If Moscow can’t dispense with foreign participation in developing 5G technologies, it will try to diversify its cooperation with foreign vendors.
The Russian cellular network market is divided among a few foreign suppliers, mostly along geographical lines due to the way it developed over the last few decades. The development of 5G networks in Russia, however, has wiped the slate clean. Regulatory requirements present foreign companies with new rules of the game that would require them to start from scratch. Some companies have lost their former competitive advantages, while others have gained an opportunity to win over a significant share of the market. Several economic and political factors put China’s Huawei and ZTE in a strong position, but despite the close partnership between Moscow and Beijing, the Russian authorities are not about to bestow exclusive preferences on the Chinese telecom giants.
Mobile communication networks first appeared in Russia in the early 1990s in Moscow and St. Petersburg before spreading across the European part of the country, and later to Siberia and the Far East. This geographical aspect significantly impacted the further distribution of global vendors’ shares of the Russian market. Western companies (Nokia, Ericsson, and Cisco) were the primary manufacturers of global telecommunication infrastructure at that time, while Huawei wasn’t yet competitive. By the time 3G network technologies appeared, however, Huawei products were of at least similar quality, but cost up to 20–30 percent less than their competitors’ products.
It’s not surprising, therefore, that Huawei won some of the first tenders in Russia for the purchase of 3G network equipment in 2007. The mobile operator VimpelCom, for example, chose bids submitted by both Ericsson and Huawei for contracts in various Russian regions. In places where VimpelCom already had networks (in Moscow; the North Caucasus; and the Volga, Northwestern, Southern, and Ural federal districts), Ericsson would add 3G infrastructure to its existing equipment. Huawei, meanwhile, was awarded 3G network construction contracts in Siberia and the Far East, which had very limited network coverage. The Chinese company subsequently continued to expand on the Russian market. In 2010, it won a tender organized by Russia’s MegaFon cellular operator, alongside the Nokia Siemens Network. The contracts were distributed in the same fashion: technology by Ericsson and Nokia still prevailed in the Central and Northwestern federal districts, while Huawei provided mobile infrastructure for Siberia and the Far East, where cellular networks appeared later.
So why, given Huawei’s comparable quality and lower prices, didn’t all Russian mobile network operators switch to the Chinese manufacturer’s equipment? The fact is that major vendors tried to make operators dependent on their equipment. It was technologically extremely difficult to combine hardware and software from different vendors within one local mobile network. As a result, operators preferred to keep working with existing equipment vendors for the construction of new generation mobile network infrastructure in places with established networks. In places where mobile network saturation was still sparse, the infrastructure essentially had to be created from scratch, and operators had more latitude in selecting equipment suppliers.
To switch from one vendor to another within the existing radio access network, an operator would have to replace virtually all basic infrastructure. An opportune moment to do that is when the operational cycle of past-generation outdated hardware is up. That’s how Huawei managed to wrestle their market share away from competitors in some instances. In 2016, for example, MegaFon, which was upgrading its networks to the LTE standard, swapped its old technology for Huawei’s hardware in the Northwestern Federal District. By that time, both mobile operators and experts had acknowledged that Huawei technology was on par with Ericsson and Nokia, but it was cheaper to use. In the Northwestern Federal District, for example, Huawei performed the network optimization and software installation for free. MegaFon only had to purchase Huawei’s technology.
Chinese financial companies also helped Huawei’s expansion on international markets. China Development Bank, for instance, extended an eight-year $300 million loan to MegaFon to finance the replacement of its telecom technology in 2015. MegaFon got another $300 million for six years from the Chinese bank to refinance its short-term debt obligations. This was not the first credit line that MegaFon had obtained from that bank to purchase Huawei equipment. Previous loans had been issued in 2009, 2011, and 2014. In total, MegaFon borrowed more than $2 billion from China Development Bank over the years.
Competition for the Russian market between Huawei and ZTE, China’s state-owned company, caused prices to drop even further. In other words, a large number of technological and financial incentives favored Huawei’s participation in the active modernization of telecom infrastructure in Russia.
Other Russian mobile operators followed in MegaFon’s footsteps. VimpelCom started replacing other vendors’ technology with Huawei’s in 2018 in St. Petersburg and the surrounding Leningrad region at an estimated cost of over $50 million. The company later completed a similar swap in the Moscow region. Another Russian mobile operator, MTS, tried until very recently to diversify its suppliers. While the company started using Huawei technology to build networks back in the mid-2000s, it continued to rely on Nokia and Ericsson in the European part of Russia. In the last two years, however, MTS has been cooperating with Huawei more closely, especially on 5G communication technologies.
