the failure of Express AM2 it is necessary to correct the development plans of the enterprise as well as some operators of satellite communications in regions.
According to analysts, the failure of Express AM2 did not affected USE carrying out in schools of the Krasnodar region and the Altai Republic. According to the statement of the Federal Service on Supervision in the sphere of Education and Science, Internet access is not necessary. Besides, GPKS possesses substituting resources to provide services of satellite communications even if there is breakdown of space machines.
GPKS did all the necessary works to remove consequences of the failure of Express AM2. Besides, the enterprise’s authorities assess impartially problems in the sphere of satellite communications. According to experts, the government approach was effective in the problems solving. The problems may be solved successfully in the frame works of the Federal Space Programme by 2015. The only obstacle to solve them may be reduction of financing in crisis conditions.

MTT reported for 2008

Over 2008 MTT’s revenue has come to 1.107 bn USD, 4% growth y.o.y. Besides, the operator has managed to increase its share on the market of ILD/DLD communications up to 7.5% (while the total market was 3 bn USD), 0.7% growth y.o.y. According to the non-audited results, the company’s OIBDA was 105 mn USD, 5% growth y.o.y. the revenue from subscribers of ILD/DLD communications was 222 mn USD, 7% growth.
In particular, the revenue from additional communications services increased by 35% to 29 mn USD. The transited voice traffic from the major services was equal to 13.4 billion of minutes. MTT managed to increase its revenue from reception of the incoming international traffic to 66 mn USD, 46% growth y.o.y. We note the number of subscribers, calling in pre-select regime was 1.5 mn people in 2008 (0.8 mn in 2007). The company’s authorities do not report on net profit, CAPEX and the company’s debt. (06/05/2009).
Analysts have different opinions on MTT’s statements for 2008. According to some of them, the company’s results are positive. The company has managed to compete with Rostelecom due to the increase of its share on the market of ILD/DLD communication, which became possible due to the more flexible pricing strategy. The number of additional services has also increased. However, according to other analysts, the results of the company for 2008 have been worse than it was expected. So, the operator has not managed to connect new regions to hot-choice regime and the company’s revenue in the sector of traffic transit is going down.
The company’s share on the market of long-distance communications will remain on the level of 10%, analysts say.

AFK Sistema intends to reduce its debt in 2009

AFK Sistema has published its financial statements for 2008, according to which the company’s total debt is 10.7 bn USD. In 2009 the company’s key objectives are first of all reduction and restructuring of the debt. Currently the holding’s authorities are being interested in the search of partners in the field of telecoms and consumer assets to achieve the goals.
In 2008 Sistema’s net loss was equal to 713.9 mn USD, compared to 467 mn USD of net profit in 2007. OIBDA went down by 39.2% to 873.2 mn USD. The company’s revenue increase by 24.3% to 16.7 bn USD, OIBDA margin was 32.9%. At that the company’s net profit went down 25 times from 1.57 mn USD to 62 bn USD.
52% of Sistema’s total debt falls to the business unit Telecommunication Assets. In 2008 the telecoms segment’s net profit reduced by 26.3% due to changes of currency rates. This kind of business is the key for Sistema and the company’s authorities pointed to its high profitability even in crisis conditions.
The debt of another business unit Technologies and Industry was equal to 20% as of the end of 2008. The revenue in this segment grew by 21.6% to 2.532 bn USD. Net loss in this segment decreased from 165 mn USD to 50 mn USD during the year. The business unit’s OIBDA increased 417.7% to 180 mn USD.
8% of Sistema’s total debt fall to the business unit Consumer Assets, in which attracting potential partners is preferable for the company’s authorities. Besides, investors will be able to take shares in some small subdivisions of Sistema. The holding is not planning partnership in MTS and the Bashkirian fuel and energy complex. The government may become the holding’s partner in the Indian project Sistema Shyam Teleservices Ltd, which needs additional financing. Sistema-Hals’s debt restructuring was carried out after its share had bee sold to VTB. Besides, Sistema is planning to reduce its debt due to the dividend policy. (07/05/2009)/
The financial results, published in the report of AFK Sistema, are not unexpected for experts since Comstar, MTS and Sitronics have already reported for this period. Experts note the holding has managed to improve its position, linked to the debt restructuring. According to experts, the strategy of attracting partners to Sistema’s subdivisions will impact positively the further reduction of the company’s debt as it happened after the share in Sistema-Hals had been sold to VTB. The partnership agreement with the government regarding Sistema’s Indian project is another important issue, experts note.
In the complex economic situation on the market, Sistema’s results seem quite stable, according the analysts. However, not all the company’s business units are being developed dynamically. The total revenue of the holding is mostly contributed by the telecoms segment. The acquisition of the Bashkirian fuel and energy complex is another positive aspect, experts say. The strategy of attracting investors-partners will also succeed in current conditions.

Vimpelcom affected Telenor’s statements

In 1Q2009 Telenor’s net profit was equal to 250mn USD, 64.5% decrease y.o.y. according to the holding’s authorities there are several reasons for the slowdown. Firstly, Kievstar’s decreased profit affected Telenor’s results. Secondly, the results were also impacted negatively by Vimpelcom’s losses due to changes in currency rates. The holding’s revenue was equal to 4 bn USD, 3.1 % growth.
The company’s EBITDA increased by 0.45 to 1.5 bn USD. EBTDA margin has gone down to 34.2% y.o.y. (35.1 % in 2007). According to the company’s authorities, the operator managed to achieve stable revenue. Telenor Norway and Grameenphone in Bangladesh are the companies, which have managed to achieve more positive results over the reported period.
The financial crisis has affected the international traffic transit as well. According to the company, the traffic remains quite stable. Besides, the Ukrainian market impacted negatively the company’s revenue growth. However, according to Telenor, the company’s profitability has remained quite high. We note the Norwegian holding owns 56.2% of Kievstar and the rest 43.49% belong to Alfa Group. Kievstar remains the leading operator of communications in Ukraine. The operator’s market share is 42%. Over 1Q2009 the operator’s net profit has come to 361 mn USD, 24% decrease. The operator’s EBITDA has gone down to 210 mn USD (27% decrease). Kievstar’s ARPU has reduced by 5% in the national currency. The company’s subscriber base has reduced by 479 thousand subscribers to 23.052 mn people.
According to experts, Telenor’s results for 1Q2009 are positive in crisis conditions. Kievstar’s negative impact was compensated due to the positive results of the company on the Norwegian and Asian markets. Vimpelcom’s activity has affected Telenor’s results, experts believe. Vimpelcom’s costs and investments are nominated in foreign currency and the revenue is obtained in roubles by the company. The change in currency rates has certainly influence the Russian operator’s activity, affecting first of all Telenor’s statements. However, Telenor will hardly refuse to operate on the Russian market.
According to analysts, the demand for Vimpelcom’s assets on the market of European bonds, is quite high despite the negative results. This may be caused by differentiation of Telenor’s and Altimo’s assets in Vimpelcom. Telenor’s shares in Vimpelcom will be probably sold on auction, if the Russian and the Norwegian government do not interfere in the conflict.

MRK: ways to the profit growth

The regional operators Sibirtelecom, Uralsvyazinform, North-western Telecom have reporter for 1Q2009. The company’s general trend is reduction of their net losses.
In 1Q2009 Sibirtelecom’s net loss was equal to RUB 81.241 mn, compared to RUB 579.196 in 4Q2008. The company managed to reduce considerably the loss after it had accepted the accounting policy on additional provisions. Sisbirtelecom’s condition was also influenced considerably by Sberank’s shares devaluation on exchange.
In 1Q2009 Uralsvyazinvest’s net profit increased by 22.5% y.o.y to RUB 980.1 mn. In 1Q2008 the company’s net profit was RUB 800.4 mn. The operator managed to increase its net profit due to the sales, the reduction of personnel costs, materials and the cooperation with other organizations.
North-Western Telecom reduced it net loss from RUR 168.9 mn in 4Q2008 to RUR 90 mn in 1Q2009. The operator also reduced its operating costs in 1Q2009 due to the completion of repair work and inventory, which affected the results of 4Q2008. (08/05/09)
Analysts point to the positive changes in the telecoms activity in regions. However, according to experts, the changes are mainly caused by reduction of costs due to staff reduction, etc. Besides, the companies increased prices in their tariff plans.
According to analysts, it is hard to assess whether the regional operators will be able to maintain the results in future. They emphasize the companies has external debts, nominated in dollars. Due to the inflation and the rouble devaluation this may become a serious obstacle in the companies’ net profit growth in 2009. Anyway the anticrisis measures, taken by the companies, were successful, experts note.

SMARTS reported for 1Q2009

According to the published report for 1Q2009, the revenue of the regional operator of cellular communications SMARTS has gone down by 13% q.o.q to RUR 1.2 bn. The operator and its subsidiaries’ total net loss was equal to RUR 322.7 mn, RUR 309 mn of which fall to the mother company, compared to profit worth RUR 2.7 mn in 4Q2008.
The operator’s negative results have been caused by the already usual subscribers’ tendency to save money on roaming in crisis conditions. Besides, Smart lost RUR 448.5 mn because of the changes in currency rates and the increase of interest rates. According to the operator’s authorities, the company’s revenue was also affected by Big3 operators, which increased prices and thus, the subscribers’ incoming traffic reduced. Although the operator did not increase its tariffs ARPU of SMARYS went down by RUR 5.4 to RUR 123.7 in 1Q2009 due to the strong competition in regions. The operator’s MOU was equal to 138 min.
However experts also point to positive trends. So, within 1Q2009 the operator’s subscriber base increased by 0.4%, while the cost for new subscribers attraction were reduced by 49% q.o.q. Besides, the operator clears its bases, eliminating subscribers, who were inactive within three months. Currently 2.85 mn people are using the operator’s services. The company’s net debt reduced by 11.5% to 107 mn USD in 1Q2009. The company’s authorities expects for all its results improvement in 2Q2009.
Analysts have different opinions on the operator’s results for 1Q2009. on the whole, according to the statement, the operator is in difficult situation. The company’s revenue decrease, caused by the country’s economic crisis, is aggravated by SMARTS’ dependence on Big3 operators. The operator is not able to resist their policy of tariffs increase.
According to experts, SMARTS will continue suffering losses on the market of cell communications. Even being a large regional operator, the company is not able to compete with Big3 operators. The quality of the services, provided by the operator, also yields considerably. The operator should focus on its debt reduction which is only possible if the company continues reducing its costs, experts say.

Euroset and Nokia are going to sign a dealer agreement

The conflict of many years between the Finnish Nokia and the Russian biggest cell retailing company Euroset is close to be settled. The companies intend to renew direct cooperation and are going to sign a dealer agreement.
We remind that in august 206 Euroset almost broke with Nokia. Eugeny Chichvarkin, presiding the company’s Board of directors then, sent a letter to the employees, in which he informed that the relations with the vendor had reached a deadlock. In 2006 Euroset intended to make a dealer contract with Nokia, but the contract was not signed as many of the contract terms did not the Finnish vendor.
According to analysts, after the contract is signed, Euroset’s share in Nokia’s sales in Russia may increase up to 2-25%. However, Nokia may also lose its market share, which is around 32% at present, experts note. Nokia’s retailing partners in region may face competition with Euroset and to maintain their positions on the market they will start working more actively with other brands, for example Samsung.

