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Russian Market in Rude Health

Russia's incumbent long-distance operator, Rostelecom (NYSE: ROS), has reported increased revenues, traffic, and profits for 2003, so providing a positive health check for Russia's telecom market (see Rostelecom Reports 2003 Growth).

The carrier, which provides carriers' carrier services across its national network and also offers long-distance and international services in Moscow, reported an increase in revenues to just over $1 billion from $837 million a year earlier, while net profit grew to $40.6 million from $37.2 million.

Revenues from international traffic rose more than 3 percent to $263 million in 2003, as international outgoing traffic grew 7.2 percent and incoming traffic grew 24.1 percent. Volumes of domestic long-distance traffic grew 15.2 percent.

And the carrier expects further growth in 2004, estimating "domestic and international long-distance traffic growth of at least 10% and incoming international traffic growth of at least 20%," according to its results statement.

But due to costs associated with closing some units and writing off some equipment, the carrier's numbers fell below analyst expectations, and its share price fell to $12.39 by the end of trading on Thursday, from a closing price of $12.92 on Wednesday. It dipped even further today to $12.20, giving the operator a market capitalization of $1.48 billion.

And while its revenues might be rising just now, as fixed and mobile usage by consumers and businesses soars in Russia, Rostelecom faces much greater challenges in the next few years. It's due to lose its stranglehold on the long-distance market in 2007 when full competition is introduced: currently about a third of its revenues come from handling other service providers' long-distance traffic, and about another 24 percent comes from leasing lines to alternative operators.

Already some of the stronger competitive carriers are building their own inter-city networks and finding ways to lessen their dependence on Rostelecom's services and infrastructure (see Alcatel Tests VOIP Waters in Russia, Golden Plans Further Buildout, Golden Expands With Intelsat, and Golden Telecom's Fiber Handshake).

As a result, Rostelecom has been slimming down. In 2003 the carrier reduced its staff level by 13 percent to 26,742, closed down some underperforming ancillary businesses, and restructured some debt.

At the same time, it's beefing up its network, planning to increase its capex in 2004 to $170 million, up from $108 million in 2003 and $80 million in 2002.

Rostelecom's results aren't the only sign of a booming telecom market in Russia and the former Soviet states. Transtelecom, the Russian railway authority's operator, is boosting the capacity of its network from 2.5 Gbit/s to 40 Gbit/s with DWDM gear from Chinese vendor Huawei Technologies Co. Ltd.; and the Ukraine's national operator, JSC Ukrtelecom, has just announced a network expansion project with ECI Telecom Ltd. (Nasdaq/NM: ECIL) (see Ukrtelecom Expands With ECI).

Other news announcements of note include:

— Ray Le Maistre, International Editor, Boardwatch

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