In our latest quarterly report on the Russian telecommunications industry we have updated our mobile, fixed-line and internet user forecasts as well updating the market data analysis sections. The Russian telecommunications markets are continuing to develop despite the economic plight of the country, and now that the Russian economy is expected to emerge from its recession over the second half of 2009 and the operators have restructured their debt loads, the next few quarters could see an acceleration of the industry’s development.

ADSL continues to be the most popular broadband technology in Russia, having been the most widely deployed. However, interest in wireless technologies such as WiMAX and 3G is growing; wireless technologies are expected to play an important role in the development of the broadband sector.

Combined, the Svyazinvest regional telecom operators are the largest broadband providers in Russia.

However, Comstar-UTS is the largest single broadband provider in the country, followed by VimpelCom. At the end of 2008, broadband penetration had reached just 6.4% after annual growth of over 70%. Broadband is the telecommunications market with the most potential in Russia, with BMI forecasting its subscriber base to more than triple over the next five years. In addition to the expansion of services to previously underserved areas, the development of next generation broadband networks is also progressing. Although next generation network expansion plans have been scaled back during the economic and financial crises, VimpelCom has reported robust growth in its fibre-to-the-building (FTTB) subscriber base, with around 780,000 FTTB customers at the end of Q209. Demand for super high-speed broadband and advanced services such as video on demand and IPTV is set to soar, and this will help drive subscriptions to next generation broadband networks.

Growth in the fixed-line sector slowed to 1.6% in 2008, down from 2.4% in 2007. The market is being negatively impacted by fixed-to-mobile substitution and the growing popularity of VoIP services. Indeed, some estimates suggest that VoIP could account for 40% of wireline voice traffic by 2012. In addition, operators have moved to scale back capital expenditure plans for the expansion of their fixed-line networks, further limiting the development of the sector. As a culmination of these factors, BMI anticipates 2009 being the last year of fixed-line subscriber growth in Russia, and we have forecast muted declines through to 2013 when penetration will have fallen to 30.7%, down from 31.2% at the end of 2008. Russia’s fixed-line sector is dominated by Svyazinvest, along with alternative operators such as Comstar-UTS’ MGTS and VimpelCom. Attention is increasingly being transferred towards developing broadband operations to tap the massive potential in Russia’s broadband market, as well as bolster the fixed-line businesses by bundling fixed-lines with broadband.

In June 2009 the Russian government approved a plan to restructure Svyazinvest by merging its regional telecoms subsidiaries into one operator, centred on long-distance and broadband operator Rostelecom. At the time of writing, full details of the plan had not been released, but the restructuring process is expected to take between one and a half and three years to complete. The government also revealed plans to offer an IPO of Svyazinvest shares on a Western stock exchange after the restructuring is complete. Once Svyazinvest has been restructured and a more coherent development strategy has been formalised, both the fixed-line and broadband sectors should be given a significant boost. Additionally, if the incumbent is then privatised, we should see an acceleration in both sectors’ development.

Mobile penetration in Russia reached 132.5% at the end of 2008, after slower growth than in 2007.

However, we have had to revise our mobile forecasts after exceptionally strong growth in the first half of 2009 of over 10mn net additions. Actual mobile penetration in Russia is believed to be closer to the 100% mark; the market holds a large number of inactive SIMs and there is a tendency for users to own multiple SIMs. The sector is also characterised by large discrepancies between rural and urban penetration rates, leaving growth opportunities as operators expand their networks into underserved areas. The country’s fourth-largest operator, Tele2 Russia, plans to expand into 12 new regions in 2009, which should result in a boost to competition as well as expanded network coverage.