Chapter V.4 Telecommunications

International Monetary Fund
Published Date:
December 1991
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Until quite recently, there was little appreciation in the USSR of the economic significance of telecommunications. Its development was strictly controlled by the state and strongly influenced by military objectives. Facilities for communicating with the rest of the world were regarded as having particularly important security implications and, as a result, their use was restricted almost entirely to agencies of the central government and the military. Even statistics relating to the telecommunications system were classified as defense secrets. At the same time, the resources devoted to upgrading and expanding the civilian networks were relatively limited, leaving them underdeveloped in both qualitative and quantitative terms.

The involvement of defense interests in Soviet telecommunications has far from disappeared, and official information remains hard to come by. But the attitude towards civil communications has changed significantly in recent years, as the political and economic system has become more decentralized and more open, including to the outside world. Looking ahead, the importance of communications for the effective functioning of a market economy is now fairly widely understood. The main challenge is to put what limited resources are likely to be available to best use in overcoming the legacy of past neglect.

This chapter attempts to characterize the current condition of the civil telecommunications network in the USSR, and identify its main weaknesses. In so doing, it has been necessary to draw on a variety of Soviet and Western sources and, in some instances, to make largely judgmental estimates. The main focus is on the telephone system and related facilities (such as fax and telex); there is no discussion of radio and television. In the concluding sections, the authorities’ ambitious development program for telecommunications is assessed, and recommendations on organizational issues and possible investment priorities are set out.


a. The Ministry of Post and Telecommunications

The civil telecommunications industry is dominated by the union-level Ministry of Post and Telecommunications (MPT). Employing around 1.8 million people, the MPT ranks as one of the largest telecommunications organizations in the world. Following the recent merger of two former ministries, the MPT now controls not only the operation of most of the civil telecommunications network but also the production of a wide range of communications equipment, computers, measuring instruments and consumer electronics. It also has its own construction and installation enterprises, research institutes and educational establishments.

MPT’s national network is subdivided into a large number of territorial departments, each of which is responsible for operations in its own region and receives the corresponding revenues. The most important of these is the Moscow Local Telecom Network (MGTS), which appears to have a special status and plays an important role in the national operations.

In addition, each republic has its own MPT. Although these agencies in principle have had the right to manage their own budgets, with the important exception of investment expenditures, in practice their autonomy appears to have been negligible. This is beginning to change, however, as part of the general tendency for the republics to attempt to enhance their autonomy vis-à-vis union-level organizations in Moscow. As one example, Armenia, after the 1988 earthquake, obtained the right to open its own transit center for international telecommunications. (Previously, all civil international links had to pass through Moscow.) As another example, the RSFSR has been engaged in negotiations with the union-level MPT over the devolution of regulatory powers and the control of international services.

b. Specialized networks

In spite of its size, the MPT has in the past been relatively unsuccessful at extracting resources from the state budget. The correspondingly poor quality of its services has encouraged many of the technical branch ministries to set up their own networks—in some cases, using lines leased from the MPT. In addition to the defense sector, which is a special case, examples include the ministries that oversee the oil and gas industries, the railroads, the state airline (Aeroflot) and the merchant marine. Since most of the operators of these networks generate their own foreign currency earnings, they are able to import modern, high quality equipment. As a result, their facilities tend to be more sophisticated than those of the MPT, and can provide services, such as data transmission, that are not available to MPT’s customers.

The main limitation on the specialized networks concerns international communications, which continue to be monopolized by the MPT.1 Pressures are emerging to relax this monopoly, particularly as regards data transmission. Alternatively, if branch ministries were phased out in the near future, enterprises put on a more commercial footing, and the MPT’s services improved, considerations of efficiency might suggest that the specialized networks should contract or disappear altogether, rather than expand further.

c. New operational entities

As the legal environment for foreign investment in the USSR has improved over the past two years or so, a number of joint ventures have appeared in the telecommunications sector. The earliest examples involved various Western corporations in collaboration with the MGTS in Moscow. These now provide a range of services including mobile telephones, international pay telephones in Moscow’s airport and main hotels, and cable-laying facilities for business-users; they are also involved in some manufacturing operations (e.g., for telephones and multiplexors). Increasingly, joint ventures have focused on operations which can generate convertible currency directly, for instance through leasing international circuits which bypass the public network.

