MTS Ukraine head says MTS could bid for Ukrtelecom

Graham Stack in Kyiv for business new europe
February 5, 2009

The announcement on February 4 by Ukraine’s Transport and Communications Ministry that a tender for fixed-line operator Ukrtelecom could take place this month was no surprise to Andrei Dubovskov, CEO of MTS Ukraine, Ukraine’s second-largest mobile operator.

“Everyone is waiting for Ukrtelecom’s privatization,” says 42-year-old Dubovskov. “The government and regulatory authorities are seriously pursuing this. We expect it will finally happen this year.”

Ukrtelekom’s fate, and the country’s privatization plans in general, have long been a political football. Ukraine’s parliament, the Rada, and the presidential administration cannot even agree over who should run the State Property Committee that’s responsible for privatization. President Viktor Yushchenko has in the past blocked the privatization of major companies, partly for fear Russian companies could buy strategic Ukrainian concerns, and partly over worries that his bitter rival Prime Minister Yulia Tymoshenko would use privatisation revenues to boost social spending, and thus her own ratings, in the run-up to presidential elections in January 2010.

But now privatisation is a last option to fund a budget predicated on a 2% deficit and 0.4% GDP growth, when consensus forecasts have now fallen to minus 5% GDP growth. The International Monetary Fund (IMF) is also demanding privatization. An IMF mission is currently in Kyiv and said to be unhappy with Ukraine’s patchy implementation of conditions for a second tranche of a $15.5bn stabilization credit agreed in November.

Speaking on February 4 about the Ukrtelekom privatization, PM Tymoshenko said that the tender would only take place if a decent price were offered by a “global brand.” She said talks were ongoing with interested parties about the exact terms of the tender.

Dubovskov says, “We have already expressed our interest, and have submitted our preferences for the conditions of tender. Nothing has changed from our point of view. We are already involved in the process.”

MTS is certainly among the most likely candidates to participate in a tender. Dubovskov adds. “But the decision on whether we participate or not, while not situative, will nevertheless depend on the specific conditions of the tender,” he warns.

In fact, proposed tender conditions for Ukrtelecom in the past have favoured MTS, by excluding any companies from bidding that have over 25% state ownership, thus ruling out several European majors such as Telenor, TeliaSonera, Telekom Austria and France Telecom. The Russian state has no stake in MTS. Tymoshenko, speaking Wednesday, February 4, reiterated that only private telecom firms would be allowed to participate.

Yevgeny Yevtushenkov, main shareholder in AFK Sistema, the Russian conglomerate that owns 52.8% of MTS, was quoted February 2 as saying that Sistema was planning some acquisitions, after securing financing facilities with Russian and foreign banks for several billion dollars. He made the comment while attending the Davos Economic Forum, according to Moscow Times.

Ukraine’s Minister of Transport and Communications Iosif Vinskii said February 4 that he expected Ukrtelecom to go for at least UAH25bn, currently just under €2.5bn.

Talking about devaluation

Regarding MTS Ukraine and the economic crisis, Dubovskov says the massive 60% devaluation has torn strips off Ukraine’s previously booming mobile telecom sector, and MTS Ukraine is no exception. “The strain on our budget has increased, our equipment comes from abroad and we have to buy hard currency at a significantly different level from earlier. Much of our expenditure is denominated in dollars, not only capex, but also [operating expenditure] such as international roaming. But our revenue of course is in hryvnia.”

Now the highly competitive Ukraine mobile telecom market is waiting to see who will take the plunge first and raise prices and/or switch to a dollar peg. “We will definitely not be the first to do so, and we have not yet made any decision,” says Dubovskov. “But when it does happen, the whole market will follow.”

Dubovskov is optimistic about demand staying stable, despite the crisis cutting into Ukrainian pockets in the form of inflation, hard currency credits turning into millstones, salary cuts and unemployment. Even with the crisis on everyone’s lips in Kyiv, Dubovsksov does not anticipate any drop in minutes of use. “MTS has the highest minutes of use per user in Ukraine, and our subscribers will not be talking any less in 2009.” But this could be speaking too soon: State Statistics reported for November a drop in the mobile sector’s revenues by 4.7% on the month, followed by stagnation in December.

Without providing any figures, Dubovskov says that MTS Ukraine’s debt situation remains stable despite the devaluation. “Our finances are sustainable, and our debt burden is manageable. Margin calls are absolutely excluded.”

