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. Last Updated: 07/27/2016

Is Sonic Duo Frequency Battle Over or On Hold?

Communications Minister Leonid Reiman has annulled last months controversial move to commandeer frequencies from mobile phone operators Vimpelcom and Mobile TeleSystems to make room for a third newcomer, Sonic Duo.

But the scandal that was on everyones lips in the telecommunications industry, and which angered Wall Street investors and the government of Norway, is not yet over.

Sonic Duo, a company Reimans ministry has already shown favorable treatment, still needs frequencies in the 900 megahertz range if it wants to start offering phone service next year and it is likely that someone will again soon be asked to share. That someone may well be Vimpelcom, which throughout has received the Communications Ministrys coldest treatment.

Anatomy of a Scandal

The story of the frequency grab begins in the fall, when President Vladimir Putin put the two top executives from PTS, or St. Petersburg Telephone deputy director Reiman and director Valery Yashin in charge of the Communications Ministry and the Svyazinvest telecoms holding company, respectively.

Spring came and brought an April 17 letter to Reiman from Anatoly Kvashnin, chief of the General Staff and a general often mentioned as a future defense minister. The letter stated that Vimpelcom was using more 900 MHz frequency channels than initially envisaged by its license. (The Russian air force also uses 900 MHz frequencies.)

There was no public response. But about a month later and within hours of his May 19 confirmation as communications minister Reiman approved a coveted mobile phone license for a brand-new player on the Moscow market, Sonic Duo.

Sonic Duo was 65 percent owned by Svyazinvest-subsidiary Tsentralny Telegraf, with the lions share of the rest belonging to Finnish telecoms giant Sonera. The company received its license without an auction in an exchange that amounted to one former PTS executive handing a license worth millions of dollars to another.

Analysts immediately pointed out that no frequencies in the 900 MHz range remained for building Sonic Duos network. There were rumors that mighty Sonera had struck a deal with the military, but by mid-summer it was clear that no space had been found.

In August, Vimpelcom and MTS officials met with officials at Glavsvyaznadzor, the Communications Ministry arm that deals with frequencies. The mobile phone operators were told to make room for Sonic Duo. They refused.

BeeLine Destroyed?

On Sept. 5 a laconic letter was sent to both companies signed by the deputy head of the Glavsvyaznadzor, Vladimir Alexandrov. Referring to Kvashnins April appeal, the letter ordered the operators to surrender, by years end, some 52 frequencies that had been allocated to them by Glavsvyaznadzor.

The ministry at first argued that the air force needed the frequencies. But two days earlier, on Sept. 3, General Kvashnin had already distanced himself from the matter. In another letter to Reiman, Kvashnin wrote that the distribution of frequencies to civilian operators was up to the Communications Ministry. He also wrote that his April 17 letter had not been meant as a request that the allocations be annulled.

So the buck stopped with the Communications Ministry, which soon admitted it was acting for Sonic Duo.

Vimpelcoms chief, Dmitry Zimin, responded to the Sept. 5 letter by stating that it would mean the annihilation of the BeeLine GSM network. Vimpelcoms Wall Street-traded stock fell steeply, and within a day after the letter was released the company was worth some $400 million less.

MTS, however, was in less trouble: It was using the disputed frequencies only to develop a system allowing mobile phone use on the metro. MTS briefly complained, then sat back to watch its major competitor, Vimpelcom, sweat.

Vimpelcom did not just sweat; it shrieked. Soon market analysts and the media were speaking of "expropriation." Reiman returned from a vacation in mid-September to announce the letter was null and had been dispatched without his authority although Reiman had been in Moscow on Sept. 15.

MTS was notified in writing of this new ministry position Sept. 14. Vimpelcom was notified Sept. 16. At this point Boris Nemtsov, head of the Union of Right Forces Duma faction, joined the fray in defense of Vimpelcom. He appealed to President Putin to "personally sort out this disgraceful situation." The Norwegian ambassador also got involved Norways Telenor is a major Vimpelcom shareholder. The ambassador asked Russian officials, "Have you forgotten that Telenor is a major investor here?"

Even Anti-Monopoly Minister Ilya Yuzhanov, another St. Petersburger brought to Moscow by Putin, spoke out, saying the Communications Ministry had exceeded its authority.

On Sept. 18, Prime Minister Mikhail Kasyanov stepped in, promising a rapid final decision. Later he set a deadline for a decision of Oct. 6.

Vimpelcoms enemies began to mobilize. They returned to the events of 1998, when Vimpelcom received an addition to its operating license that permitted work to begin on its GSM-900 network. On Sept. 20, a group of Duma deputies wrote to the Cabinet that Vimpelcom had received that 1998 license on the basis of a one-person decision by Nemtsov, then a deputy prime minister, "contrary to the legally established procedure."

Sonics Winning Hand

Throughout, the general director of Sonic Duo, Alexander Esikov, has held a winning hand. His company has had nothing to do with the exchange. It simply obtained a license and is now waiting for the promised frequencies to be allocated. But time is passing, and according to a company plan released this summer the network is due to be up and running in a few months.

"At present we have no further plans regarding the launching of our network. There is no need to notify the market at present," Esikov said Tuesday.

But negotiations continue between Vimpelcom, MTS and the Communications Ministry, and Vimpelcoms Zimin suggests the ministry is continuing to take a hard line toward his company.

Reiman finally wrote Kasyanov a letter on Monday standing down. But not only was Vimpelcom unaware of Reimans letter to Kasyanov, but Zimin said Glavsvyaznadzor was demonstratively delaying the go-ahead for a cellular network in Tver that has already been built.