Share Square: Russian Federation

The Russian Federation is the largest country in the world by land area, spanning two continents and 11 time zones. Russia had an estimated population of 143.4mn people and 248.8mn mobile connections at the end of 2015, giving a penetration of 173%. The mobile market is dominated by four Mobile Network Operators (MNOs), Beeline (VimpelCom), MegaFon, MTS, and Tele2, which between them accounted for 245.6mn connections (99%). Other MNOs include MOTIV, SMARTS, Sotel, Tattelecom and Vainakh Telecom. MegaFon and MTS lead the market with 74.8mn and 73.7mn connections respectively, while Beeline follows closely with 59.8mn and Tele2 with 37.3mn.

The mobile market in Russia is highly competitive and also has the largest market in Europe in terms of connections. 2G population coverage is 97% on both MegaFon and Vimpelcom reaching 83 out of 92 regions, and is likely to be required for some time to come. 3G services were first launched at the beginning of 2006 by SkyLink (merged with Tele2 in 2012) and Sotel. The three large MNOs didn’t launch until 2008 and Tele2 (previously Rostelecom) didn’t launch their 3G service until 2011. There are a total of 83.5mn 3G connections, which makes up 33.6% of total connections. 3G population coverage is over 85% on the three (excluding Tele2) large networks, over 95% on MTS and almost 95% on MegaFon.

According to Ericsson, half of Russian internet users use their smartphones for entertainment and to watch TV; this is due to the growing penetration of mobile gadgets, lower prices of internet and enhanced infrastructure quality of 3G/4G.

Russia first rolled out 4G/LTE in January of 2012 when MegaFon launched LTE services in Moscow using MVNO Yota’s network, while it built its own 4G network; Yota previously launched 4G via a WiMax solution in 2009 before it gained approval to abandon WiMax for LTE, re-using its existing spectrum. MTS launched 4G later in 2012, and Vimpelcom and Rostelcom (merged with Tele2) the following year. Initially the take-up of LTE was comparatively slow, a reason being the large number of prepaid phones in Russia, and many people even remained on a 2G connection for a period of time after LTE became available. Additionally, cheap smartphones which only support 3G postponed upgrades to more expensive LTE-supported devices. It is worth noting in this context that in Russia mobile phones are not subsidised by operators, which can encourage subscribers to use their current handsets for longer. There were 9.1mn 4G connections at the end of 2014 – 3.8% of all connections – which had risen to 17.9mn by the end of 2015 (7% of all connections); smartphone penetration has reached roughly 73% (2015) of mobile subscribers. Additionally, the number of LTE BTS almost tripled in 2013-2014 – and now stands at 42,047. By early 2016 LTE coverage had reached 70% of the population.

It should also be noted that companies such as MTS and Nokia, which now focuses largely on telecommunications infrastructure, are testing the first 5G mobile systems in Russia. The aim is to be operating a 5G system on a section of MTS’ commercial network, coinciding the roll out with Russia’s hosting of the football World Cup in 2018. The tests so far, according to Comnews reports, have resulted in mobile data rates of up to 4.5Gbps using 200MHz of aggregated frequency bandwidth.

MegaFon launched its mobile service offering in Russia in 2002 after acquiring several regional companies, including North-West GSM which was founded in 1993. MegaFon is the largest MNO in terms of recent growth and subscribers. MegaFon had 59% 4G coverage and 90% 3G coverage in 2015. MegaFon’s recent growth has been driven by numerous contributing factors: for example, it announced a framing cooperation agreement with China Development Bank (CDB) Corporation for financing of up to USD600mn, in early 2015. MegaFon subsequently released details of extension plans of an additional 400 2G/3G BTS and 700 LTE BTS, and fibre-optic lines are also set to increase by more than 450km in 2016.

MTS is Russia’s second largest mobile operator by subscribers and has featured in the mobile market since 1993 as a Public Joint-Stock Company. MTS was the first operator to reach 1mn 4G subscribers and has continued to maintain the largest subscriber base in the 4G market with 4.5mn subscribers (Q4 2015). MTS has recently (2016) reintroduced a form of national roaming charge on certain tariffs for customers outside of their home region (oblast), this has been reported to reverting ‘back to the 1990s’, as customers will have to pay USD0.24 per day to use their phone in other oblasts.

VimpelCom entered the Russian market in 1992 when it was founded in Moscow under the Beeline brand; it is the sixth largest MNO in the world by subscribers and operates in 18 countries. VimpelCom recently (2016) formed a partnership with Cisco Jasper to enable enterprises to implement and manage the Internet of Things (IoT). The partnership utilises VimpelCom’s Smart Connectivity management platform is based on Cisco Jasper’s Control Centre platform, to boost business in areas such as fleet management and smart metering.

