The Russian satellite market received a boost with Russian Satellite Communications Co.’s (RSCC) plans to boost regional capacity through a strategy to develop a new fleet of satellites. According to CFO Dennis Pivnyuk, RSCC will operate 680 equivalent transponders by 2015, which more than doubles its current capacity of 283 equivalent transponders.

The expansion makes sense for RSCC and the population of Russia, as many people live in remote areas not in the reach of terrestrial means of communications technology, but the plan does not come without risk. Pivnyuk discusses RSCC’s strategy to address its need for public debt financing and what factors will shape the operators plans to capitalize specific markets. 

VIA SATELLITE: What are the spending plans for these satellites?

Pivnyuk: The total investment program for eight spacecraft will exceed $1 billion dollars. We currently have the Express-AM4, AM5, AM6 and MD2 satellites under construction, with the total investment for these four satellites at about $700 million. The next stage of the RSCC satellite constellation development program includes four more satellites. These are Express AM7, AM8, Express-AT1 and Express-AT2. We have just signed contracts with Thales Alenia Space and ISS for the procurement of the AM8, Express-AT1 and AT2 satellites. The cost of manufacturing these three satellites is about $270 million. With the previous four satellites, the investment program amounts to around $970 million. We have sent the specifications for the Express-AM7 satellite to manufacturers and are waiting for proposals from them. It may take three or four weeks before we get any feedback from them. We see this satellite as a mid-sized one. The manufacturing costs of Express-AM7 will be between $100 million and $130 million. 

VIA SATELLITE: How is this plan being financed?

Pivnyuk: The Russian government has subsidized $700 million of the total cost. This will cover the AM4, AM5, AM6 and MD2 satellites. The Express-AM7, AM8, AT1 and AT2 satellites will be funded through a public tender where we will choose a bank to provide financing. We will take a commercial structured loan and use the guarantee we received from French export credit agency Coface. The loan will cover all three satellites. We have yet to decide how to finance the AM7 satellite, but we know the Russian government will not subsidize it. We will either sell as much capacity as we can at a pre-launch basis to gain the funding for AM7 or go for a commercial loan again or probably do both.

VIA SATELLITE: Are you confident you can sell the capacity?

Pivnyuk: If it fits our financial model and the operator is happy with it, nothing would preclude us from selling this capacity on a pre-launch basis, but it is not our ultimate goal to sell as much capacity we can on a pre-launch basis. 

VIA SATELLITE: Are there any risks in taking on so much debt?

Pivnyuk: My major concern right now is the currency exchange rate volatility. A part of our debt is nominated in foreign currency, thus, we need to limit these risks. As for refinancing, we are constantly seeking better ways to finance. Historically, we have never addressed the public debt markets, which we will probably do in the near future. Currently our debt comes from commercial banks. 

VIA SATELLITE: When will you secure this public debt?

Pivnyuk: Certain things need to be done to be ready to go for public debt. One needs a rating from a rating agency and a financial statement according to international standards and so on. We are doing all that, but it won’t happen immediately. 

VIA SATELLITE: What will these satellites bring to the market?

Pivnyuk: Two of those eight spacecraft are direct broadcast satellites that will open the door to wider penetration of DTH services to the Russian population. In terms of broadband, the AM4, AM5 and AM6 satellites will have 26 Ka-band transponders, which will cover the most populated areas of the Russian Federation. We will use those to check if the business model for broadband access in Ka-band is a viable one. Once we have seen this, we will then make a potential decision on procuring a dedicated Ka-band satellite. 

VIA SATELLITE: When will you know if broadband Ka-band is viable?

Pivnyuk: I do not see any chance for a decision on a dedicated Ka-band satellite to be taken earlier than the end of 2013. We need to understand the market first. The AM4, AM5 and AM6 are commercial satellites. The AM4 satellite will be launched in the third quarter of next year. We will start to use the first Ka-band transponders in the first part of 2012. It will take some time to evaluate the model. 

VIA SATELLITE: Does Russia’s National Broadband Access Project affect your decision on Ka-band?

Pivnyuk: That project was just introduced by the government and president of the Russian Federation this past summer. The government allocated $17 million to evaluate the technical feasibility of providing the Russian population with broadband services using Ka-band, but this project is more of a social program. We have to provide paperwork by the end of the year, and then some time next year, probably in the first half, the Russian Government Commission on Telecommunications and Transport should chose the optimal solution for this project. The source of financing would then be allocated. 

VIA SATELLITE: Which factors are driving RSCC’s satellite expansion efforts?

Pivnyuk: With greater penetration of telecoms services available to all areas of Russian society, you can’t imagine this happening without space segment. If you look at the average penetration of DTH services in North America and Europe, certainly it is much higher if compared to Russia. Less than 11 percent of Russian households have access to DTH services. Nevertheless, with GDP growth as well as the Russian population’s wealth growing, satellite communications services will be of a greater importance. TV, broadband access, mobile communications and various applications will become a daily need for people. We have five existing DTH platforms and a line of operators who are just waiting for additional capacity to emerge. They want this capacity right away to promote their DTH platforms. These are potentially new DTH operators and RSCC has negotiations with all of them. NTV-Plus also needs some extra capacity to go into HD. They have already launched HD services. DTH operators have moved towards MPEG-4, but despite going to MPEG-4, they still need more capacity. It is a matter of rather short time until we see really strong growth in DTH.

Cellular backhaul is another driver. There are three major cellular operators in Russia, and we are in negotiations with all of them to lease on a pre-launch basis quite substantial amounts of capacity on future satellites. There is a huge interest from their side for satellite capacity, which is needed to develop 4G services.

We are planning to strengthen the RSCC position outside Russia as well. Our Express-AM8 satellite will help us expand our global footprint, as it will be positioned at 14 degrees West. Its coverage will include the territory of Central America, Europe, Africa. These markets will become more important to us.