Perhaps more significant, in terms of the future development of the telecommunications industry in the USSR, has been the proposal (made public in September 1990) to establish a new national entity, Sovtelcom. Under this scheme, the republican MPTs would take full control of intrarepublican services, while Sovtelcom would acquire responsibility for long-distance and international transmissions. Some of the issues this raises are discussed later in this chapter.


a. Telephone

The number of telephone lines in the USSR is thought to be around 35 million.2 This would imply a density of roughly 10 lines per 100 inhabitants, which is about one quarter of the average in Western Europe. Moreover, within the USSR, there is significant variation in service levels. The large cities are now fairly well-equipped, whereas the line density in rural areas is little more than half the national average. More than 100,000 villages have no telephone service at all.

The 12th Five Year Plan set a target increase of 20 million lines, to be achieved by the end of 1989. The outturn fell well short of this objective—by an estimated 8 million lines according to official data, and perhaps more according to Western sources. As a result, the waiting list for telephones now stands at around 15 million. Even in Moscow, which has the best service in the country, there is a waiting list of 120,000.

The scarcity is particularly severe for international dialing services, which are an essential facility for business customers. There are only 2,000-3,000 International Direct Dialing (IDD) lines in the entire USSR. Except for official agencies, IDD is available only in Moscow; even Western consulates in Leningrad cannot make automatic international calls. Moreover, the capacity of the IDD network is already overstretched by the number of existing lines, so that a relatively high proportion of calls that are placed typically fail to connect. The long delays involved in obtaining a new IDD line inevitably encourage corruption.

Mobile telephone services are also available only in Moscow. Operating with relatively primitive technology, the system currently has no more than a few hundred subscribers, and its expansion thus far has been inhibited by a lack of available frequencies.

b. Telex

In the USSR, as in Eastern Europe, telex continues to be an important component of the telecommunications system. Telex has been largely superseded by fax in most Western countries, but fax requires a relatively high quality telephone network. Telex copes much better, for example, with the delays in transmission, particularly on congested international lines, that are commonplace in the Soviet and Eastern European systems.

Despite the decline of telex in the West, some expansion of the Soviet telex system may still be worthwhile, in order to enhance communications with its Eastern European neighbors and trading partners. The latter are generally better-equipped than the USSR; Poland, Hungary and Czechoslovakia average around 9 telex subscribers per 10,000 of the population, compared with a figure of less than 2 for the USSR. The Soviet system also suffers from having a domestic network which, because it only uses the cyrillic alphabet, is totally segmented from the very small international network (which has less than 3,000 subscribers).

c. Data transmission

Data transmission for civilian users is almost entirely the province of joint ventures; services provided by MPT are extremely limited. Recently, a number of specialized networks have begun to set up their own data transmission facilities and have expressed interest in finding foreign collaborators for this purpose. The military is also reported to be in search of private clients for its facilities; and the Institute of Automated Systems now provides services on its IASNET network.

The typical transmission speed on these systems (9,600 baud) is rather low, but can be enhanced as the use of computerization in the USSR spreads further. The main requirement for the future development of data transmission services is that MPT should be able to provide efficient leased lines.


a. Switching systems

Most of the switching equipment currently in use in the Soviet telephone network would be considered out-of-date by Western standards. Around 35 percent of all telephone lines are still connected to step-by-step exchanges. The majority of the remaining switches are of the crossbar type, imported from Eastern Europe.

