Development of Russian mobile communications

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Publication 9

Natalia Dobrovolskaya, Antonio Salueña

DEVELOPMENT OF RUSSIAN MOBILE COMMUNICATIONS

Lappeenranta University of Technology Northern Dimension Research Centre

P.O.Box 20, FIN-53851 Lappeenranta, Finland Telephone: +358-5-621 11

Telefax: +358-5-621 2644 URL: www.lut.fi/nordi

ISBN 951-764-937-1 (paperback) ISBN 951-764-938-X (PDF)

ISSN 1459-6679 Lappeenranta 2004

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Development of Russian Mobile Communications

Natalia Dobrovolskaya, Antonio Salueña

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List of Abbreviations

3G Third-generation AC&M Advanced Communication & Media AMPS Advanced Mobile Phone Service

AP Access Point

ARPU Average Monthly Revenue per Unit CDMA Code Division Multiple Access

CGW Combined GateWay

CIS Commonwealth of Independent States

DAMPS Digital AMPS

EBITDA Earnings Before Income Tax, Deprecation and Amortization ECU European Currency Unit

EDGE Enhanced Data Rates for Global Evolution

EGSM Extended GSM

EMC Electromagnetic Compatibility

EMS Extended Messages Service

ER Exchange Rate

ERDI Exchange Rate Deviation Index

FD Federal District

GDP Gross Domestic Product

GMTX Gateway Mobile Transit Exchange GOST R Gosudarstvennyj (State) Standard Russia GPRS General Packet Radio Service

GRX GPRS Roaming Exchange

GSM Global System for Mobile Communications HSCSD High Speed Circuit Switched Data

IMT International Mobile Telecommunications IMT-MC International Mobile Telecommunications – Multi Carrier

IPO Initial Public Offering

IS-95 Interim Standard – 95

ISC International Switching Center

ITN Interconnected Telecommunications Network LBS Location Based Services

LDTE Long-Distance Telephone Exchange MCC Moscow Cellular Communications

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MGTS Moskovskaya Gorodskaya Telefonnaya Set’

MLA Moscow License Area

MMS Multimedia Messaging Service

MOU Monthly Average Minutes of Use per User MSS Mobile Satellite Service

MTS Mobile TeleSystems

MTT Multiregional Transit-Telecom

MVNO Mobile Virtual Network Operator

NAMPS Narrow Band AMPS

NMT Nordic Mobile Telephone NYSE New York Stock Exchange

OIBDA Operating Income Before Depreciation and Amortization PDN Public Data Network

PPP Purchasing Power Parity

PSTN Public Switched Telephone Network RCB Russian Central Bank

RTDC Russian Telecommunications Development Corporation RUB Rouble

SAC Subscriber Acquisition Cost SMS Short Messages Service SPLA St. Petersburg License Area SS7 Signaling System 7

STK SIM Tool Kit

TDMA Time Division Multiple Access

TE Transitional Economy

UAE Unit Automatic Exchange UIC International Union of Railways UMC Ukrainian Mobile Communications

UMTS Universal Mobile Telecommunications System

US United States

USSR Union of Soviet Socialist Republics VAS Value Added Services

WLL Wireless Local Loop

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List of Figures

Figure 1. Trends of Subscriber Base and Penetration Level, 1995-2003 ... 13

Figure 2. Russian Federation: Division into Macroregions... 16

Figure 3. Subscriber Base by Mobile Standards, 2003... 21

Figure 4. GSM Licenses Distribution... 23

Figure 5. GSM Networks Distribution ... 23

Figure 6. NMT-450 Subscriber Base and Market Share, 1998-2003 ... 25

Figure 7. Market Shares of AMPS Variants, 2003 (%)... 27

Figure 8. Development Trends of Mobile Systems in Russia ... 31

Figure 9. Base Architecture of MTT Transport Network... 34

Figure 10. Modernized Regional Architecture of MTT Transport Network... 35

Figure 11. Architecture of MTT GRX... 37

Figure 12. Mobile Revenues in Eastern Europe, Turkey and CIS in 2002... 40

Figure 13. Operators’ Market Shares, end of 2003 ... 41

Figure 14. Trends of MTS’s Customer Base Structure (Moscow vs. Regions), 2001-2003 ... 45

Figure 15. MTS’s Capital Expenditures, 2000-2003 (US$ million) ... 46

Figure 16. VimpelCom’s Customer Base Structure (Moscow vs. Regions), 2000-2003... 49

Figure 17. VimpelCom’s Customer Base Structure (Prepaid vs. Postpaid), 2000-2003... 50

Figure 18. VimpelCom’s Capital Investments, 2001-2004 (US$ million)... 52

Figure 19. MegaFon’s Investments to Network Infrastructure Development, 2001-2004 (US$ million) ... 54

Figure 20. Main Indicators of Russian Mobile Leaders (growth rates, %) ... 55

Figure 21. Average Revenue per Unit, 1998-2003 (US$)... 57

Figure 22. Regional Penetration Rate, 2000-2003 ... 58

Figure 23. Subscriber Base by Macroregions, 2000-2003 (%) ... 59

Figure 24. GSM Market Shares of Holding Companies, 2003... 62

Figure 25. Current Strategic Partnerships... 63

Figure 26. Operators’ Market Share, 2001-2003... 63

Figure 27. Spectrum Allocation in the 900 MHz Band... 72

Figure 28. Spectrum Allocation in the 2 GHz Band... 73

Figure 29. Frequencies Allocated for 3G Pilot Zones in Moscow and St. Petersburg ... 74

Figure 30. Spectrum Allocation in the 450 MHz Band... 74

Figure 31. Licensing Procedure... 76

Figure 32. Certification of Wireless Equipment... 79

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List of Tables

Table 1. Main Economic Indicators (real growth, p.a. %) ... 10

Table 2. Average Monthly Gross Wage (euro-based), 1997-2003... 11

Table 3. Trends of Mobile Subscribers, 1995-2003 (thousand) ... 13

Table 4. Mobile Penetration, 2000-2003 (%) ... 14

Table 5. Investments to Telecommunication Sector, 2002... 14

Table 6. Rating of Macroregions, 2003... 15

Table 7. Rating of Federal Districts, three quarters of 2003 ... 18

Table 8. Key Financial Figures of MTS’s Activity in Russia and Ukraine, 2001-2003 ... 42

Table 9. Financial Indicators of MTS vs. Largest Russian Companies, 2003... 43

Table 10. Financial Indicators of MTS vs. Largest European Operators, 2003 ... 43

Table 11. Key Operational Indicators of MTS’s Activity in Russia, 2001-2003 ... 44

Table 12. Key Financial Figures of VimpelCom’s Activity in Russia, 2001-2003... 47

