Graham Stack in Kyiv -

The announcement on February 4 by Ukraine's Transport and Communications Ministry that a tender for fixed-line operator Ukrtelecom could take place this month was no surprise to Andrei Dubovskov, CEO of MTS Ukraine, Ukraine's second-largest mobile operator.

"Everyone is waiting for Ukrtelecom's privatization," says 42-year-old Dubovskov. "The government and regulatory authorities are seriously pursuing this. We expect it will finally happen this year."

Ukrtelekom's fate, and the country's privatization plans in general, have long been a political football. Ukraine's parliament, the Rada, and the presidential administration cannot even agree over who should run the State Property Committee that's responsible for privatization. President Viktor Yushchenko has in the past blocked the privatization of major companies, partly for fear Russian companies could buy strategic Ukrainian concerns, and partly over worries that his bitter rival Prime Minister Yulia Tymoshenko would use privatisation revenues to boost social spending, and thus her own ratings, in the run-up to presidential elections in January 2010.

But now privatisation is a last option to fund a budget predicated on a 2% deficit and 0.4% GDP growth, when consensus forecasts have now fallen to minus 5% GDP growth. The International Monetary Fund (IMF) is also demanding privatization. An IMF mission is currently in Kyiv and said to be unhappy with Ukraine's patchy implementation of conditions for a second tranche of a $15.5bn stabilization credit agreed in November.

Speaking on February 4 about the Ukrtelekom privatization, PM Tymoshenko said that the tender would only take place if a decent price were offered by a "global brand." She said talks were ongoing with interested parties about the exact terms of the tender.

Dubovskov says, "We have already expressed our interest, and have submitted our preferences for the conditions of tender. Nothing has changed from our point of view. We are already involved in the process."

MTS is certainly among the most likely candidates to participate in a tender. Dubovskov adds. "But the decision on whether we participate or not, while not situative, will nevertheless depend on the specific conditions of the tender," he warns.

In fact, proposed tender conditions for Ukrtelecom in the past have favoured MTS, by excluding any companies from bidding that have over 25% state ownership, thus ruling out several European majors such as Telenor, TeliaSonera, Telekom Austria and France Telecom. The Russian state has no stake in MTS. Tymoshenko, speaking Wednesday, February 4, reiterated that only private telecom firms would be allowed to participate.

Yevgeny Yevtushenkov, main shareholder in AFK Sistema, the Russian conglomerate that owns 52.8% of MTS, was quoted February 2 as saying that Sistema was planning some acquisitions, after securing financing facilities with Russian and foreign banks for several billion dollars. He made the comment while attending the Davos Economic Forum, according to Moscow Times.

Ukraine's Minister of Transport and Communications Iosif Vinskii said February 4 that he expected Ukrtelecom to go for at least UAH25bn, currently just under €2.5bn.

Talking about devaluation

Regarding MTS Ukraine and the economic crisis, Dubovskov says the massive 60% devaluation has torn strips off Ukraine's previously booming mobile telecom sector, and MTS Ukraine is no exception. "The strain on our budget has increased, our equipment comes from abroad and we have to buy hard currency at a significantly different level from earlier. Much of our expenditure is denominated in dollars, not only capex, but also [operating expenditure] such as international roaming. But our revenue of course is in hryvnia."

Now the highly competitive Ukraine mobile telecom market is waiting to see who will take the plunge first and raise prices and/or switch to a dollar peg. "We will definitely not be the first to do so, and we have not yet made any decision," says Dubovskov. "But when it does happen, the whole market will follow."

Dubovskov is optimistic about demand staying stable, despite the crisis cutting into Ukrainian pockets in the form of inflation, hard currency credits turning into millstones, salary cuts and unemployment. Even with the crisis on everyone's lips in Kyiv, Dubovsksov does not anticipate any drop in minutes of use. "MTS has the highest minutes of use per user in Ukraine, and our subscribers will not be talking any less in 2009." But this could be speaking too soon: State Statistics reported for November a drop in the mobile sector's revenues by 4.7% on the month, followed by stagnation in December.

Without providing any figures, Dubovskov says that MTS Ukraine's debt situation remains stable despite the devaluation. "Our finances are sustainable, and our debt burden is manageable. Margin calls are absolutely excluded."

Dubovskov points out that MTS Ukraine is a fully-owned subsidiary of Russian mobile giant MTS, "and thus is fully integrated into parent company financial flows." The Russian parent has access to Russia's emergency funds held by state bank VEB to refinance debt. And Russian Prime Minister Vladimir Putin recently included MTS on a list of 250 system-forming Russian companies that can qualify for direct financial help.

Dubovskov says MTS Ukraine does not need any such formal status in Ukraine itself- because the company already de facto enjoys such status: "On account of the size of our tax payments, we are already de facto a system-forming company in Ukraine. We have been the leader in tax payment growth in recent years. The government take good account of us as it is."

Business as usual 'in three to six years time'

Despite the crisis, MTS will continue to invest in its network. MTS Ukraine's corporate governance director Andrei Bereznyi stated January 23 that the company would invest $323m in 2009.

Dubovskov himself is cautious about committing to specific figures, saying capex would be "restrained" in 2009. However, he stressed that the company will not abandon any major projects. This includes the rollout of its CDMA-based wireless internet network, already covering 100 cities and towns, 2G services and participation in any UMTS tender. "We will continue to pursue our plans, slowly, step by step," says Dubovskov. Dubovskov rules out any adventures such as moving into handset retail, the current trend among Russian mobile operators.

MTS Ukraine's CEO is downbeat about when business will return to normal. "I'm not one of the optimists who say that things will revive in the second half of 2009. I think it will take from three to six years to return to previous levels."

Dubovskov relativises the shock of the massive hryvnia devaluation, saying he has been through similar traumas in 1991, 1994 and 1998. But he sees one important difference to the current crisis. "Those were local crises, affecting one country or a group of countries. This one is a global crisis."

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