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Telecommunications
in Russia
Copyright 2017, Faulkner
Information Services. All Rights Reserved.
Docid: 00017975
Publication Date: 1705
Report Type: MARKET
Preview
The Russian telecommunications market is starting to gather steam as it moves
forward. The industry has been historically hampered by having a series of
regional local providers deliver service, but the Russian government
in 2010 consolidated all of those companies into a single company that is now as
large as some of the major global players. Like many developing countries,
wireless technologies have been crucial in bringing telecom service to the
population, especially outside of metro areas where broadband Internet access
is still scarce. This report discusses the state of the Russian telecommunications market
and the massive changes it has gone through, including the effects of the country’s controversial annexing of Crimea. It identifies its major players and discusses the trends shaping the market.
Report Contents:
- Executive Summary
- Market Dynamics
- Market Leaders
- Market Trends
- Strategic Planning Implications
- Web Links
- Related Reports
Executive Summary
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The
Russian telecommunications market continues in a state of flux, still
growing but offering a surprisingly uneven landscape of positive and
negative factors.
| Related Faulkner Reports |
| Telecommunications in Eastern Europe Market Trends |
The Law on Telecommunications was rewritten in 2003 and implementation
legislation is very gradually being put into place. In 2004, the large
number of regional incumbent telcos was reorganized and reduced to just
seven, and in 2010 the government merged all of those companies with
Rostelecom, the country’s main long distance company.
During
the time that the telecom sector in most countries was in a downturn, the
Russian telecom sector continued to grow, particularly in cellular
service, which has now outstripped wireline by a growing percentage and
achieved a national average penetration rate of nearly 183 percent. Landline teledensity
remains low in comparison with Western industrialized nations and, overall,
operations remain uneven. Some communities have only basic phone service and
many rural connections are reliant upon aging copper lines. On the positive
side, the building of
infrastructure consists of mainly new systems rather than updating legacy systems, so
problems of compatibility and the need to make use of existing systems
create far fewer problems.
Market
Dynamics
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Russia is the largest country in the world. It stretches across Europe and
Asia
world’s land. With 144.1 million people, it is the ninth most populous
country.
Russia
has five very diverse regions that span horizontally from east to west and
include the following: tundra zone, forest zone, plains zone, arid zone,
and mountain zone. Its coastlines include the Pacific Ocean, the Arctic
Ocean, the Black Sea, and the Baltic Sea. Because
of the harsh conditions, particularly its winters, concerns for the
environment have not been a priority. Soviet-era industrial developments
have left Russia
with some of the highest polluted areas in the world. The ravages of
industrial waste and overuse of pesticides and fertilizers is likely to
continue as a result of the quest to modernize.
Figure 1. Russia
Source: CIA World Fact Book
|
Category |
Statistic |
|---|---|
|
|
|
|
Size |
6.6 million |
|
|
144.1 million |
|
Per |
$8,664 (72nd |
|
|
|
|
|
25% |
|
Mobile |
160% |
|
4G |
Yes |
|
|
19% |
|
% of |
70% |
|
State |
|
|
|
Open in all sectors |
|
|
Ministry of Communications |
|
|
Rostelecom |
|
Mobile |
Beeline, MegaFon, MTS, |
Russia is a semi-presidential republic with both a president and prime minster.
The president is elected by a popular vote and serves a four-year term. The
president also appoints the prime minster, who must be approved by the lower
house of the legislative body, called the State Duma. The current president,
Vladimir Putin, has a storied history at the front of Russian politics. He
served two terms as president in 2000 and 2004. Since the Russian constitution
prevents the president from serving for three consecutive terms, he was
ineligible to run in 2008. However, when the new president, Dmitry Medvedev was
elected, he appointed Putin prime minister. Putin then won a third term in 2012
and appointed Mededev his prime minister. This power structure has been in place
since then.
