Daily analyst comments

It has recently been reported that the Russian government is set to create a Russian national internet search engine. On July 6, presidential advisor, Leonid Reiman confirmed the rumor. The project is to be run by private companies supported by the Communication Ministry. The project’s budget is estimated at USD 100 mn; launch is scheduled for late 2011.

The list of potential project contractors includes linguistic software developer ABBYY, internet marketing and SEO consultant Ashmanov and Partners, and state-run, nation-wide telecom operator Rostelecom. Spokespersons affiliated with the operator have confirmed that Rostelecom is in negotiations over participation in the project. The project was initially to be integrated with the Electronic Government program, where Rostelecom is the main contractor.

There is every likelihood that Rostelecom will be selected the general contractor, and become a key beneficiary of the project, but only of course, if it is ever brought to life. The economic potential of the project is difficult to estimate, as the majority of search engines’ profits come from difficult to predict advertising income. If the project has commercial success, Rostelecom has a fair chance to become Russia’s third leading internet search provider with over 10% of market share. The first two positions on the Russian internet search market are currently held by Google and Yandex, followed by Mail.ru with a 7.3% market share. We regard the news as positive and believe Rostelecom’s entering the national internet search market should be positive for the company.

The fair price for Rostelecom (RTS: RTKM) as of year-end 2011 is USD 5.30 per common share with a 48% upside and USD 3.30 per preferred share with a 46% upside.