TIA | PulseOnline April 2001, Reports from TIA Offices: Russian Communications Company Leaders Review the State of the Industry

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April 2001

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Reports from TIA Offices

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Russian Communications Company Leaders Review the State of the Industry

On March 13, Russia’s Ministry of Communications hosted a meeting of Russian communications company executives, during which the state of the industry was discussed. Among the issues mentioned were the rapid success in mobile communications and the lag in traditional communications.

The successes achieved by mobile communications operators were presented as an illustration of growth in Russia’s telecommunications industry. The number of cellular mobile communications network customers in the year 2000 grew 169 percent, significantly exceeding forecasts. As of January 1, mobile communications networks were providing services to more than 3.5 million customers. Moreover, approximately 70 percent of these customers were GSM network subscribers. The two Moscow-based companies, MTS and Vympelcom, when taken together, serve 60 percent of Russia’s cellular customers. Operators providing “traditional” communications showed more modest results last year.

First Deputy Minister of Communications Yuri Pavlenko stated, “While the average telephone density in Russian cities is about 23 telephones per 100 people, in rural areas, it is less than 10 telephones per 100 people.” In his report, Pavlenko briefly described the scope of effort needed to bring Russia’s telecommunications infrastructure up to the “average European level” of development. To achieve this, Russia needs to double existing network capacity, installing automatic telephone stations for 3.4 to 4 million new numbers every year (in order to reach a penetration level of 40 percent). At the same time, the country must upgrade existing networks because only 29 percent of them satisfy modern requirements.

According to the Developmental Concept for the Sector through the Year 2010, a telecom sector development plan, $33 billion will be needed for this purpose. Half of this amount will be invested by the telecommunications companies themselves, but the government plans to raise the rest from foreign investors.

In the year 2000, 1.24 million urban telephone numbers, 158,900 rural telephone numbers and 2,523 km of fiber optics communications lines were put in service in Russia. The number of Internet users grew by almost a factor of two compared to 1999 (to 3.1 million people). In the year 2000, 2,759 licenses were granted to do business in the area of communications.

According to Communications Minister Leonid Reiman, another major achievement in the sector was the fact that Russia and the Commonwealth of Independent States (CIS) countries were able to keep their satellite positions in near-earth orbit. At the World Electrical Communications Conference, Russia was granted three times more orbital frequency resource than the USSR in the mid-70s.

According to the opinion of Vice Premier Ilya Klebanov, who is responsible for the telecommunications sector, last year’s most significant result was the formulation of a developmental plan for future growth in the telecommunications services market. If the concept is implemented, there will be 33 telephones per 100 Russians, 18 percent of Russians will have access to the Internet, and the penetration level of mobile communications will be 15.2 percent by the year 2010.

If the forecasts are correct, the Russian communications sector will raise $33 billion in investments over the next 10 years. However, according to estimates by Konstantin Chernyshev, Head of IK NIKOIL’s Analysis Department, the volume of foreign direct investments (FDI) in regional communications companies (with the exception of cellular operators) in the year 2000 comprised approximately $30 million, whereas foreigners invested $500-600 million in the regions in pre-crisis 1997.

Telecom experts expressed a somewhat different view of the year’s results. Brunswick Warburg analyst Dmitry Vinogradov and NIKOIL’s Konstantin Chernyshev considered the sector’s major achievements to be an improvement in rate regulation and the appearance of definite plans for restructuring Svyazinvest. They held its major failures to be the “frequency scandal” linked with the Ministry of Communications’ attempt to take radio frequencies away from the cellular companies Vympelcom and MTS, and the absence of a precise formula for determining local communications service rates.

Renaissance Capital analyst Andrei Braginsky noted positively the rapid growth in the number of cellular communications users and the entry of MTS to the New York Stock Exchange (NYSE). However, Braginsky also pointed out the failure to grant mobile licenses in Moscow and the Povolzhye Region without contest, delays in introducing time-based billing for telephone conversations, the absence of a clear position vis-à-vis the future Rostelecom, and the questionable state of a legislative base regulating the Internet.

For more information, please contact TEC-NIS, TIA's affiliate office in Moscow, via email at tecnis@dol.ru.

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April 2001

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