It is also important to note that tensions between Russia and the West are the
highest they’ve been since the Cold War. In 2016, parts of the United States
government accused Russia of interfering in its presidential election by hacking
into government systems and leaking information to Wikileaks that was damaging
to Hillary Clinton’
s campaign. In 2014, Russia drew the attention of
the international community when it annexed Crimea from the Ukraine after a
territorial dispute with the latter country. The United States, Australia,
Japan, and European Union responded with heavy economic sanctions against
Russia. These sanctions have pushed the country into an economic recession.
History of the Telecommunications Industry
When the Soviet Union dissolved in 1991, Russia was left with a dated
infrastructure, very low telephone penetration, total state ownership, a massive
bureaucracy, and insufficient capital. Only 33 percent of the population had a
telephone and millions of people were on a waiting list to be connected.
Several government agencies also operated their own telephone networks
independent of the national infrastructure. These networks tended to be more
advanced than the public telephone network since they were used by the military
or other industries. This created a digital divide within the country, and the
Russian government estimated that it would have to spend $40 billion over 10
years to expand the telecommunications network and upgrade parts of the
infrastructure that had become so antiquated that they were practically obsolete.
To stabilize and modernize the industry, the government reorganized the
telecommunications sector by establishing Rostelecom as the single long distance
provider. It also created a holding company called Svyazinvest (translation:
Investment Telecommunications Company) to manage all of its telecommunications
assets. All together, Svyazinvest had ownership of 85 companies.
President Boris Yeltsin attempted to attract international investment into
Russia by privatizing several industries. In 1997, the government sold 25
percent plus one share of Svyazinvest to a group of banks. The same year, the
government did away with the Ministry of Communications, an agency that had
ties to the old Soviet days that monitored and controlled the telecommunications
market as much as it regulated it. In its place, it created the State Committee
on Communications and Infomatics. This agency was tasked with guiding the
Russian telecom sector into the 21st century, liberalizing the
market, and promoting competition.
By 2000, there were more than a thousand telecommunication companies in Russia, but
Svyazinvest’s operating companies still controlled most of the industry. At the
same time, the company began a massive consolidation where it combined 75
regional companies into seven larger ones: CenterTelecom, North West Telecom,
Volga Telecom, South Telecom Company, Uralsvyazinform, SibirTelecom, and
Dalsvyaz.
In 2010, the Russian government consolidated the company even further by
combining all of the regional operators into Rostelecom, of which Svyazinvest
now owns 25.1 percent.
State of the Marketplace
Russia’s telecommunications industry is one of the fastest growing sectors of
its economy, but it is very difficult for new companies to make any headway
since the market is dominated by a handful of well-established, nationwide
players. Not surprisingly, most of the competition is in Moscow.
The Russian Ministry of Communications and Mass Media is responsible for
regulating the industry. The current regulatory policy, the Law on
Communication, has been in place since 2004 and provides a general framework for
the market, but there are also more than 20 different decrees and orders in
place that govern specific parts of the industry.
Theoretically, Russia’s regulatory landscape complies with World Trade
Organization requirements, European Union directives, Organization for Economic
Cooperation and Development (OECD) recommendations, and the International
Telecommunications Union. However, the government has been slow to enact laws that
actually enforce those policies.
The telecommunications law continues to have a number of positive and
negative effects. It has many contradictions and is not widely understood. Major
issues include incomplete licensing procedures, a universal service tax, unequal
rights for vendors, lack of transparency, and the active role the Ministry
continues play in the market.
Fixed-Line. According to the most recent data published by the
International Telecommunications Union, Russia has approximately 35.5 million
local access lines, which puts the fixed-line teledensity at around 25 percent.
This figure is low compared to some of its European neighbors, but, to its
credit, the country has made some great strides over the last several years to
improve the quality of service. The following chart shows how the number of
fixed lines has evolved over the last recorded ten year period.
Figure
2. Russian Fixed-Line Statistics, 2005-2015
Source: International Telecommunications Union (ITU)
The communications infrastructure is more advanced in the western part of the
country, where most of the major cities are located.