The USSR has been prevented from importing digital switches from the West by a combination of COCOM restrictions and the shortage of convertible currency. Attempts to develop Soviet “quasi-electronic” exchanges have met with limited success. Although the “Qvartz” and the “Qvantz” exchanges have been functioning in Lithuania for more than five years now, they have proven unable to handle effectively high-traffic areas such as Moscow and Leningrad.

b. Local facilities

Private exchanges (PABX) are almost unknown in the USSR, being confined to a few of the most modern hotels in Moscow. Generally, each telephone set in a hotel will be connected to an outside line, and therefore routed through the local exchange. This is to a large extent a function of the fact that local calls in the USSR are free. There is therefore no incentive to set up private exchanges, and the load on the local exchanges is correspondingly increased.

Parts of the local cable networks are known to be very old and of poor quality. Some of the telephone cables in Moscow, for example, are said to predate the 1917 revolution. Many are still paper-insulated, and therefore tend to deteriorate in wet conditions.

c. Main trunk-lines

The long-distance telephone system in the USSR is relatively inefficient. The vast size of the country requires a large transmission network, and yet capacity tends to be low. The microwave trunk-line between Moscow and Leningrad, for example, has only 600 circuits (i.e., can handle only 600 telephone calls simultaneously). On average, the number of long-distance calls per main line in the USSR is less than half that in Hungary and Czechoslovakia and less than one fifth that in Poland.3

Much of the long-distance network conforms to a “star design”, with calls being routed through the Moscow hub. This could become a serious problem in the future, as the volume of traffic grows, and may require a fundamental redesign of the routing system.

Up to the early 1980s, a substantial number of analogic microwave links were installed for the transmission of long-distance telephone calls, and the USSR now has some of the largest systems of this type in the world. However, the number of frequencies available for expansion of the civil microwave network was limited, possibly by the requirements of the military. More recently, the MPT has tended to use satellites and coaxial cables instead, and most of the domestic trunk-lines continue to rely on cable. A small number of domestically-produced, relatively low-capacity fiber optic cables have also been introduced, but these appear to suffer from low levels of attenuation, which adds substantially to their cost.4

d. International connections

The international telephone transit center in Moscow is equipped with a switching exchange using technology from Yugoslavia. It has a capacity of 1,500 circuits, of which slightly more than half are outgoing. This exchange has to handle all the international calls from the RSFSR, as well as calls in transit from the other republics and from a number of Eastern European and other socialist countries. Since it allows a maximum of around 800 outgoing calls at any one time, it constitutes a major bottleneck in communications between the USSR and the rest of the world. Moreover, most circuits are dedicated to links with Eastern European and other socialist countries; there are, for example, only 40 circuits for calls to the United Kingdom, 25 to France and 16 to the United States. Not surprisingly, under these circumstances, the number of international calls to and from the USSR is extremely low, even in relation to the very limited number of international subscribers. The capacity of the Moscow transit center was to be doubled at the end of 1990. Given the scale of the shortfall, however, even this would be insufficient to eliminate excess demand.

e. Satellites

The size of the USSR makes the use of satellites for domestic as well as international telecommunications a natural choice. In fact, the Soviets are more advanced in the deployment of satellites than they are in any other form of communications equipment. MPT’s domestic network now includes 19 satellites and thousands of earth stations.

Less successful has been the decision to go it alone in international satellite communications. Rather than joining one of the existing operating organizations (such as Intelsat, or Eutelsat), the USSR elected to establish its own system, Intersputnik. Recently, a number of Eastern European countries have been switching to Eutelsat, and it now seems unlikely that Intersputnik will survive in the long term.

f. Customer hardware

The terminal equipment available in the USSR (including telephones and fax machines) is generally of poor quality and in short supply. Exceptions include telephones from a Soviet-Spanish joint venture, which operates a factory in the USSR, and equipment imported by various Moscow-based joint ventures. Even these suppliers, however, have faced difficulties. Production from the joint venture is reported to have fallen well below capacity, as shortages of hard currency limited imports of vital components. And MPT’s rather idiosyncratic technical standards (for example, on voltages) have constituted an important hurdle for potential exporters of telecommunications equipment to the USSR.


