The regulation of the telecommunications industry in Russia - a report prepared by Cameron McKenna for World Markets Research Centre.

The following is a report prepared by Cameron McKenna for World Markets Research Centre.

A. Introduction
According to Article 71 (i) of the Constitution of the Russian Federation, communication is within the exclusive competence of the federal parliament.
The telecommunications industry is regulated primarily by the Law of the Russian Federation “O Svjazi” [On Communication] dated 16 February 1995 (the “Law on Communication”). The Law on Communication distinguishes between:

(a)electrical communications which include wire, radio, optical or other electrical or magnetic means of data transfer; and
(b)post.

A communications network is defined as a system for the transfer of data by means of telephone, telegraph, and facsimile, including e-mail, television, audio and other radio and wire transfers.

According to the Law on Communication all communication networks in the Russian Federation form a so called interrelated communication network which is subject to central regulation. The interrelated communications network includes general use networks access to which is not restricted and special networks established by governmental authorities for special needs. Free access to these special networks is not allowed.

The overall control over communications is exercised by the Government of Russia and its relevant bodies including the Ministry of Communications. State control over the industry may be divided into four main areas: (i) provision of frequencies and related issues (for example, the import of radio-electronic equipment, the registration of equipment that produces electromagnetic radiation); (ii) licensing, (iii) certification of means of communication and communication services, and (iv) tariff regulation.

Frequencies and related issues

According to the Law on Communication, regulation of the use of radio frequencies and the orbital positions of communications satellites is within the exclusive jurisdiction of the Government. A special commission within the Ministry of Communications (called the “Committee on Radio Frequencies”) allocates frequencies among providers and users. Order No 18 (the “Order 18”) of the Ministry of Communications provides the criteria for allocation of frequencies within the 800 MHz band. For example, Order 18 provides that within each territorial region (e.g. Moscow region or Vladivostok) covered by the relevant licenses there may be:

(a)only one operator using frequencies 824 -834 MHz and 869 - 879 MHz (FDMA, TDMA or FDMA/TDMA division of channels) and 828 - 831 MHz and 873 - 876 MHz (CDMA division of channels);
(b)several operators using frequencies 815 - 820 MHz and 860 - 865 MHz (including trunk radio services) provided that the capacity of each of these networks may not be less than 1,000 lines connected with the fixed telephone network, 859 - 860 MHz and 864 - 868 MHz.

As regards the allocation of numbers, mobile cellular telephone numbers must consist of the same number of digits as fixed telephone numbers for the relevant region.
The use of radio-electronic equipment is subject to regulation by the Committee on State Supervision of Telecommunications. For example, mobile phones can only be used in Russia with a permit issued by the Committee on State Supervision of Telecommunications. Officers of the Committee on the State Supervision of Telecommunications have a power to request a user of a mobile phone to produce a permit and may impose fines for failure to do so.

Licensing

Communications activities are subject to licensing. Licences are issued, amended, extended and revoked by the Ministry of Communications. The Regulations for Licensing of Communications of 5 June 1994 (the “Licensing Regulations”) provide that one provider can obtain several licences for different types of communication activities. The territory in which the licence is effective can be restricted to certain areas or regions. Licenses are usually granted by means of tender. Licences are not transferable and are issued for periods from 3 to 10 years; the term of a licence for television or radio broadcasting may not exceed 5 years. Licence fees are payable to the Ministry of Communications.

There is also a requirement for the operators of GSM and NMT standards to make a contribution for the development of the telecommunications network. This requirement was introduced by the Order of the Ministry of Communications of the Russian Federation of 22 March 1994 No 70 “On conditions of activities of operators of GSM-900 and NMT-450 cellular networks” (the “Decree No 70”). Decree No 70 is formally in force and licences for GSM and NMT standards issued by the Ministry of Telecommunications include provisions for the contribution. However, the procedure for paying of the contribution has not been established yet.

On 10 June 1998 the Government issued Resolution 578 which introduced new Tender Regulations for Cellular Telephone Services (the “Tender Regulations”). The Tender Regulations provide that the term of the licence issued to the highest bidder may not be less than 5 nor more than 15 years. Unlike other telecommunications licences, a cellular telecommunications licence issued to the highest bidder is freely transferable.

