The Russian mobile market has always been interesting, partly due to its exploding growth and partly due to the battle between its three large national players. It has just got more interesting.
Vimpel Communications (VimpelCom), the second largest mobile operator has been hit by a claim for unpaid taxes of 4.4 billion roubles (reported as being around US$157 million), in a move reminiscent of the case concerning oil producer Yukos. VimpelCom had already been having other regulatory problems but they had appeared to have blown over in the last couple of months. The latest move dwarfs its other difficulties.
There are big stakes to play for in the Russian mobile market. Subscribers reached a total of 65.59 million at the end of November, up by 6.15% during the month, according to figures from Advanced Communications & Media (AC&M). Annual growth rates are slowing gradually from the 100% experienced in early 2004 but remain very high. AC&M put the national penetration rate at 45.2% at end-November. Penetration in Moscow has reached a massive 92.1%, with numbers of subscribers up a surprisingly high 3.31% during the month. St Petersburg is not far behind with penetration at 83.8% but growth seems to be levelling off, with monthly subscriber growth of only 1.92% during November. The highest growth rates are in the ‘regions’, as the rest of the Russian market is termed. Subscriber numbers outside Moscow and St Petersburg rose by 7.71%.
The two largest national operators, Mobile TeleSystems (MTS) and VimpelCom enjoyed the biggest share of these new subscribers. VimpelCom had monthly subscriber growth of 7.38% during November and MTS just over 6%. MTS still has the largest national market share at just under 35% but VimpelCom’s market share improved to 34.2% during the month, up from 33.8%. The third, and smallest, national operator, MegaFon, has a national market share of 19.4%. Fourth and fifth largest operators, far behind the big three, are regional operators Uralsvyazinform, with market share of just under 3%, and SMARTS with around 2.6%.
VimpelCom is catching up after experiencing Ministry delays in approving new numbering capacity earlier in 2004, which caused it to reduce its cut-off period for inactive pre-paid customers from 6 months to 4 months in June 2004. The problems were solved with the award of 5.6 million new numbers in August 2004. VimpelCom has now reverted to a 6-month inactive prepaid user cut-off period, perhaps accounting for some of its subscriber growth.
VimpelCom has also experienced other difficulties. It has been seeking frequencies in the far east region of Russia but was told it must acquire a local network. However, it would appear that competitor MTS received the frequencies it required. In late February 2004 VimpelCom claimed the regulator had not only refused to award it a concession to operate in the Far East region, but had turned down 97 of its requests for additional bandwidth to enhance the capacity of its existing GSM systems.
VimpelCom has had further problems with a recent action brought against it by the local Moscow regulator because VimpelCom’s licence to provide services in Moscow is held through its subsidiary KB Impuls, under an agency agreement approved back in 1998. The regulators said the agreement did not directly allow Vimpelcom to sell services on behalf of KB Impuls. VimpelCom claimed that the licence arrangement had passed repeated regulatory checks since 1998. VimpelCom sued the regulator. Despite winning a court case proving that it had broken no law, VimpelCom was still ordered by the Ministry to correct the situation. VimpelCom has resolved the matter by merging KB Impuls into the parent company, which was approved by the Anti-Monopoly Service in June 2004. It is KB Impuls in particular that is now being targeted by the tax demands.
All three Russian national mobile operators are controlled by large Russian-owned groups, each with a major west European telecoms operator as a partner. MTS is majority owned by Sistema with Deutsche Telekom as its partner. VimpelCom is owned by the Alfa Group (itself controlled by the ‘oligarch’, Mr Mikhail Fridman) with Telenor as its partner. Alfa Group is one of Russia’s wealthiest financial-industrial groups and in addition to its share of VimpelCom also owns a large stake in international oil major TNK-BP. MegaFon is owned by Telecominvest and TeliaSonera. Sistema, Alfa and Telecominvest also have substantial interests in fixed-line operators in addition to their mobile telecoms holdings.
It has been suggested that VimpelCom’s problems date from August 2003, when Alfa Group purchased a fairly large share (25%) in rival MegaFon, a move that other MegaFon shareholders claimed to have first heard about in the press. In then transpired that IPOC, a Bermuda-based investment company, which owns a stake in MegaFon directly and is also a major shareholder in Telecominvest, claimed to have bought the same shares back in 2001. The battle is ongoing with numerous court cases in the Bahamas and British Virgin Islands.
The long-standing Russian minister responsible for communications, Mr Leonid Reiman, originally founded Telecominvest and is rumoured to have retained connections with both Telecominvest and IPOC, and maybe even principal ownership. MegaFon is the most recently established of the three national operators and there have been accusations that it has received preferential treatment, including being awarded a licence for Moscow in 2000 without a tender process. Mr Reiman was himself having a few problems earlier in 2004, mysteriously demoted by President Putin but then reinstated shortly afterwards.
One thing is for certain the activities are not going to improve the already battered business image Russia has in the international market. It looks like that after other industries telecoms is no also being infiltrated by corruption and mafia practises.