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. Last Updated: 07/27/2016

Competing to Communicate

Second of two parts

Unlike other Western businesses in Russia, selling telecommunications services to foreign clients has been profitable. Firms like Sovintel, Combellga and Comstar, industry leaders in Moscow, all say they made money in their first year of operations.

But now, also unusual for business in Russia, competition is changing the market, ending the honeymoon for some foreign phone companies.

These companies, which provide satellite connections to the outside world, have been forced to lower their rates for international calls and expand their services. Ultimately they want to ingrain themselves permanently into the Russian network.

"As more competition has entered the market, we have lowered our rates", said Tony Kuczura, deputy general director of Sovintel, one of the first to provide long-distance service to Russia.

The consumer is the winner. Comstar, Combellga and Sovintel - which together have between 8, 000 and 10, 000 phone lines operating for their customers - have cut their rates by 10 to 35 percent in just the past month.

Instead of paying $4. 50 a minute for a call to the United States, customers of Sovintel's satellite system now will pay $3. 95. Comstar customers who wait until after 11 P. M. on weekdays or dial anytime on weekends will pay just $3 a minute, a 30 percent discount rate the company just recently introduced.

But some have begun to question whether lowering rates will be enough to ensure the survival of these firms.

The long-term threat to the foreign phone companies comes from the Russian network itself. Eventually, it will improve to such a point where it will compete with foreign overlay phone networks. The Russian phone system may wipe out the foreign companies if it can offer a comparable service at a lower price.

"I think they will go bankrupt", said Valery Kerichenko, deputy general director of Intertelekom, the Russian national telephone company. Kerichenko's comments are all the more important because Intertelekom is a partner with Sovintel. "By the end of the year, they will have very, very serious difficulties".

The Russian government could eventually be the source of these difficulties. Right now, the country has one of the world's most liberal long-distance businesses, especially compared with the tightly controlled markets in Western Europe. It remains to be seen if the government will allow these long-distance companies to operate after the Russian system is brought up to speed.

Executives of the foreign companies, which have all invested tens of millions of dollars to set up their networks, respond that tales of their demise are premature. They say foreign business won't switch to the Russian network until it can offer 100 percent reliability, and even then they feel they can compete shoulder-to-shoulder with a functioning national system.

Even as the Russian system improves, they say their business has continued to grow. Yuri Pazlenko, managing director of Comstar, said his company has grown to 3, 000 lines since it began last year and continues to grow by 300 to 400 per month.

But executives at these companies acknowledge that the days of easy profit are over and that the Russian network is an up-and-coming competitor. While they were setup to provide a temporary solution, now they are looking for long-term business.

"We have to evolve and mature if we are to stay here, to integrate and have a place in the overall Russian network", said Jean-Francois de Lantsheere, director of Combellga in Moscow.

And they acknowledge there is a coming shakeout in the industry here.

"I don't see how our competitors can survive because they are not into the infrastructure", said Bill Short, a board director of Comstar.

The important question is not whether the Russian system improves but over what period of time and at what rates. Some say the Russian network is one year away from rivaling the overlay networks, others say four years.

"All of us are justified in being here by the fact that they didn't provide proper phone service", said Kuczura of Sovintel. "We are betting there will be some time before that happens".

Preparing for that improvement, the companies are expanding and moving to ingrain themselves into the market, looking for slices of the local network that will make them irreplaceable.

Sovintel is working on expansion into Sochi and other cities.

Others, including Combellga, Comstar and the latest entrant to the market, AT&T in a joint venture called Telmos, are laying fiber-optic cable in Moscow on a bet that there will be a class of Moscow businesses and residents that can afford the service.

With connection fees of $1, 000 to $1, 300, their business has been limited mostly to hotels and Western firms.

The companies now use state-of-the-art technologies to bypass the old Soviet phone system, which still has equipment dating from pre-revolutionary days, and send calls to satellites 23, 000 miles above earth orbit.

The capacity of the new equipment, in some cases up to 400, 000 lines, far exceeds what could conceivably come from just the foreign community.

But foreign long-distance carriers looking to become an integral part of the Russian phone system have still not solved the major problem of pricing. Foreign carriers will have to charge world-market rates to the majority of their customers for their services.

"It's a social problem", said de Lantsheere of Combellga. "Most people are not used to paying for telephone service. Most people don't know what a telephone bill even looks like".

At the moment, this is not possible. Costs for residents in Moscow now, although they will be increased Aug. 1, are extremely low. The monthly rate is just 360 rubles per month (36 U. S. cents), up from 106 rubles. Businesses subsidize the rate, paying about 8, 000 rubles for their monthly service.

International calling is still cheap by world standards. A call to the United States costs about 600 rubles per minute (60 cents), compared with $3. 50 and up for foreign companies.

Comstar is also about to embark on a major expansion of its network. It has received a $75 million loan from the British government to build almost 500 kilometers of fiber-optic cable with a capacity of almost 175, 000 lines. The total cost of the project is 250 million pounds.

It has agreed with MGTS, the Moscow telephone company, one of its partners, to offer 80 percent of those lines to Moscow subscribers and use 20 percent for its own private clients.

The plan is for the 20 percent - which will likely be foreign customers and wealthy Russian firms - to pay international rates that will in turn subsidize the remaining 80 percent. That 80 percent, however, will not have access to the international network unless they pay.

"We're building the big motorways, that's conscious and deliberate", said Bill Short of Comstar. "It's unfortunate because of the enormous capital investment that service can't be provided to everyone for rubles. But the idea is not to provide a privileged private network for foreigners".

To do that, Short said, "We have to find some different rate structure".