a. Tariffs

The structure of tariffs for telephone calls in the USSR is severely distorted in relation to relative costs. Local calls are free except when made from public payphones, in which case the tariff is 2 kopecks (a rate that has been unchanged for several decades). Charges for long distance calls (including those to other CMEA countries) are also highly subsidized. By contrast, the tariffs on international calls to nonsocialist countries are extremely high. Outgoing calls are typically charged at rates three times higher than those for comparable incoming calls. Moreover, although annual subscription fees for IDD users are reasonable (at around US$650), connecting fees are set officially at US$25,000 and can reach US$60,000 for those wishing to bypass the waiting list (all amounts payable in convertible currencies).

b. Revenues

There are no detailed data on MPT’s revenues from its telecommunications operations, and any assessment therefore has to be based on estimates. MPT’s total annual revenues are put officially at rub 12-12½ billion. In a conglomerate of this type, telecommunications generally account for some 60-65 percent of total revenues—in this case, say, around rub 7 billion. Given an estimated 35 million telephone lines, this implies an average revenue per line of rub 200, or approximately US$110 at an exchange rate of rub 1.8 per U.S. dollar. The comparable (unweighted) average figure for Hungary, Poland and Czechoslovakia exceeds US$340, and for the United Kingdom, France and the Federal Republic of Germany it is around US$760—almost seven times the estimated Soviet figure. Thus, it would appear that the level, as well as the structure, of tariffs in the USSR is severely misaligned.

There is no information on MPT’s convertible currency earnings; but, given the low volume of international traffic both in and out of the USSR, they cannot be substantial.

c. Productivity

Of MPT’s total labor force of 1.8 million, perhaps one third can be ascribed to the telecommunications operations. If productivity is measured by the number of employees per line, this would imply that MPT is highly inefficient by international standards. The assumed Soviet ratio of 17 employees per 1000 lines compares, for example, with a figure of 11.8 for Argentina’s Entel and 7.5 for Belgium’s RTT.

d. Investment

Figures from the MPT’s 1990 budget suggest that investment expenditure in telecommunications is currently around rub 2-2½ billion per annum. This represents up to 35 percent of estimated telecommunications revenues, or approximately 0.25 percent of GDP. When compared with telecommunications investment in the EC, which averaged 0.62 percent of GDP in 1987, and given the relatively underdeveloped state of the Soviet network, it would appear that the present rate of investment is inadequate. Experience from other countries implementing major programs of expansion and upgrading of their telecommunications systems suggests that investment rates would need to be at least three times as high as that currently prevailing in the USSR.


a. Objectives

The role of an enhanced telecommunications system in the development of an increasingly sophisticated, decentralized and open economy appears to be widely understood in the USSR. In 1990, the MPT prepared a draft report, for consideration by the Supreme Soviet and the Council of Ministers, advocating an accelerated program of modernization in telecommunications up to the year 2000. The main objectives were:

  • (1) the installation, over a ten-year period, of 80 million new telephone lines, of which 20 million would be replacements for existing lines. It was estimated that this would raise the average density from 25 telephones per 100 households in 1990 to 48 in 1995 and 86-90 by the end of the decade;

  • (2) the development of a mobile radiocommunication network that would be compatible with the European cellular system and would have as many as 3 million subscribers nationwide by the year 2000;

  • (3) the construction of new fiber optic telecommunications links, including a Trans-Siberian Line (TSL) which would form part of the global fiber optic loop. As part of the TSL project, five new international switches would be opened in major Soviet cities;

  • (4) the establishment of new commercial satellite systems for communications and TV and radio broadcasting;

  • (5) the territorial expansion of national TV and radio broadcasting, and the creation of independent broadcasting facilities in each republic.

b. Evaluation

This program is an ambitious one, the feasibility of which will depend on a variety of factors, including the availability of physical inputs (switches, cables, etc.) and of financing, as well as the MPT’s managerial capabilities.

