Wireless operators, especially those in emerging markets, will have to operate leaner to survive the second stage of a financial crisis that originated in Asia a year ago, spread to Russia more recently-and within a matter of days fanned out like wildfire to markets worldwide in August.
Stock markets around the globe-in Europe, Japan, Latin America and the United States-took dramatic plunges during the days immediately following the announcements by Russia’s Central Bank it could no longer maintain the value of the ruble and by Russian President Boris Yelstin that he once again fired his team of economic advisers and reinstated Viktor Chernomyrdin as prime minister, whom he had fired only five months earlier.
Russian citizens clamored to banks trying to withdraw their savings, but most were only allowed to sign a waiting list to make a future withdrawal. The trading of rubles for dollars at the Central Bank had to be suspended, as the ruble slid into a freefall.
Most world markets effectively bounced back after a couple of days.
“(The Russian crisis) comes on the heels of what has already been a year-long currency crisis in Asia. It is a deeper problem than it would have been had there not been a problem that already existed,” said Glenn S. Gerstell, partner in the New York-based law firm Milbank, Tweed, Hadley & McCloy and head of the firm’s global telecommunications practice.
“Until Japan and Russia solve their problems, the crisis will not go away,” Gerstell stated. “This is something that will persist for several months.”
Russia’s largest wireless provider, Vimpel Communications (VimpelCom), which has seen its stock fall 74 percent this year, said it might have to cut some of its 1,400 workers, and that it plans to reduce next year’s capital spending by as much as 40 percent, or US$66.4 million, in an effort to reverse its declining stock.
“We have frozen any non-network related capital expenditures,” said VimpelCom Chairman Augie Fabela. “We are reviewing and reducing our overhead, assuming and preparing for the worst-case scenario.”
Although the value of the Russian ruble plummeted by about 50 percent to detrimental levels, some Russian wireless operators seem undaunted and continue to view the country’s emerging and seriously under-served wireless market as having great long-term growth potential.
“This is not the first time for this (problem) here,” said Sergey Avdeev, deputy general director and strategy development director for KB Impuls, Moscow, which owns about 20-percent of VimpelCom.
“The penetration in our country is not so high yet. It is not a consumer market yet-it is the business segment … They can pay their bill any time,” said Avdeev.
At the end of 1997, the country had a cellular penetration rate of only 0.3 percent, with fewer than 500,000 subscribers. The prices of VimpelCom’s wireless services did not actually rise with the crisis, but they always have been dollar-denominated, which essentially raises the price because of the devaluation of the ruble.
“The problem with all those operators is that not only did they inherit poor fixed networks-mostly analog-(they have) waiting lists that don’t even begin to address demand,” said Jill Finger, Eastern European telecom analyst for U.S.-based Pyramid Research.
“When there is a currency devaluation, it lowers the dollar-denominated revenues per subscriber, and … this means the operator may have to pass the cost on to subscribers in the form of tariff hikes,” Finger explained. “Russian tariffs are extraordinarily high for wireless services, especially for a start-up. I don’t think the business customers VimpelCom depends on are going to be immune to this.”
“We do believe that churn will increase and revenues may be less than projected … (although) our sales to date show no sign of decline,” said Valery Goldin, vice president of international relations for VimpelCom.
The cellular provider said it already has terminated some customers’ service because of potential credit risk and has more than doubled its provision for doubtful accounts receivable from US$3.2 million during the second quarter last year to US$6.7 million for the same period this year.
Russian business people and government officials need a reliable way to communicate with investors, clients and each other if the country is ever to emerge from the sudden crisis. In fact, VimpelCom reported increased traffic on its AMPS/D-AMPS (Advanced Mobile Phone Services/Digital-AMPS) network during the midst of the upheaval.
The VimpelCom Group also offers PCS (Personal Communications Services) using GSM (Global System for Mobile communications) technology.
VimpelCom has four licenses in the network-buildout stage, and the telecom operator plans to forge ahead with the infrastructure buildout-for now.
“Our long-term plans include building large-capacity networks to gradually create conditions to make cellular a mass-market product,” said Goldin. “The present crisis may slow down the projected rate of development. Of course, we will reconsider certain less important areas of our development if the crisis persists and the situation worsens.”
“The hidden problem of this situation is that, while being overall profitable, operators do not have enough traffic and cash to expand systems beyond initial configuration,” said Vladimir Slobodyanyuk, a lead engineer for Cellarer Telecommunications Consulting, Moscow.
“It is very unlikely that in the nearest future Russian companies will be able to borrow money on the foreign or domestic markets, or vendors will agree to ship the equipment without 90 (percent) to 100 percent down payment.
“The credibility of Russian banks will be under question for some time as well. This translates into a suggestion that new infrastructure acquisition will be delayed, if not stopped instantly,” Slobodyanyuk predicted.
