By Peter J. Brown

For the global satellite industry, Russia remains a challenging place to conduct business, an area where the process entails a mix of patience, politics and partnering. Everyone wants to be upbeat when it comes to discussing the enormous range of opportunities for satellite service vendors in Russia today, but making plans and making progress are two entirely different things.

More than 10 years after the dissolution of the U.S.S.R., Russia is still struggling to establish a modern market economy and achieve strong economic growth. However, there is a new mood that permeates the country,” says Gervais Roussy, regional director of Montreal-based NSI Communication Systems Inc.

“Russian President Vladimir Putin is implementing what he calls a ‘managed democracy.’ This effort, along with President Putin modernizing sector after sector, a new central bank chief committed to reducing inflation, and a restructuring of the Soviet commercial debt, gives Russia the potential of an annual GDP growth of 5.2 percent from 2002 to 2010, as long as reforms are continued and the external economic situation remains favorable,” he adds.

A relatively untapped market spread across eight time zones, Russia is attracting considerable attention. Only a few thousand VSATs are now deployed in this region, according to Arunas Slekys, vice president and general manager of the Russia and NIS Business Group at Germantown, MD-based Hughes Network Systems Inc. (HNS). He counts only five to seven million Internet connections in Russia; and, out of perhaps 350 ISPs nationwide, approximately 50 ISPs in Moscow are generating 80 percent of the total Russian Internet revenue. “We view this as a good opportunity based on unmet demand of some significant size. Satellite can play a big part here,” says Slekys. “I describe Russia as very similar to Brazil.

“Russia has a number of regions, where access to the information backbone is possible only via telephone lines. For example, by the end of 2001, the largest Russian ADSL-access provider, MTU-Intel, sold 1,000 times fewer ADSL lines than Deutsche Telekom,” says Stefan Kollar, Moscow-based sales director for Intersputnik.

But, although satellite not only offers the most attractive solution for access to multimedia content in remote regions, according to Kollar, two-way satellite is not feasible in most instances. “A two-way satellite channel remains a more complicated solution due to the high equipment costs and channel lease prices, as well as the lengthy approval process for emission (a process known as Electrosvyaz). It is for this reason that the customers often choose cheaper and lower-quality terrestrial channels,” he says.

“In Russia, there are quite a few bureaucratic and financial obstacles hampering the introduction of two-way satellite services. At present, the licensing and registration costs for a VSAT station are comparable to the cost of the station itself, reaching $4,500 to $6,000. It takes about three months to register a station and six to 12 months to place it in service. Simplified procedures are applicable to the VSAT network of the Russian Satellite Communications Co. (RSCC), but not to other operators,” Kollar adds.

On the other hand, broadcasting via satellite in Russia is expanding much more quickly. Kollar estimates that the growth rate for this sector ranges from 15 to 20 percent. And, in general, the need for more satellite-based services is tremendous. “Satellite is very important in Russia where the size of the country and the predominately winter conditions make laying fiber extremely difficult,” says Ludmilla Naumova, London-based European sales manager at the Netherlands-based New Skies Satellite N.V. “Good terrestrial links can be found west of St. Petersburg and Moscow. In Siberia and the rest of Russia, however, existing terrestrial infrastructure is quite poor.”

In other words, this is a telecom market that still has a considerable distance to go before it reaches maturity. Landline telephones do not reach a majority of the population, while cell phone penetration is just crossing the 10 million unit threshold, according to Slekys.

Russia Makes The Technology Leap

Like drilling down through the rock hard tundra in mid-winter, probing the reality of the Russian marketplace and the broader regional marketplace is no easy task. In late summer, Via Satellite interviewed several companies that are doing business today in Russia and a select few countries out of the ranks of the former republics of the Soviet Union. Not everyone was forthcoming in wanting to discuss what deals were in motion or what partners were in the mix. And for good reason. It seems that Russia and the region are not only one of the most highly competitive markets, but also one where predictability is at a premium.

“Although Russia remains a top priority, I am encouraged by all the business that we are getting from the other countries in the region as well,” says Tim Moran, managing director of channels for interWAVE Communications in Menlo Park, CA.

“Russia missed everything that has been going on in Scandinavia and Western Europe, for example, throughout the past five or six years, and now it has jumped right to what I would describe as 2.5G technology. We anticipate numerous wireless deployments in the near future there with satellite links,” Moran adds.

This is the reason that interWAVE has partnered with a local integrator and service provider to install public and private VSAT-based GSM phone systems in Russia, and Uzbekistan. interWAVE uses VSAT equipment supplied by HNS, Gilat and others to backhaul cellular phone traffic to a main switch, according to Moran. InterWAVE has done this in a few dozen other sites around the world, and it is now ready to roll out a similar solution on the outskirts of Moscow.