Mobile operators don’t officially disclose the proportion of their infrastructure accounted for by individual vendors. But acquisition data published by the operators, as well as information on outsourcing agreements, shed some light on this issue. According to the available data, VimpelCom’s networks still predominantly run on European vendors’ technology in the Central Federal District, while the Northwestern Federal District relies on Huawei’s equipment. MegaFon mostly works with Nokia in the Central Federal District, including Moscow and the Moscow region, and in the North Caucasus Federal District, while Huawei controls its networks in the Northwestern and Volga federal districts, Siberia, and the Far East. In some regions (Chelyabinsk, Orenburg, and Chuvashia), the technology is provided by another Chinese vendor, ZTE. The operators MTS and Tele2 still mostly work with Ericsson. Its technology supports MTS in the Siberian, Ural, and Southern federal districts. Nokia is in charge of the past-generation network in the Northwestern District, while high-speed LTE networks run on Samsung technology. Tele2 makes minimal use of Huawei equipment, preferring the European vendors Ericsson and Nokia.
5G: Redrawing the Lines
The emergence of 5G technology in Russia set off another round of replacing base stations with so-called LTE Advanced and 5G-ready ones. These base stations currently work in 4G mode, but software updates and the use of dynamic frequency redistribution technology allow them to easily switch to 5G service. MTS reported that it would spend 7.5 billion rubles (over $100 million) on replacing its base stations in the Moscow region with 5G-ready ones purchased from Huawei. VimpelCom previously made a similar swap in the Moscow metro, with Huawei as its vendor once again. In addition, VimpelCom bought 5G-ready base stations for the St. Petersburg metro from Huawei.
Like many EU mobile operators, Russian operators cannot avoid cooperating with Huawei on the development of 5G networks. The Chinese company holds over a third of all patents in the field of 5G technology. But in contrast to a number of Western states that see Huawei as a national security threat and have limited the spread of Chinese technologies, Russian mobile operators are mostly driven by commercial interests. In a research interview with this author, the head of MTS’s radio access department claimed that Huawei technologies pose no more of a security threat than any other provider’s; therefore, no one gets preferential treatment, and everything comes down to ease of use and the price-to-quality ratio.
Some companies have made exclusive agreements with Huawei on developing their 5G networks, including MTS, whose agreement was signed in June 2019 in a Kremlin ceremony attended by Russian President Vladimir Putin and his Chinese counterpart Xi Jinping. Under that agreement, MTS and Huawei launched a 5G pilot zone on the island of Kronstadt and even made the first holographic video call. MTS has also launched 5G pilot zones in fourteen Moscow locations using Huawei equipment in the 4.9 GHz bandwidth. Later, Huawei and VimpelCom launched a joint 5G pilot zone in Moscow.
The Fight for Frequencies
The development of 5G networks in Russia has changed the rules of the game for international vendors. The primary reason is the conflicts between various Russian government agencies, which are slowing down the development and implementation of 5G technology in the country. The lack of an optimal frequency spectrum for 5G development seems to be the main problem. 5G networks can work on so-called C-band frequencies (up to 6 GHz) and super-high frequencies (over 20 GHz). Most countries have adopted a 3.4–3.8 GHz bandwidth for 5G network development, since that’s believed to be optimal in terms of signal stability, speed, and data transfer distance.
In Russia, however, this bandwidth is already in use by the country’s intelligence services, the Defense Ministry, and the Russian Space Agency (Roscosmos). In 2019, President Putin agreed to a Russian Security Council letter arguing against allowing the use of 3.4–3.8 GHz frequencies for 5G networks. Earlier that year, the Defense Ministry had published a negative review of the proposed Concept to Develop 5G Technologies in Russia prepared by the Communications Ministry, and refused to make the required frequencies available. Instead, Russian mobile operators were offered the 4.7–4.99 GHz bandwidth. From a technological standpoint, it’s possible to develop 5G networks under any bandwidth, but market players, including mobile operators and vendors, have questioned the economic feasibility of building 5G networks in such conditions.
First, commercial technologies will be tailored by default to the internationally accepted bandwidth. This means that technologies compatible with other frequencies used in Russia would have to be custom-made, which would certainly make them more expensive. For now, Huawei is the only producer of 5G network equipment operating at the 4.8–4.9 bandwidth, since one of the country’s largest operators, China Mobile, uses this frequency (though the traditional 3.4–3.8 GHz bandwidth is also available in China, and major operators like China Unicom and China Telecom build their networks to that specification).
But that is far from the biggest problem. Operating a 5G network at 4.7–4.99 GHz would require the installation of many more transmitters and base stations, since the signal stability and transfer distance is lower than on 3.4–3.8 GHz frequencies. Russia’s stringent health norms on the maximum allowable transmitter radiation levels further exacerbate the problem. According to Russian health standards, cellular network radiation levels can’t exceed 0.1 watts per square meter on frequencies higher than 2 GHz. Most countries allow for radiation levels that are dozens of times higher. These two factors combined mean that Russia would require five times more base stations for its 5G networks than it currently has. According to GSMA calculations, operator expenses for building 5G networks in Russia are set to increase by at least 84 percent. Operators point out that unless they receive the proper frequencies for developing 5G, it might take them over twenty years to start turning a profit.
