Huawei Wins MegaFon Contract as Russian Ties to China Deepen

Jun 09, 2014 3:30 am ET

(Updates with other China deals in seventh paragraph.)

June 9 (Bloomberg) -- OAO MegaFon, Russia’s second-largest wireless operator, agreed to buy at least $600 million of equipment from Huawei Technologies Co. at a time when ties between Russian and Chinese companies are strengthening.

MegaFon chose China’s largest maker of network products for a seven-year contract to speed mobile networks in several Russian territories, Chief Strategy Officer Alexander Bashmakov said in a phone interview. The deal, including software and maintenance, is worth “dozens of billion rubles,” he said.

Russia companies have boosted ties to China after the U.S. and European Union imposed sanctions on the country to punish it for annexing the Crimean peninsula from Ukraine. OAO Gazprom, Russia’s biggest company, signed a $400 billion deal last month to ship gas to China.

“Huawei is one of the technological leaders in 4G equipment,” Bashmakov said. “They are leading in the number of signed contracts with operators. The Russian market is very competitive in equipment prices, unlike the U.S. where supplies of Chinese equipment are limited.”

MegaFon based its choice of Shenzen, China-based Huawei on financial and technological factors rather than politics, Bashmakov said. MegaFon, controlled by Russia’s richest man Alisher Usmanov and part-owned by TeliaSonera AB, will use a credit line from China Development Bank to fund the purchases.

China Investments

President Vladimir Putin is turning eastward as the U.S. and EU sanctions batter the Russian economy. Putin visited China last month to strengthen ties with the country, Russia’s largest trading partner, after two-way trade surged sevenfold in the past decade to about $94 billion last year.

On May 20, a unit of Usmanov’s mining company Metalloinvest Holding Co. announced a strategic cooperation agreement with China’s Hopu Investment Management Co., saying they plan a joint development of a copper deposit. On May 22, billionaire Gennady Timchenko said China is prepared to finance most of Russia’s largest liquefied natural gas project, Yamal LNG.

Usmanov has sold most of his Facebook Inc. shares and expects to benefit from investments in China’s Internet giants Alibaba Group Holding Ltd. and JD.com Inc., Ivan Streshinskiy, head of the billionaire’s asset-management company USM Advisors LLC, said in March.

MegaFon, based in Moscow, is continuing talks with other network providers for other regions, Bashmakov said. At least seven vendors were ready to supply equipment, he said. The carrier previously used equipment from Huawei and Finland’s Nokia Oyj to build 2G and 3G networks. Closely held Huawei’s rivals also include Sweden’s Ericsson AB and France’s Alcatel- Lucent SA.

MegaFon has said it plans at least $5.2 billion capital spending in 2013 through 2015. The carrier trails billionaire Vladimir Evtushenkov’s OAO Mobile TeleSystems in Russia.

“The era of highly-priced purchases is over,” Bashmakov said. “Instead, vendors in Russia have to agree on lower margins and long-term co-operation.”