Global News Insider

Photo by: Insidetelecom.com

Author: Marián Šeliga

The telecommunications sector, as well as many other industries or services in Russia, are heavily dependent on critical technology imports. The issue of significant dependence on foreign spare parts and equipment has become especially acute after Western countries imposed unprecedented sanctions against Russia. The purpose of today’s analysis is to look at how one of the most important sectors of the Russian economy – the telecommunications industry – has been affected by the current restrictions under the sanctions regime and what are the future prospects of the industry.

Subscribe and receive a weekly in-depth analysis on top international issues.

Russian Telecom’s overdependence on foreign critical equipment

Although many Western observers are inclined to characterize the future situation in the Russian economy as catastrophic, in the case of the Russian telecommunications sector, this description seems somewhat exaggerated. With sanctions imposed on the Kremlin, Europe’s biggest telecommunications equipment suppliers to Russia, Ericsson and Nokia, almost immediately decided to “pause” their business operations with Russia. This also implies the termination of the delivery of all mobile network generations including base stations to Russian telecom companies such as MTS, Megafon, Tele2 or BeeLine. It shall be noted that Nokia and Ericsson together account for between 40% and 60% of Russia’s market for radio access network (RAN) equipment. Nevertheless, as the Russian magazine “Expert” points out Russia has its own manufacturers of telecommunications equipment. Although Russian companies provide technologies that are competitive with foreign counterparts, in recent years they have often been sidelined by European companies that could provide more flexible financing terms. But in a situation where Nordic suppliers temporarily cease cooperation with Russian companies, Russian telecom equipment manufacturers can (especially with the help of government subsidies) take a sufficient share of the market. On the other hand, telecom companies have enough stockpiles of equipment for at least 8 months, so they have enough time to find alternative providers of equipment. At the same time, the most complex situation on the market is with base stations which are not produced in Russia and shall be imported from abroad. In order to overcome this dependence, Russian corporation Rostec is actively working to develop its own base station prototype supporting LTE and 4G network.

US sanctions imposed on Russia because of the war with Ukraine prohibit the sale of computer chips, telecommunications equipment, lasers, aviation and marine equipment to Russian companies. The ban must be observed by all businesses that use US hardware or software. Otherwise, secondary sanctions may be imposed on them: in particular, the United States may restrict the sale of its technologies to such companies.

Russia turning to alternative suppliers

One alternative option for Russian telecommunications companies could be closer cooperation with Chinese telecom manufacturers that are already on the market. But this option is not as simple as many in Russia anticipated. Large Chinese corporations, especially Huawei with its fresh memories of the arrest of Meng Wanzhou (daughter of Huawei’s founder) in Canada for allegedly violating US sanctions against Iran, are now extremely cautious about selling their equipment to Russia for fear of becoming the target of secondary US sanctions. Huawei even cut sales of its equipment and mobile phones to Russia in March and April. Moreover, companies like ZTE and to some degree also Huawei lack the most advanced chips which are produced in South Korea or Taiwan, so by helping Russia they run the risk of possibly losing cooperation with the most advanced chipmakers. On the other hand, apart from large telecommunications companies such as Huawei or ZTE, there are many smaller manufacturers from China that can become alternative suppliers of telecom equipment to Russia. But it is unclear whether their equipment is advanced enough to change the current base stations and how they can interoperate with the software used by Russian telecom companies.

As we have found out, for the moment being one of the alternative options for the Russian telecom companies is to import “second hand” equipment from other countries. The purchase of used equipment is perhaps the only way in the current conditions to make up for the shortage of base stations as they break down and the load increases due to increased mobile Internet traffic.

While until recently Russia’s internet and mobile communications were among the cheapest in the world, the current sanctions and equipment shortages have weighed on telecoms’ profits, which could lead to higher bills for customers or an appeal to the government for subsidies. One way or another, the telecommunications sector in Russia may become one of the sectors that, in the face of sanctions and the absence of Western equipment, can develop their own technologies, and also, through the use of alternative non-European suppliers, become more resistant to excessive dependence on European and American technologies. But the question remains, when will this happen and will it actually happen?