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. Last Updated: 07/27/2016

First We Take Manhattan

Dmitry Zimin's VimpelCom has gone from roots deep within the Soviet

military-industrial complex to become the first Russian company to complete a full listing on the New York Stock Exchange. Now Moscow's largest

cellular provider is planning to launch a more accessible, lower-cost network. Simon Baker reports.At the beginning of this decade, Dmitry Zimin's military-industrial enterprise was figuring out how to shoot down U.S. missiles.

A scant six years later, VimpelCom has left the secrecy of the Soviet defense machine far behind.

Now, VimpelCom is the most successful operator in Moscow's mobile-phone arena. Over half of the city's 100,000 cellular users, an uncommonly high-paying bunch, have signed up for the company's Beeline-brand service.

Late last year, VimpelCom became the first Russian company to have a full listing on the New York Stock Exchange. While other Russian companies hide in the shadows of shoddy accounting and organized crime, VimpelCom opened its books to meet Wall Street's toughest listing requirements.

This policy of glasnost raised a tidy $66 million, and the stock price has kept rising. Issued at $20.50 per share on Nov. 15, the shares were trading last week in the $36 range, slightly off its $38 high.

For Zimin, 63, who serves as VimpelCom's president and chief executive and controls a majority stake in the company, success was a matter of outpacing Russia's changing market and building a company from the ground up. VimpelCom started its Beeline cellular phone service with a single, borrowed transmitter atop the Foreign Ministry tower on Smolenskaya Ploshchad.

"It was ridiculous even to call it a network, with only one switch and one connection," Zimin told The Moscow Times last week. "We invested everything that we earned; our salaries were very low. Today that would be absolutely impossible. You need tens of millions of dollars just to enter the market now."

But the New York listing is just one sign that Zimin is ready for the big time. Cellular industry consultants MTA/ EMCI, in research carried out for VimpelCom, estimated the number of cellular users would increase from the current 100,000 to about 350,000 by the year 2000, and then to about 550,000 by 2005.

Zimin thinks growth will be a bit faster. "I think that the number will increase by four times over the next three years," he said.

To capture the lion's share of new customers, VimpelCom is planning to launch a new mobile phone network by the end of June that should consolidate its position as Moscow's top mobile provider and offer services that will appeal to a wider base of users.

How VimpelCom captured this commanding position in Russia's plum mobile market is a tale of defense industry know-how, startup entrepreneurs, good contacts and, perhaps most importantly, good instincts.

The parent organization of VimpelCom, Vimpel, was a major contractor for the Soviet "Star Wars" program and controlled 20 research institutes, writes Richard Poe in his 1993 book, "How to Profit from the Coming Russian Boom."

Vimpel developed the phased-array antiballistic missile radars -- housed in huge, high buildings that looked like airship hangars -- that figured in Soviet-U.S. arms reduction talks. At that time, Zimin was head of a communications department at one of the member radio technical institutes.

Vimpel then got an introduction to Plexsys, a small Illinois-based company that had developed low-cost cellular infrastructure for use in developing markets. Plexsys was itself something of a phenomenon -- its president, Augie Fabela II, was a business greenhorn when he signed a deal with Vimpel in October 1991. Fabela, now 30, said he agreed to cooperate with Vimpel based on his personal assessment of Zimin. "He was so committed and fanatical. He was entrepreneurial," he recalled.

"It was the partnership with Zimin" that sold him on a cooperation deal, Fabela said, "rather than just a company."

Then there were early hurdles. The Communications Ministry told VimpelCom there was no frequency available for the cellular technology it had chosen to use, the American AMPS standard. The company also lacked major participation from the city of Moscow telephone network, which controls numbers and access to city telephones.

What it did have, however, was influence with the military-industrial complex -- and the military just happened to control a lot of frequency spectrum. Fabela noted the people at Vimpel "knew all about the frequency range we needed."

With frequencies and city cooperation finally in hand, the Beeline service was launched in 1993 with the single transmitter atop the Foreign Ministry's headquarters. That early equipment was lent by Plexsys and given supplier credit from Swedish telecoms giant Ericsson.While VimpelCom's Beeline network was finding its feet three or four years ago, Moscow Cellular Communications was the only other game in town. But Moscow Cellular was having problems, with its entire network completely blocked at times.

