Background on Russia Telecommunications found by Benji
JULY 1998
AUTHOR: MARIA BREITER
INTERNATIONAL COPYRIGHT, U.S. & FOREIGN
COMMERCIAL SERVICE AND U.S.
DEPARTMENT OF STATE, 1998. ALL RIGHTS
RESERVED OUTSIDE OF THE UNITED
STATES
I. Overview of the Telecom Market
I.1. Narrative Information
Until 1993, the Russian telecommunications network was
fully controlled by the Russian
Ministry of Communications. In 1993, local network
operators were privatized in such a
way that each region received one telecommunications
provider. Rostelecom became the
single national network operator, and 85 regional
telecommunications companies were
formed. In 1995, Svyazinvest, a holding company which
consolidated the government
stakes in all of the 85 regional telecommunication
companies, was created. The
government held 51 percent of Svyazinvest, with the
remaining shares intended for sale at
auction.
In July 1997, the Russian Government sold 25 percent
plus one share of the Svyazinvest
holding. The sale raised $ 1.875 billion. The tender was
won by the Cyprus-based
consortium Mustcom, which included Oneksimbank,
MFK, the Renaissance Capital
Investment Fund, Deutsche Morgan Grenfell, Morgan
Stanley, and George Soros' Quantum
Fund. The money raised during the transaction went
almost entirely to the government
budget, with Svyazinvest retaining $ 95 mln.
On April 3, 1998, the Russia State Property Ministry
announced an open tender to value
shares it currently owns in Svyazinvest. The Russian
Government considered three or four
options for selling the second stake in Svyazinvest,
including selling the 25 percent
minus-two-share stake as a whole at a commercial tender,
or small lots.
American Appraisal Inc. was the company chosen to
value Svyazinvest in preparation for
the second round privatization. On June 2, 1998, the
company delivered its report to the
Russian Ministry of State Property. On June 5, the special
government commission
charged with preparing the sale of the second tranche of
Svyazinvest holding, stated that it
has made a decision on the method of the sale. The
government has fixed the starting price
for the stake of 25 percent minus two shares at US$ 1.1
billion and has attached investment
obligations of US$ 400 million. Thus, the total value of the
sale is US$ 1.5 billion.
Svyazinvest is currently among the most profitable Russian
companies, with a net profit of
US$ 1.2 billion in 1997.
The commission has decided to permit foreigners to
participate in the sale scheduled for
Septmber 8, 1998. While the issue of "national security"
has been discussed by the
Ministry of Defense, Federal Security Service and other
law enforcement structures who
were members of the commission, it was decided that
foreigners will be allowed to
participate because the winner will not obtain a controlling
stake in the company and the
second tranche does not have blocking rights.
I.2. Statistical Information
Table: Telecommunications Sector (in billions of US
dollars)
DATA TABLE 1997 1998 1999
(Est.) (Proj.)
A. Gross revenue 7.10 7.70 8.20
B. Production cost 5.30 5.67 6.01
C. Operating profit 1.67 1.88 2.35
Exchange rate: $=5.787 6.070 6.120
Source: the State Committee for Communications and
Informatization of the RF
(Goskomsvyaz) and the State Statistics Committee of the
RF (Goskomstat). Estimates for
1998 are based on the data from the TEC NIS Telecom
Newsletter provided by Skate
analytic and consulting company.
II. Status of Liberalization Legislation
II.1. Implementation
The first regulations on certification of telecommunications
equipment in Russia were
implemented in 1991. New regulations were put into effect
in 1993 and again in 1995, the
latter including a provision (Article 16) which called for
mandatory certification of
telecommunications equipment. In 1997, the Department
on Certification of
Communications Facilities and Services of the State
Committee for Telecommunications
and Informatization of the Russian Federation
(Goskomsvyaz) created a new procedure for
telecommunications equipment certification, called
"Electrosvyaz". According to
Goskomsvyaz officials, the procedures recently
established by Goskomsvyaz mirrored
those in the European Union but they still admit that further
adjustment is needed to
facilitate entry into the World Trade Organization (WTO).
As Goskomsvyaz officials in
charge of telecommunication equipment certification have
stated, Russia is not inventing
anything new but is merely harmonizing its system to the
world's requirements.
Goskomsvyaz has introduced 12 certification schemes
instead of simply reviewing the
applicant's declaration that the equipment has been
certified in its home country. The
applicant can request which scheme it would prefer to be
used for testing its products.
However, the Certification Department makes the
determination as to which scheme will
actually be used in certifying the equipment. The fifth
scheme is the one most frequently
chosen by the Committee. Under this scheme, the
application goes to the Certification
Department for preliminary technical analysis. The
Department will reject applications
which ask for certification of outdated equipment or
equipment that cannot be used in the
Russian Federation due to unspecified technical
requirements. After this technical review,
two designated certification laboratories (of the 43 located
across the country) will test the
equipment "on type" and also for quality assurance. This
will involve testing in the field
and at the manufacturer's site.
