WASHINGTON — Gazprom Space Systems, the smaller of Russia’s two domestic satellite telecommunications operators, would have had a stellar year were it not for the ruble’s free fall.
The operator’s 2016 revenue of 5.48 billion rubles ($82 million) was 9 percent more than the previous year, but in U.S. dollar equivalents, 2016 revenue looked exactly the same as 2015, according to Dmitriy Sevastiyanov, director general of Gazprom Space Systems (GSS).
GSS supplies 30 percent of the satellite capacity available in Russia through a fleet of four satellites: Yamal-202, Yamal-300К, Yamal-402 and Yamal-401. The latter three launched between 2012 and 2014, forming the core basis for a young fleet.
Two more satellites — Yamal 601 and Yamal-500 — mark GSS’s foray into high-throughput Ka-band services in Russia. Yamal 601, a replacement for the Yamal-202 satellite that launched in 2003, is under construction by Thales Alenia Space, with a launch slated for Proton. Yamal-500 is currently under a feasibility study.
On top of leveling out GSS’s full-year earnings, the depreciation of the Russian ruble, worth less than two cents today compared to just over three cents in 2013 (the year prior to Russia’s annexation of Crimea), put pressure on the loans GSS took for its three newest satellites, which were made in euros and dollars.
But GSS has been able to drive up its fill rate to 65 percent by holding its ruble capacity prices, enabling customers to buy more bandwidth for the same amount. Sevastiyanov says Russia’s broadcast sector has remained strong despite the recession, and that the country’s overall economic situation is “beginning to change for the better.”
“We believe that in the next three years, the Russian market will come to an equilibrium state,” he said.
Sevastiyanov spoke to SpaceNews about GSS’s business and reasons for optimism.
How much of Gazprom Space System’s capacity is for Russia? How much is international?
The total capacity of the GSS orbital constellation is about 9 GHz. One-third of the capacity is concentrated in the beams serving areas outside Russia. This capacity is the base for our international business.
Each satellite has its own target markets for international sales. For Yamal-202 – it is the Middle East, South and South-East Asia. Yamal-402 is focused on services also for the same Middle East and Africa, and Yamal-300K operates in the Far East and in the Asia-Pacific region. Yamal-401 is designed for the Russian market, although it has foreign clients.
In 2016, the company received 36 percent of the total revenue from the sales of satellite capacity in the international market.
When Yamal 601 replaces Yamal-202, will it have more international business or less?
The Yamal-601 satellite is designed both for the planned replacement of Yamal-202 at the orbital position 49 degrees east, and for furthering GSS’s business development.
Yamal-601 is being equipped with a C-band payload that is almost the same as the payload of Yamal-202, both in terms of capacity, volume and the coverage zone. It means that the capacity for the international market business that the company has today in C-band will not change.
Yamal-601 will be also equipped with a Ka-band payload. This capacity will be used only on the territory of Russia to deliver satellite broadband services to the various user segments, including private persons (business to consumer).
In the past year, financing of the project was organized. Loans for the project are provided by the Russian Sberbank. Thales Alenia Space has started the satellite manufacturing, and in two years we expect to see Yamal-601 in orbit. This launch will give a new impetus to the development of the company.
How is the broadcast business in Russia? How many channels is Gazprom supporting today? Do you see growth in HD and even ultra-HD?
Notwithstanding the challenging economic situation, the broadcast business develops in a sustained way in Russia. Among pay-TV market segments, satellite TV constitutes approximately 40 percent, and shows the best dynamics over the last years.
GSS offers Yamal satellite capacity for TV-distribution. The company’s share in this segment of the Russian market is about 30 percent.
Currently there are approximately 210 TV channels, including five HD channels, being distributed via Yamal satellites.
Last year, GSS and the Japanese company NEC conducted a successful transmission test of a television signal in 4K UHD format. That confirmed the technical capability of TV signal broadcasting in new formats via the Yamal satellite network.
