The future has to wait: 5G in Russia and the lack of elite consensus

ABSTRACT

Although the rollout of 5G in Russia has been much anticipated by both businesses and the government, progress in the introduction of the new standard came to a standstill by 2021. Key elite groups in business, the federal bureaucracy, and the security apparatus (the siloviki) have failed to agree on the rules for 5G. Major sticking points in the debate are the distribution of radio spectrum, the operators’ business model, and the degree of import substitution for 5G equipment. This article examines the bargaining among different elite actors over the new mobile communications standard. The foundering introduction of 5G illustrates a more general lack of agreement among Russia’s elites about the future direction of Russia’s economy. Negotiations are complicated by shrinking resources, the relative strengthening of the siloviki, and unrealistic aspirations to economic sovereignty in the digital sphere.

KEYWORDS:

• Russia
• 5G
• digitalization
• elites
• limited access order

Introduction

Information and communications technology is one of the fastest growing sectors of Russia’s economy. In 2012–2020, the sector expanded by 3.8% per year on average, whereas the Russian economy as a whole reached only 1.1% annual growth in the same timeframe (Abdrakhmanova, Zinina, and Kovaleva 2021). One of the drivers for the digital economy has been Russia’s rapidly developing telecommunications infrastructure. In 2019, the country had more mobile cellular subscriptions per capita than almost all OECD members.¹ Russians are embracing mobile Internet services, with mobile Internet traffic growing at an annual rate of 67.6% in the years 2011–2019 (Kovaleva and Utyatina 2020). These developments have fostered hopes among the Russian leadership that digital technologies will help to overcome the country’s decade-long economic stagnation. The potential is supported by estimates from Moscow’s Higher School of Economics that expect more than half of Russia’s GDP growth until 2030 to come from digitalization in all sectors of the economy (Higher School of Economics 2019, 38). To realize this potential, President Vladimir Putin made the speedy introduction of digital technologies one of Russia’s national goals at the beginning of his fourth term in office in 2018 (Kremlin.ru 2018).

Much of Russia’s digitalization hope hinges on the successful introduction of the newest mobile communications standard, 5G, which is expected to play a central role in the economy of the future across the world. In Russia, the new standard could not only help mobile operators to accommodate the exploding data volumes in Russia’s mobile networks and alleviate congestion, but also enable new applications for both private citizens and businesses. The first 5G test zones were already operational in Russia during the World Cup soccer tournament in 2018. However, although the swift introduction of 5G is a core element in Russia’s much-vaunted Digital Economy National Project, progress had almost come to a complete halt by 2021.

The cause of the delay is the lack of agreement among different elite groups in Russia. While Russia’s mobile operators and the influential businessmen behind them are looking for the new standard to be rapidly introduced using foreign equipment on the internationally most common radio frequencies, Russia’s military and security services (the siloviki) are refusing to cooperate on the necessary reorganization of the radio spectrum. Meanwhile, the Communications Ministry and the Ministry for Industry and Trade are pursuing prohibitive import substitution requirements – to the delight of state corporation Rostec, which has been given the lucrative task of developing Russia’s 5G solution, along with billions of rubles in government subsidies.

The uncompromising stance of Russia’s ministries and security elites is rooted in both Russian domestic politics and sanctions. The dominance of the siloviki in “late Putinism” and worries of technological vulnerabilities have hardened positions that were always difficult to reconcile in post-Soviet Russia. Most importantly, after the 2014 fallout with the West, Russia’s elites have lacked a common vision of the country’s economic future that could help bridge the different positions. As a result, Russia’s economy is unlikely to realize the full potential of its currently thriving digital economy and continue to lose ground in international competition.

This paper presents a case study from the mobile communications sector to examine these developments and interpret them with the help of the limited access order (LAO) framework developed by North, Wallis, and Weingast (2009). The following section introduces the LAO concept and discusses the rollout of the mobile communications standards 3G and 4G in Russia in this context. Then, the more detailed case study on the introduction of 5G in Russia is presented, including an overview of the relevant actors in the elite bargaining process. Finally, the conclusion points out implications of the lack of elite consensus for Russia’s future development, both regarding the mobile communications sector and the economy as a whole.

Struggle for elite consensus in Russia’s limited access order

North and his co-authors characterize the LAO as a social order which is ruled not by one overpowering leader, but by a group of competing elites. The members of the elite coalition enjoy highly lucrative privileges in the LAO, which creates incentives for them to support political stability, while deterring their impulse to fight one another. In other words, the economic rents they derive from their privileges are the “glue that holds the coalition together” (North, Wallis, and Weingast 2009, 30). In post-Soviet Russia, the most important privileges reserved to the elites are the ability to establish and control a big business or any other type of large, influential organization, but also access to budget subsidies, state procurement, and licences, e.g. for the exploitation of natural resources or radio frequencies.

Following North and co-authors’ LAO concept, the ruling coalition is stable as long as there is a basic consensus among the elites about the distribution of rents. There is always an inherent risk that elite factions or individual actors will find it worthwhile to fight or sabotage the others in order to expand their piece of the pie. To avoid this, the distribution of privileges has to be roughly in line with the elites’ political power. In North et al.’s terms, the correspondence of rent distribution and political power has to be in a “double balance” (North, Wallis, and Weingast 2008, 60). In fragile LAOs, e.g. less developed countries that are dominated by competing warlords, political power mainly refers to the ability to organize physical violence, such as militant groups. In more mature LAOs such as Russia, control over violence still plays a crucial role, but the battle for rents is also fought with more “civilian” weapons, e.g. by instrumentalizing the corrupt judicial system against an opponent.