Looking For The Right Model

Russia and the other countries in the region are not unlike much of the rest of the world when it comes to pricing and payment models, but it is the structure of the market that stands out. In addition, there are issues of how stable some of the countries will remain over time.

“This can be a relatively dangerous and unstable environment. Still, the Russians need a lot of services, and we have knocked on every door. The energy and banking sectors appear to be well covered already from the standpoint of satellite connectivity,” says Pier du Plessis, sales director at Biddinghuizen, The Netherlands-based Carrier to Carrier Telecom N.V. (Carrier2Carrier). “While an oligopoly continues to yield considerable power in the Russian satellite market, it remains an untapped market which is a lot stronger than you might imagine.

“Throughout the past year, what Carrier2Carrier discovered is that from the standpoint of voice traffic, Moscow and St. Petersburg make up almost the entire market,” he continues, adding that “there is no money in it. What I call the ‘kamikaze pricing’ undertaken again by many large carriers is having a very negative effect throughout this region. We see this happening in the Middle East as well. We do not think this will last, and the markets will stabilize.

“With respect to two-way Internet, it is a growth opportunity. However, given the substantial licensing and operating costs, there are reasons why simplex multicasts or one-way satellite feeds in general are likely to dominate this region for some time to come,” he adds.

Using a pre-payment model is the only way to proceed, according to du Plessis, who sees a steady demand for a cascade of small circuits into remote areas. “The instability, and market conditions as a whole, lends itself to the creation of numerous islands as opposed to a single homogenous network in any one country,” says du Plessis.

“The ability to pay remains the biggest barrier. Despite this and other barriers, such as the sizeable licensing fees for two-way services and the lack of adequate satellite capacity in Far Eastern Russia, a number of suppliers are here in this market,” adds Slekys.

HNS has three hubs servicing Russia and a hub in Kiev where HNS has partnered with Datasat, which is part of Incom Corp., to introduce broadband via satellite services. Slekys describes the Ukraine as a country that has made big strides in the past two years. The immense size of the Russian market, however, combined with the fact that both its consumer and its small-to medium-sized enterprise components are so undeveloped overshadows all the other markets in the region.

“President Putin wants to facilitate the growth of this sector, not inhibit it. He has placed considerable emphasis on his e-Russia initiative, which involves upgrading all the Russian ministries, among other things. Someone has to address the details such as the 30 to 35 percent overhead for customs and value added tax. This has to be reduced to make doing business in this market more attractive,” says Slekys. “This country is still the paradox it has always been.”

Geography and the obstacles described above against two-way satellite solutions in Russia and the NIS are compelling Israel-based Shiron Satellite Communications Ltd. to aggressively pursue the sale of hybrid wireless satellite (HWS) solutions in this region, according to Shaul Laufer, co-founder and president of Shiron. Shiron is teaming up with wireless technology provider Alvarion and Intersputnik to offer a high performance HWS platform.

“This is an emerging market like Africa which is starting to move ahead. The adverse nature of the licensing and regulatory environment is well known, and yet each month we see more prospective local partners streaming to our Web site,” says Laufer. “The Russian government’s efforts to protect its assets are understandable, and it lends itself to a combination of satellite and wireless technology. This is the most cost effective solution in this instance.”

For the Russian market, Shiron offers the InterSKY system, a broadband two-way via satellite communications infrastructure for fast Internet and IP applications. InterSKY allows service providers to achieve operational cost-savings by using BOD FDMA return links with a DVB-S-based forward link. Return link speed changes dynamically between 16 kbps to 2 Mbps to support multiple users per earth station.

“This market is designed around the concept of multiple users per earth station, and we are arriving at just the right time,” says Laufer. “This approach to wireless Internet access became our focus a year ago, and now it is justifying itself.”

Satellite Operators See Lots Of Potential

Washington, DC-based Intelsat Global Service Corp. has not yet established an office in Moscow, according to Intelsat’s Vice President of European Sales Yuli Wexler. Intelsat, however, sees the regional demand for private networks and Internet services as robust. In fact Wexler describes Russia and Kazakhstan in particular as higher growth zones than Western Europe.

An association of VSAT users in Russia is actively lobbying to reduce the regulatory burdens, according to Wexler. “Everyone recognizes that there is a need to streamline the time it takes to obtain a domestic license and a need to reduce the fees that are in place, which are fairly steep. These regulatory hurdles in general are not insurmountable, but they are not easy to work with,” Wexler says.