(1) Supply constraints

In principle, the additional hardware needed to implement the program could be almost entirely imported, allowing development of the system to proceed as quickly as the new equipment could be installed. In practice, however, there are likely to be severe constraints on the volume of imports.

First, the USSR’s traditional sources of supply in Eastern Europe will become less accessible and at the same time less relevant in terms of the USSR’s future needs. They will be less accessible to the extent that, under the new CMEA trading arrangements, payments will be required in convertible currencies and at world market prices. They will be less relevant insofar as their products, at least in the telecommunications field, tend to be technologically outdated. While some transitional agreements have been reached to secure supplies of particular items, these are likely to make a relatively minor contribution to the program as a whole.

Second, access to Western suppliers will continue to be conditional on the availability of convertible currency and on COCOM restrictions. The latter were partially relaxed in July, 1990 (see Table V.4.1), but for the USSR, in particular, they continue to restrict a number of the most important components (including switching systems, X25 protocols and high-speed transmission equipment). For the foreseeable future, therefore, most of the additional inputs for the modernization program will have to be domestically produced. A number of joint ventures have already been established to this end. Two of these are expected to produce digital switches; another will provide the copper cables that are required for the installation of new switching equipment. Even if these projects are implemented as planned, however, there are several reasons for believing that supply may fail to meet the demands of the MPT’s program:

Table V.4.1.USSR: COCOM Liberalization from July 1, 1990
1. Telephone exchange switching equipment
Decontrol of digital PABXs up to 512 ports (with a few restrictions remaining on facilities).

Relaxations to permitted facilities on larger PABXs and public exchanges, for example, digital interfaces (not ISDN); use for cellular telephone services; unrestricted size and performance.

Licenses may be approved for packet switches, with some line and node performance limitations and some restrictions on facilities.

Licenses may be approved for technology transfers for manufacture of telephone exchange equipment up to the same levels permitted for supply.

Licenses may also be approved to a selected group of countries (in the first instance this is likely to include Poland, Hungary and Czechoslovakia) for equipment for common channel signalling and Integrated Services Digital Network (ISDN) facilities.
2. Transmission equipment
Licenses may be approved for export to Poland, Hungary, and Czechoslovakia for:
  • a. all forms of digital transmission equipment, including optical fiber systems, up to 156 Mbit/second. For laserbased optical fiber systems, the wavelength is restricted to 1,370 nanometers (a 156 Mbit/second system allows 1,920 telephone channels to be carried on one pair of optical fibers);

  • b. all modems; and

  • c. technology transfers for production of permitted equipment.

3. Radio relay equipment
Decontrol of satellite earth stations for civil communication, direct broadcast or meteorological uses.

Decontrol of all civil types of satellite television receiving stations.

Licensing to the aforementioned countries of:
  • a. digital radio-relay equipment up to 156 Mbit/second and 64 QAM (Quadrature Amplitude Modulation); and

  • b. technology for production of permitted radio-relay equipment.

4. Other communications equipment
Decontrol of most types of analogue radio receivers.

Decontrol of analogue cellular radio and CT2 (e.g., Telepoint) base stations.
  • (a) production by the new joint ventures cannot begin, at best, until early 1992;

  • (b) one of the proposed projects for the production of digital switches currently plans to use a 32 kbts standard; since the international standard is 64 kbts, this may inhibit the future integration of imported switches into the system;

  • (c) it is not clear that the supply of intermediate inputs will be able to keep pace with the additional production of telecommunications hardware. For example, there is only one plant in the USSR which produces copper pure enough for use by the new copper cable factory; the latter, if producing at capacity, would absorb 40 percent of this plant’s copper output;

  • (d) little attention appears to have been given to the need for more terminal equipment, for use with the additional lines. Current production of telephone sets is running at around 2 million per annum, compared with MPT’s target for a cumulative net increase of 60 million in the number of lines by the year 2000. Realistically, it seems unlikely that supply could exceed 3½-4 million lines per annum over the medium term (up to 1995, say), which would put the proposed development program well behind schedule.