Throughout history, many LAOs have been able to achieve high (average annual) economic growth rates over certain periods of time. Russia in the 2000s is one such example. The LAO’s ability to generate economic growth depends on external factors (such as the oil price in Russia’s case), but also on the quality and stability of the internal elite consensus. Under certain circumstances, elite coalitions may even support limited economic reform, including the reorganization of their privileges, if they expect that it will be beneficial to them in the future.² If, however, the elite consensus over the appropriate direction of economic policy falls apart, stagnation or crisis become likely, and shrinking rents can lead to the destabilization of the LAO.

Russia’s mobile communications sector epitomizes the features of the LAO outlined above and can be seen as a litmus test for the elites’ consensus. The most important privilege in the mobile communications sector is exclusive access to the radio spectrum. The different parts of the spectrum (frequency bands) are tied to public licenses that allow their owner to set up a lucrative communications business. Radio spectrum is also needed for military and security purposes, satellite communication, or for broadcasting state TV. The multitude of possible applications makes bargaining over spectrum a complex and often lengthy process involving many elite groups with different backgrounds, such as the siloviki, the federal bureaucracy, the business empires behind Russia’s mobile operators, and even state media. All these actors have their own particular interests regarding how frequencies should be allocated and radio networks should deployed in Russia, the most important of which are outlined in the detailed case study below.

Technological change is a constant challenge to the elite consensus in the sector. With each new generation of mobile communications standards, the radio frequency spectrum has to be partially reorganized to make space for new networks. A successful reorganization of the spectrum allocation can bring material benefits to the elites: newer mobile communications standards generally make the use of the radio spectrum more efficient, yield new business opportunities and potential economic growth (including tax revenue directed to the siloviki), and may even free up parts of the spectrum (e.g. the “digital dividend”). However, these gains can only be realized if the elites can reach a consensus on their distribution.

The bargaining over the arrival of 5G in Russia echoes past struggles among elites surrounding the introduction of 3G and 4G. The rollout of 3G in Moscow was initially delayed because the Defense Ministry refused to cooperate in the reorganization of its existing radio applications to free up frequencies for the new networks on the 1.9–2.1 GHz spectrum. After years of unsuccessful bargaining, the situation was only resolved in October 2009 by an intervention of then-President Dmitry Medvedev. Medvedev called the lack of 3G a “shame” and ordered the Defense Ministry and the Communications Ministry to come up with a solution within a few weeks (Interfax.ru 2009). The political issue of the 3G rollout aligned well with Medvedev’s own agenda for economic modernization in Russia. Although Medvedev’s “Modernisatsiya” was eventually considered a failure, it served as a political backdrop that helped to create a new consensus on the use of the radio spectrum at the time.

During the introduction of 4G, the elite networks within the Defense Ministry and the Communications Ministry attempted to benefit directly from their influence on the spectrum allocation. Already in the 1990s, obscure offshore holdings with ties to Putin’s first communications minister, Leonid Reiman, had commercial interests in the mobile communications market (Lavitskiy 2010). In the late 2000s, three business structures with close links to the defense and communications ministries were established to snap up 4G frequency licenses without competition (Petrov 2010). This would have allowed the businesses either to resell the licenses to the more established mobile operators, or to establish a competing provider on the profitable and quickly growing mobile communications market. The prospect of a lucrative involvement helped to build an elite consensus in favor of pursuing 4G within the elite coalition by aligning the interests of businesses, siloviki, the federal bureaucracy, and the modernization-minded President Medvedev (Balashova 2009).

When a batch of frequency bands was eventually allocated for 4G in 2012, the Defense Ministry received a large chunk of the spectrum (2.3–2.4 GHz) and planned to establish its own provider, Osnova Telekom, which was meant to serve both military and private customers. However, these plans were shattered by a major corruption scandal surrounding former Defense Minister Anatolii Serdyukov, after which the idea of a “siloviki mobile operator” was dropped. The frequencies became a toxic asset to Serdyukov’s successor, Sergei Shoigu (Korolev 2018b). Meanwhile, four 4G licences were given to the three market-leading mobile operators and state company Rostelekom in a so-called license competition, which eventually looked more like an insider deal: the criteria of the competition closely followed the suggestions of the four winners, while smaller regional operators and the less connected foreign-owned Tele2 were left out in the cold (Kluge 2017).

The allocation of 3G and 4G licences allowed the federal mobile operators to further consolidate their control over the Russian market. Their success is linked to the influence of their owners, and illustrates the key role that private business continues to play for economic policymaking in today’s Russia. While wealthy businessmen have stayed out of Russian politics under Putin, their businesses have been successful in lobbying for their particular or sectoral interests in recent years. The association of Russian big business, the Russian Union of Industrialists and Entrepreneurs (RUIE), continues to be a powerful voice in many matters of economic policymaking. RUIE managed to significantly weaken environmental rules on using the “best available technology” in 2010–2014 (Martus 2017), successfully shot down a proposal for taxing “excess profits” in 2018 (Matveev 2019, 411), and blocked the introduction of cap and trade carbon pricing in Russia in 2019 (Climate Home News 2019).

