Russia and CIS FAQs

As the largest country on the planet, Russian passive infrastructure is made up of 30-35,000 towers and 60-80,000 rooftops across its populated regions, most of which remain operator-captive. In a fiercely competitive MNO landcape with little experience of colocation, a couple of small towercos are steadily creating an independent towerco market in the country. For the last five years there have been rumours of towerco JVs, SLBs and BTS opportunities in the country, and most recently the entry of Tele2 offered a unique opportunity to attract tenants, but activity in the market has been frozen by the crash of the rouble in late 2014. With political, economic and commercial uncertainty still rife, what’s really going on in the Russian market?

How many towers are there currently in Russia?

TowerXchange estimates that there are around 30-35,000 macro tower structures in Russia (i.e. not including rooftops and street poles). Our sources indicate that Megafon has the most extensive network with around 10,000 towers, Vimpelcom and MTS own around 8-9,000 towers each, Tele2 owns about 2,000, Russian Towers a further 1,000+, and a handful of smaller towercos including Link Development account for a few hundred more.

How many rooftop and streetpole masts are there in Russia?

TowerXchange estimates there are around 60,000-80,000 urban mast solutions in Russia, mostly rooftops and streetpoles. However this number is hard to pinpoint as asset registers and contractual documentation is often incomplete as far as these assets are concerned.

What is the current situation for urban masts?

A lot of the urban capacity in Russia is currently provided by rooftop and pole solutions. MNOs find it easier to secure licensing for streetpoles and are subsequently more inclined to put points of service on existing high buildings. However there is no standard for agreements on rooftop space and dealing with multiple private landlords across urban areas is a logistical nightmare for operators. There are also a lot of question marks over the legality of new and existing rooftop masts and the permitting situation is not always clear. Although rooftops and streetpoles would probably not be included in a potential tower divestment, TowerXchange believes there may be room in the market for a standardised and legal solution provider for Russian rooftop points of service.

How extensive is current LTE coverage?

LTE is currently available in 30-50% of Russian regions, mainly in Moscow, St Petersburg and the larger cities.

How has the recent decline of the rouble affected the Russian telecoms market?

On one hand the unstable currency and resulting economic turbulence is causing operators to reassess their capital expenditure, but on the other hand devaluation of the rouble is a disincentive for divestiture of passive infrastructure assets as MNOs won’t want to sell if they can’t get full value. Russian tenants would pay their bills in roubles and although raw materials and rent for towers are bought in roubles, and Russia has plenty of domestic energy resources, technology tends to be bought from overseas and is thus effectively building and maintaining towers becomea more and more expensive as a function of devaluation.

There is some discussion currently as to whether a tower divestment would be conducted in roubles or dollars; a rouble price would allow the operator to reduce tower opex, however the amount raised would be less significant for the overall balance sheet. For the interested towercos, however, it seems increasingly unpalatable to pay for an asset in dollars for which they would receive rent paid in unstable roubles – and this brings down the potential purchase price irrespective of currency.

How does the fiercely competitive Russian telecom market affect the potential for tower transactions?

In general we find that the Russian MNOs have a relatively conservative and defensive attitude to selling towers – coming round to the idea of sharing passive infrastructure is a big psychological step. For those organisations with roots in both Europe and Russia, this seems to mean that there are strong forces pulling in both directions, with the European-thinking parts of the business pushing to monetise passive infrastructure and the more Russian elements resisting this strenuously. A high staff turnover in many large Russian organisations is also inhibitive to change as there is little continuity of strategic thinking and process.

What is the most important market in Russia?

Moscow is the biggest market in Russia, with by far the greatest population density and the highest ARPU, however there are still significant coverage gaps in the area and MNOs are keen to add capacity to improve their quality of service to Muscovites.

Which regions are the hardest for Russian operators to cover?

Due to a much lower ARPU and population density than the rest of the country, the far east is the hardest area to cover and sustain operationally and MNOs are much more open to sharing in this area to try and minimise opex. All operators are under pressure from the government to provide service to rural areas and 4G licenses require that Russia’s MNOs cover all areas with a population of 10,000+. Leveraging the Rostelecom network then delivering the ‘last mile’ helps them to do this.

How has the Russian tower market evolved?

