OREANDA-NEWS. Fitch Rating says that the lack of further organic growth is increasingly pushing mobile and fixed-line Russian telecoms operators to search for synergies, including through in-market consolidation and infrastructure sharing/outsourcing.

Declining EBITDA generation is likely to be a catalyst for operators to reconsider their strategic positioning, seek alliances and explore new options to increase efficiency. Headline service revenue growth in the Russian telecoms segment has slowed nearly to a halt. This, against the backdrop of persistently high consumer inflation - reported at 12.9% yoy in 2015 and 7.3% yoy in May 2016 - has resulted in profitability margin pressures and EBITDA contraction in absolute terms.

Headline revenue growth is no longer sufficient to compensate for cost increases. Telecom service revenue growth in the Russian market has stalled to consistently below 3% yoy for almost all major companies. Cumulative quarterly revenue growth rates for MTS (BB+/Stable), Vimpelcom (BB+/Stable), Megafon (BB+/Stable), T2 RTK (B+/Stable) and Rostelecom (BBB-/Negative), a proxy sample for the industry, slowed to around 1% on average in the last 12 months to 1Q16. Quarterly EBITDA contracted for all five operators in each of the three quarters to 1Q16, with the exception of MTS in 1Q16.

In-market consolidation in the Russian mobile industry would be the easiest way to achieve synergies. It would enable participating operators to immediately achieve a larger scale, a key factor for better financial performance, and increase spectrum portfolio.

Crucially, we believe, the regulatory authorities may give their go-ahead for a merger that would reduce the number of facilities-based mobile operators to three from four, with likely moderate remedy requirements attached.

Russian regulators are not entirely independent from the government, and may take into account a need for the industry to generate sufficient cash flow to be able to fund ongoing and future infrastructure upgrades. Sustained self-funding flexibility is particularly important in the context of Western sanctions that complicate Russian corporates' access to the global financial markets.

Consumer protection is unlikely to be placed at the top of the agenda due to modest average mobile bills, at around RUB300 per month equivalent to approximately 1% of the average disposable monthly salary, and telecoms price increases lagging behind inflation.

We expect mobile operators to increasingly participate in infrastructure sharing and outsourcing, such as mobile tower sales. Uniquely, the Russian regulator allows spectrum sharing, which is often a more appealing option, as it allows joint use of both passive and active elements of the network.

Infrastructure outsourcing through a dedicated tower company would allow for higher colocation rates and more efficient cost management. However, the prospects for the development of independent tower companies in Russia may be complicated by their reluctance to fix long-term lease rates in roubles, as they prefer to receive payments pegged to US dollars.

Russian telecom operators with even moderate FX debt have felt a sharp negative impact from the domestic currency weakening in 2014 and 2015. They are unlikely to easily agree to increase their FX exposure through locking in US dollar lease rates.