Table 13. Key Operational Indicators of VimpelCom, 2001-2003 ... 50

Table 14. Investments and Operation Revenues (MLA and Regions), 2003 ... 51

Table 15. Key Financial Figures of MegaFon’s Activity in Russia ... 53

Table 16. Main Indicators of Russian Mobile Leaders ... 55

Table 17. Leading Regions by Mobile Penetration Level, 2004 ... 59

Table 18. Revenues from Mobile Services by Federal Districts, 2003 ... 60

Table 19. Leading Regions by Mobile Revenues, 2003... 60

Table 20. Regional Acquisitions of MTS and VimpelCom, 2002-2003 ... 64

Table 21. Procedure for the Frequency Assignment ... 70

Table 22. Radio Frequencies Allocation and Rights of Spectrum Users ... 72

Table 23. Procedures for 3G Services Licensing ... 77

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Foreword

The Northern Dimension Research Centre (NORDI) is a research institute run by Lappeenranta University of Technology (LUT). NORDI was established in the spring 2003 in order to co-ordinate research into Russia. NORDI’s mission is to conduct research into Russia and issues related to Russia’s relations with EU with the aim of providing up-to-date information on different fields of technology and economics. NORDI’s core research areas are Russian business and economy, energy and environment, the forest cluster, the ICT sector, as well as logistics and transport infrastructure. The most outstanding characteristic of NORDI’s research activities is the way in which it integrates technology and economics.

LUT has a long research tradition in making research and educating students in the field of communist and post-communist economies. From the point of view of these studies, LUT is ideally located in the Eastern part of Finland near the border between EU and Russia.

This volume “Development of Russian Mobile Communications” focuses on the major technological and economic factors influencing development of Russian mobile networks.

The study includes analysis of current situation with mobile communication infrastructure as well as the development trends of this sector. Authors discuss regulation of mobile industry and state of transport infrastructure for mobile communications.

The authors would like to express their gratitude to the EU’s Interreg IIIA programme, Ministry of Education of Finland and the cities of Lappeenranta, Imatra and Joutseno for their financial support towards NORDI. We give sincere thanks to NORDI’s Director Professor Tauno Tiusanen for his contribution to the book and valuable comments; to project manager Jari Jumpponen and administrative coordinator Maija Kuiri for comments and support. We are also grateful to our supervisor, Professor Valeriy Naumov, without his help, this work would not have been possible. Authors appreciate greatly suggestions and editing provided by Professor Juha Väätänen and Ph.D. student Daria Podmetina from the Department of Industrial Engineering and Management of LUT. Finally, we must thank our Russian colleagues: Vladimir Efimushkin and Svetlana Yarlykova from Central Research Telecommunications Institute for help with collecting materials, and Professor Konstantin Samuylov from Peoples’ Friendship University of Russia for essential information about Russian telecommunication issues.

Lappeenranta, August 2004 Natalia Dobrovolskaya, M.Sc.

Researcher

Lappeenranta University of Technology

Antonio Salueña, M.Sc.

Researcher

Lappeenranta University of Technology

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Introduction

¹

In the communist system of central planning combined with an authoritarian political system of one-party rule, all communication systems were firmly in state’s hands. The centralized system of communist states in the former Soviet Union and the Eastern bloc controlled all means of communication extremely tightly. Typewriters and photo coping machines had to be registered. Cable telephones were allocated with care, and thus, were in short supply.

Authorities had far-reaching rights to monitor the use of private means of communication.

Thus, a post-industrial information society was not a realistic option, as long as the communist system was intact. Thus, dismantling of the one-party state with central planning system in 1989-91 was a necessary precondition for the IT revolution in transitional economies (TEs). Obviously, there was a huge bent-up demand for consumer electronics, computers and means of telecommunication in all post-communist societies in the early 1990s. Suitable technologies were easily available in the West: equivalent supplies had to be created to satisfy this extensive potential demand in TE-region. Therefore, it is not surprising that mobile phone sector has experienced a phenomenal growth.

In the global economy of the 21^st century, telecommunication is the most decisive lifeline of international business. More and more households and individuals throughout the world are willing to enjoy the communication options offered by mobile phone operators.

Obviously, in the largest country of the world, in Russian Federation, it is economically feasible to construct infrastructure for mobile telephony, because the alternative, fixed line network improvement, is expensive. The penetration of telephones was extremely low in the last years of Soviet power: there were only 15 phones per 100 inhabitants. Thus, there is plenty of potential in a country with a population of 145 million.

In every country, mobile phone operators need a license, which means that an entirely free competition is not possible. From the point of view of consumers (users of telecom services) it is important that every TE gives several licenses, in order to hinder monopolistic structures to come into being. It is highly likely that in every country there will be an oligopolistic market, in the framework of which operators will be forced to compete with prices.

1 This chapter was written by professor, Ph.D. Tauno Tiusanen, Director of Northern Dimension Research Centre

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Telephone messages are not in the sphere of necessities. Business units can hardly exist without means of communication, but private persons must have disposable income, in order to be able to communicate by phone. Thus, personal income level is an important factor in mobile phone business.

Economic development in the post-Soviet Russia has been a very complicated process. Only some main features of this development path can be described here.

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1. Economic Trends in Post-Soviet Russia

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The first five post-Soviet years in the Russian economy can be called the era of stagflation.

The overall economic activity measured by gross domestic product (GDP) declined by some 40%. This slump was even deeper than the Great Depression in the USA in the 1930s. Amid economic decline there was a very strong inflationary wave after freeing prices from the strait-jacket of central planning.

Presumably the output decline gives clear evidence of economic deterioration. However, in post-Soviet studies some features of the previous system must be taken into consideration including an overproduction of many input goods, a prevalence of worthless output, the non- existence of some claimed output, and waste of output that was produced. Given the very uneconomic nature of the central planning, systemic change was basically reasonable.

In the early period of the systemic change, public sector subsidies to industry were reduced which forced many firms to cut production. Facing a steep slump, the officials started pumping money into the economy accelerating the inflation. Solid investment decisions became hard to made since accurate forecasting of economic conditions was virtually impossible. At the same time, a golden era of capital flight was established.

Amid the post-Soviet stagflation, average monthly gross wages measured in hard currency (ECU, or European currency unit which is the predecessor euro) showed an amazing boom.

Average monthly gross pay increased from ECU 18 in 1992 to ECU 53 in 1993 - an increase of almost factor three. Between 1993 and 1997, there was again a nearly 3-fold increase to ECU 145. It can be concluded that in this period (1992-1997), the real exchange rate of rouble (RUB) appreciated extremely strongly, which means that Russian strong inflation was not reflected in nominal depreciation of the external value of rouble, which was floating on the market.

In 1997, it was assumed that the strong inflationary wave is over and a new semi-fixed exchange rate (ER) policy was discussed. As a result of this, a managed floating regime of RUB was introduced at the beginning of 1998. In this system, the central rate of rouble was fixed at RUB 6.2 = US$ 1. Fluctuations of 15% were permitted in that system (± 15% around the fixed central rate) to allow market flexibility.

