Svyazinvest Raises Local Tariffs by 8%

March 11, 2009

On March 1, Russia’s Svyazinvest raised its local tariff rate by 8% for its consumer and business subscribers. Since last summer, Russia’s market environment has deteriorated, with the ruble spiraling to historic lows and continued talk of a currency devaluation. As a result, operators face increasing income and balance sheet pressures and are reanalyzing their strategies in light of the market decline.

The Federal Bureau of Tariff Regulations, the government body responsible for setting call package pricing for operators, gave its consent to Svyazinvest to raise tariffs, affecting local packages that charge a flat rate for unlimited use. Russian operators had moved to the unlimited use model in November 2008, because the lack of network digitization made it difficult to institute per-minute pricing. The bureau regularly indexes telephone tariffs to Russia’s inflation rate, which reached 14.1% in 2008, and had decreased the average tariff price in 2008 by 33%, based on its reading of 2007 market figures. The combination of last week’s increase and the 2008 decrease means that the price of local unlimited tariffs has fallen back to 2007 levels.

The tariff rise comes as welcome news to telecom operators, which have been petitioning regulators while watching their margins squeezed by the ruble’s downward spiral against the dollar. The government has been critical of operators’ requests for tariff increases, previously granting increases of just 50% of what was requested. The Federal Bureau for Tariff Regulations’ decision to grant an 8% increase is likely connected to the government’s revived interest in fully nationalizing Svyazinvest. Following the appointment of Igor Shchyogolev to the head of the Ministry of Communications, Minsvyaz, the government began to explore the possibility of reacquiring the remaining 25% privately held stake to bring Svyazinvest under full government control.

Exhibit: Market share by service in Russia, 2008

Source: Russia Country Intelligence Report, February 2009

Meanwhile, mobile operators faced a host of difficulties in 2008. The volatility of Russia’s capital markets and uncertainty of the ruble’s value against the dollar has added to the burden of a slowing mobile market. VimpelCom (Beeline) has already raised tariffs on its networks to compensate for the declining trading environment. Other operators have maintained their existing tariffs but have not discounted the possibility of a future increase. With the high level of competition among mobile operators, the likelihood of operators passing their costs on to subscribers seems unlikely. Instead, we believe that mobile operators will focus on operational and cost efficiencies while reigning in the high Capex-to-revenue ratios that have become characteristic of the Russian market.

Despite the recent market difficulties, Pyramid Research believes that the Russian mobile and fixed markets will continue to expand, thanks to high demand for 3G and broadband services. Meanwhile, the government’s monopolistic control of the fixed-line infrastructure, through Svyazinvest, is likely to spur a wave of innovation as firms seek to bypass the lack of LLU and satisfy Russia’s demand for high-speed Internet technologies and associated services, such as VOIP and IPTV.

— Andrei Tchadliev, Analyst, EMEA

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