Matthew Flanigan Issue: Europe I 2002
Article no.: 3
Topic: Building a Telecommunications industry in the Russian Federation
Author: Matthew Flanigan
Title: Not available
Organisation: Telecommunications Industry Association
PDF size: 24KB

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Article abstract

Russia is making great strides to improve its telecommunications sector. Nevertheless, much needs to be done, but, given Russia’s legal and regulatory structures, it will be difficult to attract investment. Current laws create market access barriers, allow discriminatory interconnection policies and pricing and do little to assure reasonable access to existing infrastructure. Fortunately, there are many encouraging signs of change. The Ministry of Communications has drafted new laws and is moving forward with ambitious plans to transform the sector.

 

Full Article

This is a welcome change from the dark days of 1998-1999, when Russia was reeling from a major economic crisis that threatened the collapse of its entire financial system and many industries, including telecommunications. Though the industry appears to be on the rebound, many still view Russia’s tele-communications system as very antiquated and badly in need of upgrading. Therefore, it’s worth taking a closer look At the current state of the market and, the factors that will affect its future growth, as well as the challenges this market poses to domestic and foreign industry leaders who see much potential but somewhat limited opportunities to invest and do business in Russia’s tele-communications market. Market Overview The Russian telecommunications market is a dichotomy. Major population centres, such as Moscow and St. Petersburg, are relatively well served, while most of the country’s telecom infrastructure and service offerings outside of these two urban centres are antiquated or non-existent. According to U.S. & FCS, there are an estimated 54,000 small communities, mostly in rural areas, with no telephone access at all. Among Russia’s 145 million people, there are only 22 phone lines per 100 people, with over 6 million people on waiting lists for service. The number of fixed phone lines for the nation’s population is believed to be about 32 million, of which about 22 million are still analogue and only 10 million are digital. While people wait for fixed-line phone installation, many wealthier Russians in urban areas are turning to cellular service as a faster – but much more expensive – option. In fact, the number of cellular subscribers more than doubled from 3.4 million to 7.8 million between 2000 and 2001 alone, partly attesting to the frustration of many individuals who are fed up with poor – quality, non-existent service and lack of mobility of traditional fixed line telephony. This 130 per cent increase in subscribership raised the national cellular penetration rate to 5.3 per cent by the end of 2001. Russian telecommunication analysts expect substantial growth in fixed-line, cellular and Internet subscribers within the decade. By 2010, estimates are that,Russia will have more than 22 million cellular subscribers (15 per cent penetration rate), 48 million fixed lines (33 percent penetration rate) and 26 million Internet users (18 percent penetration rate). Major Changes A Foot Despite the poor state of Russia’s telecom infrastructure and service offerings, there is hope that major policy changes will soon result in substantial increases in infrastructure deployment and service upgrades. The 2001 Electronic Russia programe, the recent restructuring of Svyazinvest and the new Law on Communications reflect Russia’s desire to accede to the World Trade Organization (WTO), and President Vladimir Putin’s desire to improve Russia’s overall business climate and status on the world’s stage. Electronic Russia Programme In December 2000, the Russian Government approved the Ministry of Communications and Informatization’s (MinCom) launch of a decade-long US$2.6 billion “Electronic Russia” programme. The programme hopes to attract up to US$33 billion in investment in Russia’s ailing telecommunications and information technology (IT) sectors. The programme includes four main areas: regulatory and legal environment, Internet infrastructure, e-government and e-education. The goals of the plan are multifold: o Improve legislation covering information and communication technologies (ICT) regulations. o Ensure information transparency of Russia’s state entities, in order to create preconditions for efficient interaction between the authorities and citizens using IT resources o Upgrade ICT capabilities within state agencies and other publicly owned organizations. o Improve the interaction of the State with the private sector and promote the efficient use of ICT in the general economy. o Develop independent information resources, and create and enhance publicly available databases, electronic libraries and archives. Launch and develop – market systems for state procurements. A MinCom-led interagency working group has been established. It includes the Ministry of Economic Development and Trade; the Ministry of Industry, Science and Technology; the Ministry of Education; the Russian Aviation and Space Agency; the Federal Agency of Government Communications; and the Russian Agency for Systems Management. This group will define the needed feasibility studies and pilot projects. Implementation should begin in 2005 and last through 2010. The programme has been well received, but he real test will be in the implementation, which is slated to begin next year. It is too soon to evaluate the programme, but it does offer hope that information and communication technologies will be integrated into many aspects of Russian life. Svyazinvest Restructuring The consolidation of Russia’s 70 regional operating companies under the Svyazinvest umbrella into seven pan-regional companies is another recent development worth noting. The Svyazinvest holding company, founded in 1994, consolidates government-owned interests in Russia’s regional telecom operating companies. The restructuring plan began in early 2001 to increase cash flow through greater economies of scale and new tariff structures. This has led to a 70 per cent increase in Svyazinvest’s market capitalization in 2001, and Svyazinvest’s revenue should grow 25 per cent during 2002. In addition to concentrating on revenue, Svyazinvest is developing cost accounting methods for its regional operators. As a result, per-minute billing for local phone services has begun in 80 Russian cities and will begin in most other regions in 2002. The restructuring has been well received by the foreign business community, as well as many