As mobile penetration has exploded in Russia over the last ten years, the three major MNOs engaged in something of an ‘arms race’ in order to gain competitive advantage through better network coverage. However MNOs are now being more cautious about this kind of capital expenditure and over the last couple of years Russia’s operators have started to focus on bilateral swaps and leasing space where possible, and only built new infrastructure where there was a clear revenue stream. A large MNO in Russia told us they currently spend around US$1bn per annum (a figure quoted before the rouble crashed) on their network to develop coverage and capacity.

Where is tower growth needed in Russia?

The main priorities for operators in the short term is the LTE roll out and infill in Moscow.

In sparsely populated parts of Russia offering network coverage is commercially unattractive, however MNOs are able to use Rostelecom’s fixed-line infrastructure and focus on providing the ‘last mile’ of network connection in order to fulfil license obligations.

What does sharing look like now?

Currently tower sharing does take place to a limited extent in the form of bilateral swaps. Tele2 is generally excluded from this, particularly in Moscow where the most value is to be found, as they are unable to offer attractive tower locations to the most established MNOs.

What is the current tenancy ratio and how many towers are shared?

TowerXchange sources suggest that less than 30% of towers are currently shared, typically through bilateral swaps and some through existing towercos such as market leaders Russian Towers. Existing tenancy ratios on independent towers are thought to be no higher than 1.2.

How ready are Russian MNOs for tower sharing?

All of the top four operators use Russian Towers’ infrastructure to a certain extent so there is a level of appreciation of shared towers in the market, however some network planners are more open to pursuing this than others and there is a big difference between a small strategic colocation and sweeping changes to the way towers are managed. None of the MNOs seem keen to abandon the concept that the network confers a competitive advantage, and even the most keen to sell and lease back towers may limit the number of shared sites with their competitors. However, TowerXchange believes that all of the operators would be open to increasing their network by leveraging independent towers.

What is the current state of the passive infrastructure and asset registers in Russia?

Reports on this vary wildly, but TowerXchange estimates that the majority of asset registers are not complete and there remains a significant amount of work to be done before a Russian tower sale process could take place. The infrastructure is functioning but paperwork is not in good order. It is rumoured that some of Russia’s MNOs have begun to work on tidying up their asset registers over the last couple of years, possibly with a sale in mind, but generally it seems that Russian telecoms infrastructure is blighted by poor maintenance, poor record keeping, complex legislation and unclear information about land ownership.

Incomplete asset registers could slow any sale process, but at the same time the time lag could exacerbate the value of first mover advantage if it takes competitors many months to clean up asset registers and bring their towers to market.

Is there sufficient capital available for a Russian towerco to raise the up to US$1bn needed to make a significant acquisition, should the opportunity arise?

Experts believe that in general, even given the current economic situation in Russia, that raising the necessary capital will not be a problem. However, the source of the investment and the structure of the investment may vary depending on the political climate. Foreign investors are more prudent and there are few actively investing in Russia given the current currency devaluation and political issues. However, there is a shallow pool of foreign investors with experience of investing in Russian infrastructure and with an appetite for more. In Russia, unlike in many emerging markets, there is no shortage of home grown investors.

Who is investing in the Russian tower market right now?

Known investors in the market include: UFG, Macquarie, IFC, Eurasian Development Bank (EDB), EBRD, ADM Capital and Sumitomo

Who are the most likely potential buyers if a significant tower sale were to take place in Russia?

There are currently two main competitors who TowerXchange believe represent credible counterparties for Russian operators: Russian Towers and ESN.

There has been interest from other parties, and in the Russian market there is always room for surprises, however it is generally felt that building the right level of tower experience and Russian market expertise is not something which can be done overnight. In terms of other market players, at least one of Russia’s tower build and O&M contractors has sought international partners and finance and may be interested in entering the space, perhaps focusing on build to suit, and Russian towerco Link Development operates around 250 towers currently. It remains to be seen whether any new market entrants can raise the financial backing needed to build or acquire a large chunk of infrastructure.

It’s worth noting that Russian operators also use infrastructure owned by RTRS (part of the state-owned Russian Television Broadcasting organisation) to boost their network, although to our knowledge this network of around 16,000 broadcast towers is not run as a commercial towerco.

What’s clear is that whoever manages to persuade a Russian MNO to part with their towers will instantly lead the market and will become the most likely counterparty for any subsequent deals which may be done. This means that despite a long and so far fruitless process, Russian towercos cannot afford to take their eye off the ball for a second in case they lose ground, and therefore the whole market, to a competitor.