Most major Russian cities have modernized networks that are capable of providing
broadband service, and the market for direct-fiber access is one of the fastest
growing in Europe. Metropolitan areas are connected by a backbone that runs from
Saint Petersburg to Khabarovsk and from Moscow to Novorossiysk. The provincial
areas, however, still struggle with antiquated, analog service – if they
have service at all. Russia is trying bring service to these area by investing
heavily in a broadband network that will span 2,000 kilometers and provide
service of at least 10M bps.
Internationally, Russia connects to several submarine cable
systems and it has satellite earth stations for Intelsat, Intersputnik, Eutelsat,
Inmarsat, and Orbita.
Wireless.
Mobile technologies have exploded,
going from a density rate of less than 2 percent in 2000 to 156 percent at the
end of 2015. Wireless technologies have been successful for two main reasons. First,
Russia
with access lines mostly concentrated in major cities and parts of the network still using analog
switching technologies. The second factor is geography.
Russia
is a huge country with a challenging terrain in parts. Telecommunications
carriers have little incentive to build out their networks to remote parts of
the country because there are not enough people living there to bring a return
on the investment required. Mobile services have become so popular
that they now outnumber landline connections by more than four to one.
At the end of 2015,
Russia
had approximately 227.3.million mobile telephones. The market is fully deregulated and competition has helped fuel growth
in this market. All four of the country’s main mobile companies are
licensed to provide 3G and 4G service, but Russia was late to receive 4G
service. It issued
its 4G licenses in July 2012, much later than many other parts of the world. The government initially planned to auction the
licenses but scrapped those plans and issued licenses to Rosetelcom, MTS,
VEON, and MegaFon in exchange for the companies agreeing to invest $456
million into their networks every year through 2019.
The
following graphs show how the wireless market has grown over the most recently
recorded 10-year period.
Figure 3. Russian Wireless Statistics, 2005-2015
Source: International Telecommunications Union (ITU)
Internet. Internet access was slow to take off in Russia because many people could not
afford computers and there was a lack of infrastructure. In the 1990s,
Rostelecom built a fiber-optic network that spanned the country and
connected Russia to Denmark, Italy, Japan, Korea, Turkey, and the Ukraine, but
it operated at just 560M bps. In 2005, the company built another nationwide
network that could handle 120G bps.
In 2008, only 27 percent of the
population used the Internet. By the end of 2015, that figure had reached 70
percent and there were more unique
visitors coming from Russia than any other
country in Europe. The country now also has 26.8 million broadband subscribers,
a density rate of 19 percent.
The lack of infrastructure over the years has
actually been somewhat of a blessing for very fast Internet access. Since so
many parts of the country did not have cable or DSL access, people flocked to
direct fiber access when it started to become available in major cities.
As a result, Russia has one of the fastest growing markets for fiber broadband
in Europe and 60 percent of Rostelecom’
s broadband customers now subscribe to
the service.
The
following graph shows how broadband sectors has evolved over the most recently
recorded decade.
Figure 4. Russian Broadband Statistics, 2005-2015
Source: ITU-D
Market
Leaders
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of this report]
The
Russian telecommunications sector is still highly centralized,
particularly when compared to the telecom sectors in much of
Europe.
The following
companies are major players in the Russian telecom
market.
Rostelecom. Rostelecom is the
incumbent telecommunications carrier in Russia. The modern company was formed in
late 2010 when the Russian government consolidated the country’s fixed-line
market into a single provider. This move combined seven regional carriers, which
provided local service in their designated operating regions, with the old Rostelecom, which was the country’s leading long distance company.
The Russian government decided to consolidate all of
these landline players into a single carrier for several reasons:
-
It gives Rostelecom greater
purchasing power for purchasing networking equipment, while
eliminating redundant and older infrastructure. -
The combined company can invest
the profits from successful parts of the business into others. -
It
allows Rostelecom to operate under a single brand. -
It streamlines the company’s
management structuring, making it more nimble. -
The larger company is a more attractive
investment on the stock market.
In 2013, Rostelecom announced plans to merge its mobile assets with Tele2
Russia’
s in a joint venture so it could focus more on its landline operations.