The reason, Moscow Cellular admits, was that huge fraudulent use of the system -- as much as 50 percent, by one account -- was swamping the capacity available. Calls were being monitored by pirates and the user-identification numbers "stolen." These numbers were programmed into other phones, whose calls were then billed to the legitimate subscriber. The problem was subsequently solved with the use of new encoding systems, says Moscow Cellular.

With its only competitor occupied fighting pirates, demand for Beeline's services was huge. A former Beeline executive recounts that the service's single base station had a capacity for only 200 subscribers. There was a waiting list, and bribes were offered to jump the waiting line. All this when the total cost of signing up was some $4,500.

So it comes as no surprise that VimpelCom was profitable straightaway. It made a net income of $9.5 million in 1994, $27.6 million in 1995 and $18.8 million in the first six months of 1996, the company reported in documentation accompanying its New York depositary share flotation. The company's 1995 turnover already rivaled that of the entire St. Petersburg regular telephone network, which serves a city of 5 million .

Such immediate success made VimpelCom an early candidate for a stock market flotation.

The New York Stock Exchange offering was a pioneering move for a Russian company, as it was the first Level Three depositary share -- meaning the company must provide three years of U.S. standard audits and an unbiased prospectus -- on the U.S. market. The only other Russian company to have had such a listing, according to VimpelCom, was the Trans-Siberian railway in 1903.

"We understood what was behind [NYSE's] requirements for openness, and we changed ourselves," Zimin recalled. "From people who were amateurs setting up all kinds of networks, now we're having to get used to the very strict laws and regulations of a public company."

The flotation valued VimpelCom at $527 million, according to figures provided by Renaissance Capital, which assisted in the flotation. The 21 percent of shares sold raised $66 million after costs.

According to the flotation documents, VimpelCom will use the proceeds of the flotation to pay off debt incurred to start up its new Moscow mobile system, purchase line capacity and network equipment, and provide working capital.

VimpelCom's $527 million overall valuation is a lot of money no matter how you slice it. It adds up to around one-quarter of the market capitalization of long-distance operator Rostelecom. It equals about 10 percent of the combined value of the rest of Russia's telecommunications network, judging by the $1.2 billion tag placed on the 25 percent stake in Svyazinvest soon to be sold. And it represents some $10,000 per subscriber.

VimpelCom's flotation price was high, both for a cellular company and for a company hailing from Russia. Valuations per subscriber in emerging markets are typically around $3,000, said Yury Krapivin, a telecommunications analyst at Renaissance Capital.

But investors appear to be buying into VimpelCom's potential as much as its performance now. Krapivin pointed out that by measure of the population of the coverage zone, the price was much more reasonable at $34 per person, compared with an average $50 in emerging markets and $100 in Western Europe.

Renaissance Capital's managing director and co-head of investment banking Alan Apter said the high valuation of VimpelCom had much to do with its unique position. "There were three main reasons why the flotation was so well received," he said. "There is a strong growth potential in general in cellular in Russia. ... There was a stellar reaction to VimpelCom's management, which has proven how to make cellular work in Moscow, including mastering Western marketing practices. And there was the transparency and liquidity of the New York Stock Exchange listing."

The asking price for VimpelCom would have been even higher if it had not been for "Russia risk," said Valery Goldin, the company's vice president for international affairs. In the end, he noted, the issue was oversubscribed.

Today, Fabela's FGI Wireless, part of Fabela Group International, owns 14 percent of VimpelCom. Fabela, who is also the chairman of VimpelCom's board, said he did not actually begin investing in the company until 1994.

Zimin acknowledges that over 50 percent of the shares of VimpelCom are held by companies that he controls, giving him overall control; with the company valued at over half a billion dollars, that would make him a very rich man.

Former acting prime minister Yegor Gaidar also sits on the VimpelCom board; the company says his presence has been very influential to its success.

VimpelCom's next step, Zimin said, is to offer a cellular technology that is new to the Moscow market and suited to mass use in densely populated areas.

This new technology, called DCS, is expensive to install but has a high subscriber capacity. This means it makes commercial sense to fill the network quickly and could have the effect of ratcheting down startup prices for Moscow's newest wave of cellular users.

