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. Last Updated: 07/27/2016

Changes in the Cards for Overseas Phone Calls

VedomostiNew regulations governing telephone systems could threaten the booming phone card market in the next few years.
Tear up your calling cards and put your mobile on standby: Making direct international phone calls on your land line may again make financial sense once the shakeup of Russia's longdistance telephone market is complete.

Liberalization and rule changes from the IT and Communications Ministry may halve the cost of international calls from Moscow phones, push up mobile charges and eventually edge many card operators out of the market altogether.

Currently, the most straightforward way to call abroad is simply to pick up a regular Moscow land line phone and dial the number. But convenience does not come cheap: A call to the United States will set you back 19.50 rubles (70 cents) per minute during business hours.

Rates on MTS mobiles are considerably higher, but smart users will have a MegaFon O'Lait SIM card on hand, which offers a flat rate of 23 cents per minute for numbers in 150 countries, including the United States.

A calling card can cut your costs dramatically. MTU-Intel offers 4 cents per minute to the United States, a price made possible by routing traffic over the Internet. But what you save in price you lose in convenience -- most IP cards require you to punch in dozens of digits before each call, and quality varies.

The first change to hit the telephone market will be the revoking of Rostelecom's long-distance monopoly at the end of March, a move that should eventually slash call prices from regular phones.

Rival long-distance operators -- likely Golden Telecom, Transtelecom and MTT -- should be ready to compete with Rostelecom toward the end of 2005, roughly six months after they are expected to receive long-distance licenses, according to Aton analyst Yelena Bazhenova. Subscribers will then have a choice for calling abroad.

The first victim of this change is likely to be Rostelecom's artificially high international rates, which subsidize below-cost line rental rates. Bazhenova predicts a halving of prices within the next few years.

Even more dramatic savings could follow if Moscow fixed-line monopoly MGTS were to buy a long-distance license and offer IP telephony from regular phone lines. The company offered such a service last fall, but it withdrew the service in February, citing new licensing regulations requiring providers of IP telephony to have a long-distance license rather than a data license.

Although MGTS could likely afford the estimated $50 million required to fulfill the requirements for a long-distance license, conflicts of interest make such a bold move unlikely. For example, 28 percent of MGTS is owned by Svyazinvest, which also owns 51 percent of Rostelecom, the likely loser in such a move.

"MGTS has the money for a license, but it is a question of principle," Bazhenova said. "They would need permission, and it is a big question as to whether they would get permission."

When the new IP rules were announced in February, it looked like the calling card market could be obliterated. An editorial in Vedomosti on Feb. 7 warned that the rules could lead to the bankruptcy of as much as 80 percent of IP telephony operators, as the requirement to either buy a license or sign deals with long-distance license holders would destroy their business models.

The threat of a collapse now seems to have been postponed. Data licenses will be sufficient until they run out, which means the end of 2007 for many firms. But card rates are likely to rise, posing a threat to smaller operators.

"Prices will go up gradually as operators gradually move to the new system, where they will have to route their international traffic via licensed operators under the new rules of connection," said ACM-Consulting's Yelena Sayapina. "But much of the increases will just cut into companies' margins."

"IP telephony will lose its competitive advantage because companies will have to pay operators who have long-distance licenses," IKS-Consulting's Tatyana Tolmacheva said. "Their prices will depend greatly on what they are charged for their traffic and how they are able to agree with these operators. IP providers who won't change their business will simply leave the stage."

Long-distance competition may eventually push down international rates for mobile users, but the planned introduction of fixed rates -- possibly before the end of 2005 -- is set to increase costs.

"If interconnect rules [for mobile operators to connect calls between different networks] are changed, it will have an effect on all prices, and international and intercity rates represent the one area where they can increase prices," Bazhenova said.

However the markets look in 2005 or 2006, the cheapest way to call abroad is likely to remain bypassing the country's phone system by plugging your phone into the Internet. Skype, which has 165,000 users in Russia, offers calls for 2 cents per minute to most of the West using a headset or handset connected to your PC. And its prices are blissfully indifferent to changing regulations.