What does a towerco have to do to appeal in this market?

Ideally a towerco needs to attract a solid management team with extensive experience in comparably challenging markets, strong financial backing and the experience in Russia to navigate any political and administrative difficulties which might arise.

Who are Russian Towers?

Russian Towers was established in 2009 by both Russian and Western professionals with substantial telco experience in Russia. Backed by both Russian and international investors, including Macquarie and the IFC, Russian Towers is the leading and only institutionally backed towerco in Russia. Russian Towers’ current portfolio of around 1,500 towers has grown organically through Build to Suit and relationships with key partners including Russian Railways, to deliver tower access in low coverage areas. Russian Towers are under pressure to secure a Russian tower deal if and when it happens and TowerXchange speculates that they might be more open to a JV or partnership with Russian MNOs than their competitors ESN.

Who are ESN?

ESN is one of the largest private companies in Russia. Established in 1991 by Grigori Briozkin, they began in oil and gas and were then able to diversity into new areas such as energy, engineering and media with a current interest in high tech and start ups. For an ambitious and bullish company like ESN, acquiring a portfolio of towers in Russia could be a way into CEE and even Europe as a whole. Given ESN’s proven ability across multiple industries and track record in maintaining infrastructure across a country the size of Russia, it’s likely that if they were to bid they would have a strong preference towards an outright acquisition of a tower portfolio over a collaborative partnership with any of the Russian operators. However ESN’s lack of existing specialism in this field and flexibility in the market means their interest in the tower market may not remain top of their agenda indefinitely.

How ambitious are Russian towercos in terms of growth?

To date Russian Towers has built portfolio through BTS programmes and partnerships with other infrastructure providers. They see themselves as able to acquire a substantial portfolio if an opportunity came to market, but in the meantime they have a focus on organic growth with guaranteed returns. As far as TowerXchange can tell, ESN are focussing solely on a big deal and will enter the tower market only if they are able to acquire a large portfolio.

How likely are we to see a big international towerco come into Russia?

There have been rumours of international towercos or consortia entering the Russian market on a management agreement with limited scope in order to mitigate country risk then taking more control at a later stage. However this was before the events of 2013 and TowerXchange believes that there is currently minimal interest from the big established towercos to enter the Russian market.

How will existing market dynamics affect the tower market?

Given the fierce competition between the three incumbent operators in Russia (Megafon, MTS and Vimpelcom) there is a pervading fear of losing market share, particularly now that the Tele2/Rostelecom merger has created a highly credible competitor with significant political clout and an appetite to rapidly expand their network. If one of the incumbent MNOs were to divest their towers, it has been suggested that they may choose to retain right of veto for potential tenants. The feasibility of this choice and the resulting impact on the value of a tower portfolio would undoubtedly throw into question the ability of the tower industry to develop in the country.

Who will trigger a change in the Russian market?

Vimpelcom have the potential to set the pace if they choose to divest their towers following a successful divestiture of Wind’s towers in Italy. Vimpelcom achieved a 16x valuation in Italy, which is sure to have boosted their case to consider further tower sales.

Tele2 will also have a strong influence on the market as potential tenants for a new Russian portfolio. In the mean time Tele2 will be focussing on build to suit towers in order to meet coverage targets following their merger with Rostelecom. TowerXchange has reason to believe that they may be interested in a buy and lease back deal at some point in the future if they are happy with their towerco partner. Given Tele2’s European background, they may be more open to tower sharing as a way to cut costs and increase operational figures.

What drives Vimpelcom being the most likely to divest?

A need to restructure debt from their merger with Orascom, with Vimpelcom’s balance sheet believed to be US$25bn in the red. Executives with experience of tower M&A at Vimpelcom’s European HQ led the recent Wind process in Italy. With the excellent valuation realised in that tower transaction, Vimpelcom may have appetite for further tower sales, although their assets in Russia may not be next in the queue! However, the size of Vimpelcom’s debt means even a US$1bn sale would not release sufficient capital to substantially restructure debt, especially if Vimpelcom prefers to retain a substantial stake in the towers, or even offer the assets on a Manage with License to Lease basis.

How good would Tele2 be as tenants for the Vimpelcom towers?

