Russian Telcos Look to Asia for Growth

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This year alone, says Abugov, Sistema plans to invest $1 billion in the country, with a similar amount slated for next year. Sistema opened its first office in New Delhi on Feb. 12, the first private Russian company to do so since the end of the Soviet era. As well as telecom, the Russian conglomerate is eyeing other investment opportunities in India, from real estate to microchips—areas where it is also a big player back in Russia.

Sistema's bold expansion into India gets positive marks from analysts. "Russia and the CIS [Commonwealth of Independent States] markets are already saturated, so it's a logical step to expand into other countries, and India is one of the fastest-growing," says Maxim Savvatin, an analyst at iKS-Consulting in Moscow. He adds that Sistema's Indian foray "will be very positive for its future development." Currently only around 25% of Indians own mobile phones, but penetration is expected to take off as India's economy develops.

True, Sistema will face stiff competition. The burgeoning Indian market also has attracted the likes of British operator Vodafone (VOD). In February, 2007, Vodafone paid a huge $18.8 billion (BusinessWeek.com, 1/16/07) to buy Hutchison-Essar, India's fourth-largest mobile operator. Vodafone already owned 10% of Bharti-Airtel (BRTI.BO), the market leader.

Barriers to Entry

Huge sums like that are off-putting for other potential Russian entrants into the market. "India is phenomenally interesting, but also phenomenally difficult," says Vimpelcom CEO Isozimov, who declined to bid for licenses in the country.

Sistema's Abugov agrees that the Indian market is "very, very competitive." But he points out that with MTS's 83 million existing subscribers, Sistema is already one of the world's largest mobile-phone companies, so it has no reason to balk at the challenge.

Another formidable hurdle is India's notoriously difficult regulatory environment. Although Sistema has already obtained licenses to operate in India, it has yet to obtain frequencies for all the regions. And allocating spectrum in India is a thorny issue, with licenses awarded based on the order in which companies apply for them. Sistema is seventh in line to receive Global System for Mobile communications (GSM) allocations, which means it may have to wait for more than a year.

But that isn't deterring the company's expansion. It has also applied for frequencies used by the less common code division multiple access (CDMA) standard, and has already been awarded spectrum in several regions. Analysts regard the choice of CDMA as a smart move, enabling Sistema to get a head start on competitors still lined up to get GSM allocations. Abugov also argues that the latest CDMA technologies will surpass GSM, with much faster data-transmission speeds. "GSM cannot bring anything like the speed and efficiency which we can bring to the market," he says.

Boom in Vietnam

Both Sistema and Vimpelcom have benefited from warming political and economic relations between Moscow and countries that staked relationships with the Cold War Kremlin. In Vimpelcom's case, that meant investing in Vietnam. In September, it signed a preliminary joint venture agreement with the country's Public Security Ministry to create a new mobile operator, GTel Mobile, Vimpelcom's first venture outside the former Soviet Union.

GTel Mobile received a license in January, becoming the seventh mobile operator in the country and the first with a major foreign shareholder. Vimpelcom also announced it was preparing to invest $1 billion in the necessary infrastructure, as well as provide technical and managerial expertise. Negotiations over the venture are still in progress.

To be sure, Communist Vietnam may seem a surprising choice. Where else in the world do investors have to team up with the police ministry to provide mobile-phone services? But, notes Vimpelcom CEO Isozimov, Vietnam's sizable population of 86 million means it has huge market potential.

As the nation's economy liberalizes and opens up, economic growth is notching 8% per annum. Half the population is under 30, thanks to a postwar baby boom. And with mobile penetration still at just around 20%, the market is primed for takeoff. "Such a combination of a very young population and a dynamically growing economy creates a very buzzing attitude inside the country," Isozimov says.

Vimpelcom's bet on fringe markets is certainly a different approach from Sistema's safer Indian strategy. But there's one thing the Russian companies agree on: When it comes to developing mobile-phone services in difficult markets with huge potential, Russia has been the ideal testing ground.

Bush is BusinessWeek's Moscow bureau chief .