Is Russian Opportunity Knocking?
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:
- April 3, 2003: Metromedia International Group Inc. (Amex: MMG) announces the sale of several of its Russian telecom interests, including a stake in an alternative business carrier and cable TV company, to a shadowy outfit called Adamant Advisory Services (see Metromedia Sells Russian Assets). (More on that in a moment.)
- April 2-3, 2003: Standard & Poor’s raises ratings on several Russian telecom companies, citing the advantages of their consolidation under investment company Svyazinvest (see S&P Raises CenterTelecom to CCC+, S&P Raises North-West Telecom to B-, S&P Raises Uralsviazinform to B, and S&P Raises Southern Telecom to B-).
- March 11, 2003: Riverstone Networks Inc. (Nasdaq: RSTN) announces a contract to help Russian business services provider Comstar build an MPLS-based network that's offering the first Ethernet-based services in Russia.
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