In 2020, Rostelecom president Mikhail Oseyevsky described another problem with building 5G networks on the bandwidth provided by the regulators. He said it would be impossible to cover most of European Russia on the 4.7–4.99 GHz frequencies because NATO aircraft identification systems operate on the same bandwidth. It would therefore be necessary to obtain permission from neighboring states if networks are to be built within 300 kilometers from the border, and such permission is unlikely to be granted in the current political climate. This means that the Northwestern, Southern, and North Caucasus federal districts would have serious problems utilizing 5G frequencies.
At a 2019 meeting with Putin, then deputy prime minister for communications Maxim Akimov alluded to the problem of securing the most efficient 5G frequencies and asked the president for help on the issue. Akimov also mentioned the possibility of creating domestic 5G technology. According to Akimov, the government would spend 650 billion rubles ($8.9 billion) on developing 5G networks. “We would not want this money to go to foreign vendors of technology, the so-called Big Three oligopoly: Cisco, Huawei, and Nokia,” he said.
Just a month after the meeting, the deputy prime minister publicly presented a draft program titled “The Development of Industrial Production of 5G Networks and the Internet of Things for 2019–2024.” The program calls for the allocation of 28 billion rubles ($382 million) to create Russian hardware and software for 5G networks and the Internet of Things (IoT). Among the key participants, the program lists the Rostec state corporation and the Skolkovo Institute of Science and Technology (Skoltech), as well as companies whose products are on the Ministry of Industry and Commerce registry of Russian-made telecom equipment. According to the draft program, domestic 5G technology should account for no less than 18 percent of the Russian market by 2024.
Less than two months later, Rostec started working on developing 5G network technologies. In the fall of 2019, its CEO Sergei Chemezov said that the state corporation was capable of producing its own 5G technology, and that the first experimental 5G network running on Russian hardware could be launched in 2022–2023. Chemezov also said it was possible to localize production, so that some key components are only produced in Russia. It’s important that 5G technologies are produced domestically, he clarified, since given their potential use, they can be considered critical national security infrastructure.
In turn, the Communications Ministry proposed that new 5G networks should be required to run on domestic technology as part of the Information Infrastructure federal project within the framework of the Digital Economy national program. That initiative is strongly opposed by many in the business community, however. They point out that since the market currently has no real alternatives to foreign technologies, it’s impossible to predict how competitive Russian-made products will be. Besides, it would undermine all of the current cooperation between Russian mobile operators and foreign vendors, including developing 5G networks for industrial use.
An agreement between the Russian government, Rostec, and Rostelecom revealed the names of the key companies responsible for import substitution. In 2020, Rostelecom introduced the base station prototype for 5G networks. The model base station reportedly runs in a stand-alone mode and allows for the full functionality of 5G networks. According to a patent application, its software meets the specifications and recommendations of the 3GPP consortium, as well as OpenRAN international standards.
In November 2020, the state committee on digital development approved the Fifth Generation Mobile Networks road map prepared by Rostec and Rostelecom, which outlines the requirements for domestically manufactured 5G technology. According to those requirements, 40 percent of 5G/IMT-200 base stations (in monetary terms) should be produced in Russia by 2024. By that time, 5G networks should be up and running in Russia’s ten largest cities. By the same deadline, all localities with a population of more than 1,000 should be covered by LTE networks, which will later be supplemented by 5G technology.
The problem is that at this point, Russia has no working domestic 5G or even LTE technology; only prototypes. In 2021, Rostec created the Spectrum company, which should become the main national vendor of 4G and 5G technology. Rostec also introduced a 4G R45F base station that works at 450 MHz. But it turned out that Russian mobile operators hardly ever use that bandwidth. The top four mobile operators reported to the Digital Development and Communications Ministry that the homegrown technology had failed to perform at the minimal required level.
Inspired by China?
To stimulate import substitution, the Russian authorities also decided to apply administrative pressure to mobile network operators. For instance, the state commission on radio frequencies granted mobile operators a ten-year permit extension for the use of 800 MHz and 2600 MHz frequencies in LTE networks—provided they only use equipment from the Russian-made electronic products registry to build new networks and update existing LTE network infrastructure. In addition to making their products in Russia, any joint enterprises whose products are featured on that list must be at least 50 percent Russian-owned.
The idea is to force vendors to use technological solutions that satisfy the requirements of the Russian government. For example, the Federal Security Service and the Digital Development Ministry insist that only Russian encryption algorithms should be used on the radio channel between the base station and the clients’ equipment. Producers of the equipment—Qualcomm, Nokia, and Ericsson—have already pointed out that they do not support non-3GPP algorithms. Updating the algorithms may be economically unsound unless the equipment is produced domestically. In that case, the vendor will simply be forced to adjust equipment specifications based on regulatory requirements.
