The Russian telecommunications market continued to demonstrate moderate growth until October 2008 when the global economic crisis hit Russia. Growth was driven in part by Russia's steady economic performance, the need to upgrade the telecommunications infrastructure throughout the country, and the continued interest of investors in the telecommunications market. In 2007, the Russian telecommunications market reached $38.5 billion in sales. In 2008, the market was forecast to grow 14% and total $44 billion. The sector’s average annual growth for 2004-2008 was 20%, but market dynamics are now influenced by the economic crisis and strong US dollar.
The cellular segment accounts for more than 50% of the telecommunications market, and remains very concentrated with 90% of total revenue earned by three major national cellular operators: MobileTeleSystems (MTS), VimpelCom and MegaFon. By December 2008, the total number of registered SIM-cards in Russia reached 178 million, a 5% increase over 2007. According to market experts, the number of active mobile subscribers in the first quarter of 2008 was 56% of total SIM card holders, leaving good potential for cellular market growth. According to the Institute of Modern Development, mobile operators' revenues amounted to $21 billion in 2008. The average revenue per user (ARPU) by the end of 2008 had increased almost 40% to $11, thus motivating mobile operators to look for new technology and/or value-added services, as well as expand into Russia’s regions and CIS countries, to increase revenues. Operators are launching sales of iPhones and offering WIMAX and GPS navigation services.
The market for mobile network equipment is one of the largest sub-sectors of the telecommunications equipment market in Russia. Three generations (1G, 2G and 2.5G) of mobile networks are currently represented here. GSM, the standard, covers more than 90% of the cellular market. The remaining 10% is operated in CDMA and DAMPS standards. The Ministry of Information Technologies and Communications reported that the State Radio Frequencies Commission announced on October 23, 2006 its decision to "allocate radio frequency bands 1935-1980MHz, 2010-2025MHz and 2125-2170MHz for the development of mobile IMT-2000/UMTS standard networks in Russia.” Three 3G licenses were allocated through tender offerings in accordance with the Commission's decision. As expected, licenses were awarded to Beeline, MTS and MegaFon. The launch of commercial 3G projects in Russia started in late 2007. The potential 3G subscribers’ pool for the first half of 2007 is estimated to range from 400,000 to 600,000 and 3G operators expect profits of $50-70 million by the end of the first year. Further development will depend on the cost of voice services and what consumers are willing to pay. The main problem for successful 3G development is the lack of radio frequencies that can be used for this standard. Due to the friction between the Ministry of Defense and cellular operators, 3G projects have not yet been launched in Moscow.
In 2008, the number of internet subscribers increased by 15% reaching 40 million, putting Russia in 11th place among the countries with high internet penetration. The internet market was worth $2.5 billion mainly due to the growth of broadband access, which, at 90%, showed the fastest growth in 2006. Although the broadband market is still not large, the potential is huge; there are currently 2.6 million users, and that number was expected to increase 130% to six million by 2008. The promotion of WIMAX access will increase the number of internet subscribers in the future.
Total 2007 revenue for fixed-line connection services increased 29% to $17.6 billion, up from $13.6 billion in 2006. The process of market liberalization, which was formalized in 2005 and 2006, resulted in 22 long distance licenses being issued in this two-year period. Most recent mergers and acquisitions in telecommunications occurred in the fixed-line segment due to the privatization of federal operators. This privatization has dramatically changed the balance of forces in the market. However, currently only two operators, MTT and Rostelecom, can be considered active market players. MTT is a private company, owned by Systema Holding, while Rostelekom is a state-owned company.
The high growth rate of Russia’s telecommunications market has created increased demand for imported products and solutions. Russia currently spends more than $4 billion annually on telecommunications equipment, most of which is imported. The sector remains one of the most rewarding for foreign investors and manufacturers.
The highest market growth is expected in the broadband access sub-sector. Residential broadband (using Ethernet, ADSL, etc.), now booming in Russia, was a $480 million market in 2007 and a further growth of 30% is expected in 2008. Growth in the regions is lagging Moscow, whose market value is $200 million, but is expected to increase rapidly in the near future. The most promising locations for broadband development are Moscow and the Moscow region, St. Petersburg and other cities in the Northwest Federal District, Yekaterinburg, Novosibirsk, Samara and other cities in the Volga Federal District. The new WIMAX technology has already been launched in Moscow and St. Petersburg, which will contribute to further internet penetration.
Paid TV is another locomotive of the Russian telecommunications industry, represented by cable, DHT, and IPTV. This category includes broadband access via DOCSIS and HFC (Hybrid Fiber-Coaxial) technologies. Cable TV networks are being actively developed and are showing steady increases. Cable TV services are mostly implemented by internet providers.
Continued growth in the Russian telecommunications services market will yield business opportunities for U.S. telecommunications equipment suppliers. The best sales prospects are high-speed, broadband technologies, multi-service and multimedia solutions and digital equipment. Companies entering the market should be prepared to compete with major European and Asian equipment manufacturers and deal with a complex regulatory environment.
According to the Federal Special Program of the Education Development for 2006-2010, provisions for IT coverage and internet access in Russian educational institutions, including distance learning, are part of the Federal Program. This initiative may also present opportunities for U.S. companies.