04

Business

From window cleaner to one of Russia’s richest men, Mikhail Fridman has always set his sights high. And now it appears his telecoms dream may come true.

BEN ARIS

BUSINESS NEW EUROPE

Of the original oligarchs who rose to prominence under Boris Yeltsin, Alfa Group founder Fridman is one of only two still in the game. He set his heart on telecom- munications early on, and in April he cleared away the last obstacle to fulfilling his dream: to create a “Vodafone of the East”. “Fridman always made it clear that everything in the group was for sale – but not the phone business,” says a former Alfa Group executive (who didn’t want to be named) talking about the group’s strategy. Alfa Group was originally supposed to be a member of Mustcom, the consortium put together by Vladimir Potanin (the other surviving Yeltsin- era oligarch), which includ- ed a 25pc stake in the state’s fixed-line operator Svyazin- vest bought by international financier George Soros in 1996. “We were pushed out by Potanin at the last minute,” Fridman told this corre- spondent in an earlier inter- view. (Fridman refused to be interviewed for this article.) It was years later that Frid- man began to formulate his plan to lead the Russian tel- ecom sector. Fridman’s chubby figure and jolly demeanour is deceptive

RUSSIA NOW WWW.RBTH.RU

SECTION SPONSORED BY ROSSIYSKAYA GAZETA, RUSSIA

DISTRIBUTED WITH THE DAILY TELEGRAPH TUESDAY_JUNE 01_2010

BOOKMARKS

www.minfin.ru/en/ Russian ministry of finance www.hpl.hp.com/russia/ HP Labs Russia www.vimpelcom.com VimpelCom www.alfagroup.org Alfa Group Consortium

Markets A Russian oligarch seeks to build an international mobile giant via mergers and acquisitions

Fridman succeeds in phone war

Group said in January that it wants to merge MegaFon and Turkcell into a holding company called Altimo, but Russia’s regulator is not happy with the idea. Yevgeny Dumalkin, a spokes- man for Altimo, told news- wires in January: “The potential of the telecommu- nications sector inside and outside of Russia is far from exhausted. In this regard, Al- timo does not plan to part with its current assets in this sphere and will actually work to consolidate assets in the telecommunications sector.” But it is VimpelCom that holds the greatest promise and will be the cornerstone of Fridman’s vision to build a mobile phone company covering the entire territory of the former Soviet Union and beyond.

A luxury item for the privileged in the Nineties, mobile phone penetration in Russia has now topped 140pc, with more than 209 million SIM cards bought by a population of 143 million

– in business he can be ruth- less. And trouble has tended to follow in the wake of many of Alfa’s purchases in the tel- ecom sector.

The empire expands

The jewel in the crown in the group’s telecom holdings is the stake in Russian mobile operator VimpelCom, which was set up in the early Nine- ties. With a sign-up fee of around £3,500 and usurious per-minute rates, it was prof- itable from day one; the com- pany has since been a driv- ing force in developing mobile telephony across Rus- sia’s nine time zones.

However, one of the very first reforms that president Vladimir Putin made on tak- ing office in 2000 was to com- pletely remake the telecom sector and create a level play- ing field. The reforms went so smoothly that its success has got very little attention – a lot less attention than subsequent reforms to sec- tors such as oil and banks that have gone less well. The upshot is that Russia’s telecom sector today doesn’t look much different from those of Russia’s western Eu- ropean peers. Growth of the sector has been quicker than most experts forecast: sim

Telecommunications Need for speed prompts change

4G technology casts net wider

ITAR-TASS

New applications and diversified holding companies are the key future trends in Russian telecoms as mobile technology enters a new experimental phase.

