By James Careless

Back in the 1980s, Russia was the next big opportunity for Western satellite equipment manufacturers. Despite being the world’s largest country and the first nation in space, Russia’s satellite infrastructure is extremely meager. "Even as recently as two years ago, there were only 1,800 to 2,500 VSAT earth stations in all of Russia," says Arie Rozichner, Gilat Satellite Networks’ (Gilat) director of sales in Russia. "Moreover, at least half of those VSATs were for military use, so there were 1,000 VSATs at most for government/business use."

Rozichner adds that these VSAT totals are "so shocking that we didn’t initially believe they were correct. But we triple-checked them, and they are accurate."

Factor in Russia’s inadequate and antiquated terrestrial networks and one can understand why Western satellite vendors clamored to do "business with the Bear." "As we all know, the opportunity in Russia is significant," says Arunas Slekys, general manager of Russian sales operations for Hughes Networks Systems (HNS). "This is a country of 150 million [people] that spans two continents and 11 time zones. If ever there was a country ideally suited to satellites, Russia is it."

Unfortunately, Russia’s subsequent economic collapse and political instability drove most Westerners out of the former "Land of Lenin." But there was money to be made. Given these formidable obstacles, however, Russia posed a challenge for satellite businesses looking to turn a profit.

Fast forward to the 21st century. Almost two decades after Mikhail Gorbachev launched Perestroika, Russia is getting economically and socially on its feet.

Stronger Business Dawns

Thanks to oil and gas exports, Russia’s gross domestic product (GDP) grew 7.1 percent in the first five months of 2003, according to Russian Trade Minister German Gref (Source: Pravda). This follows up on solid growth for the past three years. Meanwhile, Russia is expected to produce around eight million barrels in 2003, according to the U.S. Energy Department. In 2002 it produced 7.3 million barrels, consuming 2.6 million and exporting the rest.

Like all governments, the administration of Vladimir Putin takes a cut of the oil revenues through taxes. In turn, the Russian government allocated some of this money to improvement projects such as "Electronic Russia 2002-2010." Nicknamed eRussia, this $2.6 billion program aims to bring Russian telecommunications up to date through a mix of terrestrial and spaceborne projects. For instance, HNS has won a $10 million contract to network together approximately 8,000 Russian schools by satellite. EMS Technologies is also taking part in this initiative, by supplying ground station equipment.

With such government support, supplemented by purchases by large private petroleum firms such as Lukoil, Russia has become a good place to do business. "It is possible to make good and successful business relationships in this country," says Andrei Ivanov, EMS Technologies’ director of marketing for Russia. "We have been doing so for the last 10 years, and things keep getting better."

Business Challenges Continue

Russia’s economy took a recent hit from the fallout when authorities arrested and jailed YUKOS Chairman Mikhail Khodorkovsky on fraud charges. This arrest of the oil baron, which some say is politically motivated, has stirred fears that Russia is not yet stable enough for foreign investment. But thankfully the demand for advanced communication systems remains. Satellite opportunities, therefore, may soon enjoy an upswing growth in Russia once the economy rebounds from this recent scandal.

"Twelve years ago, Russia was like the U.S. Wild West in the 1850s. The man with the biggest gun got the job," says Frank Morgan, president of MCL, a seller of amplifiers and other satellite equipment to Russian integrators. Gilat’s Rozichner agrees. "It used to be that you could have the elements in place for a deal–the need, the government approvals and the budgets–and then it would be cancelled on a whim when someone new moved into the top job," he says.

"Under Putin, this has all changed," Rozichner adds. "He has stabilized the business environment and nowadays you can count on deals being kept." EMS Technologies’ Ivanov echoes this assessment. "Today people investing in Russian satellite projects feel comfortable that the Russian government will honor its commitments."

Opportunities In Russia

Thanks to the improvements in the Russian economy and ways of doing business, the country is providing numerous opportunities for the world’s satellite equipment manufacturers. Along with eRussia, other satellite-based business projects are underway.

