Oleksandr Komarov: "Nationalizing Kyivstar would be a regrettable mistake" (photo — Andrey Gudzenko/LIGA.net)
Ukraine's largest mobile operator, which had 26 million users at the beginning of the year, continues to count its military losses. A million subscribers are down, the network is nearly lost in several regions, and revenue growth has stalled. Kyivstar President Oleksandr Komarov predicts the bottom will be visible in a month or two. This was reported in an interview with Valentina Dudko. Forbes.
At the same time, there's the risk of nationalization and regular cyberattacks. How is the operator living in the fourth month of war, and when will the time come for the most difficult decision? A long interview.
How much do you estimate Kyivstar's losses for the three months of war?
Alexander Komarov: We cannot disclose the losses due to certain agreements with insurance companies. In terms of numbers, it's not millions, but billions of hryvnias.
You have the largest number of subscribers among mobile operators. How has this number changed?
Alexander Komarov: The number is dropping significantly, and this is the most concerning factor. Firstly, people roaming are naturally switching to local operators. If you're trying to establish yourself in a new country, you need to have a local connection.
In most occupied territories, the network operates offline, and we have no operations there. In the Luhansk region, fewer than 10 websites operate intermittently. These two factors are significantly impacting our subscriber base.
We're publishing three-month figures, but they're not comparable to current circumstances. Some subscribers who used our services in February, while nominally with us, are no longer physically with us. Therefore, we focus more on the one-month and even one-day base. There, we see a decline of over a million subscribers.
And this is perhaps the biggest threat to the entire market. The loss of such a significant portion of the active population could be a serious blow to Ukraine and its future.
Data: April 2022, Forbes calculation
According to Veon's financial statements, Kyivstar's hryvnia revenue for the first quarter of 2022 increased by 15,1% year-on-year to UAH 7,87 billion. EBITDA grew by 9,3%. How long will the effect of the peaceful January-February period last?
Alexander Komarov: We had significant growth across all our services in early March, with many new connections. People deposited large amounts of money into their accounts to stay connected. It was an unrealistic situation for ten days.
Then came the massive outbound travel, and revenues from roaming and international interconnection began to grow very rapidly. We didn't see a decline in our base; on the contrary, we saw growth. As I understand it, people were buying second and third SIM cards.
Around the tenth of March, a steady trend began: a gradual disconnection from Ukrainian operators, despite the fact that we provided free services in many countries for two months.
Everything depends on how events unfold on the front lines. We're all hoping for the best-case scenario. In that case, we'll see a bottom by the end of the second or early third quarter. Then a certain recovery will begin.
So there will be a drop in revenue in the second quarter?
Alexander Komarov: Yes. There will be a significant decline in revenue. I think it will be negative year-on-year.
Revenues will fall more significantly. Domestic revenue is declining. International services are growing, but their margins are lower. The subscriber base is shrinking.
We're investing heavily in network resilience. When they destroy it, we restore it. This is the entire company's focus. Inflation certainly plays a role: electricity prices have increased by 30%, rent by 40%, and vendor fees by 17%. The exchange rate is another factor: 60-70% of investments are made in foreign currency. All of this will impact our second-quarter results and, importantly, will shape the trend in the second half of the year.
The same Veon report states that the company will likely report a significant devaluation of assets in Ukraine and/or Russia. How much could Kyivstar's value decline?
Alexander Komarov: We are a public company that must inform public investors about the full range of risks. The company's annual report is very revealing—200 pages, a third of which is devoted to various types of risks.
Of course, there's credit risk—all major telecom businesses rely on borrowed funds to grow. The average operator's debt is two to three times EBITDA. It can be as high as four, but that's a risky metric. Many lenders are very critical of our performance.
I don't believe it's possible to sell any significant business in Ukraine today at market value. Messages about "potential asset depreciation" are aimed at investors and creditors, so they understand the real situation. But calculating the asset's value now would be speculation.
Veon claims it is not subject to European or US sanctions. However, Mikhail Fridman and Petr Aven are shareholders in Letter One, one of Veon's co-owners. How does this affect Kyivstar's business?
Alexander Komarov: Kyivstar is 100% owned by Veon, and 47,9% of Veon is owned by Letter One, which is partially owned by the individuals you mentioned. In other words, they are shareholders. Veon has been declaring for many years that it has no controlling shareholder.
We are guided by the law and the Kyivstar Charter. According to the Charter, 99% of decisions are made by the Kyivstar management or supervisory board. It consists of Veon's top managers: citizens of Germany and Turkey, but not a single Russian citizen. Three independent board members are Ukrainians. Two of them are Mr. Kobolev and Mr. Shimkiv — are under Russian sanctions.