II.2. Enforcement
The Department on Certification of Communications
Facilities and Services of
Goskomsvyaz takes measures to inform companies about
the certification requirements by
organizing seminars at least twice a year on changes in the
certification procedures
attended by 100-170 companies each. The latest seminar
took place on February 25-26,
1998. Chief of the Certification Department, Yuri
Yelemyanov, wrote an article in the
February edition of the "Mobile Systems" Magazine in
which he described recent changes
in the certification requirements and described the quality
insurance certificate issued by
his Department. In 1996, a reference book on certification
of telecom equipment in Russia
was published in cooperation with the FCC (with TDA
funds), though this manual has not
been updated since then. Goskomsyvaz also has a WWW
page (http://www.ssktb.ru).
II.3. Role of Regulator
According to some experts, there is a lack of overall
regulatory oversight within Russian
telecommunications industry by the State Committee for
Communications and
Informatization of the Russia Federation (Goskomsvyaz).
However, regional adminstrators
have strong influence over the telecommunications sector.
Goskomsvyaz approves long
distance tarriffs and mediates negotiations on
interconnection rates between Rostelecom
and local operators. Local calling rates and monthly calling
charges are set by individual
local antomonopoly committees and political authorities.
II.4. Remaining Issues / Pending Legislation
According to the experience of telecommunications
companies in Russia, there is a number
of issues that need to be resolved, including legal and
regulatory instability and
uncertainty of enforcement; improvement of the process of
certification of
telecommunications equipment and services; improvement
of licensing procedures for
provision of telecommunications services in Russia;
improvement of availability to user of
the frequency spectrum; improvement of tax regime; and
legal protection of investments in
the Russian telecommunications sector.
III. Actions in Response to the Legislation
III.1. Activities of the Former Monopoly
a. International/Global Services
Russia's main international telecommunications carrier is
Rostelecom. In 1992, Russia had
1,000 international lines (only 0.3 percent were digital). By
1996, Rostelecom owned 51,000
digital lines and operated 12,000 international digital lines.
Currently, Rostelecom controls
more that 90 percent of international connections for
Russian customers and provides
international connections to more than 200 countries.
Rostelecom uses 1,500 satellite lines
leased mainly from Teleport TP and Russian Satellite
Communications Company (see
below). Other international operators such as Sovintel,
DirectNet, and Combellga are
expanding their activities in Russia.
The current strategy of Rostelecom is to construct new
digital trunk lines, network
digitalization, expanding the range of services, introducing
new management technologies,
and re-organization of the accounting and billing systems in
keeping with international
standards. In 1996, a digital line was built from Moscow
via St. Petersburg to Denmark.
Optic fiber lines were built linking Russia to Finland,
Estonia, Japan, South Korea, China,
Turkey, and Italy. In 1998, fiber optic lines from Moscow
to Kharkov (Ukraine) and Minsk
(Belarus) are planned to be completed. A number of
regional projects including Moscow
region, Vologda, Kostroma, and Ivanovo will be
completed in 1998-1999.
b. Local/National Services
The telecommunications industry in Russia has been
organized so that each region is
served by one local company, while long distance and
international calls are handled by
Rostelecom. Being the sole national carrier, Rostelecom
retains long distance trunk lines
throughout Russia. Revenues from long distance and
international service are shared
between Rostelecom and local companies, while local
revenues are retained by the local
companies. Presently, Rostelecom is adding a number of
new international and
long-distance connections which will be able to carry more
traffic. Rostelecom is also
currently establishing strategic partnerships with foreign
telecommunications companies.
One of the problems which Rostelecom is trying to solve
with the help of its foreign
partners, is the poor state of the local company's assets
which need to be modernized. As
an example, only 15 percent of the local networks' total
access lines are digital.
c. Mobile (Voice, Data, Paging, Trunking)
In 1997, the number of cellular subscribers doubled in
comparison with 1996 (200,000
subscribers in 1996 and about 400,000 in 1997). The
number of pager users has increased
by about 1.5 times, with about 70 percent of the users
based in Moscow and St.
Petersburg. However, these numbers are still relatively low
in comparison with most
European countries. The penetration rate of cellular
phones in Europe is more than 20 times
higher than the rate in Russia. Future growth of the cellular
services market is expected in
Russia, although, in the near term, it is hampered by low
purchasing power of the
population. However, some major service providers,
including Vympelcom, recently
lowered their prices.
The paging market is rapidly expanding in Russia due to
the relatively low operational and
user costs. Although the majority of current paging service
subscribers are located in
Moscow and St. Petersburg, more than 430 licenses had
been issued in almost all of the
regions of the Russian Federation. In 1997, the paging
industry in Russia generated about
USD 55 million in sales, 60 percent more than in 1996.
In general, the mobile communication services market in
Russia is regulated by a number of
regulatory and supervisory institutions, such as the State
Committee for Communications
and Informatization (Goskomsvyaz), the State Committee
on Radio Frequencies (GKRCh),
and the State Communications Inspectorate
(Gossvyaznadzor). Many telecommunications
companies, both Russian and foreign, consider the
regulatory system not sufficiently
transparent and insist that changes in licensing procedures
are necessary.
