Hello.
The world has gotten very bizarre and logic doesn’t always work as expected. Sanctions imposed on Russia formally prevent operators from purchasing equipment from suppliers in different countries. But there are exceptions to every rule, for example, after the introduction of the fifth sanctions package from Europe, American officials immediately barred their companies from any restrictions – nothing personal, just business. But the increase in sales of American producers at the same time did not happen. The explanation, which I have heard several times, sounds plausible: why change the awl for soap, you still have to take into account the possibility of locking the equipment. There is no need to rush headlong and buy everything you can. And here lies another factor that is hardly ever discussed publicly.
Contracts for the supply of infrastructural equipment are long, any operator concludes them for a period of several years, and in this the market differs from temporary supplies that involve short periods of time. The key difference between the operators’ activities is that the planning horizon is years. With the imposition of the sanctions, everything has changed, and now the planning does not seem so simple, it seems that operators should buy everything that is possible. But they don’t! The reason for this anomalous behavior turns out to be very simply: Russian operators have stocks of equipment, as they received them in sufficient quantities for development. Here one can long complain that operators have invested in purchases to eliminate maximum discounts, received equipment in advance and accumulated stocks for at least a year of work, that is, until the summer of 2023. But consider things like distances within a country, the need to plan networks with a limited number of engineers, and so on. The situation is quite unique and different from that of other countries, it is as similar as possible to ours only in China, where operators have large stocks of infrastructure equipment in their warehouses.
In March, there was a lot of discussion in the market as to whether Russian operators could find a new source in the supply of used equipment from other markets, but nothing of the kind happened. Operators do not need such equipment, it brings a lot of problems: it is heterogeneous, it breaks down quickly, it is quite expensive and you do not get any guarantees. But the most important thing is that the warehouses of the Russian operators were full, there were no reasons for hasty purchases.
The first supplier to realize the reality of the Russian market was Ericsson. At the Swedish government level, the company has obtained more than a dozen exemptions from sanctions for supplying equipment to Russia under old contracts. It is in fact the fact that those very long contracts have continued to work. On the public level, Ericsson, answering questions from reporters, argued that it was more about licenses and software, and this is partly true. But it is also true that the equipment is among the exceptions. The limit is the provision of 5G infrastructure, but everything else is affordable. Another thing is that here, too, Russian operators behave surprisingly at first glance, they do not buy equipment, they ignore offers.
The other day, Nokia also asked for exemption from sanctions, citing the need for it because Ericsson has received them and its business suffers from uneven conditions. At the same time, Ericsson blamed the Americans and showed that they were benefiting – there were actually no real deliveries, but that doesn’t play a big role. Strange as it may seem, the fight against sanctions is not being carried out by Russian companies, but by suppliers, who have formed a powerful lobby. The explanation for this unique phenomenon is to be found in the way Russian operators behaved and in the way they reacted to pressure.
Between March and April, all companies, including Huawei, offered to buy their equipment in third countries, such as Kazakhstan. This appears to be a unique proposition that should appeal to operators who do not receive new equipment and need it. In reality, this simply did not happen, as traders unwittingly took the same position: they refused to conduct business in this way. And this is a matter of self-preservation and getting the conditions they need.
Let’s consider the offer of some European supplier. Shipping of necessary equipment to Armenia, “lost” software and licenses, which can be obtained unofficially somewhere on the net. Yup! That’s right, big companies “lose” software and explain that it can be found here and there. But at the same time no responsibility is assumed for the supply, performance of both software and hardware. To traders, this approach doesn’t seem appealing, because when you buy hardware and software for hundreds of millions of dollars, you don’t want to get a pig in one fell swoop. The problem with buying in a third country is that no one guarantees you anything, you buy everything at your own risk.
The first mistake made by the suppliers was in the argument that the operators were cornered and simply had nothing to choose from. Hence the conclusion: they will buy equipment on the supplier’s terms, they will ask for anything. The reality is very different from these inventions, there is equipment, you only buy what does not require a guarantee as such, simple and popular things.
The cost at which suppliers were willing to sell has skyrocketed for Russian operators. It is not just about the logistics of other countries, but also about the lack of a guarantee. At the same time, the suppliers wanted to supply goods at the old prices, they presented this as a kind of conquest. As a result, traders simply refused to work this way, due to special offers, prices quickly jumped to a level of at least 20 percent less. The global crisis is such that suppliers cannot ignore the large Russian market and its operators, they need all available sales. And it turned out to be painful to lose the Russian market, there is nothing to compensate for it. Furthermore, sales are falling everywhere, in all countries of the world. Look at how investors react to Ericsson’s prospects, they are illusory.
The tactics of the Russian operators seem very simple: we are waiting for the partners to offer the conditions we need. There is a safety margin until at least the fall of 2023 and traders are ready to wait. At the same time, suppliers cannot do this, they are constantly waiting for purchases to begin in certain volumes, although not in the same volumes as before. But they do not happen, as the operators want to receive goods in Russia and with service obligations. If in the spring they explained to us that this was practically impossible due to the sanctions, in the autumn some exceptions have already been received and some of the goods have arrived on our market (not much, but anyway). They hide it with humanitarian considerations, but the reality is that companies need money, they suffer without Russia and a lot. The prospects for the near future look very bleak, we are talking about the survival of companies and they are aware of it, hence the huge number of attempts to somehow secure their sales. Sometimes they seem like a direct violation of the sanctions their governments have imposed on their activities. But the reason here is that they were pushed into a corner.
The irony is that the equipment suppliers believed that it was the Russian operators who were cornered and had nowhere to go, they would be forced to play by their rules. But we can already say that this has not happened. The situation does not seem like a victory for Russian business, it is equally a defeat for both sides. And this is a struggle of attrition, who will be the first to blink and accept the conditions of others. So far, the development of the situation is such that it is equipment suppliers who are constantly making concessions and looking for ways to return to Russia. From conversations with Ericsson employees, I can say the following: They firmly believe that when the equipment is needed, it will be supplied, in one way or another, by Chinese companies. This creates additional pressure and forces them to look for ways to stay in Russia.
The inability to work is determined by European politicians, there is no doubt. But the important thing is that infrastructure equipment suppliers have suddenly become lobbyists explaining simple things at the European level: refusing to work with Russia will result in a drop in revenue, job losses, and the list goes on. Some are already talking about the impossibility for companies to survive in the medium term as the crisis continues to intensify.
What are the next starting points in the development of this comparison? I think we need to look at the start of 2023, what exactly Russian operators will do, at what price level third country suppliers will fall and how they will comply with their service obligations. In February-March we will see fundamental changes, when someone falters or, on the contrary, finds solutions together to overcome this crisis. While everything seems to ensure that the total isolation of the Russian market does not occur, harsh and sometimes peremptory statements to the public actually turn out to be just a cover for the desire to continue trading. And as one of Nokia’s high-ranking employees said in a private conversation, “as soon as you defeat Ukraine, there will be a peace treaty, we will be ready to provide whatever you want, there will be no more obstacles.” This is by no means a guarantee that it will be so, after all, these are the ideas of a particular person of business that do not coincide with the opinion of politicians. But the starting point is the spring of 2023, when many things can change in one direction or another. For Russia at the moment and the operator market the situation is difficult, but no catastrophe has occurred. There are equipment and they are ready to sell it in any quantity in third countries, but another thing is that our companies are not ready to work under such conditions and to abandon the civilian market. In any case, this road will always be open for us, it will never be too late to return.