However, with the return of Vladimir Putin to the Kremlin in 2012, several shifts in Russia’s ruling elite began to undermine the position of the mobile operators within the dominant elite. With the end of the Medvedev presidency, the “Modernisatsiya” agenda was abandoned. While Medvedev was infatuated with digital gadgets himself and looked to the US’s Silicon Valley for inspiration, Putin has favored state-led, centralized development of the mobile communications market (and the economy in general). He also claimed not to use a smartphone as late as 2020 (Vandenko 2020). In addition to Putin’s economic priorities, several domestic and foreign policy events had a lasting impact on the balance of power within the ruling elite. After a wave of protest in Russia in 2011–2012, the siloviki managed to consolidate their position within the elites and, in accordance with the LAO’s “double balance” of political power and economic privileges, their budgetary funding increased dramatically. This had detrimental effects on Russia’s business climate. Already in 2013, Andrei Yakovlev observed the rise of these “influential groups in the Russian elite who deny, in principle, any need to meet the interests of business and, on the contrary, insist on toughening of regulations and on firmer control and supervision” (Yakovlev 2014, 17). After the Crimean annexation and the introduction of sanctions, Russian policy further shifted towards economic sovereignty and import substitution, which increasingly put pressure on Russian mobile operators who rely on foreign capital and technologies (Connolly 2018; Kluge 2020). Another driver of the securitization of the mobile communications market was the increasing political significance of the Internet and digital platforms, due to their importance for independent news reporting and the self-organization and mobilization of the Russian opposition. The Yarovaya law of 2016 introduced sweeping surveillance requirements for the mobile operators, and was followed by the law on Russia’s “sovereign Internet,” which introduced even further-reaching regulations (Epifanova 2020). Against this background, the Russian mobile operators and their internationally integrated business models faced an uphill battle lobbying for favorable regulations during the introduction of 5G.

Case study on Russia’s 5G introduction

The case study below examines the process of 5G introduction in Russia. First, the key actors involved in Russia’s 5G bargaining are introduced. Then, business–state interaction within the Digital Economy National Project is analyzed, focusing on three key regulatory issues: frequency allocation, business models, and import substitution. The case study is based on media archives and interviews with industry insiders, experts, and academics.

Key actors

Big four

While most of the Russian telecommunications sector is – at least formally – in private hands, Russia’s private operators are controlled by three of the richest and most influential Russian businessmen. This is reflected in, for example, the Nezavisimaya Gazeta “best lobbyists ranking.” Mobile operator owners Alisher Usmanov (ranking 7–8), Mikhail Fridman (11), and Vladimir Yevtushenkov (25) have been leading figures for many years (NG.ru 2020). Together with the state-owned operator Rostelekom (who runs the brand Tele2), MTS, Vimpelcom, and Megafon are often characterized as the Big Four. In the market, the Big Four are fierce competitors, which has led to low prices in Russia in international comparison. At the same time, the Big Four have co-operated closely to keep market access limited: no new market entrant has been able to overcome the clout of the Big Four since the mid-2000s. They have also joined forces in several different lobby organizations to act collectively vis-à-vis the regulatory authorities, such as the LTE Union or the RUIE.

Vladimir Yevtushenkov controls the operator Mobile TeleSystems (MTS), the market leader with 79.1 million subscribers in Russia (30% market share).³ The company has internationalized its business since the 1990s and is listed on the New York Stock Exchange, although Yevtushenkov has more recently pondered returning “to the fold” of Russia’s stock market considering the geopolitical situation (Interfax.ru 2019). Yevtushenkov’s initial business success is often connected to his personal relationship to the former mayor of Moscow, Yurii Luzhkov. The reach of Yevtushenkov’s personal network in the political elites in Russia looked weaker in the 2010s. This affected his wealth as well: he was investigated for money laundering and had to give up his most valuable business asset, Bashneft, in 2013. Bashneft was later acquired by state oil company Rosneft, which is controlled by the close Putin ally Igor Sechin, but Yevtushenkov was able to retain control over MTS through his holding AFK Sistema (Kluge 2018, 38).

Alisher Usmanov controls the second-largest Russian operator, Megafon. The company owns 29% of the market (75.2 million subscribers). Megafon is formally a private company, but its owner is more closely tied to Putin’s personal circle. Usmanov rose to wealth and influence in his role at Gazprom in the early Putin era. Over the years, the Kremlin has trusted Usmanov with many politically delicate business assets (e.g. in mass media). When Usmanov began his step-by-step acquisition of Megafon in 2008, the company was co-owned by foreign investor TeliaSonera, Fridman’s Altimo, and several non-transparent offshore holdings that were tied to the “St. Petersburg connection” around Putin’s first communications minister, Leonid Reiman (Simpson, Crawford, and White 2005). Megafon was listed on the London Stock Exchange (as well as in Moscow) for a brief period from 2012 to 2018, but has been delisted from all exchanges and Usmanov remains the only final beneficiary. The company explained the delisting with plans to cooperate more closely with state companies and the need to take on low-return infrastructure investments, revealing that shareholder value is not the only interest of the management (Novyi 2018). Usmanov has handled the company more like a trustee than a profit-maximising owner, at times accepting loss-making deals in the interest of businessmen from Putin’s inner circle (Shkolin 2012).

