When a telecommunications giant is thwarted in a multi-million-dollar bid to take control of another company, onlookers might expect its employees to be mightily disappointed.

But analysts suggest managers at Moscow City Telephone Systems (MGTS) are most likely relieved at last week's news that Moldova's government has blocked its attempt to acquire the country's national landline operator, Moldtelecom.

If successful, they say, MGTS's $20 million bid (plus a promised $10 million in investment) would have left the company overstretched.

Both MGTS and Russian mobile operator Mobile TeleSystems (MTS) are partly owned by AFK Sistema – which was eyeing the Moldovan GSM mobile license up for grabs if the deal went through.

AFK Sistema has a controlling stake in MGTS and is the largest shareholder in MTS.

"It was clear that MGTS was acting only in the interest of AFK Sistema," Aton's telecoms analyst Nadezhda Golubeva told The Russia Journal this week. "MGTS would probably have had to take on more debt to finance a deal done in the interests of a third party, while they themselves are in need of more investment."

Kommersant newspaper reported that MGTS was the formal vehicle for the bid because the rules on tendering were restricted to companies whose annual turnover exceeds $150 million and who have a capitalization of no less than $300 million.

It is widely thought that MGTS is the poor relation of MTS – which stood to benefit from the GSM licence in the Moldtelecom deal – when it comes to AFK Sistema's strategy.

In this case, the controlling shareholder was absolutely open about the use of MGTS as a proxy buyer. The fact that MGTS can be used in this way is still just one of the structural problems facing the landline operator, analysts say.

Another obstacle is the politically sensitive nature of its business – MGTS provides some 4.2 million landline connections in Moscow. That's a lot of votes, and the Moscow government is hostile to changes that might upset telephone users.

In particular, MGTS has long talked about introducing per-minute billing to replace the current inflexible pricing regime of fixed tariffs and unlimited call-time. But Moscow Mayor Yury Luzhkov has long opposed and blocked that plan, fearing that the idea would repel talkative Muscovites, who on average spend about twice as much time on the phone as Russians elsewhere.

Renaissance Capital telecoms expert Vyacheslav Nikolayev said: "The lack of a per-minute tariff does not really inhibit development. It would be more of a long-term revenue driver – in the short term there would be a sharp fall in revenues."

There are signs of progress – a proposed amendment to legislation currently passing through the Duma could authorize per-minute billing, if only on a voluntary basis at first.

In the meantime, the company has to stick with incremental rises in the existing tariff to increase its revenues. The latest rise to 115 rubles per month took effect on Nov. 1.

Telecoms analyst Yevgeny Golossnoi of Troika Dialog says that this "might be enough to make a little profit on the service next year."

The company makes money at the moment, he says, because business users subsidize the households.

The low tariffs leave little room for investment – apart from modernization, money is needed for maintenance. Digitalization of the network stands at 15 percent, compared to a national average of 35 percent. Little progress has been made on "value-added" telecoms services.

Also, the company has largely missed out on the mobile boom, because the "8" you dial before a mobile number switches you to a non-MGTS network.

However, one plus point is the completion of a new fiber-optic "trunk line" that provides a good basis for making the rest of the network more efficient.

And they are becoming more market-driven, casting around for other ways to make money. Earlier this month the company announced that it would be issuing domestic bonds worth 1 billion rubles, and an IPO is planned next year.

But Aton's Golubeva said: "I don't think they present a particularly attractive investment. Every new bond issue increases the risk on the company, making it less attractive to investors. "

Renaissance Capital's Nikolayev is more upbeat about the potential of MGTS. "We believe that if the company goes for the IPO it might get more investor attention," he said.

"It does have opportunities to fight for the share of the market, and it always has the last mile – actual access to the end customer."