RSX: Your Guide To Anti-Telecom Law

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Summary

The anti-telecom law fuels intense discussion.

I clarify my view on why the law will survive in one form or the other.

Telecoms will have to pay.

In my previous article on VanEck Vectors Russia ETF (NYSE: RSX) I wrote about the anti-terrorist law that could destroy the business of Russian telecom companies like Mobile TeleSystems (NYSE: MBT) and Vimpelcom (NYSE: VIP).

The subsequent discussion in the comments section revealed that readers tend to underestimate the problem and seem to believe that the law could be almost ignored. I tried hard to explain how the system works both in the previous article itself and in the comments section, but the topic needs another visit to clear things out.

A quick refresher: Russian Duma passed a law that requires telecoms to store all calls and messages (and messages could contain graphic and video content) for 6 months.

The costs are tremendous and the infrastructure does not exist. Previously, telecoms were required to store up to 3 years of call data, but the data contained only a fact of call.

So, if Victor called Marina to ask her what to buy at the nearby market, the telecom would store only the date and the time of the call. Now, the system will be obliged to store all dialogues about potatoes and meat.

While it seems that everyone except the Duma thinks that it's an overkill and would not enhance security, the law quickly passed.

Here's what follows next. The law will be reviewed by the Federation Council, which could reject the law, but in practice it's almost impossible.

In the current system, the Federation Council is not a significant political entity and rarely a place for any discussion. So, the odds are that the law will pass swiftly. Then the law must be signed by the President. The President is the leader of the ruling party, United Russia, and the law was proposed and supported by the members of the party. The chance of veto by the President is effectively zero.

However, it is clear that the law is not workable at its current state. This is where readers make the mistake - they believe in the power of human mind and assume that it will be ultimately rejected or significantly changed. To show how things actually work in Russia, I'll tell you the story of another controversial law, the Platon system for trucks.

Companies that deliver goods via roads already paid several taxes - the transport tax and the excise duty on fuel. However, the roads did not get better and the government invented another way to make money - a system where any truck will pay for the actual mileage of every journey.

The system was called Platon as a reverence to the ancient philosopher as well as because "platit" means "pay" in the Russian language. Protests followed, and the pay was significantly cut (but not eliminated). Time went by, protests lost steam and the government currently plans to discuss the possibility to increase payments in October.

I expect that the similar tactics may be used with the anti-terrorist law. The new Duma (elections are in September) may revisit the law together with the Ministry of Communications, but one outcome is certain - telecoms will ultimately have to pay for something.

Yes, a law in Russia could only be a prelude to the dialogue, but make no mistake - there's always a farmer and a cow, and the cow will do what the farmer tells her to do.

As you can see, the story with the law has not ended and we can expect more news on this front in autumn. Despite the fact that I don't expect that the law will function in its current form, I expect that it will ultimately cost telecoms dearly just like the Platon system cost truckers all over the country.

Disclosure: I am/we are short RSX.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.