Today, it is one of the largest companies in Russia and a full-service
telecommunications carrier capable of providing local and long-distance voice
calling, wireless service, high-speed Internet access, and television services.
It provides basic telephone service to 24.4 million customers and 12.3 million broadband customers,
of which 60 percent are direct fiber subscribers. In May 2014, the company
bought the fixed-line infrastructure of Datagroup and Atracom, two Ukrainian
companies operating in Crimea. In March 2016, the company purchased Morton
Group, which provides service to 40,000 consumers and 2,000 businesses in and
around Moscow.
The company’
s fiber-optic network now reaches 33
million people, and its backbone network runs
500,000 kilometers across the country, with connections to 30 international
cable systems. The company has been focusing on expanding and expanding its
network in the central, northwest, Vogal, and Ural regions of the country.
The following image shows Rostelecom’s network.
Figure 5. Rostelecom’s Network
Source: Rostelecom
For wireless services, Rostelecom has a joint venture with Tele2 that
provides service to 38.4 million customers and 12 percent of the market. The decision to create the joint venture made sense for both
companies because they were significantly smaller than the three leading
players in the market. Tele2 was also at a strategic disadvantage because it
did not have one of the country’
s coveted 4G licenses. The joint venture
is now working to expand its network in the lucrative Moscow region by
building as many as 100 base stations a week for a year.
Rostelecom
is the prime network resource for Russian ISPs to provide access to domestic and
international Internet sites. It leases lines from VSNL, Cable &
Wireless, Verizon Business and TeliaSonera.
MTS. MTS
is the largest wireless carrier in Russia and the 21st largest mobile operators in the world. It provides service to
77 million people in Russia, giving it 32 percent of the overall market.
The company got its start as a wireless carrier, but it branched out into
the broadband and cable sectors when it acquired 62 percent of Comstar in
2010. It also offers fixed-line telephone service in Moscow through a
subsidiary called Moscow City Telephone Network (MGTS), which has 4.4
million customers in Moscow and the surrounding area. While the company’
s
landline market is geographically small, it it is actually larger than
Rostelecom in terms of local calling revenue.
It now leverages its strong brand recognition and large retail network to
also offer landline telephone service, IP television, and broadband Internet
access.
MTS launched 4G service in Moscow in September 2012, and it started testing
5G service in 2017.
Beeline. Beeline is Russia’
s leading alternative
telecommunications provider and one of the most powerful brands in the country.
The modern company was formed in 2008 when VEON (then called VimpelCom) acquired
Golden Telecom, another major alternative telecom carrier.
It focuses largely on serving
corporate customers in major cities across
Russia
and the Commonwealth of Independent States. At the end of 2016, the
company had 2.2 million broadband customers and 58.3 million wireless
subscribers. The company focuses on its data and Internet services and offers
competitive local phone exchange (CLEC) service, as well as domestic and
international long-distance. It operates a fiber-optic and
satellite-based network and provides mobile service in
Kiev
and
Odessa
Beeline’
s 4G network covers about 50 percent of the Russian population.
The company started testing 4.5G and 5G technologies in January 2017.
MegaFon.
MegaFon
is the second largest mobile company in Russia, with about 75 million
customers and million customers and
31 percent of the market. It was the first company to offer 3G service and
it also operates a 4G network. It expanded its fourth-generation network in
October 2013 when it acquired Scartel / Yota, a smaller wireless carrier. The company is
now owned by TeliaSonera and USM Group, and it
was the first Russian company to be listed on the New York Stock Exchange.
Other
Carriers. The other companies competing in the Russian mobile sector are
significantly smaller than the market leaders. They are Sotovaja Svjaz
MOTIV, SMARTS, Tattelecom, and Vainahtelecom.
The next several charts and graphs show market share information for the
Russian telecom sector:
Figure
6. Market Share for Russian Local Market
Source: Rostelecom
The following chart shows the
market share for the major players in the Russian mobile market.