Dubovskov points out that MTS Ukraine is a fully-owned subsidiary of Russian mobile giant MTS, “and thus is fully integrated into parent company financial flows.” The Russian parent has access to Russia’s emergency funds held by state bank VEB to refinance debt. And Russian Prime Minister Vladimir Putin recently included MTS on a list of 250 system-forming Russian companies that can qualify for direct financial help.

Dubovskov says MTS Ukraine does not need any such formal status in Ukraine itself- because the company already de facto enjoys such status: “On account of the size of our tax payments, we are already de facto a system-forming company in Ukraine. We have been the leader in tax payment growth in recent years. The government take good account of us as it is.”

Business as usual ‘in three to six years time’

Despite the crisis, MTS will continue to invest in its network. MTS Ukraine’s corporate governance director Andrei Bereznyi stated January 23 that the company would invest $323m in 2009.

Dubovskov himself is cautious about committing to specific figures, saying capex would be “restrained” in 2009. However, he stressed that the company will not abandon any major projects. This includes the rollout of its CDMA-based wireless internet network, already covering 100 cities and towns, 2G services and participation in any UMTS tender. “We will continue to pursue our plans, slowly, step by step,” says Dubovskov. Dubovskov rules out any adventures such as moving into handset retail, the current trend among Russian mobile operators.

MTS Ukraine’s CEO is downbeat about when business will return to normal. “I’m not one of the optimists who say that things will revive in the second half of 2009. I think it will take from three to six years to return to previous levels.”

Dubovskov relativises the shock of the massive hryvnia devaluation, saying he has been through similar traumas in 1991, 1994 and 1998. But he sees one important difference to the current crisis. “Those were local crises, affecting one country or a group of countries. This one is a global crisis.”

Belarus takes big step with Velcom privatization

Graham Stack for business new europe

Velcom’s new Austrian CEO Helmut Duhs does not hesitate to call the privatization of Belarus’ second-largest mobile operator by Telecom Austria, “the biggest step in privatisation for Belarus.” The 37-year-old Duhs hardly anticipated Minsk as a future posting, but since he took over in November, Velcom has become a flagship for Belarus’ new economic policy of openness.

The privatization has been a feather in the cap for President Alexander Lukashenko’s privatization programme, but the deal was mired in scandal to start with. Only a year ago, the Belarusian government suddenly announced that its second-largest mobile telecom asset, then called Mobile Digital Communications (MDC), had been clandestinely privatized for an undisclosed sum to a shadowy Syrian investor called Ead Samawi, bringing with it accusations of insider dealing.

Samawi’s business interests in Belarus allegedly originated with arms trading, and he was one of the few foreigners in the country said to be close to the president. Ead Samawi also surfaced in public shortly after the Syrian foreign minister visited Minsk on a state visit about two years ago. Analysts point out that the state arms exporter Beltekhexport held 20% of the government’s total 51% in MDC. Relationships between the Belarus administration and Samawi have had their ups and downs since MDC was founded in 1998: Samawi even spent a night in a KGB detention cell in 2003. But 2008 saw a number of televised love-ins between Samawi and Lukashenko, which seemed to pave the way for the behind-the-scenes privatization. With a decade’s delay, Belarus seemed to be making the same transition from state-ownership to crony capitalism that Russia and Ukraine had done in the 1990s.

This initial apprehension made the cheer greeting the Telekom Austria deal weeks later all the louder: the Austria firm bought 70% of Samawi’s holding company SB Telecom for €730m, with a call option agreement for the remaining 30% exercisable in the fourth quarter 2010, valued at approximately €320m. Suddenly a new optimism was in the air: Belarus seemed to be skipping over the crony capitalism stage and looking instead to attract foreign investors – from the West.

The shift was a big surprise apparently for Telekom Austria itself, which first made contact with the Belarusian government in 2007. The sum Telekom Austria paid SB Telecom, Duhs told bne, was only a slightly higher valuation than the €550m the government belatedly this year said it had received from SB Telekom for its 51% stake.

And now the government has said it intends to privatize the other two mobile phone companies as soon as possible. The Belarusian market leader, MTS, a joint venture between Russian mobile giant MTS (49%) and Belarus fixed-line monopolist Beltelecom (51%), looks set to see the Russian company acquire an extra 2% for around $27m, according to the telecommunications ministry. The third-placed BeST is likely to be acquired by Turkey’s Turkcell when a price has been agreed upon.

So what only a year ago would have seemed fantasy, is now nearing reality: the complete privatization of a key sector to foreign investors.