Scartel has started its regional expansion

Since autumn 2008 Scartel has been testing WiMAX networks in Moscow and St. Petersburg. Within a year the company has already invested 300 mn USD in the networks development. On November 1st Scartel started selling the equipment for subscribers.
Now Scartel has announced about its regional expansion. From May 1st the operator will launch the programme “Yota-Champion” I Ufa, where 500 USB-modems will be handed out. Until September the Ufa WiMAX network will be working in test mode. Scartel has already started constructing WiMAX network in Krasnodar and the network is planned to be started in Sochi in 2009.
Scartel’s networks work in the 2.5-2.7 GHz bond. The hard-to-get frequencies were acquired by the company due to the acquisition of other market participants. For example, in Moscow Scartel acquired Macmis company and Sinamax company in St. Petersburg. In the regions the operator has also bought several companies and currently it is able to construct networks in all towns, where the population s over 500 thousand people. In 2008 Scartel obtained frequencies for Kaliningrad, Perm and Ufa. All the companies, acquired by Scartel, were transferred to a unified legal entity.
According to analysts, WiMAX may be considered as a niche service. Demand is defined by subscribers’ ability to pay, which is not very high at the moment. Scartel will have either to dump to compete with other operator or remain a niche operator. On other hand, Scartel will succeed if the networks will be developed fast, experts say. The project will be reasonable if within a year the company constructs the network and attracts subscribers due to an aggressive advertising campaign. Otherwise, the company will not manage to take the most of subscribers because of other market participants.

Comstar-UTS pretends to Synterra

Comstar is going to make an agreement with Synterra about exchange of shares. At the beginning of April the company’s president Sergey Pridantsev informed that Comstar was ready to exchange 11% of its shares, acquired from Leonard Blavatnik’s structures, for assets, operating on the market of fixed-line communications. Akado, National Telecommunications and Synterra were among the possible options for the merger with Comstar.
The acquisition of Synterra may provide Comstar with the access to some promising regions, in particular, the North-West, experts note. St. Petersburg and the North-Western region have not been developed by Comstar yet. And Synterra owns PeterStar, which is the leader of the market in the corporate segment. Acquiring Synterra Comstar will reach good positions in the second effective segment in Russia. Besides, Synterra’ mainline infrastructure is the most valuable for Comstar. According to analysts, 100% of Synterra may be assessed at 500-600 mn USD, without taking into account the debt.

Svayzinvest is not ready to leave cell business

In the nearest future Svyazinvest is planning to consolidate its cell assets, according to the holding’s chief Yevgeny Yurchenko. In 2009 the holding is planning to develop its cell assets, to consolidate them to enter the market as a new company. The holding’s target is to take equal positions with the leaders of the cell communications market. The idea to consolidate Svyazinvest’s cell assets in one vertically integrated company was announced last September for the first time.
According to Svyazinvest, currently the operator’s subscriber base on the cell market is equal to 12 mn people, i.e. 9% of the regional market in Russia. Big 3 operators own 30% of the market.
However, the advantages of Svyazinvest’s cell assets consolidations are not obvious: currently MRKs’ advantage is that they react faster to changes of the situation in the regions than the Big3 operators. After the consolidation MRKs will lose this advantage. It would be more logical for Svyazinvest to sell unpromising cell assets in some regions and to continue the business as flexible participants, experts believe.

Kentavr has launched mobile TV
 

Not only AFK Sistema and Vimpelcom are planning to develop mobile TV in Moscow. They may be competed by Kentavr company, which has been unknown recently, but already constructed a network of mobile TV in Moscow and obtained the necessary frequencies. Kentavr is included in WiMAX Holding, the main asset of which is a WiMAX operator Scartel, 25.1% of which were acquired by Rostehnologii last autumn.

The investments in the project are equal to tens millions dollars. To cover Moscow by DVB-H networks hey needed around 30 base stations; 8 channels will be only broadcasted at first. In 2009 the service will be free of charge and mobile TV broadcasting is planned to be started this summer. However, it depends on the company’s ability to obtain all the necessary licenses. The company possesses frequencies, but it does not have documents from Roscomnadzor, the distribution of which was stopped this February.
DVB-H technology allows to transmit a digital video signal to cellular phones and other mobile receiver. To watch mobile TV it is necessary to have a device, supporting the standard. Such handsets are produced by LG, Motorola, Nokia, Samsung and others.
So far Scartel has only stared about its plans to develop mobile WiMax in Russia. in September 2008 the company informed that within 3-4 years it would cover 40 biggest cities of Russia and invest around 1 bn USD in the project.
According to experts, the potential of DVB-H is not big in Russia. The services will probably cost RUR 200-300 per month. If cell communications penetration reaches around 70%, in 2012 the market may be equal to RUR 10-18 bn. It is not a big sum for cell operators. Besides, high prices will be another obstacle for the service development (the subscriber fee is equal to a the subscriber’s ARPU) as well as lack of mobile devices, supporting DVB-H. the service will be probably used by 3-5% of all subscribers.

Megafon has acquired control shareholdings of two Georgian operators

In March 2009 Megafon completed the acquisition of the offshore company Debton Investment, which is the owner of 51% of the Abkhazian cell operator Aquafon GSM and 515 of the South Osetian Ostelelecom. The amount of the transaction was RUR 935 mn.
The Abkhazian operator Aquafon GSM operates in GSM and UMTS standards/ According to the company’s estimates, as of the end of 2008 its subscriber base was equal to around 100 000 users. Ostelecom’s subscriber base is over 22 000 subscribers. Megafon considers the acquisition of the operators as an interesting investment project. Both countries have borders with Russia and thus are of more interest. Apart from Megafon no one of Big3 operators owns assets in these republics.
According to analysts, Megafon will become a monopolist in the region. at that the competitors are not planning to enter this market due to the population’s low incomes and small territory of the region. Megafon had owned these assets actually before the transaction, experts note. The company has just declared officially about the acquisition. Penetration of cell communications is rather low in the region, but the competitors may face problems when entering this market for lack of their own infrastructure. These factors may become additional drivers for the development of the acquired assets by Megafon. The company’s development will be also hampered by the population’s low incomes and low penetration.

The Agency for Deposit Insurance will obtain around 25% of Rostelecom

The Agency for Deposit Insurance (ASB) will help VEB to acquire around 40% of shares of the biggest operator of long0distance communications Rostelecom from KIT Finance. ASB will become a provisional owner of 25% of Rostelecom and then give the shareholding to VEB’s structures (which will acquire other 15% of the operator), on the basis of which the government intends to consolidate its assets of the telecoms sector.
The government decided to involve ASB in the redemption of Rostelecom’s shares to avoid an obligatory offer to other owners of the company. According to the law “On Joint Ventures), an investor, consolidating over 30% of shares, is to make an offer to other shareholders. 51% of Rostelecom belong to Svyazinvest (75% to the state and 25% to AFK Sistema) and around 9% of the shares are in free circulation.

According to analysts, even if the transaction is completed and apart of Rostelecom’s shareholding is acquired by ASB in the interest of VEB, it will be a technical solution. The government does not probably need to increase its share in ordinary shares, since it has already collected the necessary number of privileged shares to obtain the necessary three 75% of votes when voting regarding Rostelecoms’s reorganization.
 

MTS and TeliaSonera have connected networks

MTS and TeliaSonera International Carrier have signed an agreement about mutual connection of networks for international traffic transit.
MTS obtained the license for provision of services of long-distance communications in 2006. In November 2008 the operator put the network of long-distance communications into operation and also obtained the license from the Ministry of Communications for provision of services of international and domestic traffic transit through its own network. As a result the company has obtained a possibility to set direct connections with international operators. Previously, according to the normative requirements, MTS transited international traffic through national operators of long-distance communications. the company cooperated with Rostelecom, MTT, Golden Telecom and TTK
In the frameworks of the agreement between TeliaSonera and MTS the companies will be able to carry out direct exchange of voice traffic between the operators’ subscriber networks. Besides, MTS will get an access to all TeliaSonera’s international transit directions, organized by connection to 300 operators on 44 communications centres in Europe, Asia and America. TeliaSonera will get a possibility to terminate its traffic on MTS’ network in Russia, Ukraine, Armenia, Byelorussia, Turkmenistan and Uzbekistan.
According to experts, the direct connection between MTS and TeliaSonera is the first step to MTS’ entering the market of international intercontent after putting networks of long-distance communications into operation. MTS is realizing the strategy of creating direct partnerships with international operators which will allow to reduce costs on traffic termination and provide MTS’ subscribers with high-quality communications when making international calls.

MTS have applied to FAS about the acquisition of Teleforum

The cell operator MTS has submitted the application to the Federal antimonopoly Services regarding the acquisition the St. Petersburg company Teleforum (193 salons), which is assessed at around 10 mn USD. Teleforum is of interest to MTS as a company, which has been working on the market of St. Petersburg for the long time.
Teleforum may become the third purchase of MTS in cellular retailing from the beginning of the year. At the beginning of the year MTS declared about the acquisition of 100% of Telefon.ru (512 salons) for 60 mn USD and on April 1st the company stated it had acquired 100% of shares of Eldorado communications salons (380 shops) for 22.5 mn USD.
To develop its own retailing the operator has hired a team of managers from the second biggest cell retailing company Svyaznoy. RTK network has been presided by the former vice-president Sergey Rumyantsev. Previously MTS stated they were planning to possess 2.5 thousand shops (after the acquisition of Telefon.ru and Eldorado salons the company possesses around 2.65 thousand shops). The biggest cell retailing company Euroset, 49.95 of which belong to Vimpelcom, possesses 3.7 thousand salons.
According to analysts, after MTS has stopped cooperating with Euroset, the company needs maintain its sales, so the operator may acquire some more regional retailing companies. the amount of the possible transaction on Teleforum’s acquisition by MTS is assessed at 50 thousand USD per salon, according to experts. On the market of St. Petersburg Teleforum’s share in contract sales does not exceed 5%, analysts note.

RTKomm.RU has signed a memorandum with Tata Communications

The Russian Internet-provider RTKomm.RU (a Rostelecom’s subsidiary) has signed a memorandum with the Indian operator of underwater cable systems Tata Communications (the former VSNL).
In the frameworks of the agreement the operators will provide services of data communications on the territory of Russia and overseas, using networks and technical appliances of each other. RTKom.RU has been connected to the points of traffic exchange in Amsterdam, London and Frankfurt and also possesses “junctions” with big international operators. Thus, the partnership with Tata Communications is the next step to improve efficiency of links with the international segment of Internet and to improve the quality of the services provided.
The partnership with the international provider is necessary for RTKomm.RU as this will allow to offer the company’s clients services overseas. In the frameworks of operating overseas RTKomm.RU provides services on connections of foreign offices to its clients’ corporate networks. So far the possibility of connection has been limited by the number of cities, where RTKomm.RU possesses communications centres (Amsterdam, London and Frankfurt). The partnership with Tata Communications will allow the company to expand the geography of presence and connections of clients overseas.
Using the Russian company’s resources Tata Communications intends to increase its presence on the Russian market. In Russia VSNL became known after the scandal with the Russian group Polarnet. At the end of 2004 VSNL deceived the Russian operator, with whom it had signed the agreement about mutual obligations when acquiring the underwater cable system Tyco Global Network (TGN), the length of which was 60, 000 km.
Tata Communications actually entered the Russian market about 4 years ago, acquiring the Canadian main-line operator Teleglobe in 2005-2006. The operator provided services to Russian companies. In February 2008 Tata Communications declared about its intention to invest 2 bn USD in the development in India and other developing countries within the nearest 3 years. The company’s local representative office Tata Communications Russia will start working in our country. The operator has been already carrying out the works on creating its representative office in Moscow.
RTKomm.RU has been chosen for the cooperation due to its client base across Russia (over a thousand of clients) and the developed IP-network with 130 points of access all over the country. Thus, RTKomm.RU is an ideal partner for Tata Communications as it possesses the technological base to provide innovative telecommunication solutions. The cooperation between the companies will help realize global plans on enhancement of the network connection on the growing markets.