For servicing arrangements, GSS has our own teleport and satellite digital TV center, and operates a network consisting of more than 1,100 VSATs. Almost all of these stations operate in the territory of Russia.
Gazprom Space Systems said in 2015 that a new hub was needed to support Ka-band for Yamal-601. Are those ground segment updates complete? What is your expectation for the uptake of Ka-band services?
In order to deliver services in Ka-band, there will be a need to create two new hubs (in the European part of Russia and in Siberia), providing broadband services and control of several hundred thousand satellite terminals. Their construction is stipulated within the project of Yamal-601 satellite creation.
Now GSS selects the optimal technology and, accordingly, the equipment supplier. The works on hubs creation shall be performed in 2017 and 2018.
Concerning Ka-band, we certainly see the good prospects of its use in Russia. In this band, Russian service providers plan mainly to develop broadband services for private users as well as for satellite mobile applications: automobile transport, aeronautical and maritime communication services. We believe that point-to-point trunking will be also in demand.
Does Gazprom Space Systems have future satellites planned after Yamal-601?
Up to 2025 GSS is going to launch three new geostationary communication satellites.
Yamal-601 will cover approximately three quarters of the Russian territory in Ka-band, and the remaining fourth will be covered by the next satellite Yamal-501.
The installation of Ka-band on Yamal-501 will broaden the customer base and geography of services, and will create a full-scale system of satellite broadband for Russia.
Another satellite will replace Yamal-402 when the time is due.
Lots of operators are talking about oversupply. Is there a capacity glut in Russia or no?
The fixed satellite communications segment is stable, but it is currently going through a transitional period.
Due to oversupply of satellite capacity alongside a complicated (and thus restraining the demand growth) macroeconomic environment, the competition between traditional satellite communications operators has increased.
The outbreak of high-throughput systems, which marks a sort of technological breakthrough, led to a significant reduction in data transfer costs counting on one bit of information, and also had a significant impact on the industry and prices.
There was a sufficiently long period in Russia (2007 to 2013), when there was a deficit of satellite capacity. Between 2012 and 2015, satellite constellations were updated by the Russian operators GSS and RSCC: 10 communication satellites were put into orbit. This created a significant increase in supply in the Russian market.
The peculiarities of the economic situation in the country has led to some reduction in the growth rate of satellite capacity demand, which has always been higher than the world-wide average.
But we feel the situation is beginning to change for the better, and we believe that in the next three years the Russian market will come to an equilibrium state.
The main demand growth drivers for satellite capacity in the Russian market in the coming years will be: the development of corporate VSAT networks, satellite trunking for mobile operators traffic transit (backhaul) and satellite TV.
The ruble rose in value at the beginning of 2017, but is still weaker than it was in 2014. How has this affected you? What do you expect of the ruble in the future as it pertains to your business?
The situation on the financial markets certainly affects our business, if only because we implement all our projects without government budgetary financing, using our own and attracting loan funds.
Currently, GSS has loan commitments (including in U.S. dollars and euro), that the company attracted to build Yamal-300K, Yamal-401 and Yamal-402 satellites. Due to the Russian national currency weakening in 2014 and 2015, the sum of the obligations under these credits, calculated in rubles, increased.
Revenues in rubles increased mainly due to the improvement of satellites fill rate, because in spite of the ruble’s decline against the main world currencies, we did not raise prices in ruble, since we realized that it could bring down the business of our Russian customers.
In order to harmonize our revenue and commitments, we also try with priority rates to increase currency earnings received in the international market.
We have already returned a significant part of the loans, without any breaking commitments ever in our history, but we still have considerable repayments.
In our business, we try to use generally accepted during the project financing ways to optimize the debt load, such as, for example, refinancing. Following this practice, in 2016 GSS realized the refinancing of loans acquired from 2010 to 2014, signing an agreement with UniCredit Bank Austria AG for a new credit line in the amount of up to 350 million euros.
So, against all the odds, we are optimistic about the current state of the company’s business and prospects for the implementation of our new projects.