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Is Russian Opportunity Knocking?

Light Reading
News Analysis
Light Reading
4/9/2003
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Telecom worldwatchers with an ear to the ground hear distant rumblings from the East -- and we don't mean China.

A spate of recent news points to increased telecom activity in Russia and the other republics of the former Soviet Union. Consider the following:

These and other items signal renewed interest in Russian telecom -- which took a backseat during the downturn debacle. But is Russia poised to offer a vibrant new telecom market? And if so, when?

Russian telecom has long been characterized as underdeveloped but with huge potential. According to Business Information Service for the Newly Independent States (BISNIS), a Website run by the U.S. Department of Commerce, Russia's telecom industry grew 24 percent to $6.6 billion in 2001. That year, Russian companies laid 1,574 km of cable and 657 km of fiber, and digitized 35 percent of the country's public switched telephone network, according to one BISNIS report.

The telecom bust seems to have hit Russia most by depriving its market of much-needed outside investment. Russia will need about "$33 billion in telecommunications investment over the next 10 years to bring the country to European standards," says the same report. Since the government won't pick up the tab, much of that money will have to come from entrepreneurs and international investors.

Now that telecom markets are perking up a tad in North America and Europe -- or at least showing signs of stabilization -- there are hints of new Russian growth. What's more, it looks as if Russians themselves are in a better position to spend. According to an article published by national news vehicle Pravda, "Rising personal incomes, a stronger economy and even a bumper grain harvest" encouraged Russians to spend more than 45 percent more on telephone service for the first nine months of 2002, compared with the previous year.

The Metromedia sale is a good example of possible synergies. In that case, a struggling North American Metromedia International Group will get about $58.6 million for some Russian communications assets, including a portion of Metromedia's 50 percent stake in Comstar, for which it paid about $61.4 million in cash to Marconi plc (Nasdaq/London: MONI) in December 2000, according to SEC filings. Also included is a Moscow cable TV company called Kosmos TV and a handful of Russian radio stations.

The buyer, Adamant Advisory Services, remains a mystery. Metromedia says only that it's a British Virgin Islands company; and senior VP of finance Ernie Pyle says his agreement with the buyer is not to divulge more information than that.

A bit of digging suggests the power behind Adamant may be Andrei A. Volgin, onetime owner of a Moscow securities firm called Adamant Financial Corp. Volgin is an entrepreneur who's been active in Russian business for years, and he seems known in worldwide financial circles for his outspoken views on Russia's economy.

If Volgin's group is involved, which wasn't confirmed at press time, it could signal Russian business folk are once again mobilizing on what they see as key opportunities in the country.

At least one other industry source sees those opportunities, too. "Russia's a lot like China... sort of a business Wild West," says Andrew Feldman, VP of corporate marketing and development at Riverstone. "There's a chance for big, bold plays... The winner of a set of small and mid-sized battles could win big in a couple of years."

Riverstone got its "in" in Russia through Alcatel SA (NYSE: ALA; Paris: CGEP:PA), Feldman says. He thinks firms like Comstar are eager to build out business services and that some of the larger companies doing business in Russia want to fill the gaps in their own product lines through partnerships.

There are risks, of course. Feldman acknowledges Russia has a "large and fragmented" telecom market. There's no guarantee Russian data services will sell consistently well throughout all areas of the country -- and no answer as to when really big money will come. But for now, at least a few key players are willing to wager it will.

— Mary Jander, Senior Editor, Light Reading

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infojunkie
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infojunkie,
User Rank: Light Beer
12/5/2012 | 12:15:50 AM
re: Is Russian Opportunity Knocking?
I do not know about Volgin or his company, but according to russian telecom sources, the company behind Adamant is Sistema Telecom, which is one of the major players in the russian telecom market (source: comnews.ru web site, it's in Russian, sorry :-). Sistema Telecom belongs to the AFK Sistema holding, apparently closely connected with the City of Moscow. Sistema's main property is MGTS, a sort of a "Moscow Bell". "Sistema" is actively looking to increase it's telecom portfolio, and the Metromedia deal is a logical step. Officially there is no confirmation from Sistema itself, but Metromedia representatives reportedly confirmed that the holding is behind this buy.
Peter Heywood
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Peter Heywood,
User Rank: Light Beer
12/5/2012 | 12:15:31 AM
re: Is Russian Opportunity Knocking?
It used to be said that secret forces are at work behind some of the carriers in Russia. I came across this myself when I did a survey of Russian operators for Data Comm magazine about 6 or 7 years ago.

Have things changed?
rafaelg
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rafaelg,
User Rank: Light Beer
12/5/2012 | 12:15:30 AM
re: Is Russian Opportunity Knocking?
"It used to be said that secret forces are at work behind some of the carriers in Russia. I came across this myself when I did a survey of Russian operators for Data Comm magazine about 6 or 7 years ago.

Have things changed?"
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Investment in the Russian economy is a risky business. Why?

1-With the remnants of a socio-communistic society in which banks, factories, etc., were own by the state, any investor looking to enter the market in Russia needs to be prepared to deal directly with the government.
2-The bank system in Russia was previously managed by the government with the allocations set by numerous ministries each responsible for one specific sector of the economy.
3- The negative value added of manufacturing, (i.e. The finish product costs less than the materials to make it), is a left over from government-managed economy.
4- Typical US Capitalism for raping under developed countries won't work in Russia. See:
http://www.russianobserver.com...
5- Any Telecom deals may have to be disinfected from influence or connections to the Russian mafia.
http://www.pbs.org/wgbh/pages/...
http://members.tripod.com/~org...
6- Possible deals with India may render Russia as a middleman in mobile comm. due to undercutting prices from the West. The hype about Turkey and Russia may turn out to be another Asian/China bust where after the technology was learn, the country became a competitor.
dip
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dip,
User Rank: Light Beer
12/5/2012 | 12:15:26 AM
re: Is Russian Opportunity Knocking?
Wow! Is it just russophobia or you did not bother to update your information for 15 years?