Tele2 would be drive demand for tenancies for any substantial Russian towerco, but would not take on tenancies on the towers wholesale – they would pick and choose according to when the towers became available, their locations and local competition. Nonetheless, Tele2’s appetite to rollout represents a potential near-term spike in tenancy ratio growth.

How will a substantial divestment affect the market?

Tele2’s need for coverage creates a ‘first mover advantage’ for whoever is first to divest their towers, particularly if their deal is structured in a way to allow Tele2 to significantly improve their network. However, because the market includes some bilateral swaps and network coverage is not equal across all operators, there will be continued and proven opportunity for at least one subsequent  tower deal. As TowerXchange has noted in other markets though, if the ‘first mover advantage’ isn’t clear cut, the ‘last mover disadvantage’ still holds true and whoever doesn’t divest will be left with stranded assets on their balance sheet being devalued as first and second movers’ towers are leased up.

What is the potential tenancy ratio in Russia for a divested tower portfolio?

Given Tele2’s clear need for network growth the tenancy ratio in Russia could achieve a healthy annual growth rate near 0.2, and eventually exceed two, although would be unlikely to go beyond three. We would expect a substantial difference, in the order of 0.5 or greater, between the potential tenancy ratios in major urban cities compared to smaller towns exceeding 10,000 population.

What would a deal structure look like?

Given the Russian reticence to lose control of their networks, it is likely that we will see a deal structured as a joint venture, or with the MNO retaining a stake in the tower portfolio, or indeed structured as a ‘Manage with License to Lease’ deal rather than an outright sale and lease back. TowerXchange believes that, although the Russian towercos would prefer a straightforward sale, the pressure to secure a deal and effectively take control of the market will probably drive them to compromise when the opportunity arises.

How long would a potential Russian transaction take once someone decides to divest?

Much depends on the state of asset registers. If asset registers are quietly being tidied up, then an advisory firm could be appointed and a process commenced relatively swiftly. However, if asset registers require substantial work, there could be a 12 month lag before a process even commences.

The devaluation of the Rouble has likely moved the potential for a tower transaction in Russia from a near-term to a mid-term opportunity.

What time pressures are there to bring towers to market sooner rather than later?

By worring about conceding market share to Tele2, Russia’s incumbent MNOs risk losing value in their towers as Tele2 (most likely tenants) acquire alternative solutions to fulfil their RF planning needs. Tele2 are pouring millions into a capex programme meaning that their value as potential tenants is likely to decrease in the near future. However it’s been at least five years since rumours started to come out of Russia about a potential tower deal – a process has even been started and stopped within that timeframe – so most commentators see this dragging on for another three or more years, especially given the current economic and political situation.

How has the Ukrainian telecom market been affected by recent events?

The Ukrainian telecom market has been heavily affected by the unrest in the country and our sources confirm most companies in the country are adoping a ‘wait and see’ attitude with no plans for asset divestment or significant strategic change in the near future. However given Ukraine’s ties to the European market it may well be easier for Western firms to invest once the region settles down and we may see the telecom industry bouncing back quite quickly.

How ready is Ukraine for an independent tower market?

There is one small towerco in the country – Turkish owned UKRtower – who are focussed on organic growth and have around 400 towers and deep partnerships with two of the major operators in the region. The market accepts towersharing as a concept but a large scale tower divestment is unlikely at this stage. Very limited growth is expected next year due to the political situation.

What is the potential for a Ukrainian tower market?

Good sized population of five million. 3G is due to roll out 2015-17 if the spectrum auction is realised and there is a need for rural network extensions. If the political situation calms down there could be a good market but that seems unlikely in the next one to two years.

What is the size of the Ukrainian telecom tower market?

There are approximately 11,000 towers in Ukraine in total, Kievstar owns around 5,500, MTS 4,500, Life 1,000 and then there are UKRtower’s 400. There is an estimated need for another 1,000 or so towers in the market just for full 2G coverage.

How are the tower markets in the CIS region seen in relation to Russia?

Investors and MNOs tend to cluster together the CIS as the region consists of a small number of countries and could fold into a pan-Russia & CIS initiative. There is also a significant cross-over of key MNOs across several markets. However CIS countries do have their own challenges and several have a unique tower market structure – for example in Kazakhstan the incumbent national operator owns the vast majority of towers, which they are required to share at a remarkably low lease rate.