Studies Eastern European Markets
Eastern European Markets
March 2005

Nikita E. Lisitsyn, Sergei F. Sutyrin, Olga Y. Trofimenko and Irina V. Vorobieva
OUTWARD INTERNATIONALISATION OF RUSSIAN LEADING TELECOM COMPANIES
Electronic Publications of Pan-European Institute
1/2005 ISSN 1795-5076

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Abstract

The paper deals with the outward internationalisation of Russian leading telecommunication companies (MTS, VimpelCom, and MegaFon). Both target foreign markets and entry strategies of the mobile operators are investigated. Outward internationalisation of the companies under review was preceded by growth and expansion within the national boundaries. The first market entries occurred in 2001-2002, when key regional telecom markets of Russian Federation were almost saturated.

From the very start Russian leading mobile operators focused on the CIS countries. This approach was based both on the economic and political ties inherited from the Soviet era and on the attractiveness of the CIS states as fast growing markets. Relatively low penetration rate and rapidly increasing subscriber base presume significant future opportunities for telecom sectors. Knowledge of business environment and practices in the CIS countries, which were quite similar to those in Russia, favoured the entries.

Competition on most target markets is comparatively low due to weakness of most local operators and presently small interest of large Western companies in the CIS states. With the only exception of Belarus (where a joint venture was established) acquisitions of local mobile operators constituted the basic entry mode. Russian mobile operators contributed much to the development of telecom sector in the CIS countries.

While operating in Belarus, Ukraine, Kazakhstan, Uzbekistan, Turkmenistan, Tajikistan these cellular companies demonstrate interest towards the markets of Kyrgyzstan, Georgia, Azerbaijan and Armenia. The paper argues that despite increasing competition entries to new CIS markets might be expected. In December, 2004 one of the owners of MTS (AFK Sistema) made initial steps to enter Indian markets of cellular communications.

Although the project is not jet finalised, it clearly indicates that outward internationalisation of Russian mobile operators expanded beyond the boundaries of post-Soviet area. The paper investigates the growing international ambitions of the companies under review.

Conclusions

Russian mobile market has been experiencing fast growth during last several years. At the moment three leading mobile service providers divide among each other almost 90% of the market. Competition between telecom companies inside Russia gets stronger and they have to look for new growth opportunities.

The outward internationalization strategy could be regarded as the best option for their development. The mobile service markets of the former USSR countries (except from the Baltic States) are potentially quite attractive for Russian telecom companies due to various reasons. First of all, the competition level in the CIS is not as high as in Russia. Second, those markets demonstrate an impressive growth potential. Third, Russian companies try to pass ahead leading Western telecom services providers and consolidate their grip on the new territories. In each CIS country where Russian companies operate one could observe sustainable mobile market growth.

It could be explained by two main reasons: an urgent need for modern communication tools, on the one hand, and aggressive marketing campaigns of mobile service providers, on the other hand. Entry modes for Russian companies were predetermined by technological and regulatory considerations.

As for target markets they largely resulted from historical and cultural traditions, common infrastructure network, similar business practices, and development of reintegration process within the framework of the CIS. It seems that those companies will use their knowledge and existing positions as the platform for future expansion to other CIS countries.

Due to various types of similarities between Russia and its neighbours Russian telecom companies may understand market environment in the region better than their Western counterparts, and therefore, use this understanding as its competitive advantage. At the same time main threats would most probably come not from national telecom service suppliers, but from Western telecom MNCs with huge financial recourses.

Regarding regulatory issues, it is necessary to mention that without a political will of the national authorities Russian companies could not get access to their privatization processes. In addition to that, due to high level of monopolization in most of the countries under review in order to be successful the companies should establish good relationship with local anti-monopoly agencies.42

Since 2001 Russian leading mobile phone companies started their outward internationalization by expanding to the neighbouring CIS countries. The first were MegaFon and MTS in 2001, VimpelCom “joined the club” in 2004. The most attractive markets of those companies were Ukraine, Belarus, Tajikistan, Kazakhstan, Turkmenistan and Uzbekistan. India might become a new promising target destination for the Russian telecom companies.

Despite low GDP per capita and complicated and strict regulation of the telecom market in the country, rapid growth rate of the sector under review gives hope that operations of Russian mobile operators would be successful. India could also be used as a platform for future expansion to some other countries of the region. All in all, internationalisation of Russian telecom companies might be seen as sign of their maturity.

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