Intelsat is working with several large Russian VSAT networks, including the Central Bank in Russia with a hub outside Moscow and VSATs at 1,100 branch offices aimed at Intelsat 704 at 66 degrees E. Russia’s largest oil company, LUKoil, uses Intelsat 604 at 60 degrees E to link its VSAT network, which encompasses most of its farflung production, administrative and exploration sites. “These companies are part of a broader trend in the corporate sector in the region. They want the best equipment available, and they want to have it all tied together using the most reliable and highest quality satellite feeds in the region,” says Wexler.

According to Naumova at New Skies Satellite, the satellite operator is now offering capacity in the region on both NSS 7, which was activated in mid-2002 at 338.5 degrees E, and NSS 703 at 57 degrees E. She indicates that New Skies has signed two large deals in the past 12 months for capacity covering the region and these have given the company a serious presence in a region that has been dominated by RSCC and Intelsat.

“These deals are in addition to other existing large capacity leases with customers in Russia and together those agreements have given us a serious presence,” says Naumova. “Now, we are a big player in this market.”

At the same time, despite a widespread perception that in order to access links to the outside world potential customers must deal with RSCC first, as the longstanding Russian Intelsat signatory, Russian customers now have direct access to satellite capacity provided by international operators such as New Skies. Even so, upgrades to the domestic Russian fleet are underway. “In the next five years, Russia is planning to radically upgrade its satellite fleet by launching advanced satellites with more Ku-band capacity suitable for VSAT networks,” says Kollar. “Ka-band services are still not in great demand, due to a low number of densely populated areas, which are the real market for these services.”

A Positive Long-Term Outlook

Throughout the past year, it has been difficult for most of the companies in the broader telecom sector to make headway, due to the global industry downturn. Russia, however, is in a class by itself, both in terms of its immediate telecom needs and its vast resources and potential for steady growth.

“Current activity leads us to believe that business is picking up. Add to this, industry forecasts indicate by 2010 capacity demand will require a five-fold increase in the number of Russian transponders,” says Roussy. “There are countless opportunities for equipment vendors.” Roussy sees that Russa’s accession to the WTO and GATS is opening the door to foreign suppliers, and that “North American companies will be in a good position to respond to the increase in demand for equipment.

“This being said, Russian officials admit that it takes too much time to obtain permission to use frequencies. The certification procedure for telecommunications equipment is another area that needs significant improvement. These issues are currently being discussed by state officials,” she adds.

Roussy points to LUKoil as a prime example of a network using NSI’s VSATPlus2 technology to meet their needs for a full mesh, hubless network. Included among the new services that are being developed in Russia are high-speed Internet access, distance learning and telemedicine.

“The first two show great potential in the short term. However, while the potential demand for telemedicine services in Russia is very high, it will be years until the market is ready for such a service. Again, the relatively low cost of VSATs is well suited to these markets,” Roussy says.

Elsewhere in the region, there are promising developments too numerous to list. In Azerbaijan, for example, a great deal of information flows via satellite channels. Throughout the past decade, the number of direct satellite channels grew from 30 to more than 800, according to Ramazan Veliyev, director at Delta Telecom Ltd. in Baku, Azerbaijan Republic, which has partnered with HNS.

“HNS Delta Telecom now deploys an ISBN and TES Quantum hybrid station, the only one in Transcaucasus, through which it creates corporate data and voice networks for big customers with remote branches such as the International Bank of Azerbaijan and State Customs Committee,” says Veliyev.

He is upbeat about the regulatory environment, which he describes as changing to match high-tech development and European standards. “Particularly, state entities are going to be privatized in the near future. In comparison [with] what we had at the very start of the project and now, we can judge that relevant regulatory authorities tend to compromise and amend,” says Veliyev. “Foreign satellite companies, namely Russian and Turkish, that worked here before faced the local competition and they are not interested so much in expanding as in remaining.”

As for Russia’s regulatory environment, much remains to be done. “The changes are necessary. The association of satellite operators is actively working on it, but the results are little so far. The main issue is that there is no allocated frequency bandwidth for satellite communications. Each dish has to be coordinated with terrestrial radio communications facilities,” says Gudenko.

With the organizations such as the World Teleport Association, for example, which has no members in Russia, electing to conduct its most recent board of directors meeting in Moscow, there is, however, the sense that momentum for open dialog and positive change is building. Russia and the region are embracing satellite technology much faster than they are actually deploying the satellite equipment itself. The collective impediments to an acceleration in telecom development, which is essential to Russia’s future prosperity, are no secret. Ultimately, it is up to Russia and its neighbors to find ways to make the entire system more user friendly.

Peter J. Brown is Via Satellite’s Senior Multimedia Editor. He lives on Mount Desert Island, ME.