We are truly decentralized in our decision-making. This is a deliberate strategy at Veon.
Have you personally communicated with Friedman since February 24?
Alexander Komarov: No, I didn't communicate.
Kyivstar President Oleksandr Komarov. /Photo: Kyivstar press service
And before that?
Alexander Komarov: Yes, several times. It was related to some of Kyivstar's development projects, and at the time, he was a member of Veon's supervisory board.
One of the matters that Veon's supervisory board must approve is inorganic M&A activity. This includes anything related to the potential acquisition of other assets or investments in projects outside of telecoms, the acquisition of new frequencies, or the divestiture of parts of the business. All such projects must be approved by the supervisory board. I have made several proposals to the supervisory board and have spoken with Mr. Fridman on those occasions.
Kyivstar periodically appears on various "nationalization lists." How do you feel about the risk of possible nationalization?
Alexander Komarov: The decision to nationalise would be an unfortunate mistake, a major blow to investment attractiveness and the subject of lengthy international litigation.
But I don't think there's a risk. There's a lot of PR going on, but it's a bit of "white noise." Does it actually help us work? No. But we need to work. Because tens of millions of people need to be connected. Every day, Kyivstar receives hundreds of thousands of subscribers from other networks via national roaming.
Veon simultaneously operates telecom businesses in Russia and Ukraine under the Beeline brand. This creates a conflict of interest on many levels. Under what conditions might a shareholder agree to sell telecom assets in one of the countries?
Alexander Komarov: Perhaps the question should be phrased differently: can a shareholder take such steps? In my view, yes. Russia's war against Ukraine makes operating in both countries simultaneously incompatible.
But it's important to understand that operators are embedded within the legislative framework—any decision and its implementation takes a long time.
This is my subjective view of the situation; I don't participate in such meetings. Veon has a company and a supervisory board that have a strategy for the next few years and an understanding of which markets to focus on.
You mentioned national roaming. Is there any competition between Kyivstar, Vodafone, and lifecell?
Alexander Komarov: For the first two months, everyone was 100% focused on network stability and the continued existence of communications services. Now we're gradually returning to competition.
We have trends or forecasts for how many people will return and when. They are more or less optimistic. Women and children were the first to be forced to leave their homes. The longer this forced migration continues, the more people will remain abroad.
The next factor is internal migration—from within one's own region or from city to village. There's also a fairly significant migration from east to west. And in regions where mobile service was previously satisfactory or very good, networks are now overloaded.
Therefore, it's necessary to rethink the fundamentals of network construction. We need to invest more quickly and in capacity and network development in rural areas. Historically, the further west you go, the stronger Kyivstar's position. I'd argue that Vodafone was stronger in the east of the country. This also creates imbalances.
It's too early to say we understand each player's strategy. But we are seeing a gradual return to some form of advertising.
What part of the network doesn't Kyivstar control? In which regions is the situation worst?
Alexander Komarov: In the Kharkiv region, 83% of base stations are operational. In the Luhansk region, the situation is very poor, and in the Donetsk region, 30% of the network remains operational. In the temporarily occupied part of the Zaporizhia region, 50% of the network is down. There is a high risk of losing service in the temporarily occupied territories.
What's the situation in the Kherson region and in Kherson itself? Is at least one Ukrainian operator's website operational there?
Alexander Komarov: As of June 3, only 2% of base stations were operational in the Kherson region. Employees of Ukrainian telecom companies have no access to network facilities in the temporarily occupied territories. Unfortunately, the occupiers have cut off power to the telecom equipment of all Ukrainian mobile operators.
What's happening to the company's infrastructure in the temporarily occupied territories? What's the likelihood of a repeat of the Phoenix scenario in the so-called "DPR"? What have you done to avoid it?
Alexander Komarov: It's unavoidable. We've ensured that the network can operate autonomously. All switching nodes in the occupied territories that handle critical subscriber data and could potentially be penetrated are shut down. We've relocated them to Ukrainian-controlled territory. This is a major project we've been working on for the first two months of the war to reduce the risks of penetration.
If someone decides to take over the network tomorrow, they'll take the hardware, antenna masts, repeaters, and so on. Restarting it all requires the help of international vendors. This isn't a trivial task. So far, we haven't seen any moves to dismantle the Kyivstar network and reassemble it into the Phoenix network. But we know there's some movement in that direction.
The State Service for Special Communications reported a large-scale cyberattack on Ukrainian mobile operator websites on May 9. Apparently, it wasn't the first. Was this the largest attack? What were the losses?