VENERA REZTSOVA

SPECIAL TO RN

Over the last 10 to 12 years, the Russian mobile commu- nications market has been booming. Before the 1998 public debt crisis, mobile phone ownership was a priv- ilege of affluent consumers; today the number of regis- tered SIM cards greatly ex- ceeds the total Russian pop- ulation. “This is not so surprising. Mobile phones are used even by pre-schoolers and gran- nies who no longer need to walk all the way downstairs for a chat with a neighbour,” says Ilya Fedotov, a telecom- munications market special- ist at Veles Capital. According to J’son & Part- ners Consulting, Russians have about 209.1 million SIM cards. With a population of approximately 143 million, mobile market penetration has reached 147.3pc in Rus- sia. Today, the market is domi- nated by MTS, a subsidiary of the AFK Sistema group, which serves 33pc of Russian subscribers. The other mem- bers of the “Big Three” group of cellular operators include Beeline (VimpelCom) and MegaFon – each with a mar- ket share of 24pc. Russian mobile operators have come up with increas- ingly comprehensive service packages and are now about to roll out their fourth-gen-

card penetration rate passed 100pc several years ago. As the Russian market reach- es maturity, the game is al- ready starting to change, with the leading companies cast- ing their eyes across borders to other emerging European markets that are still play- ing catch-up to Russia’s lead. Fridman picked up a minor- ity stake in Russia’s third- largest mobile phone opera- tor MegaFon in another long-running corporate tus- sle, as well as doing a deal two years ago to acquire a stake in Turkey’s leading mo- bile company Turkcell. Alfa

Where next?

The merger – which featured a long-standing dispute be- tween Altimo and Telenor, a Norwegian company that owned a 29.9pc stake in Vim- pelCom – marked one of the nastiest corporate battles in eastern Europe and did Rus- sia’s image a lot of damage. In the end, Fridman won out and both companies agreed to the creation of VimpelCom Ltd, combining his assets with VimpelCom and Kyivs- tar, a leading Ukranian mo- bile operator. One of the first Russian com- panies to list abroad, Vim- pelCom is listed on the New York Stock Exchange. So far, the new company has said little on what its next step will be, but the merger

means the company is al- ready the leading operator in the two biggest markets in eastern Europe with a combined population of 188m people – equivalent to a quarter of the entire Euro- pean population. “VimpelCom Ltd says it doesn’t have a strategy for now, but that it will be de- veloped and announced in the summer,” says Victor Kli- movich, a telecom analyst at VTB Capital in Moscow. “The only hint given is that the [former] CEO, Alexander Izosimov, said in February the company will probably concentrate more on merg- ers than acquisitions.” Fridman still has a clear field in most of the countries that the new company can expand into, but to really make the dream come true, Altimo will have to go up against the

world’s largest companies at some point. “There’s a rumour in the market that VimpelCom may bid for some of [the Middle East’s mobile powerhouse] Orascom’s assets – one of the biggest emerging market op- erators with operations in Africa as well as Pakistan and Bangladesh,” says Mr Klimovich. “It’s thought VimpelCom is interested in the latter, but Telenor already has strong positions in those two coun- tries – so that could see a problem again.” With the world’s economy in tatters, the future for telecom companies is now in the fast- growing economies of the emerging markets, and Frid- man has already placed him- self in a strong position to emerge as one of the leaders in the race.

BUSINESS IN BRIEF

Lada is back in business in Britain

ITAR-TASS

Mobile telephony’s market share

Russia’s Lada car may re- turn to the British market after a 13-year absence. Renault, which holds a 25pc stake in Russia’s largest car- maker AvtoVAZ, is set to re- launch production of the budget car brand in the UK. “The UK was one of the few markets where Lada was a success. I’m confident the time is right to bring it back,” Renault vice presi- dent Steve Norman said. Ladas were assembled in Britain from 1992 to1997, but the company had to withdraw from the country as it did not comply with British safety and environ- mental standards. The new Lada will cost around £5,200. However, the British media is sceptical about the Russian car in- dustry, dubbing Lada “Rus- sia’s tin can on wheels” and “the byword for budget mo- toring from the Eighties”.

