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. Last Updated: 07/27/2016

Sistema Tipped as Winner in Svyaz Sale

Good connections and solid infrastructure will help newly listed AFK Sistema become the main winner in the forthcoming liberalization of long-distance phone services, analysts said.

IT and Communications Minister Leonid Reiman has said the government will start issuing long-distance licenses in March -- a key step in Moscow's push to join the World Trade Organization.

The government plans to privatize national telecom holding Svyazinvest, which controls Rostelekom, this year. Sistema, Alfa Group and Telekominvest have all said they plan to bid.

Analysts said Sistema unit Multiregional TransitTelecom, alternative fixed-line firm Golden Telecom and state-owned TransTelecom would be the likely winners.

They will compete to take market share from monopoly Rostelekom, which is set to lose up to a third of its business, analysts say.

But they will have to rent trunk wires from Rostelekom, which is likely to post 2004 revenue of about 36 billion rubles ($1.3 billion) on a market growing at about 10 percent per year.

"MTT will win without any doubt. Golden Telecom will gain to some extent too," a Western bank analyst said.

MTT operates 11 local switches in federal districts and plans to increase this to 44 in the next few years. This means it will not have to pay local telecoms for "the last mile" connecting Rostelekom's trunk network with the end-user.

Sistema owns 50 percent of MTT with the other half owned by a firm with ties to Telekominvest, which is believed to be close to officials in the IT and Communications Ministry.

Telekominvest owns about a third of Russia's No. 3 mobile phone firm MegaFon and is in a legal dispute over the ownership of a further 25 percent with Alfa Group. Alfa Group owns No. 2 mobile phone firm VimpelCom, a key rival to mobile market leader MTS, Sistema's prize asset.

Alfa also controls a third of Golden Telecom, which has only recently started building its own trunk line and would have to lease most lines from Rostelekom and local operators.

Sistema says it has no plans to consolidate MTT's figures into its balance sheet but Alfa Group and Sistema are likely to benefit indirectly as Golden Telecom and MTT would provide long-distance services to VimpelCom and MTS.

"Getting a license is only important for Alfa and Sistema because they will get hold of an asset which will service other telecom assets," said Aton analyst Yelena Bazhenova.

The third company likely to get a long-distance license is TransTelecom, a firm fully owned by the government via Russian Railways. It has Russia's second biggest trunk network after Rostelekom. It is only fit for data transmission but analysts say it will be cheap to turn it into a voice system.

However, the Western bank analyst said TransTelecom would not get a license as the government would not want one state-owned firm to push aside another government firm.

Line leasing will depress firms' margins, but profits will rise as traffic increases, analysts said.

"Maybe the long-distance business does not provide high margins, but revenues are there," Bazhenova said.

MDM bank analyst Sergei Reznik said the new service could double MTT's revenue of about $100 million within a year.

UFG analyst Alexei Yakovitsky said Golden Telecom's revenue could increase up to 20 percent in the long term.