Russian Communications Minister Leonid Reiman has announced that the inter-city and international communications market will be liberalized, and that the first alternative licenses will be issued in May. Mr. Reiman said seven companies had already applied for the licenses, but only five will be successful. Analysts, though, believe that three, rather than five, companies have the resources and strength to expand on this market segment during the initial licensing stage.
Russia promised to end Rostelecom's monopoly by 2007 during the talks with the EU on the country's accession to the WTO. Rostelecom is part of the state-run Svyazinvest holding, and provides inter-city and international communications services to Russia's law-enforcement agencies. That leaves it as a strategic asset, which means it can only be privatized by a presidential decree. The confrontation between government liberals led by German Gref and law enforcers over the future of Rostelecom was just one of the many obstacles blocking the sale of Svyazinvest's 75% minus one share owned by the state.
The liberalization of the long-range communications market will clarify the situation. For instance, analysts say that privatization is the only way to attract staff capable of saving Rostelecom from the consequences of Soviet-style management. However, Mr. Reiman has said Svyazinvest is unlikely to be sold off before 2006. What then does the de-monopolization of Rostelcom services, if not privatization, mean if it remains part of Svyazinvest? According to some estimates, Rostelecom will lose about 30% of its market segment, first of all, corporate clients, who are already signing contracts with other operators. Rostelecom will only retain individual subscribers and will face price competition with other market players.
Which three major companies will profit from these forthcoming changes? Experts believe that the liberalization process will, first of all, benefit AFK Sistema and its division Inter-Regional Transit Telecom (MTT), the Golden Telecom alternative operator and the TransTelecom state-owned company.
MTT has already announced plans to offer inter-city and international communications services this summer. Therefore, MTT, which manages 11 local switches in Russia's federal districts, has an impressive advantage. The company plans to increase the number of local switches to 44 within the next few years. This means that MTT will not have to make "last mile" payments to local operators for using Rostelecom networks. Both MTT and Golden Telecom will have to rent Rostelecom networks to provide long-range communications. Golden Telecom, 33% of whose shares belong to Alfa-Group, also wants to operate on the long-range communications market. Alfa also has a controlling interest in the Vimpelcom cell phone operator, the country's second largest, and will take advantage of its positions for providing "its" operator with cheaper long-range communications. Yelena Bazhenova, an analyst with the Aton brokerage, believes Alfa and Sistema need these licenses because they will acquire assets that will provide services to their own communications assets.
TransTelecom, which belongs to the state transport monopoly Russian Railways, will most likely become the third company to obtain a license. Its extensive network across Russia, which is also its main advantage, is second only to Rostelecom's. At the moment, its network can only transmit data, but experts say it will not be expensive to upgrade it for phone users. However, some analysts doubt whether TransTelecom will receive a license because a state-run company would therefore oust another state-owned entity from the market.
On the whole, the liberalization of the national long-range communications market is a landmark event that highlights the government's plans for continued reforms. At the same time, the de-monopolization of this segment of the communications market has its pluses and minuses. The liberalization of the long-range communications market will bring Russia a step closer to joining the WTO, while Russian subscribers will see their phone bills come down. At the same time, Svyazinvest will eventually lose a large market segment, which means a sharp fall in its market value and less money for the state when it is finally privatized.
