Russia Telecommunications Report Q4 2012

BMI View: The Russian telecoms market is the largest in Central and Eastern Europe, with high levels ofpenetration in mobile, fixed-line and increasingly broadband services. There are major internationaloperators in mobile and fixed line including MTS, VimpelCom, MegaFon, Rostelecom and Tele2 – aswell as competition in the wireline segment from ER Telecom. Competition between these operators hashelped to expand the reach of telecoms services and drive down prices. Meanwhile, competition has alsocontributed to advances in technology, with higher capacity broadband (both wireless and wireline) a keydevelopmental trend in the market as operators roll out LTE, fibre and associated pay-TV services.

Key Data:

Growth in the Russia mobile market has slowed considerably, falling to 2.1% y-o-y to Q212,down from 5.6% y-o-y to Q211. Total subscriptions reached 227.5mn at the end of June 2012,equating to a penetration rate of 161.7%.

As a result of slowing subscription growth, and the potential for inactive subscriptiondiscounting, we have revised our five-year forecast to 2016 downwards. We now forecast totalsubscription to reach 242.3mn at YE16, giving penetration of 170.6%.

Key Trends And Developments

The key developments have come in the mobile segment, most notably the July 2012 announcement byRoskomnadzor that it awarded 4G LTE licences to the 'big four' telecoms firms – MTS, VimpelCom,MegaFon and Rostelecom – as expected. It also announced roll-out requirements with all licence winnersrequired to begin to offer LTE services by June 1 2013 and cover all Russian regions by 2019, withservices accessible in all communities with populations of more than 50,000. Each operator must invest aminimum of RUB15bn (US$457mn) annually until the construction of a federal LTE network iscompleted. This will be a major catalyst of mobile data service development across Russia's regions in themedium term.

There were a number of acquisition moves in the mobile segment in the past quarter. On June 15 2012Russia's Federal Antimonopoly Service (FAS) approved the motion filed by MegaFon and Scartel (Yota)for a merger – giving MegaFon access to Scartel's infrastructure and licences. However, the FAS requiredthat Yota allow other operators and MVNOs access to its LTE network, with a number of operatorsalready agreeing terms. Rostelecom has also been active. In June 2012 it acquired the remaining 50% ofregional mobile operator SkyLink, taking its ownership of the company to 100% and adding 1.338mnsubscribers in Moscow and St Petersburg to its growing mobile business. Further, it announced plans tolaunch 3G services in 27 regions before the end of 2012, through both MVNOs and over the coming yearsbuilding out its network, while looking to share infrastructure with rival operators in order to keep capitalexpenditures under control.