Tuesday, 29 January 2008

Sistema CEO lays out global expansion plans

Business New Europe

Jason Corcoran in Moscow

January 29, 2008

Sistema's president and CEO, Alexander Goncharuk, is not easily rattled by corporate brinkmanship or pressure-cooker situations in the boardroom. A naval man from Sevastopol, the home port of Russia's Black Sea Fleet, Goncharuk was once an officer on a nuclear submarine, spending 260 days a year at sea. That experience has helped him in his current role heading up Russia's largest private sector consumer services company with a flotilla of subsidiaries involved in telecommunications, tourism, property development, banking, retail, IT and healthcare.

"I had to solve unique tasks in the underwater conditions of the submarine. In submarines, you are always at a level of danger because you are 200 metres underwater with nuclear weapons for company," Goncharuk told bne in an interview. "That experience was a great practice for your nerves; you can sustain uncomfortable situations for a long time and are not afraid of challenging tasks."

In 1991, Goncharuk resigned from the Navy with a huge tinge of regret after the dissolution of the USSR led to its neglect. "I was a very successful officer and for me, leaving the navy was very much of a tragedy. But one has to continue to live. That's when my second life started," he says. Goncharuk went into business in 1991, joining a wholesale trading company and later worked in a Sistema division, joining the board in 1996. He has been president of Sistema since February 2006 and its chief executive officer since 2006.

Sistema's plush headquarters are located next to the National hotel at 13 Mokhovaya Street, which was the US embassy until 1950. Goncharuk's own room has a bird's eye view of the Kremlin and one of his desks features framed photographs of leading politicians, including one of him shaking hands with Dmitry Medvedev, first deputy prime minister, at Sitronics' office in Leningrad. Medvedev's photo was moved from the back row to a more a prominent position at the front when President Vladimir Putin named him as his favoured successor. Goncharuk respects what Putin has done for the country and voted for his United Russia party in the recent parliamentary elections.

He says Putin's administration has recently been very supportive of the group's overseas expansion. In January, Sistema announced its Indian telecom firm Shyam had been granted licenses to provide nationwide mobile services in India, the world's fastest-growing market. Goncharuk said the government had helped broker the deal and is actively supporting the creation of Russian transnational champions. "Of course, we got support from the Russian government, especially during the governmental meetings between Russia and India," he says. "The government sent us a message that they will support the creation of transnational corporations and nothing else could help us better than the support of our own government."

In December, Sistema also received approval from India's Foreign Investment Promotion Board to increase its stake in Shyam to 51% from 10%, with an option to raise it to 74%. Goncharuk said Sistema would invest $4bn-7bn in building a national Indian mobile network to compete with the UK's Vodafone, which spent $11bn last year to take a controlling stake in Hutchison Essar. Sistema will resist calls made by Shyam's minority shareholders at December's annual meeting for an IPO or to buy them out. "We explained to [shareholders], 'please be patient and let us invest and develop the company and you will be co-owners of the company that you couldn't even dream of,'" Goncharuk says. "An IPO would put obstacles in our way, but we openly explained that we want to build it into a national player within five years and everybody will be happy."


Global expansion is the core strategy for Sistema, which owns Russia 's biggest mobile phone operator MTS, along with fixed-line operators Comstar and MGTS. Its fastest growing business is Sitronics, the technology systems business where Goncharuk grew revenues tenfold in three years before taking over as Sistema's president.

The group is now scouting for M&A opportunities in developed markets despite the German government scuppering talks about an asset swap with Deutsche Telekom in 2006. "We are looking at companies as acquisitions and not particular markets. With the existing technologies, I would not advise anybody to build a new mobile telecommunications network in Germany, for example," says Goncharuk. "On the other hand, there are successful examples of small local discounters in developed markets: E-Plus in Germany and Tele2 in Russia."

Sistema's main revenue driver MTS is the largest mobile phone operator in Russia and the CIS. Together with its subsidiaries, the company serves over 79m subscribers in Russia, Ukraine, Uzbekistan, Armenia, Belarus and Turkmenistan. Goncharuk said expansion abroad was not a hedge against saturated home markets. "Two years ago, analysts said average revenue per user would stagnate in Russia, but I said there would be at least five years growth and it's still growing because of the additional services and the fact people are talking more."

Convergence between fixed and mobile telecommunications is set to be a big play for the group. TS Retail, a unit of MTS, opened nine Tochka branded stores in December offering retail products and services of MTS, Sky Link, MTT, Moscow City Telephone Network, Comstar Direct, Sistema Mass Media, MBRD, Intourist and other firms. The Tochka stores were opened in Moscow, St Petersburg, Samara, Novosibirsk and Yekaterinburg, with more planned for Vladivostok and Kursk. TS Retail plans to open about 2,500-3,000 stores in Russia and other CIS countries where MTS has a presence.

With the belated introduction of Blackberry services to Russia, Goncharuk envisages personal digital assistants (PDAs) taking off as restrictions on such devices are eased. "PDAs are important because they are important in the global market. We are looking at PDAs and other assistants from the point of view of operators. Of course, it would be more exciting if we would start their production but that's in the future."

Sistema's main shareholder is Vladimir Yevtushenkov with 62.1%, who is also its founder and board chairman. Yevtushenkov is the only top-20 oligarch in Russia without ties to the country's natural resources and the company's squeaky clean reputation has helped with tapping international capital markets. "Borrowing money costs for us less on average than for other Russian companies because we are transparent for investors. And of course we value very much our reputation for corporate governance," Goncharuk says.

Sistema has sold shares in four of its subsidiaries: mobile operator MTS (in which it retains a 53% stake); fixed-line telecom firm Comstar (59% retained stake); property arm Sistema Hals (80%); and technology company Sitronics (85%). Goncharuk says the group will consider IPOs of its non-listed companies, such as Moscow Bank for Reconstruction & Development and Detsky Mir, when they increase sufficiently in value.

A merger of its fixed and mobile operators is also on the cards. "Merging Comstar and MTS is something that we are looking at and might be inevitable, but it's for the midterm," he says

New tougher listing requirements for foreign companies on the London Stock Exchange won't present a problem for Sistema, according to Goncharuk. "We already have five listed companies, and we listed MTS and VimpelCom in New York and they have stricter regulations under Sarbanes Oxley. Anyone who has lived under Sarbanes Oxley is prepared for London's new regime."


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