2 This chapter was written by professor, Ph.D. Tauno Tiusanen, Director of Northern Dimension Research Centre

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This system of semi-fixed ER of rouble collapsed in August, 1998. The market lost confidence in the correctness of the central exchange rate (RUB 6.2 = US$ 1) and the Russian Central Bank (RCB) was unable to defend the set 15% depreciation limit that in absolute terms was about RUB 7 per dollar. Panic took over on the Russian currency market bringing RUB rate in a couple of months to 20 roubles per dollar. The Central Bank used some US$ 10 billion in defending the lower limit of the managed floating and gave up the flight after that (for details see [44]).

The rouble devaluation crisis became an important watershed in the transitional period of Russian economy. The post-crisis exchange rate gave an incentive to invest in import- substituting branches in the Russian economy – for example, in food and beverage production. A revival of investment activity took place.

An essential increase in oil price occurred between 1999 and 2000. This price hike gave a strong boost for Russian export which consists mainly of oil and natural gas. Export value increased by no less than 60% in 2000 helping the Russian economy to recover. Soaring export income has also allowed to balance the books in the public sector which showed serious deficits in the pre-crisis period.

Table 1. Main Economic Indicators (real growth, p.a. %)

1997 1998 1999 2000 2001 2002 2003

GDP 1.4 -5.3 6.4 10.0 5.1 4.7 6.8

Investment -5.0 -12.0 5.3 17.7 8.7 2.6 12.5

Average gross

monthly wage, RUB 4.7 -13.3 -22.0 20.9 19.9 16.2 10.4 Retail trade turnover 4.7 -3.3 -6.1 9.0 10.8 9.0 8.0 Consumer price

inflation 14.8 27.6 85.7 20.8 21.6 16.0 13.6

Export 8.3 -13.3 6.5 60.5 0.1 -0.2 6.0

Import 18.2 -18.4 -28.5 31.0 23.6 7.5 3.0

Source: WIIW, 2003

The table above shows that GDP declined in the crisis year of 1998, but recovered strongly already in 1999. Economic growth accelerated to 10% in 2000 (after 6.4% growth in 1999) amid a very strong export boom (export value increased by 60.5%). In that year (2000) two indicators of living standard (average wage and retail trade turnover) show strong recovery, while inflation abates after the post-devaluation peak of 1999.

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The most important detail in the above table is the growing tendency in investment: it can be assumed that the period of capital flight, which occurred in the early period of transition, is over. High propensity to invest is the best guarantee for sustainable economic growth.

It is interesting to analyze Russian income figures on the basis of euro-calculations. Rouble devaluation in 1998 affected average wages in Russia, but the exchange rate blow to living standard was rather mild.

In international living-standard comparisons it is important to take different price levels into consideration. Official exchange rates do not necessarily reflect relative prices correctly.

The crude method to make living-standard comparisons between nations is to take GDP (gross domestic product) figures per capita in terms of the national currency and convert them into dollars or euros at the going exchange rate. This standard method neglects the fact that price levels in various countries differ considerably from each others.

Thus, international living-standard comparisons of real income presently contain purchasing power parity (PPP) adjustment - the rate of exchange between currencies, which gives equal purchasing power over commodities. In principle, PPPs can be calculated for every good and service: a higher price is normally demanded in a rich country than in a poor one.

The basic idea of PPP adjustment is to take an average “basket” of goods and services and measure what the content of this basket costs in different countries. In transitional economies, goods and services are cheaper than in the West, and thus, PPP adjusted GDP figures are higher than the original ones. By dividing PPP adjusted GDP figures by the original ones (both per capita) it is possible to get so called ERDI - figures (exchange rate deviation index).

ERDI measures the level of exchange rate bias in countries under review. In Russian case, the average consumer “basket” is essentially cheaper than in euro-area, and thus, ERDI has a relatively high figure indicating that rouble is essentially undervalued.

Table 2. Average Monthly Gross Wage (euro-based), 1997-2003

1997 1998 1999 2000 2001 2002 2003

A: Nominal (ER) 145 95 58 85 124 147 160

B: ERDI 2.15 3.12 4.35 3.18 2.80 2.82 2.92

C: “Real”

(A*B=C)

312 296 252 271 348 414 466 Source: WIIW, 2003

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The table above shows that the “real” (euro-based) average wage decreased in the crisis year of 1998 and further in 1999, but recovered already in 2000. The real monthly pay in 2001 was already on a higher level that in 1997. The equivalent figure in 2003 was almost 50% higher than in 1997.

ERDI values in the latest years of the table are about three: it means that every euro has about three times more value in Russia than in euro-area (prices in Russia are in average one third of euro-area prices).

In this context, it is important to note that some prices are very distorted in Russia. Housing costs, including energy prices, are much lower in Russia than in Western Europe. It can also be assumed that Russians have in average more non-monetary income than West Europeans:

many Russians have private plots in which they cultivate potatoes and vegetables.

Moonlighting is wide-spread, etc. Personal income taxes are essentially lower in transitional economies than in Western welfare states.

In sum, gross income levels cannot be easily measured in international manner. It can only be assumed that in Russia there is some discretional income left after paying for taxes and necessities, even gross income figures are relatively low (in comparison, the gross average monthly wage in Finland was € 2300 in 2003).

In all transitional economies, mobile phone operators have been able to achieve very rapid growth rates after the systemic change. The market system has brought about essentially higher phone penetration rates in comparison to the communist period. Presently, citizens are free to communicate with each other’s and are obviously willing to pay for this pleasure.

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2. Russian Mobile Market Overview

In 2003, the mobile market in Russia achieved significant results: the total number of subscribers increased from 18 million in the end of 2002 to 36.5 million in the end of 2003.

However, deceleration of the growth rate is observed: number of subscriber’s year-on-year growth was 102% in 2003 (124% in 2002). For comparison, the world’s mobile user base grew by over 17% in 2003 and by 21% in 2002. The overall penetration level in Russia doubled from 12.4% to 25.1% in 2003 (Figure 1) [1].

Figure 1. Trends of Subscriber Base and Penetration Level, 1995-2003

0 5000 10000 15000 20000 25000 30000 35000 40000

1995 1997 2000 2001 2002 2003

Subscribers (Thousand)

0 5 10 15 20 25 30

Penetration (%)

Subscribers Penetration

Source: ITU, 2001-2003; J’son & Partners, Goskomstat, 2003; authors’ calculations

Russia was ranked the second after China in terms of the absolute growth of the mobile subscriber base during 2003. The significant growth was achieved due to the increase of GSM subscriber base. The comparison of Russia with others countries in terms of subscriber base dynamics (Table 3) and the change of penetration level (Table 4) are presented below.