TMSat, for example, is another initiative that is providing big opportunities for Western suppliers. TMSat is a privately-held Russian service provider that has partnered with the Thuraya Satellite Telecommunications Co. (based in UAE, Thuraya is a Middle Eastern satphone carrier) and the Russian Satellite Communications Co. (RSCC) to bring Thuraya service to Russia. Under the plan, HNS will build a Thuraya gateway and network management system in Dubna, near Moscow. TMSat will also use Thuraya mobile handsets.

"TMsat sees a tremendous market for Thuraya satellite-based mobile telephone service in Russia, which is both complementary to and compatible with terrestrial GSM service," says Nikolay Prokhorov, TMSat’s CEO.

Gilat is also busy in Russia. In May 2003, for instance, Gilat announced a deal with the RSCC and the "Jackpot" gaming company to deploy a 500-site VSAT network and Skystar 360E hub to support country-wide electronic gambling.

"Cooperation between Gilat Satellite Networks and Russian producers is significant for Gilat not only commercially, but also politically," says Zorichner. "It is an important cooperative effort expanding our markets in Russia in which all sides benefit."

The Russian government along with other vertical markets are indeed turning profits for satellite endeavors. EMS Technologies is a key supplier to General Telecom, a Russian integrator that builds and sells Inmarsat Mini-M and M4 mobile satellite communications systems. "Government users and major private aviation companies are General Telecom’s sole focus and business is very, very good," says Yuri Fink, the company’s president and director general. "The monthly revenues from our Mini-M terminal sales and service is quite substantial," Fink says. "Next year we are planning to sell several hundred M4 terminals. We expect revenue from that traffic to be dozens of times more than from our Mini-Ms." General Telecom is also interested in selling EMS Technologies’ Fleet 55 maritime data terminals.

On the Pacific/Siberian side of Russia, the Canadian equipment maker Polarsat, formerly the broadband division of NSI Global Inc., is pursuing opportunities on Sakhalin Island. Thanks to huge oil and gas deposits off the island’s east coast, Sakhalin Island has become a mecca for some of the world’s biggest oil companies.

"We’re providing the Sakhalin exploration teams with the telecom they need via satellite," says Richard McPhaden, vice president of Polarsat. "It’s a huge potential oil field, which some say could be the next Saudi Arabia." Polarsat also built and maintains two VSAT networks (50 earth stations in all) for Lukoil, one of Russia’s largest oil and gas companies.

Miteq is also reaping the rewards that the Russian oil and gas sector is bringing to the satellite sector. "We have definitely witnessed a business growth trend since the fall of communism, primarily for major communication infrastructures both in the commercial and industrial arenas," says Chris Alfenito, Miteq’s director of sales for satcom products. "Oil and gas may, indeed, lead the pack in these endeavors, but we also see continual expansion of military and commercial communications within the country."

Ongoing Obstacles

As good as the Russian news is for Western satellite vendors, the situation is far from perfect. Chief among the obstacles they face are Russia’s continuing insistence on VSAT licensing fees. "Whether you are installing a network of 100 or 10,000 VSATs, you still have to get a license for every single one," says Rozichner. "At a few thousand dollars per site, this takes a lot of money, and can delay a deployment by six to nine months.

"It’s the biggest constraint that we’re up against in Russia," he adds. "We’re in 70 to 80 countries worldwide, and this is the only one with such a constraint."

A second constraint on satellite vendors is bandwidth. Like any government, Putin’s regime wants Russian users to send their traffic through the country’s domestic Gorizont satellites. The trouble is that Intersputnik’s 1980s-vintage Gorizonts are based on analog technology, and offer just seven transponders (six C-band and one Ku-band) each.

Finally, the toughest customers are the country’s older generation who grew up under the Soviet system. When in doubt, these Apparatchiks (a Soviet term that combines the ideas of bureaucrat, middle manager and Party careerist into one), revert to pre-Perestroika form.