Another concern of the mobile telecommunications
companies is implementation of
security-related SORM requirements. In 1995, the
Federal Minister of Communications
stated that the system of "Technical Means for Support of
Operational and Search
Activities (SORM)" should be established at all
Russian-made and imported electronic
switching stations for all phone networks: for public use
and corporate use, and does not
depend on the form of ownership (Decree No. 135 of
November 8, 1995). On January 31,
1996, the Minister added a new decree which extended
these regulations to include mobile
communications network (for public and corporate use).
According to the decree, SORM should provide control
of all incoming and outcoming
calls (local, long distance, and international) to/from
particular users of the phone station,
and also control of particular phone numbers of the
network. The decree states that all
activities related to implementation of SORM are
confidential and should only be provided
by a limited number of employees. It is also stated in the
decree that the system is designed
for operational control of phone connections and location
of users of cellular
communications. In all decrees and instructions regarding
the implementation of SORM, it
is often stressed that the system is established in
accordance with the current legislation
and that non-sanctioned access is prohibited.
Enforcement of this regulation is still in progress, however,
several companies reported
that they had already been contacted by the Russian
security services regarding the
implementation of the SORM requirements. According to
Russian Government officials,
this requirement is mainly for exchange (switching)
equipment for radio/wireless
communication, and the decree and implementing
regulations were formulated as a
response to the rising crime rate.
d. Satellite
The Russian Satellite Communications Company (RSCC)
is owned by Goskomsvyaz and is
a former monopoly in the field of satellite communications
in Russia. The company has
been involved in satellite systems for communications and
TV broadcasting for more than
30 years. RSCC is responsible for the operations of
satellites of the "Gorizont" and
"Express" type. The company currently owns nine
"Gorizont" satellites and five large
teleports. RSCC also owns smaller regional monitoring
stations all over Russia. In 1997, the
company signed a contract with Alcatel (France) for the
supply of three "Express A"
satellites to be launched in 1999.
On August 1, 1997, Goskomsvyaz and RSCC proposed
a three-phased program to develop
satellite communications in Russia:
- urgent goals (contract with Alcatel [France] for the
supply of three "Express A"
satellites);
- priority goals (reorganization of the national fixed satellite
communications network in
1998-2001);
- future goals (further development and modernization of
satellite communications).
e. Other Services
A growing sector of the Russian telecommunications
market is dial-up Internet access
which currently represents a relatively small share of the
Russian telecommunications
market. The quality and range of services offered by
Internet Service Providers (ISP) such
as Demos Plus/RELcom, GlasNet, SovAm Teleport (a
division of Global TeleSystems),
Infocom, Sprint, and others, is constantly increasing in
Russia. Having channels to major
international ISP, these companies provide Internet service
of sufficient quality at
affordable prices.
Russian Telecommunications Network (RTN) - the
proprietor of the nation-wide ROSNET
data communications network - recently prepared two
proposals: high-speed connection to
Internet via ordinary copper telephone line and high-speed
wireless access to Internet via
ROSNET wireless backbone network. Abovementioned
technologies are based on
technologies of two RTN's western partners - Paradyne's
RADSL (HotWire family) and
Lucent Technology's radio-Ethernet. These technologies
will not be implemented
exclusively in Moscow and St. Petersburg, but will be
offered in the near future in such
distant places as Ulan-Ude (Buryatia) and
Komsomolsk-on-Amur (Far East).
III.2. New Entrants and Licenses
The results of the tender of Goskomsvyaz and the Russian
Space Agency (RKA) for the
supply of satellite systems from 1998-2000 to form the
basis of the national fixed satellite
communications network were announced on March 12,
1998. The tender was the first of
this type in Russia. One of the conditions was that satellites
would be designed and
manufactured by Russian manufacturers (in cooperation
with their foreign partners)
without state funding.
Five companies applied to participate in the tender, and
two projects were finally selected:
the "Troyka" project of NPO PM (the Scientific and
Industrial Enterprise of Applied
Mechanics), Krasnoyarsk Region of Russia, with Alcatel
Espace and Aerospatiale Espace
& Defense (France) as investors for the supply of three
"Express K" satellites; and RKK
"Energiya", Moscow Region of Russia, with Gascom
(Russia) as the investor for the
supply of four "Yamal" satellites. By 2001, the number of
transponders on the Russian
fixed satellite network will reach 500. According to some
industry experts, since the launch
of the seven satellites will follow very closely one after the
other, there could be more
satellite channels than can be used by the year 2001.
IV. Most Promising Subsectors
The level of teledensity (the number of access lines per
capita) throughout Russia is
extremely low. According to the Telecom Newsletter,
published by TEC NIS in Russia,
Russia-wide average is about 19 lines per 100 people
(compared to 63 in the United States),
and waiting lists for telephone installation in Russia include
nearly seven percent of the
population. Waiting time varies by region and is about five
years average. In many regions
demand exceeds the total number of telephone lines, and
only 5-10 percent of the
applicants on regional waiting lists are serviced each year.
Monthly tariffs are growing;
future time-based local tariffs have been announced in
some regions, prices for
long-distance calls are extremely high, and customer
service is almost non-existent. The
residential installation fee varies from USD 120 to 1,000.
Given this situation, significant
future growth for telephone providers is expected. |