Table 3. Trends of Mobile Subscribers, 1995-2003 (thousand)

1995 1997 2000 2001 2002 2003

Russia 88.5 484.9 3,263.2 7,750.5 17,608.8 36,450

Finland 1,039.1 2,162.6 3,728.6 4,175.6 4,516.8 4,700

USA 33,785.7 55,312.3 109,478.0 128,374.5 140,766.8 157,000 China 3,629.0 13,233.0 85,260.0 144,820.0 206,620.0 266,000 Source: ITU, 2001-2003; Sotovik 2004; authors’ calculations

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Table 4. Mobile Penetration, 2000-2003 (%)

2000 2001 2002 2003

Russia 2.22 5.28 12.01 25.1

Finland 72.04 80.38 86.74 93.0

USA 38.90 45.08 48.81 54.0

China 6.58 11.03 16.09 <20.0

Source: ITU, 2001-2003; Sotovik 2004; authors’ calculations

There are over a hundred operators providing mobile services in Russia. However, due to the specific of Russian mobile market, there is tough competition of only three companies:

Mobile TeleSystems (MTS), VimpelCom and MegaFon.

Company MTS is the leader of Russian mobile market serving 37% of the total subscriber base in the end of 2003 that amount to 13.5 million customers. The second company VimpelCom has managed to increase its market share from 29% to 31% (11.3 million subscribers) in 2003. MegaFon’s share increased from 16% to 17% (6.2 million subscribers) for the same period [2].

The main factors driving development of the mobile market in Russia are stabilization of the macroeconomic situation, growing purchasing power of population, increased competition and consolidation trends. Russian mobile sector becomes more attractive for investments.

Thus, 70% of foreign investments and more then 24% of domestic investments to telecommunications has been made in mobile communications sector in 2002 [3]-[4] (Table 5).

Table 5. Investments to Telecommunication Sector, 2002 Investments Telecommunication

sector

Mobile communications

Domestic investments (US$ million) 1640 395

Foreign investments (US$ million) 436 305

Source: Minsvyazi Rossii, Goskomstat, J’son & Partners, 2003

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3. Russia: Territorial Division

The total area of Russia is 17.1 million square kilometres. About 145 million people live in the country. Among them, about 73% are urban inhabitants and 27% live in rural area.

According to Constitution, Russia consists of 89 federal subjects (Republics, Regions, Territories, etc.).

In year 1997, Ministry of Communications has divided the all 89 Russian regions to seven license areas, so-called macroregions³ for GSM-1800 licensing, this grouping is later retained for different purposes. Entire Russian territory is divided into seven macroregions (Figure 2):

Central (including Moscow and Moscow region), North-West (including St. Petersburg and the Leningrad region), Volga, North Caucasus, Siberia, Ural and Far East.

The rating of macroregions in terms of mobile penetration level and subscriber base share is presented in Table 6. The differences in penetration level among the macroregions illustrate the uneven development of the Russian mobile market. The penetration level in Center and North-West exceed penetration level in other macroregions 2-4 times [20].

Table 6. Rating of Macroregions, 2003 Macroregion Population

(million)

Mobile penetration level

Share of the total mobile subscriber base

Centre of macroregion

North-West 13.0 42% 14% St. Petersburg

Central 41.5 40% 44% Moscow

Volga 22.7 21% 13% Samara

North Caucasus 19.0 18% 9% Rostov-on-Don

Ural 21.5 18% 10% Ekaterinburg

Siberia 15.8 17% 7% Novosibirsk

Far East 11.5 11% 3% Khabarovsk

Source: J’son & Partners, Goskomstat, 2003-2004; authors’ calculations

The Central macroregion, with population of over 41.5 million, remains the leader in terms of the share in the total Russian mobile subscriber base. However, in 2003 its share dropped down from 50% to 44%. The penetration level in Central area is the second among the macroregions (until September of 2003 this indicator was the largest in Center) mostly due to Moscow License Area (MLA) market and totaled more than 35% in September 2003. The penetration in Central macroregion, excluding MLA, is surprisingly small, only 14.8% of population used the mobile communication by this date.

3 We use the classification of the regions based on the license division of the regions according to the Russian Ministry of Communications (Appendices 2 and 3 to Order 41, March 20, 1997)

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North-West macroregion with some 13 million inhabitants, is the leading market in terms of the mobile penetration level. As of January 2004, the penetration level in North-West macroregion was 42%. St. Petersburg license area (St. Petersburg and Leningrad region) is most developed region of North-West, Kaliningrad region is the second with penetration rate about 42%, as of March 2004. Kaliningrad region has the leading position due to the intensive trade and economic activity conditioned by closeness to Western Europe. Competition enforced in St. Petersburg in 2003, owing to VimpelCom entered this market in April. St.

Petersburg remains second important (after Moscow) and one of the most competitive mobile markets in the country with 5 operators (4 GSM) struggling for the market share [5].

Center is followed by the Volga macroregion in terms of the penetration level that was 21% in January of 2004. The fundamental growth of subscriber base happened in 2002 (194%), when

“Big three” mobile operators started operation activity in the region. The number of subscribers in Volga macroregion, with a population about 22.7 million, exceeded 2.7 million in the end of May, 2003. The main players of Volga mobile market are: MegaFon (23.2%

share of the subscriber base), MTS (23%), VimpelCom (18.8%) and the biggest regional mobile operator SMARTS (23.9%). SMARTS operates in 16 Russian regions, provides services to more then million subscribers and is the fifth Russian mobile operator in term of subscriber base size. MTS tried to acquire SMARTS in 2001 but the companies did not agree on the price.

North Caucasus (population about 19 million) takes the fourth place in terms of the level of mobile development among Russian macroregions. Activity of the leading mobile operators resulted in the significant subscriber base growth in 2001-2002 years and competition increasing. The penetration in this region increased from 3.8% in 2001 to 10.1% in 2002 and exceeded 18% in January 2004. Due to political instability, mobile market of North Caucasus is fragmented to zones on different stages of development; the penetration varies from 38% in Krasnodar Territory (end of first quarter of 2004) to practically zero in Chechen Republic.

Ural demonstrated the largest growth rate among macroregions during the first 7 months of 2003. The number of subscribers increased by 100% and reached 2.3 million. Ural with penetration 18% has the fifth rank among macroregions in beginning of 2004. The leading operator of Ural is Svyazinvest’s subsidiary company Uralsvyazinform. Uralsvyazinform takes fourth place among Russian mobile operators by subscriber base size (about 1.4 million in March of 2004) and obtains 55% of mobile services revenues in this macroregion. The acquisition by Vimpelcom of the “Vostok-Zapad Telecom” company owning the GSM- license for Ural macroregion opened the door to Ural market for this nation-wide operator.

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VimpelCom plans the commercial launch in Ural macroregion in 2004, which becomes the most significant event for the mobile market in that area.

Siberian macroregion with its population of almost 16 million witnessed significant growth of subscriber base in 2002 (168%). Siberia is next to last in the list of license areas by penetration with subscriber base of over 1.6 million at the end of June 2003. Now, Siberian macroregion is one of the most extensively developing mobile regional markets. The competition in Siberia wishes to accelerate even more, when MegaFon launches its network.

MTS also have plans to start operation in this region.