Progress Towards Change

Progress, however, is being made to remove those obstacles remaining that hinder Russian satellite technology development. For one thing, satellite vendors and the Global VSAT Forum are lobbying the Russian government to eliminate the licensing fees, or at least to reduce them. As well, anti-fee proponents are lobbying for licenses to be granted on a bulk per-network basis, rather than through a time-consuming, one-at-a-time process.

In addition, Russia is modernizing its satellite fleet by launching new digital spacecraft. For instance, Intersputnik’s new Express A satellites carry 17 high-power transponders (12 C-band and five Ku-band) and can handle spectrum-saving digital transmissions. Three Express A satellites are in orbit, and more are on the way. "The Express A is a very modern satellite that provides very good service," says Rozichner.

Finally, the younger Russian generation is comfortable and competent in the ways of Western business. As for the time-honored tradition of bribery? "Those days are basically over," says Slekys. "But we don’t do business that way, anyway."

Future Possibilities

Assuming economic times improve in Russia, the sky is the limit when it comes to satellite communications. The land is just too vast to bridge economically with terrestrial networks.

Considering Russia’s business development rides on the price of oil, all eyes will now follow how the country rebounds from the recent arrest scandal. "As long as crude oil stays above $22 a barrel, the Russians will keep spending money on infrastructure," says Morgan. "If it drops below $22, their market will dry up overnight."

At press time, the U.S. Energy Dept.’s Energy Information Administration (EIA) was predicting about $29 per barrel for Russian crude. If the EIA’s predictions prove to be true –and only time will tell–then Russia may resume its role as the satellite industry’s next big opportunity. The good news is that it should hold onto this role, oil prices willing, for the foreseeable future.

Eastern Europe Quiet, But Growing

Unlike Russia, Eastern Europe is not yet enjoying the same economic boom when it comes to satellite communications and services.

"A lot of satellite service providers have gone out of business in Eastern Europe," says Simon Bull, a senior consultant at Comsys. "The market here isn’t big enough to support very many operators."

The problem is money. Unlike Russia, Eastern Europe does not have oil reserves to top up its coffers. This said, there are still satellite opportunities in the region.

In Bulgaria, for example, Gilat Satellite Networks is deploying a Skystar 360e hub and 511 remote sites. The VSAT sites will support 450 gas stations owned by the Bulgarian petroleum company Transat, plus 30 bank branches and other businesses. "Transat relies on Gilat’s rich experience in the deployment and support of these networks," says Mincho Pankov, Transat JSC’s executive director. "The geographic proximity of Bulgaria to Israel, as well as our excellent economic relations, are strategically important to us."

HNS also has a number of resellers in Central Europe who are also CLECs (Competitive Local Exchange Carriers), says Arunas Slekys, general manager of Russian sales operations for Hughes Networks Systems (HNS). "A case in point is Contactel, who operates in the Czech Republic and Slovakia and are expanding elsewhere. Contactel is a classic CLEC who is deploying satellite broadband in areas where DSL isn’t cost-effective. We’re helping them by supplying equipment and expertise," he adds. HNS also built a satellite broadband network and operations center for the Ukrainian satellite services provider Datasat. This new network provides all of Ukraine with high-speed two-way broadband service, plus fax telephony, telemedicine and broadcast television.

In Slovakia, Surface Heating Systems has been busy selling its dish-heating systems to Slovakian TV. Surface Heating Systems’ solution integrates heating elements in shaped insulated panels, which stick directly to the back of an antenna. "We’ve had to design the Slovakian products to run at 48 volts, rather than 110 or 220," says Michael Cummings, managing director of Surface Heating Systems. "In this country, our product has to be installed by non-qualified technicians. By keeping the power below 50 volts, we can keep them from being hurt."

Even though Eastern Europe may not be one of the most profitable regions in terms of satellite technology initiatives, it does hold strong promise.

James Careless is senior contributing editor to Via Satellite magazine.