From Russia With Dial Tone

Russia's telecom market may be worth billions, but is it worth the risk?

For decades, U.S. telecommunications opportunities in the U.S.S.R. were limited to maintaining the fabled hot line linking the Kremlin with the White House.

But with the collapse of communism and the advent of proto-capitalism, Russia's archaic and less-than-ubiquitous telecommunications infrastructure is in desperate need of expansion and upgrade. But American telcos and their western European counterparts moving in to fill the phone gap must balance the opportunity to supply a huge market with the reality of political instability and a dearth of cold hard cash.

International Technology Consultants, a Washington, D.C., firm, recently released an analysis of the Russian telecom market, which found total investment in equipment and services may surpass $150 billion by 2005. A modern and widespread telecom network is essential for economic growth at home and the attraction of capital from abroad, but Russia has her work cut out for her.

"Demand for basic telephone service stands at well over 10 million unfulfilled applications, which translates into an average 10-year wait to get a telephone," said ITC president Blake

Swensrud.

Because of this enormous supply-demand gap, the Russian government has embarked on a program to raise its "teledensity" to 25 telephones per 100 people by the year 2000. In order to realize this goal, ITC study estimates, the Russian government must invest $3 billion annually. Last year, foreign governments and global financial institutions pledged more than $1 billion in support of this program, which is considered equally essential to the success of both economic and political reform.

Foreign investment in Russia's telecom sector reached $340 million last year, a figure the ITC projects to top $500 million this year. As a result, said Swensrud, "telecommunications is the only major industry in Russia that has not experienced a contraction of output."

Some of the world's best-known telecom titans, including Ericsson, AT&T, Alcatel, Deutsche Telekom, Motorola, Siemens, and Sprint are all active in Russia, supplying equipment, providing wireless service and

establishing joint ventures or buying pieces of privatized Russian telcos.

Russia is also home to the largest infrastructure upgrade on earth, a 10-year, $40 billion project known as the Russian digital overlay network (RDON). This ambitious endeavor, designed to double Russia's existing 22 million line network, requires installation about 70,000 kilometers of fiber optic cable connected to digital switches in at least 70 cities. RDON is a joint venture between Rostelecom, the Russian national long distance carrier, Deutsche Telekom, France Telecom and Baby Bell US West.

The wireless sector represents a particularly fertile portion of Russia's telecom landscape. The ITC study predicts GSM cellular networks will connect more than 200,000 Russians within the next decade, generating some $1.5 billion in operating revenues for predominantly foreign-owned companies.

Sounds great, but as Gene Prilepski, a senior consultant with ITC pointed out, the wealth of telecom opportunities in Russia doesn't necessarily mean there is much money to be made. And many such studies have emerged over the last five years, only to be proven as wishful thinking by the ever-chaotic Russian business climate. "The companies that really want to get into the market should be more creative in financing," he said. The creativity includes doing business by barter. France's Alcatel, for example, Prilepski said, established a trading unit that swaps their smaller telecom switches for things such as oil and minerals.

Swensrud acknowledges Russia's political and economic instability, as well as a commercial code that often does more to discourage rather than encourage foreign investment. "But as our study clearly shows investment in the telecommunications industry remains the best poised to lead in Russia's difficult transition to market economy and prosperity," he said.

Analyst Bob Rosenberg, president of Insight Research, said any company considering a Russian venture should seriously consider the political uncertainty and the ability of customers to pay in something other than chromium, cod or vodka. "With the fall of communism, there are very heady expectations about the pent up demand of previously closed markets," said Rosenberg. "Whether the dreams of marketers will actually put money in the bank for those willing to gamble remains to be seen."

And don't forget history, which often repeats itself. In the late 19th century, imperial Russia was industrializing at a frenetic pace to catch up with the West. In 1887, the government induced Lars Magnus Ericsson, founder of the Swedish telecom conglomerate, to establish a manufacturing plant in St. Petersburg. Ericsson did good business for 30 years supplying the Russian market, until the factory was nationalized during the revolution. Not one ruble in compensation has ever been paid.


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