Far East has the least developed mobile market among the macroregions. The subscriber number totaled 850 thousand (3% of Russian subscriber base) and penetration level reached 7.5% at the end of August 2003. In spite of the sparse population and complex geographical conditions, Far East attracts the leading operators by the high overall purchasing power of population and by the low bars for entry to the market. In 2003, MTS have spent US $31 million in order to acquire 50% shares of the operator Primtelefon that owned a GSM-license for the whole Far East macroregion. This deal would result in the active development of Primtelefon GSM networks backed by MTS. The entry to the Far East market is the main objective of the VimpelCom Company for 2004 year. The company applied for licenses and frequency permissions for the Far East macroregion but has received no answer yet. Due to new communications law coming into effect⁴ and lack of by-laws, licensing is suspended.

In 2000 Russian president Vladimir Putin signed a decree dividing Russia into federal administrative districts (Table 7) for strengthening of federal control over existing regions.

Table 7. Rating of Federal Districts, three quarters of 2003 Macroregion Population

(million)

Mobile penetration

level (%)

Monthly mobile revenue per subscriber (US$)

Monthly revenue per inhabitant

(US$)

Central 38.0 33.7 15.56 5.24

North-West 14.0 33.1 11.88 3.93

South 23.0 15.6 8.47 1.32

Volga 31.2 14.0 8.29 1.16

Ural 12.4 13.5 11.42 1.54

Siberia 20.1 11.4 8.75 1.00

Far East 6.7 8.4 24.61 2.08

Source: Russian TeleCom, 2004

4 The new communications law came into effect on January 1, 2004.

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The division of Russian into seven macroregions by Presidential office is not identical the divisions made by the Ministry of Communications. For example, five regions (Irkutsk, Chita regions, Buryatiya Republic, Agiinskiy Buryat and Ust-Ordynskiy Buryat autonomous districts) of 16 regions belonging to Siberian federal district are among the Far East macroregion, according to the Ministry of Communications. Below we use regional division adopted by the Ministry of Communications.

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4. Mobile Technologies and Standards

Initial selection of technological mobile standard in Russia has been left for market forces by issuing licenses for different standards. Later, regulatory authorities have developed stricter policy, which, in fact, prefers one standard to another. However, there still exists a great variety of both analogue and digital standards.

The Russian Ministry of Communications⁵ officially recognizes and issues licenses for the following mobile standards [11]:

• Federal mobile standards

o NMT in the 450 MHz frequency band;

o GSM in the 900, 1800 MHz and EGSM⁶ bands;

o IMT-MC (CDMA2000) in the 450 MHz band;

• Regional mobile standards

o AMPS family of the US standards operating in 800 MHz frequency band.

Note, that CDMA-800 (IS-95) standard, presented in Russian communications market, is not officially considered as “mobile”. Operators are not allowed to build CDMA-based mobile networks. Instead, they are restricted to provide only fixed radio access to the Public Switched Telephone Network (PSTN) by means of IS-95 cellular technology.

GSM standard is dominating in Russian mobile market and its share grows every year reasoned by decreasing share of other standards – NMT-450, AMPS/DAMPS, IS-95. Market share of the various mobile standards in Russia as of October, 2003 was GSM – 93.8%, AMPS/DAMPS – 3.1%, NMT-450 – 1.4%, IS-95 – 1.4% and IMT-MC-450 – 0.4% (Figure 3).

5 Since May of 2004, Ministry of Information Technologies and Communications

6 Extended GSM, its operating frequencies extends GSM-900 band up to 2x10 MHz, increasing overall GSM frequency resource up to 40%. Russian State Commission for Radio Frequencies have selected for EGSM 1.6 MHz-wide diplex band.

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Figure 3. Subscriber Base by Mobile Standards, 2003 Total 32 million subscribers

NMT 1.4%

IS-95

1.4% IMT-MC-450 AMPS/DAMPS 0.4%

3.1%

GSM 93.8%

Source: Sotovik, October 2003 4.1 GSM

Regional operators have deployed the GSM⁷ networks in Russia since 1995, originally in the 900 MHz frequency band. The Ministry of Communications initially limited licensing of GSM-900 services to one license per region. The main restriction was that required 900 MHz band was mostly occupied by military and other governmental facilities such as short-range navigation and landing systems. This lead to complex Electro Magnetic Compatibility (EMC) testing ensuring that new GSM systems will be compatible with existing military and civil radio infrastructure which in many cases result in costly process of spectrum redeployment.

In 1997, the Ministry organized tender for GSM-1800 network licenses for macroregions.

Two licenses per macroregion have been granted.

At present time, the official requirement for GSM licensing is the availability of sufficient unallocated spectrum in 900 or 1800 MHz band in the particular region. The criterion of sufficient spectrum is defined as 2 x 4 MHz duplex band for GSM-900 and 2 x 8 MHz band for GSM-1800 taking into account frequencies reserved for existing operators.

Therefore, existing GSM operators can be classified by the frequency and regional coverage of its licenses [11]:

• regional GSM-900 operators – holders of GSM-900 regional licenses;

• regional GSM-1800 operators – holders of GSM-1800 regional licenses;

• operators having GSM-1800 macroregional licenses;

• operators having GSM-900/1800 macroregional licenses;

7 Global System for Mobile Communications

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• nation-wide GSM operators – operators, accumulated, either directly or via subsidiary companies, GSM-900/1800 licenses covering most of the Russian territory.

Currently, MegaFon company has GSM-900/1800 licenses for the whole Russia. MegaFon Group includes North-West MegaFon branch (formerly known as North-West GSM), Moscow based Sonic Duo, Mobikom-Kaukas, Mobikom-Novosibirsk, Mobikom-Khabarovsk, Mobikom-Center, MSS-Povolzhye and Uralsky GSM [15].

In terms of GSM licensed territory, the second place takes nation-wide operator MTS with its subsidiary companies. Their GSM-900/1800 licenses cover 76 Russian regions mainly in Central, North-West and Ural macroregions and some regions in Volga, Siberia and Far East.

The nation-wide operator VimpelCom has GSM-900/1800 licenses covering 74 regions of North-West, Central, North-Caucasian, Volga, Ural and Seberia macroregions. In 2002-2003, VimpelCom managed to expand its licensed territory substantially owing to acquisition of new licenses and mergers with regional operators. VimpelCom obtained GSM-900/1800 license for North-West macroregion (consisting of 11 regions) and has bought majority shares of five regional mobile operators.

The practical use of licenses by the three leading operators is quite different. The widest mobile coverage is provided by MTS, which amounts to 60 regions. The second place is taken by VimpelCom, which operates GSM networks in 55 regions. MegaFon holding company has deployed or consolidated networks in 55 regions.

Figure 4 and Figure 5 show number of GSM licenses and number of operating GSM networks distribution by number of regions respectively. The observed inconsistence between amount of licensed territory and actual service provision is changing gradually, and tends to three-or- four GSM networks in most Russian regions as a new network is being built by nation-wide operators on their licensed territories and due to consolidation and mergers of regional operators.

