The Kremlin Has Set Its Sights on Russia’s Private Tech Firms

The internet, Russian President Vladimir Putin declared in 2014, is a “CIA project.” Russia’s biggest tech firm, Yandex? It was “developed with Western influence.” Yet nearly six years after Putin vowed to “fight for [Russia’s] interests” in the internet sphere, Yandex appears to have dodged yet another attempt by the Kremlin to bring it under state control. Last week, the company announced that it would slightly restructure its corporate governance to grant the government a greater say in its operations. But the firm would remain largely owned by shareholders, many of whom are foreigners. In turn, Russia’s parliament withdrew a bill that threatened to put Yandex out of business.

The Kremlin has hardly abandoned its plans to take over Russian tech. But the Yandex episode shows that it is fiddling with its strategy. In the 2000s, the Kremlin similarly decided that the oil sector could not be left in private hands, so it jailed the boss of Russia’s then-largest oil firm on trumped-up charges and handed his assets over to a state-owned firm. But the Kremlin has realized that such tactics won’t work now. Instead, it is trying to develop a strategy of state control for the internet age.

Now the Kremlin is targeting Russia’s own tech titans. In July, a little-known deputy from the ruling United Russia party introduced a bill in parliament that proposed limiting foreign ownership in “key internet resources” to 20 percent. The bill threatened not only Yandex but also its main competitor, Mail.ru Group. These two companies dominate Russia’s online market, hosting the country’s most popular search engines, social media sites, food delivery, and taxi services. Yet both firms are registered outside of Russia, and their shares are traded abroad. Roughly 85 percent of Yandex shares are traded on the Nasdaq, and 50 percent of Mail.ru shares are traded on the London Stock Exchange.

The legislation threatened a death blow if the firms did not comply. Without major changes to their shareholder structures, Yandex and Mail.ru would have been prohibited from advertising in Russia or posting ads from other Russian companies. In the third quarter of 2019, Yandex received nearly 70 percent of its revenue from ads.

Although the stated goal of the bill was to prevent strategic resources from falling into foreign hands, it seemed to jump-start the Kremlin’s long-sought seizure of the tech sector. In one day, Yandex lost $1.5 billion in market capitalization, with markets fearful that the company would soon be nationalized.

The timing of the legislation reinforced these concerns. In 2021, Russia will hold parliamentary elections in which the Kremlin’s main political party is polling around 33 percent. The authorities have made it clear that dissent will not be tolerated ahead of the elections. They have also hinted about the possibility of a Cambridge Analytica-style targeted political ad campaign. If so, the government will need troves of data and complex algorithms like those held by Yandex and Mail.ru. What’s the best way to secure access? Force a seizure at a knock-down price after political moves generate a market sell-off.

Yet the Kremlin’s relatively mild deal with Yandex suggests that overt nationalization is not its goal. Per the agreed-on changes, Yandex will create a public interest foundation that can block the sale of 10 percent or more of Yandex’s voting or economic interests to any one party. This will ensure that Yandex does not fall into foreign hands.

But backing away from overt nationalization doesn’t mean that the Kremlin is bowing out for good. Instead of nationalizing the tech sector outright, the Kremlin is using the state-owned Sberbank to capture a dominating stake in the industry. On Oct. 29, Sberbank confirmed that it was in negotiations to purchase a 20.6 percent voting stake in Mail.ru. Last week, the companies signed an agreement granting Sberbank the option to acquire another 20 percent stake in Mail.ru in three years.

Sberbank has likewise been courting Yandex for years. The bank first registered its interest in the firm in 2009, when it bought a so-called golden share in the company that allowed the bank to veto large ownership changes. Yandex and Sberbank then developed several joint projects, such as an online payment service and Beru, a Russian Amazon equivalent. The relationship soured, however, when Yandex rebuffed Sberbank’s attempts to acquire a larger stake in the internet company in October 2018. Sberbank argued that the deal would protect Yandex from competitors and the government. Yet Yandex responded by discussing changes to grant its top managers more control. The two are now looking to dissolve their joint e-commerce business, and Sberbank will sell its golden share back to the tech firm.

Having been spurned by Yandex, Sberbank turned to the second-best of Russian tech. In July, the two companies announced the formation of a 100-billion-ruble food delivery and taxi joint venture. Then in October, Mail.ru and China’s Alibaba closed a deal to create an e-commerce platform, AliExpress Russia, in which Sberbank will soon hold an indirect stake. As the state-owned bank expands its reach into Russians’ online lives—what they eat, where they travel, and what they buy—so, too, does the Kremlin, albeit indirectly.

Once the deal with Sberbank is complete, 100 percent of Mail.ru’s class A shares will either belong to Sberbank or pro-Kremlin allies. And that will create stiff competition for Yandex.

Yet by exerting influence indirectly, the Kremlin preserves an air of independence in the tech sector. To compete with the West, the Kremlin knows that it needs innovative technology. Outright nationalization is a surefire way to kill private investment and spark brain drain to companies like Facebook and Google.

Over the past decade, the government has repeatedly tried to bring Yandex to heel. That effort is unlikely to stop. The Kremlin has a track record of nationalizing sectors it deems strategically important, such as the oil sector in the mid-2000s. In the tech industry, however, the government’s increasing role will take a different form. With nearly unlimited funds and political support, Sberbank will capture Russia’s most lucrative online platforms on the promise of eliminating foreign influence from the sector. By building a de facto financial technology monopoly, the Kremlin can punish firms that resist its dictates. Yandex, once the star of the Russian tech sector, will increasingly be an internet utility dependent on the will of the Russian state.