The Russian telecommunications market evolves rapidly. It has turned from a secluded field for telecommunications equipment sales, and grandiose attempts at Soviet-style projects with foreign participation, into a real market where foreign players are increasingly willing to become direct participants and active strategic investors.

Three main groups of investors now exist in the Russian telecoms industry – international investment funds; well-known financial institutions including EBRD and IFC and, finally, strategic investors, both Russian and foreign. It appears they will determine the true face of Russian telecoms in the near future and that they will be the ones interacting with state structures, including Svyazinvest and Rostelekom – at times struggling, at times cooperating with them, with varying degrees of success.

The groups with the most influence in today’s Russian telecommunications market are the Germans and the Scandinavians. Their strong national operators include companies such as the Norwegian Telenor, the Swedish Telia, the Finnish Sonera and the German Deutsche Telekom. Small operators of note include Mollicom of Luxembourg and the American MCT Corp.

The cellular-service segment of Russian telecoms is the juiciest piece for Western companies due to its high profitability, fast return of investment and great potential. Cellular communications are not yet regulated by official bodies, while ground communications are, for the most part, under the government’s control.

ASIAN SYNDROME

In recent years, Asian equipment producers have become serious competitors for Western companies in Russia, following the path laid out by Western producers. These are Japanese companies, as well as Korean and Chinese nouveaux riches. The Japanese are in a league of their own, with positioning and behavior in the Russian market identical to those of their Western colleagues and competitors. For instance, NEC is filling a number of orders for switching systems, ground satellite communication stations and transmitting systems for optical networking in several Russian cities, and intends to continue developing its manufacturing base in Russia with a series of new factories, in addition to its Chernogolovka factory in Moscow region. The company plans to assume the role of a leading cellular communication equipment producers on the same scale as LG, maybe even in Russia. The first experimental MTS zone, launched late last year, operates with equipment produced by Siemens and NEC.

Korean Samsung and LG, meanwhile, intend to stand their ground. They have traditionally occupied solid positions in supplying telecommunications equipment to Russia’s small- and medium businesses, and they see this as their future niche.

Worth noting is a considerable change in the way that Korean companies approach business administration in Russia. While they once insisted on unconditional fulfillment of contract obligations, regardless of major circumstances (like the 1998 default), they have now become more flexible.

However, a real threat to Western companies’ positions on the Russian telecommunications market comes from the Chinese producers of telecommunications equipment, first and foremost Huawei and ZTE. Initially, Huawei occupied a solid niche by delivering switching systems and related equipment to Russian telecoms specialists. Now, in a joint effort with ZTE, Huawei has resolutely turned its sights on the Russian cellular communications sector.

Moscow Cellular Communications (MCC), which is upgrading its obsolete NMT network to a digital CDMA-450 standard, initially worked exclusively with Lucent. But it recently announced an agreement with the Chinese ZTE to create a test segment of a CDMA-450 network, based on equipment supplied by ZTE. The MCC deputy director for new technologies, Mikhail Kosinov, announced that a similar agreement had been reached with Huawei earlier.

Undoubtedly, MCC’s choice is related to the company’s financial policies. While Lucent sold MCC equipment at full price, Chinese makers supply it free of charge. In the future, Huawei and ZTE intend to offer their equipment to other, smaller Russian NMT operators. Earlier this year, Huawei received an order for GSM-1800 network equipment from a group of companies under the Indigo brand. In June, MTS will launch its second test 3G zone based on Huawei equipment.

In the case of GSM network equipment, the price using Chinese components is up to 40 percent lower than using components from European and American makers. It is typical for Russian operators to prefer cheaper equipment in a time of financial deficits, though it is more difficult to make cheaper equipment perform reliably, especially if there is a lack of experience in working with this particular equipment.

Equipment Suppliers

The future of foreign equipment suppliers and operators on the Russian market seems bright. Despite recommendations to Russian operators to give priority to purchasing Russian equipment, imports are still high.

Many companies, including Lucent, Alcatel, Huawei, and NEC have joint ventures in Russia today, but all are involved in "screwdriver assembly" at best. It is simply not profitable to maintain full-fledged production of communications equipment, since customs dues for assembled products are half those of parts: 5 percent, rather than 10.

The sometimes-inconsistent steps taken bt the Communications Ministry when regulating new technologies and standards are also significant in evaluating the future of the Russian telecommunications equipment market. A vivid example is CDMA networks.

For a long time, the Ministry opposed their introduction to Russia, though that did not keep individual CDMA networks from developing in some regions. Now there are signs that the Ministry no longer sees CDMA as a threat, and there is a planned conversion of NMT-450 networks into CDMA networks. The first deputy general director of the Russian Lucent office, Sergei Pridantzev, said if the Communications Ministry permits the IMT-MC technology for 450 mHz frequencies, then a huge market will open up for Lucent.

Indeed, with this transformation, over 60 analog network operators will be able to provide the most advanced services, superior to those provided by GSM in both quality and selection. By some estimates, sales of this equipment across the entire Russian market may reach nearly $10 billion by the year 2010.

Apparently, the pure telecommunications market in Russia does not translate into big dividends for large Western companies, though they see Russia as a very promising field of activity in the IT sphere overall. This is in part indicated by the latest contacts between the Russian business community and the American Chamber of Commerce, with the participation of the Communications Ministry and the U.S. Department of Commerce. At the core of this contact is identification and discussion of problems impeding the growth in business activity of American companies in Russia; the identification of barriers that prevent Russian companies’ access to the U.S. IT market, and also cooperation in the removal of business obstacles.

Russia is becoming a real mecca for the IT business. Russia’s Minister of Communications, Leonid Reiman, said foreign investment into IT amounted to $2.2 billion in 2001, which is a 50 percent increase over the year before. The minister expects investment to increase to $3 million to 3.5 million in 2002, which will correspond to the country’s needs.

The author is Editor-In-Chief of Communication Technologies & Equipment magazine