Ernst & Young has assessed Svyazivest

Ernst & Young has assessed the shareholding, which belong to AFK Sistema in Svyzinvest (25%+1 share) at RUR 29-32 bn. This assessment is based on the optimistic variant of the holding’s development and it implies positive initiatives of the government in the field of communications, in particular the suggested growth of tariffs. The previous assessment of the shareholding at RUR 23 mn was based on the pessimistic variant of the development.
Svyazinvest’s shareholding assessment is linked to the prognosis of the company’s activity in 2009 and it depends on the government’s initiatives, in particular in the field of tariffs and benefits regulation. Experts have also assessed the government’s shareholding in MGTS (23.3% of voting shares) at RUR 4.5-5 bn.
The estimate at RUR 29-32 bn is more fair for the participants of the transaction, the government and Sistema. The government’s target is to consolidate Svyazinvest and Comstar’s objective is to sell the blocking shareholding, which is not necessary for the operator without the outlooks of the holding’s privatization. If the value is RUR 23 bn, the parties will hardly arrange the transaction. Du to the current market prices, we have a sum of 1.1 bn USD.

Moody's has raised Megafon’s rating

According to the rating agency Moody’s, Megafon is one of Big3 operators, which have the most beneficial position. Despite the slowdown in the Russian economics Megafon’s revenue and EBITDA are going to increase this year, according to Moody’s forecasts. The Bi3 operators’ (Megafon. MTS and Vimpelcom) ratings have remained on the level Ba2, but the forecast of Megafon’s rating is “positive” now. MTS’ rating is “stable” and the rating of Vimpelcom is ‘negative’. According to the agency, it has been impressed by Megafon’s high operating and financial results, the operator’s good position and settlement of the conflicts between the shareholders.
Megafon’s revenue and EBITDA will increase in 2009, though EBTDA profitability will go down, Moody’s forecasts. In 2008 Megafon’s income was equal to 7.05 bn USD (almost all the money was earned in Russia) has lag behind the revenue of MTS (7.84 bn). In the beginning of 209 Megafon’s subscribers started using the network less. However, in April the situation stabilized.
A month ago when speaking about risks for MTS and Vimpelcom Moody’s was also afraid that due to crisis people would start speaking less on phones. However, the forecasts regarding Megafon are positive: the use of the operator’s “base services” will increase and revenue from additional services (mobile Internet access, content-services, etc) will continue growing as well as the whole Russian market of communications in spite the slowdown in the Russian economics.
According to the market experts, analysts from the agency are too optimistic, expecting for the market growth. It is untimely to expect for the growth due to mobile Internet in crisis conditions. At best Megafon will not decrease its revenue, analysts say. Megafon’s tariffs are not growing and the use of mobile communications will hardly go up. There are no reasons for the growth: the level of unemployment is now 10% in Russia and most of Megafon’s subscribers are private users. The growth may be only caused by the increase of subscriber base, but the market has been already saturated.

Rostelecom has reported for 1Q2009

Rostelecom has declared the results of 1Q2009 under RSBU standard. The operator’s net profit has decreased by 28% to RUR 1.98 bn y.o.y. OIBDA was equal to RUR 3379.6 mn, OIBDA profitability was 22%. The revenue from data communications services and telematic services increased 2.7 times to RUR 1296.1 mn. The international traffic from foreign operators increased by 12.9% to 846.2 million of minutes. The operator’s revenue from international traffic transit and termination in Russia increased by 29% to RUR 1731.5 mn. Revenues fromm new and additional services, including data communications services and telematic services, providing with channels of communications continued growing as well. They increased by 19% to RUR 4.2 bn.
Rostelecom did not have to realize the anticrisis plan, prepared by the company’s management. The idea of the plan was that when the operator’s revenue went down by 10% and more, they would start taking measures on deterrence, reduction of costs and decrease of investments in particular.
According to analysts, in 2008 Rostelcom’s share on the market of services of long-distance communications dropped to 47% compared to 555 in 2007. However, the positions of the operator’s competitors are even worse. Rostelecom’s position is primarily beneficial and to take the operator’s market share its competitors would have to spend significant money on advertising and their services promotion. It was possible before crisis and Rostelcom could lose a considerable market share. Currently alternative operators have faced other problems.

Svyazinvest helped Envsion to double its turnover

The system integrator Envision Group has reported for 2008. In 2008 the company’s revenue was equal to 569 mn USD, 2.2 times as more than in 2007. The share of IT services in the revenue was 34%. The share of telecoms services was 45% of the company’s total turnover. The share of government contracts was 32.7%. In 2008 the company’s regional offices brought 15% of the total turnover.
The turnover doubling was possible due to several big projects, such as reconstruction of Centertelecom’s zone network in the Moscow region with the transfer to NGN technology, modernization and development of Rostelecom’s network as well as the large-scale project in Kazakhtelecom. Actually crisis did not affect the results of 2008 since the company’s work concerned the long-term contracts that had been already made before. Another positive factor is that the company does not have any debts. The company hopes to maintain the turnover of around 570 mn USD in 2009 and increase its market share to 3-3.5%.
According to analysts, the company’s growth is explained by the company’s several big orders with Svyazinvest’s MRKs as well as groundworks over the first 3 quarters of 2008. On the whole in 2009 the market is going to go down considerably by 30-40% as integrators exist due to projects for the most and IT budgets have been cut dramatically. IT market is expected to become stable until next year. In 2009 the company will survive due to long-term contracts, made before, as well as government contracts. The company’s turnover will probably drop by 10-20%, experts note. The market will become stable by 2011, experts remind.

Effortel redeemed Synterra’s share in Eurotel

The telecommunication holding Effortel Russia, which belongs to ex-president of Rosnano and the former 1st deputy chairman of RAO EES Leonid Melamed, has redeemed Synterra’s share worth 51% in the operator of communications Eurotel. 49% of CJSC Eurotel have been redeemed by Melamed’s structures in the interest of Enifcom. The parties do not disclose the sum of the transaction. According to experts of the sector, the sum may be equal to 20-50 mn USD.
We remind that Synterra acquired the share in Eurotel in autumn of 2007, redeeming 51% of the company from the disclosed structures. At that time Synterra was mostly interested in the operator’s key asset, the mainline Moscow-St. Petersburg – the border with Finland as well as the constructed line in Siberia.
In 2007 Effortel Russia stated they wanted to acquire Eurotel and Enifcom. The company intended to construct a multiservice operator of communications and its own fiber-optic lines had to allow it to increase the business efficiency. After the transaction Eurotel will be consolidated by Enifcom. The businesses consolidation is planed to be completed this August. Currently the total length of the company’s lines is around 10 thousand km and 5 thousand km more are being constructed. According to the company’s plan, by 20011 the length of the company’s lines will have to each 22 thousand km.
The key segment of the main-line market is channels leasing, experts say. According to their preliminary assessment, last year this segment grew by 13-15% to around RUR 25 bn. around 37% of this amount fell to Transtelecom, (31% to Rostelcom and 20% to Synterra). The share of Eurotel is 10% and the share of Enifcom is even less. However, Eurotel and Enifcom aim at another segment of the main-line market: the market of IP-transit (when an operator does not lease a channel, but earns due to other participant’s traffic transit in its network). According to the results of 2008, this market was equal to RUR 10 bn and the market was divided as follows: TTK – 37%, Rostelecom and its subsidiary RTKomm.RU – 40%, Vimpelcom’s subsidiaries Golden Telecom – 10%, Start-telecom- 4% and the Swedish-Finnish TeliaSonera (3%). According to analysts, the attempt of creating another national main-line operator is a good sign for the market since it will lead to stronger competition and it will eventually contribute to reduction of tariffs. The matter is that if Effortel will be able to obtain money to continue constructing networks actively in current crisis conditions.

MTS have agreed about the credit refinancing

In April 2006 MTS obtained 1.33 b USD from the banking syndicate, the participants of which were the Bank of Tokyo-Mitsubishi UFJ, Bayerische Landesbank, HSBC Bank, ING Bank, Raiffeisen Zentralbank Oesterreich and Sumitomo Mitsui Banking Corporation Europe. In May the operator will have to repay the first tranche worth 630 mn USD and the second tranche worth 700 mn USD will have to be repaid until 2011.
MTS have already made agreement with over 10 banks about its first tranche refinancing. At first MTS will attract around 600 mn USD and then 30-50 mn USD more. MTS will obtain this money for a three-year term and will not have to pay off within the first two years. The interest will be LIBOR + 6.5% and besides MTS will have to pay a reward worth 2.5% annually to the banks.
According to experts, making the agreement with the banks is good luck for MTS: few companies have managed to obtain syndicated credits since the beginning of crisis. Analysts remind that as of the end of 2008 MTS’ total debt was equal to 4.1 bn USD, and the operator’s net debt was 3 bn USD. This year MTS will have to repay 1.18 bn USD and the company had around 1.06 bn USD on its accounts. The operator is interested to prolog as many loans as possible on the most profitable conditions. This will allow MTS to free the cash and feel safer when taking decisions on investments. Besides, the money may be necessary for the operator to acquire assets.

3. Tension Lines

Loral is beginning the court examination with Rostelecom

The American corporation Loral space & Communications (Loral) has filed a claim against Rostelecom to the Federal Court of the USA in New York. The claim concerns the company’s claims on 49% of shares of the satellite operator Globatel, 51% of the assets of which belong to the Russian Rostelecom.
Loral’s claims against Rostelecom are based on the demand to admit the corporation to the control over the satellite operator Globatel as a shareholder. Previously 49% of the company’s share belonged to Globastar. On June 17 2004 the company was announced a bankrupt by the US Court on Bankruptcy Affairs of Delaware and the changes were not introduced to Globatel’s articles of association. However, so far Russia’s arbitration courts refused to recognize Loral’s claims on the matter. If Loral obtains 495 of Globatel’s shares, it will certainly impact positively Loral’s financial condition: according to the results of 2006 Globatel’s net profit was equal to RUR 39.66 mn and its total revenue was equal to RUR 802.5 mn. In case of non-execution of the American Court’s decision by Rostelcom sanctions may be imposed on the operator and criminal proceedings may be taken against the operator’s authorities.
Besides, Loral intends to exact 8.5 mn USD from Globatel. The decision on this calim was made by the London International Arbitration Tribunal on March 23rd 2007 and was recognized by the RF Higher Arbitration Court in Russia. The loan worth 8.5 mn USD was given to Globatel by Loral corporation in 2000. The money had to be returned by January 30th 2003, but a part of the debt was not repaid.
According to experts, the court examination may not be completed in favour of Loral corporation. Globatel will probably have to repay its debt to Loral under the corporations’ claim, the decision on which was taken by the London International Arbitration Tribunal and recognized by the RF Higher Arbitration Court in Russia. Concerning the corporation’s claim against Rostelecom, Loral’s outlooks seem to be vague, according to experts.
The corporation’s main goal is to put pressure on Rostelecom by the court examination, experts say. Rostelcom’s authorities may make a compromise with the corporation since there is a risk that sanctions may be imposed on the operator and criminal proceedings may be taken against the operator’s authorities.