(2) Financing

It is estimated that the program would require a doubling of the current investment rate—that is, to approximately rub 5 billion per annum at 1990 prices, or ½ percent of GDP. The amount of convertible currency required is unknown. Although MPT is a state entity, the efforts of the authorities to stabilize the budget deficit would probably limit the extent to which this additional investment could be financed directly from the budget. A substantial increase in MPT’s tariffs therefore seems inevitable. Since, as was mentioned earlier, tariffs on domestic calls are extremely low at present, such a move would have much to recommend it.

(3) Management of the program

A final issue relating to the feasibility of the proposed development program concerns MPT’s organizational capabilities. Experience shows that the success of a program on this scale typically depends on tight overall direction from the center together with effective decentralization in implementation. MPT’s bureaucratic structure, however, is not well-suited to the first of these tasks; and the demarcation of authority over telecommunications at the regional level, between the union and the republics, is far from settled. It seems unlikely that MPT could simultaneously manage a fundamental reform of its organizational structure and the implementation of an ambitious modernization program.


The shortcomings of the Soviet telecommunications system will take many years, if not decades, to put right. It is necessary at this point to specify a limited number of objectives, which might be feasible in the short term. Three such priorities are given below.

a. Providing the right environment for foreign investment

Joint ventures offer the best prospect for boosting domestic production of modern telecommunications hardware relatively quickly. It is important that those that are already preparing to go into production should be given the best possible chance of success, so that others might follow. This will require, above all, a clear legal framework, along the lines proposed in Chapter IV.7. Moreover, the economic conditions for conducting business in the USSR needs to be extensively improved. This would include the development of domestic wholesale markets and the liberalization of trade in order to assure these joint ventures of readier access to inputs. It would also involve development of domestic markets, establishing the conditions for convertibility of the ruble, and measures to promote competition (see Chapter IV.4).

b. Focusing on basic business services

Given the wider objective of promoting economic reform, priority should be attached to developing services for the business user. This means, in the first instance, an improvement in international telecommunications facilities. New international transit centers should be established in the major cities, so as to alleviate the current bottleneck in Moscow and provide the capacity for reliable fax links. Since there will be the potential to earn convertible currency from these operations, they may be of particular interest to foreign investors. New satellite links could also be established with the rest of the world if the USSR were to join Eutelsat and Intelsat. And telex facilities could be vastly improved, probably at relatively low cost, by integrating the domestic and international networks.

At a later stage, the long distance and local networks could be modernized and expanded, taking the new system of international “gateways” as a framework. In the meantime, some expansion of the mobile telephone system could assist business users, while relieving some of the pressure on the overburdened local exchanges.

c. Decentralization

MPT could take some first steps toward a more efficient long-term structure without disrupting the functioning of its existing organization, and with possible short-term improvements in performance. One approach would be to create decentralized units responsible for the implementation of particular projects, such as international overlays, data transmission, mobile telephones and diversified business services. In order to respond most effectively to local needs, this decentralization could be pursued right down to the city level. But, in all cases, the national organization would continue to set broad objectives, ensuring that the decentralized units were following a coherent and consistent plan.

Eventually, this system could evolve into one in which local networks are entirely decentralized, being operated by regulated regional monopolies (as in the United States). Private operators could compete to provide long-distance and international services.


With the exception of a few small-scale operations managed by new joint ventures (see below).

Official MPT figures indicate 40 million lines; some Western estimates are as low as 30 million. The scope for uncertainty occurs because a significant proportion of lines (perhaps 20-25 percent) serve more than one telephone number.

It is possible, of course, that the relatively low number of long-distance calls is an explanation for, rather than a consequence of, the use of low-capacity trunk-lines in the USSR.

The term “attenuation” refers to the degree to which a signal maintains its strength as it travels along a cable. The lower the level of attenuation, the more “repeaters” are needed on the line to boost the signal.

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