Central Asia Telecommunications Report Q3 2007

The key event in the Central Asian region over the last quarter is the completion of TeliaSonera's acquisition of US-based MCT Corporation for US$292mn. Its significance was manifold. First, it disrupted the stranglehold that Russian operators MTS and VimpelCom, and to a lesser extent MegaFon had on the Central Asian region. Second, it means that the region has another (and non-Russian, at that) significant investor in the shape of TeliaSonera. Through its interest in Fintur Holdings, the carrier already had a presence in Kazakhstan, Azerbaijan, Georgia and Moldova, but now its Eurasian footprint also includes Uzbekistan and Tajikistan, not to mention Afghanistan. Finally, it highlights the significance of Uzbekistan and the growth potential it holds.

BMI is excited at the prospects of Uzbekistan's mobile market. Not only is it a large country with over 27mn people, but penetration is low, at just 13% in June 2007. Pushed by intense competition between the region's three largest investors - MTS, VimpelCom and TeliaSonera - (and Uzbekistan is the only market in the region where this happens), we expect 17% annual average growth over the next five years so that by the end of 2011, penetration will be in excess of 50%. The fact that the government has been trying to attract inward investment in recent months - the Prime Minister has visited Egypt, Ukraine and Japan of late - is a good sign for improved FDI to Uzbekistan across all sectors.

Mobile penetration in Kazakhstan is an impressive 59%, and BMI expects solid growth so that by the end of our forecast period, penetration is likely to be well in excess of 100%. MTS may not have any presence in the market, although the operator could look to change this, but growth is being driven by a battle for market leadership between TeliaSonera and VimpelCom, with the Nordic carrier just ahead at the moment. VimpelCom, however, has just de-registered many of its inactive customers, which may have caused a temporary hit on its subscriber numbers. Aside from competition between the two operators, which is likely to lead to a series of price wars before too long, the other main growth driver is Kazakhstan's economy, which is expected to grow by 9.7% in 2007.

It is something of a surprise, but perhaps the fastest growing mobile market in Central Asia is not Uzbekistan, but Kyrgyzstan, which is witness to 30% penetration. It is difficult to see what is behind this growth, but given that the market has been home to 500,000 net additions in the first six months of the year, we are confident that there should be 1.95mn mobile subscribers by the end of 2007, accounting for 34% penetration, and that 50% teledensity will be reached during H209.

Such has been the paucity of investment and levels of liberalisation across Central Asia that wherever one looks, there is much potential for growth. Russia's largest mobile operators were quick to spot this, and TeliaSonera appears also to have grasped the opportunity. Are there other strategic investors, such as Telenor or Telekom Austria, prepared to take the chance and accelerate market development?