Mostelecom is going to be sued
 

Several claims worth over RUR 70 mn have been filed against Mostelecom. The company is not able to discharge its debt liabilities to the partners because of the financial problems, caused by crisis. The operator would like to arrange for a credit and is negotiating the matter.
Around 10 claims were filed by Mostelecom’s contractors and suppliers to the Arbitration court of Moscow. According to the subject of the claims, the company is not discharging its liabilities on the contracts that have been already made. Some contractors were ready to be paid by installment, but if previously Mostelecom had promised to pay, currently the situation is vague. However, Mostelecom continues negotiating with its partners. The first result was withdrawal of the claim of RUR 5.2 mn by Vimcom company. The parties have made the amicable agreement and Mostelecom has already started to repay the debt.
Mostelcom’s financial condition has been caused by the rouble devaluation. The operator acquired equipment for foreign currency and its revenue was determined in roubles. As a result the planned CAPEX increased considerably and did not allow to company to repay its debt on time. Mostelcom is now trying to postpone its debts repayment.

According to experts, the situation with Mostelecom is typical for crisis. The sum of the company’s debt is assessed as not very big so it is untimely to speak of the company’s bankruptcy. The company will obviously manage to postpone repayment of its debt. Mostelcom’s contractors’ claims are aimed to stimulate the operator to solve faster its financial problems.
Mostelcom’s currency risks, when CAPEX are determined in foreign currency and revenue is determined in rubles, could be leveled due to the company’s correct financial policy. Mostelecom could use a large number of financial tools to avoid the impact of the negative macroeconomic events. On other hand Mostelcom’s tariffs are controlled by the government and they cannot be reconsidered quickly to repay the debt.

Telenor has been refused suspension of executory process
 

The Federal Arbitration Court of the West-Siberian region in Tyumen has not answered the cassation of the Norwegian holding Telenor for suspension of the executory process on Farimex’s claim about payment of 1.7 bn USD to Vimpelcom.
We remind in spring 2007 Farimex addressed to the Arbitration Court of the Khanti-Mansiisk Autonomous Region with the demand about reparation of damages at 3.8 bn USD to Vimpelcom. According to Farimex, Altimo’s and Telenor’s shareholders did not let the operator enter the Ukrainian market within a year. As a result Farimex suffered financial loss. Telenor was against the acquisition of Ukrainian Radio Systems by Vimpelcom. So, the Arbitration Court of the Khanti-Mansiisk autonomous region answered partially Farimex’s claim, obliging the Norwegian holding to pay 2.8 bn USD. Telenor appealed to the 8th Arbitration court of Appeal of Omsk, which decided later that Telenor was guilty of the conflict and answered the claim at 1.7 bn USD. At the beginning of March 2008 Telenor filed a cassation to the court and in April 2008 the holding was given the order about institution of the executory process on Farimex’s claim. On May 26th of 2009 the Federal court of the West-Siberian region will consider Telenor’s cassation regarding the decision of the 8th Arbitration court of Appeal. Telenor’s authorities intend to prevent the sale of Vimpelcom shares, which belong to the holding.
We note that the court of New York has remitted the penalties from Alfa Group, which the company had to pay for non-execution of the court’s order. We remind the Commercial arbitration court of New York had answered Telenor’s claim and obliged Alfa Group’s authorities to sell 43.55 of Kievstar, owned by Alfa Group, or to decrease the company’s share in the competing companies to 5% and less, and to stop boycotting meeting of Kievstar’s shareholders. Alfa Group started attending Kievstar’s Board of directors, sold 8.2% of Turkcell to Nadash International Holdings and Henry Services Limited, owned by Alexander Mamut. The contract did not imply the right of buyback. Besides, according to the decision of the Court of New York, Alfa Group has to stop the court examination in Ukraine, which was initiated by EC Venture. Doing this the company has managed to avoid the penalty worth 12 bn USD per year.
According to analysts, the court’s decision is right. The order of the 8th Arbitration court of Omsk will not be suspended. If Altimo and Telenor do not make an amicable agreement, Vimpelcom’s shares, owned by Telenor, will be sold on auction. As a result Telenor will be only able to obtain financial compensation for the asset.
So, the conflict will drag on for a long time. However, According to all the decisions, taken by the court, it will result in the sale of Telenor’s shares in Vimpelcom, and this result may be only prevented by political interference of both states in the process.

RTS has assessed the shares, owned by Telenor

The Federal Bailiff’s Service has sent a request to RTS to assess Vimpelcom’s shareholding, owned by Telenor. We remind the offshore company Farimex, owning -.002% of Vimpelcom, filed the claim against Telenor to the 8ht Arbitration Court of Omsk, according to which the company had prevented Vimpelcom from entering the Ukrainian market. as a result the court obliged the Norwegian holding to pay the penalty worth 1.73 bn USD to Vimpelcom. Telenor’s representatives sent the application about abolition of this decision to the Arbitration court of the West-Siberian region in Tyumen. The court dismissed the application. Currently the Norwegian holding has submitted the cassation to the Moscow Arbitration court to suspend the execution. The court has postponed the hearings several times. The reason for postponing was absence of Vimpelcom’s representatives and the judges’ wish to get to know the decision of the Arbitration court of the West-Siberian region in Tyumen. Now the decision about beginning the execution is in force. Telenor has refused to pay 1.73 bn USD to Vimpelcom. So, the Federal Bailiff’s Service can withdraw Telenor’s property and in particular, sell the company’s shares of Vimpelcom and clear the debt by the money gained. We note over April 2009 the penalty has increased by 15 mn USD. Besides, the government is acting as a claimant in this case: Telenor has to pay 7% of the sum of the claim, i.e. over 120 mn USD.

RTS has submitted the response for the bailiffs’ request. So, as of April 28th of 2009 the market price of the share was equal to RUR 3889,2. The price for Vimpelcom’s holding of voting shares (26/6%), owned by Telenor) is 1.809 bn USD. Thus, this sum will not be able to clear all the claims, filed against the Norwegian holding in case of the asset sale. After receiving the response the bailiffs have to make a report on the shares assessment and send it to Telenor and Vimpelcom. The companies will be able to contest the decision in court within 10 days.
According to analysts, there is a risk that Vimpelcom shares, owned by Telenor, will be sold. Some experts believe that the conflict between Altmo and Telenor will be settled by peaceful means. The situation will end logically after Telenor’s cassation is considered in court. If the court answers the cassation, Vimpelcom’s ADR will get the opportunity to go up. According to other analysts, the sale of the asset is becoming more probable.
The sale may be postponed due to two factors. The first factor is dissatisfaction with the asset assessment, carried out at the exchange. In this case both parties can contest the report in court. The second factor is that bailiffs can use the non-market assessment of the asset and it will take about a month. Besides, Norway may interfere in the conflict between Altimo and Telenor.

The Ministry of Communications has criticized the state computer-aided system Management

The Ministry of communications is dissatisfied with the development of the state computer-aided system (GAS) Management, which is the part of the federal special-purpose programme Electronic Government. The Minister of communications Igor Shegolev has stated about the more efficient use of the government investments. Previously the RF President Dmitry Medvedev criticized the programme realization. He pointed to the very slow rates of the programme realization.
We remind the federal state-owned programme Electronic Russia was developed in 2002. in 2007 the RF government approved the concept of Electronic Government programme development. According to the concept of development, by 2010 services, provided by the government are to be carried out through the Internet.
GAS Management is to integrate various state information resources in ministries and departments, currently working independently. The problem of the unified system operation is that it is necessary to match a large number of regulations and instructions of all interested parties. Currently the system has not been formalized by any legal acts and only in June 2009 the RF government must sign the regulations on GAS Management.
The main target of GAS management introduction is to increase efficiency if interaction at interdepartmental and interregional levels. In particular, the system will allow to enhance efficiency of the budget funds expenditure, to reduce labour inputs on operations of information collecting, processing, search and submitting as well as preparedness of aggregate statements.
The Ministry’s plans for 2009 include the integration of some ministries and departments with the help of GAS Management. First of all the system will be started for the ministries of health, education, regional development, finance and economic development. GAS Management will contain electronic desks, which will be also possessed by the Cabinet of Ministers. A typical electronic desk will consist three blocks: monitoring of departmental statistics, internal monitoring, including control over execution of orders, and external monitoring, which contains feedback, including mass media.
According to experts, the Ministry’s critisism regarding the development of GAS Management is logical and reasonable. However, all the problems, occurring during the Electronic Russia programme realization, have been known for a long time, but the situation has not been changed. The government’s critics will not change the situation either. To solve the problems it is necessary to introduce criteria to estimate the use of the government investments and to fix responsibility for non-execution of conditions and terms of the programme realization.
On other hand, it is possible to integrate the work of ministries and departments, experts say. Within the system development it is necessary to take into account the international experience of such systems creation and integration. Besides, it is important to train personnel of ministries and departments for quick and smooth transfer to new method and means of work.

Synterra has filed a claim against the Ministry of Communication
 

Synterra has filed a claim to the Moscow Arbitration Court against the Ministry of Communications. The sum of the claim is RUR 123.5 mn. Synterra demands this amount for services it provided to departments on biopassports production and distribution after the term of the state contract had been over.
Synterra was providing the services within 2008. After the term of the contract had been over, the company continued providing services to biopassports producers in January-February 2009. The competition was only held at the end of February of 2009 and Synterra won the competition again, making the contract worth RUR 64 mn. However, the term of the new contract began in March 1st of 2009. As a result the Ministry of Communications has refused to pay for the company’s work in January and February as the services were provided without a contract within this period. Within the two month Synterra continued providing the services on its own initiative in order not to break down the system’s operating.
According to the Ministry of Communications, there are no documents, confirming the previous contracts prolongation. Besides, there are no documents, confirming the regulator’s debt to Synterra. In this situation Synterra is accusing the Ministry of ungrounded enrichment as the services were provided but they were not paid for.


Euroset and MTS have exchange claims

Euroset spread the information that it had filed a claim to the Arbitration Court of Moscow against MTS. The retailing company demands the operator has to return a royalty and advanced payment, paid for MTS’ contracts, worth RUR 499 mn. The total sum of Euroset’s claims against MTS is equal to around RUR 2 bn.
The Arbitration court of Moscow has also received a claim at RUR 272.3 mn from MTS against Euroset. The claim concerns economic disputes on civil legal relationships. MTS still has not managed to obtain the retailing company’s debts. The total sum of the operator’s claims against Euroset is around RUR 1.1 bn.
Euroset’s debts to MTS are divided into three categories: 1) the unexpended part of the advanced payment, made by MTS in the summer 2009 in the frameworks of the dealer agreement; 2) unpaid payments of subscribers, making payments through Euroset; 3) the debt for iPhones, received from MTS. MTS can only resume negotiations if the retailing company pays off the whole debt.
According to experts, before submitting to court a copy of a claim has to be submitted to a defendant. One of Euroset’s shareholders is a direct competitor of MTS so the court examination may be dragged out, analysts say. They expect the parties will eventually come to a compromise. According to one of the experts on the telecoms market, MTS, which are currently engaged in its own retailing network construction, develop intentionally the conflict with Euroset to weaken the competitor’s position.

