OXFORD, United Kingdom-GSM operators from Central and Eastern Europe met in Prague in September, in the midst of the Russian financial crisis. One of the Ukrainian operators couldn’t make it. “My parent company has asked for an urgent report on the recent financial crisis in Russia and its effect on the Ukraine,” explained the chief executive officer in a fax apologizing for his absence. “In fact, the Ukrainian economy is well-insulated from Russia, but unfortunately my superiors don’t understand. They see Russia and the Ukraine as the same.”
The unfortunate CEO’s superiors are American. And many Americans still fall into the trap of viewing Europe as a homogeneous collection of states similar to their own domestic environment. It is not, of course. The differences between regions and countries are vast. Those differences can create special problems of their own.
The consensus of the operators meeting at the IBC conference on GSM (Global System for Mobile communications) in Central and Eastern Europe was that inflation and lack of convertible currencies is a key issue in their region. Inflation is a particular problem for many of the mobile operators in Eastern Europe. Bulgaria even experienced hyperinflation in 1997. “Due to socialist guiding of the country after socialism had been abolished,” said Eugene Karakanovsky, director of international affairs for MobiTel.
Fluctuating currency environments create major tariffing problems, noted Olga Kilkovak, roaming coordinator with Promonte GSM of Montenegro. After a three-year period of economic sanctions, inflation in the Federal Republic of Yugoslavia is now running at nearly 15 percent. Tariffs had to be increased to preserve margins following the 80-percent devaluation of the Yugoslav dinar in April 1998.
The situation remains unstable, compounded by the huge discrepancy between official and black-market exchange rates and sudden unannounced increases in public telephone network interconnection rates. Delays in implementing financial settlements for roaming charges are a key issue in such an environment and have resulted in huge losses. Roaming charges are now expressed in German marks.
In some other countries, operators are unable to increase their tariffs or price in convertible currencies as the market is now so competitive. U.S. dollar pricing on the NMT (Nordic Mobile Telephone) network in Poland was discontinued in 1996 with the arrival of two GSM competitors. The Polish economy is fragile but improving, yet operators face severe customer care problems caused by the repercussions of roaming agreements with other countries with rapidly fluctuating currencies.
Many operators now address this problem by quoting roaming tariffs in U.S. dollars but accepting payment in local currency converted at the exchange rate on the day of billing. But settlement of international roaming charges between operators opens up a whole new range of problems.
Unlike in Central Europe, banks in Eastern Europe and the CIS tend to be owned by the government. Restrictions on currency transactions can be severe. Some operators have not been allowed to open accounts in foreign countries for the settlement of their international roaming agreements. Some countries, such as Russia, will not permit the settlement of net balances in roaming agreements; all monies owing have to be transferred, in both directions.
Roaming has only recently been possible with Uzbekistan, even though the traffic patterns are such that the country makes a significant net gain from the roaming arrangement. Previously, the government would neither allow netting nor money transfers out of the country, ensuring it received no money.
The situation with value-added tax (VAT) reclamation is equally confusing. Some countries allow VAT to be reclaimed; others don’t. In principle, VAT can be reclaimed in Russia, reported Przemek Jablonowski, regional manager of the financial clearing house MACH in Luxembourg. In practice, this has never happened because the procedures are so complicated that no one knows how they work.
Currency difficulties manifest themselves in other ways. Spectrum availability remains a problem in some countries. Large blocks of spectrum are still occupied by the military, and congestion problems are expected soon in parts of the region. But the military has difficulty in getting hard currency and so cannot obtain new equipment enabling it to move frequencies. This is delaying the award of some 1800 MHz licenses.
Not all countries in the region are seeking further expansion. Lithuania has seen penetration rates shoot from 1 percent to 5 percent over the past year. “This is an unhealthy level of penetration,” said Pierre Woda, managing director of Bite GSM, the pioneer of prepaid mobile services in Central and Eastern Europe. “It is driven mainly by handset subsidies, which may increase penetration but also increase churn.”
Unlike the Ukraine, Lithuania has been hit hard by the Russian financial crisis. A quarter of all Lithuanian trade is with Russia. “Many companies are going bankrupt,” reported Woda, “particularly those who did not have contracts in dollars.”
In the subsidized handset environment, even dollar contracts do not solve the churn problem for Bite GSM. Most new connections are simply handset replacements, often leaving behind bad debts. But the broken contracts are essentially unenforceable, noted Woda.
“Are you going to sue someone for US$50?”
