The Russian telecom industry has been buzzing with dramatic growth, experts say, with the wireless market expanding by a projected 50 percent and the Internet sector by a projected 40 percent this year.

More conventional, landline and long-distance telephone industries are showing less dramatic growth, but analysts expressed optimism about their long-term future, with Syazinvest – a state-controlled telecom monopoly – undergoing a restructuring that could have wide-reaching effects.

Here's a look at the four main sectors in greater detail:

Wireless

The mobile telecom market rapidly swelled last year, with subscribers more than doubling from about 1.4 million at the end of 1999 to about 3.2 million by the end of 2000, analysts say. The distinguishing feature of that growth was that the majority of the new subscribers – almost 70 percent – were based in Moscow, St. Petersburg and the their oblasts.

That trend continued this year, with Russia's two major wireless providers, Mobile TeleSystems (MTS) and VimpelCom, owner of the Bee Line brand, announcing a record number of subscribers nationally: more than 1 million for MTS; about 800,000 for VimpelCom.

Competition between the two in Moscow and its oblast, where the bulk of those subscribers continue to reside, has been fierce. Analysts say that, currently, MTS serves more than 50 percent of all wireless subscribers in Moscow and its oblast; VimpleCom serves roughly 40 percent.

"MTS seems to have a growing market share, at the moment" said Thomas Adshead, a telecom analyst at the Troika-Dialog brokerage. "But VimpelCom is marketing very aggressively in the corporate sector, which it hasn't done in the past."

Despite the rivalry between Russia's two major service providers, experts say that high barriers to entry and economies of scale mean that MTS and VimpelCom will retain their combined market dominance until at least the end of next year.

Moreover, Russian telecom regulations are also likely to stifle any dramatic changes, said Vycheslav Nikolayev of Renaissance-Capital, a financial consultancy. As an example, Nikolayev noted how current regulations prevented users from transfering wireless phone numbers from one service provider to another, inhibiting switchovers that would alter the market landscape.

Both MTS and VimpelCom are expected to continue focusing on the GSM standard, although not exclusively. The only other company with a GSM license is newcomer Sonic Duo, partly owned by Finland's leading operator, Sonera. But Sonic Duo is not expected to begin operation in this standard until mid-2001.

"From mid-2001, the Moscow mobile market's growth is likely to slow down," said Golubeva, who explained that this was largely due to the near total saturation of cellular services demand. "Starting from the second half of 2001, the main growth will be in the regions."

Another consequence of the market saturation is that subscription fees, which have been steadily dropping over the past year, will begin to plateau. This is because rates per minute in Moscow are already in line with those in most of Western Europe and cannot get much lower then that, Adshead said. "The likeliest scenario is that there will be a 10 percent decrease in per minute rates [in 2001]."

The Russian wireless market began in 1991, with St. Petersburg-based Delta Telecom offering mobile communication in the Northern Mobile Telephones (NMT) standard. But in the mid-1990s, a new standard, DAMPS, became dominant.

Today, both NMT and DAMPS have given way to GSM, widely regarded as a technologically superior standard. With GSM, subscribers can send short text messages to each other and have access to a limited form of the Internet specially designed for mobile phones, known as WAP. The other two standards cannot carry these services.

However, experts say that despite DAMPS' and NMT's technological lack of sophistication, the two have a long way to go before being pushed entirely from the Russian telecom market.

"It's too early to bury DAMPS," said Nadezhda Golubeva, a telecom analyst with the ATON brokerage in Moscow. "There are substantial networks in the regions for that standard, including places where landline connections are not available."

What may keep DAMPS from the grave, she added, is its possible use as an alternative to landline phone service – the standard's networks are already well entrenched, and its low operation costs mean that providers can make very cheap offers.

Landline phone services

To look for changes in Russia's landline sector, one must look for changes in its most important player, state-monopoly Svyazinvest, currently undergoing a massive restructuring.

The company is an outgrowth of the Soviet national telecom monopoly, and still retains a controlling share in a majority of the country's local operators.