The businessman behind the third mobile operator, Vimpelcom, is Mikhail Fridman, one of the few banker billionaires of the Boris Yeltsin era who were able to retain their wealth under Vladimir Putin. He is not particularly close with Russia’s current leadership, but knows how to skillfully navigate and exploit Russia’s political and institutional environment. Fridman bought a controlling stake in Vimpelcom from its Russian founders in 2001. The corporate structure of Vimpelcom is highly internationalized. Fridman’s holding Veon is incorporated in Bermuda, has its headquarters in Amsterdam, and is listed on the NASDAQ. Vimpelcom struggled in the Russian market in the 2010s and controls 21% of it (54.6 million subscribers).

The fourth mobile operator in Russia, Tele2, is controlled by state-owned Rostelekom. Tele2 Russia used to be a subsidiary of Swedish Tele2 AB, before it was sold to Russian investors led by state bank VTB in 2013. Rostelekom has retained the rights to use the Tele2 brand. The Swedes were successful as a discounter in Russia in the 2000s, but ultimately lacked the political clout to secure radio spectrum licences for 3G and 4G broadband Internet against the lobbying power of the Big Four (Kluge 2017). Tele2/Rostelekom has 44.6 million subscribers (17% of the market).

Rostec

With Rostec, another state corporation has big plans to expand its presence in the mobile communications sector. The industrial behemoth was created in 2007 to consolidate the state’s assets in arms manufacturing and technology. Since its formation, it has been led by Sergei Chemezov, who has close ties to Putin after both worked together at the KGB in Dresden in the 1980s (The Bell 2020). Rostec first entered the mobile communications market in 2008, when it bought a stake in the telecom start-up Skartel. Chemezov’s influence helped Skartel, which was later taken over by Megafon, to acquire exclusive spectrum licences (Oleg, Dzyadko, and Romanova 2009). In the electronics market, Rostec is lobbying for strict import substitution requirements to create demand for its civilian production in Russia. Diversification into civilian markets is expected to cover for the shrinking state armament procurement program. Chemezov sees the corporation’s radio electronics unit as the key driver for Rostec’s civil production in the future (Rostec 2019). According to its development strategy presented in 2015, Rostec wants the share of telecom equipment in its turnover to rise from 4% to 12% by 2025 (NG.ru 2015).

Mintsifry

The Mintsifry, formerly Minkomsvyaz’,⁴ is the abbreviated term for Russia’s Communications Ministry, officially called the Ministry of Digital Development, Communications, and Mass Media. It is formally in charge of the Digital Economy National Project and the introduction of 5G in Russia. The ministry has seen five leadership changes under Vladimir Putin, and has mostly been headed by relatively young ministers. After the government reshuffle in January 2020, it was taken over by Maksut Shadaev, a former Internet entrepreneur who made a career in Moscow’s bureaucracy as a protégé of Putin’s first communications minister, Leonid Reiman. The Mintsifry also hosts the State Commission for Radio Frequencies (GKRCh), an inter-ministerial body that formalizes the rules for the use of radio spectrum in Russia.

Siloviki

Finally, the siloviki, especially Russia’s Ministry of Defense, the Federal Protective Service (FSO, a special agency for protecting the president and other high-ranking officials) and the Federal Security Service (FSB), have frequently been at loggerheads with the mobile operators and the Mintsifry over the allocation of radio frequencies and encryption requirements. The expanding need for radio spectrum for mobile communications required the conversion of military applications to different parts of the spectrum, a complex and costly undertaking. The siloviki have proven immune to pressure from the mobile operators, who often bemoan the lack of a functioning dialogue with this group of the elite.

5G planning and the digital economy national project

The development of Russia’s first strategy for the introduction of 5G mainly took place within the framework of the Digital Economy National Project, which was originally developed by Mintsifry as a national program in 2017 (Lowry 2021). In preparation for Putin’s fourth term in office, the program was rebranded to become one of Russia’s 13 national projects, a major investment program.⁵ The Digital Economy National Project consists of several subprojects (federal projects). The 5G rollout in Russia is part of the Information Infrastructure subproject, the biggest and most important subproject in terms of planned investments. Certain overlaps exist with another subproject, Digital Technologies, which is concerned with the development of Russian-made radio electronics equipment.

The investment planned under the Information Infrastructure subproject strongly relies on extra-budgetary contributions (mainly private business capital expenditure). Overall, 345 billion rubles of the total investment of 768 billion rubles are expected to come from private sources (Tishina 2020). This demonstrates how, in order to ensure that the project’s goals are achieved, the Mintsifry is dependent on the collaboration of the mobile network operators. To facilitate cooperation with the business side, the Mintsifry has created a special governance mechanism for the project. Two dozen state and private businesses were invited to set up a non-governmental organization (the Autonomous Non-commercial Organization Digital Economy, or ANO Digital Economy) in 2017. The ANO Digital Economy features independent working groups and competence centers on each of the subprojects.

Although it was set up as a non-governmental organization, the ANO Digital Economy is an integral part of the formal governance of the Digital Economy National Project (Krasnushkina 2017). Changes to the project’s goals, budgets, and timelines (the so-called pasport of the project), including the rules and priorities of 5G introduction, have to be approved by a majority vote in the respective working groups within the ANO Digital Economy, giving the business representatives in the body a certain degree of formal power.⁶ However, while the working group has veto power over changes within the National Project’s plans and milestones, final decisions are taken by an inter-ministerial government body (the Presidium of the Government Commission for Digital Development, Use of IT for Improving the Quality of Life and Conditions of Entrepreneurial Activity).