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Figure 4. GSM Licenses Distribution

6

17

43

22

1

2 3 4 5 6

Number of GSM licenses

Number of regions

Source: Sovremennye Telekommunikatsii, 2003 Figure 5. GSM Networks Distribution

8

11

39

23

8

0 1 2 3 4

Number of GSM networks

Number of regions

Source: Sovremennye Telekommunikatsii, 2003

Note, that three leading GSM operators have their licensed territories intersected in 54 regions (as of May, 2003) mainly in Central, North-West and Ural macroregions. All three competing mobile networks are present in 10 regions.

More than 200 regional GSM networks are deployed in 81 Russian regions. Nation-wide operators control more than 60% of the mobile networks; independent local providers own the rest.

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The analysis made shows, that Russian GSM networks are still extensively developing. GSM market trends and financial indicators of leading GSM operators are discussed in more details in Chapter 6.

4.2 NMT-450

NMT⁸ standard is a first-generation analogue mobile technology that still has its niche in Russian communications market. Historically, it was the first international cellular standard in Russia, employed by commercial mobile operators since early 90s. From the beginning, NMT has got “federal” status, which gave it in principle an administrative advantage compared to AMPS, its main competitor of that time.

The original variant of standard, which uses 450 MHz frequency band (NMT-450) has been adopted in Russia. Later NMT modification operated in 900 MHz band (NMT-900) has not been used as GSM already hit the Russian market.

Due to its technological properties, NMT-450 has been considered for a long time as an optimal mobile standard for Russian regions: large territory with scarce population. The use of 450 MHz frequency band provides relatively long-range coverage with small number of base stations; the cost of building analogue NTM-450 network is less than of its modern digital counterparts.

In the middle of 90s, NMT-450 operators took the leading position in terms of regional coverage and subscriber base all over the country. Situation started to change with introduction of GSM as a second federal mobile standard.

Federal NMT-450 network under “SOTEL” brand, uniting all NMT-450 regional networks, covers more than 500 cities around the country. Only in 2002, GSM networks left NMT-450 behind in terms of the covered territory. However, the subscriber bases of GSM and AMPS networks have outperformed NMT-450 already in 1999 [23].

In the end of 2003, 78 NMT-450 licenses have been granted and 63 operators have deployed the NMT-450 networks in 76 regions. In the rest of regions, licenses are either not issued or canceled by legal means.

8 Nordic Mobile Telephone

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Figure 6. NMT-450 Subscriber Base and Market Share, 1998-2003

0 50 100 150 200 250 300 350 400 450 500

1998 1999 2000 2001 2002 2003

Subscriber base (Thousand)

0 5 10 15 20 25 30

Share of total subscriber base (%)

Sources: J’son & Partners, operators’ data, 2003

Since 2001, the market share of NMT-450 operators started to go down (Figure 6). Now NMT-450 operators are characterized by the smallest subscriber base in the market, most companies have up to 10 thousand customers and only two – St. Petersburg-based Delta Telecom and Moscow Cellular Communications have more than 50 thousand.

4.3 IMT-MC (CDMA2000)

The third-generation mobile standard IMT-MC (International Mobile Telecommunications – Multi Carrier, also known as CDMA2000) is already considered as a successor of outdated analogue NMT-450 standard.

Specification of IMT-MC has been developed by International Telecommunication Union as a part of IMT-2000⁹ family of standards for third-generation mobile systems. It can be implemented in a wide range of possible mobile frequencies including 450 MHz band and can utilize multiple of 1.25 MHz-wide frequency bands (hence the “multi-carrier” name). General advantages of the technology include increased voice capacity, better voice quality, soft handovers, lower terminal power requirements and better spectral efficiency. In addition, the standard provides high-throughput data transmission service. Unlike some third-generation technologies, IMT-MC is based on existing IS-95 second-generation wireless standard, which represents mature CDMA¹⁰ technology. The standard has modest spectrum requirements – 2x1.25 MHz band in its minimal variant. This is especially important for NMT operators

9 International Mobile Telecommunications 2000

10 Code Division Multiple Access – a digital wireless telephony transmission technique

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having the license for 4.5 MHz-wide band in the 450 MHz frequency and wishing to upgrade their networks. They can deploy IMT-MC-450 network on the single carrier, which will coexist with the old NMT-450 network.

According to the policy described in “Concept for the Development of Public Mobile Communication Networks through Year 2010” [19], Ministry of Communications conducted various research projects during 2001–2002 in order to select digital technology that will replace analogue NMT-450 standard on the federal mobile network. Results of the testing on pilot network zones have confirmed effectiveness of the IMT-MC-450.

In March 2002, Ministry of Communications passed regulation¹¹, which approved federal status of the IMT-MC-450 standard. However, formally, the new standard still has to confirm its federal status in high level industry regulations such as a “Concept for the Development of Public Mobile Communication Networks”.

The current Ministry policy aims at replacing of NMT-450 networks with IMT-MC-450 and deployment of new IMT-MC-450 federal network. Nevertheless, existing NMT-450 networks have to serve its subscribers and provide domestic roaming until licenses expire.

Many NMT-450 operators obtain permissions for necessary frequencies and licenses to build new IMT-MC-450 networks. The first was the oldest Russian mobile operator St. Petersburg- based Delta Telecom licensed for St. Petersburg, Republic of Karelia, Novgorod, Pskov and Murmansk regions. Moscow Cellular Communications (MCC) got IMT-MC-450 license for Moscow region.

Russian Telecommunications Development Corporation (RTDC), an investment and management holding with stakes in Russian operators including MCC and Delta Telecom, has created SkyLink company to accumulate established operators and develop a pan-Russian IMT-MC-450 standard network. So far, it has already got MCC, Delta Telecom and some smaller regional operators.

In the end of 2002, the first commercial IMT-MC-450 network in Russia was launched by Delta Telecom covering St. Petersburg city and its suburbs. In November 2003, MCC has launched commercial IMT-MC-450 service in Moscow. Both networks are operated under

“SkyLink” brand, enabling roaming service for the subscribers.

11 Ministry of Communications by-law 45.194-2002

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Recently Sistema Telecom, Russian financial and industrial holding company, has got involved into SkyLink project by purchasing 50% of SkyLink shares [24]. The official plan was to bring a new life to Sistema’s own analogue mobile assets and to take part in development of the new market niche. Given that Sistema also owns majority share of the leading GSM operator MTS, there are expectations that Sistema might really intend to limit potential competition from another standard.

4.4 AMPS/DAMPS

AMPS¹², North-American analogue mobile standard, has been originally deployed in Russia in its basic and narrow band (NAMPS) variants. An AMPS system uses 30 kHz wide (10 kHz for NAMPS) sub-bands, called channels, in the 800 MHz frequency band. Most AMPS operators then have gradually upgraded their networks to the Digital AMPS standard (DAMPS). DAMPS is operated in the same 800 MHz frequency band but divides its 30 kHz wide channels into number of time-slots, scheme similar to used by GSM. Figure 7 shows market shares of various AMPS standard variants.

