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Analysis & Opinion
20.07.10 Systemic Pressure
By Tai Adelaja

Lately, AFK Sistema, billionaire Vladimir Yevtushenkov’s holding company, has been busy lobbying for some direct and indirect protectionist measures to shield its struggling GLONASS navigation system from its archrival, the American GPS. The GLONASS devices, for which protection is sought, are being produced by two of AFK Sistema’s high-tech subsidiaries – Sitronics and RTI Systemy. Sistema controls a 51-percent stake in the Navigational Information System, the main producer of the GLONASS module, and Sitronics, the main contractor for the project. The pilot batches of GLONASS chipsets are expected to hit the market this year.

In a televised meeting with Prime Minister Vladimir Putin on Friday, Yevtushenkov said that his company has discussed the possibility of using chips by Motorola and Nokia in the GLONASS module, to improve its competitiveness. Mark Durrant, director of Corporate Development Communications at Nokia, confirmed that the company is in talks with Sistema on a range of issues, but declined to provide the details, citing corporate regulations. Motorola would not confirm whether or not those talks took place when contacted on Monday, but in E-mailed comments through the Maslov PR firm the American company said that it “strives to supply its new products to the Russian market in compliance with all legislative requirements, technical and frequency standards, and certified as appropriate for sale and use in Russia."

During Friday’s meeting the Sistema chief suggested that Russia should require all cell phone makers to provide handsets compliant with GLONASS for use in the country. He said devices not equipped with a GLONASS chip will be banned as soon as Russia adopts a law requiring the use of the new system. “Makers of telephones and smartphones understand perfectly well that we will close the market for equipment that doesn’t have a GLONASS chip. They only want us to do this legislatively,” he said. "We aren't able to do this legislatively yet because we have some of our own problems to untangle, making chipsets and so forth."

This is not the first time the telecoms magnate has lobbied Putin to keep its rivals at bay. In a May 5, 2009 televised briefing the Sistema chief urged the government to introduce measures that would encourage the domestic use of the GLONASS system. "It is necessary for the vendors of devices and mobile phones distributed on Russian territory to build in both GLONASS and GPS chipsets," Yevtushenko said, according to a transcript of the meeting posted on the government’s Web site. "We want to appeal to the government to protect its market as Americans protect theirs." Yevtushenko said there is a law in the United States that prohibits the sale of handsets without built-in GPS chips. "So we somehow have to encourage for producers to do likewise," he said.

In a clear signal that some protectionist measures might be looming, prime minister Putin on Friday welcomed the idea that “foreign entities understand the need to defend Russia’s national interests,” adding that Russia needs “to build relations with them the right way — like we did, for example, with the carmakers, when they were shown the trend for how the situation would develop." But Putin frowned at Sistema’s practice of outsourcing production of some components to firms in countries like India and China, where labor is cheap. "I remember your plans for setting up partial production in countries where technology permits and production is cheap. Nevertheless, it’s necessary to move toward creating jobs domestically,” Putin said.

The Industry and Trade Ministry also appeared to be going along with the proposal. The ministry is already preparing customs regulations that could raise duties on various types of devices, The Moscow Times reported on Monday, citing an unidentified source familiar with the matter.

The Russian GLONASS satellite network was first developed in the early 1970s by the Applied Mechanics consortium, based in the secret Russian city of Krasnoyarsk-26. Beginning in the 1970s, both the United States and the Soviet Union launched a network of satellites to provide military aircraft with exact navigational information. Between 1982 and 1995, Russia added 24 satellites to the GLONASS constellation. But with the collapse of the Soviet Union, the system fell into disrepair. In the early 1990s the project received a boost, as many Russian military products were converted to civilian use to give them wider a in civilian shipping, aviation and even automobiles. In 1994, futile attempts were made to integrate the Russian and American systems, and the U.S. defense giant Rockwell International Corporation even received $4.7 million in a grant from the U.S. government to unite the Russian and American satellite navigational systems, in a program that could have, for the first time, created a single worldwide navigational system.

In 2001, then-President Vladimir Putin rekindled interest in the system. The Russian GLONASS system now consists of 20 satellites, out of which 19 are operational and one is suspended for maintenance, the Federal Space Agency reports. In order for GLONASS to operate globally, it still needs to have 24 operative satellites in orbit 19,000 kilometers above the earth's surface. Nikolai Testoyedov, the head of Informatsionniye Sputnkoviye Sistemy, which produces the satellites, said in March that six more satellites will be sent into orbit in two launches this year, giving the system the needed 24 working satellites, as as three in reserve.

However, the United States' Global Positioning System (GPS), which consists of 24 satellites circling the globe, is currently the only fully developed satellite navigational system in the world. After the downing of flight KAL 007 over Kamchatka in 1983, the U.S. government allowed the system to be used for civilian purposes, and Ronald Reagan, the former U.S. president, offered to allow any country in the world to use GPS free of charge. Most modern handsets, computers and iPads come with the GPS system installed. Russia has said it would also allow the GLONASS system to be freely used for civilian purposes, although it still cannot produce enough chips for the mass manufacturing of GLONASS-compatible devices.

But even if GLONASS chipsets do get mass-produced, the commercial prospects for such devices remain bleak, Eldar Murtazin, a leading analyst at Mobile Research Group, said. Murtazin said there are simply no companies in Russia that could mass-produce competitive handsets, which is crucial to the popularization of the system. While Russia struggles to roll out untested devices, almost all of the GPS devices on the market are already equipped with power saving chipsets, which prolong the life of navigation devices – something that GLONASS lacks, Murtazin said. GLONASS will also be hard-pressed to churn out products able to compete with GPS in pin-point accuracy-cost ratio, he said.

Analysts say that even a partial ban on imports of navigational equipment not equipped with GLONASS will be a step back in the process of liberalizing the telecommunication markets in Russia. "Such proposals clearly contradict Russia's declared objectives to commit to WTO principles," Alexander Shugol, the director of the Department of Telecommunications Consulting at J'son & Partners Consulting, said. "In addition, the market for expensive imported navigation devices is likely to react negatively to the idea of supporting a non-existent GLONASS network." An open and fair competition with GPS through demonstrating the possible competitive advantages of the domestic system, such as its significantly lower cost and greater integration with vehicles, is the only path toward GLONASS’ commercial success, Shugol said. Applying administrative pressure on device makers could foment very strong negative psychological distaste, he said.

Samsung spokesman Marat Tarakayev said that there is a long way to go before the GLONASS system can start competing with GPS and be included into handheld devices. "Many of GLONASS devices are bulky and unwieldy in their present form, and it will take some refinement to even think of them in handheld devices, such as mobile phones," Tarakayev said. "Of course, electronic manufacturers should have no problems including them in devices once smaller, lighter chipsets become available." Tarakayev said there is no need for suppliers of navigation and other devices to worry, as it will take time for Yevtushenkov's suggestion to be realized. "The GLONASS devices are not even mass-produced yet," he said.

However, other analysts have said that Sistema stands to gain from its relentless lobby to protect the domestic market for navigational devices. “While the production of competitive navigational system by GLONASS is still a long way off, concrete measures to support the system are realizable,” Nadezhda Golubev, an analyst at UniCredit Securities, wrote in a note to investors on Monday. “This could mean that investment in the AFK Sistema segment of high technology can bring greater returns than originally expected. We also believe that this news is positive for the ratio of investors to the AFK Sistema, as it demonstrates the ability of Sistema to lobby for changes in legislation relating to the areas in which to invest in the AFK Sistema.”
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