LTE progress has slowed down in Russia, and it appears that commercial LTE will be available only in 2014-2015.

Amid the lack of frequencies for developing fourth generation (4G) wireless services in Russia, the country’s largest mobile operators, MTS, MegaFon, and VimpelCom, as well as wireline company Rostelecom and wireless broadband provider Scartel, have decided to develop a joint 4G network via the Long Term Evolution (LTE) technology. The agreement was reached with the assistance of the Russian government, which in January determined the timeline for the commercial launch of LTE services in the country as 2014-2015. Although it is quite unclear how the operators will build their common LTE business, market analysts generally regard the network infrastructure model as favorable for the telecommunications industry and a good way to save money on network rollout.

MTS, MegaFon, VimpelCom, Rostelecom, and Scartel on March 3, 2011 signed in the presence of Prime Minister Vladimir Putin an agreement to develop jointly a 4G wireless network.

Scartel’s CEO Denis Sverdlov said before the agreement was signed that it envisaged major mobile operators’ and Rostelecom’s use of Scartel’s infrastructure in order to provide 4G services via LTE technology. Scartel currently provides wireless broadband services via Mobile WiMAX technology under the Yota brand in five cities, including Moscow and St. Petersburg. The company said that in 2010 it planned to switch to providing services via 4G LTE technology.

“In other words, major mobile operators and Rostelecom are expected to provide services under some kind of MVNO (mobile virtual network operator) model,” iKS-Consulting Project Director Konstantin Ankilov said. Mobile virtual network operators provide services under their own brands using the networks of other operators.

The deal raises more questions than it gives answers to, noted Ilya Fedotov, head of the equity research department at investment company Veles Capital, adding that it is unclear whether Scartel will build main line infrastructure in order to back the LTE network or lease main lines from Rostelecom and major mobile operators, who will lease LTE base stations from Scartel.

MegaFon’s CEO Sergei Soldatenkov said the signed agreement was an agreement of intention. All the companies involved agreed with the idea, but there is still no common understanding on traffic routing details and the price for services, he added.

As for the model of sharing infrastructure, it isn’t a new model, according to market analysts. “It is used in a number of other industries in Russia, for example in power distribution, railroad transportation, and oil and gas transportation, where the whole infrastructure is owned by a single company,” Fedotov from Veles Capital said.

An infrastructure sharing agreement was also used in order to develop 4G services in Sweden, where Nordic operators Tele2 and Telenor jointly launched an LTE network in 2010, according to Ankilov from iKS-Consulting and Ivan Kim, telecom analyst at investment company Renaissance Capital.

The Russian subsidiary of Tele2, the country’s fourth largest mobile operator Tele2 Russia, which has also expressed its desire to develop LTE services and claimed that the experience of its parent company was an advantage in 4G development, is, however, unlikely to be admitted to LTE development, with other smaller mobile operators, Fedotov from Veles Capital said, noting that this certainly limits competition.

Nevertheless, the agreement between mobile majors, Rostelecom, and Scartel is beneficial to the mobile industry, investment company TKB Capital telecom analyst Kirill Bakhtin said. “The operators are keeping up with the leading international operators. Infrastructure sharing allows operators to turn their attention to improved innovation, better customer service and eventually better commercial offers,” he wrote in a note commenting on the deal.

Communications and Mass Media Minister Igor Shchyogolev, who was present during the signing of the deal, said that the companies involved in the project would compete not in the speed of rolling out networks, but in the quality of services provided.

Fedotov from Veles capital and Ankilov from iKS-Consulting agreed that the competition between the companies is likely to be in terms of marketing and customer service and noted that there could be no competition between them in terms of the quality of communications, because all five project participants are expected to use a single network built by Scartel.

Scartel is expected to build LTE infrastructure, investing USD 2 billion by 2014, Sverdlov said, adding that Scartel plans to build LTE networks in 180 Russian cities. The company plans to take out a loan in order to finance the construction.

If the participants of the project built 4G networks separately, they would have had to invest billions of U.S. dollars each, while the deal envisages building only one joint network, which is expected to save the operators money, Ankilov from iKS-Consulting said.

