Russian telecom may have to be made in China from now on. Both Ericsson and Nokia today confirmed they would cease product deliveries to Russian customers while they assess the impact of Western government sanctions, imposed after the invasion of neighboring Ukraine ordered last week by Russian dictator Vladimir Putin. For reputational reasons alone, it is hard to see how the Nordic vendors can possibly resume work unless that conflict draws to a close. Escalation seems likelier. And that leaves Russian operators with only Huawei as an alternative.
It means Russian mobile operators – MegaFon, MTS and Veon – could potentially face billions of dollars in future swap-out fees to replace Nordic equipment they can no longer support. What's unclear at this stage is just how reliant those companies are on the Western equipment vendors. But all seem to have some degree of exposure and Russia – like most other countries – has no viable domestic suppliers.
MegaFon, for instance, is known to have signed a multi-year contract for nationwide microwave backhaul with Ericsson back in 2019. It also identified Nokia as a mobile network supplier last year. Veon, an Amsterdam-headquartered operator with a huge Russian business, has bought IT products from Ericsson previously, and Nokia is understood to have replaced Veon equipment, including gear made by Ericsson, at about 2,200 Russian mobile sites, sources revealed in 2019. In its last annual report, MTS identified Ericsson and Alcatel (now a part of Nokia) among its principal suppliers.
On a bad day for Ericsson, due largely to new revelations regarding a scandal in Iraq, the Swedish company confirmed its move in a statement emailed to Light Reading. "Ericsson is also urgently reviewing how our business might be affected by sanctions imposed," it said. "We have decided to suspend all deliveries to customers in Russia while we conduct our analysis."
Nokia adopted a similar line. "Our focus is to ensure we comply with all sanctions and restrictions on Russia and have put a pause on our delivery system," it said by email. "This is a complex situation which is evolving rapidly and we continue to assess it."
The decisions are unlikely to have a major impact on either company's business. While they do not break out financial results for most individual countries, Ericsson identified the UK as its fourth-largest market last year and generated just 3% of its revenues there. Raymond James, a bank, thinks Russia accounts for just 2% of Ericsson's sales.
Action was taken days after US President Joe Biden announced sweeping sanctions against Russia. They include "Russia-wide restrictions on sensitive US technologies produced in foreign countries using US-origin software, technology or equipment," said a White House statement. "This includes Russia-wide restrictions on semiconductors, telecommunication, encryption security, lasers, sensors, navigation, avionics and maritime technologies. These severe and sustained controls will cut off Russia's access to cutting-edge technology."
The rules could affect ZTE, a Chinese vendor that still relies heavily on US components. Any continuation of sales might land ZTE in trouble with US authorities and back on the Entity List. Named on that trade blacklist several years ago, it was unable to procure technologies it needs for its products and almost went out of business. Restrictions were lifted only when ZTE agreed to pay a crippling fine to the US Department of Justice.
Huawei aligns with China
Deemed a security threat as a big Chinese company, Huawei still features on the Entity List and is therefore subject to many of the same restrictions that now affect Russia. It has relied on stockpiles as well as in-house and other Chinese technology and has shown no public interest in halting Russian deliveries, as Ericsson and Nokia have done. A spokesperson for the company confirmed its position has not changed.
That will do nothing for Huawei's image in Western countries horrified by Russia's activities. Huawei has long insisted it has no connections to China's government and is independently owned. But if it carries on with business as usual, it will appear aligned with Chinese authorities that have refused to be critical of Putin. A possible scenario is that Russia moves even further into China's sphere of influence, replacing Western suppliers with Chinese ones across various industries.
But the sanctions have left operators in an extremely difficult position. A wide-scale rollout of 5G has not started in Russia and Huawei's stockpiles may have depleted by the time it does. Denied access by US sanctions to chips made by TSMC and Samsung, the world's most advanced chip foundries, Huawei may eventually need to fall back on less sophisticated semiconductors for 5G network equipment. China currently lacks the expertise needed to produce state-of-the-art chips and is not expected to acquire it for several years.
In the meantime, Russia's currency has plunged to a record low against the dollar after various Russian banks were ejected from SWIFT, the main international system for cross-border transactions. With interest rates jacked up to 20%, and ordinary Russians struggling to make payments, Veon's share price has plummeted 61% since February 23.
Seeking to reassure investors, the company issued a statement about liquidity, saying it has about $2.1 billion in cash and deposits, including $1.5 billion at banks in the US, European Union and Japan. "The $1.5 billion HQ cash and deposit balance and $0.8 billion undrawn credit line under the RCF [revolving credit facility] will allow us to maintain a prudent liquidity position in these times of macroeconomic uncertainty," said Serkan Okandan, Veon's chief financial officer. Russian telecom is in turmoil.
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— Iain Morris, International Editor, Light Reading