Figure 7. Market Shares of AMPS Variants, 2003 (%) Total 1 million subscribers

DAMPS 88%

NAMPS AMPS 9%

3%

Source: Sovremennye Telekommunikatsii, 2003

From the beginning, AMPS standard has got regional license status, which means that interconnections of the AMPS cellular carriers to the country’s public service telephone network are allowed at regional level only.

12 Advanced Mobile Phone Service

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As of the end of 2003, more than 50 operators deployed AMPS networks in 58 regions [6].

All issued licenses are actually used by operators. In the rest of the country, AMPS licenses are either not issued or canceled.

The crucial moment for AMPS/DAMPS operators came, when in 2000 Ministry of Communications initiated decision of State Commission for Radio Frequencies to withdraw 800 MHz frequency band from operators of AMPS/DAMPS and CDMA standards. With time, released frequencies would be allocated to emerging digital TV systems to comply with the treaties between Russia and European Union. This decision was backed by Ministry policy pursuing the dominance of European mobile standards. According to State Commission for Radio Frequencies, the AMPS and CDMA networks, being of US origin, can continue operating in Russia until expiration of their licenses, but not beyond 2010. Although existing licenses are still in force, no new licenses for AMPS will be issued. After protests from operators supported by Antitrust Ministry, Ministry of Communications promises to grant them licenses for building GSM-1800 networks instead.

So far, regulator issued all requested GSM-1800 licenses – 36 AMPS/DAMPS operators have received GSM-1800 licenses for 40 regions. As of middle of 2003, 7 operators already launched commercial GSM-1800 networks [11].

According to the Association-800, inter-operators organization, in the end of 2003 AMPS/DAMPS subscriber base accounted to about 1 million, which is approximately 3% of total Russian mobile subscribers. In terms of subscriber base AMPS operators are far behind its regional GSM competitors. While, in 2001 the AMPS/DAMPS operators had leading position in many regions. In 2002 – the time of massive GSM regional expansion, the AMPS/DAMPS subscriber base demonstrated slack 9% growth, compared to 30% in 2001 [26]. Since the second quarter of 2003 it started to decrease in most regions, where new GSM- 1800 networks were launched [6].

Two macroregions – Central and Volga – have the largest AMPS subscriber bases, though the share in Central region continued to fall since the leading AMPS operator VimpelCom started to develop its GSM network.

Note that some of AMPS/DAMPS operators having GSM-1800 licenses were acquired by GSM leaders to cover holes in their regional presence. Thus, the GSM-1800 license is appearing to be the most valuable asset for many of AMPS operators.

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4.5 IS-95

The IS-95 standard¹³ (also known as cdmaOne or simply CDMA) is a first mobile standard that uses CDMA technology for air interface. CDMA has some technological advantages over the TDMA-based¹⁴ systems (GSM and DAMPS), such as better spectrum utilization and lower terminal power requirements.

In Russia, IS-95 networks in 800 MHz frequency band are started to develop after Qualcomm, creator of the technology and its primary vendor, signed memorandum of understanding with Ministry of Communications in 1995.

However, US-origin, IS-95 standard is a subject of the discrimination from Russian communications regulatory authorities according to official policy supporting European mobile technologies. As a result, the use of IS-95 standard in Russia was restricted to wireless local loop (WLL)¹⁵ or fixed cellular networks only. Thus, IS-95 operators become just a part of fixed line infrastructure and must obey all its regulations including tariff regulations.

There are 18 IS-95 WLL networks operating in 23 regions across the country [25]. These networks were deployed before infamous order of the State Commission for Radio Frequencies in 2000 that restricted usage of 800 MHz frequency band by CDMA and AMPS operators to the year 2010. Since then no new licenses have been granted.

According to CDMA Association [25], which unites CDMA operators, IS-95 total subscriber base accounted to more than 410 thousand in the fourth quarter of 2003. In 2002, IS-95 subscriber base increased by 35%, compared to 152% in 2001, that demonstrated the negative impact of regulations.

Operator companies tried to defend their interest in court and persuade the Ministry to allow building regional IS-95 mobile networks in 800 MHz band. The conflict is not solved yet.

4.6 Prospects of Next Generation Mobile Technologies

Mobile networks in Russia are mostly used today for plain voice communications. However, advances of mobile technologies are not limited to improvements of this traditional service.

While second-generations mobile systems represented transition from analogue to digital telephony, third-generation is aimed to bring multimedia handsets with high data-transmission

13 Interim Standard – 95, CDMA standard for the US digital cellular service

14 Time Division Multiple Access – a digital wireless telephony transmission technique

15 Wireless local loop, also known as fixed radio access, is a system that connects subscribers to the PSTN using radio signals as a substitute for copper between switch and subscriber’s terminal

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rates that are capable of providing services beyond plain voice calls. To save investments into existing network infrastructure the transition from 2G to 3G is usually done via so-called 2.5 systems. The term “Generation 2.5” broadly includes various upgrades for second-generation networks. These upgrades in fact sometimes provide almost the same capabilities as planned 3G systems.

Extensions of GSM standard are represented by the following technologies:

• High-Speed Circuit Switched Data (HSCSD);

• General Packet Radio Service (GPRS);

• Enhanced Data Rates for Global Evolution (EDGE).

In Russia HSCSD technology has been used only by MegaFon in North-West region but later was abandoned in favor of GPRS. The problem with HSCSD is its inefficient usage of spectrum and network resources.

Initial adoption of GPRS was slowed down by narrow market for the services based on this technology and lack of cheap handsets supporting GPRS. The coverage and real data-transfer rates also left much room for improvements. In 2003-2004 wide range of relatively inexpensive GPRS handsets appeared, meanwhile operators had improved coverage, making GPRS-based services more accessible for the subscribers.

Leading mobile operators have already launched GPRS technology in the large cities. In 2003, operators started GPRS deployment on regional networks. Major regional mobile operators are planning to upgrade to GPRS soon.

NMT operators have received green light from Russian Ministry of Communications to replace their outdated analogous networks with modern 2.5G IMT-MC-450 networks. One of the advantages of those networks is a built-in high-speed data transfer facility (rate up to 153 Kbit/s). However, the spread of IMT-MC-450 is hampered by high cost and narrow assortment of available handsets.

As for GSM, EDGE technology is used in evolution of DAMPS to the third-generation TDMA standard UWC-136¹⁶. However, since regulatory authorities have ordered operators to dismiss their AMPS/DAMPS networks, no further development of this technology will be

16 UWC-136 standard developed by Universal Wireless Communications Consortium is one of the 3G proposals submitted to the International Telecommunication Union by the United States

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realized in Russia. Former AMPS/DAMPS operators are now completing migration to GSM- 1800 networks.

Despite the fact that IS-95 operators have technical potential to relatively easy upgrade existing CDMA networks to the related IMT-MC technology, this is unlikely to happen unless Ministry of Communications will abandon the ban of IS-95 standard.

Following general policy towards European integration Ministry of Communications has decided to adopt Universal Mobile Telecommunications System (UMTS) as a prospective 3G standard for Russia. Spectrum has been allocated for UMTS in 2 GHz frequency band.