In addition, domestic production requirements should allow Russian producers to acquire their own technological skills and stimulate the growth of the domestic radio-electronic industry. Closing the market to imports and requiring domestic production are very reminiscent of China’s approach to attracting foreign technologies. For decades, the Chinese authorities would only grant foreign producers access to Chinese markets if those producers set up a joint enterprise with a local partner, localized production on Chinese soil, and transferred their intellectual property.
The Russian telecom market is attractive to foreign vendors. NeoAnalytics data suggest that it grew 21 percent in 2020 and totaled 1.15 trillion rubles ($15.7 billion) in value. Given the size of the country and lack of LTE network coverage in Russia’s remote territories, the Russian market remains extremely promising, and any foreign vendor would be bound to take a hit upon leaving it. The new localization requirements eliminate the competitive advantages that certain vendors had, so foreign vendors see the situation as a new opportunity to expand their presence.
In November 2021, Nokia became the first foreign company to sign an agreement with a Russian partner (Yadro, a computing system manufacturer), creating a joint venture to manufacture 4G and 5G base stations in Russia. Under the agreement, the Russian partner will be a 51 percent stakeholder in the business, with Nokia holding the other 49 percent. The agreement doesn’t just move technological processes to Yadro production facilities in Russia, but will also see the transfer of Nokia software licenses and the establishment of an R&D center to develop 4G and 5G technology.
Huawei has also disclosed that it’s negotiating with the Russian government and mobile operators to localize production in Russia. Huawei-Eurasia President Daniel Zhou said in an interview that the company is currently looking for a local partner with appropriate capabilities. He noted that his company already has experience of localizing its production processes in Russia: in 2021, Huawei started manufacturing servers using Sitronics Group production facilities. That Russian company is part of Vladimir Yevtushenkov’s AFK Sistema, which is a controlling stakeholder in MTS. It’s been reported that Ericsson is also prepared to manufacture base stations in Russia.
As of the end of 2021, there are still no answers to many fundamental questions on how the 5G market in Russia will develop. First of all, the government hasn’t yet decided whether it will create 5G technologies on its own with Rostec in charge, or allow foreign vendors onto the market, provided they localize production in Russia in conjunction with domestic companies. If foreigners are granted access, how much manufacturing will be done locally and how will the share be calculated? Foreign vendors and their potential local partners also need to know the specific regulations for 5G development in Russia, because they will determine the commercial viability of those projects.
It’s no mean feat to figure out the financial components of a project, its timeframe, and market prospects when the objectives are constantly changing. Plans to introduce 5G networks in cities with a population of over 1 million (as envisioned by the Digital Economy national project), for example, have been postponed multiple times. At this point, 5G networks in the ten largest cities are scheduled to start working in 2024, but that date is by no means guaranteed. The conversion of the radio frequency spectrum for 5G networks has not yet been completed, for example, even though it was scheduled for 2021.
Nor has the key issue of bandwidth been resolved. The proposed frequency is too narrow to ensure the normal functioning of 5G networks. Individual operators need a bandwidth of at least 200 MHz, which means there won’t be enough frequencies for everyone. The top four mobile operators have created a joint venture—New Digital Solutions—to free up the frequencies. This would allow each of the operators to receive nondiscriminatory access to the frequencies they need. But what should be done if 5G networks can’t be introduced in border areas? There is no answer to this question as of now.
The steps taken by the Russian authorities shed some light on Moscow’s fundamental approaches to cooperating with foreign investors. First, the government has opted for the domestic production of base stations: either through full import substitution (the most technologically complex and expensive option) or through attracting foreign vendors in partnership with Russian producers. In any event, Russia will no longer be buying off-the-shelf 5G hardware with no domestic participation, as it did with past-generation mobile networks.
Nor are the Russian authorities going to favor a particular foreign vendor for political reasons. China’s Huawei could have become an undisputed favorite on the Russian market after relations between Russia and the West deteriorated following the imposition of sectoral sanctions. Back in 2015, government officials saw Huawei as the lesser evil when compared to Western producers like Nokia and Ericsson. After all, Beijing hasn’t imposed any sanctions against Russia, and has refrained from using economic or technological leverage to exert political pressure on the Kremlin. Yet the very fact that Russian mobile operators and regulators have been negotiating with both Chinese and Western vendors for years, despite Moscow’s very different relations with these two camps, means that companies from friendly China will get no automatic preferences. If Moscow can’t dispense with foreign participation in developing 5G technologies, it will try to diversify its cooperation with foreign vendors.
This publication is part of a project carried out with the support of the Swedish Foreign Ministry.