FOCUS: Russian Operators Want to Expand Abroad, Opportunities Limited"

MOSCOW, Feb 3 (Prime-Tass) -- Russia's largest mobile operators have divided the saturated domestic market and are now looking for opportunities in neighboring countries but there are not many assets available for sale and they may be pricey.

At the same time no major foreign operator is likely to challenge the Russians as they have a competitive edge due to close linguistic, cultural, political and economic ties between Russia and the former Soviet republics.

Russian operators started expanding into CIS countries in 2001 and completed five acquisitions abroad in the last three months worth a total of U.S. $670 million.

There are still four CIS countries where Russian operators are not present. Russian mobile companies have also showed interest in expanding into Afghanistan, Vietnam, India and Turkey.

"This (expansion) trend is likely to continue but it is also depends on whether there are sellers," Oleg Salmanov, telecom analyst at Prospect Investment Company, said.

VimpelCom's CEO Alexander Izosimov said recently that the most "attractive" markets for VimpelCom are now Belarus, Azerbaijan and Armenia. MTS also said the company is interested in continuing expansion in CIS countries where the company does not operate at the moment.

The only asset known to be for sale in the CIS at the current time is 77.8% in Kyrgyz state fixed-line operator Kyrgyztelecom. The company, which has a GSM license, will soon be offered at a tender for at least U.S. $20 million.

Reportedly, Russia's largest mobile operator MTS or its key shareholder AFK Sistema are interested in acquiring Kyrgyztelecom. Last year MTS bought 51% in Kyrgyzstan's largest mobile operator Bitel for $150 million but the sale was disputed by a company reportedly affiliated with Alfa Group and its is not clear whether MTS will be able to keep the asset.

MTS is not present in Moldova, Azerbaijan, Georgia, Armenia, Kazakhstan and Tajikistan, while VimpelCom has no presence in Moldova, Georgia, Turkmenistan, Tajikistan, Belarus, Azerbaijan and Armenia. Russia's third largest operator MegaFon is present only in one country outside Russia, Tajikistan, the poorest country in the CIS.

Analysts said MegaFon is unlikely to become a real competitor to MTS and VimpelCom although reportedly it is planning to start operations in Kyrgyzstan soon. MegaFon executives have said that the Russian market remains the main focus for the company.

The opportunities in the CIS are indeed very limited since private companies control most mobile assets in the CIS and, as penetration remains low, are unlikely to sell for a cheap price.

The Armenian market is split between ArmenTel and VivaCell. ArmenTel, controlled by Greece's OTE had a monopoly on the market till mid-2005. Armenia, with about 3.2 million people, has penetration of about 11%. VivaCell was created by the Karabakh-Telecom company, based in Nagorny Karabakh, the area captured by Armenia from neighboring Azerbaijan.

Azerbaijan's GSM mobile market is currently split between two operators, Azercell with about 85% of the market and Bakcell with about 15%. The Azeri government also has recently issued a GSM license to Azerphone company. In addition, CDMA operator Catel controls less than 1% of the mobile market. Azercell is 35.7%-owned by Azeri IT and communications ministry, while the rest is indirectly owned by Fintur Holdings, a joint venture between Turkcell and TeliaSonera. Bakcell is fully-owned by Israel's GTIB company. Azerphone is 30%-controlled by Siemens, two U.K. companies hold 20% stakes each and Azerbaijan's Aztelecom operator holds 10%. Penetration in Azerbaijan exceeds 20% and the country's population stands at 8.3 million.

The Georgian market is split between two GSM operators and one CDMA operator. Geocell and Magticom control about 55% and 44% of the market respectively, while CDMA operator Iberiatel controls about 1%. Geocell is 83.2%-owned by Fintur Holdings. Magticom is fully controlled by the U.S.' Metromedia International Group. Penetration in Georgia, with 5 million citizens, stands at about 20%.

The Moldovan market is split between Voxtel and Moldcell, controlling about 60% and 40% of the market respectively. Fintur Holdings holds 89% in Moldcell. It is not clear who owns Voxtel. The penetration rate in the country, with a population of about 4 million people, is close to 25%.

Tajikistan's market is divided among six mobile operators, including one CDMA operator, with two major GSM operators - the U.S.-Tajik joint venture Vavilon Mobile and TT-Mobile, a subsidiary of MegaFon, controlling about 35% and 27% of the market respectively. Somoncom and Indigo Tajicistan mobile operators, which together control about 25% of the market, are both owned by the U.S.' MCT Corp. Penetration in Tajikistan amounts to about 3.5% with the population standing at about 6.5 million people.

Due to rapid development of mobile markets and cutthroat competition, the Russians are unlikely to find cheap purchases anymore, a fact the mobile companies are increasingly becoming aware of. "There are no mobile assets in the CIS left that can be purchased cheaply," MTS' President Vasily Sidorov said this week. MTS is present in six former Soviet republics.

Russian mobile operators are most likely to compete with each other for CIS assets as major global mobile operators do not show any considerable interest in this region and are not expected to turn to CIS countries in the near future.

"These are not large enough markets for major foreign operators. Major foreign operators have not even entered Russia itself," Yevgeny Golossnoi, telecoms analyst at Troika Dialog, said.

Norway's Telenor and Turkey's Turkcell have stakes in two mobile companies in Ukraine, but neither Telenor nor Turkcell is a leading global mobile operator and their experiences in Ukraine have not been trouble-free.

"Russian operators show more interest in CIS countries, as they are closer to Russia geographically and have a similar mentality. These markets are not very attractive for global operators, as income per capita is low. They are interested in other markets, Turkey in particular," Salmanov of Prospect said.

However, even Russian companies face unexpected problems entering CIS markets. After MTS purchased 51% in Barash Communications Technologies (BCTI) for $28 million in June 2005, the latter's license was cancelled by the government immediately after the deal was made. MTS got the license back after promising to pay part of its profit in Turkmenistan to the state budget.

MTS also faced problems when it entered Kyrgyzstan in late 2005 by buying the Bitel operator. Several days after the purchase a little-known Russian company Rezervspetsmet claimed a right to Bitel and managed to win the case at the Kyrgyz Supreme Court. Even in Belarus, Russia's closest ally, local authorities tried to create barriers to MTS' entry.

MTS was the first to start expansion outside Russia. In 2001, MTS created the MTS Belarus joint venture with Belarus' Communications Ministry, in 2002-2003 it purchased in several stages a 100% stake in Ukraine's largest mobile operator at that time, Mobile Communications, or UMC, and in 2004 MTS purchased Uzbekistan's largest mobile operator Uzdunorbita.

VimpelCom, Russia's second largest mobile operator, was far behind MTS, starting its expansion only in 2004 by purchasing Kazakhstan's second largest operator KaR-Tel.

"Ukraine now accounts for 25% of MTS' total subscriber base and revenue,” Golossnoi of Troika Dialog said. "Poorer countries are still untouched both in terms of money and in terms of population. Russian operators now make acquisitions hoping for future growth," he said, adding that since mobile penetration in Russia exceeds 80% and growth potential is shrinking, mobile operators are looking for countries where they can get in cheaply.

On the domestic market Russian mobile operators have suffered slumping average revenue per user (ARPU) in last couple of years and buying CIS assets should help improve this key indicator.

In 2005, ARPU of MTS stood at $8.90, while VimpelCom's ARPU was at $7.20. The figures are below Kyrgyzstan's Bitel

Posted to the site on 3rd February 2006