. Last Updated: 07/27/2016

Phone Deal Collapse Casts Pall on Future

Thanks to Soviet distrust of telecommunications, Russia embarked upon the communications revolution more than a little late.

In the mid-1980s, making an international phone call was a considerable feat. Then direct dial -- and very expensive -- satellite links began to appear via special booths in hotels. Over the last three years, big strides have been made in international connections through the public network, and these days the line quality of a call abroad can sometimes be surprisingly good.

The line quality for a local call in many parts of Moscow, to say nothing of elsewhere, is a different matter. In 1996, Russia was planning to take a big step toward modernizing the network as a whole, via a two-stage sell-off of big stakes in the state telecoms holding company Svyazinvest.

The sell-off got a false start late last year when a deal for the Italian state-controlled telecommunications company STET fell through over differences in how to implement the transaction. The Russian Privatization Center said the investment tender would be held again in the new year.

The deal was to be followed by the sale of another 24 percent of the company sometime in 1996 to banks and portfolio investors. The minimum bid in both instances was $430 million, together with an investment commitment of about $730 million.

The collapse of the Svyazinvest transaction threw the prospects for the telecommunications industry back into a period of uncertainty, dampening earlier forecasts by analysts that the industry would attract the most investment in 1996. Instead, the situation seemed to resemble that in the oil industry, where multi-billion dollar pacts with foreign oil giants remain unimplemented because of legal and taxation uncertainties.

One longtime Western telecommunications executive in Moscow, speaking anonymously, said that it was still possible that both of the Svyazinvest investment tenders could take place this year. For the crucial first tender to succeed, however, he said that it would need to be restructured, and the points which apparently made STET balk -- notably what the tariffs would be for interconnection into the main long-distance network, and management control over investments -- would have to be addressed beforehand.

Interest in a relaunched tender may well be thin. There was originally only one rival bid to STET's, from a consortium of France Telecom, Deutsche Telekom, and U.S. West. The Moscow office of U.S. West said after negotiations with STET fell through that it continued to be interested. The French and German partners declined to comment.

The second stage of the tender, to portfolio investors, may also be difficult to sell. International investors are currently spoiled for choice in global telecommunications, and they will need some convincing that the Russians can create a workable industry structure.

Svyazinvest has already received a licence to compete with the current monopoly provider of domestic long-distance and international services, Rostelecom. But in 1996 Rostelecom is set to remain a favorite with Western investors. It is well-known internationally among Russian equities, among the top five in market capitalization and quite possibly the most-traded stock, and produces accounts to international standards.

It already has its network, and international traffic is rising fast. According to the International Telecommunications Union, outgoing international traffic has been growing at 33.5 percent a year over the last four years. Russia still has a very low level of international calls per capita, and growth can be expected for many years to come. Long-distance traffic growth within Russia is slower than international growth, but Creditanstalt Investment Bank thinks that it should accelerate markedly through the end of 1997, rising to as much as 9 percent annually from the 3.8 percent compound registered between 1993 and mid-1995.

Tariffs for calls abroad are now close to world levels, and the company is profitable. Creditanstalt expects revenues to rise at a compound rate of 27.8 percent to 1997.

The unwieldiness of the Svyazinvest structure may encourage investors serious about telecommunications in Russia to investigate taking stakes directly in regional operating companies, said one Moscow-based telecommunications sector analyst, who asked not to be named. Another analyst, Gregory Van Beek, of the brokerage Rinaco-Plus, expected that 1996 would see more trading of stocks of regional phone companies.

This year will also see a wrangle over whether Russia will follow the U.S. example of a competitive telecommunications environment, or the increasingly outdated continental European model of a highly controlled market.

In pitting Svyazinvest against Rostelecom, Russia appears, rather surprisingly, to be moving toward the American model of open competition. As in Russian politics, however, the real reason for the move may not be ideological approach, but simple rivalry.

In theory, it should be possible for the Communications Ministry to have a grand plan for the sector. In practice, it doesn't seem to work like that.

It is this lack of an agreed-upon plan, and numerous questions about who really calls the shots, which threatens to hold back the development of telecommunications. The growth of demand is virtually assured. The Communist victory in the parliamentary elections, and their calls for renationalization of some sectors, will but add to the uncertainty. However, one Western telecommunications executive in Moscow, who asked not to be named, said that he thought it unlikely that the Communists would try to stop foreign investment in the sector.

The new joint-venture telecom operators, such as Sovintel, Comstar and Combellga, which sprang into being when the Soviet Union first began to open up, now amount to a sizeable sector. They face a harder fight expanding now that international access has improved from the public network.

Nevertheless, Creditanstalt expects them to increase long-distance market share, taking perhaps 18 percent of international traffic by the end of 1997 against 5 percent in 1994.

Russia also trails the West in the industry of mobile telephones, partly because the Communications Ministry demands high fees to win licenses. The brokerage Rinaco-Plus estimated that by autumn 1995 there were some 60,000 mobile-phone subscribers. Growth in Russia in 1996 is expected to be rapid and to focus on licenses for more advanced systems, such as the European GSM digital-cellular standard.