>Investment in the Russian economy is a risky >business. Why?

>1-With the remnants of a socio-communistic >society in which banks, factories, etc., were >own by the state, any investor looking to enter >the market in Russia needs to be prepared to >deal directly with the government.

Wake up man! It is 2003! At least in Russia. For 15 years there have been 100%-private banks, factories, IT companies, etc. Yes, there are also historical monopolies in oil, telecom and gas industry. Gasprom, for example, is multi-billion corporation. The government might own a part in those companies, even might have reps sitting in a board of directors. Having said that, Russian government is activly selling its assets in order to pay off the Soviet Union debt.

>2-The bank system in Russia was previously >managed by the government with the allocations >set by numerous ministries each responsible for >one specific sector of the economy.

Other way around. Some _private_ banks were created 15 years ago, mainly to service those ministries because ministries did not want to deal with Sberbank, the only bank in former Soveit Union.

>3- The negative value added of manufacturing, >(i.e. The finish product costs less than the >materials to make it), is a left over from >government- managed economy.

Are you trying to say it is true today? My short comment: BS. In Soviet Union it was forced by the government. You can find out there is less socialism in Russia then in US or Germany now.

>4- Typical US Capitalism for raping under >developed countries won't work in Russia. See:
>http://www.russianobserver.com...

If you would like to do business in/with Russia:
a - do not consider Russia 3rd world country. Leave your "pioneer" mood at home;
b - send your best managers there;
c - hire local lawyers to navigate in sometimes messy local legislation.

>5- Any Telecom deals may have to be disinfected >from influence or connections to the Russian >mafia.
>http://www.pbs.org/wgbh/pages/...
>http://members.tripod.com/~org...

It is not even funny to spend time on commenting of tabloid and an amature article based on 1986-1991 materials.

>6- Possible deals with India may render Russia >as a middleman in mobile comm. due to >undercutting prices from the West. The hype >about Turkey and Russia may turn out to be >another Asian/China bust where after the >technology was learn, the country became a >competitor.

Unlikely China, after "technology was lerned" in Russia and India, you will compete with _companies_ not contries. But if you wish, sit at home and wait when Europeans will catch up and expand to Russian and Indian markets.


infojunkie
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infojunkie,
User Rank: Light Beer
12/5/2012 | 12:15:25 AM
re: Is Russian Opportunity Knocking?
I cannot answer your question, Peter, but here are my general observations:

- When people say "Russian mafia", they often mean different things? Inside Russia the word mafia is frequently used to describe any kind of collision between well-connected private companies and public entities, usually involving some form of corruption. If this is it, then definitely things have not much improved, even possibly got worse, as many of the western players dominating the country's telecom landscape in the early 90s have left, being replaced by powerful domestic "oligarchic" groups, closely connected with the government.

- If, however, "Russian mafia" for you means what you would normally call "gangsters", then I am not sure things were ever that bad. Telecom (and any high-tech business for that matter) is usually not the first thing that comes to the mobsters' mind. It is too complex, not sexy, infrastructure-based and does not involve that much easy "cash", normally associated with other business such as services, sport or retail. Inside telecom, the sectors more hit with the extortion problem would be cellular, anything retail, as well as enterprise equipment and software sales. Regular phone service and big-ticket service provider sales would be more difficult for the mobsters to crack. In addition, the heavy government influence in this industry (see point above) is also a deterrent. In a way, the involvement of the "government mafia" leaves much less on the table for the "common" mobsters.
rafaelg
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rafaelg,
User Rank: Light Beer
12/5/2012 | 12:15:25 AM
re: Is Russian Opportunity Knocking?
"My short comment: BS. In Soviet Union it was forced by the government. You can find out there is less socialism in Russia then in US or Germany now."
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You have to be kidding right? You are not basing your opinion in factsGǪOtherwise you wouldn't even make that statement.
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"If you would like to do business in/with Russia:
a - do not consider Russia 3rd world country. Leave your "pioneer" mood at home;
b - send your best managers there;
c - hire local lawyers to navigate in sometimes messy local legislation."
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You support my stand. Thank you. They (US)are not approaching doing business with Russia as an equitable and mutual relationship. Rather as, "let's see how much we can rape before they find out"..
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"It is not even funny to spend time on commenting of tabloid and an amature article based on 1986-1991 materials."
PBS is tabloid? A research paper from a reliable and outstanding credentials an " amature"( (amateur)?
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"Unlikely China, after "technology was lerned" in Russia and India, you will compete with _companies_ not contries. But if you wish, sit at home and wait when Europeans will catch up and expand to Russian and Indian markets."

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I meant to say companies. My error. Your response doesn't relate to the statement. When the big boom in ASIA was "predicted", there was a rush only equaling the American Gold Rush. However, once China acquired the technical knowledge and learned most of the western business practices the companies, as you agreed, became competitors. With the current anti-American sentiment in the World and the present Russian and French status with regards to foreign policy, I will be surprised if any Telecom ventures pan out within the next 2 or 3 yrs.
Besides, it will be a long while before the US telecom market has to worry about Russian Telco's competing with US Telco's.
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