The Russian telecommunications market is facing several major hurdles. These range from high operating costs to the lack of enforcement of existing legislation, and from outdated infrastructure to inadequate financing. Despite these hurdles, the Russian telecommunications market is developing at a rapid pace. The majority of telecommunications operators have technically been privatized as joint stock companies, and cellular/communication companies are continuing to grow and compete for market share.

Russian telecommunications legislation is similar to and even more detailed than Western legislation. Nevertheless, legal practice in Russia is clearly different from that in the West. In the West, one of the main issues is the right of telecommunications providers to use the terrestrial network of a single former monopolist. Problems tend to centre on pricing questions and other conditions concerning the use of the network. In Russia, however, there is not just one former monopolist. Instead, many local and national companies operate different networks which obtain revenues from a relatively small number of services, for which efficient price controls do not exist. Therefore, reform of the telecommunications sector will depend more on political readiness to introduce reforms in the pricing structure, which allow real competition, rather than on legal reforms.

This is because in Russia, for political reasons, local calls through fixed-network, former monopolist companies continue to be free of charge. This system places a financial strain on the regional (former monopolist) companies. In part as a result of this, they are overcharging for interconnections, inter-city and international calls. Particularly hard hit by this are the cellular companies. To operate in Moscow, for example, cellular companies must interconnect through local, inter-city and international telephone lines. A cellular company can only provide access to a non-cellular Moscow number if there is an interconnection agreement between the cellular company and the former monopolist Moscow telephone company (MGTS). In other countries, the market is regulated to ensure that payment charges for interconnections do not discriminate against cellular companies. In Russia, although there is legislation stating that the price for interconnection may not exceed three times the actual cost of the service, this legislation is not enforced because there is no mechanism in place to define such a cost. The real financial strain placed upon regional companies, and the lack of overall market regulation and structure, have resulted in high prices for interconnection services.

Similarly, local cellular and fixed-line companies need interconnection agreements to provide inter-city and international telephone services. Since fixed inter-city and international lines - to the extent that they are in commercial use - are still owned by monopolists, competitors who wish to offer these services will either have to use the expensive wireless communication networks or accept the prices imposed by the monopolist.

The biggest hindrance to the evolution of the Russian telecommunications market is its outdated infrastructure, which stretches throughout the Commonwealth of Independent States and is not suitable for today's hi-tech needs. Since privatization has created many regional telecommunications companies with depleting resources, major countrywide investments in the networks are unlikely to occur in the near future. With little improvement in the infrastructure of regional fixed networks, and due to their distorted revenue structure, it is very difficult for fixed-network providers (as opposed to mobile providers) to obtain financing. The lack of investment in this sector is evident by a waiting list of 6.4 million for allocation of telephone lines in Russia. As the Russian marketplace does not provide adequate financial resources to telecommunications companies, mobile operators in bigger cities such as Moscow and St Petersburg must turn to international markets for financing. Unfortunately, the need coupled with the difficulty of seeking financing abroad will continue to be a serious obstacle hindering improvement, growth and development in the regional telecommunications sector.

Surprisingly, however, this outdated infrastructure is unlikely to have as negative an impact on the growth of the telecommunications and internet sectors as might otherwise have been anticipated. This is primarily because there are several alternative transmission possibilities in the commonwealth, including satellite and the telecommunications networks used by railways, the army, and other government and private entities. The use of contemporary technology as a substitute for fixed networks may actually enable Russia to evolve at a quicker pace than other countries with better infrastructures.

For further information on this topic please contact Max Gutbrod or Alla Izmailova at Baker & McKenzie's Moscow office by telephone (+7 095 230 60 36) or by fax (+7 095 230 60 47) or by e-mail ([email protected] or [email protected]). Alternatively, contact Anya Kruglova at Baker & McKenzie's St Petersburg office by telephone (+7 812 325 83 08) or by fax (+7 812 325 60 13) or by e-mail ([email protected]).
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