Russian telcos look to Asia for growth

Jason Bush
23 Apr 2008

The Russians must know a thing or two about mobile telephony. After all, few countries in the world have seen such a dramatic explosion in mobile-phone usage: The number of Russian subscribers has risen to 170 million today, up from just 1.35 million in 2000. That phenomenal growth has been good news for Russia's leading telecom companies, now among the largest and financially strongest in the world. But there's one obvious downside. Now that so many in Russia have mobile phones, where do the nation's telcos go for growth‾

The answer, it turns out, is Asia. In recent months, Russia's leading mobile operators have made their first forays outside the former Soviet Union. They're pinning their hopes on the fledgling telecom markets of southern and southeastern Asia, where Russian companies have recently announced plans to invest billions of dollars.

So far the most ambitious plans are those of Sistema (AFKS.RTS), a Russian conglomerate that owns Mobile TeleSystems (MBT), known as MTS, Russia's largest mobile-phone operator. Sistema has recently been causing a stir in India, becoming the latest international heavyweight to join the Indian telecom race. 'Of course, India was always the top priority because of its market size, population, economic growth, and other factors, including a very good [historic] relationship between the Soviet Union and India,' says Anton Abugov, a vice-president at Sistema and member of the MTS board of directors.

Bold forays

But India isn't the only place in Asia where traditional political ties are blossoming into contemporary business opportunities. Sistema's leading competitor in Russia, No. 2 mobile operator Vimpelcom (VIP), is busy staking out territory in an even more exotic location, Vietnam, and is eyeing opportunities in underserved markets such as Afghanistan and North Korea.

'We're looking at countries where other people would be scared to go to,' says Alexander Isozimov, chief executive of Vimpelcom. 'With a very small investment, you're accepting a risk but you position yourself for a future when the country becomes more open. Sooner or later, it's going to happen.'

In India, it'll be sooner rather than later. Sistema first signaled its interest in the country last September, when it paid $11.4 million to acquire 10% of Shyam Telelink, a regional mobile and Internet operator in the Rajasthan region of northern India (operating under the brand name 'Rainbow'). Not a huge deal, on the face of it. But there was much more to the acquisition than met the eye.

Sistema has since raised its stake in Shyam Telelink from 10% to 51%, with an option to raise it to 74%. Meanwhile, in January, Shyam was awarded licenses to operate in 21 additional regions, as well as Rajasthan, becoming one of nine companies to be awarded licenses that cover the whole country. That gives Sistema a platform to become one of India's major nationwide operators. 'We paid a very minor fee for opening the door [to India],' says Abugov. Ultimately, he says, Sistema aims for an 8%-to-10% share of the Indian market.

Heavy outlays

True, turning little Shyam into a pan-Indian operator will require a lot more than the cost of the acquisition. Sistema has already spent an additional $620 million to acquire the licenses covering the whole country. And longer-term, Sistema has announced that it plans to invest $5 billion to $7 billion to build the necessary mobile infrastructure, one of the largest Russian investments anywhere in the world.

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