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Russia’s large size, population and continued economic development made it the dominant communications market in Eastern Europe in 2011.   The country’s burgeoning high-income households and falling rates for telecom services are driving consumer market growth, while its urban centres and large swathes of territory offer communications businesses diverse opportunities. However, Internet access remains limited in rural areas, while high income inequality restricts consumer market potential.

  • Russia led Eastern Europe across most telecom indicators in 2011, from Internet users and mobile telephone subscriptions to telecommunications revenues. In large part this is due to Russia’s large population, which was more than triple that of Ukraine in 2011, the second-largest country by population in the region. Russia made up 56.4% of Eastern Europe’s total consumer communications expenditure in 2011;

Consumer Expenditure on Communications and Total Telecom Revenues in Selected Eastern European Countries: 2011

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Source: National statistical offices/OECD/Eurostat/Euromonitor from trade sources

  • Growing disposable incomes, greater market competition and increasing collaboration between operators is facilitating communications sector expansion. Mobile telephony remains the dominant segment, although Internet has been the most dynamic sector over 2006-2011. However, the country’s vast rural areas, high levels of income inequality and saturation in mobile telephony present challenges to businesses. Russian total telecom revenues expanded by 31.3% in real terms over 2006-2011.

Implications

Stable economic growth and increases in household disposable incomes have driven consumer demand for communications, although high levels of poverty in rural regions restrict market development:

  • Real average annual GDP growth of 3.7% in Russia over 2006-2011 facilitated public and private investment in information and communications technology (ICT) infrastructure, which raised Internet user and mobile telephone subscription penetration rates. Although the sector took a hit from the global economic downturn of 2008-2009, a quick recovery in 2010 demonstrated its resilience. Russian communications consumer expenditure expanded by 31.0% in real terms over 2006-2011;
  • Russia’s per capita annual disposable incomes increased by 23.9% in real terms over 2006-2011, above the Eastern European average of 19.2%. This rising consumer purchasing power, alongside the increasing emergence of the middle class, has driven booming sales in communications retail stores such as Media Markt and Evroset. Retail competition has been increasing, but opportunities remain for businesses, with online retailing expected to see healthy expansion going forward;
  • However, Russia’s extreme income inequality, the worst in Eastern Europe according to 2011 Gini index rankings (a standard economic measure of income inequality), is restricting market growth, with low-income households on the periphery of communications advances. Nonetheless, providers of low-cost telecom services and equipment are in high demand, while the upmarket high-speed Internet broadband sector is being driven by the urban elites;
  • Russia’s Centralnij region, which encompasses the cities of St. Petersburg and Moscow, was responsible for over a third of the country’s total 2011 communications consumer expenditure, and recorded more spending in this category than Poland, Eastern Europe’s second-largest communications market. This region is a good market entry point for new businesses;
  • Russia’s rural areas present more of a challenge. Poorer households, geographical inaccessibility and high input costs prevent operators from developing the necessary ICT infrastructure, with fixed-line Internet broadband often unavailable in regions such as the Caucasus and Siberia. Wireless Internet access via mobile handheld devices is thus more appealing to both consumers and businesses in these areas. As of 2011, there were 70.6 million Internet users and 252 million mobile telephone subscriptions in Russia.

Eastern Europe’s Three Largest Markets by Internet Users and Mobile Telephone Subscriptions: 2006-2020

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Source: International Telecommunications Union/World Bank/Trade Sources/Euromonitor International

Prospects

  • Russia’s consumer communications expenditure is expected to expand by 40.1% in real terms over 2012-2020, ahead of the Eastern European average of 35.8%, with Russia remaining as the dominant communications market in the region. Sector growth will be driven by moderate economic expansion, falling prices of telecom goods and services, and an expanding middle class;
  • Mobile telephone subscriptions are projected to expand by 15.1% and Internet users by 18.4% over 2012-2020 in Russia. However, with Russia’s population expected to decline over this period and mobile telephony reaching oversaturation, local operators will look to both added-value triple play services and the wider Commonwealth of the Independent States (CIS) market in order to increase revenues;
  • Under a government-backed policy of widening Internet access, Russia’s four largest telecom operators signed an agreement in March 2011 to collaborate in the roll out of a 4G high-speed Internet network on a national level by 2014. This is expected to significantly increase the country’s Internet user penetration rate, which stood at 49.4% of the population in 2011, according to mid-year statistics.

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