domestically who have viewed Russia’s old telecommunications network structure as outdated. New Law on Communications The Russian Government is currently considering the Ministry of Communications’ draft law “On Introducing Changes and Additions to the Federal Law On Communications”. Its purpose is to accelerate the growth of Russia’s telecommunications infrastructure and improve its attractiveness to investors. According to news sources, the draft law has been agreed with over 20 Russian ministries and government departments and will be submitted shortly to the State Duma, or lower house of parliament, for consideration. The final draft is not available to the public, but is said to reflect the current market situation and provide more transparency in telecom licensing procedures. Reportedly, it provides for the connection of every significant operator to the public switched telephone network (PSTN). WTOAccession Negotiations have been ongoing for years, but much needs to be resolved before Russia can accede to the World Trade Organization (WTO). Two of the main sticking issues in recent negotiations have centered on agriculture and services, areas in which Russia’s influential domestic industries have traditionally maintained a stronghold. Russian negotiators are fighting an uphill battle, domestically and internationally, to balance the forces of protectionism and the desire for openness. In the telecommunications arena, equity and personnel restrictions, unjustified monopoly rights for incumbent carriers, and a lack of commitments in value-added services are just a few of the sticking points to be resolved. Problems still loom. Despite the promise of the E-Russia programme, Svyazinvest’s restructuring and WTO accession talk progress; foreign and domestic companies still face a host of problems affecting their ability to sell equipment and services in the Russian telecommunications market. Some of the difficulties expressed by TIA’s own member companies include: Over-Regulation through Subordinate Regulatory Acts The existing Law on Communications is general in nature, providing executive government agencies the right to issue regulatory acts on a very broad range of matters, including issuance, suspension and withdrawal of licences; licensed activities in the telecommunications sector; licence fees; approval of rules for connection to PSTN; obtaining telephone lines; tariff regulation; etc. The result is that the many regulatory acts issued by a multitude of government agencies creates market instability, confusion among businesses, and difficulty adhering to applicable laws and regulations. Excessive Number of Regulatory Authorities Regulatory acts governing the activity of telecommunications operators and manufacturers are adopted by many government agencies, including the Ministry of Communications, Ministry of Anti-Monopoly Policy, the State Service for Telecommunications Supervision, the General Radio Frequency Centre, and several other authorities. The excessive number of agencies with authority to regulate leads to jurisdictional confusion and a lack of regulatory transparency and predictability in Russia’s telecommunications sector. Licensing Issues Currently, licences for Russian telecommunications services have terms ranging from five to ten years. The Ministry of Communications, Russia’s sole licensing authority, has broad discretion over the methods of awarding licences, as well as the content and terms of licences. These licensing rules create a number of problems for international firms seeking to operate in Russia. Interconnection with the PSTN and Use of PSTN Infrastructure At the present time, there are no uniform conditions for alternative operators to interconnect to the networks of, or use the infrastructure of, dominant operators. This, coupled with the lack of effective anti-trust procedures, allows dominant operators to abuse their positions in the market providing resources to their subsidiaries at discounted or preferential rates. Certification of Telecommunications Equipment The existing Law on Communications requires mandatory certification of telecommunications equipment before services can begin. The certification procedure is complicated and may take up to one year. The Ministry of Communications employs a long, costly, process to certify telecommunications equipment. The delays can cost millions of dollars in time spent obtaining certificates, in labour to complete the certification process, and paying fees to commercial entities licensed by the Ministry to conduct certification. Lack of Effective Dispute Settlement Procedures Russian legislation provides for dispute settlement between operators in Russia’s courts, but this often takes an inordinate amount of time and is ineffective since judges often lack experience with telecommunications law and Russia’s dispute settlement procedures need of improvement. Foreign Ownership Limitations Recently, Russia has attempted to limit foreign ownership in the charter capital of Russian telecom operating companies. The Ministry of Communications and Informatization’s ten-year blueprint for the development of Russia’s telecommunications industry states the Ministry can “impose restrictions on direct access by foreign entities to the Russian telecommunications services market and restrict (foreign entities’) direct and indirect majority ownership in Russian telecommunications companies.” Foreign telecom companies want assurances that restrictions on foreign ownership do not become part of the new Law on Telecommunications recently submitted to the DUMA. Conclusion The promise of greater market access, investment, infrastructure development and service provision in Russia’s telecommunications sector is a mixed one. On the one hand, positive developments such as tremendous cellular subscriber and related infrastructure growth, the new E-Russia programme, WTO accession discussions, and Svyazinvest’s current restructuring plan point to better opportunities for foreign and domestic investors, as well as sales of telecom-related products and services. On the other hand, there are still many barriers to market access, infrastructure development and service provision that threaten to stifle Russia’s long-term economic growth unless forward-looking laws and regulatory measures are enacted to facilitate the kind of growth necessary to keep Russia from falling behind the rest of the world. These positive changes are clearly possible, given President Vladimir Putin’s willingness and commitment to elevate Russia’s importance on the world stage as both a political and economic power internationally. Whether or not they become reality will be the true test of time.