Russian mobile telecom firms target CIS for growth
By Julie Tolkacheva

MOSCOW, Sept 8 (Reuters) – Russia’s top mobile phone firms, fearing
a domestic boom may slow, are looking to grow in other former Soviet
states to add new high-margin business, analysts said on Wednesday.

Analysts and firms believe 2005 will be the last year of strong market
growth in Russia when mobile operators can add 2 to 3 million new
subscribers a month.

Russia’s mobile penetration has almost doubled over the past 12
months to 38 percent, according to the AC&M market research group,
meaning growth rates must slow as the market matures.

Market leader Mobile TeleSystems (MTS) said recently that 30 percent
of Russians will never own mobile phones as they are too poor or live
in such remote areas that operators would lose money by serving them.

Last month Russia’s No.2 operator, Vimpelcom, bought a mobile firm
in neighbouring Kazakhstan and said it was in acquisition talks with
firms in all countries of the Commonwealth of Independent States (CIS).

In July, MTS bought an Uzbek mobile phone firm, adding to its existing
operations in Ukraine and Belarus.

“I will be very much surprised if in a year or two Russian companies
do not cover most of the CIS,” said Alfa Bank telecoms analyst Andrei
Bogdanov.

GOOD MARGINS

Russia is the biggest and wealthiest of the CIS states with a
population of 140 million. Kazakhstan is the CIS’s second wealthiest
state, where gross domestic product per capita is the same as in
Russia. But its population is just 15 million.

Neighbouring Uzbekistan has 26 million and economic reforms there have
been shaky. Ukraine’s economy is now on the rise but its population is
about 48 million while Belarus is one of the CIS’s poorest countries
with a population of 10 million.

But analysts said small economies and population would not discourage
mobile operators.

“In absolute terms these markets will never be comparable with Russia
because their size is smaller. They will never see such penetration
levels as developed states, or even Russia,” said an analyst with a
Western bank.

“But they require little investment, low advertising costs, small
dealers’ commissions, and subscriber acquisition costs are low.”

WIDE MARGINS

MTS reported that its EBITDA margin, a key figure showing a company’s
efficiency, was 57 percent both in Russia and Ukraine in the second
quarter of this
year.

The purchase by Vimpelcom, majority owned by Alfa Group, of KaR-Tel
in Kazakhstan was its first acquisition outside Russia.

“I would note Ukraine as Vimpelcom’s next potential acquisition
target. And there is Belarus,” said Olga Zhilinskaya, a Renaissance
Capital analyst.

Belarus is now holding a tender for a third mobile phone service
licence and a Belarus government official has said Alfa Group planned
to participate.

The Western bank analyst said mobile firms would primarily look at
states with low penetration: “Penetration shows growth potential,
which is the key criterion for such fast-growing companies as MTS
or Vimpelcom.”

According to data from UFG investment bank, CIS states with the lowest
penetration levels are in Turkmenistan, Kyrgyzstan and Tajikistan in
Central Asia and Armenia in the Causasus.

Analysts said that Russia’s third biggest mobile firm, MegaFon, was
unlikely to join the expansion rush as a row between its shareholders
deprived it of credit.

Bogdanov said foreign firms were unlikely to oppose Russian expansion
in the CIS as foreigners would be reluctant to match high acquisition
price levels established by Vimpelcom and MTS.

“For Russians it is natural exposure,” he said. “For international
firms CIS markets are not such a priority.”

09/08/04 02:54 ET