You're reading: Russia’s cellphone operator monopoly stressed by threat of sanctions, hryvnia devaluation

Russia’s 80 percent stake of Ukraine’s $3.8 billion cellphone operator market is facing a three-headed monster:  the threat of sanctions, Crimea’s unclear legal status, and the hryvnia currency’s sharp devaluation.

MTS Ukraine and VimpelCom’s Kyivstar mobile phone operators are
major Russian brands in Ukraine, while their main local rival is Life, jointly
controlled by major shareholder Turkey’s Turkcell and billionaire Rinat
Akhmetov’s System Capital Management. Formerly state-owned Ukrtelecom’s UTEL,
now owned by Akhmetov, is an insignificant player on the mobile communication
market.

The issue of sanctions has the potential to materially affect the Russian
telecom business should current sanctions be expanded to whole sectors of the
Russian economy. Japan and Western nations, including the U.S., Canada and the
European Union, have in various forms imposed restrictions in dealing with some
Russian banks and other companies, and have frozen the assets of Russians and
Ukrainians deemed responsible for the annexation of Crimea and over the
escalating civil unrest in southeastern Ukraine.

Thus, borrowing on foreign markets for Russian mobile operators will become
costlier in the best case scenario and nearly impossible in the worst case.

Moreover, since 48 percent of MTS shares and VimpelCom’s 10 percent are
traded on the New York Stock Exchange, investors could serious impact their
business activity. Rising tension around Russia will lead to panicky mood among
them.

A large-scale boycott campaign of Russian products may add more problems to
MTS’s and VimpelCom’s businesses in Ukraine.

Regarding the situation in Crimea, which came under Russia’s control in
March following an invasion, much will depend on the its state telecom
regulator Roskomnadzor. It will dole out frequencies to operators who want to
enter Crimea. Roskomnadzor Deputy Head of Service Oleg Ivanov told Kommersant
that almost all of the peninsula’s operators have the opportunity to develop 3G
networks, since the 2G free ranges are almost gone.

MTS Ukraine

MTS so far hasn’t been touched by sanctions. “Sanctions can be extended, so
we may have difficulties with external borrowing,” warns MTS in a corporate
statement.

However, the company views the presence of foreign capital in shareholding
structure as an opportunity to gain additional capital investments, MTS Ukraine
spokeswoman Victoria Ruban said. The chief financial officer of the parent
company, Aleksey Kornya, said the political and social unrest has created a
short-term “risk-off” environment, but no fundamental change, according to
CNBC. 

Evgeniy Golosnoy, an analyst for Moscow-based Metropol research firm, warns
that “loans will be more difficult. If MTS falls under sanctions, there will be
a lot of problems.” As of Dec. 31, the MTS had a total debt of $6.1 billion.

Commenting on the hryvnia’s devaluation, MTS president Andrey Dubovskov
said that it has a negative impact on their business. “People talk, money is
paid, revenue is growing, profitability is good. Of course, we’ve seen
devaluation… In any case, it is bad for everyone.”

Meanwhile, MTS Ukraine still plans to invest $1 billion in network upgrades
this year, according to Ruban.

In Crimea, however, the company officially recognized the risk operations
being disrupted, where the company holds 57 percent of the mobile market. In an
April 28 note to investors, it stated that business could suffer there while
questioning its ability to retain its license.

“Our license status in Crimea and our ability to receive a steady cash flow
in the region are in limbo,” the company’s report says.

According to Metropol’s Golosnoy, problems with frequencies in Crimea for
MTS will not happen because the frequency grid on the peninsula remains intact.

“The European Union has already taken measures to restrict bank activities
in Crimea, so we can assume that these measures affect and publicly-traded
companies, such as MTS,” Golosnoy told Kommersant.

At the end of 2013 MTS Ukraine served 22.7 million subscribers – 22 percent
of the total MTS subscriber base and 37 percent of the Ukrainian market. Its
net profit grew by 19.4 percent last year, reaching $335 million.

Kyivstar

To account for the heightened risk, Kyivstar’s parent company VimpelCom on
March 6 stated that it had made a $2.1 billion write-off of its Ukrainian asset
due to deteriorating macroeconomic indicators and with major global credit
worthiness rating agencies lowering Ukraine’s debt rating.

Kyivstar representative Michael Shuranov said on April 7 that the company
has not received any requests or demands on changing the order of service on
the peninsula.

“We are studying the technological environment in Crimea and preparing a
feasibility study for the project deployment of mobile and fixed networks in
the area,” said VimpelCom representative Anna Aybasheva.

The company reported a nine percent drop in net income last year, which
stood at $75 million. Kyivstar is Ukraine’s most popular mobile operator with a
40.7 percent market share servicing 25.8 million people.

Kyiv Post business journalist Evan Ostryzniuk can be reached at  [email protected].