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. Last Updated: 07/27/2016

Vimpelcom Eyes $530M Regional Investment

Trying to catch mobile subscribers outside its home town, Vimpelcom-R, the regional arm of the country's second-leading operator, plans to pour as much as $530 million through 2004 into building a regional network, a company official said Wednesday.

Beyond the lucrative capital, less than 2 percent of the population uses mobile phones, and cellular operators are increasingly chasing potential customers everywhere they can find them, from Belarus to the North Caucuses and across Siberia to the Far East.

"Traditionally the Russian regions are considered hopeless. You can do business in Moscow, a few romantics say in St. Petersburg. … Now we think the situation has changed," said Stanislav Shekshnya, general director of Alfa-Eco-Telecom, a Vimpelcom shareholder, at a news conference Wednesday.

Vimpelcom has 95,000 subscribers outside the Moscow region, just over 1 percent of its subscriber base, with licenses for four of Russia's seven macro-regions. No. 1 cellular operator Mobile Telesystems has 2 million subscribers, 228,000 outside Moscow.

The company expects a 30 percent to 35 percent market share in the regions, compared to around 40 percent in Moscow, said Alexei Mischenko, general director of Vimpelcom-Regions, the subsidiary responsible for development outside Moscow.

The $530 million investment includes $200 million in vendor financing and assumes the possibility that Vimpelcom and strategic partner Telenor of Norway will exercise their option to invest $117 million into Vimpelcom-R. In May, when Alfa Group paid $247 million for blocking stakes in Vimpelcom and Vimpelcom-R, Telenor and Vimpelcom got the option to jointly invest another $117 million into the regions.

Shekshnya said in about five years the value of Vimpelcom-R would reach that of its parent, and the two companies may merge.

Until Alfa came on board with cash, analysts had doubted the strength of Vimpelcom's regional prospects. It still lacks a license for St. Petersburg, though the Communications Ministry has said it will issue a third license when penetration reaches 10 percent, which Shekshnya said should happen by year's end. Before the end of 2002, commercial launches are planned for Saratov, Nizhny Novgorod, Novosibirsk and Rostov-on-Don.

With St. Petersburg holding Telecominvest and MTS both making moves across the country, Vimpelcom could not have waited much longer to roll out a network, some analysts said.

"The first mover will enjoy a significant competitive advantage," said Andrei Braginsky, an analyst at Renaissance Capital.

The potential of the regions is still up in the air, and companies are looking at slow and steady growth rather than a boom.

"We've always underestimated the amount of money that is available for something that people really want," said Tom Adshead of Troika Dialog.

MTS is considered to be the furthest along, starting earlier than the rest of the pack and with substantial capital behind it.

While only 2.4 percent of Telecominvest's subscribers fall outside the Northwest region, a spokesman said they are negotiating to cooperate with companies holding licenses in the regions where Telecominvest currently has no presence, Moscow and the Urals.

Another potential hot spot is the Northern Caucuses, where Vimpelcom and Telecominvest, through Mobicom-Kavkaz, both have GSM licenses. MTS majority shareholder Sistema has had its eye on another prize in the region — Kuban-GSM, the country's largest operator outside Moscow and St. Petersburg with more than 200,000 subscribers. But this week Telenor was reported to be in talks with Kuban-GSM. Shekshnya said those negotiations began before a contract was signed at the end of May tying Telenor's and Alfa Eco's future telecoms forays in Russia to Vimpelcom.

That contract also left Alfa Eco free to participate in an ongoing tender in Belarus, which is licensing a second GSM operator. Shekshnya would not comment on whether Vimpelcom would participate in that project should Alfa Eco win the tender, which is set to be announced in early September. Other tender participants are MTS majority shareholder Sistema, Telecominvest-controlled NorthWest GSM, a Saudi Arabian firm and one from Austria. Belarussian media have reported that a Russian company is likely to win.

Shekshnya said only 40,000 of 10 million people in Belarus are mobile subscribers, and they could expect a 10 percent penetration rate with two players.