Duhs himself disputes that there has been any u-turn in government policy, arguing the development is entirely logical. “Velcom was the first GSM operator in Belarus and Samawi was always the driving force behind the company. The digital mobile industry was from day one, competitive and liberalized. It simply made sense for the state to sell its stake when the market had matured and the entrepreneurial stage completed. It made sense that the existing partner make a deal, and then negotiate with an international investor.”

President Lukashenko himself boasted to students at Belarus State University in February about how profitable this strategy had been for the state: “We invested nothing at all [in Velcom] and got around $600m for our stake,” he said, adding that “billions” were being offered the state for MTS, and for BeST even “with all its debts.”

Growth potential

From the point of view of Telekom Austria, the attraction of the Belarus market lies in its great potential for growth. “It is the only market we have with less than 100% penetration, in fact around 70%, and currently our tariffs are 70% lower than in the next lowest market,” explains Duhs.

Velcom’s monthly ARPU in the first quarter was €6.5, compared with Telekom Austria’s ARPU of €28.7 in Austria for the same period. In the Belarusian context, however, Velcom boasts the country’s highest ARPU due to its traditional focus on better-off users: market leader MTS reported only €6.25 of ARPU in 2007.

Part of the reason for such low tariffs, besides competition, has been government involvement in the branch, admits Duhs, and the ideology of a “socially-oriented economy.”

“This is a country-specific approach,” shrugs Duhs, “which requires a commitment from large companies. You have to know and accept it before you enter the market.”

One such commitment is for mobile operators to provide equal quality to all inhabitants, ie. to ensure coverage of unprofitable rural areas. The rural population is an important government constituency, and because Belarus is sparsely populated, operators have to invest a lot in their networks relative to subscribers. In addition, the fixed-line operator Beltelekom is a state monopoly offering the lowest call tariffs in Europe. “Mobile phone operators subsidise the fixed-line operators,” says Duhs.

So Velcom has no worries about a price war breaking out between the newly privatized operators as happened in Ukraine 2006: “Prices are simply as low as they can get.” Instead, Duhs welcomes increased competition as stimulating market growth.

He also notes that Belarus is committed to WTO entry, which requires the liberalization of fixed-line communications. “Positive signs by the government on such issues were a condition for us entering the market.”

But for all the low ARPU and social strings attached, the 3.2m Velcom subscribers now comprise 20% of Telekom Austria’s mobile subscribers in a country with GDP growth averaging 8% per year, with the first tenders for 3G licenses likely to take place this year. And Duhs is aiming higher: for Velcom to be market leaders within five years, by providing more value-added services while diversifying its subscriber base away from business users.

Improving investment climate

Regarding the investment climate as a whole, Duhs points to the Belarusian tax system as the biggest obstacle. “It is by far the most complicated I have ever seen, with 42 taxes meaning that huge administrative efforts are needed for compliance.” And it’s not just the number of taxes: taken together, Belarus has the highest tax rates in region, says Duhs.

Duhs points out that Velcom enjoys a privileged position when it comes to dealing with government, “because the privatization is perceived by all parties as a pioneer action and supported as such.” In general, he says, since foreign investors are still a novelty, government works with them on a case-to-case basis, not yet having developed routinised procedures.

Duhs sees Velcom acting both as an “ambassador” for Belarus abroad, promoting the country as an investment location, as well as for Austrian business investing into Eastern Europe. “The Austrian approach regarding [foreign direct investment] is more flexible than in larger countries, and Austria has always been a pioneer in entering East European markets. So it’s not a coincidence that the biggest sectors in Belarus are privatized first with the help of Austrian companies.”

Duhs points to Austria’s historical links to Central and Eastern Europe. Metternich once quipped that the Balkans start on the outskirts of Vienna, and it’s no coincidence that the Austrian pioneers in Belarus, Telekom Austria and Raiffeisen International, are both headed by men with roots in the former Yugloslavia – Boris Nemsic and Herbert Stepic, respectively. Looking east comes easy to them.

That is not all the two pioneering investors share: Belarusians might well imagine that yellow and black are the Austrian national colours. Following rebranding, Velcom’s new black on yellow logo now perfectly matches the Raiffeisen emblem displayed by Priorbank. The new Velcom brand aesthetics are also pioneering: The eye candy previously smiling from billboards has now been replaced by sombre, even harsh, images of “real people,” about which even Velcom’s own sales staff openly express their puzzlement.

But this, argues Duhs, is what foreign investment can bring – new approaches, new ideas, new technologies. And thus, to explain the rebranding to staff, Duhs and his team did what few Belarusian managers do – they launched a roadshow through Belarus to convince workforce on the rebranding, explaining the concepts and answering questions openly. “There were a lot of questions,” smiles Duhs.