Euroset has been accused of non-observance of dealer contracts’ terms

Regional operator, not participating in re-division of the Russian retailing market, have faced the consequences of its transformation. The biggest cell retailing company Euroset does not sell actually their contracts, focusing on the sales of Big3 operators’ SIM cards.
In April Tele2 sent a claim against Euroset to the Rostov Department of FAS. In the Rostov region Euroset violated repeatedly the terms of the contract with the operator. The violations were revealed within the programme “Mysterious Purchaser”, regularly held in the dealer shops. It was found out that the employees of the Rostov Euroset refused to sell contract of Tele2 under pretence of the operator’s contracts delivery delay, though the contracts were delivered on time. Instead the employees offered to acquire contracts on one of Big3 operators. Such violations were also revealed in other regions. Tele2 and other regional operators submitted repeatedly their complaints to regional unions of consumers.
SMARTS also revealed violations of the dealer contract by Euroset. In some regions Euroset’s employees refuse to sell contracts under pretence of delay of SIM cards delivery.
According to analysts, the share of Big3 operators’ sales has reached 90% of the total sales across the country. It is unprofitable for big retailing networks to work with regional operators. The commission fee for such contracts is small and the number of connections is not large as well.

No one iPhone has been acquired by Big3 from Apple this year

Reporting for 2008 Vimpelcom and Megafon admitted they had acquired no iPhone since the beginning of 2009. MTS has not acquired iPhones as well. In the autumn of 2008 Vimpelcom made the agreement with Apple to sell 1.5 mn of iPhones within two years, according ot the operator’s report. However, in 4Q2008 the operator only acquired 12% of the planned number. And in 1Q2009 no one iPhone was acquired by Vimpelcom. Megafon promised Apple to sell 1 million of iPhones. However, due to the dramatic decline in demand the operator has only managed to sell a part of iPhones, purchased in 4Q2008. MTS, promising to sell 1 million of iPhones within three years, has not even sold the first part of the acquired handsets.
Vimpelcom is not obliged to purchase a fixed number of iPhones in certain time. The operator only has to sell 1.5 million of handsets within two years. However, Megafon has to purchase periodically certain parcels of iPhones 3G from Apple. Currently the operator is negotiating about reconsidering the terms of the contract with Apple. Non-execution of the contract terms may lead to claims from Apple, but the amount of a possible penalty has not been disclosed.
At the beginning of 2009 the three operators tried to come to the agreement with Apple reduction of the purchasing price for iPhone and the number of purchases. So far the negotiations about the number of the purchases have been unsuccessful. And reduction of the purchasing price is even more improbable since the price is common for all the countries. At that in Russia iPhone 3G costs RUR 21 000 – 25 000, while in the USA the price for I Phone is 199-299 USD. However, in the USA a consumer also acquires a long-term contract with an operator. Nevertheless, the difference in prices in quite big, experts say.
According to experts, in total over 900 000 iPhones have been imported to Russia. And 500 000 handsets have been imported unofficially. The official sales of iPhone started in October 2008. at that time, according to analysts, Vimpelcom, Megafon and MTS purchased around 400 000 handsets and by the end of March 2009 they only managed to sell around 280 000 iPhones. Experts are now finding out how many handsets the operators give to retailing networks on credit terms. The operators have only obtained money for 127 000 iPhones. In April 2009 MTS filed the claim at RUR 272.3 mn against Euroset regarding the debt on payment for iPhones.

Megafon is demanding RUR 280 mn from Cifrograd

Megafon has filed a claim at RUR 280 mn against Cifrograd to the Arbitration Court of Moscow. The operator tried to come to the agreement with Cifrograd, but failed. To exact the pledge it is necessary to confirm the retailing company’s debt issue to the operator by judicial settlement. Currently Megafon is thinking of how to use this right.
Megafon possesses 51% of Cifrograd. The retailing company’s shares are a security under the one-year marketing agreement worth over RUR 250 mn, made by the parties on December 30th 2008. The money was paid flat by Megafon. Previously the operator’s subscidiary Sonic Duo had been given one share of Cifrograd, which gave Megafon the right of priority to acquisition of the retailing company’s share.
Megafon’s claim is not the first claim against Cifrograd. The claim of Samsung Electronics Rus Company against San-Mobile about non-execution of obligations under the contracts at RUR 381.5 mn was registered in the Moscow Arbitration court before April 7th. Sun-Mobile is a 100% subsidiary of Cifrograd.
The refusal to cooperate of one of Big3 operators has already led to closing of one of sell retailing companies. MTS have broken the franchise agreement with Betaling and demand judicially to return RUR 840 mn. According to the agreement, within a year Betalink had to transfer its salons under MTS brand and refuse to sell the operator’s competitors’ contracts. After MTS had refused to cooperate, Betalinnk applied to court to be declared bankrupt.
According to experts it is the second Megafon;s transaction that failed. In the autumn the operator obtained the option for acquisition of Dixis, which eventually was transferred to Alfa Bank. For the last half-year Betalink has not been evident almost on the market. If the network is not acquired by anyone, it will go bankrupt. However, the chances of Cirfrograd’s shareholders to find a purchaser for the assets are very small.

4. Power and Business

Medvedev offered to regulate the Internet

Dmitry Medvedev stated it was necessary to create a legal base for Internet regulation. At that he emphasized that the legal base had to be “reasonable” to eliminate crimes, committed due to possibilities of the network, and to impact the network’s further development. He also pointed out that the Internet was not very dangerous and in particular, criminal environment. The network becomes a platform for public opinion development and provides with communication opportunities. So, it is necessary to create a normative and organizational basis for the network’s efficiency.
According to analysts, the creation of a large normative base for the Internet regulation is not as necessary as it may seem at first. Such problems as spam, violation of copyright, propaganda of racism and extremism have been already fixed in the legislation for long time. It is necessary to carry out works on systemizing the existing documents to avoid similar documents doubling.
The problems, connected with domain names and users’ anonymity may be included in the normative base, regulating the Internet. According to experts, to solve these problems a register of users may be introduced. At that the censorship and blocking the resources are impossible in the modern Internet.

The government will support electronic industry

The RF Government has prepared the project on nulling the state duties on import of electronic components for telecommunication equipment and other products. This measure is to contribute to the development of the Russian electronic industry to make it competitive on the world market. Currently the state duties on the components import are 5-15%, while the duties are not imposed on import of finished commodity.
The project is being prepared and carried out by the interdepartmental group, presided by Vice Prime Minister Viktor Zubkov. They also work out the offer on increase of duties on finished commodity import to 5-15%. In crisis conditions such measures will support the Russian electronic industry and provide Western companies with beneficial conditions for their equipment assembly in Russia.
First of all the project concerns Russian companies, engaged in production of telecommunication equipment. Currently producers of fixed communications products are the most competitive. However, on the world market their products yield Western analogues in quality as well as the whole electronic production in Russia.
According to analysts, the duties abolition will become an incentive for Russian producers of electronic equipment, allow to reduce costs on assembly process which will influence the product’s price. However, these measures must become the start for the further reorganization of production which will lead to products’ quality improvement.
The process of entering the international market by the Russian electronic industry will demand taking a number of additional measures from the government to simplify working conditions in this sector. This project may result in positive changes for development of electronic production on the whole, which is first of all an important condition in the rapidly growing sphere of telecommunications, experts say. However, according to commentators, the government should pay attention to the experience of other developing countries, which have outstripped Russia in this filed.

The government may redeem Rostelecom from KIT Finance

VEB is planning to spend around RUR 50-700 bn for the acquisition of Rostelecom to become an owner of 40% of the company, which belongs to KIT Finance. In the frameworks of the forthcoming reorganization of Svyazinvest’s business Rostelecom’s consolidation may become essential.
We remind in 2008 ALROSA and RZD acquired 45% of the KIT Finance’s asset each. The bank is now the owner of 40% of Rostelecom’s shares it acquired on exchange within a year and half. In the spring 2009 KIT Finance pledged the shares to banks, including Gasprombank, Sberbank and VTB.
Currently the creditors KIT Finance and RZD, managing the investment bank, have worked out the strategy, aimed at Rostelecom’s sale and the sale of the operator’s securities and mortgage bonds to pay of their credit debts. Thus, the government may get a possibility to consolidate Rostelecom, which will contribute to Svyazinvest’s reorganization and centralization.
According to analysts, the acquisition of Rostelecom by VEB is quite probable. This decision may initiate Svyazinvest’s reorganization. In this case MRKs will join Rostelecom’s business, experts say. The government can influence positively the situation in the telecoms sector on the whole. Acquiring a cheap asset, the regulator may create a big enterprise and then sell it on the market. The business will be only effective in case of the privatization.
Simultaneously the regulator is discussing the transaction with AFK Sistema on redemption of Svyazinvest’s blocking shareholding from the company. Until these problems are solved the question about Svyazinvest’s reorganization remains open.

The Ministry of Communications will unify radio stations

The Ministry of Communications stated it intended to unify the procedure of licensing ship and aircraft radio stations. The Ministry also wants to introduce unified norms on granting licenses for this kind of equipment.
The bill “On Making Changes in the RF Legislative Acts on the Question of Granting Licenses for Ship and Aircraft Radio Stations” has passed 1st reading in State Duma.
Currently the procedure of granting licenses for ship and aircraft radio stations as well as the form of such licenses has not been defined by normative acts. The bill, submitted for consideration, will set unified norms on granting licenses for ship and aircraft radio stations.
As regards the addition to the law “On Communications” it is offered to be added by the clause, according to which radio electronic devices, included in ship or aircraft radio stations, are not to be registered and must be used on the ground of the license.
The changes to the law “On Communications” are made due to the discrepancy in different legislative acts. For example, Article 14 of the Code of Internal Water Transport of the RF and Article 25 of the Trade Navigation Code include the lists of documents, necessary on a ship. The lists contain “the license for ship radio station”, which is to be available according to Article 18.1 of the Regulations of Radio Communication of the International Union of Telecommunications. On other hand, according to the federal law “On Communications” the activity on compensated provision of communications services is to be licensed.
And the common procedure of registration of a ship radio station as a radio electronic appliance is impossible because of the following reasons: according to Article 18.6 of the regulations of Radio Communication of the International Union of Telecommunications the license of ship radio communication is a list of radio electronic devices on a ship such as distinguishing signal, the category of public correspondence, general characteristics of established radio electronic devices. According to the Regulations of Radio Communication this document is not a license for use of frequencies and only gives a right to set and use radio equipment on the board.
Besides, the International Convention for the Safety of Life at Sea of 1974 establishes requirements to each ship regarding radio sets and radio equipment. We note that Article 67 of the Air code of the RF uses a similar concept “the license for board radio station”.
To avoid contradictions and provide the unified procedure the bill implies replacement of the concept “the license for ship radio station” in Article 14 of the code of Internal Water Transport and Articles 25 and 29 of the Trade Navigation code of the RF.
According to experts, the initiatives of the Ministry of Communications are positive. Some bills contain contradictions which do not allow to interpret equally related spheres such as regulation of ship and board radio stations. The amendments to the law “On Communications” will allow to interpret similar clauses in accordance with equal legislative norms.
Besides, re-registration of ship and board radio stations according to new rules will cause problems to owners of radio equipment and might complicate the procedure of receiving the license for the use of ship and board radio stations. Re-registration may take a lot of time and funds, which may affect company’s activity.

