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. Last Updated: 07/27/2016

Telecoms Investment Cap Called 'Bad Idea'

The government risks choking off investment in the telecommunications industry if it goes ahead with a plan to curb foreign firms from buying stakes in domestic phone companies, investors and analysts say.

Russia wants to limit foreign investors to minority stakes of no more than 49 percent in telecommunications companies to protect a fragmented, underfunded industry from foreign competition when Moscow joins the World Trade Organization.

"This is a bad idea and it doesn't make any sense. Historically there has been no limit on direct foreign investment, which has not resulted in foreign telecoms taking over the industry," United Financial Group analyst Alexei Yakovitsky said. "The government has better things to defend."

A representative of one European operator heavily invested in Russia, Norway's Telenor warned the cap could cut off Russia's access to capital.

"There will be no strategic operator who wants to invest in Russia if this proposal comes through," Goran Olson, the Norwegian operator's Moscow representative, said at a telecoms conference in St. Petersburg last week.

Telenor has plowed $350 million into a controlling stake in Moscow-based alternative fixed-line carrier Comincom-Combellga and into minority stakes in three cellular operators, including No. 2 cellular operator Vimpelcom.

Other large foreign phone companies with Russian interests include Deutsche Telekom, Sweden's Tele2 and Telia and Finland's Sonera, whose main interests are in the lucrative mobile business.

"You already have a number of dedicated foreign players, mainly Scandinavian, who are very committed to the Russian market," Yakovitsky said. "It's essential for these Scandinavian players to be sure that at some point in future they will be in a position to consolidate those assets and get full control."

In their latest round of talks on WTO accession, which ended Friday, Russian officials and European Union trade negotiators found points of compromise, but disagreements remained over the plan to put up new telecoms barriers.

The EU accuses Russia of back-tracking on market liberalization, a criticism Telenor echoed.

Foreign investment helped fuel growth in mobile telecoms in recent years. Europeans hold strategic stakes in Vimpelcom and Mobile TeleSystems. Shares in the two companies are widely held by foreign portfolio investors.

"Russian telecoms rely on international capital markets as a source of funding," Vladislav Riabiouk, an official at the European Bank for Reconstruction and Development who manages Russian telecoms investments, said at the conference.

Industry specialists say that even without caps, Russian telecoms will be a tough sell now that foreign telecoms operators have to deal with massive debts and weak markets. The weakest Russian companies -- state-controlled local fixed-line firms -- will have the hardest time attracting investment.

"The 49 percent [limit] is bad, but to attract sizeable investment into an industry which has a lot of questions hanging over it -- that is a much bigger hurdle than limitations on capital," Renaissance Capital analyst Alex Kazbegi said.