Eugen Iladi in Brussels -

A battle is brewing over 4G licenses in Russia's fiercely competitive, but lucrative, telecommunications market as the country's big three private mobile operators square off against a little-known player that's clearly a front for vested interests in the government.

At stake are an as-yet undecided number of new Long Term Evolution technology licenses (LTE), better know as 4G licenses. The three mobile incumbents that dominate Russia's mobile market - Mobile TeleSystems (MTS), VimpelCom and MegaFon - are the obvious operators of choice for this new technology, as they already own the 3G licenses.

However, at the end of May, Defence Minister Anatoliy Serdyukov wrote to President Dmitry Medvedev calling for the 4G bandwidths to be awarded to little-known Osnova Telecom, which currently doesn't offer mobile phone services of any sort in Russia, reports Russian daily Vedomosti. The Russian State Radio Spectrum Committee and the Ministry of Telecommunications are in charge of allocating the bandwidth and licenses, and the incumbents fear the state agencies will follow the advice of the military, which nominally controls all the country's radio frequencies that are allocated to civilian use. The State Radio Spectrum Committee has postponed discussing the granting of 4G licenses three times since May and vowed to come up with a solution by the end of August.

As asset grabs go, this one is pretty blatant. Osnova was registered in June and lists Aykominvest as a majority shareholder, with the remaining 25.1% stake belonging to Voyentelekom, which is controlled by the Ministry of Defence. According to company records, Aykominvest is owned by Vitaly Yusufov, a 28-year-old former Gazprom executive-turned entrepreneur, who also happens to be the son of Igor Yusufov, an influential Kremlin insider who has a long history of service to Prime Minister Vladimir Putin dating back to his days in the St Petersburg administration. Yusufov-senior was deputy industry minister and headed the State Reserves Committee before becoming Russia's energy minister from 2001 to 2004. A Gazprom board director since 2003, he is close to President Medvedev, acting as his special envoy for international energy cooperation. In other words, Osnova's backers are about as well connected as it's possible to be in today's Russia.

Medvedev has so far said little on the 4G issue, but did instruct the Ministry of Defence to "take all essential measures jointly with the Ministry of Telecommunications according to the established procedures," Vedomosti reported. This was vague enough to give the big three the willies and they countered Defence Minister Serdyukov's letter with their own joint letter to the telecom minister, Igor Shchegolev, urging a "precise and transparent" solution to the allocation of 4G licenses. In July, the same companies followed up with a second letter to Putin saying in rather understated language that giving the 4G opportunity to what is little more than a start-up would cause, "negative consequences for the vast majority of the population of Russia, our companies and the state as a whole," Vedomosti reported.

Crossed lines

Indeed, handing Osnova the 4G bandwidth would make no sense at all. The big three have largely been responsible for building Russia's $40bn mobile phone market from scratch, which is expected to grow to $48.5bn by 2013, according to a Pyramid Research survey. Telephony is arguably the only sector in Russia that Putin managed to totally reform and is probably the most modern part of the economy, as well as being Europe's largest and fastest-growing telecom market. However, the start-up Osnova would need at least five years and over $5bn to build a 4G network from scratch, whereas the incumbents could do it in half the time and at a fraction of a cost by bolting the new technology onto their existing GSM and 3G networks.

The trouble is that the telecom ministry doesn't exactly have a good track record when it comes to handing out licenses; MegaFon was partly set up and backed by former telecom minister, Leonid Reimam, and was also the beneficiary of a frequency allocation at the expense of the other two in 2004 in what came to be known as the "frequency scandal."

The whole affair boils down to another test case for Medvedev. The president continuously espouses the need to modernise Russia and stamp out corruption, but when push comes to shove the nice words run up against the vested interests. If Osnova is awarded a 4G license, then the president's entire campaign will be shown up as empty rhetoric.

And it is already starting to look bad for the big three operators. In what some have taken as an early-warning signal of a coming showdown, the Russian Federal Anti-Monopoly Service (FAS) started investigating MTS, VimpelCom and MegaFon in March over alleged violations of anti-monopoly legislation by applying artificially high prices for roaming services.

The FSA did not indicate a date by which it would consider or conclude the case, but if roaming tariffs are determined to be in violation of current legislation, the parties could face hefty fines. The mobile operators argue there was no violation of the anti-monopoly legislation.