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. Last Updated: 07/27/2016

State May Divide Telecom Company

The government may separate Rostelecom, the country's biggest long-distance telephone company, from holding company Svyazinvest to allow Svyazinvest to be privatized, Interfax reported, citing a source familiar with negotiations at the Economic Development and Trade Ministry.

The latest government push for restructuring is to enable it to maintain state control over Rostelecom when the Svyazinvest sale goes ahead. Rostelecom and Giprosvyaz, Svyazinvest's design arm, are of strategic importance to the government.

With its dominance over long-distance telephone services, Rostelecom is the principal national operator, providing services that sometimes involve security issues.

The long, drawn-out preparation for the privatization of Svyazinvest started in 1998.

Last year, President Vladimir Putin signed a decree giving the country's military preferential access to national telecom services, removing an obstacle that has held up the Svyazinvest sell-off for years.

If the latest initiative is approved, analysts say the government may have to buy back a 35 percent stake in Rostelecom from KIT Finance, a brokerage firm with close links to Gazfond, Gazprom's pension fund.

"KIT Finance has been buying Rostelecom stock at inflated prices over the past year with the hope that it could resell them to the state at an even higher price," said Yelena Bazhenova, a telecom analyst at MDM Bank.

KIT Finance is believed to have paid $1.5 billion to $2 billion for the stock.

Bazhenova described Rostelecom as a big, unwieldy state company with little potential for growth, adding that KIT Finance's speculative buying had pushed up the stock price.

Separating Rostelecom from Svyazinvest will help Vladimir Yevtushenkov's Sistema conglomerate, Bazhenova said, because it would open the door to the full privatization of Svyazinvest.

Andrei Bogdanov, an analyst at Troika Dialog, said that Rostelecom could not expect to attract private investors, given its outdated technology and rickety infrastructure.

"The 35 percent stake believed to be controlled by Gazprom front companies is likely to be sold to the state, since it is extremely overvalued," Bogdanov said. Bogdanov said Rostelecom, currently trading at $8, has a real market value of to $2 to $2.50.

Last month, Rostelecom posted a 2006 profit of 60 million rubles ($2.3 million) to Russian accounting standards.

Nobody was immediately available for comment at Rostelecom on Thursday.