In the Information Infrastructure working group, which is responsible for the 5G rollout, the interests of the network operators MTS, Vimpelcom, Megafon, and Tele2/Rostelekom are well represented. The working group’s chairwoman is Anna Serebryanikova from Megafon’s board of directors. The operators mostly act collectively and coordinate their stance within their lobby group LTE Union.⁷ 5G development is also part of discussions in the parallel Digital Technologies working group, which is concerned with advancing Russia’s domestic hardware and software industry.⁸ Here, the network operators have a weaker voice, and the group is dominated by state corporations in the tech sector, such as Rostec or Rosnano, who lobby for subsidies and stricter import substitution requirements, which often runs counter to the operators’ interests.

Competing 5G strategies

According to the outline of the Digital Economy National Project, the first step on Russia’s path to 5G is the approval of a commonly developed 5G concept (Kontseptsiya 5G) by March 2019. Due to disagreements among the Mintsifry, mobile operators, and siloviki, the final Kontseptsiya was still under development in 2021. The mobile operators tried to shape the discussion in the ANO Digital Economy early by introducing a first draft Kontseptsiya 5G in November 2018 that argued for business-friendly regulation of 5G frequencies, equipment supplies, and business models. The development of the draft had been commissioned by the LTE Union. With the votes of the business representatives, and against the will of the Mintsifry, the ANO Digital Economy’s Information Infrastructure working group voted to approve the first concept. However, the Mintsifry ignored the vote and reacted by introducing its own, independently developed draft in December 2018, which contradicted the operators’ proposal on key points discussed below (Ustinova 2018). It was subsequently rejected by the working group with the votes of the mobile operators (Ustinova 2019).

Throughout 2019 and 2020, the Mintsifry, network operators, siloviki, and other government agencies negotiated over the Kontseptsiya 5G. Three sticking points arose in the debate. First, the network operators insisted that the 3.4–3.8 GHz band should be prioritized for the deployment of 5G, which was supported by the Mintsifry, but resisted by the siloviki. Second, the Mintsifry pushed for a single shared 5G network to be jointly built by all operators, an idea that all privately owned operators (and also Russia’s Federal Antimonopoly Service) strongly opposed. Third, the Mintsifry, siloviki, and Rostec state corporation were pushing for different degrees of import substitution, while the operators were opposed to any requirements.

Parallel to the already ongoing discussions on the Kontseptsiya 5G within the Information Infrastructure working group, two more strategies were developed on the introduction of 5G in Russia. Both partially overlapped with the Kontseptsiya, but focused primarily on the development of Russian 5G hardware and software, and less on the deployment of networks. First, Rostec produced its own roadmap on Technologies for Wireless Communication, which it introduced in the ANO Digital Economy’s Digital Technologies working group. The goal of this roadmap was mainly gaining access to budgetary funds and positioning Rostec as a 5G supplier: the document proposed an expansive list of state subsidies for the development of technical specifications and prototypes, and called for several new plans on different aspects of wireless high-tech to be developed (Mintsifry (Ministry of Digital Development, Communications, and Mass Media of the Russian Federation) 2019a).

Second, another parallel 5G strategy process led by state companies outside the National Project’s governance mechanism was launched in July 2019. In the presence of President Vladimir Putin, Rostelekom and Rostec signed an agreement with the government to produce a roadmap on Fifth Generation Mobile Networks.⁹ The result was presented in December 2019. It mainly focuses on the question of 5G equipment “Made in Russia,” and envisions the local production of 20,000 5G base stations by 2024, and 200,000 base stations by 2030 (Korolev 2020), which subsequently should be exported to other post-Soviet and African markets (Tishina 2019c). However, it also prioritizes the use of locally produced equipment for Russia’s own networks and suggests strict import substitution requirements.

The “golden band”

The most important sticking point during the development of the 5G strategies was the question of which part of the radio spectrum should be made available. In principle, 5G can be used on many different frequency bands, but only one particular spectrum, 3.4–3.8 GHz, promises profitability. From the standpoint of Russia’s mobile operators, this band represents the sweet spot between achievable bandwidth and the density of base stations required to build a network. It is especially suitable for urban markets, which are the most lucrative. Among market participants, it is referred to as the “golden band” (zolotoi diapazon).

What makes the 3.4–3.8 GHz frequency band “golden” in the eyes of Russia’s network operators is both its radio electronic characteristics and economies of scale on the international market for telecommunications equipment. A large and highly competitive ecosystem of end-user devices (such as smartphones) and network infrastructure is rapidly developing around the 3.4–3.8 GHz radio spectrum. This is not the case for other frequencies, such as the 4.4–4.9 GHz band, which Russia’s siloviki have suggested as an alternative. Frequencies outside the “golden band” are currently not prioritized by international 5G equipment producers and operators (Kovachich 2019). According to a Huawei representative in Russia, equipment for 4.4–4.9 GHz would be at least 50% more expensive (Tishina 2019a).¹⁰

Complicating the elite bargaining process, Russia’s “golden band” is occupied by a large set of civilian and military applications. They include fixed wireless Internet providers, radio relay systems, medium-range flight radars (such as used by the Russian S-400 air defense system), and satellite communications. According to experts, radio relay systems and air defense systems could coexist with 5G if they remain at a certain distance from 5G base stations. The main problem standing in the way of 5G in Russia is satellite communications. Most importantly, the Defense Ministry operates its own satellites and communicates with them through 1,400 base stations, both stationary and mobile, in the “golden band.” The military and the FSO also use the spectrum for their emergency communication system (Korolev 2019b).