Tractor cash for Domodedovo

Future mobile internet growth is now largely dependent on penetration into Russia’s vast regions

Broadband penetration in Russia is only 6 or 7pc, indicating vast market potential

eration project. The main dif- ference between 4G and 3G service is faster data trans- mission. On May 28, the Rus- sian State Radio Frequency Commission approved pilot zones to test LTE (4G) tech- nology in four federal regions comprising Primorskiy Krai, Kostroma, Rostov and Sver- dlovsk. Expansion of 4G and broad- band internet access are the prevailing trends in the Rus- sian telecoms market. While the number of subscribers

who use voice services ap- pears to be no longer grow- ing at the impressive pace it previously demonstrated, the army of mobile internet users is swelling at double its ear- lier rate. In 2009, MTS ex- panded its broadband cus- tomer base by 39.8pc over the 2008 level to a total of 1.3 million subscribers. An analysis from Frost &

Sullivan, Mobile Broadband in Central and Eastern Eu-

rope, notes that the market generated revenues of €1.1b in 2009 and forecasts that revenues will reach €5.2b in 2014, with Russia account- ing for 50pc of that growth. Broadband penetration in Russia is currently only 6 or 7pc versus 15pc in Hungary and Poland and 30pc in Eu- rope, which indicates vast

potential for the market. “Most of the market partic- ipants start mobile broad- band service development from large city centres, where they can count on relatively quick returns on investment,” says Frost & Sullivan ICT Re- search Analyst Edyta Ko- sowska. This move is still eco- nomically justified, as the highest demand comes from people with increased mo- bility needs such as corpo- rate employees and stu- dents. “However, future growth po- tential will be mainly visible within rural areas, where overall broadband penetra- tion remains relatively low. Focusing on this target group can be a worthwhile consid- eration,” adds Kosowska. Another prominent trend is consolidation of mobile com- panies seeking to maximise their service offerings. In order to gain a stronger foot- hold in the long-range com- munications and broadband market, MegaFon plans to acquire a 100pc stake in Sinterra, a national fixed-line operator. In a similar vein, Svyazin- vest, the government-control- led holding group, is under- going a reorganisation to consolidate its seven region- al subsidiaries within Ros- telecom by May 2011. As a result, the Big Three will turn into the Big Four. AFK Sistema is also taking steps to keep up with the competition. In April 2010, it bought SkyLink, a mobile broadband provider. The deal is part of a larger asset swap with Svyazinvest, in which Sistema will hand over Sky- Link in exchange for the Moscow Telecommunications Network, a Moscow fixed- line operator. “The telecommunications sector stepped into 2010 in good shape after having sort- ed out liquidity, refinancing and exchange rate hassles in- flicted by the credit crunch,” says Fitch spokesman Arty- om Frolov. “This positive trend is likely to continue.”

Manufacturing Computer giants set up new production line

HP deal gives great credit to St Petersburg

Long seen as a centre of excellence and innovation, Russia’s second city welcomes an IT joint venture between two of the world's biggest players.

ALEX ANISHYUK

THE MOSCOW TIMES

Hewlett-Packard and com- ponent maker Foxconn have opened a pilot assembly line to make computers in St Pe- tersburg, but the partners of- fered few details on when their main production facil- ity would be finished. The April ceremony, attend- ed by senior local officials in- cluding Governor Valentina Matviyenko, offered the US computer giant a welcome opportunity to showcase its investment in Russia after in- vestigators raided its Mos- cow offices as part of a cor- ruption probe earlier that month. Jim Chang, executive vice president of Taiwan-based Hon Hai Precision Group, owner of Foxconn, said the plant would “probably not be finished this year” and could exceed initial cost ex- pectations. “Two years ago when we started this project, we an- nounced the figure of $50m,”

