Joint venture to construct trans-Russia fiber-optic network

Joint venture to construct trans-Russia fiber-optic network


Aproject to construct the Russian Federation`s first national east-to-west fiber-optic network, comprising more than 35,000 km of cable from the Finnish border to an undersea link to Japan, is ready to begin its first phase. The joint Russia-U.S. network will consist of a 5-ring architecture across the country, connecting the major points now serviced by the current railroad system.

The Russian fiber-optic network project belongs to MPS-Telekom, a company co-owned by the Russian Ministry of Rails and the U.S. Defense Enterprise Fund (DEF). The DEF, sponsored by the U.S. Defense Department, establishes venture-capital funds aimed at attracting private investors to the former Soviet Union. Its goal is to convert former military assets to peacetime use, in this case, railroad rights-of-way and communications facilities into a national telecommunications network. The 17 regional railroad companies are also stockholders within MPS. The ministry is providing the rights-of-way and existing infrastructure and the DEF is securing the financing in conjunction with Global Partner Ventures (GPV--Richmond, VA), the company that handles the agency`s investments.

According to Richard Nordin, executive vice president and director of investment operations for GPV, the network will be built over the next two and a half years using both new and existing fiber. The backbone network is planned as an aerial cable because of possible permafrost and maintenance problems, although the network design could be changed to include underground cable where it makes more sense.

"We`re reviewing the network design for two reasons," says Nordin. "One is that we`ve just been given a mandate to go from 20,000 to about 35,000 km of construction. There were a number of discrete projects throughout the ministry and they decided to unify them all and use us as their partner to help put it all together. Secondly, a couple of advances have occurred recently in the ability to inexpensively lay underground cable. For that reason, it may make more sense in certain rights-of-way in some sections of the network to go underground. I would guess it may end up being a combination of underground and aerial, but it`s still undecided right now."

The network will be constructed in three phases (see Figure). The first phase will build a backbone from Moscow to Kingessepp (formerly St. Petersburg), which in turn will connect to Helsinki, Finland. The backbone also will run east to Khabarovsk on the border with Manchuria, where a fiber spur will connect the last ring to Nakhodka on the Sea of Japan, where it will interconnect with an undersea cable to Japan. The second phase will bring that backbone up to world standards by building out rings through populated regions of Russia. Finally, the third phase will continue to build-out a network that is more oriented toward the growth of internal demand in Russia, both north and south. Routes will extend from the five rings to some of the natural resource centers that require capacity and bandwidth and some populated portions of the country that aren`t on the railroad main line.

Nordin believes most of the east-to-west route will be lit by the end of 1999, depending on the severity of the winter. Construction efficiency decreases to about 15%, compared to a comparable build-out in a more weather-friendly environment. Assuming a normal winter, the backbone should be finished this year, with the five rings completed by the year 2000. It`s expected to take about two more years to hang the last cable necessary to complete the entire network.

"It looks like by 2002, we`ll have about 35,000 km of cable throughout Russia," says Nordin. "This may be sped up or retarded by about six months either way by two things: weather and the quality of the already-installed cable that`s in place across the railroad system."

The Russian Ministry of Rails oversees a group of 19 railroads. The railroads are state government enterprises that have regional responsibilities to Russia and, collectively, have hung about 5000 km of fiber-optic cable that isn`t connected to any centralized system or global network. The initial build-out will take advantage of the existing cable.

The estimated cost of the system is in the vicinity of $420 million. GPV plans to start raising the money in 1999 and will also bring a soon-to-be-announced strategic telecommunications partner on board. Initially, the network will be a 24-fiber system operating initially at STM-16 (2.5 Gbits/sec).

Previous attempts

There have been several previous attempts at a trans-Siberian fiber-optic route. The Ministry of Communications of the Soviet Union apparently conceived such a project as far back as 1990. But the country had far more important economic issues to be concerned with than building an expensive fiber network.

The network idea got a second life in 1994, when AT&T signed onto the agreement under which GPV is currently operating. According to Nordin, AT&T was nearing the point of making a large commitment when it went through some major structural changes. As a result, the champions of the Russia network went on to other things, either as AT&T or Lucent Technologies employees.

"Lucent became an equipment vendor but wasn`t an operator," says Nordin. "AT&T is an operator, but the people who had the vision weren`t there anymore. So AT&T went away. Lucent, however, stayed on in 1996 with the original group of entrepreneurs who started this."

A subsequent attempt to rekindle the project failed because the focus was almost entirely on growth and demand internal to Russia.

In mid-1997, GPV got involved in the project, taking it over in early 1998. The network was redesigned to appeal to big consumers of bandwidth within the tele communications industry who were looking for less-expensive alternatives to the Fiber Link Around the Globe (FLAG) project.

Who`s interested?

"If you look at rule-of-thumb economics, FLAG`s got $1.7 billion in debt and this venture will have about $400 million for the same route from Europe to Japan," says Nordin. "So this company could afford to sell its capacity at or below any price FLAG could offer. We say to the people who are interested in capacity that it`s kind of like getting two channels for the price of one."

Nordin divides potentially interested carriers into three groups. One group consists of the visionaries who believe the joint venture can`t build the network fast enough. He has a couple of prospects in this category that are interested primarily because of price and the competitive advantage it will offer.

Nordin refers to the second interest group as the "if you build it, they will come" people. He says although they seem very excited about the idea of the trans-Russia network, they aren`t ready to put up their money. He says these are the national telecommunications carriers, some of the independents, and a lot of the second-tier companies who are doing a big business either refiling traffic through and into Russia or have some kind of facilities-based reseller customer who is looking for bandwidth in Russia.

The last group are the ones who will buy capacity once the system is up and running. These companies are dependent on bandwidth and Nordin refers to them as "icing on the cake." Nordin feels the second group will actually provide the business case for building the network. The first group will make it financially feasible by indicating their interest in advance.

Construction costs are somewhere in the $16,000 to $17,000 range per km; Nordin estimates GPV will only have to sell the same amount of capacity that Paris currently uses, about 900 channels, to break even. "Just the first group alone is already enough interest to sell the 900 or so channels we need to sell to break even," says Nordin. "There is a lot of investment interest from the U.S. The Japanese are also interested, particularly a couple of major equipment providers. I expect them to be second-round participants because they`ll want to make sure this thing is going before they come in." q

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