In 2018, Russian operators were initially allowed to set up test zones in the “golden band.” Megafon and Rostelekom were the first to offer 5G during the 2018 soccer World Cup in the 3.4–3.8 GHz spectrum (Korolev 2018a). Since 2019, all of the Big Four have carried out experiments on different frequencies, partnering with the foreign equipment producers Huawei, Nokia, and Ericsson (Skrynnikova 2020a). However, in 2019, the siloviki dug in their heels and began actively countering any plans to deploy 5G in the “golden band” in the future. The operators were not able to establish any dialogue with the siloviki on the issue (Kodachigov 2019).

In April 2019, Russia’s operators were ordered to end their testing in the 3.4–3.8 GHz band (Novyi and Tishina 2019). The deputy head of the Mintsifry, Oleg Ivanov, reported that the ministry’s proposal to extend testing ran into full resistance from the siloviki. At that point, Maksim Akimov, then deputy prime minister responsible for the Digital Economy National Project, began intervening on behalf of the operators. In their name, he asked Vladimir Putin in a personal meeting for support against the siloviki’s blockade (Kremlin.ru 2019). In increasingly alarmist words, Akimov tried to raise attention to the issue, stating in interviews that it was a “a question of survival” for Russia that the frequencies be made available, and that Russia’s economy could be “written off” if it did not happen (Vedomosti 2019).

However, in August 2019, Russia’s siloviki-dominated Security Council decided that the “golden band” should not be made available, leaving only the 4.4–4.9 GHz band for 5G as an alternative. The council had concluded that it was impossible to combine the current use of the spectrum with 5G networks (Yastrebova 2019). Despite the Security Council’s verdict, the Mintsifry continued working on the Kontseptsiya 5G with the operators in the ANO Digital Economy working group. In September 2019, the Mintsifry and the operators agreed on and adopted a Kontseptsiya that gave the “golden band” priority for 5G development (Tishina 2019b). Although there was little chance this concept would be adopted by the relevant government committee later on, it represented another attempt to increase pressure on the siloviki.

The operators continued to show their reluctance to develop 5G on the terms set by the siloviki. In April 2020, they sent an analysis of the commercial potential of 5G outside the “golden band” to the Presidential Administration and Mintsifry, pointing out that it was impossible to break even using other frequencies (Skrynnikova 2020b). Moscow’s security elites were unimpressed and, in May 2020, the Security Council again declined a request by the network operators to allow the conversion of the spectrum for 5G use (Kodachigov and Kinyakina 2020c). The operators raised the question yet again in a direct conversation with Vladimir Putin in June 2020 (Tishina and Galanina 2020). Several schemes for reaching an agreement were discussed, including the buy-out of the needed frequencies by the network carriers (Kodachigov and Kinyakina 2020a). However, the siloviki continued to stonewall.

Meanwhile, pressure was mounting on the Mintsifry due to the lack of progress in the Information Infrastructure Federal Project. The operators were blaming it for the lack of any acceptable dialogue with the siloviki (Tishina 2020). According to Deputy Minister Igor Ivanov, the Mintsifry tried everything it could to free up the “golden band,” and hoped that it would be able to change the situation going forward, while accusing the operators of pushing the ministry into a corner and aggravating the conflict (Zhdanov 2020).

Sharing a single 5G network

The spectrum stalemate between the siloviki and the network operators puts the Mintsifry, which is formally responsible for ensuring Russia’s progress on 5G, in a difficult position. To deliver on the official 5G milestones, the Mintsifry asked the operators to join forces and build a single network together. For a single network, less radio spectrum would have to be wrested from the siloviki. A commercially viable 5G network requires a spectrum block of a certain minimum size (e.g. 50–100 MHz in the 3.4–3.8 GHz band). A single network could be built if the siloviki accepted a compromise to make 100 MHz in the “golden band” available.

The Mintsifry had traditionally supported the idea of a single all-Russian network operator. In 2011, during the run-up to the 4G (LTE) frequency auctions in Russia, telecoms firm Skartel, supported by Rostec, was supposed to build and operate one unified 4G network in Russia. Vladimir Putin attended a memorandum-of-understanding (MoU) signing ceremony that involved all mobile operators, claiming that: “Where there would have been three or four towers, there will now be only one” (Zimina 2011). However, the operators did not intend to build a single network, and their cooperation remained limited to jointly freeing up and converting radio spectrum for the mobile communications market, which was subsequently allocated and developed by the operators individually.

While Russia’s operators spoke with one voice regarding the “golden band,” their position on a single all-Russian 5G network differed. The reason is that, if a single shared network is built, the 5G service quality of all operators would be equally good. This would deprive leading operators such as MTS of their competitive advantage: MTS already has a dense 4G network in place that it could upgrade with relatively little investment to offer 5G to its customers. In the long term, a single shared 5G network could also increase the role of the state in Russia’s communications market. The physical networks that Yevtushenkov’s MTS and Fridman’s Vimpelcom have built, and the spectrum licenses they own, give them independence from the state. A single 5G network operator with state participation is almost certain to erode this independence over time.