In the early 1990s, the Soviet-era Communications Ministry pulled out of its telephone operations, retaining only its regulatory functions. However, the ministry has kept its hand in the market through its dominant share in Svyazinvest, which runs 82 of the country's official 87 local telephone operators and has a minority share in the remaining five. It owns more than 90 percent of the country's local landline infrastructure.

But a peculiar legacy of the Soviet Union has left Syazinvest with more local telephone infrastructure than it can use, and so over the years it has been leasing it out to companies offering competing services. Because of this, analysts point out that a number independent operators have had the opportunity to spring up, and in some cases, have even been giving Syazinvest stiff competition.

Today, if one were to divide up the market of telecom services using local landline infrastructure, analysts say, Syazinvest controls 60 percent of the market, and independents 40 percent.

One would expect that Svyazinvest would make conditions harsh for new operators in the market, said Golubeva. New operators should have to pay more for using the networks, because Svyazinvest subsidiaries are bearing huge maintenance and operation costs, she added.

In several ways, the restructuring scheme for Svyazinvest will address some of these problems. It will collapse the company's complicated network of local operators into seven larger subdivisions. Svyazinvest officials say that they hope this will usher in investment and make for a more efficient, competitive operation.

Still, experts say, even with the changes, growth in the sector will be limited. In general, they point out that the sector's expansion is tempered by huge operating costs, low purchasing power and artificially depressed fees imposed by the Ministry of Communications. Moreover, the restructuring of Svyazinvest will be a long process and its effects are unlikely to reach customers for several years.

"[By next year] Syazinvest won't be able to achieve much with its restructuring because of technical and bureaucratic hindrances," Nikolayev said.

To be more profitable, Svyazinvest divisions should begin adjusting prices according to inflation, said Golubeva. The next step would be to have subscribers pay by the minute, she said, pointing out that subscribers currently pay a flat fee for their local telephone services.

Long-distance phone services

Much like Russia's local landline sector, the future of the long-distance service is hinged to the Syazinvest restructuring, experts say. This is in part because Syazinvest owns a controlling stake in Rostelecom, the country's long-distance monopoly.

"It is not clear what will happen to Rostelecom after Svyazinvest reorganizes itself," said Nikolayev. But Syazinvest's restructuring will be the company's biggest challenge, he added.

Currently, Rostelecom is responsible for phone services between each of the 87 official landline phone operators, he said, but if they are collapsed into seven larger companies, Rostelecom will only be able to charge fees for traffic between a handful of subdivisions, significantly reducing its business.

Company officials have said that they do not want to see Rostelecom struggle, and in a bid to reposition the company into a more successful market, they have suggested a partnership with Syazinvest to form an Internet service provider. However, few details have been released about this.

Rostelecom's overseas traffic has dropped by 8 percent in the last year, but experts say it is impossible to get an exact figure because some companies provide overseas phone services semi-legally.

There is no way guage the size of so-called gray traffic in thismarket, said Nikolayev, but this figure has certainly increased from the 5 percent of three years ago.

Internet

The Russian Internet economy generated roughly $250 million in revenues last year, in a market that was divided among 150 active service providers, according to analysts at Brunswick Warburg.

Industry observers could not agree on the direction and speed of the sector's growth. Some projected that by the end of the year, Russia's Internet economy will have expanded by 40 percent and that the market will continue to grow at that pace.

However, others said that Russia's Internet economy had already peaked and that those who looked at the industry's rapid growth in the West would be mistaken to believe that the Russian market would grow as rapidly.

Still, there was a sense of cautious optimism among analysts.

"Internet growth seems to be sustainable," Adshead said.

"The Internet boom is over," said Nikolayev, but added that this didn't mean investors would lose interest in the sector.

Investors are looking at what a particular company can offer in addition to the number of hits, he said, adding that firms that were previously not involved in the business are now developing Internet companies.

Among Russia's Internet service providers, the main players are TeleRoss, a subsidiary of Golden Telecom, Demos-Internet, PTT-Teleport Moscow, MTU-Intel and Elvis-Telecom.

Of those, TeleRoss has the largest coverage throughout Russia, according to Brunswick Warburg, and PTT-Teleport Moscow is one of the largest ISPs based in Moscow.