Figure 7. Market Share for Mobile Carriers
Source:
Carrier Data
Table 2 provides an overview of the Russian mobile sector.
|
Carrier |
Subscribers |
Network Technology |
|---|---|---|
|
MTS |
77 |
GSM, UMTS, HSDPA, HSUPA, |
|
Megafone |
75 |
GSM, UMTS, HSDPA, HSUPA, |
|
Beeline |
58 |
GSM, UMTS, HDSPA, HSUPA, |
|
Tele2 / Rostelecom |
28.4 |
GSM, UMTS, HDSPA, HSUPA, HSPA+, DC-HSPA+, LTE, |
Source: Carrier Data
Figure 8. Market Share for Broadband Providers
Source: AC&M Consulting
Market
Trends
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of this report]
The
major factors driving the Russian telecommunications sector are keyed to
recovery from the heritage of
Soviet Union days. It has been gradually recovering during the past decade, through a
variety of initiatives. These initiatives have included liberalization,
re-writing of the telecommunications law, and programs related to the
"Electronic Russia" initiative.
While
the telecommunications sector in Russia has grown steadily over the years, there
are still issues that must be addressed in order for the sector to realize its
full potential. For instance, the availability of telecom services and the
distribution of related infrastructure is inconsistent, with all services
favoring the Moscow area. But efforts are underway to address these issues. The Ministry of
Communications says that Russia will need $33 billion in telecommunications investment over the next decade in
order to bring Russia up to the standard of other leading European countries. As
Russia slowly inches its way towards what many commentators believe to be an eventual
offer to join the WTO, the nation should be able to attract the sort of internal
and external investment needed to keep the telecom sector running. However, WTO
accession has been worked on for over a decade now. It will require changes
in laws on foreign investment and probably government divestiture of Rostelecom
– which
is already planned. Now that Rostelcom is the largest telecommunications
carrier in the country, it is focusing on improving its infrastructure; the
company says it plans to invest about 20 percent of its consolidated revenue
back into the business to help upgrade its network.
The broadband
penetration rate in the country amounts now to about 19 percent of the
population. While that statistic is low compared to Western Europe and North
America, Rostelecom believes the market is approaching maturity and will only
grow about two to three percent between 2014 and 2017.
While this figure has been growing steadily (it was just 0.01
percent in 2002), it remains low by
European standards. This said, the prevailing trend suggests that Russians will
continue to embrace the Internet in growing numbers. The "E-Russia"
program resulted in $2.4 billion
being invested between 2002 and 2010. Adoption of high-speed
Internet access will likely continue to lag behind adoption rates in most parts
of
Europe
for the foreseeable future. Broadband infrastructure is minimal at best in
Russia
discouraged most providers from undertaking ambitious broadband deployment
projects. In 2014, Rostelecom agreed to bring Internet access to more than
13,800 towns across the country that have a population of between 250 and 500
people. On the other hand, while development of the Internet and ITC sector in
general lags behind many other countries, it is important to note that
Russia
graduates enormous numbers of scientists and engineers, many working within
these areas. When some critical mass is reached, development could therefore be
extremely rapid.
As
for projections from the regulatory front, the Ministry of Communications is
revising the regulatory environment to facilitate further industry growth. The
introduction of universal service, it says, is aimed at bringing basic telephone
services to every settlement in Russia without hurting the profitability of the telephone operators. Liberalized
interconnection to the public switch telephone network will result in faster
growth of telecom services. These and other provisions of the new
Telecommunications Law are still not fully implemented. This has led to some
uncertainty in the marketplace with respect to current practices and how much
companies will be expected to pay to subsidize universal service.
There
are other questions arising in the regulatory sector, as well. The department
merged with transportation, then, in May 2004 the newly formed Ministry of
Transport and Communications was separated into the Ministry of Transport
of the Russian Federation
and the Ministry of Information Technologies and Communications of the Russian Federation. At the same time, there have been ongoing investigations of
Russia’s "oligarchs" – individuals who arrived at massive wealth and
investment after the fall of Communism. Some of the major telcos have large
investments from individuals who are under investigation. Although, as yet, none
of these instances has had direct repercussions, they are making sector
participants wary. Still, the market is booming and investment is proceeding
ahead.
