“A hurricane of discouragement:” Putin’s war on Ukraine is already impacting the Russian tech sector

“A hurricane of discouragement:” Putin’s war on Ukraine is already impacting the Russian tech sector
Russian equities have been crushed as investors flee the market. The leading Russian tech stocks that have been investor darlings are amongst the victims / wiki
By Adrien Henni in Moscow for East West Digital News February 25, 2022

From quick military victory with Russia taking control of Ukraine, to a long-lasting guerrilla war, to an escalation involving neighbouring countries and western powers, the outcome of the Russian military attack on Ukraine that began on Thursday, February 24 is unpredictable, reports East-West Digital News (EWDN).

But just hours after the invasion, the impact on the Russian economic and technology development already promised to be dire.

Stock markets in the turmoil

Moscow Exchange fell so sharply on February 24 in the morning that trading was suspended for a few hours. Meanwhile, the central bank had to intervene after the ruble crashed to an all-time low. After a rebound to around RUB85 to $1 in the evening, the Russian currency had nevertheless lost 4.5% of its value since the previous day and some 20% since early November 2021, before the tension in Eastern Europe began.

Russia’s technology sector was immediately affected, too, in multiple ways. 

Technology stocks suffered on both local and foreign markets. Ozon and Yandex stocks were slaughtered on the Nasdaq (-33% and -53% at their lowest on February 24, from the previous day), while on the LSE, VK Company (the “Facebook of Russia,” previously Mail.ru Group) lost some 20% in one day and nearly 80% since early November. 

VK Company is politically exposed due to the fact that state-controlled groups Gazprom and Rostec own the company, while its CEO, Vladimir Kiriyenko, is the son of a top Kremlin administration official.

Kiriyenko junior – alongside other “elites and families close to Putin” – is featured in the US Treasury’s initial sanction list published this past February 22, in response to Russia’s recognition of the Donetsk and Luhansk separatist republics in Ukraine. The US government has blocked “all [his] property and interests in property that are in the United States.”

State-sponsored innovation under pressure

VEB.RF, a giant state-owned financial institution, is also among the first targets of the US authorities, which aim to weaken “Russia’s ability to finance aggression against its neighbours.” VEB.RF, as well as its affiliate companies, “can no longer do business in the United States” and is being “cut off from the US financial system.”

VEB.RF is a central to Russia’s state innovation effort. Its affiliates include the nanotechnology investment corporation Rosnano, the giant tech park Skolkovo and several technology investment funds.

Among these funds is VEB Ventures, whose portfolio companies could be affected by the sanctions as they develop internationally. These companies include e-scooter leader Urent, IoT solution develop Mircod and online freight service Deliver, to cite only examples of recently funded companies with operations in foreign markets, or plans to expand there.

In a statement published this Thursday morning, VEB.RF said it will “continue to improve its financial stability and operational efficiency, to properly fulfil its obligations and to use all available means to protect its rights and legitimate interests, despite the increasing pressure. VEB.RF always complies with the legislation of the countries in which it implements its projects. The restrictions imposed by the United States will not affect VEB.RF’s commitment to […] developing the Russian economy and the well-being of Russian citizens.”

The sanctions announced on February 22, however, are widely seen as a mild first step. In response to today’s invasion of Ukraine, western powers are expected to block, among other measures, Russia’s technology development – with Britain, the EU and the US opening the way just hours after the military intervention began.

Thus the UK announced on February 24 it is freezing Russian bank assets and “totally shutting off [Russia’s] banking system from UK finance markets.” London points at VTB, a huge state-owned financial group. Whether and how these measures could affect VTB Capital (VTBC) portfolio companies – such as Delimobil and Whoosh, two prominent Russian startups in the field of urban mobility – remains to be clarified.

The UK also intends to “substantially strengthen trade restrictions to ban the export of a range of high-end and critical technical equipment and components in sectors including electronics, telecommunications and aerospace”. These sanctions will be “aligned with the US, EU and other partners” to “constrain the development of Russian’s military-industrial and technological development for years to come.”

On her side, EU President Ursula von der Leyen said on February 24 that a package of “massive and targeted sanctions” was about to be presented to European leaders for approval. “We will target strategic sectors of the Russian economy by blocking their access to technologies and markets that are key for Russia,” she elaborated, with the goal to limit Russia’s “capacity to modernise”.

Western leaders appear to be more divided regarding the option of ejecting Russia from the SWIFT interbank payment system. While Czech President Milos Zeman is advocating such a measure, arguing that Russia’s invasion of Ukraine is a “crime against peace”, Reuters heard that the European Union is unlikely, at this stage, to resort to it.

Startup drain on the rise

Just hours after the invasion, disapproval and worries were spreading among the Russia tech community. From Gleb Davidyuk (iTech Capital) to Artem Inyutin (TMT Investments) to Viktor Lysenko (Osome) to Islam Midov (MTS venture fund), several prominent investors and entrepreneurs publicly expressed their opposition to the war.

“Almost all people around me are against this war, and the Moscow middle-class is horrified,” a top e-commerce event organiser told East-West Digital News.

He also expects Facebook and YouTube to be blocked at any moment soon by the authorities in a bid to prevent the spreading of opposition feelings among the population.

“Entrepreneurs already have enough on their shoulders and need no wars,” said a startup mentor at a St. Petersburg university. “What is happening now is a hurricane of discouragement for Russian innovators. Those who have not left the country yet must operate in unsatisfactory market conditions, without sufficient access to private capital or industrial networks, let alone without any social safety net.”

“Now that access to foreign markets, knowledge, networks of colleagues will shrink or disappear, these entrepreneurs will be left alone with so-called state development agencies and their apparatchiks. This is an ‘enough is enough’ moment.”  

From California to Western Europe to the Baltic states, the Russian startup drain has already been a tangible reality for years. But it is skyrocketing now, says Alex Pospekhov, founder of Missiontech.co, a company that helps Russian startups relocate to this Baltic state.

“From December to mid-February, the number of requests we received from Russia grew from one per day on average, twice as much as before. But yesterday, on February 23, we received 10 requests, and five new ones in the early hours of this Thursday,” he said in an exchange with EWDN.  

Startup emigration is growing, concurs Arseniy Dabbakh, general manager at DSight, a Moscow-based venture research agency. However, “Russian startups may take advantage of domestic opportunities,” he believes.

These range from “growing demand for local software and hardware as substitutes to imported ones” to “joint investment programmes with China and increased soft launch opportunities in this country.”

This article first appeared in East-West Digital News (EWDN), a bne IntelliNews partner publication.