Equipment and Certification

All means of communication used in the interrelated communications network of the Russian Federation is subject to obligatory certification. “Means of communication” includes all technical equipment for the collection, processing, transfer and receipt of electronic messages. The standard of communications services to be provided within the public communications network may also be subject to certification. Certification of equipment is carried out by special laboratories and testing centres of the Federal Committee of Standardisation and Certification.
As regards telecommunications services, the Law on Communication states that all users have a right to transfer messages through electronic communications networks and the post. Access to the public communications network is guaranteed. Messages relating to the safety of life on sea, land, air or space, to national and public security and natural disasters have priority regardless of the identity of the owner or operator of a network.
The Resolution on the Rules on Providing Telephone Services No 1235 (the “Rules on Telephone Services”) which came into effect on 1 January 1998 regulates the relationship between an operator and a consumer of telephone services and establishes conditions which are binding for the operator and the consumer at the conclusion and during the implementation of a contract for providing telephone services. For example, the Rules on Telephone Services establish the procedure for calculation of billable time of telephone conversations, the procedure for payment for telephone services and disconnection for non-payment as well as the rules for handling claims. The Rules on Telephone Services contain a standard form contract for the provision of fixed telephone services which should be used by all operators.

The Rules on Telephone Services distinguish basic services and additional services to be provided by the operator. According to the Rules on Telephone Services, access to a telephone network by local, intercity and international direct dial or through an operator connection are the basic telephone services. They are provided for in the licence and determined by the technical capacities of an operator. Additional services include various services such as, for example, international conference calls, change of a telephone number, organisation of a silent number, international calls at a fixed time. The Rules on Telephone Services imposes a mandatory list of additional services such as, for example, information about area codes or about time difference which should be provided free of charge and the range of such services may not be decreased by an operator.

The Rules on Telephone Services establish than an operator shall be liable for the failure to provide telephone services of agreed quality. The customer has a set of remedies for a breach of the contract by the operator. For example, the customer can require the operator to reduce the cost of telephone services or terminate the contract for provision of telephone services. Any claim made by the customer should be dealt with by the operator within 2 months from the date of the claim. The operator is given a further 20 days to improve the quality of services and 10 days to satisfy the requirements of the customer to reduce the cost of services and payment of damages. Failure to comply with the above time limits is subject to default interest of 3 per cent a month, a week, a day or an hour of delay depending on how the time limit was established.

Tariff regulation

As a general rule tariffs for communications services are established by contract. According to the Law on Communication the Government may, however, regulate tariffs on certain types of communication services. This provision deals primarily with local telecommunication services and benefits granted for elderly or disabled people or in similar cases. The Law on Communication provides that emergency calls (fire, police, ambulance, etc.) are free. Tariffs for inter-network (interconnection) communication are established by agreements between respective operators. It should be noted that currently there is a trend for liberalisation of tariffs for local telephone services in Russia and as a result the tariffs should at least cover the costs.

The Law on Natural Monopolies of 17 August 1995 No 147-FZ (the “Law on Natural Monopolies”) (see paragraph B below) provides that federal and regional authorities which exercise control over natural monopolies in the sphere of communications services have the right to establish tariffs for certain telecommunications services covering both the Russian Federation in general and its constituent subjects in particular. Resolution No 265 of the Government introduced the Fundamentals of State Regulation of Tariffs on Telecommunications Services at the Federal and Regional Levels (the “Fundamentals”). Articles 15 - 27 of the Fundamentals establish the procedure for the regulation of tariffs. State regulation is exercised individually by application of indexes to the existing tariffs of an operator which is binding on this operator regardless of whether it is a private company or a state-owned enterprise. At the time of drafting this report the Federal Service for Regulation of Natural Monopolies (the “Federal Service”) issued Regulations for Calculation of Indexes to Be Applied to Tariffs for Regional Telecommunications Services (the “Regulations on Indexes”). The Regulations on Indexes provide that the following types of communications services are subject to indexation:

(a)a subscription fee;
(b)a fee for installation of a telephone;
(c)a fee for the use of local telephones (telephone boxes).

The data used for the calculation of indexes consists of the existing tariffs, inflation rates and average costs of production of telecommunications services. The average cost of production is provided by the operator. The Fundamentals provide that the minimum tariff so indexed should cover the cost of production including VAT and the maximum tariff so determined should not exceed three times the cost of production. This limit can, however, be exceeded if the overall cost of production of the operator is not covered.