In contrast to MTS and Vimpelcom, a common 5G operator would be an opportunity for the state company Rostelekom to expand its influence over the market. Rostelekom was a main driving force behind the idea and began lobbying for it in September 2017. A representative of MTS suggested that “those kinds of ideas” should first be discussed in the industry’s LTE Union lobby group (Balashova 2017). In its common draft for a Kontseptsiya 5G presented in 2018, the group argued against forming a common 5G operator in Russia, concluding that the “single operator” scenario would be the worst approach for the market, and recommending “limited cooperation” instead (where up to 70% of base stations are shared by two operators). The LTE Union’s concept claimed higher technical and political risks connected to a single network, as there would be no redundancy in case of a network failure (Konik 2018). In May 2019, Russia’s Federal Antimonopoly Service similarly voiced its concerns regarding the single operator idea, calling it risky for the state, business, and consumers (Novyi, Shestoperov, and Belavin 2019). In contrast, the Mintsifry promoted the idea in its version of the Kontseptsiya 5G, based on cost considerations and the scarcity of free radio spectrum (Mintsifry 2019b, 85).

While MTS and Vimpelcom intended to strictly limit sector-wide cooperation to freeing up and converting radio spectrum (Posypkina and Balashova 2019), Rostelekom and Megafon set up a joint venture in February 2019 (New Digital Solutions¹¹) which, according to Rostelekom, had the goal of becoming Russia’s single 5G operator. However, Megafon viewed the joint venture differently: as limited to carrying out the infrastructure conversion. In December 2019, Vimpelcom and MTS joined in, as the Big Four signed an MoU for a common company on the basis of the New Digital Solutions joint venture, still strictly aiming at radio spectrum conversion (Balashova 2019). The Mintsifry continued to promote the idea of turning the joint venture into a single operator in an updated draft for the Kontseptsiya 5G in April 2020. The ministry even suggested allocating the frequencies to the common operator for free, if the state would receive a stake in the joint venture. Deputy Minister Igor Ivanov suggested giving the state even more control through a “golden share,” and possibly giving it regulatory competencies, creating a conglomerate with a similar role as state corporation Rosatom in the nuclear industry (Kinyakina 2020).

Import substitution and 5G in Russia

Regulating the hardware and software permitted for setting up 5G networks is the third major sticking point in Russia’s 5G bargaining process. In 2020, China’s Huawei was the leading supplier in Russia, with Sweden’s Ericsson ranking second, and Finland’s Nokia third.¹² The network operators prefer to diversify their equipment procurement, relying on all three global vendors at the same time for different regions and networks. All three of the leading international equipment producers were involved in 5G testing with Russia’s mobile operators. Accordingly, the network operators vehemently opposed any constraints on their choice of a hardware and software supplier. However, since sanctions were imposed on Russia in 2014, proponents of import substitution (mainly the Russian electronics business, state corporation Rostec, and, citing security reasons, the siloviki) have had strong tailwinds and have been able to erect market barriers in other sectors of the economy and raise billions of rubles in state subsidies. To facilitate the introduction of import substitution requirements, the Russian industry ministry Minpromtorg began publishing a list of Russian-made radio electronic equipment in September 2019.¹³

The list of locally produced radio electronics equipment did not contain any Russian-made 5G equipment (such as base stations) by 2021. No Russian company had any experience in mass-producing 5G equipment for commercial use. Russian firms were absent from international rankings on 5G patents, and also from discussions within the international standard-setting body 3GPP (IPlytics Platform 2019). Mikhail Alekseev, a leading expert in the Russian market, pointed out that it was “apparent to all market participants that there won’t be [Russian 5G equipment]” (Content-Review.com 2020). Representatives of Russia’s operators agreed, saying that there were no signs that Russia could catch up, as it fundamentally lacked the technology, knowhow, and materials. This left only the scenario of a Russian producer “on paper,” such as an import monopoly led by Rostec, leading to higher prices at the expense of the mobile operators and consumers (Korolev 2019b).

After state corporation Rostec first announced its plans to produce 5G equipment in June 2019, the debate on import substitution for 5G began heating up in December of that year. In the mobile communications market, the strongest possible instrument for achieving import substitution are requirements to use Russian-made equipment that are tied to licenses for using radio spectrum. The import substitution requirement suggested in the initial Kontseptsiya 5G draft of the Mintsifry was relatively soft: the concept stipulated that Russian equipment should be preferred on the condition that it is competitive (Mintsifry 2019b, 59). In the Fifth Generation Mobile Networks roadmap proposed by Rostec and Rostelekom, a much stricter rule for import substitution is suggested: according to their plan, network operators should be forced to use exclusively Russian-made equipment on frequencies allotted for 5G. To facilitate the development of a Russian 5G solution, Rostec and Rostelekom also suggested new trade barriers and subsidies (Korolev 2019a).

Initially, a softer formula similar to the one proposed by the Mintsifry was introduced. On 17 March 2020, the State Commission for Radio Frequencies decided to make the first 5G licenses available for commercial networks, adding the condition that Russian material would be used if it exists on the list published by the Minpromtorg (Mintsifry (Ministry of Digital Development, Communications, and Mass Media of the Russian Federation) 2020b). In July 2020, MTS became the first operator to acquire a 5G licence in the “millimeter band” (24.25–24.65 GHz), which is suitable for smaller local (campus) networks (Kasmi and Korolev 2020).

However, after Russia’s government reshuffle and the ouster of Prime Minister Medvedev in January 2020, Mintsifry had begun pursuing stronger import substitution rules. It started a major overhaul of the Information Infrastructure Federal Project (El’yas 2020a). One of the proposed changes was to postpone the timeline for the introduction of 5G in Russia from 2021 until after 2024, to give Rostec time to develop its own 5G equipment, which would then become mandatory for all 5G networks. To formalize these changes, the support of the ANO Information Infrastructure working group was needed. When the vote took place in June 2020, the network operators managed to block the changes proposed by Mintsifry and keep strict import substitution out of the Digital Economy National Project (El’yas 2020b).