"The new service will be slightly cheaper, more democratic," said Zimin.

This does not mean VimpelCom's DCS will be cheap, just cheaper. Signing up to Beeline or either of its Moscow rivals is still a costly proposition that will set you back around $1,000. Prices have dropped a lot over the last year, when they were among costliest in the world.

Until now, Beeline and the city's two other cellular providers, Moscow Cellular and Mobile TeleSystems, have comfortably divided up a small market of clients wealthy enough to use high-priced services.

Colin Ward, the deputy managing director for commercial business at Moscow Cellular, attributes high prices to a lack of network capacity. Frequency constraints, plus the time and money necessary to build transmitters to cover the whole urban area, have meant that operators have been in no particular hurry to tap the demand that would come with lower prices. Moscow Cellular, which uses what is now becoming an obsolescent technology called NMT-450, has always had a full network.

But VimpelCom's new move to DCS should end all the capacity constraints. And VimpelCom hoped that -- based on a precedent established by the Communications Ministry -- they could use this technology to give the company a final leg up in the business.

Russia's Communications Ministry has a policy of granting only one operator the license to use any given cellular technology -- AMPS, DCS, NMT-450 or GSM -- within each license area.

VimpelCom has obtained the license to operate a DCS network in Moscow. But it may have another competitor, backed by the city of Moscow itself.

The Communications Ministry is apparently breaking with its policy and granting a second DCS licence in Moscow to a company called Rosiko, which is linked to Systema, an investment vehicle of the city of Moscow. Rosiko also gained a DCS license for St. Petersburg.

The plans of Rosiko are not yet completely clear. Its commercial director, Sergei Grigorenko, says that it is not yet studying in detail the launch of a mass-market DCS service.

Rosiko's licence is not yet cast in stone because available frequencies have not yet been allotted -- a situation both VimpelCom and the Communications Ministry were quick to note in December. But the cellular industry in Moscow sees behind Rosiko the powerful influence of Mayor Yury Luzhkov and thinks Rosiko is unlikely to be denied.

Of the existing market, at present only Mobile TeleSystems, or MTS, the city's GSM operator, is in a position to compete head-to-head with VimpelCom. GSM technology, of which DCS is a derivative, is an up-to-date standard extensively used around Europe.

To date MTS, which has Deutsche Telekom and Siemens as foreign partners, has not matched VimpelCom's high-profile marketing -- nor its catchy brand name, for that matter, based on the Russian wordplay for cellular -- sotovoi, or honeycomb -- hence Beeline. MTS is way behind Beeline, with only a third or so as many users.

Moscow Cellular has had capacity constraints linked to its NMT-450 standard, but Ward said a new "interleaving" technology will eventually increase capacity to 80,000 users.

Yet competition is stiffening between Moscow's three providers, at least judging by increasing advertising budgets.

Lyudmila Novitskaya, MTS' marketing director, said her advertising budget would triple this year. She declined to put a figure on expenditure, but one cellular industry executive in Moscow said that he expected that the total advertising outlay on cellular in Moscow might easily rise to $25 million this year from $15 million in 1996.

Zimin, too, has stayed abreast of new developments by focusing more on marketing, an effort that shows in Beeline's billboard blitz throughout Moscow.

"Western firms typically spend from 3 to 4 percent up to 15 percent on advertising," he said. "I often repeat the words I heard from a Western manager: ... 'Half of the money we spend on advertising goes down the drain. I just don't know which half.'"

Although they are behind Beeline in subscriber terms, MTS and Moscow Cellular are neither down nor out. They are less forthcoming than VimpelCom on financial details, but the picture for them still appears positive.

Said Ward of Moscow Cellular: "We are making a number of millions of dollars profit a year. That's nice, and we are developing our future potential."

Beeline's entry into a more mass market -- as well as the possible entry of the city-backed Rosiko -- could finally help place downward pressure on pricing. Air-time fees may remain high, but startup and phone purchase costs may begin to come down.

For consumers, though, a real low-cost cellular boom may still be a ways off. "I don't think 1997 will be the year," said Apter of Renaissance Capital.

--Erin Arvedlund contributed to this