Rostelecom faces uncertain future if state excludes it from Svyazinvest sell-off

3 Feb 2005

The future of Russia’s dominant long-distance and international telephony services provider Rostelecom could be bleak after the ending of its monopoly status, if the government decides to exclude it from plans to privatise telecoms holding company Svyazinvest later this year. The state is reportedly keen to sell 75% minus one share in Svyazinvest, which controls Rostelecom, Moscow fixed line operator Moscow City Telephone Network (MGTS) and seven ‘mega-regional’ operators: Center Telecom, North-West Telecom, Volga Telecom, South Telecom, Uralsvyazinform, Siberia Telecom (Sibirtelecom) and Far East Telecom (Dalnevostochnaya). Although the country’s IT and Communications Minister Leonid Reiman is believed to favour the inclusion of Rostelecom in the sale, which could raise up to USD2 billion for the state’s coffers, President Putin said he would prefer to hold on to the asset, which currently provides special telecoms services to the military and intelligence agencies.

Reiman confirmed yesterday that the government is exploring the possibility of privatising Svyazinvest in the second half of 2005, although he was quick to point out that no official decision had been taken. According to The Moscow Times, two Russian conglomerates with interests in the telecoms market, Alfa Group and AFK Sistema, and telecoms firm Telekominvest have expressed an interest in acquiring the company. Such a move to corner the fixed line market would be logical given that the three have already seized the initiative in the country’s wireless sector. Alfa Group, AFK Sistema and Telekominvest each have an interest in one of the ‘Big Three’ mobile operators – Mobile TeleSystems (MTS), Vimpelcom and MegaFon respectively – which collectively control nearly 90% of the domestic cellular market. The three parent companies are keen to profit from every segment of the country’s fast-growing industry, and not to focus their efforts purely on one source of revenue.

However, if the government decides to omit Rostelecom from the privatisation process the operator will be forced instead to rent lines to other carriers at prices dictated by the state and will also be hindered by stringent government regulations, leading to stagnation and an erosion of its position in the market. The Ministry plans to begin issuing new licences for DLD and ILD services by the third quarter of 2005 and some analysts are predicting that Rostelecom is set to lose up to 33% of its business once its monopoly ends. Already, companies such as Comstar, Golden Telecom and Transtelecom – an operator owned by OAO Russian Railways – are ready to jump when Rostelecom loses its monopoly; Svyazinvest too expects to see a surge of competition in the local loop where it currently controls more than 90% of all local connections. The forthcoming privatisation of Svyazinvest is seen by many as the catalyst which will spur sector growth, which will be further bolstered by the rise in popularity of IP telephony and SMS fixed line services.

On the surface Rostelecom would appear a useful acquisition. It owns and operates analogue and digital plesiosynchronous transmission systems consisting of metal cables and radio relay links with a total length of 160,000km, whilst its fibre-optic links extend to 44,300km. Its network is connected to Belarus, China, Denmark, Estonia, Finland, Japan, Italy, Kazakhstan, Korea, Turkey and Ukraine. Land links are supplemented by the use of satellites; Rostelecom presides over eleven earth stations (three hub stations and eight peripheral stations) located in Siberia and the Far East regions, namely Gus-Khrustalnyi, Novosibirsk, Khabarovsk, Barnaul, Kirov, Gorno-Altaisk, Kyzyl, Yakutsk, Novokuznetsk, Juzhno-Sakhalinsk and Salekhard. However, few seem interested in a company that is slated to lose its monopoly status and which is seemingly beset with internal problems. Nonetheless, Russia is intent on deregulating its long-distance services market as a precondition of its accession to the World Trade Organisation. Under a pre-accession deal signed last year, Rostelecom must lose its monopoly by 2007, but Reiman wants it to happen sooner.