Fedotov from Veles Capital, however, noted that major mobile operators could build 4G networks for themselves investing less than USD 2 billion each, as they already have well-developed main line infrastructure and sites to install 4G base stations in addition to already existing GSM and 3G (third generation) base stations.

Mobile majors have repeatedly said that they could build 4G LTE networks based on their 3G networks, investing much less money than is required to roll out an LTE network from scratch.

They could indeed roll out LTE networks by upgrading existing 3G networks, Ankilov from iKS-Consulting said, adding that the key problem is the lack of frequencies required to build such networks.

The mobile operators are nevertheless expected to continue developing 3G and GSM, which is regarded as being second generation, mobile networks along with using Scartel’s 4G infrastructure, both Ankilov and Fedotov from Veles Capital said. “In this case, mobile majors are expected to focus on providing voice and data services via their GSM and 3G networks, while the 4G LTE network rolled out by Scartel will be used merely for providing data transfer services, which means that the network won’t be used at its full capacity designed for voice services as well,” Fedotov said, adding that this makes it easier to share the network among five operators.

Meanwhile, Ankilov from iKS-Consulting noted that frequencies already possessed by Scartel are hardly enough for five operators to provide LTE services and Scartel needs more frequencies to implement this project.

Scartel, however, is reportedly expected to soon get back part of its frequencies, which were revoked by the regulator in 2010. Sergei Chemezov, CEO of industrial conglomerate Rostekhnologii, the owner of a 25-percent stake in Scartel, said in an interview with business daily Kommersant published on March 4 that Scartel and the regulator are expected to reach an amicable settlement on this issue in the near future.

Also, Shchyogolev said in January that the Ministry planned to announce a tender for 4G frequencies in July-December, after Rostelecom and major mobile operators complete a study aimed at defining the electromagnetic compatibility of 4G networks with existing and planned networks in the frequency bands of 800 megahertz (MHz), 900 MHz, 1 800 MHz, 2 100 MHz, and in the 2 500 – 2 700 MHz frequency range by July 1, as was instructed by the State Radio Frequency Commission in late 2010.

“The fact that such an ambitious agreement was signed on March 3 and the government took an important part in it suggests that Scartel will obtain 4G frequencies at the planned tender, otherwise signing the deal was unreasonable,” Fedotov from Veles Capital said.

There is still a possibility that part of the 4G frequencies will be allocated to some other operators, even including the major mobile operators and Rostelecom, Ankilov from iKS-Consulting said, adding that a question remains as to what should be done with these frequencies if only one federal LTE network is planned.

Rostelecom already has frequencies for 4G development in 39 out of Russia’s 83 regions, which it and its affiliated wireline operator Sibirtelecom won at tenders in early 2010.

Under the agreement signed by telecom majors, Rostelecom and mobile operators are expected to have an option to buy 20-percent stakes in Scartel each in 2014, Shchyogolev said on March 3. Rostekhnologii is expected to hold a 20-percent stake in Scartel, after the deal participants exercise their options. The other current shareholder of Scartel is the Telconet Capital fund, holding a 74.9-percent stake in the wireless broadband operator.

A special agreement on the options to buy 20 percent stakes in Scartel is expected to be signed by June 1, Sverdlov from Scartel said March 4. He added that major mobile operators may obtain options to buy the stakes only in Scartel’s affiliate that is expected to operate the LTE network, while Scartel with its subscriber base may not be subject to call options; a decision on this matter is expected to be made in 2014.

“It is difficult to estimate the current value of Scartel, but one can be sure that its value will jump drastically by 2014, taking into account that it will own the federal LTE infrastructure and possess 4G frequencies,” Ankilov from iKS-Consulting said.

Fedotov from Veles Capital was not so optimistic about Scartel’s future value. “The network and frequencies are obviously good assets, but one should not forget about large debts that Scartel is expected to accumulate by 2014 and should take into account that LTE operations are unlikely to be full scale and profit-generating by that time,” he said, adding that Scartel’s value may even decrease by 2014.