Tele2, although not as big as the other main mobile operators, still holds 15% of all connections. Tele2 is a Swedish group and Tele2 Russia was founded in 2001 based on networks acquired in Russia. Since then, Tele2 Russia has acquired many other networks, and in 2014 formed a joint venture with Rostelecom.

Russia’s Information and Communication Ministry’s Science and Technology Council first implemented two MVNOs in 2004: Narodny Mobilny Telefon (Popular Mobile Phone) and Euroset. To begin with, development in the market was slow due to lack of MVNO-specific regulation, as well as the three major MNOs’ resistance to offering network capacity to MVNOs. In 2009 the Ministry of Communications endorsed the introduction of more MVNOs to aid market expansion and stimulate competition. Popular Mobile Phone’s services, supported by the Moscow Government, were targeted at underprivileged consumer segments in Moscow. MVNOs include:

The market is regulated by the Ministry of Telecom and Mass Communication (Minsvyaz), a governmental agency responsible for telecommunication, media and postal services. In Q4 2015, the Russian regulator expanded the number of spectrum ranges approved for LTE to include the 800MHz, 900MHz, 1800MHz and 2570-2620MHz spectrum bands. Additionally, in Q4 2015 Minsvyaz removed the restriction on telecoms operators deploying IP Multimedia Subsystem (IMS) packet networks for public use. This allows MNOS to implement voice-over-LTE (VoLTE) and enables unrestricted launches of other services.

New regulations have been brought in regarding personal data on the internet, which could lead to MNOs incurring additional costs from data sorting needing to be done in Russia. This means that any foreign owned companies would need systems to do this in Russia before personal data is taken out of the country. From 1 September 2015 ‘Russian citizens’ personal data must be recorded, systematised, accumulated, stored, clarified and retrieved through databases located within the territory of Russia” [1], with further amendments expected to be made to the regulation in the future.

Sharing towers is considered as a key strategy in Russia for operators to reduce capex and lower costs. There are currently around 42,100 towers in Russia, and c. 75,000 rooftops, with the majority owned by the MNOs. Megafon has around 14,000 towers, MTS and VimpelCom each have around 10,400 towers and Tele2 has around 3,500 towers. Many commentators people believe that each operator needs at least  20,000 locations moving forwards.

There are four main TowerCos active in Russia: Russian Towers has around 1,800 towers, Vertical has around 1,600 and Link Development and Service Telecom have a few hundred between them.

VimpelCom hired Merrill Lynch to sell 10,000-20,000 of its towers, with Russian Towers reported to be the buyer. However, the transaction has not yet been approved, and doubt has been expressed as to whether the deal will go through or if VimpelCom plans to bundle its assets together with its CIS infrastructure portfolio, and sell everything collectively. Tele2 Russia is reported to be in discussions with the Russian Direct Investment Fund about the sale of around 10,000 towers, but there are negotiations with other potential buyers such as Russian Towers, VTB Capital, Vertical, and several unnamed foreign operators. Russian Towers has recently signed an agreement with the Russian Government to work together to develop telecom infrastructure to increase coverage and quality. MegaFon is hoping to sell 49% of its towers subsidiary.

Tower sharing took place between MTS and Vimpelcom in late 2014 in an attempt to expand LTE cost-effectively. LTE was, firstly, extended to 36 regions, of which MTS was accountable for 19 and Vimpelcom for 17. By the end of 2015 LTE was accessible in 31 of the 36 regions, and the two operators had signed a contract to build LTE infrastructure in a further 20 regions. In early 2016 Vimpelcom added MegaFon to its LTE network sharing deal with MTS, with the aim to launch more than 1,300 additional LTE- enabled base stations. The next stages of tower sharing consist of plans for Vimpelcom to add Tele2 into the deal, with an arrangement whereby the operator with the dominant market position will be appointed to manage the regional network.

The Russian Federation is the largest country in the world by land area, with a highly competitive mobile market dominated by four MNOs. The 4G market is growing but further coverage and capacity expansions are still required.  Tower sharing is common in the market with the large players all sharing towers, and Tele2, VimpelCom and MegaFon all looking to sell some of their tower assets. A relatively small number of towers are in towerco hands at present – and so there are reasons to believe the tower market could offer good potential to towercos in the near future with significant tower deals already in the pipeline.

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Sources:

GSMA

Telegeography

World Bank

World Factbook (CIA)

[1] MegaFon annual report

BuddeComm: Russia – Mobile Infrastructure, Broadband, Operators – Statistics and Analyses

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