Disagreements Arise over Limits to Foreign Investments in Russian Telcos

A row is brewing in Russia over proposed legislative amendments, which would see regulation of foreign investment in the country's telecom sector. A bill, which has already received approval from the State Duma in the first of three readings, recommends that foreign investors wishing to buy control of 50% of a telecoms operator ought to seek permission from the state. Foreign investors that are partially state-owned would require permission to acquire 25% or more, and such foreign investors would then have to wait up to six months for a reply. The bill recommends that these conditions apply to operators that "dominate the communications services market" or "hold a significant position" in the landline communications network, according to the Moscow Times. As such, the bill now defines telecoms as a "strategic industry", crucial for national security. In its first reading in 2007, the bill listed 39 such strategic industries, with telecoms not included, but this number has now been increased to 43 with the addition of communications monopolies and internet providers, among others. The State Duma has recommended that the bill be approved in its second reading on 19 March 2008.

Outlook and Implications

• Opposition at a Time of Consolidation and Investment: The proposals have met with strong opposition from Deputy IT and Telecoms Minister Alexander Maslov. His primary objection is that the burgeoning telecoms sector will be hampered by limits on foreign investment at a time when consolidation is occurring and fixed operators are under pressure to invest in network digitalisation. He has also criticised the definition of internet providers as "strategic", claiming that 95% of Russia's 10,000 internet providers are minor operators serving city districts or small towns. The terminology provided in the bill, referring to "strategic industries" and operators that "dominate" the market, is vague, leaving room for interpretation. However, Maslov estimates that some 10,400 telcos will be subsumed under the "strategic" label, and fears that the new regulation will lead to "stagnation" in an industry he describes as currently developing "dynamically".

• Proposed Changes Unlikely to Make Huge Difference: In truth, there is currently limited foreign investment in Russia's telecoms industry. Norway's Telenor owns a 33.6% stake in VimpelCom; TeliaSonera owns a Russian mobile unit; and France Telecom owns long-distance operator Orange Business Services. Generally, however, the major consolidation in recent years has been between primarily Russian-owned operators. Nevertheless, as the mobile, broadband and converged sectors continue to mature, further consolidation can be expected, particularly in the form of larger operators buying out smaller rivals. Additionally, the privatisation or reorganisation of state-owned Svyazinvest now looms large. Limits on foreign investment would be detrimental to any sale process, and therefore to future investment, with Svyazinvest's regional units needing to digitalise their networks and increase their broadband presence. A further factor to be considered is that potential Russian investors, hoping to acquire assets and then sell them on in the future, may now be dissuaded by the prospect of complications in trying to attract foreign buyers in the long term. However, the difficulties already presented to foreigners in Russia in trying to navigate the opaque operational environment, coupled with the predominantly Russian-owned telecoms market, means that in practice any new legislation would do little to alter the status quo.

• Increasing Russian Nationalism and Authoritarianism: Given that to date there has been limited foreign investment in Russia's telecoms sphere, it is a little unusual for new legislation limiting foreign investment to be suggested. The likeliest explanation for this therefore appears to be that the increasing Russian taste for nationalism and authoritarianism is seeping into the telecoms sector. The state seems to be trying to keep tabs on the fast-growing and increasingly lucrative industry, trying to ensure that telecoms wealth remains in Russia by keeping investment "in-house".

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