Moreover, as IMT-MC-450 standard received official status and is actively deployed by operators, its next generation successor IMT-MC-2000 may also become prospective mobile technology in Russia.

Figure 8 summarizes main development trends of mobile systems adopted in Russia.

Figure 8. Development Trends of Mobile Systems in Russia

AMPS/

NAMPS

GPRS

NMT-450

DAMPS

GSM

IS-95

HSCSD

EDGE

IMT-MC-450

UMTS

IMT-MC-2000

1G 2G 2.5G 3G

UWC-136

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5. Transport Networks for Mobile Communications

Transport networks are essential part of mobile networks infrastructure. They transfer traffic between geographically distributed mobile network segments and also allow interconnecting networks of various non-compatible standards. Developed country-wide transport networks allow to lower cost of mobile networks operation by eliminating need for deployment and maintenance of such infrastructure by mobile operators themselves.

Depending on requirements, transport networks can employ different kinds of physical medium and technologies. Those networks usually hide technical details and provide for its customers transparent communication service with specified characteristics. In that way, transport networks are part of the core infrastructure, which is required for development and operation of the mobile networks.

Multiservice (multiprotocol) transport network is a network that provides communications for heterogeneous environment using various transport protocols. Both mobile and fixed network operators impose high requirements for transport networks such as high capacity, scalability, support for bandwidth reservation and quality of service guaranties, reliability and redundancy. The modern transport networks are built on base of DWDM, SDH, ATM, POS, MPLS and Gigabit Ethernet technologies.

Russian mobile sector is characterized by diversity of mobile technologies, which often leads to complex intercommunication requirements forcing operators to use non-standard solutions.

Besides basic voice and data exchange between operator networks, the mobile specifics include roaming and interconnection of different standard mobile networks, PSTN and other communication networks.

Join-stock company “Multiregional Transit-Telecom” (MTT) operates the most developed high capacity mobile transport network. Other operators such as long-distance monopoly

“Rostelecom”, Ministry of Railroads communication operator TransTeleCom, state owned companies Gazprom, RAO UES, and large interregional subsidiaries of Svyazinvest holding possess enough transport network facilities and might be involved in prospective mobile developments.

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5.1 MTT Transport Network

MTT was founded in 1994 as a state owned company. The main purpose of the company was to build transit network capable to integrate individual mobile operator networks of NMT and GSM federal standards into unified mobile communications network of Russia. The objective was to provide mobile subscribers with roaming service all around the country. This task was impossible to accomplish without existence of country-wide digital backbone network. The MTT network was created in several phases and underwent number of changes since commercial operation began in 1995 [48].

MTT was one of the participants created all-Russia NMT-450 network under “SOTEL”

brand. The first phase of MTT network configuration aimed to integrate the NMT-450 networks into common mobile infrastructure with single numbering scheme. The company installed and put into operation seven gateway mobile transit exchanges (GMTX) in every macroregion. Ericsson has supplied switching equipment for this purpose. The switches have been interconnected by means of ground and satellite digital circuits. Each switch has an operating area covering from 10 to 15 regions.

On the second phase, MTT gradually migrated from the first-generation GMTX switches to so-called Combined GateWays (CGW) equipment that integrates switching functionality of various cellular standards. CGWs, specially developed by Ericsson, are essentially second- generation digital switching centers handling transit, long-distance and international traffic from the mobile subscribers. The deployment of CGWs has expanded capabilities of MTT transit network with processing GSM traffic, GSM digital signaling (SS7-MAP) and higher capacity. As a result, MTT network provides new functionality such as NMT–GSM gateway and support optimal routing.

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Figure 9. Base Architecture of MTT Transport Network

Moscow (CGW-1)

St.Petersburg (CGW-6)

Ekaterinburg (CGW-7)

Khabarovsk (CGW-5)

Novosibirsk (CGW-4) Samara

(CGW-3) Rostov-on-Don

(CGW-2) Source: MTT, 2003

The MTT backbone network, which was built between 1996 and 2000, consists of the following entities (Figure 9):

• seven Combined Gateways for connection of NMT-450 and GSM-900/1800 networks;

• digital circuits leased by MTT from Rostelecom for interconnection of all CGWs together;

• own or leased from Rostelecom circuits interconnecting CGW with transit exchanges¹⁷ and International Switching Centers (ISC) of the Russian PSTN.

To interconnect with MTT network mobile operators need to build or lease digital circuits connecting its switching equipment to the nearest CGW within macroregion.

In 2004, MTT network served 124 mobile operators: 77 – GSM-900/1800, 44 NMT-450 and 3 IMT-MC-450 operators. Moreover, 62 fixed line providers use MTT transport facilities.

Total number of mobile networks interconnected with MTT accounts to 203 (154– GSM- 900/1800, 46 – NMT-450 and 3 IMT-MC-450) [48].

To meet continuously growing number of new mobile networks, MTT is expanding transit network resources by deploying its own access infrastructure and introducing regional traffic exchanges – local switching centers. The company plans to expand its direct network presence into 89 regions. This project aims at:

17 also known as Unit Automatic Exchange - UAE

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• bring access to the MTT transport services closer to regional customer networks;

• increase capacity of overloaded network segments;

• shorten time needed for interconnection;

• allow creation of temporary channels to meet load fluctuations;

• increase overall quality of service by reserving circuits, control of the end-to-end channel parameters, etc.

On the first stage of transit network expansion the company plans to build many regional access points (AP) facilitating interconnection and local traffic exchange. The operator interconnection to the transport network on this stage will be mainly arranged via access points, which in turn connects to the CGW. When number of connected operators and inter- operator traffic exchange grows, individual access points will be upgraded to more capable local switching centers (LSC). The new architecture of the MTT network is shown on Figure 10.

Figure 10. Modernized Regional Architecture of MTT Transport Network

LSC CGW

LDTE

MSC

MSC MSC MSC

AP

AP AP

Region 1 Region 2 Region 3

Source: MTT, 2003

The access points (AP) are built in Long-Distance Telephone Exchanges (LDTE), Russian fixed line communication infrastructure, which is present in every region. As a result, interconnecting mobile operator only needs to create “last mile” circuits to the regional LDTE, the requirement already imposed by its mobile license.

The Moscow and St. Petersburg local switching centers were put in operation in 2002. In 2003, the company created local switching centers in Krasnoyarsk, Samara, and Novosibirsk.

Development of Russian mobile communications

Natalia Dobrovolskaya, Antonio Salueña

DEVELOPMENT OF RUSSIAN MOBILE COMMUNICATIONS

Development of Russian Mobile Communications

Natalia Dobrovolskaya, Antonio Salueña

Contents

List of Abbreviations

List of Figures

List of Tables

Foreword

Introduction

1. Economic Trends in Post-Soviet Russia

2. Russian Mobile Market Overview

3. Russia: Territorial Division

4. Mobile Technologies and Standards

5. Transport Networks for Mobile Communications