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. Last Updated: 07/27/2016

Vimpelcom Aiming Low to Raise Cash Flow




As the first Russian company to list on the New York Stock Exchange, Moscow-based cellular provider Vimpelcom's fortunes have closely mirrored those of the Moscow stock exchange in the turbulent 1990s.


Oversubscribed when it first listed on the New York Stock Exchange in 1996, the firm's shares crashed in August of last year along with the Russian financial system, losing 93.75 percent of their value.


In a recent interview, Valery Goldin, the mobile telecommunications company's vice president and director of the board, acknowledged that his company has been hit hard by the 1998 financial crash after several years of high growth and profits.


Prices on Vimpelcom's American Depositary Receipts - tradeable certificates that allow foreign firms to list in the United States - plummeted from $64 per share to just $4 almost overnight, even as its customer base was being decimated by the aftereffects of the crisis.


Even though share prices have recovered somewhat - they closed at $20.16 Friday - the crash forced Vimpelcom to scramble for a new marketing strategy, not the least because it has drastically altered Moscow's cellphone market.


Now, almost exactly three years after listing in New York, Vimpelcom, which operates in Russia under the Beeline brand name, is attempting to turn itself - and the mobile phone - into a mass-market product.


"I think we would have eventually made the move to the mass-market approach, but the crisis forced us to do this sooner than we expected to," Goldin said.


Vimpelcom began offering its basic Bee-Plus package for $49, including handset, through consumer electronics retail outlets around Moscow last month.


Although demand has been exceptionally high by all accounts, it is still unclear whether the mass-market strategy will pay off.


Vimpelcom's main rival, Mobile Telephone Systems, has also cut prices significantly in reaction to the crisis, but has not made a concerted move for the extreme low end of the market.


"They are not going to do anything right away because they want to see if Vimpelcom's strategy works out," said a London-based telecoms analyst who declined to be named.


Svetlana Sobeleva, manager of an MTS dealership, said she did not expect to lose any business when asked last month to respond to Vimpelcom's marketing move.


"Our phones have different reception and roaming capabilities and our clientele is different as well, so we are not worried," she said.


MTS officials were not answering the phone, but according to the company's web site, its lowest priced telephone offer costs about $130 not including taxes.


"[Vimpelcom's] is a risky strategy and definitely not a short-term one. Vimpelcom will post a loss in 1999 and probably 2000 as well," the London analyst said.


He added that MTS is in a stronger position to respond with a low-priced phone offer of its own if it chooses because its GSM standard network is more developed than Vimpelcom's.


Vimpelcom is offering the Bee-Plus deal on its D-AMPS network, which is less popular than GSM in Russia.


The $49 that customers pay does not even cover the cost of supplying the handset, which means that Vimpelcom will have to rely on monthly call charges for the bulk of its earnings - a dicey prospect given Russians' low average incomes.


"It is too early to talk about traffic," Goldin said. "We will have to monitor it for several months before drawing any conclusions."


"We understand that the new price-sensitive customers we are gaining will talk much less," he added.


The strategy appears to be in part the product of Vimpelcom's recent alliance with Telenor, a Norwegian telecom that bought up a 25.7 percent voting stake in the Russian company earlier this year.


"Joe [Lunder's] role is very significant in managing the transition," Goldin said, speaking of Vimpelcom's new chief operating officer brought over from Telenor.


"He knows everything about mass marketing and how to handle this because he has a great deal of experience in Norway doing the same thing," Goldin said.


Alexander Kabanovsky, a telecommunications analyst with the Brunswick Warburg brokerage, said Vimpelcom's strategy is, in effect, a bet on the future of the Russian economy after the presidential elections, due to be held next June.


"If you believe that the Russian economy will experience an upturn after the presidential elections, then Beeline's strategy is very sensible," he said.


Beeline has doubled its subscriber numbers since the beginning of the year - up to 245,000 - and predicts it will have 330,000 by year's end, giving it a roughly 40 percent market share, Kabanovsky said.


"Those subscribers who today are only using their phones in an emergency or extreme situations will begin to view it as an essential tool once their incomes begin to rise," he said.


For its part, Vimpelcom has already told investors that it expects to finish the year with a loss, mainly due to its efforts to widen its subscriber base.


"Initially, it was a sort of a shock to have to reveal so much information publicly," Goldin said. "It was like being a fish in an aquarium."


Given that none of Goldin's competitors are required to maintain the same openness, they gain by having access to Vimpelcom's financials, he said.


"Our competitors know everything about our financial status. This allows them to draw conclusions about what we can and cannot do [in the marketplace]. Of course, we wouldn't mind having their financial reports reported in an international format."


However, despite this and the drubbing Vimpelcom shares took during last year's stampede to dump Russian stocks, Goldin said his company remains committed to the financial transparency required for listing on the New York exchange.


"We understood very quickly that being open brings benefits as well as challenges. We know we can't hide our weaknesses, which makes us work at solving our problems," he said.


Kabanovsky of Brunswick Warburg, said that Vimpelcom's openness strategy has worked for other reasons as well.


"Not only did they get capital to finance expansion projects with, but they also got some degree of protection to operate securely within the Russian political system," he said.


The Russian mobile telecommunications business is highly politicized, due to the difficulty in getting operating licenses.


"It's an insurance policy that certain decisions that are clearly biased will not be taken because [policy-makers] realize they are playing to a wider audience [of foreign shareholders]," Kabanovsky said.