GLOBAL

RUSSIA BUSINESS CALENDAR

he said. “We are still in the process of making our invest- ment, but I have a feeling we may go beyond this figure.” The main factory in Kolpi- no, a suburb in southern St Petersburg, was supposed to be launched first, but because of the recession, the partners agreed to start with a pilot production line on a rented 10,000-square metre facility in nearby Shushary, HP and Foxconn said in a statement. The line, operating in test mode since the start of the year, will produce HP, HP Pro and Compaq models. It will initially employ 100 staff, though numbers will grow as production increases. Eric Cador, HP’s senior vice president in Europe, the Mid- dle East and Africa, said the production pace would “be driven by demand”. The assembly line will pro- duce up to 40,000 PCs per month. HP is now negotiat- ing with its Russian partners on distribution, the statement said. When asked by reporters about the logic of localising in Russia rather than import- ing from China, Chang con- ceded that the project had obstacles to overcome, at least in the short term.

8TH RUSSIAN PETROLEUM AND GAS CONGRESS ALONGSIDE NEFTEGAZ 2010

JUNE 22- 24, MOSCOW EXPOCENTRE

Russia is considering different options for liberalising foreign investors’ access to its natural resources. As well as tackling all the major issues, this con- gress, in partnership with the

“Like any company, from the efficiency point of view, we’d like to see ourselves in a prof- itable position, but we are realists,” he said. “At least at the beginning, this will not be a profitable project. We’ll have to learn, but we are historically fast learners, so I’m optimistic about it.” “We are here for the long term, so I think it will be profitable,” Cador added. The main benefit to consum- ers, he said, will be faster ac- cess to new technology, since all updates will be made lo- cally. Matviyenko, who was on hand for the project’s an- nouncement in May 2008, said there was a good reason her city was chosen for the high-tech production. “The first radio and the first TV in Russia were made in St Pe- tersburg, so we have a long tradition of innovation. “We as a government are doing our best to create a hi- tech cluster, and this factory will become the first of its kind.” She then pressed a symbolic blue button to launch pro- duction, gifting the first 20 computers made there to a local school.

Russian ministry of energy, will also feature the first Russian- Iranian conference. The two oil and gas giants will discuss op- tions for economic and techno- logical co-operation.

› www.mioge.ru/RU/congress/

FIND MORE

IN THE GLOBAL CALENDAR

at www.rbth.ru

US-based tractor maker John Deere has opened a factory in Domodedovo as part of a plan to invest £350m in the country, re-

ports The Moscow Times.

Initially, the products will be assembled mostly from imported materials, but the company plans to localise the production of compo- nents in the near future. The newspaper says that John Deere is betting that Russia, with a rapidly grow- ing supply of cultivated land, will become a key market for its agricultural equipment and other capi- tal goods. The factory not only has plans to assemble tractors and combines, but also in- tends to include a parts dis- tribution centre. The deal makes John Deere the first resident of a ware- house facility under devel- opment by Candanian com- pany Giffels.

Digital Sky Technologies snaps up ICQ

ICQ.COM

Leading Russian technol- ogy company Digital Sky Technologies (DST) has bought online chat service ICQ from AOL for $187m. The company earlier made news around the world when it paid $300m for a stake in social networking site Facebook at the end of last year. The purchase of ICQ is a strategic step in the devel- opment of DST’s business in Russia and eastern Eu- rope, said Yury Milner, DST’s founder. The ICQ deal was closed in the same week that Face- book opened an office in Moscow and began talks with mobile phone compa- nies to expand its service into the former Soviet Union. It still needs the approval of regulators and is expect- ed to be finalised in the third quarter of this year.

MILITARY REFORM

CAN RUSSIA’S ARMED FORCES ADAPT TO 21ST-CENTURY REALITIES?

ALEXANDR SCHEMLYAEV_PHOTOXPRESS Page 1  |  Page 2  |  Page 3  |  Page 4  |  Page 5  |  Page 6  |  Page 7  |  Page 8