B. Natural Monopoly

Another factor which affects the industry is the position of telecommunication operators as natural monopolies. The concept of a natural monopoly was introduced by the Decree of the President of the Russian Federation On Measures for State Regulation of Natural Monopolies in the Russian Federation of 28 February 1995 No 220 (the “Decree 220”). Pursuant to Decree 220 the Law on Natural Monopolies came into force on 17 August 1995. According to the Law on Natural Monopolies, a natural monopoly is a condition in the market for goods or services where satisfaction of demand in that market is more effective in the absence of competition due to technical particularities of production (in connection with a significant reduction in the costs of production for a single good on the basis of an increase in the volume of production), where goods or services produced by natural monopolies cannot be exchanged by consumption of other goods so that demand in the given market for goods or services produced by natural monopolies is not as susceptible to price changes as for other types of goods.

The Law on Natural Monopolies and Decree 220 provides that pipeline transportation of oil, energy and electricity production and transportation, railway transportation, services of sea and river ports and airports, and communications services including post are natural monopolies and are subject to state control and regulation. The Law on Natural Monopolies does not distinguish between state-owned and private companies which are natural monopolies and its provisions apply to both. According to the Law on Natural Monopolies, the Federal Service should keep a register of companies which are subject to its regulation.

The Law on Natural Monopolies establishes three basic methods for state regulation and control. One is tariff regulation. The second method is the protection of consumers. According to the Law on Natural Monopolies, an operator may not refuse to enter into a contract with a consumer and may be forced by the Federal Service or it regional subdivisions to enter into such a contract. The third method is control over transactions and investments carried out by a natural monopoly company. The Federal Service and its regional subdivisions have to be consulted by a natural monopoly company prior to the acquisition of major assets with a value exceeding 10 per cent of the value of its assets provided these assets will not be used for production of the regulated goods or services. The consent of the Federal Service should also be obtained prior to the disposal of major assets designed for production of the regulated goods or services with a value exceeding 10 per cent of the company’s assets.

The Federal Service must also be informed within 30 days of the acquisition in any way (including by pledge) of more than 10 per cent of the voting shares of a natural monopoly company. The Federal Service has the authority to examine the accounts of a natural monopoly company, request information and impose sanctions for non-compliance with its orders.

C. Telecommunications Industry Reform

The Decree of the President of the Russian Federation “On basic principles of structural reform in the sphere of natural monopolies” of 28 April 1997 No 426 provided that the purpose of the reform is to improve the quality of service to customers, to increase profitability and to develop competition in the sphere of telecommunications.
The reform was supposed to be implemented in two steps:
1997:

(a)the mechanism for settlement between operators and the mechanism for regulation of tariffs for traffic were introduced. This was done in order to ensure competition and access to the network on a non-discriminatory basis;
(b)reduction of the cross-subsidisation of certain spheres of industry and groups of customers, unification of tariffs for similar services for different groups of customers;

1998:
(a)the introduction of dual-tariff system for business and non-business customers was to be completed.

However, in reality this programme has not been fulfilled. At present, the tariffs for fixed telephone lines are gradually being raised to cover costs and a new billing programme is introduced.

D. International Aspects

Russia is not a WTO member. The application for membership was submitted in 1993 and negotiations are in progress. However, the Russian offer for membership conditions with regard to services has not yet been submitted to the WTO.

Article 71 “Postal services and telecommunications” of the Agreement on Partnership and Co-Operation between Russia and the EU (the “APC”) provides for the co-operation in this area with the aim of gradual integration at the technical level of the telecommunications and postal networks. Article 28 provided for the most-favoured nation treatment including in respect of companies operating in the sphere of telecommunications. However, both the EU and Russia made reservations in respect telecommunications services including mobile and satellite services. According to Annex 3 to the APC, in some member states of the EU market access concerning complementary services and infrastructure is restricted. In Annex 4 Russia reserved its right to introduce restrictions on telecommunications services including mobile and satellite services, construction, installation, operation and maintenance of communication devices.

The members of the Commonwealth of Independent States signed the Agreement on Co-Operation in Development and Use of Mobile Cellular Telecommunications Services on 17 January 1997 (the “CIS Co-Operation Agreement”). According to the CIS Co-Operation Agreement, the parties agree to ensure free movement of mobile telephones within the CIS, provide roaming for mutually approved standards and will take measures with the purpose of unification of national legislation in relation to telecommunication services. The parties also agreed to develop recommendations for co-operation of mobile telephone services operators in accordance with the MOU standards.