Rossvyaz created the Public Council

The Public Council has been created at the Federal Agency for Communications (Rossvyaz). The new body will be engaged in examination of normative acts, linked to the department’s activity, and development of offers on Rossvyaz’s work improvement. The Public Council includes representatives of state institutions as well as Russia’s biggest associations in the field of communications.
The Public Council at Rossvyaz was created in accordance with the government’s order of August 2nd 2005 “On Procedure of Creation of Public Councils at Federal Ministries, Federal Services and Federal Agencies, Dependent on These Ministries as well as State Committees, Federal Services and Federal Agencies, Governed by the RF Government”. According to this document, public councils at federal agencies of executive power can be created by heads of the corresponding federal executive bodies at the suggestion of the Council of the Public Chamber.
Alexander Krupnov, president of the Infocommunication Union, has been appointed head of the new body. Vladimir Dokuchayev, director general of the Association of Producers of Communications Equipment, has taken the position of secretary. Besides, the Public Council of Rossvyaz includes 14 participants more, among which there are Valery Butenko, president of the Association of Users of the National Radio Frequency Resource; Dmitry Biryukov, deputy chairman of the Public Chamber Commission on Communications, Information Policy and Freedom of Speech in Mass Media; Arkady Kremer, chairman of the Executive Committee of the Association of Documental Telecommunications; etc.
The Public Council at Rossvyaz will be engaged in studying citizens’ initiatives and needs, preparing the corresponding suggestions to Rossvyaz’s authorities and offers for Rossvyaz’s work improvement. Besides, the Public Council will be engaged in examination of normative acts, connected with the department’s activity.
Analysts support the idea of the Public Council creation at Rossvyaz. Such measures on attracting the public and representatives of various professional associations always demonstrate maturity of the society. The regulator always needs to know opinion of citizens and professional associations and start realizing projects on the assumption of the society’s needs.

President Community appeared in Internet

Dmitry Medvedev’s video blog, posted on the website of the Kremlin, has started to be transmitted officially in lifejournal.com. Now Internet users can discuss President’s speeches in the specially created community “blog medvedev”.
The Community was registered on February 12th 2009 (Medvedev’s previous statements and extracts from his interviews to the federal channels have been already posted there). However, the news about President’s blog opening only appeared on the website of the Kremlin on April 22nd. President’s speech became the first official record. Sitting in his office, President welcomed users, suggested to use the new possibility “to comment on comments” and pointed on new objectives of the information society (equal Internet access, availability of the power and information convenience for citizens).
Within several hours 4500 people subscribed for the blog. Many users of lifejournal.com doubted about appropriateness of such publicity stunt during crisis and were perplexed why President paid so much attention to information technologies.
According to experts, President’s decision to create the additional information ground has been caused by two aspects: 1) emotional – Medvedev likes Internet, computers and enjoys participating in it; 2) the wish to interest Internet-audience, which is either apolitical or does not take part in elections or is opposed. Medvedev needs to make the audience believe that he writes himself and the content of future messages has not been defined yet, experts say. President will probably focus on such subject, which are interesting to the public but do not concern politics.

GKRC simplified the procedure of radio electronic appliances import

At the session of the state Commission on radio frequencies (GKRC) of April 28th 2009 they decided to simplify the procedure of import of radio electronic appliances and high-frequency devices to Russia. As a result the import of 90% of the equipment will be simplified.
The list of radio electronic appliances, imported to Russia, will be changed. The new document will not include a name of each appliance, and general solutions of GKRC will be only listed.
Besides, GKRC has simplified the procedure of radio electronic appliances import with the term of less than 6 months if they are not be put into operation on the territory of Russia. It was done to allow companies to show their equipment at exhibitions, conferences and other events of the sector.
According to analysts, the initiative of GKRC will not solve all problems of operators. The current list, including almost 14 thousand items, would have to be changed and the changes will positively influence the industry. And the changes must be coordinated with customs bodies. When previously the Ministry of Communications had simplified the conditions for radio electronic appliances import customs officers continued demanding those documents which had been issued at the Ministry.

Vladimir Yevtushenkov offered a deal to Vladimir Putin
At the meeting with Vladimir Putin on May 5th Vladimir Yevtushenkov gave him a letter, in which he had specified his offer on the return of Svyazinvest’s 25% + 1 share to the state. According to the letter, Comstar-UTS, controlled by AFK Sistema, is ready to return the blocking shareholding and get rid of the 5-year debt to Sberbank (obtained in 2007 on the pledge of the blocking shareholding) and obtain Svyazinvest’s share in MGTS (28% of voting shares). Prime Minister has charged the profile departments to consider the offer.
Comstar-UTS acquired the blocking shareholding of Svyazinvest in December 2006 for 1.3 bn USD. Last autumn Yevtushenkov offered Vladimir Putin to consider the possibility of the shareholding’s redemption by the government for 1.9 bn USD. The Ministry of Communications, the Ministry of Economic Development and the Ministry of Finance approved the transaction on condition that the federal budget finds would not be used for the acquisition. And there appeared the idea of exchange. Ernst & Young assessed Comstar’s share at RUR 23 bn. Sistema assessed its share in Svyazinvest at RUR 37.7 bn: the debt to Sberbank and the price for 28% of MGTS shares (RUR 11.7 bn).
The exchange of the blocking shareholding for 28% of MGTS and writing off the debt to Sberabnk is one of the options, listed in the letter, experts say. According to Sistema, Svyazinvest’s value will be increasing. The company is ready to participate in management of this strategically important asset. And if it is impossible, Sistema is ready to sell it for a fair price.

The government is preparing the order on reorganization of the Ministry of Communications

The government’s project implies actual elimination of the Ministry with the transfer of its functions to other executive structures. In particular, management of the programme Electronic Government will be transferred to the Ministry of Economic Development. The block of innovative policy will be transferred to the Ministry of Educations and Science. To provide state and public interests in the field of mass communications and development of new kinds of mass media the Federal Agency on Mass Communications, directly subordinated to the government, could be created. During the new Ministry’s work its representatives criticized the former Ministry’s programmes, in particular they admitted that the programme on technoparks creation and the project on electronic government’s development had remained at the same level. According to experts, “certain circles” have been struggling with the Minister since Shtgolev was appointed Minister of Communications.

During its work the Ministry has announced a number of measures, which have to solve problems of the sector, according to the Ministry. In particular, the interdepartmental group, presided by Igor Shegolev, is engaged in working out some amendments to the law “On Communications” and protection of alternative operators from monopoly companies on the market. Besides, the Ministry promises to make the procedure of license granting more transparent. The regulator has also worked out a number of measures, which have to improve the situation with technoparks, the programme on Electronic Government creation and some other special-purpose programmes.
Experts see no use in the next transfer of the Ministry’s authorities. In all countries in the world there are bodies, regulating frequencies distribution for radio communications and administrating the sector of fixed-line communications. In particular, the necessity of such bodies’ foundation has been directed by some international conventions. On other hand, a lot of questions, regulated by the Ministry of Communications in Russia, are controlled by other departments in other countries.

FAS declared MTS, Vimpelcom and Megafon strategic operators

Head of FAS Igor Artemyev has signed the order which includes Vimpelcom in the list of enterprises, taking the leading position on the market. The same notifications have been sent to MTS and Megafon. An operator is dominating, if it takes 25% of the market at least. According to the data as of March 31st, MTS provided services to 34.1% of Russian cell subscribers (Vimpelcom – 25.9% and Megafon – 22.8%). However, FAS has also studied traffic and other aspects.
The operators were included in the list to apply the law about foreigners’ access to strategic assets. According to Article 6 of this law, the dominating companies are equal to strategic ones. If a private investor wants to acquire over 50% of such a company, he will have to obtain the government commission’ permission. And if it is also controlled by an overseas state (like the Norwegian Telenor, owning 29.9% of Vimpelcom), the permission is necessary for acquisition of over 25% of the asset. Foreigners that have already owned over 5% of a strategic operator have to inform the government.
In 2006 Telenor applied to FAS to increase its share in Vimpelcom to 100%, but failed. And currently the holding may lose 26.6%: the shareholding was arrested in the frameworks of the case on exacting 1.73 bn USD from Telenor and may be sold on auction. The Norwegians informed the government about their share in Telenor. The law also concerns the Sweden-Finnish TeliaSonera (35.6% of Megafon). The company discussed the question of informing the government with Megafon. Previously TeliaSonera wanted to control Megafon and now the company does not hope to do it, director general of TeliaSonera Lars Nyberg admitted in November 2008.

5. Economic of Innovations

Microsoft is going to invest in Russia

Director general of Microsoft Steve Balmer declared that the company wanted to invest around RUR 10 bn on the territory of Russia within 3 years. The money will be invested in three directions of development. Microsoft is planning to open new centres on training computing and support the start-ups , engaged in development of innovative solutions in IT sphere. Free licenses for software will be granted to 1000 companies, chosen by the Fund for Assistance to Small Innovative Enterprises in Science and Technology Sphere according to the results of special competitions.
Microsoft does not conceal that Russia is a strategic market for the company concerning the increase of profit from software sale as well as creation of innovative and technological grounds. So far, the company has not disclosed the expected revenue. At the end of 2008 the former director general of Microsoft’s Russian office Byrger Sten noted that over 4 years sales of Microsoft in Russia had grown 10 times. Currently Russia takes 5th place in terms of revenue.
Experts assess positively the initiatives of Microsoft’s authorities. The sum of the investments is considered as quite big. It exceeds all previous investments within the company’s presence on the Russian market. Despite crisis the Russian IT market has good growth rates and must be interesting for the corporation regarding the increase of economic results. Besides, Russia possesses the quality and not very expensive human resources to create innovative programmes Microsoft will benefit from in future.
On other hands Microsoft’s activity is not random. For the first time for many years the government paid attention to the IT-sphere and held revision of the sector. According to the results of the revision, they launched the project on free software introduction, which would impact the Russian IT industry development. Such measure can undermine Microsoft’s position in Russia, which is a strategic market and strategic ground for innovative programmes development. According to the sum of investments, Microsoft’s intentions are serious and the corporation is not going to give up.

Trade union organizations may appear in Big3 companies

The Russian Trade Union of Communications Workers (OPRS) has declared about its demand to shareholders of Vimpelcom and Megafon to stop preventing the creation of trade union organizations. Telenor and TeliaSonera have been accused by OPRS of the current situation, too.
According to heads of OPRS, development of trade movement in telecoms sector is far from being perfect. In contrast in Byelorussian MTS the trade organization has been set up successfully due to the position of the government, which owns the control shareholding in the operator.
According to Russian companies, the trade union is unnecessary for them since their employees do not need it. The companies have well-developed corporate culture which allows the employees to settle their matters.
Telenor and TeliaSonera have denied the fact of preventing the creation of trade union organizations. According to results of 2008, Telenor has been considered the company #1 in the field of stable development among the world operators of mobile communications according to Dow Jones Sustainability Indexes. One of the principles of trade unions’ activity in Russia is independence. Telenor does not influence the creation and activity of trade unions and at the same time the company welcomes efficient initiatives, aimed at the employees’ rights protection.
Lack of trade unions does not cause any legal consequences for companies’ shareholders. Shareholders as well as the companies’ authorities cannot prevent creation of trade unions in the company if it is necessary and the company’ employees want, according to the Russian legislation.
Experts doubt that Vimpelcom’s and Megafon’s Western shareholders participate in preventing the creation of trade union organizations in the companies. On the contrary Western companies have the experience and culture of relations with trade unions. Western companies also realize that any prevention is illegal, and those, running their business in Russia, are accustomed to keep to the legislation. However, Western shareholders could fear that trade unions may lobby interests of certain shareholders and prevent the policy of others.
It is impossible to prevent the creation of trade union movement in telecoms companies, experts believe. If it is necessary such organizations will be created since they are legal. It is important for foreign shareholders to involve in the process of such organizations’ creation in order not to be considered opponents to trade unions and employees.