The Russian Ministry of Telecom and Mass Communications has
identified the following goals for the period between 2012-2018:
-
Have 20 million people sign up
for 4G service every year. -
Make wireless and
Internet services available during all kinds of transportation,
including airline travel. -
Have all incoming domestic calls
be free of charge for the person receiving the call. -
Have all outgoing domestic calls
charged at local rates, eliminating domestic long distance. -
Have 80 percent of the
population report they are satisfied with the connectivity they
achieve. -
Have five million
homes have broadband cable Internet access of at least 100M bps.
Lastly, Russia’s questionable
annexing of the Crimea region is already starting to impact the
telecom sector. Prime Minister Medvedev told Rostelecom to start
offering service in the territory as soon as possible, so the
company wasted no time in buying the fixed-line infrastructure
of two Ukraine companies operating there. In April 2014, Tele2
Russia announced plans to roll out 4G LTE service in the region.
In addition, a Russian news agency reported that a fiber-optic
connection between Russia and Crimea would be completed in May
2014.
Strategic Planning
Implications
[return to top
of this report]
During
the coming decade, the telecommunications market in metropolitan areas will
experience rapid growth, with Moscow, St. Petersburg, Rostov, Chelyabinsk and Krasnodar Krai among the strongest markets. Bearing the legacy of their
centralized, authoritarian Soviet government heritage, all telecommunications
lines lead to Moscow for both the major cities – as well as for the 15 ex-Soviet countries.
Moving away from the Moscow-centric focus has been a major undertaking for the
new republics, as well as for Russia itself. Although most of the country’s telecommunications infrastructure is
antiquated and underdeveloped, it is not surprising that the operating companies
within Moscow are indeed the strongest.
The
Russian telecommunications market continues to successfully avoid the
significant downturns experienced in the telecommunications sector globally, and
this has opened many new investment opportunities. Since most new infrastructure
is being built from scratch, rollouts are all state of the art, and do not face
the legacy infrastructure problems typical in the industrialized West. Mobile
companies were not saddled with enormous license fees, either, resulting in more
cash for building infrastructure – another reason for the high rate of growth in
cellular communications. A robust development climate persists, clouded only by
uncertainties over implementation of new telecommunications laws, and the great
enemy of Russian advancement – corruption. Upcoming major events capable of
shaping this market include the eventual privatization of Svyazinvest,
gradual refinement of the telecom law, and saturation of the mobile market
resulting in slowed growth and lower ARPU.
There are currently many opportunities for investment in this
sector, and there will be even more opportunities as the market settles down. In
the equipment area, Russia spends about $2.6 billion annually on telecom gear,
with over 60 percent invested in imports. Best sales prospects include Gigabit
Ethernet and Wi-Fi equipment, MPLS, XDSL technology, and IP telephony equipment.
Web Links
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Resource File
- ACM Consulting: www.acm-consulting.com/
- International Telecommunications Union Development Sector (ITU-D):
http://www.itu.int/en/ITU-D/Pages/default.aspx
Companies Mentioned in this Report
- Golden Telecom: http://www.goldentele.com/
- Megafon:http://www.megafon.ru/
- Ministry of Information Technologies and Communications: http://english.minsvyaz.ru/enter.shtml
- MTS:http://www.mts.ru
- Rostelecom:http://www.rt.ru/
- Svyazinvest: http://www.svyazinvest.ru/
- VEON: http://www.vimpelcom.com
About the Author
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Bruce Kramer is a
regular contributor to Faulkner Information Services who has written
over 200 articles and white papers on the technology industry over the
last 16 years. In addition to working as an independent author and
analyst, Bruce is a former Senior Editor for Faulkner Information
Services and has over a decade of experience in the supply chain
management and business process outsourcing industries.
[return to top of this report]