Though both government structures and corporate heads are trying hard to boost the investment attraction of the telecom sector, the situation remains critical and the shortage of capital is aggravating.

Stock market

Last year's situation in the market for telecom shares graphically demonstrated that the period of "investing in the sector" had ended, leaving in its place a period of "investing in the company," i.e., when investors carefully select a specific company to put their money into.

Money is coming into specific telecom projects mainly in the cases of mergers or takeovers, and no substantial primary share placements are taking place on the Russian exchanges today, just like in 1997. To raise the cash needed for development, Russia's telecoms prefer to enter the Western capital market, particularly through placing ADRs, but only a few companies can afford to do that. Those who cannot enter the Western capital market prefer to raise cash by placing bonds on the domestic market. Thus, Moscow City Telephone Network (MGTS) has placed ruble bonds of a total of 600 million rubles and is currently placing a second bond issue totaling 1 billion rubles. Another wire-line operator, CenterTelecom, has placed ruble bonds totaling 600 million rubles. Meanwhile, regional telecoms are preparing to follow suit.

"The increased activity on the part of investors and speculators and their new tactics give reason to conclude that Russia's investment climate and the situation on the Russian stock market have drastically changed for the better," said William Kimm, Ernst & Young's executive director. Later, Kimm named the following positive trends on the Russian stock market: spread narrowing, increased acquisitions of foreign corporate shares by Russian companies, increased investment activity on the part of the owners of large Russian companies and the replacement of speculators by serious long-term investors.

Svyazinvest and other wire-line telecom operators

For a long time, the 25 percent stake in Svyazinvest was viewed as a tidbit by a number of internationally famous companies that competed with each other in efforts to get a bigger slice of the Russian telecom pie. But as the years passed, the value of the stake (which was acquired by the offshore Cyprus-based company Mustcom) fell 82 percent, from $1.9 billion to $342 million. A similarly sad fate befell many regional telecoms in Russia. For example, the market values of the stakes in Artelecom and Republic Karelia Elektrosvyaz, which were acquired by AIG Brunswick for $27.1 million and $14.5 million, respectively, plummeted down to $5.2 million and $3.5 million. Similar or nearly similar depreciation has been suffered by the shares of Svyazinvest's other regional outlets that were acquired by foreign investors.

Now, Svyazinvest is determined to make a dramatic increase in capital investments. Over the next four years, the holding plans to invest more than 110 billion rubles in its facilities, and more than 55 percent of it will go into local communication networks. Major attention is being given to consolidating Svyazinvest's regional outlets by merging them together into bigger companies, which is expected to boost their investment attractiveness. The fact is that most investors will not put their money in a telecom with a capacity of under 400,000 access lines. When commenting on these plans, analysts from various investment companies said the planned mergers are likely to boost market capitalization. According to the analysts, the market value of Povolzhie Telecom will increase by at least 20-25 percent, i.e., from the current $270 million to $330 million to $340 million.

Meanwhile, the alternative (not belonging to Svyazinvest) wire-line operators of Moscow and St. Petersburg have rushed to expand into the regions, as they have exhausted all possibilities of growth in their existing markets. They are seeking to establish their presence in the regions before Svyazinvest completes its reorganization plans. After all, if Svyazinvest succeeds, competition in the regional markets will be much tougher.

The situation that has formed on the regional wire-line telecom market particularly benefits the domestic financial-industrial groups. Having made money on the raw-materials markets, mostly the oil market, they tend to view telecoms as the most attractive object for investing. Confirming the growing interest of Russian financial-industrial groups in wire-line communications is the recent acquisition by the Menatep Group of all telecom assets of Andrew Corp. (United States) for a total of $110 million.

Cellular communications

If it is not quite clear at the moment whether the wire-line operators will see a boom of investments or not, there is practically no doubt about the mobile-telecom sector. It is obvious that mobile telecoms, as well as integrated-service providers and broad-band networks, represent a sector into which investors are willing and eager to put their money without any second thoughts. The main factors determining the sector's high investment attraction are its high tempo of growth, absence of tariff regulation and the high quality of corporate management.

Back in the mid-1990s, investors made their choices guided by such criteria as a company's size, number of clients and number of access lines, but now they are more interested in a company's financial standing, profitability, quality of management, respect for shareholder rights and development dynamics. In 1999, Telenor acquired a 25 percent stake in VimpelCom for $162 million and invested another $52 million later in order to keep its right to a veto at shareholder meetings. Later, in 2000-01, Telia bought a 25 percent stake in Telecominvest for $102 million.

In the next three years, the three biggest mobile telecoms – Mobile TeleSystems (MTS), VimpelCom and Megafon – plan to put a combined total of $1.8 billion into the development of the regional networks, increasing capacities and improving coverage.

An important event on the mobile telecom segment was the acquisition of a large VimpelCom stake by Alfa Group for $130 million in 2001. Again, this proves the existence of a strong interest on the part of Russia's financial-industrial groups in the mobile-telecom sector.

Not long ago, battles for control over Russian mobile telecoms involved mostly foreign investors (Scandinavian for Vimpelcom and Telecominvest, and German for MTS), and now Russian financial groups have entered the arena. It is worth noting that Russian financial groups have an advantage because they are better adapted to the local market's conditions and have ways to influence the situation in the regions.