Alexander Komarov: I'd like to point out that Kyivstar wasn't affected. There were dozens of attacks this week, of which we consider 70-80 to be large-scale. The press only discusses the biggest ones, when something goes wrong. But that's not our story.
There were relatively successful attacks on Ukrtelecom. There was a very large-scale attack on Ukraine's financial sector, which was experiencing temporary difficulties. For us, the attack on May 9th lasted 29 hours. It was very powerful, but we survived.
Why are we so confident? In June 2021, we were blackmailed by the Fancy Lazarus group. They conducted a test attack that had a minor impact on our services. Then I received an email offering $250,000 to leave us alone.
This is unacceptable. We contacted the State Special Communications Service and the relevant EU authorities because this is a global crime, not a local one. And we began preparing. The blackmailers gave us two weeks on the condition that if we didn't pay, they would shut down our network, and the fees would skyrocket daily.
After that, we were under attack at a rate of 1,5 TB per second. For comparison, the attacks reported by Deputy Prime Minister Fedorov, for example on the financial market, were tens of Gbits per second. We'd never seen anything like that before, but we survived.
We have a reserve of strength. But this is also a war, and there are creative people on the other side who are constantly looking for vulnerabilities in our defenses. Based on three months of experience, I believe we are well prepared enough to conduct "combat operations."
How has the company's capital investment decreased?
Alexander Komarov: We had quite ambitious plans for 2022 and wanted to fulfill our licensing obligations ahead of schedule. By July 1, we were required to provide 4G coverage to all settlements with a minimum population of 2000 people. Currently, just over 30 settlements remain to be covered. However, we slowed down our investment pace this quarter. In the first quarter, we invested UAH 659 million, which is 38% less than last year.
We launched 108 new websites, but that's just inertia. They were already being built or modernized before the war. We modernized the network at border crossings.
The geography has changed. We're shifting investments in gigabit network development from large eastern cities to the west. We want to launch it in 14 western cities: Uzhhorod, Ternopil, and others.
Previously, we invested more in development, now we're focusing on recovery. Some strategic projects, such as replacing the ERP system, have been postponed for now.
In May 2022, operators on the Telas Association platform initiated a proposal to the Verkhovna Rada Committee on Digital Transformation. The operators seek guarantees that their licenses will not be revoked as of July 1 due to the failure to formally fulfill their terms as a result of military aggression and the destruction of infrastructure.
The Verkhovna Rada Committee supported the need to resolve this issue. Operators prepared proposals for the necessary amendments to the relevant law through the Telas Association. These proposals have been submitted to the Ministry of Digital Development and Communications and the National Commission for Energy and Communications (NKEC) for discussion and consultations, which are taking place at the stakeholder level.
At the same time, thanks to the loyalty and flexibility of our regulator, we will launch the 2300 MHz standard. For us, this is a new development, new frequencies. We have adopted the concept that we will invest in development, regardless of the current situation. During a war, this sounds idiotic. But we believe in victory. We believe that our primary task is to create a powerful infrastructure, maintain it, and restore it.
Kyivstar President Oleksandr Komarov. Photo: Kyivstar press service
What did you learn in three months of war?
Alexander Komarov: Kyivstar had a plan to decentralize decision-making. The war greatly accelerated this. Now, sector heads and functional directors at the operational level can make up to 90% of decisions.
The war allowed us to take a critical look at some of the company's approaches. For example, we disabled most advertising campaigns and some services. This was a good time for a clean slate.
All the principles by which I run my business have been confirmed. You need to trust people more. You need to give them direction—and people will do anything if they share it. The war crystallized many issues; everything became black and white. When you provide a critical service to millions of people every day, the question of the meaning of existence doesn't arise.
What difficult decision have you had to make during this time?
Alexander Komarov: Sometimes you think you're making the hardest decisions today, but two or three weeks later they seem like easy decisions.
If there's a threat to the network in the occupied territories, we will proactively shut it down. It's just a matter of time. In mid-2021, we conducted training to disconnect a region or a specific district from the network. Technically, we have this capability and are ready for it.
And this is a nightmare. The purpose of a company's existence is to provide services. And perhaps the hardest decision is to kill that purpose for the sake of security.
I hope for the rapid return of the captured territories, when such a decision won't have to be made. But I'm mentally and psychologically prepared for it.
DOSSIER: Andrey Kobolev. An unnoticed "veteran" of the gas pipeline.
By topic: Kobolev, Shymkiv, and Pasko joined the supervisory board of Kyivstar.
Subscribe to our channels in Telegram, Facebook, Twitter, VC — Only new faces from the section CRYPT!