MTS started the Internet-portal for content sale

The operator of mobile communications MTS is starting the Internet portal www.omlet.ru, with the help of which it will sell multimedia content. The Internet portal was worked out by MTS and the marketing agency Promo Interactive in cooperation. Currently the Internet portal is being tested but from the end of May users will be able to use all the range of offered services. MTS are planning to sell such content as music, video, games and images. They are also planning to launch a special social network for users.
MTS possess music catalogues of several majors. Next Media Channels will supervise keeping to copyright to use of games and video for PC. Shamrock Mobile will be in charge of mobile games and video. Both companies are included in the Next Media Group. An average price for a music album is RUR 240. The Internet portal will be available to users from mobile and wired Internet access.
The investments in working out and the launch of the Internet portal were equal to around 1 mn USD. The project’s total budget is 5-7 mn USD. At the first stage the operator’s key objective is to form a target audience which, according to the company’s plan, will have to reach 500 000 people by the end of 2009. MTS are planning to make the project profitable due to the sale of varied content as well as the sale of mobile traffic to MTS subscribers.
According to experts, the project is urgent and timely. Currently it can’t bring big profit to the company, but it will allow to provide MTS’ subscribers with additional services and opportunities and thus, to maintain the demand for 3G services. The sale of content through Internet will also allow the operator to obtain profit from mobile Internet traffic. For MTS this project seems to be image since the expected profit and investments made are very insignificant for the operator.
On other hand, according to experts, sales of content from possessors of the rights via Internet are not well-developed in Russia. The main reason for this is availability of free pirate content. It is unknown how MTS’ Internet portal will compete with portals of illegal pirate content. The number of users which are planned to be attracted by MTS by the end of 2009 is a little overestimated. On the whole the declared figures are quite real due to the operator’s aggressive marketing strategy and considerable investments in the Internet portal promotion.

Venture investments will help IT sector development

Within the period of economic crisis investor’s interest to high-tech start-ups have grown considerably. This segment has increased 10 times over last two years. The investments in the IT sector and software technologies are equal to 150 mn USD.
The increase of venture capital in the IT sector is connected with the growth of entrepreneurial activity in the period of economic stagnation. The government’s initiatives for small business support have impacted the sector, too. The participation of business investors, in particular, business-angels have increased noticeably. The changes on the stock market create beneficial conditions for profitable investments in developing businesses. However, the investors mostly focus on the sphere of high technologies as this segment possesses all conditions for the further growth. Besides, the investors prefer already operating companies which offer fast development of projects. In other fields the investors carry out the more conservative policy, based on the proved financial tools. On the whole the situation in the sphere of venture business in Russia can’t be called positive.
Analysts are skeptic on the possible outlooks of the venture business development in Russia. Despite the growth this kind of investment is the most risky which is negative in crisis conditions. According to experts, it is also necessary to take into account national features of the investment business, inclined to conservative decisions. The example of venture investing in the IT sector in particular, may become one of the incentives.
According to experts, the slowdown is expected on the IT market in the nearest future. The investors’ activity will certainly go down in such unstable conditions as the risks of unsuccessful investments will increase. Analysts assess positively the government’s initiatives in the field of small business support. Besides, financial crisis may impact the venture development in Russia since investors will be interested in the search of new innovative approaches.

The government will create incentives for software production in Russia

The Ministry of Communications has declared about its desire to support Russian companies, engaged in the IT sector. The project will mostly concern producers of software. The purpose of such measures is to make the Russian product preferable compared to foreign products. The bill is to enter into force in 2012.
Currently, while the project is being worked out, the Ministry of Communications has offered to introduce additions regarding the use of PC, in the order of the Ministry of Economic Development of December 5th 2008, in which the priority of some Russian products was fixed up. However, to make the government bodies be oriented towards purchase of Russian software it is necessary to make amendments in other normative acts, the antimonopoly legislation in particular.
Besides, the Ministry of Communications and Russian producers are discussing criteria to define whether the product is of Russian origin. Primarily the key parameters, offered by the Ministry of Communications, are registration of the company on the territory of the RF, obtaining 70% of revenue from sales of software.
Analysts have different opinions on the government’s protecting policy. The Russian production certainly needs the support of the Ministry of Communications, but the definition of government order may decrease considerably the competitiveness of Russian software producers. However, information security enhancement at the level of government structures will certainly contribute when using the Russian software.
It will take several years until the bill on priority use of Russian IT products is passed. According to experts, numerous disputes between the Ministry and producer will concern points of the normative acts. In particular, the disputes may be caused by the decision about a company’s belonging to the Russian market. According to experts, apart from the protecting policy the Ministry of Communications should take measures regarding Russian software quality improvement.

Big3 operators will start 3G networks in Moscow and the Moscow region

Rossvyazcomnadzor has granted the licenses for 3G networks development in Moscow and Moscow region to Big3 operators. The licenses concern construction of networks in the underground and in buildings. 3G networks will not prevent the military equipment operating. We note the limit of frequencies use in the 2.1 GHz bond does not concern regions, located 100 km far from Moscow. Currently Big3 operators have obtained the possibility to fulfill the license requirements of 2007 regarding 3G development in regions by the end of 2010.
So, MTS have invested around 40 mn USD in the “Moscow project”. According to the company’s authorities, they are ready to launch the 3G network in the underground. Vimpelcom is going to start 3G network in buildings this spring. To develop 3G outdoors is certainly the most profitable investment in terms of revenue. Thus, Vimpelcom’s authorities have sent a request to the Radio Frequency Centre to examine EMC (electromagnetic compatibility) of 3G equipment and the technologies, possessed by the militaries. If the answer is positive, the operator will apply to Rossvyazcomnadzor for a license for 3G network development in Moscow streets. Megafon’s 3G network will start operating in 4Q2009 and a lot of base stations of the operators will start operating simultaneously. According to the company’s authorities, their real objective will be 3G active development in Moscow as well as taking the leading position in terms of profit.
We remind that the frequencies in the 2.1 GHz band are used by the militaries in Moscow. The question of the use of the GSM bond of 900/1800 MHz has been still open. In 1Q2009 GKRC only agreed to test 3G in this bond.
3G networks launch in Moscow, in particular in buildings and the underground, is a kind of the test to study users’ interest and demand for the service. It will allow Big3 operators to work out marketing strategies and improve the offer. On other hand such a project will not bring considerable profit to the companies. According to experts, each operator’s subscriber base will depend on the quality of the service provided, the pricing policy, the area of coverage as well as users’ loyalty.
According to experts, 3G networks, developed in Moscow, will give the operators an opportunity to increase traffic which will increase the company’s profitability due to the Moscow population’s high ability to pay. MTS may become the leader in the development of 3G, analysts forecast.

The satellite Express-AM44 has been put into operation

The State Enterprise Space Communications has placed into orbit the satellite Express-AM44, which is to provide TV and radio broadcasting, telecommunications, transmit data of broadband Internet access. According to the forecasts, the satellite will have to work for around 12 years. Express-AM44 will provide broadcasting in the European part of Russia, Central and partially South America, Europe and North Africa. The new satellite was constructed by OJSC ISS named after the academician M.F. Reshetnev and the French company Thales Alenia Space. According to the authorities of Settelecom, the new satellite will first of all provide communications for the TV market of foreign countries. So, GPKS has replaced the outdated satellite Express-A3. We note the Russian group for civil purpose contains 13 satellites, including two new ones.
Previously Igor Shegolev, Minister of Communications declared the current situation of the satellite group could not realize the project of digital TV and radio broadcasting as well as provide operating of satellite communications networks. So, GPKS and the Federal Agency for Communications are planning to develop the programme of the Russian satellite group development on the basis of the government and private union.
We note that the competition for working out two satellites: Express-AM5 and Express-AM6, is close to be completed. We remind that previously the results of the competition were declared invalid because of incorrect calculation during the vote of the commission representatives. According to the plans, the satellites are to be placed into orbit in 2012.
Private partnership will positively impact the sector. The competition will give an opportunity to renew the technical component of satellites. Besides, such cooperation will help to modernize Russian production due to the exchange of experience with foreign companies. Lack of normative acts regarding participation of private investors in spacecrafts construction impedes their development, experts note. So, private institutions should possess equal rights and conditions as the government structures, monopolizing this sector.
Currently GPKS’ priority objective is to enhance effectiveness of the satellite group’s operating. The government will assign the necessary sum for satellites development as this field is of interest to it, analysts say. Private investors could invest in the project on condition their investments returned.

Comstar-UTS is starting WiMAX in Moscow
 

Comstar-UTS declared it was putting into operation a network of wireless broadband Internet access on WiMAX Mobile technology from May 1st 2009. construction of the network infrastructure has been almost finished in Moscow.
The network testers, connected since May 15th 2009, are now being transferred to paid, but favourable service. There have been offered a special tariff plan: 2Gb of incoming traffic for RUR 200 per month.
Users will be only able to connect to Comstar’s WiMAX network in the middle of May. The tariffs for natural people have been already announced: there are three of them with a subscriber fee of RUR 300, 500 and 700. The prepaid traffic for these tariffs is 1, 2 and 5 Gb accordingly. There won’t be any unlimited tariffs. We remind a USB WiMAX modem of Comstar costs RUR 4600.
Almost at the same time Comstar’s major competitor Scartel, working under Yota brand, is planning to put its WiMAX network into operation. Yota does not announce its tariffs, though the company’s key offer will be unlimited. A subscriber fee for access to the network will be equal to RUR 900.
According to analysts, competitiveness of both offers can be seen some time later. Probably, Comstar does not introduce unlimited tariffs due to the fears that unlimited traffic will “choke up” the network. Both companies possess everything to find their subscribers on the market, but Comstar’s offer will be more efficient due to its more resources and bigger coverage.