When the ministry could not find a majority for a common Kontseptsiya 5G in the Information Infrastructure working group, it began focusing on the second parallel strategy process, the Fifth Generation Mobile Networks developed by Rostec and Rostelekom. Mintsifry officially endorsed the strategy on 19 November 2020, stipulating, again, the need for strict import substitution rules (Government of Russia 2020a). As a consequence, on 23 November 2020, the State Commission for Radio Frequencies revised its earlier formula for import substitution, and tied the issuing of licenses to the condition of only Russian-made equipment being used (Mintsifry 2020a). While this decision affects only licenses in the millimeter band, it is seen as an indication that the Mintsifry plans to increase pressure on network operators going forward.

Conclusion

After three years of bargaining, Russia’s elites are stuck in disagreement over the future of 5G. The three sticking points continue to be the operators’ business model, the appropriate radio spectrum, and the degree of import substitution. As a result of the disagreements, the original planning process for the 5G rollout in Russia that was taking place within the Digital Economy National Project has come to a halt. More recently, Mintsifry began banking on an alternative parallel planning process that was launched with the participation of Rostelekom and Rostec, but does not have the support of the private mobile operators. The bifurcation of the 5G planning process is a consequence of the different interests of elite actors and different visions for the future of Russia’s economy. The increasing securitization of mobile communications, which is driven by the expectation of more economic sanctions and by developments in Russia’s domestic politics, is complicating the reconciliation of elite interests. While the country is mired in economic stagnation, the overall positions in the bargaining over elite privileges have hardened.

As an intermediate result of the bargaining process, Russia is attempting a 5G sonderweg (“separate path”) based on uncommon frequencies and uncertain equipment supply. The timeline for the introduction of 5G was delayed by several years, hampering Russia’s progress in digitalization and clouding its long-term outlook for economic development. For the mobile operators, the impasse has created uncertainties and at least a setback in their 5G aspirations. If the “golden band” spectrum remains blocked, operators will be very selective in their rollout and focus only on the most lucrative places, resulting in a patchy 5G network. After several years, when the new standard becomes common in other countries, the absence of widespread 5G in Russia may increase the political pressure to find a new elite consensus. The mobile operators have in the past proven their capacity for successful lobbying and skillful evasion of strict requirements, as could be observed during the implementation of the Yarovaya law (Kolomychenko and Lindell 2017). A softening of the definition of “Russian-made equipment” could allow the mobile operators to continue their established technology partnerships with foreign vendors such as Nokia, Ericsson, and Huawei. However, even if stricter rules will be circumvented, they will drive up costs and delay much-needed investments in mobile communications infrastructure.

The case of the introduction of 5G in Russia demonstrates that the elite consensus in Russia’s LAO has become much more brittle during Putin’s third and fourth terms against the backdrop of domestic and foreign policy developments. This does not bode well for Russia’s economic prospects in the 2020s: changing technologies and global market conditions will continue to require flexibility and successful bargaining from the elite coalition, including the occasional concession from the siloviki for the sake of economic growth. During the introduction of 5G, Russia’s elites have not spoken the same language, revealing that their economic vision has drifted apart. Slowing economic growth and shrinking budgetary means also contributed to the missing malleability of the elites’ positions. Slower economic growth is also the likely outcome of the 5G standstill, clouding the outlook for political and economic stability in the longer run.

Acknowledgments

The author would like to thank Andrei Yakovlev, Ekaterina Schulmann, Mark Galeotti, Jardar Østbø, Ingerid Opdahl, and Ingvill Elgsaas for their feedback on earlier versions of this paper.

Additional information

Funding

Norges Forskningsråd [288428];

Notes

1. Russia had 164 mobile cellular subscriptions per 100 people, a number only topped by Lithuania’s 169 (World Bank 2020).

2. See Andrei Yakovlev’s paper in this special issue, on Russia’s tax reform in 2001–2002.

3. For data on market shares, see MTS (2020, 24).

4. The short form was updated from Minkomsvyaz’ to Mintsifry in 2020 (Government of Russia 2020b).

5. To avoid confusion, the national program/national project will be called National Project throughout this paper.

6. For the national project’s original governance structure, see Government of Russia (2017).

7. For a list of the group’s members, see Avtonomnaya (Avtonomnaya nekommercheskaya organizatsiya ‘Tsifrovaya ekonomika’) (2020a).

8. For a list of the group’s members, see Avtonomnaya (Avtonomnaya nekommercheskaya organizatsiya ‘Tsifrovaya ekonomika’) (2020b).

9. The original title of the roadmap was “New Generation Wireless Communication” (TASS 2019).

10. There are also further problems connected with the 4.4–4.9 GHz spectrum, such as interference with NATO friend-foe aircraft recognition that would force operators to keep a 200–300 km distance from NATO borders, making deployment in cities such as St. Petersburg, Kaliningrad, or Sochi impossible (Kodachigov and Kinyakina 2020b).

11. Initially the joint venture was called OOO Digital for Business.

12. No official data are available. Most, but not all, experts interviewed for this article see Huawei as the market leader. Still, for the leading operator MTS, Huawei plays an insignificant role. For one analysis, see Zhuravleva (2017).

13. The list is published at https://gisp.gov.ru/documents/10546664/#.