Russia's telecoms market has demonstrated strong growth over the past year, which is expected to continue at a healthy rate in the foreseeable future. Driven by Russia's strong economic performance and a pressing need to upgrade the country's generally inadequate telecommunications infrastructure, the market has not been noticeably impacted by the recent economic slowdown and the high-tech downturn in the United States and Europe.

In 2001, the Russian market for telecommunications services was worth $6.6 billion, an increase of more than 24 percent over the previous year, and the number of cellular and Internet subscribers doubled. Over the next two years, annual growth is estimated to continue at about 15 per cent, which should result in an annual telecoms-services market of around $10 billion by 2005.

The continuing growth in telecommunications services will yield business opportunities for competitive U.S. telecommunications equipment suppliers. Experts say digital switching equipment, high-speed, broadband Internet access technologies, multiservice and multimedia solutions, and call center equipment have the best sales prospects. But companies entering the market should be prepared to compete with major foreign equipment manufacturers and navigate through complex regulations.

Market overview

The quality of telecommunications infrastructure throughout Russia is inconsitent, as is its accessibility. Major population centers are well-served, but large areas of the country have extremely poor access, if any at all. There are an estimated 54,000 small, rural communities with no telephone access at all. The country as a whole averages a mere 22 phone lines per 100 people, and the waiting list for basic services has 6 million names. The development of e-commerce is held back by the lack of telecommunications infrastructure.

However, the number of cellular-phone subscribers is growing rapidly in the capital and other large cities. Cellular-service providers are moving quite rapidly to increase their coverage areas. Still, there are likely to remain large, sparsely populated areas where coverage is not feasible financially.

The Communications Ministry estimates the country will need $33 billion in telecommunications investment over the next decade to bring the country to European standards. Since there are no plans for state involvement, these funds must be generated privately, from the capital markets or from direct foreign investment.

As of January 2002, only 4.3 percent of the population had Internet connection at home, double the previous year's level and still growing. In July 2001, the Russian government approved a $2.6 billion plan to boost e-commerce and Internet use over the next decade. The plan envisions transferring much of the government's work online, and the creators hope most of the plan's cost may be covered with savings through government purchases via the Internet.

There is almost no broadband infrastructure in Russia. And, although there are several projects in the works. the low level of average disposable income in Russia casts doubt on the viability of most of those projects. Outside of Moscow, average official monthly income levels are around $100. Although incomes are rising, it will take time before they will allow most Russians to contemplate subscribing to any service other than basic telephone – if ever.

In 2001, the Russian telecommunications industry generated $6.6 billion in revenue, while estimated capital spending on infrastructure development totaled more than $800 million. An additional 1.9 million fixed lines were installed. More than 1,574 kilometers of cable and 657 kilometers of backbone fiber-optic network were laid, and 105 radio relay networks were built. Digitalization of the public switch telephone network increased from 31.2 percent in 2000 to almost 35 percent at the end of 2001. 

At the same time, the number of cellular subscribers more than doubled from 3.4 million to 7.8 million. Nationally, 5.3 percent of Russians now subscribe to cellular phone service. And, as of Jan. 1, 2002, 6.2 million people had accounts with Internet service providers, although the number of individuals actually using the Internet is probably much greater. The volume of e-mail traffic in Russia more than doubled over the previous year.

The immediate outlook for the telecommunications industry in Russia, and for U.S. equipment suppliers, is very promising. Russia's Communications Ministry called 2002 a year of major investment projects, "the groundwork for which had been laid in previous years."

Industry experts agree that over the next three years, the Russian telecommunications market will increase at a rate many times that of general economic growth. Boston Consulting Group estimates an annual growth rate of 15 percent is sustainable in the telecommunications sector, with the highest growth coming in broadband (xDSL, cable TV and BWA).

Dialup Internet access should grow up to 20 percent annually, and the Internet sector in general should grow 25 percent over the next three years.

In related technologies, sales of packet-switching gear are expected to grow 55 percent each year, and the VPN market is expected to triple.

The cellular market, which represents about 35 percent of the Russian telecom market in value, is expected to maintain its market share, growing at the same pace as the rest of the industry. At such rates the telecommunications-services market could reach $10 billion annually by 2005.

By 2010, Russia expects to increase its number of fixed telephone lines from the current 38.1 million to 48 million, giving 33 percent of Russian households a fixed line. It also expects there to be 22 million cellular users, or a penetration rate of 15 percent, and 26 million Internet users, or 18 percent of the population.

Meanwhile, the Communications Ministry is revising its regulations to encourage further industry growth. The introduction of universal service is intended to bring basic telephone services to every settlement in Russia without hurting the profits of telephone companies. And liberalized connections among the public switch-telephone network will result in faster growth of telecommunications services.

The author is a commerical specialist at the U.S. Commercial service, Moscow Embassy