6. Personnel Changes
 

Sergey Sitnikov, head of the Federal Service on supervision in the sphere of Communications, IT and Mass Communications has signed the order, where he wrote his temporary duties and duties of his recently appointed deputies, Alexander Katulevsky and Roman Sheredin.
Sitnikov has been still in charge of interaction with mass media, the government structures and territorial departments of Roscomnadzor. He will be also responsible for coordination of work of the service for granting licenses for carrying out activity in the field of TV and radio broadcasting, for mass media registration, for protection of data, considered the state secret. Besides, according to the order “On temporary distribution of duties…”, Sergey Sitnikov will supervise keeping to the legislation in the field of mass media and mass communications, TV and radio broadcasting. He is also in charge of organizing the work on Roscomnadzor’s participation in various governmental committees.
Alexander Katulevsky acts as head of Roscomnadzor when Sitnikov is absent. He also supervises licensing in the field of communications services provision. Alexander Katulevsky will be also engaged in preparing offers on the government regulation in the field of communications. According to the order, Katulevsky coordinates the work of the service in the field of communications service licensing, settles matters on distribution of frequencies or frequencies channels for radio electronic appliances in accordance with the decision of the State Commission on Radio Frequencies and their registration. Besides, he is responsible for the register of telecoms operators, holding considerable positions on the market, as well as including or excluding the operators from this register. Katulevsky supervises the matter on new radio frequency channels searching out, working out a radio frequency range and orbital positions of satellites for TV and radio broadcasting. He is also in charge of registration of radio electronic appliances and high-frequency devices and supervises Roscomnadzor’s work on holding competitions for licenses reception in the field of communications.
According to the order, Roman Sheredin coordinates the work of the Service on creation, development and introduction of the unified information system and information and telecommunications network of the department. He controls the activity of the Department for Supervision in the sphere of IT, the Department for Protection of Rights of Subjects of Personal Data, the territorial bodies of the Service, and the federal state-owned unitary enterprise “Informregister”.
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Sergey Pridantsev, the former chairman of the board of directors of MTT, has quitted the board. Yevgeny Vasilyev, director general of PeterStar, a Synterra’s subsidiary, has been elected new chairman. Systema is getting ready to redeem of 100% of MTT and intends to take control over the company’s management.
Synterra declared about its intention to acquire MTT in 2007. Currently Synterra owns 50% of MTT. These shares have been acquired by Synterra from AFK Sistema for 54 mn USD. The rest 50% of the operator have been distributed between Eventis Telecom and the offshore company Danmax, which redeemed their share from Gamma Capital.
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Alexander Malis has been appointed president of Euroset. Previously he was in charge of development of the segment of broadband Internet access in Vimpelcom. According to Malis, Euroset’s key objectives are to expand the assortment and enter into cooperation with all the operators.
After Euroset had been sold to Alexander Mamut and Vimpelcom the position of the company’s president was taken by the former director general of the product network Lenta Sergey Yuschenko. However, in March he quitted the company. According to Vimplecom, he left because the company needed a new, anticrisis manager, though Yushenko had coped with his objectives. So, Valdimor Shishko from Vimpelcom was appointed for the position of acting head of Euroset.
Alexander Malis has been working on the market of broadband access for over 10 years. Since 1995 he has held different positions in the Internet-operator Corbina telecom, which had belonged to Renova Capital and Alexander Mamut until May 2007. Then the company was sold to Golden Telecom. Later Golden Telecom was sold to Vimpelcom and Alexander Malis took the position of director of the Department for Broadband Access.
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Svyazinvest can prepare substitutes of director general of MRKs and Rostelecom. The change of authorities in Rostelecom and MRKs is carried out due to the change of Svyazinvest’s authorities and will be completed until the summer. Igor Zabolotny, the former director general of MTT, is a candidate for the position of director general of UTK. He may replace Alexander Ananyev. Gulnara Khasyanov, the present head of Sky Link, may replace Vagan Martirosya on the position of director general of Centertelecom. There are two candidates for the position of director general of SZT (North-Western Telecom), currently headed by Valdimir Akulich: Viktor Koresh, vice president on regional development of Comstar, and Alexander Volkov, previously holding the position of 1st deputy director general of Megafon on operating activity. The position of director general of Sibirtelecom, held by Alexander Isayev now, may be taken by his deputy Ivan Dadykin. Nikolai Maksimenka, the former head of MGTS, is a candidate for the position of director general of Dalsvayz.
In Rostelecom there are two candidates for the position, now held by Konstantin Solodukhin: Yevgeny Yurchenko, present director general of Svyazinvest, and Vasily Sidorov, ex-president of MTS. Currently Sidorov is chairman of the board of directors of Telecom Express, the major customer of which is RZD, one of Rostelecom’s shareholders.
According to analysts, personnel changes should not be linked to Sistema’s position strengthening in Svyazinvest. So far, Sistema, possessing Svyazinvest’s shareholding, has not managed to influence the company’s strategy forming. According to experts, the personnel changes are the result of the total liberalization of Svyazinvest’s management. Independent managers are appointed for positions in the holding instead of people, close to the Ministry. This is a positive move in the holding’s managerial team creation.
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Sergey Pridantsev, president of Comstar-UTS, is a key candidate for the position of chairman of the board of directors of MTS. This position has been unoccupied since Vitaly Savelyev, head of the Sistema’s direction Telecommunication Assets quitted the company.
On May 21st MTS are planning to hold a meeting of the Board of directors, where the list of candidates to the board will be prepared and then submitted to an annual meeting of shareholders. The annual meeting of MTS’ shareholders is scheduled to June 25th.
According to experts, Sergey Pridantsev’s appointment is a step towards the consolidation of MTS and Comstar, which has been actively discussed in recent years. AFK Sistema wants to keep the experienced manager who can help a lot in the consolidation and further activity of the consolidated telecommunications company. Sergey Pridantsev is a dynamic manager, establishing a reputation as a good manager in Centertelecom and Comstar. However, the role of chairman of the board of directors is not as creative as a director’s role. It implies strategic management of the company and might be uninteresting for Pridantsev.
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Uval Almog, an American entrepreneur, has been appointed chairman of the Board of directors of Sitronics, the Russian producer of microelectronics. Uval Almog has been engaged in venture investments in international technological companies for over 23 years. Simultaneously he is chairman of the board of directors of the American Investment Fund Coral Group (Coral Group Management), which created the venture fund Coral/Sistema Strategic Fund in cooperation with Sistema about three years ago.
Uval Almog came to Sistema in January 2007, becoming a member of the board of directors of Sitronics as a non-executive director. New chairman of Sitronics’ board of directors is a creator of the fund Coral Capital Management. In 2007 Coral/Sistema Strategic Fund was founded. The fund invests money in foreign hi-tech companies. AFK Sistema and its subsidiaries (MTS, Comstar and Sitronics) undertook to invest 75 mn USD in the fund’s chartered capital. 1% was invested by the fund’s managing company Coral Capital Management, where Uval Almog was holding the position of senior managing director.
Denis Muratov, ex-chairman of Sitronics’ board of directors, has been elected deputy chairman. In January 2007 Muratov became a member of the board as a non-executive director and was elected chairman of the board in June.
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Tigran Pogosyan has been appointed deputy director general on strategic projects of Megafon. Previously he worked as deputy director general on commercial activity of Central Telegraph.
There was not a position of deputy director general on strategic projects in Megafon before. Tigran Pogosyan’s key direction will be the project of the Olympic Games in Sochi in 2014.
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Arseny Brykin has been appointed director on interaction with the state power bodies of OJSC Comstar. This position was introduced in 2008 to enhance interaction of Comstar-UTS and state power bodies as well as federal and regional executive bodies, State Duma, the Russian Union of Industrialists and Entrepreneurs, the Trade Industrial Chamber and public institutions.
Director on interaction with state power bodies is directly subordinated to the company’s president. Previously this position was held by Vladislav Vasin.

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Julia Podnos has been appointed for the position of director on economics and finance of the alternative operator Gars Telecom. Before the transfer to Gars Telecom she was holding the similar position in the group of companies Alliance Continental. Previously she had held leading positions in UralSib and NIKoil and worked as deputy chairman of the board of IBG-NIKoil bank.
Julia Podnos’ main objective will be work on the bond market as Gars Telecom is planning to acquire and wants to change partially banking loans for bonded ones.
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Nikita Sergienko has left the position of financial director of Rambler Media and member of the company’s board of directors. Currently the company’s board of directors is considering candidates for the position of financial director.
We remind in September 2008 Nikita Sergienko was appointed financial director of Rambler Media and started working in October 31st of 2008. He was transferred to Rambler from Tele2 Russia, which is a part of the European Telecommunications holding Tele2. Sergienko started working in Tele2 Russia in 2001 as a regional financial director. In 2004 he was appointed financial director of the Ural and Volga region. A year later he was appointed financial director of Tele2 Russia. In 2007 he was transferred to the position of executive vice president in the company.
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AFK Sistema has found a candidate to replace 1st vice president Vitaly Savelyev, who headed Aeroflot in march. The corporation’s telecommunication direction, which makes up 72% of Sistema’s total revenue, will be headed by Ron Zommer, the former head of one of the biggest European companies of communications Deutsche Telekom. He will become the first foreign top-manager in Sistema. He will also head boards of directors of Sistema’s telecoms subsidiaries.
Ron Zommer has big experience of work in big companies. In 1980 he took the position of managing director in the German subsidiary of Sony Group and later was appointed president and chief operating director of Sony Corporation in the USA. In 1993 he was transferred to Sony Europe and took the similar position. In May 1995 he headed Deutsche Telekom. Within his work in the company Deutsche Telekom has become a global telecommunication company, developing innovative broadband access technologies and mobile communications. He has been cooperating with Sistema since May 2003 when he took the position of chairman of the International Advisory Council of AFK. In June 2005 he was elected independent director of AFK Sistema and now he is a member of the boars of directors of Motorola, the Indian Tata Consultancy Services, the Italian Weather Investments, etc. Ron Zommer will be in charge of integration processes (currently Sistema is considering the possible acquisition of Comstar’s MTS)

7. Figures and Facts

In 2008 the sales of 3G phones increased by 68% in Russia. So, over 4.6 mn of UMTS-phones were sold in 2008, over 2 bn USD in money terms.
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The number of home Internet users has reached 44% over 6 months in Russia. however, due to financial problems the considerable decline in connections is expected in the nearest time.
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In 2008 the number of Internet users exceeded 40 million people in Russia.
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IN 1Q2009 the delivery of cell phones decreased by 11% to 258 mn handsets.
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Russia’s innovations costs were cut by 75% to around RUR 35 bn in 1Q2009. at that the total structure of costs has changed: currently the correlation of the government and private investments is 87% and 13% accordingly compared to 73% and 27 % in august 2008.
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MTS and Beeline have taken 71st and 72nd places in the Top-100 of the world most expensive brands. The brands examination was carried out by Millard Brown Optimor.
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In 2008 the number of public points for Wi0Fi access increased by 48% in Russia.

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According to experts’ estimates, the revenue from the mobile applications sales will reach 25 bn USD in 2014.
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In 2009 the number of harmful computer programmes may increase by 200%, according to the forecast of Kaspersky’ Laboratory.
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44% of users will not refuse Internet during crisis even if they do not have enough money for food and clothes. These are the result of the survey, held by RUmetrica, in the beginning of April 2009.
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In 2009 the Russian market of communications services will exceed RUR 1,490, 000, 000, 000. in 2009 over 3.1 million numbers of fixed-line communications and 12.7 million numbers of mobile cellular communications, and 72.9 thousand of cable and radio relay lines of communications are planned to be put into operation.
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In 2008 the Russian ICT sector grew by 25%, according to Igor Shegolev.

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In 2009 the total CAPEX of Svyazinvest are planned to be cut by 60%.
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In 2008 the number of Internet users was equal t 47 million people in Russian. According to the forecasts, in 2009 this number will increase by 34%/
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As of May 2009 Megafon’s subscriber base was equal to 44, 265, 000 people.
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In 1Q2009 Central Telegraph’s net profit dropped by 83.5%.
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The value of the contracts for construction of the satellites Express-AM5 and Express-AM6 is RUR 11, 880, 000, 000. The competition has been won by OJSC ISS named after M.F. Reshetnev.
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In 1Q2009 the revenue of OJSC Sitronics was equal to RUR 35, 9 mn, 10 times growth y.o.y.
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28% of MGTS’ shares, owned by Svyazinvest, have been assessed at RUR 12 bn by Ernst & Young.
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Russian cell operators’ subscriber base increased by 1% in April 2009.
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In 2008 the revenue from additional services of cellular communications (VAS Services) grew by 40% in Russia.

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